Archive for April, 2007
Friday, April 27th, 2007
In today’s column in Yahoo!Finance, I discuss research that shows some people who pay down their mortgages early may be better off putting that money into a tax-deferred retirement plan, such as a 401(k). Here’s a simple formula to figure out which option makes the most sense for you from a wealth-building perspective:
1. Take your mortgage rate, and subtract your interest expense deduction (your tax bracket multiplied by the mortgage rate) to get the after-tax cost of your mortgage.
2. Look at the rate of return of a conservative investment in your 401(k), such as a government bond fund. Subtract the after-tax cost of your mortgage.
Example: Bill has a 30-year mortgage at 6%, and he is in the 25% income tax bracket.
- 6% – (6% x .25) = 4.5%
- Bill can invest in a conservative bond fund in his 401(k) that yields 5.5%. He effectively earns 1% more on his money by putting it into the 401(k) versus an extra mortgage payment. (5.5% – 4.5% = 1%).
More importantly, if Bill’s employer offers a match on 401(k) contributions, it’s a no-brainer to put the money in the 401(k).
I used to make an extra mortgage payment every year, but switched to investing the money when yields on conservative investments started to rise. For some folks though, this is not a mathematical issue but one of security — they just want that mortgage paid off. For people who are very debt-averse, the peace of mind of paying off the house more quickly is worth the price.
Friday, April 13th, 2007
In my April 13 Yahoo!Finance column, I asked a group of experts to reveal the best-kept secrets in financial planning. Click here to see the top secrets. I couldn’t fit every idea in the column, so I’ve included them below:
Keep it simple. “Investors are bombarded with information every time they open a paper, go online, or talk to a friend,” says Catherine Gordon, Principal of Vanguard Financial Planning. “They hear, ‘it’s time for large caps, it’s time for small caps, it’s time for gold and precious metals. It’s nearly impossible to keep up.” Investors should focus instead on building a well-diversified, low-cost portfolio for the long-term, Gordon says: “It doesn’t sound all that exciting, but the reality is that when it comes to investing, it’s really the key to long-term success.”
Use 529 plans to save for your own continuing education. Many older Americans are going back to college or planning to do so in the future, and the growth in online education offers nearly limitless possibilities, says Joe Hurley, founder and CEO of Savingforcollege.com. If this is something you are thinking about doing, on either a full-time or part-time basis, consider opening up a 529 plan and naming yourself the beneficiary. The 529 plan allows for tax-deferred investment growth and tax-free distributions for qualified higher education expenses. You may even get a state income tax deduction for your contributions depending on where you live. “This strategy is best for individuals with grandchildren or other family members who will be attending college in the future,” says Hurley. “That way, if you change your mind about going back to school, you can leave the funds in the 529 plan for later use by your family members, thereby avoiding the tax and penalty you would owe by liquidating your 529 plan through “non-qualified” distributions.”
Understand the ‘why’ of your financial plan. “The basics of financial planning are simple — spending less than you earn, systematically saving, spreading your risk and sharing with others,” says Lisa Horuczi Markus, author of the new book Living a Blessed Life: Walking in Faith, Growing in Wealth. “What hangs most people up is the ‘why do it?’ If the end goal is just being rich and powerful, that’s not enough of a ‘why’ for most people. What makes the difference is being inspired by a goal or purpose greater than ourselves. That’s when you see people achieve true wealth.”
It’s not what you make, it’s what you keep. “Financially, you are worth what you save, not what you earn,” says Karen Sheridan of Money Mystique Asset Management in Lake Oswego, Ore. “A fancy salary may be nice, but a growing net worth is mandatory. Many people with big salaries live paycheck to paycheck. If you don’t manage $50,000, you won’t manage $150,000.”
Start saving and planning early. “The earlier you start saving, the more time your money has to compound,” says Sophie Beckmann, CFP®, CPA at A.G. Edwards & Sons. “I know this might not be a big secret, but most people choose to disregard it.” People who develop savings habits early usually also get a handle on how to pay down and avoid credit card debt early on as well – which can have a significant impact on wealth over time. Meanwhile, early birds who have a plan for where to invest their dollars from the get-go will get the biggest return. “The plan should include an assessment of your risk tolerance, time frame and goals,” Beckmann adds.
Understand asset allocation. “Many investors don’t realize that greater than 90 percent of an investor’s total return is predicated on the asset allocation decision, not individual investment selection,” says Greg McBride, CFA and senior financial analyst at Bankrate.com. In other words, the kinds of investments someone chooses is more important than the specific choices he or she makes within each category. Big, small, growth, value, U.S., foreign—how do you choose which areas of the market and which funds to invest in?
This is the art of asset allocation, in which you put your money into different areas of the market to spread around your risk and smooth out the ups and downs of your portfolio. Harry Markowitz, who won the Nobel Prize in economics, suggests that more than 90 percent of your investment returns come from asset allocation. (I explain this in more depth in my book, Money and Happiness; also see the investor education section at Morningstar.com.)
Got any best-kept financial planning secrets? Comment below.
Thursday, April 12th, 2007
My site, moneyandhappiness.com, offers stories on goal setting and money management.
Here’s a step-by-step guide to eliminating credit card debt.
Here are ten ways to save money today.
Here’s a basic overview on how to begin saving and managing your money.
Here’s some ideas on setting goals.
Thursday, April 12th, 2007
I loved this piece “When Boss Buys a Trophy Home” in the Wall Street Journal on April 12 by Judith Burns. (You may need a subscription to the Journal to read the piece.) Crocker Liu and David Yurmack, finance professors at Arizona State University and New York University, respectively, found that when the CEO of an S&P 500 company buys a trophy home for himself, it’s a bearish sign for the firm he’s leading. Burns writes: “Investors who short the shares of companies after the CEO has moved into a palatial home would reap returns of 29 percent after one year, and 46 percent after two years, the study estimates.” When the boss sold stock to purchase the home, the company’s shares performed even worse over time.
The average CEO lives in a home with 11 rooms that’s 5,600 square feet; roomy, but not as big as the researchers expected. Researchers speculate that the castle-buying is a signal the CEO has become “lazy, entrenched and entitled,” or is demoralizing employees with his imperial ways. It may also be an indication of insider trading – using the home purchase to dump shares of the company stock based on non-public information about the company.
At minimum, it must imply a loss of focus – getting caught up in plans for the private polo field or boat house can be a distraction when you’re trying to run a multi-billion-dollar corporation. The quintessential example of the focused CEO: Warren Buffet, who still lives in the Omaha home he purchased for $31,000 in 1958.
Wednesday, April 4th, 2007
The Wall Street Journal’s Homes section recently ran a feature called “Affordable Suburbia,” featuring a few towns with good schools and low crime that are affordable for families earning $50,000 to $60,000 a year. (You may need a subscription to the Journal online to view the story.)
If I moved from New Jersey to Matthews, North Carolina, for instance, I could buy a home 1,000 square feet larger than my place for about one-third the cost, with one-sixth the real estate taxes. This is quite inspiring to a Midwest native, who is still appalled by the cost of living on the East Coast years after moving here.
Unfortunately, I don’t know a soul in North Carolina. And I love my town, just a 35-minute ride from the Big Apple. (See my April 6 Yahoo!Finance column for more on bailing out.)
It’s getting tougher to make ends meet no matter where you live. The core rate of the consumer price index, which excludes volatile food and energy costs, rose 2.7 percent in the 12 months ending in February – up from 2.1 percent a year earlier. And those pesky staples — like gasoline and milk are also climbing. You might be able to nickel and dime your way through some of those costs – clip coupons, buy milk at Costco ($2.15 a gallon on my last trip). But it’s tough to avoid the expense creep in fixed costs — like property taxes and health care.
Nationwide, property taxes grew 28 percent from 2000 to 2004, though income rose only 16 percent, according to an analysis by The New York Times. New Jersey has the nation’s highest property taxes — double the national average, at $6,330 per homeowner. Rates have been rising 7 percent a year. In Somerset County, they skyrocketed 41 percent between 2000 and 2004, while income rose just 5 percent. (Although recently signed legislation by Gov. Jon Corzine will give most homeowners a 20 percent rebate, or around $1,100 on average.)
In storm-prone regions, the problem is homeowners’ insurance. In February, we took a family trip to Anna Maria Island, Florida, off the coast of Sarasota. Nearly every other house sported a “for sale” sign on the lawn. A boat operator we met said her homeowner’s insurance has doubled since she bought her home a decade ago — to $1,000 a month.
Health care is another potential budget-buster. Between 1979 and 2004, the number of workers who received health insurance through their employers fell to 56 percent from 69 percent, according to the Economic Policy Institute. Meanwhile, those lucky enough to keep their benefits are paying a bigger portion of their health care tab. In 1993 about half (54 percent) of workers in the private sector with individual coverage were required to pay for some of the insurance costs; by 2005 that share had risen to 76 percent. Almost all workers with family coverage – 88 percent — are required to pay some of the insurance premium out of their own pockets.
Then, for parents like me, there is the prospect of college. According to Finaid.org, tuition tends to increase about 8 percent per year. That means the cost of college doubles every nine years! For a baby born today, college costs will be more than three times current rates when the she enters college. Tuition rates are rising at twice the inflation rate. One tip for overwhelmed parents: Try to save one-third of the cost in advance; plan to pay another third out of your income when the time comes; and expect one-third to come from grants and loans.
How do you continue to live within your means when so many expenses are rising at once? Share your comments and tips below.
Tuesday, April 3rd, 2007
Just when I thought the real estate boom had expired, a home in my town went for $100,000 over asking price last month. Marissa DiNatale, economist with Moody’s Economy.com, tells me that New Jersey is one of a select handful of real estate markets continuing to appreciate in value. “The greater New York City area in general is doing well, although the rest of New York state is seeing declining house prices,” she says.
Other areas still enjoying single-digit growth: Philadelphia, parts of Delaware, northern California; Ventura County, California; and the Pacific Northwest, including parts of Washington state and Oregon. “Very few places are seeing double-digit growth,” she says. “But it’s all relative – you can have a year-over-year price decline, but if bought three years ago you’re okay.”
According to the National Association of Realtors, these are the 25 markets that enjoyed the most appreciation the last five years.
||Price Appreciation Q4 2001 – Q4 2006
|Atlantic City, NJ
|Los Angeles, CA
|West Palm Beach, FL
|Fort Lauderdale, FL
|Ocean City, NJ
|Las Vegas, NV
|Cape Coral, FL
|Punta Gorda, FL
About Laura Rowley
Laura Rowley is an award-winning journalist and author specializing in money, values and financial happiness. read more »
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