Posts Tagged ‘Personal Finance’

Americans vs. Reality: Why Your Home is Not a Good Investment

Re-posted from: http://www.fool.com/investing/general/2014/05/02/the-uncomfortable-reason-your-home-is-not-a-great.aspx

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Check out the graph below by Noel Prize winning economist Robert Shiller.  The lesson is that a home is great to meet your housing needs, but not great as a long-term investment.  Shiller — who won the Nobel Prize last year — is regarded as the world’s foremost housing expert. He has married historical data with deep insight into human psychology to offer some of the best housing analysis anyone’s ever produced.

“The housing boom in the early 2000s was driven by a sense that housing is a wonderful investment. It was not informed by good history,” Shiller said. Most people now agree on that much.

“If you look at the history of the housing market, it hasn’t been a good provider of capital gains. It is a provider of housing services,” he explained.  By that, he means a home gives you a place to live, a place to sleep, a place to store your stuff.  But that’s it. Americans believed — and still believe — that the value of their home will increase above the rate of inflation.

In the 2000s Shiller noticed that nobody had created a chart tracking national home prices historically, over the long term.  So he did it himself.  “The strange thing is, nobody else had ever made a plot like that. I can tell you, no one had ever seen that picture,” he told me, shaking his head in disbelief. “People plot all kinds of data. Why wouldn’t someone have done that? I still haven’t figured it out.”

The chart, measuring nationwide home prices adjusted for inflation, was this one:

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From 1890 — just three decades after the Civil War — through 2012, home prices adjusted for inflation literally went nowhere. Not a single dime of real growth. For comparison, the S&P 500 increased more than 2,000-fold during that period, adjusted for inflation. And from 1890 to through 1980, real home prices actually declined by about 10%.

It’s important to reiterate what a home does do: It provides a place to live. A place to raise your kids. A place to spend the holidays with your family. A place to barbecue with your neighbors. Even a place to rent out. That has tremendous value, of course. Shiller owns a home. He’d buy another if he needed one. “Basically, if I were in the market right now because I wanted a house, I would buy a house,” he said.

The problem is that Americans expect more out of their homes than just a place to live. In 2010 — years after the housing bubble burst — Shiller’s surveys showed Americans still expected their home to appreciate by more than 6% a year over the following decade. If history is any guide, that’s probably about twice as fast as they’ll actually appreciate by. Despite the housing crash, people still expect stock-like returns out of their homes.

Since a home is most Americans’ largest asset, you can see how this becomes a problem. When you have inflated expectations about the largest asset you own, you walk down the path of financial disappointment.  Everyone should live in a home they can afford and provides the lifestyle they desire. But assuming it’s a superior long-term investment, one to rival stocks, is dangerous.

My addition: Of course, there are exceptions to the general rule some specific areas where homes will increase in value.  Areas undergoing gentrification is a great example of areas that generally appreciate in value.  But the key to remember is that those are exceptions to the general rule.  If you’re buying a home as a long-term investment (and not just to meet your housing needs), make sure you have data to explain why your home is an exception to the rule.

 

We meet in an elevator. You’re stoked & ask for book recommendations . . .

We both walk into an elevator, and my name tag says, “Yvette Owo.” Suddenly, you’re excited! You love Financially Fab and meeting me is 2nd only to meeting Lady Gaga.  (Okay, maybe this is a fantasy of mine.  😉 A girl’s gotta have dreams.) After you get an autograph for yourself, best friend, and future children, you ask for book recommendations.  I recommend the following:

On Personal Finance

If you only read one book on Personal Finance in the next few years, choose one of these:

On Long-Term Investing / Mutual Funds

 If you only read one book, choose any of these:

 

On Beating the Market

If you want to beat the market, read all of these books before making the first trade, opening up a brokerage account, or otherwise throwing your cash into a crapshoot.  If you’re not willing to read just 4 books, you should get out of the game. If you still want to beat the market after reading, go for it! Track all your trading costs, losses, and gains.  In 10 years, if made any money, let me know!  I’ll be surprised and happy for you!

 

 

 

    

How the iPhone cost as much as a trip to Greece!

I love to travel and enjoy fashion, but electronics are not a big deal to me. I normally buy new gadgets when I need them and rarely because they’re new or sexy—except for the iPhone.
 

I succumbed to pressure from my new team at work and bought the iPhone. One guy, Brian, should’ve worked for Apple’s marketing team.  He was constantly thinking up new iPhone commercials.  For months, I heard teammates say—“There’s an app for that . . . . Check out this flashlight app . . . . The iPhone does this faster . . . . Google maps is much better on an iPhone,” and many more comments.  It felt like working in an infomercial! When Brian showed me how to hack into the iPhone to get internet access on my laptop for no additional charge, I was sold.  I bought the iPhone a few weeks later, justifying the purchase with the free internet.

1st Problem: Justifying Long-Term Costs with Short-Term Benefits

I justified an ongoing, long-term cost—monthly plan and maintenance to the iPhone— with a temporary benefit.  Apple would eventually block the hack, which they did a few months later. Once I couldn’t use my iPhone to get internet on my laptop, I lost my main benefit and was stuck with the ongoing costs. Long-term costs should only be justified with long-term benefits; otherwise, when the short-term benefits are over, you end up stuck with all costs and none of the value.

2nd Problem: Maintenance Costs were too High

I dropped things, and often. The iPhone was the most delicate phone on the market, due to the large glass screen.  After having the iPhone for 8 months, I accidentally dropped and broke it, despite using a heavy duty case. Apple charged $295 for a replacement iPhone and wouldn’t lower the cost by allowing me to downgrade to older version or one with smaller memory.

Final Solution: Change phones & providers!

I had 2 options—sink another $300 into the iPhone, for a total of $1,725 annually, or move on to another phone. The chart below explains why the iPhone was so dang expensive!


How the iPhone cost as much as a trip to Greece!
First iPhone * $350
Yearly Costs for Cell Phone Plan: $90/ month for 350 minutes, texts,and iPhone data plan $1,080
Yearly cost before breaking phone $1,430
Replacement iPhone $295
Total 1-Year Cost for iPhone $1,725 !!!!

For someone that’s not into technology and would rather spend that money traveling, it didn’t make sense to throw more money at Apple or AT&T.

I changed to Sprint, where I got more minutes and unlimited texts for $20 less per month and got a HTC Hero with Android apps and a touch screen for $179 after the rebate.  Get this—paying the early termination fee and buying a new phone was only $14 more expensive than getting a replacement iPhone.


How cheap it was to switch to Sprint
AT&T Early termination fee $130
Cost of HTC Hero after rebate $179
Total cost of switching to Sprint (just $14 more than replacement iPhone) $309

The Sprint plan offers more minutes, unlimited texts, and costs $240 per year less than AT&T—just enough for a plane ticket to visit my best friend in Seattle!

The iPhone was the best phone on the market.  But did I need the best phone? Nope! Just one that fit my lifestyle.


If I had bought the replacement iPhone, I would have spent over $1,700 on my cell phone!


$700 saved on cell phone pays for roundtrip international flight!
iPhone HTC Hero Difference
Phone $350 $ 179* HTC Hero was over $170 cheaper
Monthly Plan $90 $   70 Sprint $30 cheaper monthly and fewer dropped calls
Yearly costbefore breakingphone $1,430 $1,029 HTC Hero/ Sprint was $400 cheaper
ReplacementPhone $295 $0 HTC Hero was not as delicate and was unlikely to break
Total 1-YearCost $1,725 $1,029 Saved about $700! Cost of international flight!

For some people, almost two grand was worth it. If you prefer electronics and can afford the iPhone after savings and bills are paid—then go for it!

As I said in the beginning of the post, I’m not into electronics. If I had two grand to spend, I’d rather travel or shop.  Spending according to my values meant changing from the iPhone to a cheaper phone and having more travel money!

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What new item did you purchase because your friends, family, or coworkers influenced your decisions?  Did the new purchase match your values?

Try adding up the total yearly cost. With the yearly cost in front of you, ask yourself if the item is worth that much?  Would you rather spend that cash on something else?

* Although I bought cases for both phones, the cost of 2 iPhone cases and 1 HTC case was not included in the calculations.

 

Do you really save when you buy discounts?

I was thinking about Black Friday and how hundreds of people camp out overnight to get massive discounts, such as 60-inch flat screen LCD TVs for $150, 70% of laptops, and buy 1 get 1 free digital cameras. Most people go through the hassle of waiting in line and waking up before dawn, so they can save money.  But, do they really save?

My questions to you are: When you buy things on sale, does that mean you’re actually saving money?   Do sales really help you keep more cash in your bank account?

What do you think?

Think about it . . .

A little bit more . . .

Got a final answer?

Alright, time’s up .


My answer: Often discounts and sales actually hurt your bank account! Let me explain with a personal example.

A few years ago, I went into Banana Republic to buy a winter jacket during the after Christmas sale.  I planned to buy one item—a jacket for about $125.  The sales were better than expected! The jacket was marked down from $300 to $32! (You already know what happened next, don’t ya?) I bought more stuff, for a total of 1 jacket, 3 pairs of pants, and 3 tops. The total cost was over $200. I walked out smiling about much money I saved.

But did I actually save money? Here’s the math:

Planned Actual Difference
# of Items 1 7 Bought 6 impulse buys
Average Price per Item $125 $32 Average price per item was about $95 less than expected, due to great discounts
Total Price $125 $225 Spent $100 more than planned, a full Benjamin gone from my bank account

I walked out happy and smiling because I bought 7 items on sale–1 that I needed and 6 that I bought on impulse.  I wasn’t thinking about the bottom line: My bank account was $225 poorer. Did I actually save money?  Was this actually a net plus to my life or finances? No to both!

I can’t tell you how many times I went shopping with the mentality that if I got discounts per item, I saved overall.  It took a while, but it finally sunk in–I save money only when my total shopping bill is less than planned or the extra items are things I needed. (Ladies, I mean need like food, water, shelter, etc. Not the way you “need” another pair of black pumps or a new LBD.)

By buying extra items I didn’t need, I wasted money.  I could have bought just the jacket, and had about $195 to spend on something I really valued.  (Like 3 -4 nights at a hotel in Greece!) Store owners are smart.  They get us in the door with sales, hoping that we’ll buy more overall. 😉

Proving the point that impulse buys often waste money, I rarely wore the 6 impulse buys and no longer even have them.  The jacket, which I needed, has lasted 4+ years, is still worn regularly, and is hanging in my coat closet right now.

Now it’s your turn: When you get discounts, does it feel like you saved money? Even if you spent more overall?

Know Your Credit Score

Top 5 Essentials for Being Financially Fab

The Financially Fab lifestyle involves being confident, making wise decisions, planning for the future, and enjoying what you have now.  Those skills are acquired overtime, and they start with a solid foundation. To set up that foundation, this week’s blog begins a 5-post series about the Top 5 Essentials for Being Financially Fab.  Each week, I’ll post another part of the series.  You can join the conversation by adding your personal stories, asking questions, or making comments.

The Top 5 Essentials Are . . .

  1. Know your credit score—the bank does, you should too!
  2. Track down your cash
  3. Knockout fees
  4. Save!
  5. KISS – Keep It Simple, Stupid

WEEK 1  – Know Your Credit Score—the banks does, you should too!

Your credit score is revealing!

  • Why is your credit score important?  It’s the financial equivalent of someone knowing your weight and dress size—no, not the weight listed on your driver’s license—your real weight.  If you don’t already know your credit score, you should. The banks do. Your credit card company does. You should too!
  • Banks use your credit score to rate how likely you are to repay credit.  The higher your score, the less risky you seem, and the lower your interest rate.  The information complied to develop the credit score is contained in your credit history, also called a credit report.

What’s credit history?

  • Your credit history lists information about your current credit accounts (loans, credit cards, etc.).  This includes whether you’ve missed payments or paid late, the number of accounts, the maximum limits, how much is owed, and other details. I told you it was revealing!  The difference between having a higher or lower credit score can hit your wallet hard–by affecting how much interest you pay.  If you have a higher credit score, you can pay less interest for the same amount of credit.  Just check out the example below.  Interest rates vary with the economy and individual circumstances, and the example below uses current rate information.

Imagine that you take a spring break trip and pay for travel, hotel, shopping, and entertainment with your credit card for a total of $700.  You pay only the minimum required, $20, until it’s paid off.

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Low Credit Score (from 581 to 660)

Annual Interest rate 20%
Time required to pay trip About 4 years and 5 months
Interest paid $360, over 50% of the $700 trip cost
Total cost with interest $1,060!

You’d be paying over $1,000 for a $700 trip. What?! $360 dollars extra!

Excellent Credit Score – (741 and above)

Annual Interest rate 10%
Time required to pay trip About 3 years and 6 months
Interest paid Only $132, paying 63% LESS with a better credit score
Total cost with interest $832

The 1st essential to being Financially Fabulous is figuring out your credit score.  Once you know what it is, you can start avoiding those high interest rates and stop throwing money at credit card companies and banks.

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Act Now – Get Your Score!

Everyone with credit has a score. Find out yours! There is only one official source for your FREE credit report, www.annualcreditreport.com. The only official source for your credit score is www.myfico.com.  You can also scroll over the links in the top right column of this page for more information about both websites.

The banks know your credit score.  If everybody else knows the number on the scale, the real number, you should too.

Share your experience.  How did you feel after looking at your credit score?  Were there any surprises in the credit report?

Financially Fab is here!

This blog is about making your money work for you and making smart decisions.  This is a space to learn from the ground up, share questions, and become financially savvy.