House Hunting How-To: Deciding on the Best Down Payment

 You have decided to purchase a new home. Now questions start racing through your mind. How much do we put down?  What is our interest rate going to be?  Do we get a fixed loan or a variable loan? Do we finance it over 15 years or 30 years? In today’s historically low interest rate environment the answer to some of these questions may surprise you.

Let’s take a scenario between John Doe and John’s identical twin brother Jack Doe.  John and Jack have the same exact job, the same income, and the same assets.  Everything about them is the same except for how they approach money decisions.  John is a firm believer in staying out of debt. He doesn’t believe in financing anything. He pays cash for cars, houses, vacations etc…  Jack on the other hand believes that responsible use of debt could be a good way to get ahead in life.  He firmly believes that you shouldn’t put more then 20% down on a house, you should finance a car, especially when interest rates are less then 3%, he’ll even put a vacation on a credit card to earn the mileage points, making sure he pays it off within a month or two. 

John and Jack are looking to purchase an identical home in the same neighborhood; same square footage, same interior design, same lawn animals, same everything.  The purchase price of the house is $250,000. They both have identical investment portfolios valued at $250,000. John has the option to finance it with a 30-year fixed loan at 3.5%.  But instead John takes a look at his finances and decides he will take the money out of his investment portfolio and buy the house outright.  John now has no money left in his investment portfolio, but at least this will save him that pesky $1,200 mortgage payment over the next 30 years. He doesn’t like the fact that his investment portfolio now has a 0 balance, but he intends to rebuild his drained investment account by adding $1,200 each month. 

Jack, on the other hand, decides he is only going to put down 20% on the house and keep the rest of his money invested. He needs to come up with 20% of $250,000, or $50,000. After the down payment, Jack will have $200,000 remaining in his investment account.  He won’t be able to add any funds to his investment account because he needs that money to pay the mortgage.

Let’s break down the impact of their decisions after 10 years factoring at a 6% interest rate compounded annually for their investments. Let’s also assume the value of their homes has also appreciated in value at 6%:

Jack has less equity in his house because he put 20% down so, after 10 years, he still owes the bank $150,000 on the original $200,000 mortgage note. From the totals, it might appear that Jack made a slightly better money decision, but life is not quite that simple.  We can’t possibly account for all the “what if’s” that life might throw at the two brothers over that 10 year period. 

Here are some things to consider: 

• What if John had a sudden emergency such as an unexpected job loss over that 10-year period?  He has no liquidity to tap into to help him pay the bills because he spent it all on the house. 
• How much mortgage interest can John deduct off his income tax bill annually?  None because he doesn’t have a mortgage! 
• What if house prices in the neighborhood depreciate in value instead of appreciate?  Jack could potentially hand the keys back to the bank whereas John could be stuck with a rapidly depreciating asset.
• What if John isn’t as disciplined as he thought he was and starts spending the $1,200 a month instead of saving it?  Jack might not be as prone to this problem because there is a big consequence to him not paying the bank $1,200 a month which is that he loses the house.   

As you can see, having a mortgage might not be the worst thing in the world. Even though it bucks the traditional value of having a home paid off as quickly as possible, there can even be some advantages to using debt responsibly. Make sure you talk to your financial planner when deciding if you’ll follow Jack or John’s example.

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The example contained herein is hypothetical and for illustration purposes only.  It is not intended to reflect the actual performance of any particular investment.  Actual investor results will vary.  Investing involves risk and investors may incur a profit or a loss.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.  You should discuss any financial or mortgage matters with the appropriate professional.

Personal Emergency Reserve Savings

 The other day during my morning drive to work, I heard a rather startling statistic on our local news radio program – 40% of Michigan residents have NO (that means $0) savings!  Michigan is number 26 of the 50 states in savings rankings, which means that there are 24 states that are worse.  OUCH!

There is no doubt that with the market downturn of 2008 and the slow economic recovery in the last several years, many families had no choice but to dig into savings to survive. But that’s exactly one of the reasons that emergency reserve savings are so important!  Now that more people are back to work and are back to a more normal cash flow, it’s time to get back to business and build the reserves again.

How much emergency savings do you really need?   

Experts don’t always agree on an exact number, but many financial planners recommend having at least three to six months living expenses in an emergency fund, invested in cash or cash alternative investments.  For some, it is easier to pick a specific dollar amount as an achievable goal (say $10,000 or $20,000).  Clearly, the higher your monthly expenditures, the higher your reserve savings should be, especially if the majority of those monthly expenditures are non-discretionary.

Whether you are one of Michigan’s 40% with no savings, or are just someone who doesn’t have enough set aside for an emergency, start “reserving” some cash today. 

To get started, here are a few tips to consider:

• Save aggressively.  Use payroll deduction from your paycheck, if possible, or budget in savings (i.e. have an amount automatically moved from your checking to a savings or investment account on a monthly or bi-monthly basis).
• Reduce your discretionary spending.  Remind yourself that this is likely a temporary adjustment until your reserve savings reach an adequate level.
• Consider other resources until reserves are built.  Do you have cash value life insurance that you can borrow from if you have an urgent need?  Do you have other investments generating income that can be pulled off to build reserves? 

Hopefully, you’ll never have to tap into the funds you are committing to setting aside. But it is impossible to know what is around the next bend and it is always best to be prepared. The time to start (or continue) building your emergency reserves is now!  Consult a Certified Financial Planner™ for these and other ways to help save for your financial future.

Sandra Adams, CFP® is a Financial Planner at Center for Financial Planning, Inc. Sandy specializes in Elder Care Financial Planning and is a frequent speaker on related topics. In 2012 and 2013, Sandy was named to the Five Star Wealth Managers list in Detroit Hour magazine. In addition to her frequent contributions to Money Centered, she is regularly quoted in national media publications such as The Wall Street Journal, Research Magazine and Journal of Financial Planning.

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Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any information is not a complete summary or statement of all available data necessary for making an investment decision.  Prior to making an investment decision, please consult with your financial advisor about your individual situation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.

College Students and Debt

Recently I read an article about the level of debt college students have at the time they graduate.  No, I am not talking about student loans. Those are overwhelming enough.  I am talking about credit card debt.  One study found that the average college student has 4 to 6 credit cards.  The combined balances on those cards averaged between $3,000-7,000. Can you imagine beginning a new career with that much financial burden? It is a formula for disaster.

I remember, in what seems like the not-so-distant past, our 17-year-old college freshmen whispering through the phone that no one on her floor had a clue of how to balance a checkbook and they were bouncing checks all over the place. Today, you’d replace “balancing a checkbook” with “responsibly handling a credit card” but in either case, it is a reminder that when students enter the halls of higher education, they do not have instant financial savvy. But it can be learned. Wise parents give their student some financial responsibility while they are still under their wing. Before leaving the parental home:

• Try designating bills they have to pay with their own earned money or an allowance.
• Talk to them about the use of credit and more importantly the consequences of misuses of credit and what it can mean when trying to purchase a car or qualify for a mortgage.
• Start with a loaded credit card, they are a great way for students to experiment. Its easy to see how quickly pizza and incidentals can add up over time. When the card is empty, it can be a long month.
• Let them make small mistakes under your guidance and let them work their way out.

Last but not least, tell your student you are going to have joint statements for whatever time period you deem necessary to give them help. Discuss money situations---that is what adults do.

Keep in mind you taught them to skate, you taught them to ride a bike and to drive a car.  Managing money should get the same attention.

Where Did It Go?

Do you find that you ever have too much month at the end of your money? Be honest, in the blink of an eye, extra money seems to vanish. For those still in their earnings years, one of the keys to accumulating wealth, thus achieving your financial objectives, is to stop the disappearing act. Transfer dollars from your monthly cash flow to your net worth statement by adding funds to your savings accounts, taxable investment accounts, and retirement accounts (such as employer sponsored 401k and 403b accounts) and IRA’s (Traditional or ROTH).  Another smart move is to use funds from your monthly cash flow to pay down debt … also improving your net worth statement.

Saving money and improving your overall financial position is easier said than done.  The truth is that saving money is more than simply a function of dollars and cents; it requires discipline and perseverance.  You may have heard the strategy of “paying yourself first”.  The most effective way to pay yourself first is to set up automatic savings programs.  The 401k (or other employer plan) is the best way to do this – but you can also establish similar automated savings plans with brokerage companies and financial institutions such as banks or credit unions.

Just as important, be intentional with your 2012 spending.  Rather than thinking in terms of a budget (which sounds a lot like dieting) – think about establishing a “spending plan” instead. Planning your expenses as best you can will help ensure that you spend money on the things that add value to your life and should help keep your money from mysteriously vanishing at the end of the month.

For a free resource to help track your cash flow email: Timothy.Wyman@CenterFinPlan.com

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.

Tackling Your Credit Card Debt

Do you watch the Super Bowl for the game or for the commercials?  For me, it really depends on which teams are playing, but I can’t deny that those million dollar ads often keep me in my seat through the commercial breaks.  This year, Comcast reports that advertisers will pay about $3.5 million for a 30 second spot, but that figure seems like a drop in the bucket compared to $798 billion…that’s the amount Americans now owe on their credit cards.

Recent released Federal Reserve data indicates that consumer borrowing is again on the rise.  With increased spending in the last quarter of 2012, U.S. consumer credit card debt has now reached a staggering $798 billion.  In my last post, I recommended that each of us should access and review our free annual credit report at AnnualCreditReport.com.  If your credit report shows that you have credit card debt that contributes to this enormous U.S. consumer debt total, now is the time take action!

In the spirit of the upcoming NFL Super Bowl, now is the time for you to tackle your own credit card debt.  Follow these steps to move you down the field and toward the goal line of a (credit card) debt-free future:

(1)  Huddle up. Assess your current credit card debt status.  Use your credit report to gather information on your outstanding credit card balances, interest rates, minimum payments and due dates.

(2)  Review your playbook.  Assess the minimum payments on all outstanding credit cards and make sure cash flow allows you to stay current; determine if/how much cash flow allows for more than minimum payments.

(3)  Narrow down your potential plays and make the call.  Check into the possibility of combining outstanding card balances to a card with a 0% interest or at least one with a lower rate.  Determine your strategy for tackling outstanding balances.  From a purely numbers perspective, you will end up paying the least by directing allowable cash  flow to making extra payments on highest interest rate cards first.  However, you must choose the strategy that keeps you moving forward, so if paying off the smallest card first (even if the interest rate is lower) makes you feel like you’re making the most progress, that may be the best strategy for you.

(4)  Keep moving forward by avoiding penalties.  Keep making payments against your outstanding debt AND avoid moving backwards by charging more.  Put your credit card spending in time out until your credit card debt has been paid down.

As Tim Wyman mentioned in his recent post about your Net Worth, one way to positively affect your financial wealth is to decrease your debt.  Set yourself up to score on your Net Worth and plan to tackle your credit card debt in 2012.

Source:  http://online.wsj.com/article/SB10001424052970203899504577130940265401370.html

The Genetics of Saving

For all of you that find saving money for future goals a challenge – don’t worry – its genetics!  At least that’s what a recent study seems to suggest.  Stephan Siegal, assistant professor at the University of Washington, Foster School of Business in Seattle, concludes that based on his research that “genetics is the single greatest determinate of an individual’s propensity to either save or spend.”   Professor Siegal’s research and conclusions are sure to draw interest from the many individuals and advisors that just might think his explanation is a bit too simplistic.                                                 

In working with individuals who have accumulated the necessary wealth to meet their goals, such as financing a college education or funding a successful retirement, I have found that saving money is more than just dollars and cents.  Becoming a good saver (and meeting future financial goals) requires discipline, perseverance and sound strategies such as systematic savings plans like 401k’s, 403bs, and other automatic investment plans.

So, the next time you buy the 52” HDTV instead of fully funding your 401k blame your genetic makeup!  And then make sure you schedule your annual meeting with your financial planner to make sure your on track to meet your short and long-term financial goals.

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.

A Holiday Shopping Three-Step Challenge

If you’re like millions of Americans, one of your after Thanksgiving dinner activities tomorrow will be making your holiday shopping list and browsing the Black Friday savings deals that are published in advance.  Your excitement will build as you anticipate the first store door opening on Friday morning.  You will prepare to feel the adrenaline rush as you dash in for the best buys of the season.  You are ready to save!  Or are you?

For most of us, we feel a great sense of accomplishment in finding great deals during the holidays.  In fact, many of us will buy an item that isn’t even on our list because the deal is just too good to pass up.  So, are we actually saving or just spending?  Wouldn’t it be a better strategy to find good deals on those items actually on our list, and save the rest?

My three step challenge for you this Black Friday (and the entire holiday shopping season) is this:

1. Make a list of those items you wish to buy for each person on your shopping list – before you leave home – and set a limit on what you can afford to spend.
2. Find the best deals you can find on those items you have listed, but avoid buying additional items just because the deal is too good to pass up.
3. If you find that you have money left over in your budget after your shopping list is completed, invest in yourself.  Put the extra dollars towards either a short-term savings goal (like a car) or a long-term savings goal (like retirement).  Add the cash to a savings account, investment account, or to your IRA or ROTH IRA (if you haven’t already contributed the maximum amount allowable this year).

Meeting the three step challenge will help you to cross of all of the items on your gift list, feel the accomplishment of finding great deals, and invest in yourself all at the same time!  So get ready, get set, and SAVE!

The Key to Planning for Your Lifestyle in Retirement

After working with retirement clients for nearly 30 years, I have learned many things.  One of the most important lessons I have learned is that we all need to have the answer to one very simple question before we begin the planning process -- “what does it cost for me to live per month”?   As planners we can develop scenarios to help achieve retirement goals, but if we start with the wrong premise, we may be forming strategies to meet the wrong goal. 

Why is it so difficult to come up with a figure for our income needs? The general tendency is to underestimate expenditures and overestimate income. We also think about what we should be spending, not what we do spend.  Not knowing our expenditures comes about because we forget a few things:

• Food, shelter, transportation and clothing are only the beginning of expenses. They are the ones we see each month.
• We need to add insurances, taxes, gifts, car replacements, vacations, travel, family visits, and hobby and entertainment expenses. 
• If you have children, your educational expenses may drop off by the time you retire but you need to determine how much you might need for weddings and launching (yes—getting your darlings out of the parental home)
• If you plan to change your living arrangements, you need to factor in not only the additional cost of making a change but also the change in monthly expenditures related to the move.

There are circumstances that are out of our control, such as the rising cost of health care and insurance, declining markets and inflation.  To guard against these events we need to factor in percentage increases over time and to have a savings cushion of at least six months to help us weather the storm.

When I have gone through this analysis with clients, I often find a dramatic difference between projected income needs and actual income needs.  Can you imagine trying to reach your destination with only half a tank of gas?  It doesn’t work. Using the wrong expenditure figure can ruin the lifestyle you anticipated.

Talk to your financial advisor about tools to help you track your monthly income needs.

What Does MOM Stand For?

The other day, my teenage daughter related to me a quip she received by way of Twitter.  It goes something like this… a child was pestering his mother about his urgent need for a new cell phone.  The mother continued to answer “NO,” without an end to the requests.  She finally asked in frustration, “Do you think I’m made of money?”   The child replied, “Isn’t that what MOM stands for… Made Of Money?”

My first response to this story was to chuckle; it is a very clever play on words.  However, after my own children continued to use the Made Of Money reference over the next several days, I realized that this is a clear indication of a real problem.  Most school age children and younger adults are receiving little to no financial education at school or at home.  They see the kids on TV and their friends at school ask and receive anything they ask for, without understanding what it takes to earn the dollars that are being spent.

As a parent, what can you do to begin to teach your children about the value of money?

• Help them learn the difference between wants and needs. 
• Pay them an allowance, but make them earn it with specific weekly responsibilities.
• Put them in charge of something (financially) at home; put them in charge of something at home (like food for their pet).  They are in charge of buying it when it runs out…using part of their allowance.
• Encourage saving (i.e. if they can save ½ of something they want, you can match it to make up the difference).

For list of Financial Education Resources for Parents and Children, visit the Certified Financial Planner Board of Standards, Inc. website at http://www.cfp.net/learn/resources_children.asp

Back-to-School Shopping -- 5 Financial Lessons for Your Kids

It’s that time again – the first day of school is right around the corner!  You likely received your supply lists weeks ago and stores have been advertising back-to-school items since the Fourth of July.  If you’re like me, you’re dreading the last-minute crowds…and the bill at check-out.

I have read several articles recently telling parents that the easiest way to save money on school supplies is to leave your children at home.  As tempting as this may be, I urge you to take your children on this shopping trip.  Back-to-school shopping can be a great opportunity for financial education. 

Here are 5 financial lessons you can teach your children:

1.  Take inventory of what you have.  Before you leave the house, make sure you know what you have and what you need to avoid purchasing duplicate items.

2.  Comparison shop.  Search printed newspaper ads or shop the internet to find sales and compare prices on the items you need.  Coupons are also a great savings tool!

3.  Set a budget.  Set the maximum dollar amount you can afford to spend, and stick to it.  This is a basic cash flow planning principle we should all stick to!

4.  Stick to a list.  Make a list of the items you need, and don't deviate.  Just like a trip to the grocery store, straying from your list can be detrimental to your wallet.

5.  Make smart choices.  Within your budget, there may be items you choose to spend more on.  Consider buying store brands for basic items, and spending a little extra for others (backpacks, clothes, etc.) to enhance quality or style.

Prepare a plan and stick to it for the start to a successful school year!