Tag Archives: Debt

What do you do when there’s nowhere to invest?

nowhere to invest

Nowhere to invest? With a sky-high stock market, it often seems like there’s nowhere to put money.
Image courtesy Renjith Krishnan via FreeDigitalPhotos.net.

I had an interesting exchange with a reader named Bradley recently. Bradley’s basic question was “with the market at all-time highs, where do you put your money? It’s a good question because it does feel a bit like there’s nowhere to invest right now.

And it’s a particularly relevant question for me because I’ve been facing this exact dilemma with the recent windfall from the sale of my fourplex. Making matters “worse,” I just sold another piece of property so I have even more cash coming my way.

If you’ve ever made the mistake of reading any news site comment sections related to the stock market, you already know that there are two main contingents who both believe they are 100 percent correct: One says the market is headed for a crash very soon and only a fool would gamble his money in the stock market. The other group, equally sure their beliefs are correct, say the market will keep going up, up, up and only a fool stays out of the market worrying about a crash. (To get a handle on your investment portfolio, be sure to sign up for a free account from Personal Capital.)

Naturally, both sides are right and both are wrong. In reality, we all know that this market will undergo a significant correction at some point. We also know that the market will grow its way out of that dip. What we don’t know, of course, is when and we don’t know how long it will take to recover. That’s why the most important factor in any investment is the investor’s personal situation. For example, this is why people nearing retirement are typically advised to move to safer holdings as they age, although ironically people in this situation currently are among those who feel strongest that there is nowhere to invest. For some perspective, consider that my first money market account back in the late ’90s paid five percent!

There was a pretty interesting piece in CNN Money in January. While generally sticking with fairly standard allocations and advice, the writer reminds us that good ol’ cash also used to be seen as an asset class.

I recommend heading over and reading the whole thing. Lots of interesting data points pulled together, such as the fact that the market usually has a 10 percent drop once a year but hasn’t seen one in 2 1/2 years (at the time the article was published).  The writer suggests 10 years of disappointing returns await. And, oh yeah, the level of borrowed money in the market is already reaching pre-crash levels. So we’ve got a bubble again, inflated with Fed policy, borrowed money, greed and blind trust.

I might be the last honest blogger, because I’ll just tell you the truth: I have no idea what’s going to happen or when. I held my real estate winnings in cash at the end of last year, partly because I was expecting at least a small correction (which we’ve finally gotten a little taste of) and partly because I haven’t had time to really focus on it. (Which is not to say I didn’t do anything with my money last year. I actually was moving and reallocating funds quite a bit, which is still going on.)

So far this year, I have picked up a few individual stocks when I see a good value, but I’ve held off on buying much more in the way of mutual funds so far. And, in fact, I’ve been moving more money into cash, as I finally dump some stuff I’ve been packing around with higher costs. I’m dreading the tax impacts after this year, but I just want to clean up my portfolio.

My short-term strategy right now is to go ahead and sell my high-cost funds (I have seven of them left at this point with various amounts of money in them). Thus, my cash position is increasing. I’m selling those semi-quickly. Meanwhile I’ll be moving this cash back into individual stocks and/or low-cost Vanguard funds — however, this will happen much more slowly, basically dollar-cost averaging my way back in. By default, depending on how slowly I move these dollars back into the market, I’ll be effectively keeping significant assets in cash as well. I don’t want to say I’m hoping for a big market crash, but if one were to happen, this would be a pretty awesome time.

So that basic framework aside, let’s get back to the main question: what do you do when there’s nowhere to invest?

Let’s start by recognizing that, really, there is always somewhere to invest. Maybe with a sky-high market, now isn’t the time to move a large sum in all at once. But there are always a few undervalued stocks. But you have to be careful. It always rains after I wash my car and the market always dips when I make a purchase. And with the market so inflated, I have been thinking quite a bit about what options do exist outside the usual menu we typically think about. Here are a few things I’ve thought about.

Pay off debt

If you’re carrying any consumer debt at all, this is a good place to start. Whatever your interest rate is on the debt you’re carrying is your effective return by paying off that loan. Still carrying a car loan? Maybe instead of buying into an over-inflated stock market, you pay that car off for good. The free cash flow you now enjoy could dollar-cost average its way into the market or you could save it up so you’re ready to pounce when things drop.

Keep funds in cash

Why consider holding money in cash? Well, on one hand it’s a defensive move — you’re protected from a big crash. When everyone else is panicking, you’re kicking back on your pile of cash. That pile is, however, slowly disintegrating under you, however, as inflation eats away at your buying power. There is another advantage, of course. Imagine if you’d been sitting on big pile of cash during the real estate crash. I know if I didn’t have all my money tied up in, yes, real estate, I would have been on a shopping spree. Thus retaining cash can be an offensive move as well. Sit, wait for a big drop and start swinging your big weapon.

Pay off your house

If you don’t know where to put your money right now but you’re still carrying a mortgage, perhaps it’s a good time to increase your security by putting a bullet in your mortgage. If you’re worried about missing a big market dip, maybe open a HELOC on your now paid-off mortgage. If things look irresistible, you can pull out the funds from your house again and take advantage of market conditions. Remember the crash you’re waiting for could be two or three years away and you could be enjoying the cashflow improvement in the meantime.

Lower your overhead

Recently I wrote about forcing cashflow and how it can hurt you or benefit you. If you’ve got a sum of money and no place to put it, spending some of that money on increasing your cashflow situation can be a savvy move. For example, I’m still considering making the move on solar panels for our house (no-brainer if we’re going to stay in this house long-term). A $15,000 investment in solar would permanently remove our $75/month electricity bill. The downside is it doesn’t pay if we move. But the idea is the important part. For you, it could mean upgrading to a more efficient car, new insulation for your house, moving closer to work, buying new clothes that don’t need dry cleaning. You name it.

Increase your security

You could also tap your funds for  increasing your financial security as well. This might mean stepping up and paying for a few things now just so you don’t have to bother with it later. Maybe your roof is starting to fail — writing that check now while you have the cash not only removes a hassle from your list, but think about the alternative: Imagine you bought in big to the market at the top and suddenly find yourself with several years of waiting before you’re out of your hole. Then, while you’re waiting, the roof fails completely, leaving you in desperate need for cash. By making sure these aspects of your life are rock-solid now while you have this free cash, you’ll be in a much more solid position when crash time comes.

Be creative

People forget there are other places to invest outside the stock market. There are too many to list here, but for example a guy I used to work with owned shares in a local pizza place. There are always people looking for private investors — some people have friends or family who are interested in starting business for example. (Be careful!) You could even buy a small business if desired. Always wanted to own your own restaurant? Now is your chance! If you can think of it, you could probably make it happen. Have a great idea for a mobile app? You could probably hire a development team overseas for less than $20,000 and bring your idea to reality. In addition, there are online lending options such as Lending Club or Prosper where you can make a decent rate on your invested funds.

Jump in anyway

And, of course, where most of us will end up is back in the market, hoping any dip is not too deep or long-lasting. This is where I’ll probably end up as well. I’ll dollar-cost average my way in, at least, but more than likely I’ll limp my way back in and just wait out any dips, just like I always do. In the end, prudent, boring investing in low-cost index dividend funds is usually the best bet. But when you have a big chunk of cash you’re sitting on, it’d sure be nice to start out with a lower price.

What do you think? Any other creative places to put money while the market remains so high? What would you do if you had a large sum that needed a home?

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Another way to decrease your debt: Recast your mortgage

We lowered our mortgage payment by more than $1,000 without refinancing. Here’s how to recast your mortgage

recasting your mortgage

Image courtesy Sujin Jetkasettakorn via FreeDigitalPhotos.net

As I alluded to back in May in Save money with a tool library, there is some potential that we may decide to rent out our house for some period of time. We have a few different ideas in mind, some of which aren’t ready for public eyes. However, since we wisely chose a 10-year mortgage when we last refinanced our house, our payment has been large enough that we’d have negative cashflow at current market rates.

So we had a bit of a conundrum. We didn’t want to restart the clock on our mortgage term, but we wanted that payment to go down. Fortunately there’s an option that perfectly fit our needs and it could fit your needs as well.

Hold up! I suppose it’s time I explain myself. Since I’ve started this blog, I’ve simultaneously mentioned that I don’t have  a mortgage payment and have also said that we’re still working on paying off our mortgage. How can both be true?

The answer is really pretty simple. Being several years older than my wife and because I had a chunk of change from selling some real estate a few years ago, we decided it made sense for me to pay off my half of our mortgage earlier so that I could move toward pretirement (although I still pay my share of the escrow costs). Pretired Mama had quite a bit more saving to go (although she’s far ahead of where I was at her age). But that’s why I had the freedom to quit my job and stay home with the baby (even though I’m still shy of being fully pretired). (I also have two more mortgage payments related to some property I own with my brother, but that’s a story for another day.)

Anyway, here was the situation on our house as 2013 was winding down:

  • Mortgage (1st): $186,000 (10 year loan paid down from $251,000 — all of this is Pretired Mama’s debt)
  • Mortgage (Home Equity Line of Credit): $10,000 (leftover from a deck we recently had built and some other stuff – half of this was my share)

The payment on the first was around $3,000 including escrow. The payment on the second is just $100 (the minimum it can drop to under the terms of this loan.) We could probably rent our house for somewhere around $2,500/month so we’d need to drop it a fair amount to get into positive cashflow territory.

Pretired Mama has been faithfully following my patented template for rapidly paying off a mortgage (seriously — check it out if you’re working on paying off your mortgage. I have yet to see anyone produce a more efficient way to get there quickly.) She had some $40,000 in side savings built up so we had some options. Originally we had planned to do a refinance later this year, but we realized we could get to the same place easily without paying any expensive fees.

Recasting — the easy way to lower a mortgage payment

The method is called “recasting your mortgage” and it may just be the biggest secret in the mortgage industry. A recast of your mortgage simply means the bank will reset the amortization clock based on your current equity situation plus any funds you may wish to bring to the table. The timeframe of the loan remains the same, only the principal drops. She had been paying roughly three years on a 10-year loan so effectively the recast was equivalent to starting a seven-year loan at the new balance.

The bank’s rules (a local credit union) were that you had to be in good standing on the loan and you had to have a minimum of $10,000 to apply toward the recast (either that much equity or cash you brought forward). The processing fee was $150. No appraisal, no credit check, no income check. All we had to do was making a principal payment, call the person in the special products department and tell her the payment had been made, sign and notarize some documents (called “loan modification agreement” — probably the same documents people use when the bank agrees to lower the principal for people who are underwater) and wait. It really was that easy. There was one other question I asked the woman from the bank: “So does our other debt have any impact on this process? For example, if we withdrew some money from our HELOC would that impact our ability to complete the recast?” She said, “No, we don’t look at that at all. You bring the money and we recompute the amortization. That’s it.”

The biggest hassle was trying to get notarized. The bank’s paperwork was unclear about whether we had to have a witness to the notarization or not so we wasted an extra hour with a bored baby at the bank trying to figure that out. (People were scowling at us as we dealt with the signature issue and I’m pretty sure they were assuming we were deadbeats trying to get a loan modification. Heh!)

So here’s how we ended up structuring things. I paid off my half of the existing HELOC ($5,000) as originally planned. Then, we actually pulled some additional funds out of the HELOC to combine with Pretired Mama’s side savings. So effectively, we brought $86,000 to the table from the bank’s perspective (even though half of it was their own money). The remainder on the first mortgage would be $100,000 and the HELOC would now have around $51,000.

When we were done, the loans looked like this:

  • Mortgage (1st): $100,000 (still officially a 10 year loan, but with just seven years left — still all Pretired Mama’s debt)
  • Mortgage (HELOC): $51,000 (this is now all Pretired Mama’s debt as well)

The new payment is $1,800 on the first (including escrow) and it’s still $100 on the second. Monthly savings of more than $1,000/month! So now we’re well below what we could get in rent and Pretired Mama should have the HELOC paid off in a year or less. From there she can either stay on the accelerated plan to pay off the first mortgage or she can shift over to rapidly building up her pretirement fund. Another interesting fact is that the bank said there is no limit to how many times you can recast. So it’s possible we could do one more of these before our loan term is done.

Will your bank allow you to recast your mortgage?

Since I was dreading the high costs and hassle of a refinance, I’m now in love with the recasting concept.

Unfortunately, not every bank is on board with letting you recast your mortgage. My brother and I tried it with another piece of property we own together and they told us they don’t offer this service. And why would they, really? They lose thousands in interest. The only advantage I can see from their perspective is that they retain your business vs. letting you refinance away to another company. But since we use a credit union that offers good service, it’s still an available product (although one they don’t advertise at all).

But if you’re in anything close to my situation, it’s worth a phone call to find out. With a sky-high stock market it can be tough to find a good place to put money. If you’re sitting on cash and are worried about buying at the top of an overpriced market, a recast could be a good solution. You could recast your mortgage, lower your payment significantly then invest the savings on monthly basis, thus dollar-cost-averaging your way into the market — all with less debt hanging over your head.

It made sense for us right now, but every situation is different. Be sure to do your homework. For me, though, I’ll be confirming any bank I take a mortgage from in the future offers a recast. I like having options.

What the Seattle Seahawks can teach you about getting out of debt

In a hole so deep you can’t imagine ever getting out of debt? It’s never hopeless

seahawksThere were only two minutes left in the half. Pretired Mama and I sat on the couch stunned as the previously unstoppable Seattle Seahawks found themselves down 21-0. We began eating leftover Halloween candy just so we could feel something. Anything.

Already worn out from a very busy week of normal life plus a sick Pretired Baby and forced to spend most of my free time wiping up snot and scraping off the resulting “crustache,” I was exhausted. This game was too much. I couldn’t take it. I briefly considered turning the game off to get something else done.

But then I noticed something. The Seahawks weren’t shaken up. They seemed confident. Determined even. It might not be exaggerating too much to say they looked confident they were going to win despite their current situation. Quarterback Russell Wilson, in fact, almost appeared to be grateful for the challenge. He clearly decided he was going to need to show his team how to win and so he did.

With the ball safely in his hands, Wilson stayed just out of reach of Tampa Bay defenders and ended scrambling for a nice 16 yard gain. A penalty gave them an extra 15 yards and suddenly the stadium knew the momentum had shifted.

“A lot of really cool things that happened,” Coach Pete Carroll said later. “To see that Russell finds a way to get us into position to win again, he’s just a terrific football player and a great leader. He never thought for a second that we weren’t going to win this football game. He made the plays he needed to make to put us in position to do it.”

The Seahawks crawled back little by little to dramatically take the win in overtime. “The biggest thing I’ve learned is, if there’s any time left on the clock there’s still a chance,” Wilson said.

If you’re in serious debt trouble today you probably got there the same way one of the best teams in the NFL found themselves down 21 against the worst team in the league. (Those of you with health care debt get a pass.) They didn’t take Tampa Bay seriously. The Seahawks shouldn’t have needed to even break a sweat beating the Buccaneers. It’s the same way debt creeps up on people. Lack of focus, not believing it could happen to you, and a combination of many small mistakes.

Most people when faced with seemingly hopeless adversity simply give up. Sure, they may keep going through the motions. They may keep “trying.” But deep in their hearts, they haven’t adopted a winning mentality. A championship mentality.

No matter where you are right now, you can get where you want to be. It may not be easy, but it’s always possible. You’ll need to create a strategy and stay focused. In sports, champions aren’t the teams who buy the best talent (although that helps).

You can identify the champions by watching teams struggle through difficult times. Are they lazy and entitled or do they take the responsibility upon themselves to make things happen?

It’s no different for any of us. Sure, there is hard work ahead and there’s no shortcut to paying down debt. But the shift begins when the mentality changes. The first step to getting out of debt, not matter how much you have, is to shift your mindset. Know it’s possible, make a plan and you’ll get there.

Just like the Seahawks. See you next Sunday.

You’re next, Falcons! 

How much should you spend on your house?

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?

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