Friday, May 31, 2013

How can a Bank Make Money on 0.9% Interest

As someone who works in the lending field, I often find it shocking that financial institutions can make any sort of money with interest rates as low as 0.9% (I’m thinking car loans here).  Intuitively, this doesn’t make any sense.  If your interest rate is lower than the inflation rate (usually between 2-3%), how can you make any money off your loan?  Well, banks are smarter than you think.
First, consider how a bank makes money; it takes your checking and savings deposits for essentially free (you get the guarantee that your money is safe), and it loans out your funds to people who need mortgages, car loans, etc.  This is a pretty nice little game of arbitrage here.
The second interesting thing to think about is how a fully amortized loan is structured.  If you have a fixed loan, you pay the same amount each month, however the way a bank structures the payment varies throughout the life of the loan.  Your monthly payment is almost entirely interest the first couple years and almost entirely principal the last couple.  Think about this example:  you take out a $20,000 car loan for 60 months at 0.9%.  In the first year, you will pay $432.86/month, but your total interest portion for the year will be $2,005.20.  If you divide this total interest by the average monthly balance, you have an average interest rate of 10.8% for the first year.  Now say, year two comes along, and you decide to pay off your loan: the bank gets its money back and loans it out again all the while making 10.8% interest the first year.  This is why banks eventually encourage you to prepay your loans.  Inflation will eventually catch up to the payment. 
So, what should you do as someone with a car loan?  Well, there is not much you really can do?  If after 12 months you decide to pay off your loan, you will have essentially paid $21,921.77 in today’s money (assuming a 3% annual discount rate) for the privilege to borrow $20,000.  If you went through the full term of the loan, you would have paid $24,089 in today’s dollars.  Borrowing money has a price to it, so the best advice would be not to get into debt in the first place.  The contrary point is that if you can’t get to your primary source of revenue, because you don’t have a car, then the cost of inaction is far more than the debt load.
Whatever you choose, it’s important to realize what you are getting yourself into and how the bank is going to make money off of you.  You will then be able to make smarter life decisions if you are armed with this knowledge.
Wonderful Moment of the Day: The smell of fresh cut grass makes me believe that summer is finally here.

Wednesday, May 29, 2013

What’s a Jumbo Mortgage?

Believe it or not, but the economy is actually getting better.  Property values are increasing and mortgages rates are starting to go up.  In fact, home prices in some areas of the country are increasing at such an alarming rate that it is reminiscent to the pre housing crash of 2008.  Nevermind that for now, because I want to focus on an interesting problem for those of you thinking about buying a new house in these newly expense housing districts.
An interesting thing happens to mortgages when they cross the magical threshold of $417,000, they gain the title of Jumbo.  What does this mean?  Well, here are some things to take into consideration if you decide to obtain a jumbo mortgage.
-          Jumbo mortgages have higher interest rates than non-jumbo mortgages.  If you think about, mortgage companies are taking a big risk by giving you a whole bunch of money with the hopes of you paying it back over time.  We won’t even discuss the concept of interest rate risk.  With that in mind, if a mortgage financer gives you even more money, you are now considered even more risky, so interest rate increases are inevitable. 
-          The next issue with jumbo mortgages is that they are harder to get.  A $416,999 mortgage is much easier to obtain than a $417,000 mortgage, and because of this arbitrary dollar cut-off, you’ll likely have a much harder time convincing a bank to loan you that high amount of money.  You will need a higher credit score, and most likely a much lower LTV on your home. 
Unfortunately, this classification can really harm people who just happen to live in higher cost of living areas.  Places like DC and NYC often have regular 2-3 bedroom homes well north of this dollar amount, and so those of us looking to own our home will have a rougher go.  With that in mind, do everything you can to get your mortgage below that $417,000 threshold.  The easiest way is to pay a larger down payment up front.
Wonderful Moment of the Day: While being new to this whole baby thing, I’ve found the resources online to be invaluable.  It’s actually made my research very enjoyable.

Monday, May 27, 2013

When to Splurge???

Notice the asymmetric design?
Sometimes you can be too good at saving.  In fact, you start to reach a point where you get so fed up with your saving that you need to spend it on something.  This phenomena called "the splurge" is usually used as a destructive term and can do havoc in your finances if you are not careful.

Before we get into the concept of what's a "good splurge", we should first realize what the point of money is.  By itself, money is essentially useless, but it is purely a means of acquiring something else.  With that in mind, the use of money should have some goal behind it just like saving money should come with some goal.  Recently for me, my car needed new tires; in fact it just barely passed the state inspection because of this issue.  Tires for me are my splurge, and I've always been good at saving so that I can 1.) Retire early, and 2.) buy things that provide safety for my family (like good tires).

For me, a good set of all weather tires can revolutionize your car driving experience.  My personal brand of choice is Nokian, but a high quality Firestone, etc... is probably also good.  Let me tell you, those tires came in handy over the long weekend!  I had a wedding to go to, and it was over 400 miles of solid rain driving.  It even snowed on the wedding day in May!  Thanks to my new Nokian tires, I never had a problem with stability or felt like my family was at all in danger.  Safety is one of my chief concerns, and splurging on quality tires is a "good splurge".

What's important to you, and what is the goal for you to use your hard earned money?

Wonderful Moment of the Day: Happy Memorial Day!

Friday, May 24, 2013

102 Thrifty Ways to Save

My Frugal LifeIn my quest to provide you with personal Finance and smart money-sense guides, I've scoured the Internet looking for some helpful household tips.  This site called "Thrifty Fun" has an interesting article on 102 tried and true ways to save. The list includes a whole slew of simple ways to make your dollar go that extra distance.  Below is a sample of my favorite tips from reach category:

Laundry Room:
- Pre-treat stains as soon as you notice them - why have to throw away your nice work shirt when a little scrubbing can save you big bucks.  Another helpful tip is to keep a "Tide Pen" at work in case you spill there.

- Re-use bath towels - You really need to only use about 2 towels per person per week if you are just drying yourself with them.  Just make sure to keep them hung up in a way to fully dry out.

Kitchen and Pantry:
- Learn to cook - It's amazing how much you can save by cooking your own meals versus buying out, not to mention how much healthier it can be.
- Bring leftovers to work for lunch - I do this every day, and not only do I eat better food, it's also way cheaper.

Bedrooms and Living Areas:
- Buy the highest quality sheets, furniture, etc. you can afford.  They will last for years.  In today's IKEA culture, this may not be widely though of.

- Use your library for books, movies, music, and books on tape.  This is such a great and under-utilized source.

- Make a list for everything you need to purchase.  This will prevent all those impulse buys.

- Put on a sweater when you are cold.  My house is never more that 65 degrees F in the winter.

- Buy items on sale AFTER the holidays.  This requires a little more planning and forethought.

- Save your scraps and combine for interesting projects.  This is a really good option especially if you have kids.

- Clean your own carpets with a rented or borrowed machine.  Really, how many times a year do you wash your carpets; once?  Renting a high end carpet washer will do a better job and cost less in the long run.

You can see the types of easy information that can make you into a handy, frugal, and overall better person.

Wonderful Moment of the Day: The sound of rain on your roof at night.

Wednesday, May 22, 2013

Listing Your Projects

I think it's pretty obvious from my writings that I'm a planner when it comes to life.  Everything doesn't need to be detailed out, but I like to be aware of what's coming down the road.  With that said, I often battle the same urges to procrastinate as anyone.  One of the best ways I've found to combat procrastination is to start with a list.  By seeing the projects named out before you, you will be more inclined to get started and finish your tasks.

With all that in mind, here are my projects for the year:

1.) Realign bricks around flower beds
2.) Re-paint stairs/hallway down to basement - this actually looks scary with dirty finger and hand-prints all over the place.
3.) Paint laundry room windows
4.) Paint side windows of garage
5.) Fix the outlets in the office and living room
6.) Start getting the house ready for babies - This one will be more work than I think I realize

Needless to say, I think these goals are pretty doable and will make things look rather nice around the old household.  If we apply the S.M.A.R.T. system to these goals we can make them more Specific (kind of already did this), Measurable (I can obviously know when they will be completed), Attainable (these are goals that can be done), Relevant (they make sense in my overall life goals), and Time-Bound (I want all these finished by the end of this year).

Now that I've seen these goals and have an action plan, actually completing them won't seem so hard.

What projects do you have for the year?

Wonderful Moment of the Day: Petting my cat while he rolls around in the grass.

Monday, May 20, 2013

Benefits of a Hard Day's Work

It's that time of year again; as the sun stays out longer and the days get warmer, Spring temperatures and the labor that comes with it are in full circle.  Whether it's Spring cleaning, yard work, or construction projects, you're sure to be doing more physical labor in the coming months than you probably did over the winter.  With that in mind, I wanted to examine for a little while the benefits of a hard day's labor.

The first benefit to a hard day's labor is the sense of accomplishment after its all over.  Recently, over the weekend, I spent about 8 hours doing yard work from planting this year's garden to mowing, and laying 24 bags of mulch.  After it was all over, the property looked really nice and I was rather proud of the work I did.  You might not be getting too many sources of accomplishment in your own job or daily routine, so a hard day's labor can be a welcome opportunity to really receive some positive reinforcement.

After your sense of accomplishment, you can be reassured that your results are physical proof of your hard labor.  I like to think about this as if I were a construction worker, the epitome of hard labor.  After all those rough weather days and hard labor, I can look up at the building my team just constructed and feel good knowing that we created something great.  The same thing can be said for a day's labor.  You will see the result, and if done with passion, can be quite proud of it.

Physical labor can also be considered great exercise.  You have to be careful here though that you aren't breaking your back over the labor.  Lifting improperly can put a damper on your future quality of life, but if you're just moving around all day you will definitely get your daily exercise.  That mild soreness you get the day after working hard can almost be pleasurable at times.

Working out on a job doing hard labor can change your perspective on things.  You might hate your cubicle job, but after a day outside doing tough work, you might appreciate not having to do that every day for the rest of your life.  Also, I usually find hard monotonous work soothing since I can let my mind wander and think about anything that's going on in my life.  Your brain needs time to process and analyze things in your life; what better time than when you are mowing.

Finally, I think one of the often overlooked qualities of hard labor is that you will genuinely feel discomfort and that's a good thing.  This may sound strange, but in today's comfort driven lifestyle, we try to ameliorate anything that might cause us a little pain.  By experiencing this pain every once and awhile, we can be reminded of how good we have it and appreciate even more the comfortable times.

I wouldn't want to make a career out of it, but every now and then a little hard work is good for the mind, body, and spirit.  It's a humbling task that can allow you to explore other aspects of your life.  If you're feeling a little lost, why not let your mind wander and do a project?

Wonderful Moment of the Day: Got all my Spring yard projects complete!

Friday, May 17, 2013

Hope for Millennials?

I was recently inspired by this article highlighting the future planning tendencies of the millennial generation, a generation in which I find myself in towards the upper echelon.  The article explains how the millennial generation is turning out to be much more forward thinking in terms of finances than their parents, and are at least planning for retirement now.  With all the hate from TIME Magazine, it’s nice to see some bright spots about my peers. 
Some encouraging stats from this article indicate that a full 91% of millennials with jobs earning at least $50k contribute to their employer’s 401k plan.  Since this is essentially free money, I was shocked to think that 9% don’t.  What is even more shocking is at that age and demographic, only 40% of Baby Boomers were contributing to their 401k!
I think there is a couple things going on here that might explain this situation.  The article touches on one of them, and that’s that this generation has lived through 2 big economic crashes which leaves a lasting impression on individuals just entering the job market.  Watching their parents go through some despondent times can make one want to be a little more careful with their hard-earned funds.  The second theory I have is that Baby Boomers were always lead on to believe that their company’s pensions would take care of them just like their parents.  As globalism kicked into full steam, many were shocked and horrified to see their pension plans dissolve.  Millennials were never brought up in a world where a pension was even an option.  On top of all that, social security might not even be available, or at least not in the robustness it currently stands at.  Millennials therefore have to save on their own if they are going to have any sort of future retirement. 
A healthy savings rate is crucial to the stability of any economy.  I hope that if you are currently not participating in your employer’s 401k plan that you would reshuffle your budget and start contributing now.  You are leaving free money on the table.
Overall, this article left me hopeful for the future, and I hope it did for you too.
Wonderful Moment of the Day: Lying in the grass.

Wednesday, May 15, 2013

Home Owner's Shenanigans Conclusion!

Finally, it's all over and I can continue with my life!  If you are not familiar with the slightly dramatic saga of my home owner's insurance policy, then feel free to read here and here.  Needless to say, it was quite a bit stressful and I finally got my act in gear to get everything taken care of.

If you recall from my earlier posts, I had a series of fixes that needed to occur on my property in order for my insurance company to renew me for another year.  Not wanting to have to go through with the burden of finding another insurance company again at the nice price I currently had, I decided that it would make sense to follow through with the fixes.  Besides just complying with the insurance company, the fixes seemed reasonable and were probably needed anyway.  Well, in my blunderous nature, I mistook the due date that these improvements had to be completely as the date that my insurance policy would be canceled.  I actually completed all these requests about a month ago and thought I had until July 1st to get the paperwork in.

Then I got the letter in the mail; "Your policy is being canceled for failure to comply".  Panicked, I called the insurance company, informed them of my situation, and was promptly told that I needed to mail in proof of these repairs ASAP.  At least this type of work is where I excel.  I took some pictures, copied receipts, and put together a 3 page PowerPoint detailing the repairs.  I then expedited the mailing and just received notice that the Insurance company has forgiven me and will renew my contract.

In all this hustle and bustle  I've learned two very important lessons; the first being to read a little more careful, and the second being to never underestimate the power of organization and human intervention. Believe it or not, there is usually a person behind every bill you pay, and it's worth it sometimes appealing to the human side of the company.  At least now, I can sit back and relax knowing that in case of fire, my financial life is not destroyed.

Wonderful Moment of the Day: Got out of work 2 hours early!

Monday, May 13, 2013

Happy Mother's Day Plus Twins

Even though it's the day after Mother's Day, all you Mother's out there should get another greeting since you went through so much raising your children.  With that in mind, I have my own special news in that my Wife and I will be expecting our first children come December!  When I say, children, I found out a couple weeks ago that it is actually twins!  You can imagine my surprise.

As you can believe, I'm the planning type, and with this special news, it throws all my plans around like a brick in a dryer.  Needless to say, I think some of my skills will come in handy over the next 6-7 months.  Foremost, are my research skills; I've already started scoping out the best strollers, car seats, and so forth.  I feel that when the time comes, I'll know as much as possible on the subject.  Secondly, my planning will come in handy for financial means.  Two added mouths and all the stuff we will need to purchase will put a whole bunch of pressure on our wallet.  Luckily, we've got an emergency fund, and there is enough time for me to start saving for all this expense.

With all this in mind, we'll see how everything goes.

Wish me luck!

Wonderful Moment of the Day: Do I need anymore?

Friday, May 10, 2013

Rolling with the Punches and Dealing with Stress

What stress’s you out? When you think about your life, and all your experiences, what is the one or many instances in which you were so stressed, that you wanted to scream at the top of your lungs?  Some people might list such events as fighting with your spouse, kids, getting into a car crash, or especially having to call the cable company.  Whatever it might be, learning what stresses you and how to deal with it is a skill that is easy to learn but takes a lifetime to master.

It’s funny how my Wife and I have such different ideas of what makes us stressed out.  For her, it’s the big things in life.  A few years back, she was side-swiped in a car accident which caused her some very stressful nights.  Other things include paying the bills and financial management.  Luckily, I don’t mind most of this stuff and gladly manage it for our family.  It’s these large (and hopefully rare) disasters which stress her out the most.  I can totally understand where this is coming from, but for some reason, I don’t usually get too bothered by these.  She has even commented to me in the past “Why are you so calm about this?”  In my mind, these type of disasters are largely unavoidable; there is nothing you could have done to not have this situation happen.  For me, stress is all about woulda, shoulda, and coulda.  I could have studied a little harder for the test.  I should have cut that tree branch down before it fell on the house, etc…  In cases like a car crash, there is very little you could have done to make the situation safer and change the other driver’s habit. 

What stresses me out to no end are the little things in life like leaving the kitchen counter dirty.  These things just grind at your soul and are completely avoidable; there is no reason to ever have to worry about this stuff.  All this is a character flaw of myself and I acknowledge it.  What is important is that I don’t lose perspective in these situations.  What you are complaining and raging about is really a minor problem in the scheme of life.  Bumps and hiccups will come along the road of life, and what truly defines you as a person is what you do and how you handle yourself in these difficult situations. 

Whenever you are stressed to no end, take a mental step back and look at the big picture.  Does your problem seem that important now? 

Wonderful Moment of the Day: Happy Graduation Weekend to all you college graduates out there!

Wednesday, May 8, 2013

Getting Focused

With all the possibilities that life holds for you in your future, one of your biggest enemies in your quest for greatness is closer to home than you may think.  Procrastination is a terrible problem that if left unchecked will deny you from living to your potential; promotions will be passed over you, and opportunities will be missed.  With that in mind, here are some ways I've managed to maintain focus in my own career.

1.) Vary the assignments: You've been working on this big report for the past two hours and now feel drained.  For some reason, you just can't seem to get around to finishing it.  It's quite possible that you're just bored from working on the same thing for so long.  Instead, try mixing things up for a bit and work on another assignment for 30 minutes or so.  This will allow your brain to switch gears and hopefully get that much needed kick start so that you can return to your original assignment with verve and vigor.

2.) Get up and stretch: If you have the privilege of working in a sedentary job, then you might be forced to sit at a cube all day.  May sure you get up and stretch at least once every hour.  You need to get blood flowing back into your legs and other extremities, otherwise over time you could develop blood clots.  One way to give yourself an excuse to get up is to drink a whole bunch of water which will make you go to the bathroom.  Hopefully your bathroom is on the other side of the building.

3.) Listen to some music:  Sometimes your work environment can be distracting with the noise of multiple conversations, computers humming, printers printing, and telephones ringing.  This can cause a type of dissonance in your mind which may be very distracting.  Try listening to some music (preferably via headphones).  Music will not only cut out the cacophony, but will allow you to focus more on just one noise.  This often clears my mind and lets me focus on the task at hand.

4.) Take a walk: Finally, when all else fails, I need to take a walk.  A walk is a chance to literally and figuratively take your mind away from the situation at hand.  It gives you a chance to contemplate your problems before you and explore solutions that you might have not otherwise thought of.

Don't let procrastination rule your life.  Try some of the above tactics next time your having problems with getting things done.

Wonderful Moment of the Day: Playing with my cat in the yard.

Monday, May 6, 2013

Causes of Trouble When Starting a Business

If you ever think about starting your own business, well then I salute you good sir, because you are an enterprising individual!  Often times, entrepreneurs don't understand the common causes that may give them trouble in the near future.  When assessing your opportunity for a future business, it helps to know the issues that could cause problems in the future.  With that said, here's a pretty exhaustive list of potential ways entrepreneurs can get in trouble:

Strategic Issues:
1.) Misunderstand market niche
2.) Mismanaged relationships with suppliers and customers
3.) Diversification into an unrelated business area
4.) Mousetrap myopia: Starting a firm around an idea instead of an opportunity
5.) The big project: Company gears up for a big project without first examining the cash flows of the initiative
6.) Lack of contingency planning

Leadership Issues:
1.) Lack of leadership skills, experience, and know-how
2.) Weak finance function
3.) Turnover in key management personnel
4.) Big-company influence in accounting: focus on accruals instead of cash

Poor Planning, and Financial Controls:
1.) Poor pricing, and over-extension of credit
2.) Poor cash management
3.) Poor management reporting
4.) Lack of standard costing

As a potential business starter, its important for you to foresee these issues and approach them head-on.  If you do, your enterprise is far more likely to succeed and may even thrive.

Wonderful Moment of the Day: Spring tulips

Friday, May 3, 2013

Sell in May and Go Away

The old stock market adage of "Sell in May and Go Away" has its roots in the idea that many wall street traders and other money managers will usually take a vacation in the Spring/Summer months and therefre returns are far less in that time frame than the November to April returns.  With the advent of automated trading and discount online brokerages, this saying is far less true, but there are some aspects that should "go away".

One way to approach the concept of May is to "Go Away" from all the investing and financial planning you ususally do.  What I mean by this, is that you should pretty much have your retirement planning on autopilot, and shouldn't have to do much in this regards besides the occasional portfolio rebalancing.  With that in mind, it is definitely harder to stay indoors when the weather is nice out.  So, wait until November to rebalance your portfolio or make a bulk contribution to your IRA. 

All work and no play will leave you drained.  Everyone tries to take a vacation when the weather is nice, but intead of asking yourself where you want to go, think of a vacation that will provide the least amount of stress.  Booking airfare, traveling, and seeing family can all be great sources of stress to different people.  If you are living an active and busy life, finding time to unwind and de-stress is a rare opportunity.  Instead, think of a vacation that will leave you reenergized and ready to come back. 

Summer time is also the perfect time for our teenager or child to start to learn about the working world.  Many times, parents will leave their teenager to their own devices to find a summer job.  These kids have never had to find a job, and usually don't know the first thing on whether there are good opportunities out there.  You should take the time to help your child find a good job or internship.  It my seem like a mild source of improvement now, but it will pay off later in life.

Whether you go away in may literally, financially, or even mentally, the late Spring and Summer weather gives plenty of opportunities to reenergize your life.  Think smart, focus on a couple, and improve your life!

Wonderul Moment of the Day: Just bought a rope chain saw, and am excited to cut down some high over-hanging branches.

Wednesday, May 1, 2013

Home Buying Programs

The Spring time is not all just about chirping birds and the renewal of life back to the earth.  There is also another rebirth, and that is of the housing market.  Chances are, the next time you will be looking for a home (whether it be your first or seventh), it will be in the Spring.  There are a 101 different aspects of your home you need to think of before you buy, but allow me to suggest one you may not have thought of: buyer programs.

Most people are not aware of this, but many towns and municipalities offer home buying programs to incent enterprising families to move in their districts.  The long term goal is to reap the benefits of their income and property taxes.  When making your home buying decision, try looking at the different towns in your area and see if they offer any kind of incentives.  The easiest way to find out this information is to go to each town's website and doing some simple digging around.  If that doesn't turn anything up, try calling the town office and talk to someone who might know.  You'd be surprised of the many programs available.  In one of my neighboring towns, there are home buying programs that offer big discounts and incentives on buying a home.  In this particular case, it had some stipulations that you had to remodel a dilapidated home and then live in it for at least 10 years.  It also had to be your primary residence.  For some enterprising families, this would be a great idea.

If the town or city you live in does not provide a good incentive, then usually a community bank of creit union offers home buying programs; especially if you meet certain income requirements.  For my Wife and I, we met one of these requirements and through our bank, were able to get a free $7,500 with a pro-rated 5 year live-in requirement.  This money was more than enough for all the closing costs, and really helped us get situated.  All we had to do was attend a couple basic personal finance classes. 

If you're not taking advantage of your area's home buying programs then you could be leaving money on the table.  Do you due diligence and research all your possibilities, and you should come out ahead.

Wonderful Moment of the Day: 70 degrees and sunny!