Common Cents # 32 - Buying A Home

 

Buying a home 

I have a friend who is in the process of buying his first house. It is an exciting time to finally own a place of his own. But what are the advantages of buying verses renting?

When my friend moves into his new house, he will suddenly be responsible for all of the utilities and maintenance. If he paid his own utilities at his apartment, they were almost certainly far less than in a house. The house is 58 years old and will require ongoing repairs and maintenance not required in an apartment, or a house that he would rent.

A big upside is the ability to nail down housing cost indefinitely. If he takes out a 15-year loan, his housing cost will be cut in half in 15 years when the mortgage is paid. Taxes, insurance, and maintenance continue, but the house payment will end when the mortgage is paid. If he continued to rent, the rent will almost certainly go up numerous times over the next 15 years.

Buying a house as an investment does not always work out as we might hope. We bought our first house in 1978 for $60,000. We sold it in 1995 for $100,000. Adjusting for inflation during that time, $60,000 in 1978 would equal $140,000 in 1995. The value of the house didn’t come close to keeping up with inflation. Since we made double payments and paid off the house in eight years, we lived there mortgage free for nine years.

We have only owned three houses, but the experience has been similar; the value has barely kept up with inflation if at all. The joy of owning our own home, however, and knowing that the cost is reasonably fixed for years to come can make purchasing a home a good idea. Being able to paint, remodel, or even upgrade the HVAC or appliances as we see fit is also very important but must certainly be planned for and budgeted.

It seems reasonable to buy a home if it is pretty certain to be able to live there at least three to five years. Any shorter period of time will probably not be worth the hassle and the costs associated with moving. Apply for a 15-year mortgage to avoid excessive interest and look forward to the day when all that has to be paid is the taxes, insurance, utilities, and maintenance. If those things add up to more than the rent on a nice apartment. It may be time to get out the calculator and consider cashing in.

But more importantly, we should not buy more house than we need. I remember my dad commenting about a friend’s house. He said, “That is a lot of capital to tie up just for a place to hang your hat.” We should not go nuts and into crippling debt just because the banker says we can afford the payment. Things change, our income changes, home prices go up and down. We can get stuck “over housed” and “under cashed”.

Our home, whether it is an apartment, rental home, or one we have purchased should not restrict or prevent our hopes and dreams from being fulfilled. Our needs and situation will likely change over the course of years; it’s a business decision that has a large impact on every other plan we make.  Choose wisely!

Common Cents #31 Gift Giving

 

Gift Giving

 The custom of giving gifts goes back to the beginning of human history and is an important feature of every culture. When Jesus said that it is more blessed to give than to receive, he was stating the obvious. Part of the transition from childhood to adulthood is when we begin to receive more joy from giving than receiving. It has been said that the worst part of poverty is not being able to give to others.

Christians connect gift giving with Christmas because the Magi from the East brought gifts to the Christ child. They brought gold, frankincense, and myrrh. These may not sound like good gifts for a newborn, but they were practical because they could be easily converted to much needed cash. Many scholars believe that the gifts were used to finance Mary and Joseph’s escape to Egypt and their eventual return to Nazareth where Joseph could set up his woodworking shop. Those were very good and appreciated gifts.

In recent years many of us have gotten into the habit of spending huge amounts of money for gifts and running up credit cards that will take months to pay. Surely this dilutes the joy of giving.

In the earlier years of our marriage, my wife and I would designate a marathon Christmas shopping day. We would withdraw cash from the bank for the amount of our gift budget. We would kick off the day with a nice breakfast at Le Peep and then hit the stores, ending with a celebration dinner that evening. The idea was to buy gifts for everyone on our list, using the cash in hand. The goal was to get something for everyone, spending the exact amount of cash we had withdrawn from our back account. It was always a fun day, being together, picking out what we hoped were exactly the right gifts, and knowing  how much money we had to spend.  We did not go over the pre-determined budget, and that was challenging. Seeing our family and friends opening the gifts we had given made it all worthwhile.

Over time our siblings started their own families and the tradition of getting together to open presents became more of a challenge. Along with that, the joy of buying gifts began to diminish as we became less sure of what each person wanted or needed. As our parents aged and eventually passed away, the traditions of everyone being together are difficult to maintain.

Our Christmas gift budget and shopping is different now. We find that gifts given at birthdays or other special occasions for friends and family, or sometimes for no occasion at all has brought back the joy of giving, which is the whole idea. We also value the organizations and individuals who provide service and care for others. Regular giving to them gives us joy knowing that they are the hands and heart for others in a way that we cannot be.

If buying and giving gifts has become a stressful and budget breaking experience, it is time to re-evaluate why we are doing it. Maybe a family meeting to set spending limits or even a complete gift giving truce may be in order. This is a joyous time of year, let’s not overburden ourselves with pressure to overspend and lose the joy of the season and the joy of giving when other options are important to try.

Common Cents # 30 The Sermon on the Mount

 

There is a passage in the Bible usually called “The Sermon on the Mount”. It is found in chapters 5-7 of Matthew. In a few hundred words, Jesus tells the reader what it means to be his disciple, a student and follower of Christ. In clear concise language he tells us how we should live a life that honors Him and that recognizes the power that we receive as we trust in Him. He speaks of the benefits of generosity and the hazards of greed. He talks about murder and adultery in physical and emotional terms as well as forgiveness, not seeking revenge and not being anxious or worrying. He speaks clearly about loving our enemies.

An interesting point is made in Matthew 5:25. “Settle matters quickly with your adversary who is taking you to court.” In other words, resolve disputes with others without having to rely on the government’s agencies to decide remedies for us.  When I first began being in business 47 years ago, I had a few predetermined goals. One was to be totally honest and to never do anything the least bit shady or illegal. Another was to resolve all issues without ever having to sue anyone and to avoid being sued. So far, so good. 

Twenty-first century America is the most litigious society ever. We see it in advertising on TV and billboards for law firms. This is a situation unique to the United States. Some people say the problem is too many lawyers. Some states such as California even adjust the bar exam to limit the numbers of attorneys who pass the bar and are granted licenses in a particular year. But the number of lawyers is not the basic problem. The underlying problem is the general obstinance and arrogance of too many people who demand that a situation only be resolved their way with no compromise considered. People want their own way and will sue somebody if they don’t get what they think they deserve.

This explains Jesus including the subject in his Sermon on the Mount. It is in the context of forgiveness, humility, and not seeking revenge for perceived wrongs. We want our own way and are unwilling to listen to others or negotiate a settlement that is acceptable to all. This is the underlying issue in gang fights, wars, and lawsuits. Actual forgiveness that we extend to others may involve a temporary financial loss on our balance sheet but it also may provide a freedom from anger that will be for the long term. 

In business or in our personal lives, we should strive to lead lives of integrity. If a grievance arises with a family member, friend or customer, we must make every effort to make amends or settle the issue. Going to court is never the best choice. 

 

 

 

Common Cents #29 - Having it Made

 

 Having it made.

 

I often hear it said that somebody “Has it made.” I take it to mean that the person can just coast to the finish line, like when the Chiefs are ahead 38 to 7 with two minutes to go. They have it made. But when do we have it made?

Many of us want to know if or when we have it made, when is the outcome secure? When we get to the fourth quarter of life, we should be looking at the scoreboard and the clock. Sure, we need to play the whole game. Heading for the showers in the fourth quarter is not the way to go, but when can we relax a little bit, knowing that it will end well?

Since this is a column about money, let’s skip the obvious issues of health and relationships. We know that we can never start taking people, especially our loved ones for granted. We also must be diligent about taking care of our bodies. One of the basic truths about automobiles is that the older they are, the more maintenance is needed. Once a car stops depreciating, the operating costs start going up. The same is true with the human body. The older we get, the more frequent the doctors visits and the more we need to eat well and exercise consistently.

But back to money. There are some straight ahead formulas that will answer this question with some degree of accuracy. First, we need to know how much money we spend each month. We should know this but, if not, add up everything we spent last year and divide by twelve. We need to know how much guaranteed income we have or will have. I am talking about Social Security and pensions. It is extremely unlikely that Social Security will change in the next few decades, but if we are expecting a pension, is it secure like a military or government pension, or is it subject to our employer remaining viable? Subtract the Social Security and pension from our monthly expenses. If there is money left over, congratulations! We have it made.

For many of us there will be a shortfall. That brings up the next set of numbers we need to know. How much investable money do we have, how much can we expect to earn on our investments, and most importantly, how long do we plan to live? From there it is just a matter of doing the math.

Here is an example: assume that my certain monthly expenses are $4,000 and Social Security is $2,000. I will need to make up the other $2,000 somewhere. Next, I need to know how many months I will need the money. The average age of my family members when they graduated to heaven is 92. I am 72, which means I will likely live twenty more years or 240 months. 240 months times $2,000 is $480,000. If I have a half million dollars in the bank, I have it made. But that doesn’t take into account return on investment. In the past 100 years or so, the S&P 500 has averaged 10% per year gain. Plugging those numbers into a financial calculator or spreadsheet shows that to get $2,000 per month for 240 months, earning a 10% return, I need $207,249 today. If I have that in diversified investments in an IRA or 401(k), it will grow tax free and I only pay tax on what I withdraw. That is very close to having it made. If we want to invest in lower return but less volatile investments, we will need more money. A calculator will give the exact amount.

The variables are that we don’t know if we will live exactly 240 months, whether we want to have any money left over for the relatives, and if the 10% return is only a long-term average. There could be a multi -year recession that knocks that down over the next few years. More importantly, will monthly expenses change? Will we get our mortgage paid off during that time, will we want to travel more, or will we have extra high medical bills? That is where things like long-term-care insurance and good health insurance come in to insure against surprises. No one’s future is certain, but we can create a strategy for the long game and someone will likely say, “It looks to me like you have it made!”

 

Common Cents - Co-Signing

 

Co-signing

 

In these difficult economic times, many of us have friends or relatives in need. We want to do whatever we can to help. The easy thing may be to just give them some money. A gift card to the grocery store or paying a utility bill can be a big relief for somebody who is strapped for cash. But Jesus said, “It is more blessed to give than receive.” That means the receiver may not be as excited about the gift as you are as the giver, so caution is advised.

Acts 4: 32-35 tells about the early church. The first Christians cared about one another and if someone had a need, somebody else might sell something to help them out. The Bible says the money was “laid at the Apostles feet,” implying some sort of discretionary benevolence fund that could be used by anyone in need. Many churches today have a similar system in place.

We might think that agreeing to a loan is a good idea, but banks are in the business of making loans and our friend may have already exhausted this possibility. If we decide to make a loan to a friend or relative, we are considering ourselves a small bank. We need to do the things a bank would do like  having a loan document spelling out the amount, interest, and repayment schedule as well as the consequences of a default. This is a business transaction, so be firm, but you also might want to consider this as a gift with some sort of debt forgiveness clause. For example, the loan agreement might say that the debt is cancelled if certain things happen, like they lose their job, finish a degree, or some incentive that would benefit everyone involved.

The worst thing we can do is co-sign a note. Ancient wisdom from the book of Proverbs compares co-signing a note to a bird caught in a snare. We should free ourselves and run as fast as we can. Forty percent of the people who co-sign for a friend end up costing themselves money and thirty percent find that the relationship is damaged by it.

A number of years ago, my dad co-signed an automobile loan for a relative. The relative defaulted on the loan and the car was repossessed. This showed up as a default and repossession on my dad’s credit because he co-signed the note. This made it more difficult for him to a get a home mortgage a few years later. If he had been a co-borrower and had his name on the title, instead of a co-signer, he could have claimed the car and sold it to pay off the loan and saved his credit rating.

The Credit Score that we each build based on our personal financial record makes a big difference on what percentage interest we are charged on a loan or if we are able to get a loan at all.  Allowing someone else’s actions to diminish a good record is painful, at best.

If we have friends or family in need, we must find a way to make an honorable difference that will not embarrass them. Give them a loan only if the money is not needed for our own financial demands. And never co-sign a loan.  That means never; there is no upside to co-signing. We can find ways to be generous and even irrationally generous by finding creative and substantial ways to encourage, support and lift up our friends or relatives, while protecting our relationships and our own financial future in these unusual times.