Monthly Archives: May 2011

How to Zig When Others Zag: The Contrarian Approach to Personal Finances

Posted on by  at  9:02 pm
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From time to time I put out an article here that depicts me as an old curmudgeon. Well, in some ways, I guess I am. My mom used to say I had an “old soul,” even at a very early age, perhaps because I spent much of my youth around older people. In fact, I’m only in my mid-thirties.

Since I was blessed to be around strong doses of equal parts wisdom and healthy skepticism growing up, I look at things much differently than most people in my age bracket. Some may call it pessimism. I get that. In fact, I have to be careful not to take a glass is half empty approach to all of life, for I have much to be happy about and I remind myself of that frequently.

Stampede by t3rmin4t0r on Flickr

However, I’ve also learned that in many areas of life it pays to put an ear to the ground, listen for the sound of the thundering herd coming, and run in the opposite direction. The “herd” is comprised of those that often blindly follow conventional wisdom.

The Financial “Herd”

In financial terms, you may remember members of the herd buying into tech stocks in the late 90s after months of ridiculous gains. They were late to the party, but wanted to join in and got creamed. More recently, the herd turned to housing, and before 2008, housing prices were sky-rocketing, and people were feeling good again a decade after the tech bubble.

Then the fall of 2008 came and went, and in its wake left many folks in underwater mortgages. Some managed to hang on, others (very few) benefited from a loan modification program, and a large majority simply had to foreclose because they couldn’t keep up the high payments, and couldn’t sell for what they owed.

My Years in the Herd

In my early 20s I followed the herd. I borrowed money when I was 20 to invest in a Roth IRA because I heard on the radio it was simply too good an investment opportunity to pass up, even if you had to borrow money to do it. Well, it is a good investment vehicle, but in my opinion, not so good that is worth borrowing the money to invest.

Around this time I also opened several credit cards in college because the herd was doing it, en masse, at football games, and other campus events. We traded in fiscal discipline for a free t-shirt, or a pizza. Bribery works with college kids, and credit card companies know it (and so do the colleges that allow them on the campus).

How I Finally Broke Free

Fortunately, I returned to my senses, and my old frugal ways before digging a hole so deep I could never climb out. We did eventually climb out, after years of scratching, clawing and fighting to pay for past financial sins. It was not a fun time, and our family adopted a saying, “Never again.”

After turning 30 I realized an entire decade had raced past me with little to show for it, financially. I was blessed to have a wife and two children, and a secure career, but I spent much of the decade treading water. That’s not really true. I was underwater, but able to come up for air just often enough to keep from drowning.

It was time to get back to the basics – old school personal finance with a paper household ledger, an envelope system for budgeting and living on cash. Gone were the credit cards, the student loans, the personal loans I foolishly used to invest, and all other “fancy” financial tools.

I recognized that for too long I had followed the herd. I thought car payments and credit cards were normal. I figured everyone borrowed money on their home, paid a little down, and then borrowed more money for a bigger home. I figured most of my friends, also in their 20s, weren’t concerned with retirement savings and emergency funds. In short, I lived it up.

To turn things around, I started living by the following what you might call “contrarian” principles, and over the last few years, it has paid off (or at least kept me relatively safe through the biggest financial storm in my lifetime…so far). I started observing conventional wisdom in a new way. I became skeptical of those pitching the next hot stock, flipping houses, and encouraging people to borrow their way to wealth.

I started paying more attention to our nation’s fiscal health, and considering the trends being repeated from the past. I don’t claim to possess some prescient skill to see into the future (else I’d be a very rich man), but there were some trends that just seemed large to ignore.

It was around this time (Christmas 2007) that I started this blog, primarily as a way to keep myself accountable. I knew what I was writing wouldn’t be popular, but I thought if things hit the fan, it just might be one day. Heck, I even remember bashing those stimulus rebate checks the government was handing out early in 2008 – remember those? Yeah, that was a popular stance at the time.

Besides managing to tick off a few people along the way with my blog ramblings, I did learn some real lessons throughout the journey and continue to apply them today.

Pay Off Debt When Everyone Else is Borrowing

This was especially popular in 2005 up to the recession. At the time we were leasing a house, and still had debt. I couldn’t begin to count the number of people who told us we were stupid for “throwing money away on rent.”

We didn’t buy our home until March 2009, when we were on solid financial ground, and after prices had already depressed significantly. My only regret – if I had waited a little longer we could have got a sub 5% mortgage, but you know what they say about hindsight.

Pay Off Debts When Consumer Spending and Borrowing is Increasing

When we started our debt-free journey after Christmas in 2007, things were still pretty rosy, economically. The herd was at the malls shopping and borrowing there way into oblivion, and refusing to save a nickel of their income.

When the first hint of economic slowdown appeared the government sent out stimulus checks, and encouraged people to “get out there and spend!” Most people followed orders. We put half of ours in the bank and the other half on credit card debt.

Pay Down Your Mortgage and Stay Put When Everyone Else is Trading Up

A few years ago, it was a popular move to fully leverage your home via maxed out home equity lines, thanks to unnaturally high home values and falling interest rates. Others who didn’t tap equity just traded up to a bigger mortgage – after all, rates were on the way down and times were good.

Unfortunately, many of those same people are struggling to make a mortgage payment after losing half their household income, and seeing their investments wiped out (but more recently re-inflated).

Work a Year or Two and Save Up Money to Attend School While Others Borrow Thousands in Student Loans

This one is always popular. I believe one of the biggest economic threats to the next generation is student loan debt.

New graduates face a crushing debt that will be with most of them for the first decade out of school, limiting their ability to enjoy solid financial footing until well into their 30s.

It isn’t all the students’ fault, either. Colleges and tuition boards have increased rates at a ridiculous pace because, well frankly, because they can. The student loan industry has been nationalized and colleges know they can charge ungodly tuition because students can borrow the money from the government.

If there were less easy money to be borrowed, colleges would have to once again compete for a family’s dollar, and tuition would likely come down. Not going to happen, so make plans now for your kids (or yourself) to find a way to get educated without going thousands into debt.

Buy What Everyone Else is Selling (and Vice Versa)

This is where my personal investment strategy has really changed over the years. I used to stay glued to CNBC and investment newsletters to try to get a scoop on the next big market. Then it occurred to me that by the time I read about it, or heard about it, those with big money had, too.

This is when I became sort of a contrarian investor, if there really is such a thing. Wikipedia sums up a contrarian investor’s philosophy quite well.

In finance, a contrarian is one who attempts to profit by investing in a manner that differs from the conventional wisdom, when the consensus opinion appears to be wrong.

So, I adopted my own two-pronged investment strategy. I would become a dividend investor – buying stock in strong, dividend-paying growth companies in industries that did well in both good times and bad. I would reinvest those dividends to build my positions in these companies, and one day, we just might be able to live off the dividend income alone.

I would also invest a smaller percentage of money (because there is more inherent risk with this approach), in stocks with strong fundamentals, but that had been beaten down thank to negative publicity, natural disaster, or were just oversold as part of the Great Recession. This led me to sectors like:

  • Regional Banks. Many regional banks did not accept TARP money, maintained healthy balance sheets and avoided toxic mortgage markets in smaller locations. But, they still got beat up in the financial sector meltdown.
  • Housing market. The housing market touches so many secondary markets besides the home builders themselves, who have been largely decimated the last couple years. Home improvement stores took a hit, too, and I thought rather unfairly, considering more people would be staying put and investing in home remodels, etc. when the worst was behind us. I joke with my wife that you can get a pretty good read on the local economy by visiting a Lowes (I used to work at one, part time) or Home Depot early on a Saturday morning.
  • Nuclear Power. In the wake of the Japanese earthquake and nuclear disaster, nuclear power stocks took quite a hit, and one could easily understand why. During the threat of a full reactor meltdown, who wants to bet money on the future of nuclear power. Same thing happens after coal mining disasters, oil spills, etc. The fact is, we need some of all three types of energy to meet demand. I certainly don’t sit around hoping to profit from a disaster, but you have to be willing to buy when everyone else is selling, if (1) you can afford to lose money on paper in the short term, and (2) you know enough about a company’s fundamentals to believe the stock really is cheap.

This whole contrarian approach to finance won’t make you very popular at dinner parties, but it just might help you avoid debt and build wealth. For that, I don’t mind occasionally being called a “party pooper.”

Emergency Fund Planning: Don’t Assume Expenses Will Go Down

Posted on by  at  2:51 pm
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One of the more common questions in financial planning is how much to save for an emergency fund. It’s sort a personal question, really, I mean the answer to the equation is personal. Some people feel quite comfortable with three months of basic expenses set aside for a rainy day. Others, like me, have a goal to save one year of basic expenses in the event I lose my job, or am unable to work.

What are Basic Expenses?

Regardless of your goal in terms of the number of months you prefer to have saved, you must first conduct the important exercise of listing your current expenses, and then identifying which of those you would cut in an emergency. What’s left is often referred to as “basic” expenses. Consider things like electricity, car insurance, gasoline, food, and of course, rent or mortgage payments.

In my family we have agreed a number of things we pay for today could be easily dropped tomorrow if we lost our income. The gym membership would have to go. Cable and other entertainment options would be eliminated. I’d probably keep Netflix because streaming movies and television shows is such a cheap entertainment option. I’d also keep internet access and at least one cell phone active for job searching, networking, etc.

Conventional wisdom is that our monthly budget would actually go down considerably if we lost our income. Not so fast.

Accounting for New (Increased) Expenses

It wasn’t until I performed the exercise of listing our current expenses and then putting together our “emergency” budget that I realized our expenses would actually go up; not down. This concerned me because I had always assumed I needed less emergency fund since we’d be reducing our monthly expenses in an emergency.

I had not considered things like COBRA insurance, a costly way to keep health insurance coverage for up to 18 months (even longer, in some scenarios) after separating from your employer’s plan. I asked around and found out that COBRA can run as much as $1,500 a month for full family coverage. Essentially, you are paying both sides of the insurance premium, where your employer used to pick up a substantial portion of the costs.

Sure, you may be able to ultimately find a cheaper health insurance plan, but for the first month or two you are probably going to be preoccupried while scrambling to find work.

So even after cutting the cable, reducing our entertainment budget, and eating beans and rice all month, there was little chance I could make up for the increased costs of COBRA. But that wasn’t the only increased cost to consider.

Imagine if you were laid off in 2009, when gasoline for the average family worked out to about $173 a month. In less than a year, your monthly budget for gas budget would have increased to $281.06, an increase of over $100 a month. Sure, if you weren’t working you wouldn’t be commuting, but job hunting would still have you out and about burning gas. Today, many households are paying over $400 a month for gasoline.

Also be sure to account for food inflation. If your household grocery budget looks like mine, it seems we are constantly having to raise our food category. Not necessarily because we are buying more, but because the prices have gone up while the product sizes go down. Corn has almost doubled in the past 12 months.

When planning how much to keep in an emergency fund, don’t assume your post-emergency expenses will be significantly lower than your current expenses. In fact, it might make sense to save x number of months times a small increase to your regular expenses.

If you normally spend about $3,000 a month, and aim to save 6 months of expenses, normally you would anticipate a healthy savings balance of $18,000 to cover you. However, one could make an argument for rounding that up to $20,000, or even assuming a new $3,500 per month budget and saving $21,000 in an emergency fund.

I do believe you can save too much in an emergency fund, because money in excess of one year of expenses should probably be exposed to more risk, and therefore more opportunity for growth, than a money market account. However, I’ll finish this post the same way I started it–saving for emergencies is personal, based largely on your individual budget, and you and your family’s appetite for risk.

If saving 18 months of expenses helps you sleep better at night, then by all means, build that cash stockpile. If you and your spouse’s jobs are steady, you have other investments you could liquidate penatly free (Roth IRA contributions, etc.) and you’d like to only save up 3 months of expenses, then only save 3 months of expenses. Just be sure to save adequately for those three post-emergency months by not underestimating new expenses.

Home Exchange: A Frugal Quid Pro Quo

Posted on by  at  5:00 am
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What do Cameron Diaz, Kate Winslet and I have in common, you ask? Aside from ravishing good looks, we share an interest in home exchanges. Cam and Kate’s new movie “The Holiday” follows the exploits of two strangers who decide to swap their residences in Los Angeles and England. I am about to take the plunge and sign up as a house swapper too.

I may be a wee bit travel-obsessed. I devour travel books and magazines and spend hours on tripadvisor.com looking at hotels in Suriname and Morocco that I will probably never visit. So when a friend of mine recently mentioned that she is a veteran home swapper, my interest was greatly piqued.

Simply put, a home exchange is when two parties agree to trade homes for a pre-determined interval. There are many types of agreements, including simultaneous and non-simultaneous exchanges, hospitality exchanges, and exchanges with a vehicle option.

Home swappers normally pay a fee to join a home exchange service, but there is no charge for accommodations once a swap is agreed to by both parties.

The concept of home exchange has been around for a long time, but dedicated websites have taken the home exchange concept to a new level. There are many websites dedicated to introducing prospective home swappers to each other. Some have huge databases of potential exchanges, while others focus on niche markets such as luxury homes or home swaps for singles.

The Upside

  • Cha-Ching! Your family can visit countless destinations and pay nothing for accommodations, beyond the nominal fees charged by the exchange service.
  • Local Flavor: You can live like a local by drawing on your exchange family for tips on cultural events, restaurants, shopping, and attractions.
  • No Hotel Hassles: You will be immersed in a community rather than being warehoused in a bleak hotel with impersonal service.
  • Free Wheels? You may be able to negotiate the use of the exchange family’s car, avoiding pricey rental car fees.
  • Convenience: When you stay in someone’s home, you will have use of the kitchen, computer, laundry room, DVD player, toys and games, bookshelf, etc. Cooking and washing at home are huge money savers and all the other items are gravy.
  • Camaraderie: You may develop personal connections and long-lasting friendships with other home exchange families.
  • Safety: In many cases it is safer to have visitors in your home rather than leave it unoccupied during your vacation. Home exchangers can alert you to any problems that arise during your absence (e.g., leaky roof) and their presence will serve as a deterrent to burglars.
  • Free Pet-sitting: Your exchange family may be willing to babysit your pooch while you are on vacation saving you expensive kennel fees.

The Downside

  • Time Suck: It can be difficult and time-consuming to find a suitable exchange property. The sheer volume of listings can be overwhelming, and factors such as location, party size, travel dates, and home amenities and quality can make finding an appropriate exchange a chore.
  • Ick Factor: It might give you the heebie-jeebies to have a stranger in your house or to stay in the home of a stranger.
  • False Advertising: Inaccurate property descriptions are said to be uncommon, but are always a possibility.
  • Tough Sell: Homes in resort or tourist destinations are obviously easier to trade. If your home is in the middle of a wheat field, you might have a harder time attracting potential swap partners.

Other Considerations

Normally homeowner’s policies remain in force during a home exchange. This is because visitors are considered guests as opposed to renters, since no money changes hands during a home exchange. Likewise, car insurance normally covers drivers that are using your car with your express permission.

It’s a good idea to check the details of your specific homeowner’s or auto policy or speak to your insurance agent before committing to an exchange. It’s also acceptable to include parameters for the use of the vehicle such as mileage or travel restrictions and minimum age for drivers.

Most swaps are simultaneous, meaning the two parties occupy each other’s homes over the same time period. However, there are also plenty of non-simultaneous swaps available, especially since many people use their vacation homes for exchanges.

A hospitality swap is when you visit another party’s residence, while they are home—essentially as their houseguests. The type of swap you arrange depends on many factors, including the flexibility of your travel dates, your preferred destination, and personal preferences.

Trust, but Verify

The entire principle of home exchange is based on trust: trust that the homes will be as advertised, that both parties will adhere to the stated timeframes and conditions, and that the properties will be cared for responsibly during the stay. Most veteran home exchangers report that the degree of mutual trust and respect is quite high, and negative experiences are rare.

The most important factors in ensuring a positive home exchange experience are good communication and thorough research. Exchanging details about the properties and researching the area to be visited will keep surprises to a minimum and leave both parties satisfied.

Where to Start

There are loads of home exchange sites on the Internet, but a few popular sites are:

  • homeexchange.com
  • ivhe.com
  • homeforexchange.com
  • digsville.com
  • homebase-hols.com

For newbies like me, it’s also helpful to get advice and tips from experienced exchangers. There are numerous blogs on home swapping, such as homeexchangeguru.com, which provides valuable insights and information.

Now for the hard part—deciding between an apartment in Amsterdam and a cottage in Scotland…

This article was written by contributing author Laurel Gray.

Top 10 Low Cost Ways to Prepare your Home for Sale

Posted on by  at  11:53 am
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The following guest post is from Jack Simms, a former real estate professional. Jack’s bio appears immediately following the post.

The economic turmoil in the United States is nowhere more apparent than in the residential real estate world. All of that bad economic news that we hear about daily has led to a flood of homes being listed for sale. Americans in record numbers are placing their homes on the market to downsize, to avoid foreclosure and to get out of loans they no longer can afford. In this market where prospective buyers have so much to choose from, making your house stand out can be a challenge.

When the market was at its peak, the concept of “staging” a home, or revamping its appearance as a marketing strategy, had really taken hold, and an entire industry of professional home stagers had emerged. In this distressed market, however, sellers should consider several simple, inexpensive ways to enhance their home’s appearance before listing it for sale.

1. Clean, Clean, Clean. Of course your house needs to be clean when prospective purchasers come through, but you would be surprised at how often homeowners neglect this simple, no-cost tip. We all lead busy lives, but if you really want to sell your home, making sure that the kids’ toys are put away and that the dishes are safely in their spot is a must.

2. Rearrange Things. It’s hard for homeowners to hear that their chosen furniture arrangement needs work, but you must consider the appearance (not necessarily the functionality) of your personal property when trying to sell your home. For example, although most people display furniture so that the television is the focal point, that’s not always the most aesthetically pleasing arrangement. But, fear not, despite a little heavy lifting, following this tip shouldn’t cost a dime.

3. Don’t Forget about Curb Appeal. Most sellers concentrate on the interior of their homes for good reason, but you can’t neglect the exterior. Pulling weeds costs nothing and shouldn’t take much time. If your yard is an eyesore, you may want to invest in some more extensive landscaping, but before you take on any project, consider how much it costs versus how much value it might add to the home.

4. De-Clutter. The #1 complaint of prospective purchasers when they visit homes on the market is clutter. Unfortunately, it’s very difficult for some people to see past your stuff strewn all over the room and envision a world where their things look tidy and neat. So, while your home is on the market, put away magazines, kid’s toys, dog beds, litter boxes, etc. A good rule of thumb for most folks is to remove at least a few items from every room.

5. Hit the Thrift Stores. If you’re not the type that needs to de-clutter and, instead, you need to spruce up your décor, you don’t have to break the bank doing so. Consider a trip to a thrift store, a flea market or a yard sale. Because these places can be overwhelming, make sure you go with a mission. If the living room desperately needs a lamp, make that’s your sole priority when shopping.

6. Bring on the Green. Plants and flowers can bring a room to life. But you don’t have to purchase an expensive floral arrangement or a luxurious plant from a nursery. Instead, check your yard for fresh blooms or look for wildflowers.

7. Let there be Light. If you have fussy drapes or other heavy window treatments, consider removing them while the house is on the market, or at least opening them up so light can fill the room. Letting in the natural light and providing a clear view of the outdoors can make a room feel larger and more alive.

8. Don’t be a Closet Case. Unfortunately, you can’t just hide your clutter in your closets. Buyers these days are obsessed with closet size, so be ready for them to take a peak at yours. The more cluttered a closet is, the smaller it will appear to those considering a purchase.

9. Keep it Simple. If you have a flair for the dramatic, make sure you tone it down when your house goes on the market. If you have to splurge on a new coat of paint, for example, opt for neutral colors. The goal is to make your home appeal to the broadest cross section of the population possible.

10. Depersonalize. There’s no need to remove every possible sign that someone does actually currently inhabit the property, but it can help buyers imagine themselves in the home if your family photos aren’t prominently displayed.

Jack Simms has been providing research on issues of interest to home buyers and owners for LeadSteps.com’s Online Mortgage Rates business for three years. Prior to his involvement with LeadSteps, Jack was a real estate professional providing marketing services to realtors in northern California. Jack’s research for LeadSteps’ Mortgage Rates Website is driven by his desire to better explain the complicated decisions involved in both home ownership and the purchase of a home.