Tuesday, July 22, 2008

Financial Expert

"Why would anyone listen to you?" Wendell asked, pointing out the obvious question and the one I least wanted to hear.

After writing a post about my under used talents and getting some wonderful support and suggestions from my bloggers friends, I was telling Wendell that I was interested in teaching a community education class on simplified budgeting.

"What experience or expertise do you have that would make people want to listen to your financial advice?"

"I paid off $25,000 of consumer debt in three years," I offered.

"Nah!" Wendell insisted. "You cheated and used the equity in our house."

"True, but I kept the payments the same, lowered the interest rate on the house, and paid more than half of what I owe to my mom and dad on the down payment loan."

"And that makes you a financial expert?"

"I read voraciously on the subject," I asserted, "I've read numerous books and I read three to five financial articles a week."

"I'm just not sure that that is enough. What would it take to become a Certified Financial Planner?" Wendell wondered.

I sighed. "One to two years of school, passing the test and working full time for 5 years. That's really my problem. I'd love to work part time, in a few years, but not full time."

"Keep thinking," Wendell said, "you're eventually going to come up with an idea that will make us a gazillion dollars, but I don't think this is it."

***********************************************

When Wendell got a promotion to finance manager (which came with a healthy pay raise) at the Honda store a year and a half ago, I consumed every financial book and article I could get my hands on to see what we should be doing with our money. Should I pay off debts? Increase the amount we're contributing to our 401K? Buy more insurance? If so, which kinds? We even met with our financial planner.

I got a lot of really good information and set about formulating a financial plan.

Around the same time, our ward sponsored a special financial seminar. My neighbor was the instructor, but because of scheduling difficulties, I wasn't able to attend. My bishop was afraid that too many ward members who needed this advice had missed, so he scheduled another at a better time and made a special invitation to the young married couples. (Since Wendell and I are in our early 30's, we count.)

I was pleased that I was able to go, although Wendell (who trusts me implicitly with the family finances) had to stay home with the kids.

This seminar was among the worst financial advice I had ever heard. And the most appalling thing was that my neighbor did this for a living.

First he nitpicked a budget to death with sub categories of the sub categories. Just the kind of thing that makes people hate budgeting. He never touched on insurance not health, life, disability...nothing. Finally, as he was recommending getting ready to buy a house he suggested getting a $200,000 house rather than $150,000, because the $200K would hold it's value better. What? Where was the discussion on getting what you could afford? If your house is too much of your budget you won't be able to feed your family, let alone keep the house up.

He also suggested that you get a 15 year mortgage rather than a 30 year because in the long run you pay less interest. He forgot to mention that 1) you could do this yourself with a 30 year loan by doubling your principle payments and 2) a loan on a house is some of the cheapest money you can get. It's a great thing not to owe on your home, but if you don't have an emergency savings fund, proper insurance, funding for your retirement AND your children's college education saved for, not to mention money set aside for short term goals like vacations, home remodels or car purchase, then you SHOULDN'T be paying down your house.

I could go on in lambasting this poor man's financial advice, but suffice it to say that he was way out of touch with his audience and I can't actually think of anyone for whom his advice is appropriate.

It was just one of those, "I could do this better than he did," moments. I'm more fun to listen to. I'm more dynamic and for heaven sake I'm more well read on basic financial plans. (I don't doubt, however, that he could tell you more about the stock market and stuff about investing which I admittedly know next to nothing about.)

So, here I sit wondering if I could offer someone a step by step guide to a basic financial plan and simplified budgeting.

Who knows? Maybe I'll start another blog on the subject.

8 comments:

Jen said...

Hmmmm....

I share your interest in personal finance, and I think we've done ok--I'm a SAHM and my DH only has to work 60 days a year on average to support us, which is partly because of being in the right place in the right time, and partly because I'm anal about money and reading about it.

However, I disagree with you about home-buying debt. Buying a house on a 15 year note is much wiser in the long run than a 30 year, and since the difference in payments is much less expensive than paying a double payment every month its much more affordable than financing on a 30 year and then committing to yourself that you will double your payment. You get a significantly lower interest rate on a 15 year loan, so the difference between a 15 and a 30 year (if say, your payment on the 30 year is $700 on a year) is a few hundred dollars a month (compared with $1400 if you just double your payment and think it will all even out in the end).

In 15 years, you own 25% of your original mortgage on a 30 year loan.

In 15 years, you can *burn* your mortgage with a 15 year loan.

The average appreciation rate on a house over 30 years is lower than the rate of inflation. Buying a house is not an investment in the sense that it will gain capital, its an investment in the security of not having to make a payment, which leaves you money for extras like vacations. (IMO if your budget is so tight that to buy a house you can't afford things like insurance, etc you probably shouldn't be buying a house at all.)

The actual numbers of carrying a home loan just for the interest-tax deduction don't even add up when you consider that you would save more by keeping the money paid in interest vs your tax savings.

I agree with you that paying off your house shouldn't be the priority when compared with other things like consumer debt or adequate insurance, however buying a house without the intent to pay it off relatively quickly is like flushing your money down the toilet in multiple ways at once. In searching for a financial advisor, I would run, not walk, away from someone who recommends a 30 year loan over a 15 year loan as a venue to being financially secure.

Paying off the house to save 6 or 7% interest over 15 (or even 30) years is going to be much more cost effective in the long run than making 3 or 4% over 15 years (until say, a 3 or 4 y/o is college age) in a 529 college savings plan. So whether to accelerate paying off the house vs save for college depends more on the current market. In certain markets when you can yield double digits on college savings, yes, save because you will end up ahead vs paying down the mortgage. But in a market diving into recession, reducing debt is going to give you more spending power in the long run than a savings account that can't keep up with inflation.

Jenna said...

Jen,
I totally agree with you that 1)market value and current interest rates can have a big effect whether it is better to invest or pay the house down and 2)that there are many circumstances for which a 15 year loan is MUCH better financially than a 30 year one.

Let me give you 3 different scenarios.

#1 Couple makes $150K per year. They have $60K in equity from their home sale to put down on the $300K home they are getting. They have $30K in an emergency fund as well as $5K in a very liquid savings account. They are maximizing the matching employer sponsored 401K as well as putting another 3% of their income into an IRA. They have medical insurance, a million or more of life insurance and they're only debt is $15K left on a vehicle they're driving. They recently got disability insurance and every Christmas they put $200 into their kids 529 college fund.

#2 Newlyweds who have just finished undergrad. Gross income is less than $40K. They have $6K to put "down" on a $150K townhome. So in addition to paying P&I, they also will have to
mortgage insurance. They have $5000 in student loans, but no other debt. They also have no additional savings. They have health insurance, $100K life insurance, but no disability insurance. Because they just started working, they have no 401K or retirement savings.

#3 Gross income of $100K. They have $40K in equity from their previous home, but $20K in debt from a failed business venture and when they were out of work. They are looking to purchase a $225K home. They have health insurance, a million in life insurance, but no disability. They are contributing the matching on their employer's 401K, but have no other retirement savings. They have $4K in an emergency fund, but are not funding their kids college education.

In scenario #1, they should absolutely do the 15 year loan, no question, but in #2 and #3, that's a bit too rosy a view of the future. They have a lot of other things they need to do to get their financial ducks in order and would be best advised to get the 30 year loan.

At this particular seminar, virtually everyone was #2 or #3. That's why I felt he was out of touch with his audience.

Jen said...

I agree with you, but your scenarios 2 & 3 are also probably under qualified to purchase a home at all--pretty much why we have a mortgage crisis in the US right now. Both of them should wait until they have bigger down payments for houses at those prices on a 30 year loan, if they could even qualify for it in todays market.

Jenna said...

Oh, Jen, I think you also misunderstood the "double" payment. That's paying double Principle not double the Payment. At the start of a 30 year loan, it would only be an extra $100-$150 a month on most loans. Still, you pay down the principle twice as fast.

Michael Wood said...

Not to butt in here, ok maybe I am butting in . . . I agree that #2 and #3 shouldn't be buying a home. Period. If they wait a few short years and FOCUS on taking care of some other responsibilities, they'll be in perfect position to buy a home they can afford, even on a 15 year loan.

There's another problem, though (and I'll bet this assertion is pretty hard to prove, but . . .) My guess would be that most people who SAY they will make a double payment (and I know what you mean by a double principal payment), probably won't do it. . . . . just like a large number of people trick themselves into believing they will pay their credit card balances in full each month.

Barely over 50% actually do. And that's the results of a poll of the consumers themselves. I'll bet the actual statistics (if the credit card companies ever revealed them) would show that number being lower.

The Personal needs to be put back in personal finance. It should be 90% behavior and 10% math because too many smart people who know the math, don't have the personal control part to go with it. Having a 15 year loan is a decision that forces you to get out of debt in 15 years or sooner (or go through the pain of refinancing). A 30 year mortgage leaves room for letting it go to 30 years.

In the interest of full disclosure, Debbie and I aren't totally out of debt, but we don't use credit cards any more and we don't buy cars on credit anymore. I can't wait for the day very soon that our house will be the only thing we are still paying on. Then we will pay it off fast and forgo our tax deduction and lower interest loans so we don't have payments. Worth it in our book at least. Wendell and I have a cousin that has almost paid off his house and if you don't know who it is already, it might actually surprise you to find out. It's not someone who makes a ton of money, but he & his wife do a good job of managing it.

Anyway, back to your regularly scheduled programming and sorry for the interruption.

Jenna said...

Mike,
I was hoping you'd come over and share your two cents! I know you do a good job of managing your money and I wanted your take on it.

I totally agree with you that if the person is at all in doubt of consistently paying double principle payments, then they should go with the 15 year.

I believe my sister and her hubby looked at it when they refinanced a few years ago and it would actually save them interest to go with a 30 year fixed and make double principle payments than it would to go with a 15 year fixed.

Still, if you can't trust yourself, and heaven knows a lot of us can't, you should always go with what will force you to pay it off fastest.

I am totally FOR paying off your mortgage as fast as possible, but I fear that a lot of people pay down their houses with out proper protection in place (i.e. an emergency account, the correct insurance and retirement savings).

Candace E. Salima said...

Go for it. It sounds to me like you know exactly what you're doing and people benefit in taking a seminar or class from you. Do not let Wendell discourage you. You do not need letters behind your name when you've actually accomplished the task.

Jenna said...

Candace! Thank you so much! That is exactly the kind and supportive words that I needed to hear.

Maybe I will give it a try...

BTW, I'd love to add you to my blog roll, but I don't know which blog to add. Do you have a favorite?