F is for Finance

If you are looking for some financial vocabulary or a good book to read to your kids try F is for Finance.

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It is a great time to be young

Quite often I have older people coming in romanticizing yesteryear and the interest rates they used to get at the bank. At this point it has become a joke with many people, and yet I still see people moving from bank to bank trying to catch an extra 0.10% in interest. Two things that these same people don’t remember is that interest rates work both ways and that inflation plays a big roll in interest rates.

When most people who are now retired or are entering retirement were in their prime working years, we were in a much different interest rate environment. JP Morgan’s Guide to the Markets has a great chart that shows real and nominal yields of the 10-year Treasury bond.

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In 1981 the 10-Year Treasury yield was 15.84%. That is a great interest rate if you are looking to generate income or grow your savings. Unfortunately for most people that are now around retirement age, in the early 80’s they were just starting to accumulate wealth and buying their first home. Can you imagine if banks tried offering 16+% mortgages nowadays? No one would be buying houses.

The second side of the equation is inflation. Inflation is how much the price of things goes up each year. Generally speaking, when interest rates are high a lot of it is due to inflation. This was the case in the early 80’s. JP Morgan has another great chart showing historic inflation.

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We see here that inflation in the early 80’s was extremely high along with interest rates. This means that a person back then would have been paying huge mortgage payments while at the same time losing buying power to inflation at an incredible pace in their savings account.

The bright side is that today we have the exact opposite situation. We have super low interest rates that make housing much more affordable. The buying power in our savings accounts is almost flat with such little inflation. For those millennials with substantial invested savings, they can afford to take the risk with equities that provide good long-term returns. So next time you here someone complain about today’s interest rates, remember the benefits that come with it.

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Budgeting for people who can’t budget

Millennials are currently dealing with levels of debt not previously seen in past generations. Yellowbrick created an infographic that illustrates just how bad the debt load is in America right now. Outside of debt consolidation, the next best thing people can do is control their spending. A number of methods are coming out including using automated financial tracking services, creating a budget, or altering payment methods.

Budget

Credit: Hamza Butt

Many services have come out over the years such as Mint or CashBase that are designed to automate the process of tracking spending and saving for financial goals. These have been popular among many people, but I have found that I don’t really learn much about my spending and it is a bit time consuming to track when spending cash. I’m sure for other people though, if enough time is dedicated to them, they can be very helpful.

Creating a budget seems to me like another new year’s resolution. A budget sounds like a good idea, and then a couple weeks later people find that they have only been tracking spending here and there or have given up all together. It takes a certain type of person who doesn’t mind maintaining a spreadsheet before bed every night.

The method I have used for years is to dedicate one evening a month, pay all my bills, and maintain a spreadsheet of all my bills. By paying all my bills in one day at the end of the month it is not very time consuming. I don’t use auto pay on anything. Paying my bills manually every month forces me to asses each bill and take a little time to make sure I am not overpaying something and look for ways to reduce my payments. Recently Motley Fool Answers did a podcast on automating bill pay, but I think that automated bill pay detaches the consumer from their spending. I put pretty much everything on a couple of credit cards. I always go through the charges on my statement to make sure I made the charges, and I review what I am spending money on. As I make my payments I enter them into my spreadsheet, which allows me to compare spending trends. Once my bills are paid I move money into savings. I set a minimum I want to transfer every month, but if I can transfer more I will.

My method works for me, but everyone is different. The important thing is that every family do something to track spending. With the current financial burden that many Americans face, budgeting is more important now than ever before.

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Should Millennials Rent or Buy a Home?

Usually I like to talk about things that I consider myself well qualified to speak on. This week I wanted to discuss a subject that is particularly relevant to millennials. When should someone look at buying instead of renting? I am currently dealing with this dilemma myself and trying to decide if it is worth it for me to make the plunge.

House

Credit: Danny VB 

From purely a dollar and cents point of view, it usually makes more sense for a person’s monthly payments to go towards equity in a home rather than pay someone else’s mortgage. However, buying and selling homes has a lot of short term closing costs including realtor commissions, loan origination fees, and appraisal fees. So essentially what a prospective homebuyer is looking at is a significant negative short-term return coupled with a steady long-term return. “Home ownership, like stock investing, works best as a long-term proposition,” Pollack and Olen explain. “It takes at least five years to have a reasonable chance of breaking even on a housing purchase. For the first few years, your mortgage payments mostly pay off the interest and not the principal.”

Looking at a house like an investible asset creates another risk to think about. When someone buys a stock or mutual fund, they generally purchase without any leverage. If a person buys a stock for $20 they have to pay $20. A house is one of the only assets that someone can purchase for 1/5 of what it actually costs. If we saw a market decline that was a fraction of what we saw in 2008, most new homeowners would have no equity in their home. Real estate is generally not extremely volatile, but that kind of leverage exacerbates the need to focus on purchasing a home for the long-term in-order to ride out short-term fluctuations in home prices.

Millennials are known for moving around quite a bit, so with this tendency does it make sense to rush into purchasing a home? I’m not sure it does make sense to rush into purchasing a home. If someone believes that they are going to be moving around in the next couple years, I think it makes sense to eat the rent payments and wait to purchase the right home at the right time.

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A Brave New World with the DoL ruling

In 2017 financial advisors are now considered fiduciaries regarding IRA accounts. A fiduciary is someone who puts the benefit of the owner/beneficiary of the assets over their own. Ideally, every financial advisor should always be putting their client’s benefit over their own. Unfortunately the financial industry has had a lot of people who take advantage of their clients. So my question is, what does the new Department of Labor ruling accomplish?

retirementEssentially what the ruling does is force financial advisors to manage money on a fee basis. This means that they can’t pitch individual stock, bonds, or mutual funds and charge a commission/load. Advisors now are forced to charge a predefined fee regardless of the asset managed. Charging a predefined fee takes away the conflict of interest advisors have when choosing products that pay the highest commission over what is best for the client.

If forcing financial advisors to be fiduciaries is the best thing for clients, then why not make them fiduciaries for all client accounts? Is it because the Department of Labor isn’t sure if it is the best thing? Are they worried about making such a dramatic change to the financial industry all at once?

In my opinion the ruling does not cover all accounts because they don’t want to make such a radical change all at once. Financial advisors should always be looked at as fiduciaries. That being said, the financial industry has done a good job evolving on its own when it comes to acting as a fiduciary even if it is not written into law. Even in my limited amount of time in the financial industry, I have rarely seen advisors pushing individual securities to clients on a commission basis, front-end loaded mutual funds have become much less popular, and fee based advisory services are becoming much more popular. I hope the Department of Labor ruling helps build additional trust between consumers and advisors and encourages advisors to do the best for their clients.

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Are Container Homes for Real?

Recently I have been doing a little research into shipping container homes. After a quick Google search it is clear that shipping container homes are feasible. A couple of questions that came to mind were the insulation, cost effectiveness, and legal issues. I decided to do a little digging.

On containerhomeplans.org they discuss 3 methods for insulation including foam insulation, insulation panels, and blanket insulation. Each method has its pros and cons, but the recommended (and most expensive) method is the foam insulation. To cover four walls and the ceiling of one unaltered 20-foot long container would require enough insulation for 476 sq feet. One bottle of Touch ‘n Foam insulation that covers 200 square feet would cost $333. Doing the math, it would cost $493 to insulate each container in the house. Of course, a large consideration is the athletics. Spray insulation has a distinct look compared blanket installation, which can be hidden in the wall.

Container homes

Credit: David Nunn

Part of the allure of making a shipping container home is having the ability customize it. For pricing purposes however, I was able to find Montainer located in Montana that will build and assemble the house for customers. The homes range from 200 sqft to 960 sqft and cost between $60,000 – $160,000. One idea looking through the floor plans of Montainer was that a family could start with one of their homes and expand on the home with additional containers as they want additional floor space. For the DIY homebuilder, according to hometuneup.com a 40 ft container itself can cost between$3,500 and $4,500. If a person knows what they are doing, they can save a lot of money by doing a lot of the work themselves.

Assuming the customization is appealing and the home is cost effective, the legal issues seem like they could pose problems. According to Noah Arroyo of San Francisco Public Press, “Owners of a controversial collection of shipping container homes removed them from their West Oakland lot after city building inspectors threatened fines.” Unfortunately there is no one way to go about getting a container home approved. Ryan Herr of containerauction.com explains, “First, communication. Speak with the local authorities about your plans, explain the designs and benefits, and have examples of other container homes built (ideally in your area or state, or worst case any good example you can find).”

Through my research, I feel comfortable with the idea that a container house is realistic in a lot of areas. I know my questions are not an exhaustive list of issues when it comes to container homes, but they are some of the main issues that I found online. I intend on continuing to follow the trend of container homes going forward.

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Bank of America 2016 Christmas Party

Kathy made dinner for us and then we had White Elephant.

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