Investors, savers, or even advisors rarely view a primary residence (the home you live in) as an asset in the same way a person would see a stock or bond.  Generally, I agree with this perspective—that a home is for raising children and creating lasting memories, and not viewed in the same light as Tesla, Microsoft, General Electric, or Apple.  However, there are three factors present in the market today that are cause for a new point of view.  That is, your home as an investment asset used to generate income or cash flow savings.

Factor 1: Money Market and Savings Account Rates

Money market rates have remained near zero for over a decade. This means for those holding money in checking, savings, and short-term bond investments, there is virtually no return on investment.  Include net of inflation, and investors are going backward.  Today, these shorter-term accounts serve the dual purpose of offering investors safety and liquidity, but little by way of yield.

Factor 2: Bond Rates

Bond rates have followed a similar "race to zero" that we saw in the money market and savings account rates.  As of today, an investor must go out ten years to receive .63% on a treasury bond.  In other words, a $1,000 investment yields just over $6 per year.  Bond investments are GREAT, and will forever be a cornerstone of a diversified portfolio.  However, too many investors and their advisors stockpile money into bonds as though it is the only safe way to make a return.  Importantly, like money markets, the "real" rate of return (after adjusting for inflation) is negative, going out 30 years!  You can find more exciting rate related info at the U.S. Treasury link here.     

Factor 3: Mortgage Rates

Mortgage rates have been at similar levels as today in both 2016 and 2012.  So, if you were lucky to buy your home or refinance at that time, there may not be much upside to a refinance.  For the rest of us, with the 30-year rate at 3% and the 15-year rate at 2.5%, now is the time to take a second look.  More rates from Rivermark Credit Union can be found here.

Your Home as an Investment

The opportunity for homeowners comes when they can look at these three factors (money market rates, bond rates, and mortgage rates) within an overall planning framework.  Below are a few examples of how this can work:

1. Mary and John are staring down retirement.  They have a 15-year loan at 4.5% that is five years from being paid off.  Their payment is around $1,900 per month, with a pay-off of around $100,000.  They have the choice of investing a final bonus of $100k from work at .63% and generating $52 per month income, or they can take that same bonus and pay off their home.  It seems like this should be a no-brainer—generate $52/month or save $1,900/month by not having a house payment.  But for whatever reason, the repetition of saving money (which is good) into safe investments (which is also good) is not considered within an overall planning context.  If acted upon, this scenario puts an extra $1,900 per month into this investor's pocket for paying off the home versus investing it into a bond.

2. Julie is 45 and has a goal of not having a house payment by the age of 60.  She has a $300,000, 30-year loan at 4%, and a payment of $1,432/month.  Julie has also accumulated $60,000 from real estate commissions she is looking to invest.  Investing in a 10-year Treasury would yield her $31.50/month.  A better alternative is to use the money to pay down her loan.  In doing so, she goes from a loan size of $300k to $240k.  Also, moving from a 30-year to a 15-year loan allows her to have no home loan by age 60.  Importantly, her rate is reduced from 4% to 2.5%.  Although her monthly payment is more by about $170/month, she saves $167,000 over 15 years in interest expenses—or $927/month! 

Conclusion

Recent events have presented opportunities for investors, savers, and homeowners.  Leveraging a comprehensive financial plan that considers your home, mortgage rates, and reinvestment rates could be the chance of a lifetime to save and earn. 

Join our forum on May 14

To learn more about how to leverage your home within a comprehensive financial plan, join Peter Fisher and Jill Novak for their forum, “How to Empower Homeowners during a Downturn” Thursday, May 14th at 9am PST. Sign up here.

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Home is where the low-interest rate is. Putting that up on Etsy.

Real estate is a part of just about every financial plan I see.  Whether real estate is synonymous with a home or an investment, it typically starts with a loan.  The focus of this blog is on how individual homeowners should be thinking about their debt, given the historically low rates.  To be clear, how you go about financing your home is not a one size fits all approach.

This is about caring for the financial decision of a lifetime

Whether you are financing the purchase of a home or looking to refinance, how you go about it can have a lasting financial impact (good or bad).  There are many considerations, including the rate, term, how much to borrow, and where to acquire the loan.  But one thing is for sure, that there is not a one size fits all approach for a new loan or refinances.  As such, working within a successful decision-making framework will increase your odds of a positive loan outcome.

Step 1: Create your financial framework

Start by looking at your overall financial plan.  Think about your checking, short-term savings, emergency fund, and the amount you have invested in cash and bonds.  These are essential considerations when looking at a loan.  As an example, if you don’t have a savings account or an emergency fund, maybe you should put off that home purchase until you have a safety net of cash.  Also, if you are looking to refinance and your savings account is flush, you may want to consider putting extra money into your home.  Doing so may rid you of unnecessary private mortgage insurance or enable you to get a better rate because you have more equity in your home.  By starting the process within the context of your overall financial strategy and plan, your outcomes can improve, and bigger goals than just one to reduce your payment can be achieved. 

After considering the bigger picture, start looking at your goal or objective for getting the loan or refinancing in the first place. A target could be, “through financing my home, I hope to get a loan that enables me to pay off my loan as soon as possible.”  If that is the case, a loan with no pre-payment penalty and a 15-year term could make much sense.  At the same time, if your objective for the loan is to “use some of the equity I’ve built-up to increase the home’s value through a kitchen remodel,” then a simple line of credit could be the best approach.  Once you’ve looked at your loan within your broader financial picture and established goals and objectives for the loan, it is time to look at the rates and fees for the new loan.

Step 2: Shop for the right loan

In my 24 years of advising, I have learned a lot about loans and incentives for the people that sell them.  My view is that the majority of individuals should go to their local credit union and find a loan from them.  Credit unions are non-profit and member-owned, so their incentives are to keep rates low when borrowing, and rates higher when you deposit money.   As a side note, the majority of my employees who have purchased or refinanced their homes have used a local credit union.  We have had particularly good luck working with Rivermark Community Credit Union.  You can find their rates here.  Regardless of where you go to get your loan, it is essential to look at a few different options. 

Step 3: Prioritize getting Good Faith Estimates

Getting a good faith estimate (GFE)  is a critical part of the loan process as it helps you compare one loan versus another.  Closing costs can be as much as 10% of the loan amount, and with different lenders charging a variety of fees, it is wise to get a GFE from at least two lenders on the same day. Because rates can bounce around, getting the GFE on the same day provides the most accurate picture of pricing, rates, and terms.  Getting a GFE is so important and an area where many decide to get lazy.  I like the saying, “trust but verify”, and the GFE is a great way to both trust the people you are talking to but verify their results. 

A real-life example: Saving $170K over 15 years

Recently, I was speaking with a client who is in the real estate business.  She was aware that mortgage rates had been dropping, so she wanted to look at refinancing.  Having a solid understanding of her financial plan, I then asked her what her overall goal was for the refi.  Was it to lower her rate, or reduce her payment?  In the end, those were important considerations. Still, even more critical was the goal of having no house-payment by the time she was 60.

Consequently, we decided to invest some of the cash from her investment account to pay down her loan from $300k to $240k.  We shifted from a 30-year term with a rate of 4% to a 15-year loan at 2.5%.  Her total payment was approximately $170 more per month. The shift allowed her to save around $170k in interest over 15 years—a significant return on her investment.  Importantly, the new loan is in line with her bigger picture goals outlined in her financial plan and consistent with her desire to be debt-free at 60!

Establishing an easy to follow process for making financial decisions can pay dividends for years.  Looking at your broader financial goals (financial plan) is a great first step.  From there, identify specific financial goals you’d like to accomplish (be debt-free by 60) and the objectives for each (restructure home loan).  Then, establish a process for comparing rates (good faith estimate) and engaging a trustworthy financial partner.  Following these steps for financing (or refinancing) your home can have a substantial impact on your net worth, cash-flow, and ability to retire.

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This will probably take place in Animal Crossing this year

This goes out to all those who hold part of the $1.6 trillion in student loan debt in the United States. This debt has the power to ignite in us fear, uncertainty, anxiety, and hopelessness. If you’re like me, at any given moment you are subconsciously trying to scheme out some way to make it better – whether it be refinancing, making extra payments when possible, seeing if you’re eligible for forgiveness, or just praying for a miracle. Given the increased levels of anxiety world-wide during this pandemic, I’m hoping that this information will provide a little bit of relief to your worries, even for a short window of time, as it has done for me.

If you’re eligible for relief, consider waiting to refinance

If you have been thinking about taking advantage of the low interest rates and refinancing or consolidating your student loans, you may want to hold off according to Justin Kribs, MS, CFP; Director of Financial Planning and Student Loan Services at InsMed Insurance Agency Inc.

Last month, the US Department of Education announced student loan relief under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

Refinancing your federal loans now with a private loan lender will waive all the new benefits from this relief, including the temporary 0% interest rate on federally held loans and suspension of payments. These federal benefits are most likely something you don’t want to miss out on.

Here’s the student loan relief per the CARES Act

Loans Eligible for Relief Benefits

• Perkins Loans, Federal Family Education Loans, and Parent Plus Loans

Loans NOT Eligible for Relief Benefits

• Private loans (e.g. bank & credit union loans)

• Any loan not owned by the U.S. Department of Education

CARES Act - Benefits Offered to Borrowers
(In Effect 3/13/20 through 9/30/20)

1. Forebearance/suspension of payments
   Loan payments are suspended for federal loans and no interest will accrue during the six-month suspension
   Note: According to the CARES Act, the six-month window of suspended payments begins automatically, but it is recommended to confirm with your loan servicer to ensure they are suspending payments.

2. Interest rate elimination
   Interest rates are reduced to 0% on all FD and FFELP loans
   Note: It is important to note that FFELP loans that are owned by a bank, credit union or other lender are not eligible for the 0% interest rate.

3. Public service loan forgiveness
   Suspended payment months continue count towards the loan forgiveness programs. As long as you are working, you do not need to make payments to continue to qualify.

Next steps

1. Defer student loan payments
   If you’re eligible: Contact your lender and request or confirm a suspension of payments (this may have started automatically).

   If you’re non-eligible: Call your private lender ASAP to see what options they offer to suspend, reduce, or pause payments and/or waive late fees – These will not be offered if you do not reach out.  Keep in mind that each institution has its own guidelines for payments and late fees. Look here for a list of banks providing information and resources on Coronavirus relief

2. Make extra payments if you can
   If you have extra cashflow, now is a really good time to take advantage of the 6-month, 0% interest benefit period. During this 6-month period, all your payments will pay down principal (and any interest that accrued prior to March 13th), putting you further ahead in the long run. You can make extra payments on your lender’s site at any time.  
   Note: Be sure to select “Do Not Advance the Due Date,” otherwise your lender will apply your payment to future payments rather than counting them as additional payments. There is usually an option to make this selection on the “pay now” page.

What if I want to refinance after the relief ENDS?

Since the CARES Act 0% interest is a short-term benefit, you may still want to consider re-financing to leverage a lower, long-term rate.

Are you a good candidate to refinance?
A person with stable income and a higher income to debt ratio may be a good candidate for refinancing.  “A person with unpredictable income should probably steer away from refinancing,” says Justin Kribs, since private loans do not generally offer the same loan payment flexibility that is offered with federal loans.

What are your goals?
Shorter Loan-Term Length: For someone with excess cashflow to increase monthly payments and who is looking to pay off their loans as soon as possible, refinancing may offer a shorter term-length for your loan.

Lower Payments: For someone looking to free up some current cashflow by paying less on their loans each month, the reduced interest rate of a refinanced loan may offer a lower monthly payment.

This student loan calculator is a great resource to understand the impact of a refinance on your loan amortization (showing the payments split between principal & interest during your entire loan term length) and help determine if a lower interest rate will help you accomplish your goals.

How will you choose a private loan lender?
Client Experience: How are you being treated on the other end of the phone? Or on the other end of that email? Justin Kribs argues that this is one of the first things to look for when comparing lending companies.

Flexibility is Key: What types of assistance do they offer in times of hardship? Keep in mind that Private Loan Lenders do not offer the same assistance as Federal Loan Servicers (e.g. Income Based Plans, Forbearance, etc.). If this sort of flexibility is important to you, make sure to be clear when asking what benefits they will offer you.

Questions to ask: 

• How many different repayment options do they give you?

• Who does the servicing of the loan?

• What is the Co-signer release agreement?

Recommended Lenders who come with positive client reviews:

• First Republic Bank

• So-Fi

• Laurel Road

Sources

Justin Kribs, MS, CFP®, Director of Financial Planning and Student Loan Services at InsMed Insurance Agency Inc. https://insmedloanservices.com/

 https://www.forbes.com/sites/advisor/2020/03/26/student-loan-forbearance-in-the-coronavirus-covid-19-stimulus-what-you-need-to-know/#3e9e92cc2039

https://studentaid.gov/announcements-events/coronavirus

https://www.forbes.com/sites/advisor/2020/03/12/list-of-banks-offering-relief-to-customers-affected-by-coronavirus/#7411c1d73ee3

https://www.marketwatch.com/story/2-trillion-coronavirus-stimulus-bill-gives-student-loan-borrowers-six-months-of-relief-2020-03-26

https://www.bankrate.com/calculators/college-planning/loan-calculator.aspx

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@blankerwahnsinn

Your team at Human Investing is here to serve you. Though our physical workplace has changed for the short-term, our company’s missions remain as strong as ever: to faithfully serve the financial pursuit of all people.  

We are entering a financially burdensome time. Many individuals and businesses are projected to suffer financially. The impact will look different for everyone.  

If you are seeking ways to change your spending habits, something you will certainly need is time.  Said differently, cash outflow is unlikely to change unless we take the time to research, contemplate, and change current routines. 

Here is a list of ten ways you can help cushion financial burdens that have either occurred already or are expected in the future:  

1. Check your credit card points.  

   When is the last time you used credit card points? If you are in a financial crunch, now might be a wise time to cash out your credit card points. Not all credit cards include cashback rewards, but examples of companies that offer cash back cards include Chase, CapitalOne, and Discover.  

   Regardless of the cashback options available to you now, take the time to review whether you utilize the benefits of your existing credit cards. While you are reviewing your credit cards, this site is a helpful tool to figure out which credit card fits best with your lifestyle and spending habits: Nerdwallet - Credit Card Comparison  

2. Eat the food you buy for quarantine.  

   This sounds obvious. But for some households, this will be challenging since we have purchased an allotment of random items. Was the store sold out of spaghetti?  Did you instinctively grab the only noodles left? If so, make it a fun activity for your family to express some creativity or try new recipes in the kitchen.  

3. Consider refinancing your mortgage.  

   Do you have a mortgage? Rates have come down considerably this year and refinancing your mortgage is worth a looking into. Refinancing your mortgage can lower your monthly mortgage payments, offering both short-term and long-term savings. If you are interested in learning more about refinancing your home, see our recent post by Will Kellar: “How to refinance your home.”

4. Save the money you would be spending.  

   We all have had to cancel upcoming plans. In many cases, that means extra savings. Put aside those dollars and use the money as needed. 

5. Create or monitor your emergency fund.

   We realize many people do not have an emergency reserve. Traditionally a family should have three-to-six months of expenses saved in an emergency fund (three months for dual-income families and six months for single-income families). We encourage individuals to create an emergency reserve regardless of the economic forecast, but it becomes especially important during turbulence.  If you do have an emergency fund and are experiencing financial hardship, now is an appropriate time to use it. 

6. Shop and spend mindfully.  

   Personally, I love the 24-hour rule. It’s a practice of self-restraint. If you feel the urge to purchase something (new shoes, a different laundry basket, extra-spicy BBQ sauce), wait 24 hours before you make the purchase. The time-lapse often mitigates a compulsive purchase.  

   Due to the economic uncertainty of tomorrow, we must be willing to make drastic changes to our spending habits. We are all compromising our normal routine in some way, shape, or form. With that said, it’s important to be cognizant of how these changes are impacting our cash outflows.

7. Consider selling unnecessary household items.  

   I predict that people will spend more time selling their unused or unwanted household items. Take some time to go through your storage or extra items. Craigslist, Facebook Market, Poshmark, and Nextdoor are all great resources for buying and selling things second-hand. One man’s trash is another one’s treasure. 

8. Create a budget.  

   A budget can provide financial awareness and reassurance. Now is a great time to revisit your budget or create one if you have yet to do that. Here is a budget template to get you started - Budget Template There are also online budgeting tools available such as mint.com, YNAB.com, or everydollar.com.

9. Unsubscribe.  

   Out of sight, out of mind. Take this time to unsubscribe to unnecessary social media accounts that tempt you to splurge or spend extra money. To minimize your current expenses, it may also be worthwhile to unsubscribe from unused memberships like online streaming services or gyms.

10. Create ‘no-spend days’.  

    Since many Americans are working from home, ‘no-spend days’ are a good family challenge. It’s important to vocalize the game to your family so everyone can participate and be mindful of not spending money.  

Please feel free to share with others and let our team know if you have other examples of financially savvy savings that we can add to this list. We are open to new ideas and challenges!   

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@scottwebb

Is it time to refinance your home? To make sure this is a prudent decision for your family we want to share some considerations and outline the process.  

What is a Mortgage Refinance?

A mortgage refinance replaces your current home loan mortgage with a new one. Homeowners will typically look to refinance when there has been a drop in interest rates.  That said, a drop in interest rates is just one of many reasons someone would refinance their home.

Why is refinancing your home worth your time and focus? Because a mortgage is often one of the biggest expenses in a lifetime, it’s an important expenditure to get right.  According to the US Bureau of Labor Statistics, Americans spend almost 32% of their income just on housing compared to the 0.71% spent on all nonalcoholic beverages (i.e. coffee). With regards to personal finance, it can be easy to blame our financial situation on the little things like the cost of your morning coffee. Rather than worrying about the little things like a cup of coffee, overextending ourselves financially with housing costs can hurt cash flow and diminish financial flexibility. A mortgage refinance can help adjust how much is spent on housing to provide a net positive impact on households both short term and long term.

Make a Plan

Set clear financial goals regarding your mortgage refinance. Here are a few reasons why someone would consider refinancing their mortgage:

1. Lower Your Monthly Payment – Refinancing your home can reduce your monthly mortgage payment, providing more financial flexibility for years to come. There can be many advantages to extra money each month retirement savings, college savings, using monthly savings to pay more to the principal each month.

2. Reduce Your Loan Term – This may be an opportunity to shift from your 30-year mortgage to a 15-year mortgage. Reducing the term of your loan can be advantageous for those who would like to be debt-free sooner. A reduced mortgage term means you are likely to pay less interest over the term of the loan. Rates for 15-year mortgages are typically lower than those for 30-year mortgages.

3. Tap into Your Equity – Do you need to consolidate debt or take out equity for home improvement? Refinancing can free up your home equity for these needs.

Do Your Homework

It is important to “Know Before You Owe.” - Consumer Financial Protection Bureau (CFPB). The CFPB was established to protect and educate consumers in response to the Financial Crisis of 2007-08.

 As you educate yourself, here are a few factors worth your consideration as you apply to refinance your mortgage:

1. Determine How Much Home Equity You Have - Refinancing a home can be more advantageous depending on how much equity you have. Your equity is determined by your home’s value in excess of the remaining balance of your mortgage. To assess your home’s value, utilize an online valuation tool or ask your real estate agent since they may have better tools and knowledge of your neighborhood. Additionally, a refinance can be a great opportunity to get out from under the monthly cost of PMI; to do this 20% of home equity is needed.

2. Know your Credit Score - Your credit score measures your creditworthiness to lenders. An ideal credit score is greater than 760, the higher the credit score the better rate you will qualify for. Similar to your initial home loan application, your credit score will be reviewed during the refinance process. Make sure that if you have previously frozen your credit that you unfreeze it by contacting all three credit bureaus, Experian, Trans Union, and Equifax. – To learn more about freezing your credit see our post on How to Prevent Identity Theft.

3. Understand your Debt to Income Ratio - Lenders use the following ratios to measure your ability to manage the monthly payments.

   • Monthly housing payments should not exceed 28% of gross income.

   • Monthly overall debt payments should not exceed 36% of gross income.

4. Shop Around - Shop around with multiple lenders to find the best refinance rates and request loan estimates for comparison. It helps to speak with several lenders on the same day as rates can/will change daily. Requesting a loan estimate will allow you to compare rates, total loan costs, and mortgage features. Be prepared to share the following documents with the lenders: Paystubs, W-2s last two years, Recent Bank Statements, List of debts and amounts, Current Mortgage Statement, Declaration page of homeowner’s insurance policy, Name and Phone of Insurance Agent, and Proof of other income. (Submit Loan applications, within a few weeks as not negatively impact your credit score.)

5. Understand your Break-Even Point – Once you know what types of rates are available to you, use a mortgage calculator to assess your break-even point. When deciding to refinance, it is important to know the point at which the cost of refinancing will be covered by your monthly savings. This break-even point will help decide whether the refinance process is worth it based on how long you expect to stay in your home.

   Example: If your refinance costs you $3,000 and your saving $200/month over your new loan, it will take 1 year and 3 months to recoup your costs.

6. Will Your Taxes Be Impacted - Mortgage interest can be deducted on a tax return to help reduce income taxes owed. Since refinancing a mortgage often results in lower interest, your tax deduction may also be lower. This can also move a taxpayer from itemizing their taxes to taking the Standard Deduction. Consult your CPA or tax professional to discuss how refinancing could impact your tax situation.

Move Forward (Duration: Can take up to 45 days)

1. Decide on a Lender – Let your loan officer know of your intent to proceed with the mortgage application.

2. Lock-in Rate – Let your lender know that you would like to lock in your new mortgage rate. Rates will be locked for a fixed period, typically 30, 45, or 60 days. This protects you from rates increasing while you are waiting for the loan approval, processing, underwriting and loan closing.

3. Prepare for Appraisal (Duration: 2-3 weeks) – This can mean taking care of quick fixes, doing a deep clean and sprucing up the landscape. Spend your time and resources on things that NEED attention. Let the appraiser know if you have made any changes to the property.

4. Underwriting (Duration: 3 Days) – The mortgage company will verify that all information is correct. During this period you may receive additional questions or requests.

5. Review Closing Disclosure - At least three days before your closing you should receive a Closing Disclosure, which includes the details about your loan. Review and make sure this matches your loan estimate previously provided.

6. Prepare for Closing Costs – Be prepared to bring the full “Cash to Close” amount with you to your closing.

7. Sign and Close – This is the final step; go to the title and escrow office to sign all final loan documents for your refinance.

Conclusion

For many homeowners, a refinance can make sense at some point during their lifetime. When refinancing your mortgage it is important to set clear financial goals, do your homework and understand the process to help avoid pitfalls. We hope these considerations and outline can be a guide to you as you decipher whether a refinance is right for you. As always feel free to call or email at any time, let us know how Human Investing can help.

SOURCES:

https://www.consumerfinance.gov/know-before-you-owe/

https://www.myfico.com/loancenter/mortgage/step1/getthescores.aspx

https://www.bls.gov/cex/2018/standard/multiyr.pdf

https://www.zillow.com/mortgage-calculator/refinance-calculator/

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2020 has put a wrench in most plans. As a recent graduate, you were likely excited to make career moves, grow your friend circle, move somewhere new, and maybe even get your own pots, pans, and plants. Instead, you are living at home with your parents.

According to 2015 data from the Census Bureau, some 82 percent of American adults think that moving out of their parents’ house is a “somewhat,” “quite,” or “extremely” important component to enter adulthood. For those of you currently living at home with your parents, hopefully this post resonates with you.

Some of you may be choosing to live at home, but many of you have no other option. Do you find yourself vacillating about moving back home? Or maybe you are considering spending your savings just to get some space from your family? Regardless of the specifics, have you thought about the impact that saving money on rent can have on your future? Maybe this is a great opportunity for you to start saving money like a millionaire.

For illustrative purposes let’s consider Sophia, a fictitious 23-year-old. She had other plans for herself, but she is living at home for a variety of reasons. She wakes up grateful for safety and shelter, but she is also human and feels a little nostalgia for what this year could have been. Let’s run some numbers on the potential financial benefit of living at home to make her day a little brighter.

Doodle credit: Rachelle Locey

Let the savings begin

If Sophia were not living at home, she would be spending $1,100 a month in housing expenses. After 12 months of living at home, she could save $13,200 that would have ‘normally’ been spent on her rent/wifi/utilities/parking.

Please note: It’s understandable if you’re not able to save $13,200 while living at home. Whether living at home allows you to save $13,200 or $3,000, the benefit is huge for your future financial wellbeing.

Sophia is comforted by these additional savings in her bank account today. She remembers someone (like Uncle Mike or her economics teacher Ms. Anderson) explain inflation, the stock market, and compounding interest. Now what is a girl to do?

Because Sophia is living with her parents, she saved $13,200 of extra cash that she can invest in the stock market.

here’s her 5 step game plan

One year of savings, Thirty years later

**This chart assumes a 7% annualized growth for her investment over time. The 7% is based on historical data of S&P500 returns. **

By living at home, Sofia has safety, shelter, and savings. She also has significant savings for not only today, but also for the future. If you are living at home, please be thankful for your dishwasher and applaud your future self because the financial trade-off is immense.

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@franckinjapan

There is something intriguing about having a domesticated robot like C-3PO (Star Wars), Number 5 (Short Circuit), or Wall-E (Wall-E) to help with everyday tasks that while important are hard to find time to complete. Today our cell phones notify us with the time it will take to get home, refrigerators send us shopping lists (that is if no one is shopping for you) vacuums clean our homes, cars park themselves and it seems as though one day they will all drive themselves. In this day of helpful technology here are three simple tools to automate your finance.

Auto Increase: Auto Increase can help you reach your retirement savings goals without breaking the bank. It’s essential for most people to save at least 15% of their gross income for retirement, however, this can be difficult. If saving 15% is inconceivable, start small and use automation to help. Some retirement plans allow you to set up an annual increase of your contribution percentage. Increasing your savings rate by just 1 percent each year can have a powerful impact on your retirement balance.

Example: A 35yr old with an annual income of $50k begins saving 5% into her 401k by age 65 she can expect to have a balance of $335k. Now if she were to set up an annual auto increase of 1% she could increase her retirement balance to over $825k.

A 1% auto increase can add almost $490k to your retirement balance!!!

Source: dinkytown.net

Hint: Set up your auto-escalation to coincide with the time period you typically get a pay increase. This strategy will help decrease the impact on your bank account.

Auto Rebalance: Setting up auto rebalance can help you avoid unnecessary risk in changing markets. With stocks up 13.57% and bonds up 2.59% annualized over the last 5 years (see graph), you could be taking on some additional risk with an out of balance retirement account. Automating your account or taking the time once a year to rebalance your portfolio can help disperse some of this risk.

Example: Say five years ago an individual had $20,000 in their retirement plan and purposely invested 50% of their portfolio in stocks and the other 50% in bonds, a 50/50 ratio. Over the last 5 years, this account would have grown by 51% to over $30k. In the short period, the purposeful 50/50 portfolio would now be a 62/38 ratio of stock to bonds. This change in the stock/bond ratio can alter the individual’s portfolio and add additional risk.

The graph below highlights the growth of $10,000 invested in the Vanguard Total Stock Market Index Fund Admiral (VTSAX) compared to the growth of the Vanguard Total Bond Market Index Fund Admiral (VBTLX) from August 2013 until August 2018. $10,000 invested in stocks (VTSAX) would have grown to almost $19,000 while $10,000 in a bond fund (VBTLX) would have grown to just over $11,000.

Source: Morningstar.com

Automate your Emergency Reserve: American’s now have more credit-card debt than ever, passing the $1 Trillion mark, paying an average of 17.03% interest. To help avoid being stifled by such expensive debt it is important to build an emergency reserve. Building an emergency reserve of at least 6 months of your income can help keep you on track when unexpected expenses come up. Banks’ digital presence makes it easier than ever to automate saving. Rather than waiting to the end of each month to see what’s left over, if you know you get paid on the 1st of the month set up an automatic transfer to your emergency reserve on the 2nd day of the month. Setting up the automatic transfer helps force yourself to be more strategic with your dollars.

Conclusion: Whether you are wary of robots taking over or are excited to pawn off the mundane (like these robots that open doors), taking a few minutes to set yourself up for success can point you and your family in the direction of financial wellness.  

And while Artificial Intelligence can help with much, it can never replace the value of a face-to-face interaction. At Human Investing, our team of world-class humans aim to serve your pursuit of a fuller life with tailored financial planning and advice. This goes beyond the “nuts and bolts” of investing and financial planning and into the heart of why we do what we do.

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@alecbennett95

Looking to go on a “once and a lifetime” vacation to Fiji? Renovate your kitchen? Upgrade your car? Did you know you may be able to utilize your 401k or other retirement plan to take a loan to help finance this big expense? Here are the details, the dangerous reality, and things to consider when taking a 401k loan:

The Details:

If your plan document permits, a 401k loan can help you access up to $50k of likely your biggest pool of assets, avoid creditors, pay interest back to yourself (typically prime rate + 1%) and there is no need for good credit to qualify. You wouldn’t be the only one taking advantage of this opportunity; according to the National Bureau of Economic Research, about 1 in 5 active participants have a 401k loan.

NBER Working Paper No. 21102

The Dangerous Reality:

Does all of this sound too good to be true? Well, it just might be. A 401k loan can come at the cost of hundreds of thousands of dollars in future retirement income (see graph below). So, whether you have a loan or are planning to take a loan, it is important to know some of the dangers of borrowing against your future self:

Forfeit the tax advantage of your retirement plan dollars - When you are paying back your loan, interest payments are done so after tax. This forfeits the tax advantage of these retirement dollars as taxes are paid when you contribute and later withdraw.

Leaving your employer? Think again - If you leave employment at your company, whether by your choice or your employer’s, you will find yourself in a sticky situation. The remaining balance of the loan will need to be paid back by the time you file taxes for the current year. Defaulting on your 401k loan comes at a great cost. The remaining loan balance will be considered taxable income. If you are under age 59 ½, a 10% early withdrawal penalty will be tacked on as well.

Abandon free money – If your 401k has an employer match you may miss out on free money if you cannot afford to continue contributing to your 401k while paying back the loan.

Miss out on market growth - Your dollars are not fully invested while you have an outstanding loan balance. This means a portion of your portfolio would miss out on opportunity for growth, specifically when market returns are greater than the interest rate paid to yourself.

Detrimental impact on retirement income - A 401k loan can have a detrimental impact on your retirement savings and your potential income in retirement. The below graph shows the effects on an individual’s retirement savings and monthly retirement income. Three scenarios shown are 1) take a 401k loan and push pause on contributions; 2) take a 401k loan while continuing to save; and 3) don’t take a loan.

This graph is for illustration purposes only. It highlights the impact a loan has on an individual’s retirement balance and monthly retirement income after 30 years of investment growth during working years (assuming 7% annual market return and annual contributions of $7,500) and 30 years of income through retirement (assuming 4% rate of return). In this example an individual takes a $15k 401(k) loan from a $50k balance to pay down some bills and a finance a vacation.

The “once in a lifetime trip to Fiji” can ultimately cost more than $1,400 per month in retirement income.

That’s $515k over 30 years of retirement!

Options to consider:

For some, a 401k loan can be a helpful tool when “life happens,” allowing participants of retirement plans the ability to access a pool of assets intended for retirement. However, while this can be an attractive tool for some, borrowing from your future self can have its drawbacks. Either way, here are issues worth thinking about:

• Want to go on a once in a life time trip to Fiji, or finance some other big expense that isn’t worth putting your retirement income in risk? Budget for future big expenses, plan and start saving today.

• Building an emergency reserve (3-6month’s income) to keep you on track financially and avoid a last resort 401k loan when an unexpected expense comes up.

• Are you in a pinch and need to take a loan or have already taken a loan? Continue saving in to your retirement account so as to not miss out on valuable retirement savings and possible employer match.

• Want to take a 401k loan? Check with your HR representative or 401k advisor to see what options are available to you.

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Highway 212 by Matt Duncan

While working with employees at retirement plans over the years, one thing I’ve realized is that being disciplined to save for retirement is challenging and there are many obstacles to doing it successfully. For those living the northwest, saving for retirement can be particularly hard due to the average wage vs. the cost of housing.

Income vs cost of living

When thinking about specific clients that truly save well, regardless of income, a theme that I see is all of these people have a specific mindset towards saving and understand how to achieve short term and long term goals. Over the past month I’ve had a few things cross my life about perspective and goal setting that I wanted to pass along:

First order vs. Second order consequences

A book that I’m in the middle of listening to is by a famous investor Ray Dalio who is the founder of Bridgewater Investments, the largest hedge fund in the world at 160 billion. Dalio, is one of the most successful investors of our time and has some truly unique ways of managing his team and thinking through problems. One passage that really stuck out to me is:

“I’ve come to see that people who overweight the first order consequence of their decisions and ignore the effects of second-and-subsequent-order consequences rarely reach their goals. This is because first-order consequences often have opposite desirability’s from second order consequences resulting in big mistakes in decision making. For example, the first order consequence from an exercise plan (pain and time spent) are commonly considered undesirable, while the second-order consequences (better health and more attractive appearance) are desirable.”

This principle holds true for investing towards retirement as well. By saving a $100/month for their future, a person is giving up something today (coffee, vacation, entertainment) in order to have a more desirable retirement. In other words, this is a first-order consequence and second order consequence type of decision. While this concept is not a unique one, I’d never heard it explained this way and it resonated with how I view decision making.

What’s your “This” in order to get “That”

A friend of mine made the comment a few weeks back “Has your company done the whole let’s set goals for 2018 and never check back in on them again movement?” Unfortunately, corporate goal setting has that stereotype. Often, because it’s true. Luckily our company has Jill, a mother of four and a low tolerance for time wasting activities. She recently implemented a quarterly system for goal setting and tracking. Our team has high hopes for this new system and we’ll ultimately see how it goes. My big takeaway from our time talking about goals was the video she presented by Dr. Henry Cloud called “Start Small”. In this video he speaks to how we all want to get to the big goal but have a hard time setting and sticking to smaller goals.

For some of the guys in our office this meant going on the TB12 diet plan to prepare for our upcoming middle aged athletic endeavors (for me my city league basketball team starting in late January. Wish me luck!).

For you, similar to the Dalio piece, maybe this means looking at what your long term goals is (i.e. having X amount of money at retirement) and shrinking that down to what do I need to do this month/this week in order to get a little closer to that goal.

At the end of the day, the phrases “mindset” and “goal setting” can sound really cheesy, and when done poorly can lead to nothing. However, when we look at our collective social circles and see people who have reached their goals (whether those be physical, business or relationships) often times they are using mindsets like the ones Dalio and Cloud are talking about. Hopefully these can be somewhat inspirational when it comes to putting away additional funds towards your savings goal.

If you have questions or would like to have a conversation about your retirement plan, please don’t hesitate to email or call our team!

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  #1: Know Where You Stand Financially

Whether because of singleness, divorce or death of a spouse over 90% of women will be managing their money alone at some point in their future. Because women tend to save less and live longer, it is critical that women start looking out for themselves financially!  The good news is there is always time for course correction. Below are a few tips to help you know where you stand financially.

1. Get involved in your household finances. Don’t be afraid to have the hard conversation with your significant other - your future may depend on it. Some couples find it helpful to set up a financial date night. Set some guidelines for the conversation. It can be an emotional topic so try and keep it light and educational.

2. Make sure you and your significant other are fully maximizing employee benefits, especially any employee match to a retirement plan, life insurance, and disability benefits.

3. If eligible contribute to IRAs; learn about and take advantage of the spousal IRA.

4. Have jointly owned as well as individual bank and credit card accounts. Speak with your trusted advisor about how you can protect one another in the event of a death or disability - you want to have access to accounts if you need them.

5. Most importantly, know where all the money is and keep log-in credentials for all accounts stored safely.

#2: Have a Plan

Envision retirement! Whether it is around the corner or 30 years away it is important to envision what you would like your future to look like and then plan for it. Whatever your income may be, it is never too early or too late to create a plan.  In our experience clients that have gone through the planning process tend to have more contentment, assurance of their future and unity with their partners.

A financial plan can help answer questions such as:

1. Are you saving enough?

2. Are your assets allocated properly?

3. Are you properly insured?

4. What will happen to your assets when you die?

5. How will you know if you have saved enough and can retire?

#3: Don’t Forget to Budget!

In our experience clients that budget tend to have a high rate of success at reaching their financial goals. When we take stock of what we are spending it is amazing to discover how trivial things may be eroding our wealth accumulation day by day. And you don’t need to re-create the wheel: there are some great budgeting tools out there that can help. One tool we like to refer clients to is YNAB (You Need a Budget). You can do research and find all kinds of tools and apps.  Many are quite user friendly and have apps that you and your significant other can both use.

#4: Put Your Money to Work and Ask for More!

1. Part of any good investing strategy is putting your money to work for you. If you are afraid to invest talk to your financial advisor about your fears and how you feel about taking risk. There are many different strategies to accomplish your goals. By expressing your fears, exploring the options and educating yourself you will be equipped to face your fears and overcome them or at least minimize them. The sooner you address your fears around investing the quicker you can put your money to work.

2. Ask for a raise! Although the gender pay gap is closing there are still many women that are not making as much as their male counterparts. One reason for this is that women are less likely to ask for a raise and advocate for themselves. Equip yourselves by working to achieve job goals, deepen your level of expertise and research what others are making in similar positions. At your next review present your findings and then be prepared to ask for that raise. You might be pleasantly surprised by the response you receive. Commit a portion of those new dollars towards your long-term goals and get them invested.

#5: Consult with Your Trusted Advisor

Having an advisor to assist and guide you on your journey can be a game changer.  Don’t be afraid to ask your advisor the simple and complex questions so you can be involved in the conversation.  If your advisor is not a good fit, look for someone you feel comfortable with, can trust and can easily talk with.  An advisor can provide you with accountability, a roadmap for retirement, counsel in turbulent times and help with financial discipline.  They can also be a huge asset in the event of a death or family emergency.  We have helped many families navigate these difficult situations as an added support.

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As a parent of a five year-old, my wife and I cherish our occasional date nights together. For some reason, serious topics and concerns about our family seem to come up during those times. One evening we found ourselves discussing our out-of-date Will that we completed before my son was born. We both agreed that the decisions we made back then needed to be updated. We revisited questions like, “If both of us were to pass away, who is the right person to take care of our son? How much money would he get from us? Would he be responsible enough to handle that money when he turns 18?” For most of us, conversations like these tend to go nowhere and we move on with our busy lives. This task then falls into the dreaded pile of “things we need to do.”

As human beings, we are experts at procrastinating, which is evidenced by a recent survey that showed that 72% of adults either had no estate plan or their plan is out-of-date1. I have experienced many people admitting that they need to create/update their estate plan but never take the action needed to complete it. Common reasons I have heard over the years include:

• “I’m really busy right now and I will do it later”

• “I’m not sure if I need it”

• “I don’t know where to go to get it done”

• “I am concerned about the cost”

SO HOW CAN WE REMOVE THE BARRIERS THAT PREVENT US FROM DOING WHAT WE KNOW IS IMPORTANT? 

In my experience advising clients on estate planning, I have found the following tips help remove these barriers:

• GET A “WORKOUT” PARTNER - Similar to exercising with a partner, finding a partner to keep you accountable can greatly increase your odds of success. Tell your advisor that this is an important goal for you and ask them to make it part of their follow-up service. If you don’t have an advisor, ask a friend or family member.

• GET EDUCATED - Becoming informed and taking the time to understand why removes much of the uncertainty, helping you feel comfortable and motivated to take the first step. Ask your advisor for an education session. If you know an estate planning attorney, you can check to see if they will provide a complimentary first meeting where you can ask questions. Another option is to do your own research on websites like the Oregon State Bar Association http://www.osbar.org/public/legalinfo/wills.html

• GET PREPARED - Establishing your goals and making a handful of key decisions ahead of time makes your meeting with the estate attorney more productive and can save you money if they charge by the hour. In addition, it helps create progress and momentum so that the process does not stall. Ask your advisor or an estate attorney if they can provide you with a questionnaire to help you prepare. Then carve out about an hour with your spouse/partner to write down information and discuss key decisions that require thought and debate. Examples of these preparation items include:

• Decide who will be the guardians of your minor children.

• Decide who do you want to be the beneficiary(s) of your assets and how would you like them to be distributed.

• Decide who will be in-charge of managing and carrying out your plan after you pass away.

• Determine your view of the probate process.

• Prepare a list of your assets, debts and any life insurance.

• Prepare a list of your personal information – names, dates of birth, contact information for yourselves, children, beneficiaries, etc.

• GET A REFERRAL – Ask your advisor, friend or family member for a referral to an attorney who specializes in estate planning AND SCHEDULE A MEETING. Scheduling a meeting creates a deadline that will help you to move forward with the process. At Human Investing, we will often facilitate the first step by scheduling the meeting for our clients. Ask your advisor to help you take this first step for you.

• LASTLY, REMEMBER WHY THIS IS IMPORTANT - An estate plan protects the people and causes you care about the most in life. Keeping this in mind can provide the motivation you need to see it through.

CONCLUDING THOUGHTS

With just a little focus and help, you can “check the box” on completing/updating your estate plan. My wife and I did end up turning that date night conversation into a new, updated estate plan by following the above tips. Now we have peace of mind and can have more enjoyable, light-hearted conversations going forward.

 1The USLegalWills.com survey conducted by Google Consumer Surveys, June 2016.

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5 Ways to Leverage a Volatile Market for Tax Savings

When the market is volatile it can make investors feel uneasy. In a perfect world the market would never be down, but unfortunately ebbs and flows come with the territory. When the market does slow down, here are a few tax saving strategies that may be worth taking advantage of:

1. Sell the Losers – Investors who have assets in a taxable account might consider selling the assets on which they have unrealized losses. Capital losses generated can offset capital gains or up to $3,000 can be deducted against ordinary income. Additional losses can be carried forward indefinitely.

2. Contribute to a Retirement Plan – Contributions to IRAs, 401(k)s, and Roth 401(k)s are capped at specific amounts. Taxpayers can invest in their retirement accounts while values are lower and realize the benefits when the market recovers.

3. Convert to a Roth – Roth retirement accounts offer significant potential tax savings. IRA owners are allowed to convert to Roth IRAs but income tax would be due upon conversion. One strategy is to convert while the value of the assets are down in order to minimize the tax bill.

4. Exercise Employee Stock Options – Workers who received “non- qualified” options usually owe taxes on the difference between the grant price and the current value of the shares. Exercising stock options in a down market will lower the tax cost for the employee.

5. Make Gifts of Assets - If you are looking to gift stock to family or to a trust, you are limited to tax free gifts of $16,000 per year or $32,000 for married couples in 2022. A market when the cost per share has declined allows you to transfer more shares. When the value of shares rebound down the road, the IRS doesn’t assess gift tax on the increased value of the gift.

If you have questions on these strategies feel free to email or call and we would be happy to walk you through this blog post in more detail.

*Please note that Human Investing does not provide tax advice/guidance and you should contact your CPA with specific tax related questions.

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