Doing the ‘Right’ Thing – A Topic That Will Not Die
By JLP | November 16, 2009
Just watched this video clip on Larry Winget’s facebook page:
Regardless of what the guy does, he’s in deep doo doo. He paid $340,000 (financing $272,000) for a house that is now worth between $120,000 and $140,000. He can afford the payment but is still thinking about walking away since the purchase is no longer in his favor. I wish I had more details regarding his situation but I don’t. That one advisor who talks about the after-tax cost of the mortgage makes some sense in that the true cost of the mortgage is less than this guy thinks it is.
Still, using a current value for the house of $140,000, at a 3% appreciation rate, it would take 30 years for the house to appreciate back to the purchase price. An appreciation rate of 5% would take 18 years. Bottom line: this guy’s going to be underwater for a long time.
Topics: Mortgages | 16 Comments »
Addressing a Dave Ramsey Fan’s Comment
By JLP | November 16, 2009
My old Dave Ramsey posts regarding comparisons between the 15-year and 30-year mortgage still receive comments from time to time. This afternoon I noticed the following comment (on this post) that I want to address:
In the comparison above the amount in savings is only listed for the 30 year mortgage. Where does this number come from? Multiplying $458 times 180 (months) come to $82440. Nonetheless, one really important peice is missing. If I am in the 15 year category, and I just paid off my last payment of $1696. How’s about I save $1696/mo for 15 years and then let’s compare savings accounts. At the end of 15 years of saving $1696 (as I paid off my mortgge after 15 years), my savings account reads a sweet $305,280. Did I miss something?
His comment refers to this graphic:
Let’s look at this reader’s questions, one at a time:
In the comparison above the amount in savings is only listed for the 30 year mortgage. Where does this number come from? Multiplying $458 times 180 (months) come to $82440.
The savings is the difference in payment amounts between the 30-year and 15-year mortgages. I went on the assumption that the person could afford either mortgage and that the payment difference would be saved and invested.
Simply multiplying $458 by 180 ignores the potential investment growth. In the example, I used an 8% growth rate. Granted that rate has turned out to be high given the bad markets we have had recently. But the 8% number is well within reach over the long-term.
The reader then goes on to say…
Nonetheless, one really important peice is missing. If I am in the 15 year category, and I just paid off my last payment of $1696. How’s about I save $1696/mo for 15 years and then let’s compare savings accounts. At the end of 15 years of saving $1696 (as I paid off my mortgge after 15 years), my savings account reads a sweet $305,280. Did I miss something?
Yes, he missed something. If you look at the graphic, you’ll see that I do in fact assume that after the 15-year mortgage is paid off the payment ($1,696) is invested at an 8% rate of return for the next 15 years. That’s why the savings account balance at the end of 30 years is $587.009 rather than the $305,280 that the commenter mentions ($1,696 x 180 months).
Anyway, I won’t go into all the details of that post. You can read it here along with all the very thoughtful comments that followed.
Topics: Mortgages | 14 Comments »
Advice for a Reader with a Really Bad Car Loan
By JLP | November 12, 2009
I received this email yesterday:
Hello,
I am recently divorced and I recently filed bankruptcy and discharged. I needed transportation so I had to take what I could get under my circumstances. This is what I got which is not too good, but I needed something.
Loan $23,108.93
APR 19.50%
72 months
Payment $546.84 which will make my total of payments $39,372.48Should I double (or more) up on payments and try to get this paid off sooner?
Should I make my payments for awhile (2 years) to build up my credit and then try to get a better loan?
Should I put the extra money into some type of account to draw interest?
I need help, what would you recommend?Thank you in advance for your help,
D
There’s no way around it…a 19.5% interest rate on a car loan is crazy! If you kept the loan for the entire 72 months, you would be paying over $16,000 in interest! That’s roughly 70% of the price of the car. In other words, that’s almost like paying for 2 cars.
What’s done is done but I think I would have looked for a cheaper car.
Okay, now to answer your questions…
Should I double (or more) up on payments and try to get this paid off sooner?
I ran an amortization and found out that if you doubled your payments and payed $1,092.85 per month, you could have the car paid off in 27 months (26 payments of 1,092.85 and one payment of $128.05). This would bring your total interest payed to a much-easier-to-stomach amount of $5,435.23. It’s still a lot considering you are paying nearly $1,100 per month. Doubling up on your payments isn’t a bad idea if you can afford to.
Should I make my payments for awhile (2 years) to build up my credit and then try to get a better loan?
The problem I see with this strategy is that at the end of two years, you’d still owe over $18,000 on the car. It would be hard to find a loan with decent terms for a two-year old car that has depreciated 30 to 40%.
Should I put the extra money into some type of account to draw interest?
I do think you need an emergency fund of some sort…say $1,000 to $2,0000. Beyond that, it simply makes no sense to have extra cash sitting in a bank account drawing pennies in interest while you’re paying off a 19.5% loan.
So, here’s what I would do:
1. Put back a little money for a bare-bones emergency fund.
2. Pay as much as you can on the car loan to get rid of that debt. Just make sure that there’s no pre-payment penalty and make sure your lenders applies the extra payment to the principal on the loan.
3. After the loan is paid off promise yourself to never get involved that kind of loan again.
4. If you didn’t miss that payment, then put it towards your retirement once the car is paid off.
Topics: Cars | 27 Comments »
Taxation of Dividends
By JLP | November 11, 2009
BG left the following comment on one of my previous posts:
“JLP won’t like me saying it, but even the ultra-rich play this game where their “income” (dividends & investments make up the majority of their income) is only taxed at 15%, whereas I’m in the 25% bracket. That is their gain, my loss.”
The reasoning for this is simple: dividends are taxed at the corporate level and again at the individual level. That’s why they are taxed at a lower percentage at the recipient level. If the “ultra rich” are getting all of their income from dividends and investments, that tells me that they probably already paid their fair share into the system in the first place.
This is one of the reasons why I like the flat tax. Charge everyone the same percentage on ALL INCOME regardless of what type of income it is. I would even concede a certain threshold (a first for me) in which individuals and families falling below a certain level do not pay taxes at all. The threshold would have to be low as I think EVERYONE should pay their fair share.
It’s not going to happen but I can dream…
Topics: Taxes | 29 Comments »
Some Pleasant News: The Social Security Wage Base Is Not Increasing for 2010
By JLP | November 11, 2009
I was doing some work on the family budget for 2010 and looked up income subject to Social Security taxes in 2010 on the SSA website. I was pleasantly surprised to see that the income subject to social security taxes is not increasing in 2010. That means the amount subject to social security taxes is going to stay at $106,800, leaving the maximum an individual pays into social security at $6,621.60 (twice that when the employer’s amount is included).
Of course, this also means that recipients are not getting a raise this year.
Topics: Social Security | 4 Comments »
What About Those 12b-1 Fees on the Schwab Exchange-Traded Funds?
By JLP | November 10, 2009
Last week, I mentioned that Schwab was introducing several new exchange-traded funds and that what was going to set these apart from the other ETFs was that they were going to trade commission-free to Schwab clients. Lucas, a reader and fairly frequent commenter on this blog read the prospectus and found this interesting tidbit of information pertaining to 12b-1 fees (located on page 5 of the prospectus):
The fund has adopted a Distribution and Shareholder Services (12b-1) Plan pursuant to which the fund is subject to an annual 12b-1 fee of up to 0.25% of its average daily net assets. However, the Board has determined that no such fees will be charged prior to November 14, 2011 (more than 12 months from the commencement of the fund’s operations).
I wanted to clarify this information so I sent my Schwab contact the following email:
On page 5 of the ETF prospectus, the following note is attached to 12b-1 fees:
The fund has adopted a Distribution and Shareholder Services (12b-1) Plan pursuant to which the fund is subject to an annual 12b-1 fee of up to 0.25% of its average daily net assets. However, the Board has determined that no such fees will be charged prior to November 14, 2011 (more than 12 months from the commencement of the fund’s operations).
What does this mean exactly? Does it mean that Schwab is reserving the right to charge 12b-1 fees on the ETFs or is it their intention to do so at some point in the future?
He forwarded my email to the appropriate person and this is the answer I received:
I understand that you had a question about our ETFs and 12b-1 fees. I just want to be clear that Schwab ETFs do not charge 12b-1 fees and there is currently no intention to assess such fees in the future. Maintaining the ability to begin a 12b-1 plan in the future is common industry-wide practice and intended to provide the flexibility that may be needed to address future unexpected significant industry developments.
Jon De St Paer
Vice President, Investment Management Strategy
Charles Schwab
They left the window open just in case…
That’s the information I got. You can take it for what it’s worth. Thanks for the catch, Lucas.
Topics: Investing | 4 Comments »
Wow! The S&P 500 is Up 5.55% in November
By JLP | November 10, 2009
The S&P 500 Total Return Index sits at 1795.12. It’s up 5.55% for the month of November and 23.55% for the year.
The S&P Midcap 400 is up 5.61% for November (31.58% YTD) and the S&P Smallcap 600 is 49.93% for the month and 18.21% YTD.
Just a little FYI for you.
Topics: Investing | 7 Comments »
What Good Will Giving Each Baby $500 Accomplish?
By JLP | November 9, 2009
As if we don’t have enough government programs as it is…
MSN Money posted an article over the weekend titled, Junior’s 1st Paycheck: $500 at Birth.
I wrote about this program, called ASPIRE, in the past. The goal of ASPIRE is to give EVERY newborn baby a $500 savings account to be used for college, buying a home, or retirement. Babies born into lower-income families can receive more than $500. How much more? $500 for a total of $1,000.
Regardless, let’s focus on the $500. How much could $500 be worth by the time the recipient is ready for college? Not a lot, as my math shows:
Assuming a 10% rate of return (7% after inflation)…
That’s right…$1,690! Yes, this is assuming nothing is added to the account over the years, which is a pretty safe assumption unless the government adds money to the account.
Sure, $1,690 is better than nothing I suppose but what good is it going to do for the recipient? Is it 10% down on a $16,900 house? A semester’s worth of books?
Say the account stays untouched until the recipient retires at age 65. How much will it be worth by then—again assuming nothing is added to the account and we use the same expected returns from the above example?
The MSN Money article I referred to above mentions the reasoning behind this act:
“Having an asset has the potential to change the way people think and plan for their future, and sometimes those effects can be generated just from small asset holdings,” he says, adding that it’s possible for people to build significant savings over time. The ASPIRE Act also would pair the creation of the accounts with financial literacy programs in schools.
I looked up the ASPIRE Act and this is what it says about financial literacy:
The Secretary of the Treasury, in coordination with the Financial Literacy and Education Commission, shall develop programs to promote the financial literacy of account holders of KIDS Accounts and the legal guardians of such account holders who have the rights with respect to such accounts under section 3(h).
Not a lot of focus on financial literacy!
If we REALLY WANT TO HELP PEOPLE we need to be teaching them financial literacy, not giving them $500 or $1,000.
Not only that, with our country mired in debt that is in the trillions, what good is it to allocate roughly $2.1 billion (4.2 million kids born in 2008 × $500) to savings accounts? Doesn’t make a lot of sense to me.
Topics: Kids and Money | 14 Comments »
Turning Home ‘Buyers’ Into Renters
By JLP | November 6, 2009
Fannie Mae is becoming a landlord…
Fannie Mae will allow homeowners facing foreclosure to stay in their homes and rent them for as long as a year, as part of the government’s latest effort to help troubled borrowers, while keeping more foreclosed properties from hitting the housing market.
The “Deed for Lease” Program lets borrowers who don’t qualify for loan modifications transfer their property to Fannie Mae in exchange for a lease. Borrowers-turned-tenants will pay market rents, which in most cases are lower than the cost of mortgage payments, and might be offered extensions when their leases expire.
That’s what I read in today’s WSJ. You can read the article here.
The supposed goals of this program are to:
1. Allow people to stay in their homes by giving them rent payments that are lower than their mortgage payments.
2. Keep foreclosed houses from flooding the housing market with excess inventory.
3. Possibly allow Fannie to profit from the eventual sale of the homes when the real estate market recovers.
Fannie will hire a professional management company to handle all the rental details.
Basically, what this means is that since our government essentially owns Fannie Mae, our government is now a landlord. So much for property rights. Kinda scary if you ask me.
What do I think should happen?
Allow the market to address the housing situation instead of artificially propping it up until who knows when. Attack the situation like you do when ripping off a bandaid…one quick motion.
Topics: Housing Market | 6 Comments »
A Little Friday Fun For You…
By JLP | November 6, 2009
Back in August, my wife and I went to see Chris Isaak in concert. It was awesome! If you get the chance to see Chris in concert, GO! Anyway, below is a live video of my favorite song from his newest CD, “Mr. Lucky.” Enjoy…
Topics: Miscellaneous | No Comments »