Jonathan Clements's Blog, page 430

Pillow Talk

AS MY WIFE AND I ATTAIN a certain age, financial questions are taking an unprecedented top spot in our conversations. Gazing into one another’s eyes over Cabernet Sauvignon at our local inn, we as often coo about jobs, savings, taxes and car payments as about romance.

This New Year’s Eve, we cooed about hopes, regrets, fears—and a college bill.

We began saving for our two kids’ educations when they were very young. But with one of us working fulltime and the other only halftime, their 529 accounts have proven too small to cover all expenses at the private colleges they chose, so we’ve also had to dip into other savings. Our daughter recently graduated, while our son is a freshman. He has a merit scholarship covering 30% of his costs, and the combined total of several financial accounts—a 529, a custodial account and a regular taxable account—should cover much of the remainder.

The question we mulled over fizzed-out Korbel Brut: In what order do we spend down our accounts to cover our son’s college costs? Here’s what we’ve come up with:

1. First, we’re emptying his 529. The target-date fund it’s invested in has made some gains, which we can withdraw tax-free. But the bulk of the remainder is in bonds and cash investments that have limited upside potential, the money can’t be used tax-free for any other purpose and, with very little left in the account, the monthly fee no longer seems justified.

2. Next, we’ll turn to our son’s custodial account, which my wife’s folks generously started years back and contributed to until they died six years ago. This account mixes cash, mutual funds and laddered zero-coupon bonds that mature between now and 2018, so only some of that money is available today. We will pull out cash for tuition payments, as the zero-coupon bonds come due, and turn next to selling the funds.

3. We can also begin selling off the S&P 500 index fund in our joint taxable account. We think stock valuations are high and the large run-up over the last eight years may be nearing its end. We’ll owe capital-gains taxes, but we may be able to offset part of those taxes with charitable donations.

4. We will continue our monthly college savings, albeit not into the 529.

5. Finally, loans are always a possibility, though one we’d like to postpone as long as possible to avoid saddling our young fellow with debt.

What do you think of this approach? Let me (and your fellow readers) know your thoughts by commenting below.

David Byron—a pseudonym necessitated by the industry in which he works—is an IT project manager in financial services.

The post Pillow Talk appeared first on HumbleDollar.

This Week/Feb. 12-18

PROVE YOUR LOVE. This week, we celebrate Valentine’s Day. Want to show your love for your family? Make sure you have enough life and disability insurance. Check you have a robust estate plan. And talk to your family about how much financial help you can provide while you’re alive—and what they can expect upon your death.

The post This Week/Feb. 12-18 appeared first on HumbleDollar.

Collective Wisdom

FORGET YOUR POLITICAL PERSUASIONS. Forget health care, terrorism, Roe vs. Wade, the environment, education, women’s rights and voting rights. Instead, focus solely on the economy and markets. Should a Trump presidency affect how you manage your money?

No doubt about it, there’s a temptation to act—and I’ll admit to three modest portfolio changes. In recent months, I’ve invested more in funds that own gold stocks, inflation-indexed Treasurys and foreign stocks, especially emerging markets. But none of these would count as a major portfolio change, all were designed to improve diversification—and, I like to think, I would have made all three adjustments, even if Trump hadn’t been elected president.

I have heard of others who have made far more radical changes, everything from abandoning the stock market to buying homes abroad. At one level, this is understandable: When the world seems unhinged, doing something feels a whole lot better than doing nothing.

But that doesn’t mean it’s wise.

Yes, there are many reasons to be worried. The White House’s apparently chaotic decision-making and President Trump’s blistering tweets create uncertainty, and neither businesses nor investors like uncertainty. Free trade and immigration are good for economic vitality, and we’re likely to see less of both. Infrastructure spending and tax cuts should hasten economic growth, but they may also reignite inflation.

None of this, however, is news. Investors are fully aware of these issues. For three months, they have been wrestling with the implications of a Trump presidency. You might believe that stocks are too expensive and bond yields are too low—and I have some sympathy with those views. But many others have also pondered valuations and interest rates, and they have cast their votes with every buy and sell that they’ve made. The result is the prices we have today. It would be arrogant, and likely foolish, to imagine that any of us knows better than the collective wisdom of all investors. What’s the right price for stocks? The odds are, it’s the current price.

The post Collective Wisdom appeared first on HumbleDollar.

Cheap Digs

HOMES HAVE BECOME LESS AFFORDABLE. But this still looks like a good time to buy a house or trade up to a larger place, especially if you’ll need to take out a mortgage.

Affordability hinges on three key factors: home prices, mortgage rates and household incomes. Lately, both home prices and mortgage rates have been on the rise.

Property prices are up 38.2% from the early 2012 market low, including a 5.6% gain over the past 12 months, as measured by the S&P CoreLogic Case-Shiller U.S. National Home Price Index. But prices have only recently returned to the lofty levels reached in mid-2006. The upshot: In many real estate markets, you’re paying the same prices paid by crazed buyers a decade ago.

Meanwhile, 30-year fixed-rate mortgages have lately been around 4.1%, versus a recent low of 3.4%. Still, mortgage rates remain low by historical standards, and that’s given a huge boost to affordability.

To understand why, consider the affordability index published by the National Association of Realtors. If the index is at 100, it means that a family earning the typical U.S. household income has just enough money coming in to qualify for the mortgage needed to buy the average-priced home, assuming they put down 20%. If the index is above 100, it means the typical family has more than enough income.

In 1999, before the housing bubble started inflating, the affordability index stood at 130.9. That indicated that the typical family had almost 31% more income than was needed to qualify for the mortgage required to buy the typical-priced home. By 2006, when real estate prices peaked, the index was down to 107.6. Fast forward six years, to the market trough year of 2012, and the affordability index had soared to 196.5.

Since then, affordability has declined. Still, as of December, the index stood at 162.8. That suggests homes remain extremely affordable, even compared to pre-bubble levels. A big reason: the fall in mortgage rates. In 1999, mortgage rates averaged 7.3%, well above current levels. Thinking of buying a home? There are many good reasons to continue renting—but rising property prices and higher mortgage rates aren’t among them.

The post Cheap Digs appeared first on HumbleDollar.

Going It Alone

LAST YEAR, I MADE THE JUMP from employee to self-employed. Professionally, I felt ready. But what about financially? Here’s what I did to make sure everything went smoothly:

1. Eliminate Overhead. Success as a freelancer or business owner is never guaranteed. To give my business a chance to succeed, I wanted to save enough to sustain myself for at least six months.

My salary was fixed, so I had to make adjustments to my spending. I moved home for a year with my fiancée and commuted into the city. I ate breakfast and dinner at home, and started packing a lunch three or four times a week. Because I was in the suburbs, I went out in the city less. Developing these habits also prepared me for a leaner lifestyle once my salary disappeared.

2. Max Out Savings. Because my employer didn’t have a 401(k) program, my main retirement account was a Roth IRA. While living at home, I made sure to max out the $5,500 annual contribution for two years, so I wouldn’t be so concerned about saving for retirement during my initial months as a freelancer. I also invested any extra cash I wouldn’t need in the near future in a Wealthfront investment account, while opening a high-yield savings account with Ally for the funds I needed immediate access to.

3. Pay Ahead on Major Expenses. The best time to splurge on non-essentials is while you still have a fulltime job. If necessary, you can always stick it out for another paycheck or two to cover the cost involved. But once you put in your notice, that’s it. I took this time to book vacations, update my wardrobe and, most important, buy my fiancée’s engagement ring. If you’re going to treat yourself to one last spending splurge before quitting, I’d recommend picking up a new credit card that has a hefty sign-up bonus, so you get rewarded for all that spending.

4. Get Paperwork in Order. Setting up a small business isn’t hard, but the process tends to drag on. It took close to three months to set up an LLC, apply for a DBA (doing business as) and open a business checking account. I got the process started before I quit, so I could hit the ground running.

5. Check in Financially Every Month. Perhaps the smartest thing I did while preparing for self-employment: Hold a monthly financial check-in with my fiancée. At the beginning of every month, we reviewed the amount we each had in our financial accounts to make sure we were hitting our savings goals. It’s a practice we continue to this day.

Steven Aguiar is the founder of BlueWing, a B2B digital marketing agency. He majored in Economics and Hispanic Studies at Brown, and is a big fan of compounding interest.

The post Going It Alone appeared first on HumbleDollar.

Five Steps to Your Own Front Door

I BOUGHT MY HOUSE in 2010, when I was 28. I was lucky to get good advice from my parents and some finance blogs I read. Even with that, there were parts I didn’t understand until after all the paperwork was signed and the deal closed. Buying a home is probably the biggest purchase any of us will ever make, so it’s best to reduce rookie mistakes as much as possible:

1. Plan backward. When you buy a house, the first step is to figure out what’s nonnegotiable with respect to characteristics (think bathrooms, bedrooms and central air), location and—most important—price. What is the monthly payment, including taxes, utilities and cash set aside for repairs, that your family can comfortably handle? Experts suggest no more than 30% to 35% of pretax income. I think 25% to 30% is safer. If a home doesn’t fit your budget with the qualities you want, walk away or revisit your wish list. Resist the urge to pay up past your comfort point.

2. Get to 20%. Banks and realtors will assure you—as they did me—that you don’t need to put down 20% of the purchase price. While that’s technically true, it isn’t good financial advice. A 20% down payment eliminates private mortgage insurance, which is a required monthly cost until you have 20% equity. It also shows that you know how to save a substantial sum—an important attribute since you’ll need a sizeable house repair fund as soon as you become an owner. Each year, expect to spend 1% to 2% of a home’s value on repairs. Finally, the larger the down payment, the lower your monthly cost. That means you’ll have more cash available for investing and everyday expenses.

3. Push your realtor. If you’re buying, the realtor’s job is to help you get the best deal, including a lower price. But remember, the realtor also has a perverse incentive to prefer a higher price, because he or she makes more commission.

I was hesitant to push my realtor to demand a new roof repair before closing and generally trusted everything she told me as absolute. Today, I’d be more pushy, and ask for specific information and rationale behind a realtor’s recommendation. Good realtors will be glad you’re asking and see the long-term game: If you’re happy with their work, you’ll recommend them to others and they’ll make more sales.

4. Talk and listen. While I had a good general sense of the neighborhood, I didn’t spend any time on the street outside the house that we eventually bought. That would have opened my eyes to some unpleasant neighbors who ended up costing me money and peace of mind. The same advice goes for the home inspection. Don’t necessarily go with the realtor’s recommendation. Instead, pick an inspector with strong reviews and join him or her on the inspection. Ask questions, take notes and—if necessary—be willing to walk away from the house.

5. Consider your time horizon. If you aren’t fairly certain you’ll be in the area at least another five years, hit the pause button on your buying plans. You often need five years to break even, after all associated costs are factored in.

Zach Blattner is a former teacher and school leader who now teaches teachers across the Philly/Camden region as a faculty member at Relay GSE. He is a self-taught finance nerd who dispenses advice to his wife, friends, family and anyone else willing to listen.

The post Five Steps to Your Own Front Door appeared first on HumbleDollar.

Sweet Ride

HOW DO YOU GET more from your money? In HumbleDollar’s latest newsletter, I outlined 11 of my favorite strategies, including using a home-equity line of credit to pay off a mortgage that’s too small to make a full refinancing cost-effective. A reader offered an alternative strategy—one that had never occurred to me.

“If your mortgage is down to about three years remaining and you have significant equity in your automobiles, you may find a very favorable auto loan to use to pay off your mortgage,” suggested my Pennsylvania correspondent. “I borrowed $31,000 on two autos we owned outright at 1.49% for three years, and used the cash to pay off our mortgage, which was at 3.75%.”

The post Sweet Ride appeared first on HumbleDollar.

This Week/Feb. 5-11

GET READY TO REMODEL. This is the time of year when homeowners start lining up contractors for their spring remodeling projects. If you’ll need to borrow, consider setting up a home-equity line of credit. Planning to sell in the next few years? Stick with cosmetic improvements and avoid major projects, because you’re unlikely to recoup the cost.

The post This Week/Feb. 5-11 appeared first on HumbleDollar.

February’s Newsletter

HOW CAN YOU SQUEEZE more out of your money? In this month’s newsletter, I outline 11 of my favorite strategies, including taking advantage of the 0% capital gains rate, using a Roth IRA as both retirement savings and an emergency fund, making the most of credit cards that pay cash back and doing a low-cost mortgage refinancing with a home-equity line of credit.

The post February’s Newsletter appeared first on HumbleDollar.

More from Your Money

Want to make your dollars work harder? Here are 11 of my favorite strategies. In each case, you can find additional information by clicking through to HumbleDollar’s online money guide.

1. Fund a Roth IRA—and let it double as your emergency fund. Ideally, you want to leave your Roth untouched, so you milk as much tax-free growth from the account as possible. But if you need to repair the car or replace the roof, you could withdraw your regular annual Roth contributions, and there wouldn’t be any income taxes or tax penalties owed.

2. Refinance a small mortgage with a home-equity line of credit. Got a high-interest home loan? If you refinance a loan balance below $100,000 with another fixed- or adjustable-rate mortgage, the gain from the lower monthly payment may never offset the upfront costs involved. But if you pay off your current mortgage with a home-equity line of credit that charges a lower rate, there would be few—if any—upfront costs. Keep in mind that, unlike a traditional fixed-rate mortgage, credit lines leave you vulnerable to rising interest rates.

3. Delay claiming Social Security until age 70, especially if you’re married. The spouse with the higher lifetime earnings should be the one to delay. That way, you can ensure a larger benefit for yourself and a larger survivor benefit for your spouse, assuming you die first. This strategy makes sense for pretty much any couple, unless both of you are in bad health or you have young children.

4. If your employer’s 401(k) plan offers a matching contribution with immediate vesting, fund the account, even if you know layoffs are imminent—and even if you’ll have to tap the account if you lose your job. To be sure, drawing down your retirement account will likely trigger a tax penalty. But the penalty will probably be less than the money you made from the matching contribution, so you’ll come out ahead financially.

5. Increase your taxable income if you find yourself in a low-tax year. Let’s say you just retired or you have spent much of the past year out of work, so you have relatively little taxable income. You might sell stocks with large unrealized capital gains or convert part of your traditional IRA to a Roth, knowing this extra income will be taxed at a low rate.

6. Make the most of credit cards that pay cash back or other rewards. For instance, it can be worth carrying two or three credit cards that offer rotating categories that pay 5% cash back. Then, for any particular purchase, endeavor to use the card that’s currently offering the biggest rebate.

7. Double your money with EE savings bonds. Despite the tiny interest rate on EEs bought today, you’re guaranteed a 100% gain—provided you hold your bonds for 20 years. Stocks should do better than that. Still, EEs might make sense for more conservative investors.

8. Rebalance your portfolio. Set target percentages for different investment categories, and thereafter occasionally buy and sell to bring your portfolio back into line with these targets. If you regularly rebalance between stocks and bonds, you should improve your portfolio’s risk-adjusted return. Meanwhile, if you regularly rebalance among different stock market sectors, you should boost your absolute return.

9. If you’re in the 15% or lower federal income tax bracket, exploit one of the great financial freebies—the 0% long-term capital gains rate. Have a stock you’re looking to unload? This could be your chance.

10. Persuade your beneficiaries to opt for the “stretch IRA” strategy, so they squeeze a lifetime of tax-favored growth from the retirement accounts you bequeath. There’s a good chance Congress will eventually outlaw this strategy—but, until it does, you should encourage your heirs to take advantage.

11. Got stocks or funds that you’re happy to hold for the rest of your life? Do just that—and the embedded capital gains tax bill will disappear upon your death, thanks to the step-up in cost basis.

Soft Sell

My brother Andrew and his partner recently launched a website where you can design your own pillowcases. Check it out at Dialogshops.com. Shipping is free and, if you use the code DLG15, you’ll get 15% off.

Greatest Hits

Visitors to HumbleDollar.com viewed 116,000 pages in January, versus 36,000 in December for the old site at JonathanClements.com. Many folks headed to our online money guide, especially the retirement chapter. Which blogs got the most eyeballs? Here are January’s most popular:

Courtside Seat
Did I Say That?
Prosperity’s Pitfalls
Spending Time
Unexpected but Predictable

The post More from Your Money appeared first on HumbleDollar.