Greeting card tyranny

May 6, 2013 8:35 am , 21 Comments ,

greeting_cardAt this point in the development of capitalism, it is well understood that the most profitable businesses are those that sell a product that consumers cannot resist buying. Cigarettes, oil, electricity, insurance and heroin are all examples of products that once a consumer is hooked, he cannot help but to buy. I put greeting cards in this category.

Americans purchase 6.5 billion greeting cards each year, blowing $7-8 billion for the privilege, according to the Greeting Card Association.

Sure, it’s not much money per person, maybe $30 each on average. But for what?

Trees are mowed down or, in the best case, recycled paper fiber is processed into sheets of printing stock. These sheets are then printed with cute little phrases and pictures (often in China), are shipped to the U.S. then distributed to individual stores. At the local stores, the customer plays his or her role, flipping through the cards as quickly as possible until one is found that will “work” — not perfect, just “good enough.” The card is mindlessly purchased, a name is unemotionally signed and the card sits until it’s time to hand it over to the receiver. That moment is funny, too, with the giver anxiously waiting while the receiver opens the card, fakes a chuckle at the joke and says a heartfelt “thank you.” If it’s a group setting, the card is then passed around so everyone can enjoy the hilarious joke. And, then, of course, after the journey from forest to factory to store to lucky recipient, the card is usually recycled into an eggshell carton, fulfilling the much more important job of gently cradling an egg.

My biggest complaint, though, isn’t about the environmental waste of greeting cards nor is it the financial cost, which is relatively small on an individual basis. No, it’s the societal pressure to acknowledge these special dates with a decorated and branded piece of paper. Somehow the greeting card industry has managed to create a world where I must buy something to remain in good social standing. Instead of getting points for buying something for you, I get punished for not buying something. Now by spending my money on a greeting card, I get to zero. It has become, literally, the least you can do. (OK, actually sending birthday greetings on Facebook is doing even less, but you get the idea.)

For many years now, I’ve mostly opted out of buying cards for people. I feel no pressure to tape a card on top of a gift just to complete the picture. I don’t buy a card for someone to acknowledge their birthday. Cards I’m OK with are condolences card for deaths in the family, thank you cards (buy in bulk to have some on hand for less money) and occasionally I’ll spring for one just to hold a gift card. My wife and I have an understanding about this, which helps a lot. Occasionally we’re still caught by this exploitation for certain special occasions, such as a parent’s anniversary or similar event, but it’s been liberating to largely free ourselves from this tyranny.

What about you? Do you still buy greeting cards or have you found a way to escape this trap? Or do you not look at as a trap and buy cards without feeling it’s a such a horrible thing?

Posted in: Saving money , 21 Comments

PBS Frontline: The Retirement Gamble

May 3, 2013 8:49 pm , 9 Comments ,

frontline

I finally had a chance last night to watch the excellent PBS Frontline documentary on the American retirement “crisis”. If you have a spare hour, it’d be worth your time to watch the whole thing. (Here’s the transcript if you want to take a quick skim.)

The piece covers a lot of ground, but the two biggest points were that the burden of retirement planning has been plopped into the unprepared public’s lap in the form of 401(k) plans and that the 401(k) bucket of cash has been too tempting for plan managers, who have been grabbing the money for themselves in the form of fees.

In fact, the most powerful punch of the show is when it’s illustrated that the fees actually eat up as much as two-thirds of the gains over your working career. Fortunately, they also point to a solution: low cost index funds. Interestingly, it’s the exact same strategy espoused by none other than Mr. Money Mustache. They even interviewed MMM’s hero, Vanguard’s John Bogle! That was pretty cool to see and it was great to get reinforcement of my preexisting opinion about 401(k)’s and financial advisers.

Of course the program had to include some “real people” to add some emotional weight to the story. This is where the piece was at its weakest. One gaping hole was that they didn’t talk about these people’s spending rates and didn’t even mention whether they still carried a mortgage or not. For example, one woman said she had $500,000 in retirement funds at age 48, but somehow can’t imagine being able to retire until she’s in her mid-70s! Another fellow was shown at what looks like a waterfront home, talking about how he has to work part-time in his senior years. I actually liked him because he said he’d downsize into a tent if he had to. I think that’s the attitude that got him his waterfront house.

The reporter, the always intrepid Martin Smith, uses his own retirement as an example, noting that he dipped into his nest egg multiple times over the years. The financial adviser tells him he has to work full-time until age 70 and “from age 70 to 75, I have you working part-time.” The reporter notes that his savings went to his kids’ education, a divorce and “the crash of 2008.”

The real tear-jerking segment featured Debbie Skoczynski:

I freaked out when I took the money out of my 401(k). It was hard. I mean, it’s— you know, you never— every day on the news, I’d listen to it and I’d be, like, “Oh, God, it’s really bad. Will I be able to keep my house? Will—” you know, “I— what if my car breaks down? I can’t afford a car payment.” It just can’t be this hard to make— it can’t. You know, you hear these big companies with these people taking these huge bonuses. You’re thinking, “Well, what happened to the average Joe?” They just don’t care. They made their money already.

Now, I feel bad for Debbie, but you can see her one-dimensional thinking here. She asks “What if my car breaks down” and answers that with “I can’t afford a car payment.” I don’t want to pick on her, after all she’s having a rough time, but I was thinking, “Um, you can’t think of ANY other solutions to that potential problem?” Like maybe “car repair”? Or “cheaper car”. Or “the bus”? To me, she really represents how Americans have been trained to deal with life: just throw money at the problem and if I don’t have any money, that’s OK because I’ll have money later.” Had she not been too far stretched with (apparently) a large house payment and other expenses, she could have easily weathered the storm without tapping her retirement money.

The remainder of the show was mainly the strongly worded accusations and squirming insiders that make Frontline such a fun show to watch.

Unfortunately the show didn’t once talk about buying too much house, how to get rid of your mortgage, mindless spending, how much one needs to retire, or whether people should pay for their kids’ education.

If the show had a fatal flaw, it was that it uses a “Retirement Plan Consultant” to endorse the proposition that Baby Boomers don’t have enough to retire but then calls such advisers out at the end of the piece for giving bad advice and scooping up all the money in fees.

In fact, the financial planner at the beginning even pulls out the old “$1.5 million” trope again, saying one needs 10-20 times your yearly income to retire. Um, why? Not explained. Just gulped down by the reporter as if it were just handed down on a stone tablet.

I advocate trying to “pretire” as soon as possible, which means generating enough money through passive means to support yourself indefinitely. If you reach that stage before traditional “retirement”, then you should be able to get a nice raise when you retire. If we accept that as the goal, then your yearly salary becomes completely irrelevant to how much you need to have in your nest egg when you retire. There is NOTHING about how much you make today that helps you determine what you need to retire. The only thing that matters is how much money you need each month and how you’re generating that money.

The program does a great job of exposing many problems, particularly that the general public is completely clueless about this stuff and that they’re being robbed via fees. Sadly the reporter himself is in this category. His ending has him exploring online calculators(!) and finally comes to the conclusion “I will keep working.” Hopefully they’ll go deeper next time and explore the real math of retirement and pretirement: bringing in more than you spend.

Posted in: Observations , 9 Comments , Tagged: ,

How much should you spend on your house?

April 30, 2013 8:41 am , 36 Comments ,

Don’t feel pressured to buy the biggest house possible

How much should you spend on your house?

How much should you spend on your house?

Those who know me know I’m a big believer in real estate. I’ve bought and sold tons of real estate over the years, including single family houses, rental property and I even wound up doing a sort of flip once (wasn’t planned that way, but that’s what it turned into).

At this point, I’ve pretty much seen everything from sewer backups, lunatic renters, mold, leaky pipes, you name it. So I feel qualified to spray my opinion all over the internet about most real estate topics.

The latest thing that’s gotten under my craw is the nonstop drive by the real estate and lending institutions to push buyers into purchasing as much house as they can possibly afford. The most visible way we see this is in online calculators helpfully offering advice on how much home the user can afford.

These calculators all have one thing in common: the first thing they ask you for is your yearly salary. They then typically will use a simple computation to determine your debt-to-income ratio. That’s usually somewhere around 35%. In their defense, that is largely how the lending industry will look at things. And unless you have something weird on your credit report or a relatively high amount of consumer debt, you’ll probably get that loan.

But look at the calculator on CNN Money, for example. I put in a fairly typical upper income salary of $100,000 each for a couple with 20% down with no consumer debt (if you have ANY consumer debt, you should be getting rid of that right now instead of reading this). Using that input, it tells me I can buy a house of over a million dollars!

Mmmm, milliiiiiooooon doooolllllaaaaaaaaaaaaaar hoooouuuusssssseeeee… (Drool, drool, drool.) My head is filled with visions of waterfront homes, decks with hot tubs, space far from my neighbors, condos with sweeping views of harbors, kitchens with islands and built-in wine coolers, separate rooms for every possible human activity. It’s almost irresistible!

Almost.

My problem with this way of looking at house shopping, is that it’s asking the wrong question. The question isn’t “How much house can I AFFORD?’ The right question is “How much house do I NEED?”. And, really, no one “needs” a million-dollar house. It's a Trap!

It’s easy to get starry-eyed about real estate. I’ve done it myself. I did buy too much house when I moved into my current home. (Not because I was buying as much as I could, however. According to these calculators, I could have afforded much, much more. I was just confused about what I really needed, a good topic for a later post.) Beautiful real estate is one of the most engaging forms of art. I could spend ALL DAY just looking at pictures on Houzz. And like any consumerist temptation, I feel the pull to make my house look like those lovely models.

That’s when I have to work hard to slap myself back to reality. Because there is no bigger hole to flush your pretirement money down than the real estate hole. I could have shaved several working years off my career had I not bought so aggressively. That’s true for so many people. Let’s say you purchased a $600,000 home when a $400,000 home would have sufficed (which is what I did). That would be an extra $100,000 each toward your pretirement funds. That could be a third of what you each needed! In addition, there is more house to maintain. A larger house will have a larger roof, more bathrooms, more windows, more expensive furnace, etc. Plus higher insurance and property taxes. More yard to mow, bigger electric bills, the list goes on.

But we haven’t even talked about the biggest problem: your gigantic mortgage. If you really bought that $1,000,000 home that CNN Money was saying you could buy, you’d be paying a mortgage of nearly $4,000/month before tax and insurance! Now if you’re both making $100,000/year, that may not sound too bad, really. It’s, by definition, around 35% of your monthly income. You have plenty of money leftover each month. You could even afford a car payment if you wanted. What’s the big deal?

Here’s the big deal: Unless you have a way to talk to Future You 25 years from now, you don’t know how much you’re going to hate your job by then. And if you really love your job at that point, but haven’t purchased an unnecessarily expensive home, you’ll be able to buy that million dollar home then with cash! You’ll be much better off buying the cheapest house that will work for you instead of the most house you can get.

Pretirement is about gaining your own freedom. As quickly as possible, you want to build up your investment fund so your monthly bills are covered. This doesn’t happen overnight, but it WILL happen if you can resist the urge to bury yourself in debt.

With all that in mind, here are my rules for buying personal real estate. This only applies to the home you’ll live in, I’ll have different rules for investment property.

  • Buy quality, not a project
    We’ve all heard the old saying about buying the worst house in the best neighborhood. And, that saying is actually true! However, don’t let that convince you to buy any project houses. First time homeowners have no idea how much these projects will cost and once you’ve begun there is no turning back. The best way to make money in real estate is to not spend any money on property AT ALL and let the market appreciate for you. And, first time homeowners ALWAYS over-improve their first homes. I did it, you’ll do it. We all do it. By buying something that’s already in good shape, you’ll usually come out way ahead.
  • If something bothers you about the house, don’t overlook it
    My wife and I once bought a house that had more than 20 steps from the street to the front door. It was an old tudor with tons of charm and we lost our heads (it was a major project house). We overlooked the steps as long as we could and finally realized it was such an unchangeable feature that we knew we had to get out. We barely escaped the real estate collapse, closing the deal right before all hell broke loose. Had we not been able to sell, we would have been stuck living with those horrible stairs. Do yourself a favor: If something bugs you, keep looking, you’ll thank yourself later.
  • Buy what you need — don’t believe the “more is more” crowd
    With real estate, it’s very easy to move up the cost ladder by inching your way a little at a time. “Well, this one is only $5,000 more, I guess we could come up a little.” If you do that more than a few times, you’re soon in expensive home territory. It’s OK to adjust your budget to match reality, but make sure you’re clear about what you really need. If you’ve decided a three-bedroom is right for you, why are you being tempted by a four-bedroom for $10,000 more?
  • If you can’t afford the 10-year loan payment, you’re buying too much house
    The best way (right now — this could change with an increase in interest rates) to determine how much house to buy is to use a 10-year loan as a guideline. Take a look at your expected monthly bills. Add in a bit extra for breathing room. Now, can you afford the payment if you do a 10-year loan? Congrats, you’ve just found your budget! It may not make sense for everyone to structure their loan as a 10-year loan, but as a guideline to figure out your maximum budget it makes a lot of sense.
  • Buy it because you love it, not as an investment
    Real estate can be a great investment and a very lucrative one. But it can also be a harsh mistress. Make sure it’s the right home for you before pulling the trigger. Focusing too much on the investment side can leave you stuck somewhere you don’t want to be.
  • Make sure it fits your practical needs, not just emotional needs
    Now that you love it, also make sure it fits all your objective criteria. Layout, number of bedrooms and bathrooms, privacy, proximity to work and school. These are all critical and must not be overlooked just because the home has loads of style.
  • Don’t “drive until you buy”
    These days the highest priced real estate is largely found in city centers. Moving in concentric circles outward the prices drop as distance from work increases. Home buyers often will simply explore outward from the city center until they find what they can afford. This is often called the “drive until you buy” strategy. They then live miserable lives in their cars, driving to work, errands and soccer games, frantically five minutes late to everything. Instead, either buy less house (hey, earlier generations had even more kids than families today so it’s possible, right?) or rent right in town.
  • Always put at least 20% down
    Fortunately it’s harder to get a loan without a decent down payment these days. That keeps a lot of people who aren’t ready to buy off the market. But there are still a lot of purchases happening with 10% or less down. If you don’t have the 20% yet, just hang in there. It’ll be worth it in lower payments, built-in equity and no mortgage insurance.
  • Don’t rush it
    Don’t be tricked into buying, thinking you have to get in before it’s too late. It’s never too late. Stick to your strategy and don’t be rushed by anyone. There’s always another house and another great time to buy.
  • There is no shame in renting
    Renting has its annoyances but it has a lot of upsides, too. You can keep maximum dollars flowing to your pretirement fund, you don’t have to fix anything and you can move whenever you want. If anyone gives you crap for renting, just chuckle to yourself, knowing you’ll be completely pretired while they’re still schlepping to work every day.

I’ll add in any others that occur to me, but following those guidelines should keep you on a healthy path to pretirement. Once you’re well under way, you can check out my tips for paying off your mortgage early and really speed the process along.

What are your best tips for keeping real estate costs under control as you pursue pretirement?

Posted in: The system , 36 Comments , Tagged: , , ,

Should you pay off your mortgage?

April 26, 2013 10:32 am , 10 Comments ,

It’s your biggest bill — is there any reason to keep it?

If you’re reading this from the U.S. or Canada and own a home, chances are you have a mortgage. And if you have a mortgage, you’ve no doubt wondered from time-to-time if it is possible to pay it off early. As I previously showed in How to get rid of your mortgage, it is.

But today I’d like to discuss whether you SHOULD pay off your mortgage.  

There are two distinct camps in this discussion.

One one side, there’s the “peace of mind” camp. These guys advocate for getting rid of this debt as soon as possible to remove stress from their family. These folks tend to be naturally opposed to debt in the first place and taking on a mortgage in the first place was only an act of necessity. You can read more about this point of view here.

In the other camp are the investors. The investors can’t bear to have even a single dollar making less than its maximum potential. These guys look at today’s low interest rates, realize they can do better in the market and feel they are losing money by putting their money where the interest rate is so low. You can read a good writeup on this perspective here.

And, like any good disagreement, there are those that fall in-between, which is where I land, although I definitely lean toward the “peace of mind” peeps.

But let’s take a deeper look.

The investors often mention a 5% yield on investments as being a reasonable goal in today’s market. You might want to shoot for more if you’re particularly aggressive or young but you might want to aim for 3-4% if you’re older and/or need to be more conservative. But for purposes of discussion, we’ll use 5% as a good target.

So if you can earn 5%, does it make sense to target your funds at a rate of less than 4%? As of this morning, you can get a loan (theoretically) for 3.5%. Nice, right? An extra margin of 1.5% going to YOU!

Let’s pause, though, to recall what an interest rate represents. If you remember your basic economics, an interest rate is just the market representation of risk. If you’re a less risky borrower, you’ll get a cheaper rate when you buy your house. Same on the investing side, you can find investments that earn 10% or more, but your money is increasingly at risk the higher up you go.

So when thought of in that way, we should look at paying off our mortgage as “earning” the rate of our home’s interest rate. Or, in other words, we can earn a relatively safe 3.5%. I also like thinking of the principal of your home as “savings” and the interest you pay as the “cost”.

Good reasons to consider NOT paying off a mortgage

  • Your employment is secure for the long-term
    It’s easy to forget how massive the bloodbath of 2008 was. Many (many!) people who never even considered they’d be out of work were suddenly faced with bills they couldn’t pay. But if you believe you’re completely safe from job risk  or have other “safe” income sources, you could stay leveraged.
  • You have adequate safety measures in place
    Because no one knows what will happen, you have to be ready for anything. A year of your monthly expenses kept in relatively safe, accessible investments should be adequate to keep you out of trouble.
  • You are relatively young
    I’m not a fan of people in their 40s and 50s staying highly leveraged just to squeeze a bit more out of their investments. For younger people, they are  in a better position to withstand a downturn.
  • Family situation
    If you have kids, you might be more focused on increasing your security more than in building up your investment fund.
  • You have a high risk tolerance
    Being willing to lose large sums of money comes with the territory if you’re choosing investing over removing debt.
  • You are highly disciplined
    Most people who say they’re staying leveraged for investment reasons inadvertently end up loosening up their cashflow and spending rises, leaking their funds out to the consumerist world.
  • Inflation
    Should we run into a hyperinflationary period as many believe we will, your “locked-in” payment amount will be trivial compared to your newly “inflated” income.

Good reasons to consider paying off a mortgage

  • You’re in your 40s or 50s
    If you’re working toward pretirement and can see traditional retirement looming on the horizon already, you should be grateful we’re in a low interest rate environment. In times past you’d be stuck swallowing massive amounts of interest as you worked to tame your mortgage. (It’d be even more important to do so in a higher interest world, however.) With low interest rates, though, you can much more rapidly work this debt down and thus lower your needed investment number to reach pretirement.
  • You can’t stand having debt
    We often overlook emotional needs when talking finances. But we’re living our lives here. If it stresses you out to carry debt, by all means get rid of it!
  • You couldn’t handle large investment losses
    Beyond emotional reasons, a massive investment loss could devastate some people. You can build a safety wall against big losses by removing debt instead of playing the market.
  • Your balance is small
    If you have a relatively small amount left to pay on your mortgage, it might be worth getting rid of that annoyance as soon as possible.
  • Your job is shaky
    If you think your job could be at risk, living mortgage-free will greatly increase your safety margin.
  • A paid-off mortgage can act as a safety fund
    When a mortgage is paid off, it’s trivial to get a line of credit for emergencies. Hopefully you’ll never need it, but it’s great to have a large fund available. This allows you to keep the rest of your money invested as aggressively as possible.

Now I don’t advocate paying small additional amounts to principle over the years. This strategy is actually designed for people that don’t know how to manage their money, locking it away from them so they don’t piss it away. I recommend saving and investing outside of your mortgage for eventual pay-off or refinance. That means keeping this money semi-liquid and trying to earn more with that money over the years.

One could also consider a hybrid strategy: Pay off the majority of your loan and invest a smaller, controlled amount, say, $50,000 or $100,000. It lowers your risk but also lets you gain additional earning from a decent chunk of money. That may be just enough peace of mind to make it worth your while.

When we talk pretirement, however, the goal is to bring financial freedom within reach as quickly as possible. This is why I lean toward the Pay Off camp. By lowering your overhead, you have a clear target for monthly income and can even rely on part-time work to cover those bills. It’s typically one’s mortgage that keeps one working full-time. Look at your own bills and let me know in the comments if that is not true for you.

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Posted in: Pretirement How To , 10 Comments , Tagged: ,
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