This is a guest post by Hank Coleman who writes about personal finance, investing, and retirement on his blog, Money Q&A. Hank shares his story about how he and his wife decided to become landlords.
I will tell you that I don’t know the first thing about this topic, so I would encourage anyone that is considering it, to read this first before becoming a landlord. I know there are pros and cons into becoming a landlord, so weigh all your options before diving in. Enter Hank…..
Many corporations in America require their employees to move every so often in order to give them with career progression, new opportunities, and challenges as they move up the ranks.
My employer is no different and recently told me of an impending move.
Like many Americans, I’m faced with a daunting choice.
Do I try and sell my home or become a reluctant landlord?
The anxiety of losing large sums of money or equity is one of the greatest fears for most homeowners with an impending move. I wanted to share with you some of my family’s thought process as to how we came to our decision to become landlords for the first time instead of selling.
It wasn’t an easy decision, and everyone’s situation is different. You have to look at it almost like a business and weigh the cost and benefits of your decision before taking the leap.
The Drawback Of Selling Our Home
There are several drawbacks to selling our home. Even though my wife and I live in an area of the country that has not seen the dramatic nosedive in real estate values, we have not seen any appreciation in our home’s value either. We could sell our house for pretty much the exact same price that we purchased it for four years earlier. The real problem with that scenario is that it is dramatically still a buyer’s market when it comes to buying and selling a home.
The buyers call all the shots, and they can make a lot of demands. Most sellers can expect to pay most if not all of the closing costs for both parties. They can also see demands for fixing up the home or even large price reductions. Trying to negotiate with a buyer will not do much good either because there are so many houses still currently on the market. A buyer can literally go down the street in most cases and find a more accommodating seller who needs to close in a hurry.
The Benefits Of Being A Landlord
Now, you may be thinking to yourself that you don’t want to be a landlord. I really don’t want to be one either and have to deal with finding tenants, evicting them when they don’t pay, checking credit reports, fixing broken toilets, showing my house to potential renters, and all of that other garbage. That’s why I hired a property management company to do all of that for me. But, I do want to increase my family’s net worth over the long-term, and owning real estate even if it is just adding one house every few years or so is one way to continue to build wealth.
There are other financial benefits of being a landlord too that many people may not immediately associate with the job. Like any homeowner, landlords enjoy many tax breaks.
In fact, there are more tax breaks for rental real estate owners than regular homeowners. Landlords are eligible to deduct their costs of operating their new rental business from their taxes.
You can deduct the cost of things like your property manager’s fee, maintenance costs, insurance, mortgage interest, home warranties, and a host of other expenses that start eating into your profit.
Renting Our Home At A Loss
Even renting out your home at a loss may be a better option than selling it outright. Of course, most of these calculations depend on your individual situation, your mortgage, how much down payment you used, and a host of other factors. For my wife and I, the comparables for renting a home like ours was $1,300 per month in rent. Currently, our mortgage, PMI, insurance, and property taxes cost $1,350 per month.
Additionally, we chose to use a property management company to help us rent our home, and they charge 10% of the monthly rent ($130 in our case). So, right off the bat, we have a negative cash flow of $180 that we are paying out of pocket every month. But, I’m very happy doing so, and I will tell you why.
Using a closing cost calculator, I can estimate that it will cost me about $14,000 or more in real estate brokerage commissions and fees to sell my $200,000 home. If I am losing $180 per month or $2,160 per year, it would take me about six and a half years to equal that $14,000 upfront cost. It is the difference between dying a thousand cuts or getting my head chopped off in one fell swoop. I’ll wait the market out. Eventually, home values in America will start to rebound…eventually.
Just like home values, rents will not stay low forever either. In fact, rents in American a rising year after year. There is nothing holding me back from raising the rent on my home in a few years and generating positive cash flow later. Almost anything is better in my book than losing $14,000 upfront and watching almost every penny of my equity disappear by selling.
According to the US Labor Department, rents across America have been rising 2.4% year over year, and that data is not even adjusted for inflation. At that rate alone, I could raise the rent on my to $1,500 over the next six years just to keep up with the times.
Eventually, your home could become a mini pension fund during retirement. At our current rate of repayment, my wife and I will have our home paid off thanks to the help of our renters at about the same time that we will be retiring to play golf and live on the beach. Even if I still charged $1,300 per month at that same house 26 years from now, the $1,170 after paying the property manager will be pure profit every month straight into our pockets.
A few more homes providing passive income like that would allow me to completely replace my pre-retirement income. While becoming a landlord is not a dream occupation that everyone aspires to, it is not something to be completely dismissed before you even consider it. There are great opportunities to choose something other than simply selling your home, taking a big financial hit, and moving on.
Pros Cons Becoming a Landlord
Everyone’s situation is different. Some people thrive being their own landlord, finding tenants, and are handy with a hammer. Some people want to get out of a house or an area at all costs and do not mind eating the closing costs in order to do so. Everyone has to make their own choices in the best interest of their family, but I wanted to let everyone know that they should not feel backed into a corner.
There are other options out there rather than simply succumbing to a realization that you have to lose money in order to move to a new home or a new city. All it may take in your situation is a little bit of cost benefit analysis on which course of action is right for you and your family’s well-being.
Hank Coleman is currently an officer in the US Army and also spends his free time as a finance writer who has written extensively for many financial websites and publications in addition to his own blog, Money Q&A. Hank has a Master’s Degree in Finance, a Graduate Certificate in Personal Financial Planning, and is currently studying and constantly putting off taking the Certified Financial Planner exam. His dream is to one day retire from the Army, open his own financial planning firm, and try to be just like his CFP® Idol, Jeff Rose.
Save more, spend smarter, and make your money go further
There’s no secret password when it comes to getting a mortgage. But while most people know what to do to get a mortgage — or get a better rate — fewer people give thought about what not to do.
Whether you’re preparing to apply or just got approved, there are perhaps more “don’ts” than “dos” when it comes to getting a mortgage.
New Credit Is Bad Credit
Never apply for any new credit while you’re trying to get a home loan. Opening new credit decreases your net worth by giving you more available debt. This makes you a riskier investment in the eyes of a mortgage lender.
As such, you can suffer from higher interest rates or even get denied a loan. This includes co-signing for other people’s credit, which is the same as applying for your own credit in the eyes of the bank.
Opening new bank accounts and moving money between existing accounts is also a bad idea, even though you aren’t technically applying for any new credit.
And while we’re at it, leasing a car might not be the same as buying one but it also falls under this general category of avoiding new debts.
Quitting Your Job
This one is pretty much a no-brainer. While your credit score and credit history pay a big role when it comes to whether or not you get a mortgage, so does your income.
Quitting your job without having another one lined up is never a good idea, but when you’re applying for a home loan, it’s just about the worst idea out there. Switching careers isn’t the best plan either, even if you have a job waiting for you.
Lenders want to know that you have a steady income stream that (probably) isn’t going anywhere.
Depositing Phantom Funds
Underwriters want to be sure that all funds in your bank accounts are actually yours and not money your parents gave you to make it look like you have more funds than you actually do.
Talk to a mortgage advisor before you put anything into your bank account that doesn’t come from a payroll within 60 days of applying for a mortgage. After 60 days, mortgage lenders are less interested in having a paper trail for everything.
If you’ve just had some kind of cash windfall, keep the money in your mattress until after you’ve closed.
The exception? Properly documented gifts. Talk to your mortgage advisor about creating the right paper trail for gifted money.
Ins and Outs of Credit
Closing old credit accounts can potentially lower your credit score, as the length of your credit history is as important as what you’ve done with your credit. Discuss it with your advisor before you close any outstanding accounts.
The same goes for paying off unsecured credit lines or credit cards while you’re applying for a loan. When you pay off your outstanding consumer credit accounts, you might not be able to use the money for a down payment.
While on the subject of credit cards, we should say that you generally should not be charging significant sums on your credit card before or during the loan application process.
Try and pay off whatever you charge every month. This is because even a few points can make a significant difference in what you pay for your home over the life of the loan in the form of interest.
Discuss your specific situation with your mortgage advisor.
Listen To Your Advisor
If there’s one piece of advice that you should take away from this article, it’s consult closely with your mortgage advisor throughout the process. They’ll be able to tell you what to do and not to do in a manner far more specific to your situation.
Still, be mindful of your credit and remember it is under especially close scrutiny during the mortgage process. Keep your eyes on the prize — your new home.
Nicholas Pell is a personal finance writer based in Los Angeles, CA. He is the last of the die-hard renters.
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CHICAGO — You can catch a screening of a White Sox documentary, shop local at the Spring Cleaning Market, check out the Logan Square Farmers Market on its opening day and more.
Here’s 19 things to do in Chicago this weekend:
Credit: ProvidedThere is plenty to do this weekend, including a fest at the Chicago Fair Trade Museum, 1457 N. Halsted St.
1-7 p.m. Saturday
Chicago Fair Trade Museum, 1457 N. Halsted St.
The biggest World Fair Trade Day event is coming to Chicago this weekend. Learn how to grown your own greens at home, join a cross-cultural knitting project, compete in a bake-off using fair trade ingredients and more. There will also be tastings of fair trade chocolate, tea and wine. The event is meant to raise awareness of fair trade, a business model aimed at combating poverty, exploitation and climate change. You can buy tickets, enter the bake-off and donate online.
10 a.m.-7 p.m. Saturday-Sunday
Lincoln Avenue from Roscoe to School streets
Shop handmade paintings, sculptures, home decor, jewelry and more at this free North Side fair hosted by Special Service Area No. 27. Enjoy food, music, painting classes, selfie stations, interactive art activities for kids, Sunday morning yoga and more. Sign up online for a chance to win $100 in Art Bucks to spent at the fair. Attendees can also bring their gently used wall art to donate the Chicago Furniture Bank, a nonprofit that distributes furnishings and art to people who are leaving temporary shelters and moving into permanent housing.
5-11 p.m. Saturday
CHAOS Brew Club, 2417 W. Hubbard St.
Alongside a taco bar with all the fixings, birria and pastor, enjoy seasonal ales and lagers crafted by CHAOS brewers at this 10th annual Cerveza de Mayo. You’ll also be able to tour the brewhouse, listen to music by Brian Hoyt and sit by fire pits. Tickets are $45 online. Each ticket includes admission, unlimited food and drink and a 45-day membership to the brew club.
Spring Cleaning Market
1-5 p.m. Sunday
Easy Does It, 2354 N. Milwaukee Ave.
You can grab a glass of wine and oysters while buying art, ceramics, floral arrangements, vintage good and more from local artists. There will also be a motor shucker providing raw bar options and DJ at this market by Common Violet.
11 a.m.-3 p.m. Saturday
The Promontory, 5311 S. Lake Park Ave.
“Last Comiskey” is a new documentary about the White Sox’s final season at Comiskey Park, the team’s old ballpark. This event includes a screening of portions of the film and a Q&A with producer and director Matt Flesch, White Sox pitchers Donn Pall and Wayne Edwards, longtime Chicago sportscaster Tom Shaer and White Sox organist Nancy Faust. Admission is a $25 donation benefitting the Pediatric Epilepsy Surgery Alliance. You can buy tickets online.
6-11 p.m. Saturday
The Logan Theatre, 2646 N. Milwaukee Ave.
Presented by the Japanese Arts Foundation, “Melanated and Animated” is a 21-and-older event that highlights the intersections of Black and Japanese culture. Listen to a panel discussion with industry guests — including game designer, professor and digital artist Derrick Fields and Kotaku staff writer Isaiah Colbert — and watch the director’s cut of critically acclaimed anime series “Afro Samurai.” There will be music, Japanese spirits, onsite gaming and more. Tickets are $35 online.
Credit: Provided/Doug WoodThe annual Wicker Park Garden Club plant sale will run 10 a.m.- 6 p.m. Saturday in the neighborhood’s namesake park.
10 a.m.-6 p.m. Saturday
Wicker Park fieldhouse, 1425 N. Damen Ave.
Herbs, vegetables, flowers, hanging baskets and other plants hand-picked by Wicker Park Garden Club members will be for sale this weekend in Wicker Park’s namesake park. There will also be free native pollinator seeds and a children’s potting area, where volunteers will work with children to decorate pots, fill them with soil and plant seeds to take home and grow.
Doors and silent auction 7 p.m., music 8 p.m. Saturday
Bim Bom Lounge, 5226 W. Belmont Ave.
Bim Bom Lounge’s new owners have spent the past year transforming the former dive bar into an recording space. Construction is still underway, and the studio will be literally raising the space’s roof this month. To kick off renovations and raise money for the studio, there will be a BYOB roof-raising show with music and a silent auction with goods donated by local creators. Entry is $10-$20 on a sliding scale. RSVP online or pay with cash at the door to avoid processing fees.
Noon-2 p.m. Saturday
Wilson Abbey, 935 W. Wilson Ave.
The Lighthouse Foundation, a Black- and queer-led social justice nonprofit, is hosting a soul food brunch where people can learn more about the organization’s efforts to ensure equity for Black queer people in Chicago’s LGBTQ nonprofits. The event will feature live music performances, a panel discussion among Black LGBTQ+ workers and a presentation by Executive Director Jamie Frazier. Tickets are free and available online, and a $35-$100 donation is recommended.
Credit: Courtesy of Mandalyn RaelThe outdoor Logan Square Farmers Market.
9 a.m.-3 p.m. Sunday
3025-3113 W. Logan Blvd.
Shop from more than 100 vendors this weekend for the first Logan Square Farmers Market of the year. The beloved outdoor market will be along Logan Boulevard between Milwaukee Avenue and Whipple Street. Logan Boulevard from Milwaukee to Sacramento avenues will be shut down to drivers to make more room for shoppers and vendors. Alongside produce and farm products, there will be live music and informational booths helmed by local organizations. The Sunday markets take place through Oct. 29.
Noon-4 p.m. Saturday
Mahalia Jackson Court, 1 E. 79th St.
Meet local designers, see some of their fashion, paint flowerpots with your child and shop for Mother’s Day at this free fashion show. There will be food, music and more.
8-10 a.m. Sunday
Lincoln Park Zoo, 2400 N. Cannon Drive
Lincoln Park Zoo is offering a Sensory-Friendly Morning for guests this weekend so they can experience the zoo in a comfortable and inclusive way. The Sensory-Friendly Morning program is offered to visitors who are sensitive to their environments, including people with disabilities, chronic illness, autism, PTSD and dementia. Modifications include limited capacity and muted attractions. The gift shop will open 8 a.m. and Landmark Café will begin selling beverages at 8:30 a.m. Admission is free, but you must register in advance online.
7:15-8:15 p.m. Sunday
Cuddle Bunny – Club, Care & Community, 2901 N. Clark St.
Stretch and rest your mind with bunnies at this bring-your-own-mat yoga class. All skill levels are welcome, and it’s open to people 8 and older. Admission is $22. Sign up online.
Credit: ProvidedKalapriya is a nonprofit group that celebrates Indian performing arts.
2-9 p.m. Saturday
Kehrien Center for the Arts, 5628 W. Washington Blvd.
Local, national and global artists will perform new and ancient South Asian pieces using a variety of instruments and languages at this is event presented by Kalapriya, a nonprofit that celebrates Indian performing arts. There will be Indian food to buy. Tickets are free and donations are encouraged. You can get your ticket and donate online.
Noon Saturday
National Museum of Mexican Art, 1852 W. 19th St.
Teens and young adults 13-25 are invited to a free printmaking workshop led by Marimacha Monarca Press, a queer and trans people of color collective of artists and educators based on the South Side. Attendees will create and carve an original design for a rubber block stamp, drawing inspiration from the “Giving Shape: Yollocalli Artistic Practice Through the Years” exhibition. Participants should bring their own items to print with their stamp, like a T-shirt or tote bag. Email [email protected] to register. Spaces are limited.
Bidi Bidi Boom Boom: The Selena Tribute Dance Party
6:30 p.m. Thursday, Friday and Saturday
National Museum of Mexican Art, 1852 W. 19th St.
Celebrate the legacy of Selena, the queen of Tejano and Cumbia music, at the National Museum of Mexican Art throughout the weekend. Dance the night away, sing your heart out to Selena’s music and enjoy drag performances by Chicago artists. This is a 21-and-older event. Tickets are $30 and include admission and adult beverages. You can buy tickets for Thursday here, Friday here and Saturday here.
Credit: ProvidedEpic Art House, 1850 N. Western Ave., is hosting a free, family-friendly mosaic workshop in honor of Mother’s Day this weekend.
2-4 p.m. Sunday
Epic Art House, 1850 N. Western Ave.
Create your own mosaic art from scratch this weekend at Epic Art House’s free Mother’s Day workshop for children and families. You will learn how to choose colors and materials, how to cut and arrange the pieces and how to adhere them to create your final piece of art. RSVP here.
Noon-3 p.m. Saturday
Rizzo’s Bar & Inn, 3658 N. Clark St.
Dress your pup in their best attire for Rizzo’s red carpet “Pup Prom.” There will be raffles, silent auctions and photo opportunities. The first 150 people to buy tickets will get a dog-friendly swag bag. All minors must be accompanied by an adult.
11 a.m. Saturday
Anne’s Haven, 5629 W. Irving Park Road
Anne’s Haven is a nonprofit where women, girls and nonbinary people of all ethnic, racial, sexual and religious identities can gather together, support and learn from one another. This weekend, the group is hosting a ribbon-cutting for Anne’s Haven Honor Tree, a piece of artwork honoring women. You can be part of the honor tree by buying a butterfly at the event, available on a sliding scale of $75-$150 or more. Pecan pie, cupcakes and champagne will be served. There will also be a pop-up market with women makers after the ribbon cutting.
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Mortgage crisis Q&A: “What is an underwater mortgage?”
I have no idea why I never touched on this topic before…perhaps I thought it was too simple of a concept, but clearly it could use a proper explanation seeing that millions of mortgages are now underwater nationwide.
Put simply, an “underwater mortgage” is defined as a home loan with an outstanding balance that exceeds the value of the associated property.
An underwater mortgage can also be referred to as an “upside-down mortgage” or a “negative equity mortgage.”
Let’s look at an example of an underwater mortgage to illustrate:
Current mortgage balance: $500,000 Current house value: $400,000 Home equity: -$100,000 (negative equity)
In this rather common scenario, the borrower would be $100,000 underwater on their mortgage because they currently owe $500,000, yet the home is now only worth $400,000.
Typically, you’d see the opposite in a healthy real estate market. The homeowner might have a mortgage balance of $500,000 and a property value of $600,000 thanks to regular mortgage payments and home price appreciation.
If that were the case, the homeowner would have $100,000 in home equity, and it would put their loan-to-value ratio (LTV ratio) at roughly 83%.
In the underwater mortgage example, the borrower would have an LTV ratio of 125% (the lower the number the better here folks).
An LTV above 100% implies negative equity, or underwater status. It’s not good!
Why are mortgages underwater?
Borrowers owe more than their homes are worth
Because many took out zero down mortgages
And made interest-only payments or let their mortgage negatively amortize
Then home prices took a big dive
The underwater mortgage example above is actually pretty common nowadays for several reasons.
No, there wasn’t a great flood…nor was there any water damage.
During the housing boom, home prices were very inflated, no one will argue that. At the same time, scores of borrowers took out no money down mortgages, aka 100 percent financing, to qualify.
Essentially, because home prices were so high, new entrants to the market were basically forced to finance their too-expensive homes with risky types of financing, as it was the only way they could afford the properties in question.
And they probably also chose these risky types of loans simply simply because they could.
After all, why put a bunch of money down if you don’t need to, especially if you think home prices are going to rise. That was the fatal flaw.
When home prices abruptly tanked, those who started out with no equity (100% financing) quickly fell into a so-called “underwater” position, especially since most were only making interest-only mortgage payments at best.
This problem was further exacerbated for those who opted to take out option arm mortgages, which allowed for negative amortization.
Yes, at the time there were mortgages that permitted homeowners to pay less than the total amount of interest due each month, and were even designed to allow borrowers to fall into underwater positions.
But everyone assumed home prices would keep rocketing to the moon, so no one gave it much thought.
Even homeowners who made their mortgage payment in full each month fell into underwater positions thanks to the grossly inflated home prices and precipitous declines that followed.
This also explains strategic default, where homeowners choose to walk away from their mortgages because they’re so far underwater they never expect to recoup the lost equity.
Or simply feel they can start out fresh with a mortgage balance more closely aligned with today’s home prices.
[Underwater Mortgage Insurance: Yes, It Exists Now]
What to do if you’ve got an underwater mortgage…
There are options for borrowers with underwater mortgages
Namely the Home Affordable Refinance Program (HARP)
Which allows homeowners to refinance with no LTV constraints
But you need to be current on payments
And your loan needs to be owned by Fannie Mae or Freddie Mac
If you have an FHA loan, a streamline refinance may also be an option
While the options aren’t great for those with underwater mortgages, there are certainly more and more programs being unveiled that deal with them.
You may have heard about a certain government loan modification program aimed at those with underwater mortgages that allows refinancing up to 125 percent LTV…it’s no coincidence.
And recently the government launched a program to help homeowners with underwater mortgages refinance, regardless of how deeply underwater they are.
Unfortunately, this program, known as HARP Phase II, is only available to those with Fannie Mae and Freddie Mac backed mortgages.
However, similar options are available to those with FHA loans and VA loans, so don’t fret.
If you have an underwater mortgage, it’d be wise to contact your mortgage lender and/or loan servicer to see what options are available for you.
You may be surprised to find that there are refinance options available to snag lower mortgage rates and even principal reduction in some cases.
Of course, there are going to be cases where borrowers are so deeply underwater that the best option could actually be walking away.
Simply put, if a borrower is so underwater that it will take a decade or longer just to break even, the argument is there.
It may be better to walk away, rent for a few years, and buy again when you’re ready to do.
That way you won’t be waiting years for your mortgage to get back above water.
Just be sure to weigh all your options and come up with a long-term plan first. It’s a major decision and should be treated as such.
Read more: How to refinance an underwater mortgage.
What Happens When a Bill Goes to Collections? – MintLife Blog
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credit score. You will then be contacted by phone and in writing regarding the details of the charge-off.
In this guide, we’ll explore what happens when a bill goes to collections as well as what to expect during the payoff process. You can still redeem your credit score by paying down your debt as quickly as possible and staying diligent with your other accounts.
What Is a Collection?
The original lenders—such as the credit card company, mortgage lender, or doctor’s office—turn to collection agencies when they no longer expect to receive your payment. Collection agencies either act as a middleman to retrieve the debt or purchase the debt from the lender for a fraction of the original amount. The lender then writes the amount off as a loss to their business and passes responsibility off to the agency.
Collection agencies purchase your debt for a smaller percentage of the original amount since they take on the risk that the money will not be repaid. This percentage varies based on a series of details, including the age and type of debt. Often, the higher the risk the debt will not be repaid, the less the agency pays.
When does a bill go to collections? A lender will typically sell the debt between 30 and60 days of delinquency, though they may not tell you that this occurred until after the transfer. Medical bills will not be transferred until they reach 180 days of delinquency due to the National Consumer Assistance Plan.
Once a lender sells the debt to a collections agency, you will receive a phone call alerting you of the change. Within five days of the initial notice, you will receive a physical letter that outlines the amount owed and how to pay or dispute the bill. Agencies do not have the right to collect fees or interest on the amount, nor are they allowed to threaten or intimidate you to pay the bill. The debt collectors can continue to pursue the amount depending on your state’s statute of limitations. The length varies between three to ten years depending on the laws of your state.
How Can a Bill in Collections Affect My Credit?
Payment history is one of the top contributing factors to your credit report, accounting for over a third of your credit score. Lenders want to be able to see that you’ve managed your finances in the past. Missed and lapsed payments that have gone to collections could be seen as a sign of financial instability. The effect on your credit score comes down to how late the payment is, the amount due and the type of debt.
When unpaid bills are sold to collection agencies, the negative mark can stay on your credit score for up to seven years. The starting date is determined by the last time the bill was brought current. For example, notes on defaulted bills can remain on your credit for seven years after the last time you made a payment on the loan in question.
It is important to look at your credit report on occasion to ensure these negative marks do not appear by accident. If the collections agency or lender made a mistake in reporting the information, you can dispute the debt to have your report updated or the note removed.
As we mentioned earlier, the National Consumer Assistance Plan keeps medical debt from appearing on your credit report before 180 days of delinquency. This allows patients to negotiate with their doctors and insurance companies, many of which will offer payment plans when the bill is too high to pay in full.
How to Handle Accounts in Collections
Understanding what happens when your debt goes to collections can be daunting. Remember that you must receive all the details in writing within five days of first receiving notice. Once this arrives, verify the details with your own payment history and accounts. Review the Fair Debt Collections Practice Act if you’re concerned your collection agency is overstepping their bounds. Collectors are not, for example, allowed to intimidate you or call at unreasonable hours.
If all information is confirmed, you can approach the payoff in several ways. Set up a payment plan with your collection agency by determining a practical timeline with your own finances. If you can afford $50 a month for the next year, speak to your agency about this option and request any agreement in writing before proceeding. Avoid giving your bank account number or setting up automatic debits with the collection agency and clearly state how you plan to pay off the amount.
Dispute any inconsistencies within 30 days of collections notification. Collections does not have the right to list the debt on your credit report during the investigation. The Consumer Financial Protection Bureau has prepared sample letters for disputing or requesting clarification from a collection agency.
Once you’ve done your due diligence of requesting a payment plan and paying down the debt to your ability, the statute of limitations laid out by your state determines how long a collection agency can pursue you. A collection agency can sue you for unpaid debt, but you may have a case to have the lawsuit dismissed with legal assistance if the debt is outside the statute of limitations.
If a bill goes to collections, you do have options. Keep yourself informed about your rights as you work with collections agencies and be sure to request all agreements in writing. You can also track your credit as you make a plan for paying down your debt. This allows you to regain control after a temporary moment of financial instability.
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Sacramento, California, USA – February 25, 2011: Facebook.com’s homepage displayed in a Firefox browser on a computer monitor. Facebook is the world’s most popular social networking website.
Mortgage Q&A: “How much do mortgage brokers make?”
If you happen to use a mortgage broker to obtain your mortgage, you may be wondering how they get paid and what they make.
Mortgage brokers essentially work as middlemen between borrowers and banks/lenders, so they can actually be paid by either party.
Just to be clear, this article is about how much mortgage brokers make on the home loans they originate, not how much they make in the way of salary.
Of course, brokers typically aren’t paid a salary, so if we know what they’re making per loan, we’ll have a decent idea as to what they might take home each year as well depending on annual volume.
But you have to consider their costs to operate as well, which will vary based on how large their shop is, if they employ loan officers, how much they spend on advertising (if any), and so on.
How Does a Mortgage Broker Get Paid?
They can choose to get paid by either the lender or the borrower
They can charge an origination fee directly, which comes out of the borrower’s pocket
Or elect to get paid by the lender, which is indirectly paid by the borrower
The latter results in a slightly higher interest rate, meaning it’s paid over time via higher monthly mortgage payments
In the recent past (before April 1, 2011), mortgage brokers could make money on both the front and back end of a mortgage loan.
Simply put, they could charge a loan origination fee directly to the borrower and also get paid by the mortgage lender via a yield spread premium (YSP), which was the commission the bank or lender provided in exchange for a mortgage rate above market.
In short, the higher the interest rate, the more YSP the broker would receive from the lender.
YSP was also referred to as “par-plus pricing”, “rate participation fee”, “service release fee”, and many other variations.
Brokers had the ability to make several points on the back end of a loan, potentially earning thousands of dollars, sometimes without the borrower’s knowledge.
They could also collect money on the front end of a loan via out-of-pocket closing costs like loan origination fees and processing costs, which the borrower paid directly.
For example, back in the day it was possible for a broker to charge one (or more) mortgage points upfront for origination, receive another two points on the back from the lender, and also tack on things like loan processing fees.
All told, they could make three to five points on a mortgage, aka 3-5% of the loan amount. If we’re talking a $500,000 loan amount, that’s anywhere from $15,000 to $25,000 per loan!
And it could be even higher for jumbo loans. Prior to the housing crisis, it wasn’t unheard of for brokers to make massive commissions like this.
You’d hear about them asking for “max rebate” on the back end, which was the limit wholesale lenders would pay out, while still convincing the borrower to pony up an origination fee on the front end.
As a result, brokers could essentially be paid twice for the same transaction.
The beauty of it was the yield spread premium came in the form of a higher mortgage rate, so it didn’t even look like a fee or a cost to anyone – it just meant the borrower had a slightly higher mortgage payment for the entire loan term.
In other words, the borrower was saddled with a higher rate for the life of their loan and may have also paid a commission upfront, without realizing it.
Had the broker just charged the upfront fee and nothing else, the borrower may have received a mortgage rate of say 4% instead of 4.5%.
In hindsight, it probably didn’t matter because most of those loans didn’t last more than a few years (or months) before they were refinanced or foreclosed on. Eek.
How Mortgage Broker Compensation Works Today
Brokers can no longer get paid twice on a single loan
Instead they have to choose how they want to be compensated, by the borrower or lender
They may have a different compensation package with each lender
So depending on where the loan is placed their commission could vary from loan to loan
As noted, the controversial practice outlined above was outlawed in 2011.
The Fed came in and changed all that by effectively banning yield spread premiums, and now mortgage brokers can only get paid by the borrower OR the lender, not both.
That doesn’t mean they can’t still make a lot of money per loan, it just means the way they can get paid via the wholesale mortgage channel has been limited.
In other words, they either charge you directly to close the loan or they get paid by the lender and you pay for that commission indirectly (not out-of-pocket at closing) via a higher interest rate.
If charging directly, the borrower pays for the broker fee or origination fee, loan processing, and so on. Compensation can also vary from loan to loan.
If being paid by the lender, it’s similar to YSP, but brokers must now choose a compensation plan upfront with each lender they work with, as opposed to charging different amounts on each loan as they see fit.
And they usually must stick with that compensation plan for three months before they can change it again.
For example, they may choose to earn 1% commission on every loan they close with Bank A. So if the loan amount is $500,000, they’d earn $5,000. If it’s $300,000, they’d only get $3,000. And so on.
But they may select a higher compensation structure with Bank B that gives them 1.5% on each closed loan.
Assuming the loan terms and cost are the same, they can send your loan to Bank B for a higher commission, as it won’t affect what you ultimately receive.
However, a different broker may decide to set all their compensation levels at 2%, and if you happen to work with them your interest rates may be higher across the board to account for their higher commission.
So you kind of have to shop mortgage brokers too in order to find the one offering the lowest rate/costs.
In other words, you can still get a raw deal, or at least a not-as-good deal. The good news is they can no longer get paid on both the front and back end of the loan.
But you should continue to be vigilant and look over your loan documents to ensure you aren’t being overcharged.
In short, you’ll want your broker to send your loan to the bank that offers you the lowest interest rate, not the one that gives them the highest commission.
What Is the Mortgage Broker’s Commission? And How Do I Find It?
So you’re applying for a home loan and want to know the mortgage broker’s fee. I don’t blame you, it’s important stuff.
But if the interest rate and combination of closing costs are favorable relative to other banks/lenders/brokers, it doesn’t really matter what they make.
Still, you should know and you have a right to know. Here’s how to find out.
When signing loan disclosures early on in the process, look out for a “Loan Brokerage Agreement” form that spells out their commission, and whether it’s borrower- or lender-paid.
The screenshot above is an example where a broker earned $8,775 via the lender for facilitating the loan. Not bad for one loan, eh?
To figure out how much they’re making on a percentage basis, simply take the compensation amount and divide it by the loan amount.
The loan amount in this example is $780,000, making their compensation 1.125%. It’s reasonable as they could charge 2% or more depending on the wholesale lender they partner with.
You can also find the broker fee on the Closing Disclosure (CD) and the ALTA Settlement Statement when it’s time to sign docs and close your loan.
Okay great, so what do brokers make?
A survey said they were paid 2.25 points per loan on average
On a $300,000 loan amount that would be $6,750 in compensation
While it sounds like a tidy sum, you have to consider their volume and operating costs as well
It’s pretty close to what real estate agents make, usually 2.5% of the sales price
A press release from 360 Mortgage Group detailing the compensation changes said mortgage brokers generate an average revenue of 2.25 mortgage points on a home loan.
For example, on a $500,000 mortgage, they’d make roughly $11,250 in revenue. That sounds pretty good, doesn’t it?
But as mentioned, we have to subtract the costs of doing business, which are variable. From there, you’d have your profit per loan.
Not a bad take for helping people get mortgage financing, depending on how many loans are closed each month, and what expenses are involved.
As you can see, mortgage broker salary will definitely vary based on the size of the loans they typically close. In more expensive areas of town (or the country), brokers might make six-figures or much, much more.
While those in lower-priced metros could make significantly less if costs are still relatively similar.
Additionally, brokers who focus on mortgage refinances might have higher loan volume than those who help home buyers purchase real estate, as the latter can be harder to come by and slower to close.
Of course, if they partner with a local real estate office or two, they have the ability to generate a ton of purchase loan business too, so it’s hard to say either specialty would be more successful universally.
Their average income will also depend on the financial institutions they choose to partner with, as compensation structures and points per loan will vary across different mortgage lenders.
One aspect of a mortgage broker’s job is linking up with lending partners that are good at quickly closing loans, while also offering competitive pricing. As such, these partners can greatly affect a mortgage brokers salary.
[How to get a wholesale mortgage rate?]
Will mortgage brokers still make the same money?
While it might be more difficult to make a ton of money on a single loan
Brokers still have the ability to make a very good living even with limited volume
A broker who closes just $2 million a month could earn over $500,000 annually
Very few other occupations pay anywhere close to that much
The 360 Mortgage Group believes brokers will be able to adapt to the compensation changes, and if you know anything about the mortgage business, new rules are typically circumvented overnight.
Many mortgage lenders are now publishing multiple mortgage rate sheets, with one version lender-paid compensation and the other borrower-paid compensation.
So brokers can simply pick up a specific compensation-based rate sheet they’d like and be on their way.
For example, if they want to make 2.50 points, there’s a rate sheet for that. If they only want one point, there’s a rate sheet for that too.
But the rule change will probably reduce average incomes for loan brokers, since they won’t be able to take a little from both the front and back of the loan.
Receiving compensation from just one entity, as opposed to two, means it’ll be more difficult to charge an excessive amount per loan, though not impossible.
This is relatively good news for home buyers and existing homeowners looking for refinance who will hopefully enjoy lower mortgage payments, but bad news for mortgage brokers, who continue to lose market share. It could also dent their total pay.
It’s recommended that you shop for a mortgage by gathering rate quotes online, at your local bank/credit union, and also via a mortgage broker or two.
You’ll never know who might have the best rate/terms unless you actually take the time to shop around!
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Investing columnist Matthew Amster-Burton has been answering questions from the Mint.com Facebook page and Twitter. This week: questions about 401(k)s and other retirement plans.
Rolling over a 401(k) to a Roth IRA
Al asks: Can I roll my 401(k) into my Roth IRA when I leave my job?
Sort of. How’s that for a satisfying answer?
Here’s the deal. Unless you have a Roth 401(k) (a fairly new and rare beast), a 401(k) is like a traditional IRA, not a Roth IRA. You put pre-tax money into a 401(k): unlike the rest of your paycheck, your 401(k) contribution goes straight into the account without the IRS taking its share via withholding. Of course, you’ll still have to pay taxes later when you withdraw the money… or convert it to a Roth.
If you roll your 401(k) over to a Roth IRA, you have to pay income tax on the entire balance. Since you’re leaving the money in a retirement account, there’s no early withdrawal penalty, but the converted amount is considered income and you could end up in a higher tax bracket. Furthermore, the tax payment has to come from outside the account. For example, if you’re in the 25% bracket and you roll a $50,000 401(k) over to your IRA, you’ll need to cough up $12,500 cash.
The bottom line: Roll it over to a traditional IRA. You won’t pay any tax or penalty and you can look into doing partial Roth conversions, or none at all, depending on your tax situation.
Pros and cons of 401(k)s and 457(b)s
Robert asks: What are the pros and cons of a 401(k) vs. a 457(b)?
If you’ve never heard of a 457(b), you’re probably not eligible for one, but stay with me a minute, just in case.
A 457(b) is a pre-tax savings plan similar to a 401(k). While 401(k)s are widespread, only public employees and certain highly compensated employees in the private sector have access to a 457(b). (Isn’t “highly compensated employee” a great euphemism for your boss’s boss? It’s right up there with “high net-worth individual.”)
If you have access to a 401(k) and a 457(b), you can contribute $17,000 (if you’re under 50 years old) to either or both. Yes, that means $34,000 in total. The main difference between a 401(k) and a 457(b) is that with the 457(b), you can make withdrawals at any age without a penalty, as long as you’re no longer working for the employer where you signed up for the 457(b).
If you’re a public employee, therefore, it generally makes sense to contribute to a 457(b) before contributing to a 403(b) (the government employee equivalent of a 401(k), and I am so sorry for the alphabet soup), as long as you don’t forego a matching contribution.
There’s a special wrinkle to non-governmental 457(b)s, however: unlike a 401(k), the money isn’t entirely yours. Until you actually withdraw it, it’s an asset of your employer and could be turned over to creditors in bankruptcy. The actual risk of this happening is remote, but it’s scary enough that private sector employees should fill their 401(k)s before considering the 457(b).
The bottom line: A governmental 457(b) is excellent, so use it; a private 457(b) is good, but riskier, so use it only if you fill up your 401(k).
Rolling over 401(k) contributions
Craig asks: Can I annually, or even more regularly, roll over contributions I have made to my employer’s 401(k) into my Roth IRA? I am under 59.
No—except in one unusual situation.
Generally speaking, you have to leave 401(k) money in the 401(k) until you change jobs, retire, or quit in a huff and slide out the back of the plane.
Some employers, however, allow in-service distributions of after-tax contributions. What this means:
You contributed the full $17,000 maximum to your 401(k)
Your company allows you to contribute additional money, after tax
That additional money can be rolled over into a Roth IRA
Yes, this means you have to max out your 401(k) before there’s even a chance you can do this. (Actually, sometimes you can also get away with it if you’re over 59-1/2.) If you’re a highly compensated employee (yay!) and are contributing $17,000 already, by all means, ask your benefits office about in-service distributions.
There’s one other situation where you might be able to do rollovers without cleaning out your desk. If your employer’s plan is a SIMPLE IRA, rather than a 401(k) (yes, a SIMPLE IRA is yet another similar pre-tax retirement plan), you can roll over any money that’s been sitting in the plan for at least two years. And you probably should, because SIMPLE IRAs tend to charge high fees and offer lousy investment options.
The bottom line: You probably can’t do this.
Do you have an investing question for Matthew Amster-Burton? Head over to the Mint.com Facebook page or Twitter and ask away!
Matthew Amster-Burton is a personal finance columnist at Mint.com. Find him on Twitter @Mint_Mamster.
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This is Midjourney AI’s imagined version of my new car. I’ll update this picture once I take delivery and head out on my first real camping trip!
As I type this, I’m jumping through the various hoops involved in buying a 2023 Tesla Model Y, a spectacularly expensive, large luxury “crossover” that is absolutely loaded to the gills with excess: all wheel drive, faster acceleration than a Lamborghini, enough space for seven people and enough computer gadgetry to function as a small Google data center.
The total net cost of this thing to me after all the taxes and tax credits* will be about $52,000, which is just a stunning amount higher than the Honda van it is replacing. That old classic cost me $4500 when I bought it off of Craigslist twelve years ago, and it had served me dutifully until just last month, crisscrossing the mountains and deserts of this country and also helping to rebuild a considerable swath of houses in my neighborhood.
I’m supposed to be a frugality-oriented financial blogger, and I’m also known for hating car culture – I think most people use cars about ten times more often than they need to, and most people drive cars they can’t afford. So why the hell am I buying a new one?
From those first three paragraphs, you can see I’m feeling plenty of self-mockery and ridicule over this new purchase. If you’re also a naturally frugal person, you can surely relate to the thoughts and you probably also agree with me that I’m off my rocker.
And indeed, I’m still on-board with frugality and healthy self mockery. After all, it was this overall life philosophy that earned me an early retirement 18 years ago, which provides all of the glorious freedom I enjoy now.
It was also the philosophy that allowed me to procrastinate on buying this expensive car for the last four years, even as countless people both close to me and out on the Internet egged me on and told me I should just loosen up and treat myself.
But there’s a classic slogan that applies to many areas of life, and it is something I like to dig up and ponder every now and then:
“What got you here,
Won’t get you where you’re going.”
How does that piece of wisdom apply to frugal living and enjoying a long life of early retirement?
A quick story from a recent run to the grocery store will explain:
I was standing there in the bakery aisle, hoping to restock with a loaf of Dave’s Killer Bread for the next day’s breakfast with some visiting friends. But since this was in a standard grocery store rather than the Costco where I usually shop, the damned stuff was priced at an eye-watering $6.99 per loaf (instead the $4.50 or so I’m accustomed to paying, and even at the bulk store this stuff is about double the price of normal bread).
“DAMN YOU KING SOOPER’S!”
Was my first response.
“WHO THE HELL DO YOU THINK YOU ARE, TRYING TO SELL BREAD FOR SEVEN BUCKS!!!”
Then I went through a whole mental battle of what I call Grocery Shopping With Your Middle Finger:
“Should I just boycott this bullshit?”
“Hmm I wonder if any of the other competing brands are any good?”
“What else is a good substitute for bread for this breakfast?”
And then thankfully, after exhausting all other mental options, I settled on the correct one:
“JUST BUY THE BREAD YOU DUMBASS!”
“Because you are never going to wake up in the future and look at your bank account and think, shit, if only I had an extra $2.49 in there I would be a happier person.”
That night, I came home from the store and shared this funny tale with one of my guests. He understood perfectly because he too had earned his own retirement through a lifetime of grinding in tough jobs and disciplined frugality. And despite the fact that he has a net worth several times higher than mine, he admitted that he faces exactly the same mental battles over splurging on himself.
This same friend gives freely to charitable causes, has supported a local school for decades, and is always the first one to pull out the checkbook if a friend has hit hard times or is looking for a trusted business investor.
But he still has trouble bringing himself to take an Uber to the airport instead of riding the bus which takes an hour longer.
We both realized that we were being too cheap with ourselves, and we needed to work on it. And we came up with a set of three ideas that should hopefully work together to help us have more fun with our life savings, while we are still alive:
the Minimum Spending Budget,
the Dedicated Money Wasting Account,
and the Splurge Accountability Buddy.
Principle #1: The Minimum Spending Budget:
Suppose you’ve done well over the years and amassed a pile of productive investments worth about two million dollars. Yes, this is a lot of money for most people, and that is the point: this hypothetical person truly has it made.
But as it turns out, most Mustachians I know with this level of wealth are still living very efficient lives, usually with a spending level of under $40,000 per year. On top of that, they typically live in a mortgage-free house and still have various forms of side income from a small business or two.
The 4% rule tells us that this person should be fairly safe spending up to about $80,000 per year from that cozy nest egg, even if they never earn any other money.
If this person wanted to be ridiculously conservative and set the spending rate at 3%, that still leaves about $60,000 of fun money every single year.. Plus, again, any side income, future inheritances, and social security income only add to the surplus.
Thus, a reasonable minimum spending level for this person might be $60,000 per year.
And in most cases, they know this, but still go right on living on $40k or less and claim they have everything they could ever want.
But if you watch carefully you’ll still catch them firing up the middle finger at things like $6.99 Dave’s bread or the $14.00 Cabernet at the restaurant or driving around in a gas guzzler even when they would prefer to have a proper, modern electric car.
And whenever these people do get extra money, their first instinct is to stash it away on top of the already-too-big pile. In diagram form, their money flow looks like this:
Note that while this person is great at accumulating money through that big red arrow firing money back into the ‘stash, their “fun stuff” arrow appears quite flaccid and withered.
Which is a perfect segue to ….
Principle #2 – the Dedicated Money Wasting Account
Lifelong habits are hard to break, and it’s sometimes hard to “waste” your own hard-earned money on things that seem frivolous, even when you know intellectually that you have way more money than you’ll ever spend.
But have you ever noticed that if you are spending somebody else’s money, preferably an anonymous corporation, it feels different?
For example, when you’re on a business trip and you just show up at the dining table to eat and drink and you never see the bill, you probably don’t fret about the prices, right?
The key is to make your own money feel like somebody else’s, and you can do it like this:
Re-brand your main bank account – henceforth it is the FREE FUN MONEY account.
Set up an auto-deposit of your minimum spending budget that drops in each month (if you suspect that you might currently be too frugal, make this at least $1000 per month higher than your current spending level)
The only way you are allowed to use the money in this new account is to spend it on anything and everything, or give it away. It can be used for both necessities like groceries and your utility bill, but also your luxuries like travel and dining and generosity.
But the key rule is this: You are not allowed to follow your old habit of sweeping out the surplus each month to buy more and more index funds as you’ve been doing your whole life.
If the free fun money starts building up, which it probably will because you are way out of spending practice, it will stare you in the face and tell you to do a better job.
And this can and should be FUN! Now you can get the best organic groceries even when the price seems exorbitant. Go out for dinner or order delivery whenever you like. Surprise your loved ones with concert tickets, join your friends on snowboarding or beach trips, or even pay for an entire group vacation, allowing people to go who couldn’t normally afford it so easily.
Technical Note: Some people have income or wealth levels are so high that it would be insane to spend at a 3% rate. For example, a $10M fortune would lead to a $25,000 monthly spending rate, which is obviously ridiculous.
In this situation, you can still leave your dividends reinvesting but still give yourself a bigger, no-saving-allowed budget to get some practice being more relaxed and generous. The real point here is to just stop sweating the details so you can have more fun.
Principle #3 – The Splurge Accountability Buddy
Many of us frugal people tend to stick together. And most of us have different versions of the same problem: we know logically that money is plentiful these days, but our emotions keep us stuck in our old ways of optimizing too much.
But I find that when I team up with local friends who are actually trying to battle these same habits, we can question each other’s decisions, call out cheapness when we see it, and cheer on splurges when we know the other guy would enjoy it.
My super wealthy friend from above has become much better about treating himself (and his family) to quality goods for the home, amazing trips together, and just a general reduction in his stress over being “efficient with money”
My friend and HQ co-owner Carl (Mr. 1500 Days) has finally replaced his beaten-down minivan with a spiffy new Chevrolet Bolt electric car, and is loving that leap into the future.
And of course Mr. Money Mustache, after squeezing one final mountain road trip out of his 23-year-old Honda van, is finally allowing himself to get the Tesla he has been talking about for half a decade.
An early spring Sunrise at our new “Friends Mountain Resort”
A recent life change (becoming a co-owner of a fixer-upper vacation rental compound in beautiful Salida Colorado) has reignited the travel fire in my heart and made me realize how much I do love getting out to distant places for visiting, mountain biking, gathering with groups of friends and my favorite activity of all: Carpentourism.
Running the Numbers: how ridiculously expensive is this car?
This is the perfect start to my experiment in spending more. Realistically, a $50,000 car is going to cost me about $10,000 more per year than my old van was burning. With the biggest costs being these:
Foregoing roughly 8% annual investment returns on the 50 grand: $4000
Depreciation on the car: an average of $3000 per year over the first 10 years
Higher insurance premiums: $1000 more per year
Replacing those exorbitantly huge performance tires when they wear out, and probably things like repairing the all-glass roof someday when it meets Colorado’s pebble-strewn mountain roads: the remaining $2000 or so.
Since I personally had a spending deficit of several times more than $10k per year, I figure this is a solid first step. And, since the car’s primary purpose is things like epic camping trips, dream dates, and long adventures around the country, it will definitely help me spend more on experiences, hotels, and go out to dinner a bit more often as well.
“This Privileged Rich Folk Talk is Making Me Sick, why don’t you give your money away to charity, or to me?”
In general, I agree: the world has problems and the richer you are, the more you should consider giving generously.
But also, to be honest, the whiny people who constantly send complaints like this out to strangers on the Internet really need to get a life. It’s great to encourage philanthropy through positive examples, but completely unproductive to send negativity to shame people you don’t even know for not following your own personal value system. The world has seen more than enough of this.
On top of that, this one-sided thinking can be counterproductive. Both of my friends have given generously throughout their lifetimes. In my own case, I have donated over $500,000 to the best causes I could find during the years I’ve been writing this blog, but I was still refusing to let myself replace that 23-year-old van.
And that overthinking was leading to even more of a scarcity mentality, as I compared my own meager spending to these bigger numbers of my donations, and found myself thinking things like,
“Damn, I’m spending $100 on this dinner date which sounds like a lot, but I also spent ONE THOUSAND TIMES more on donations last year, which sounds like even more. Maybe I am spending too much and need to cut back on EVERYTHING!”
And then the fear side of my brain would illogically chime in: “Yeah and you’re going to make us run out of money and be poor forever! waaaah waaaah! Cut back and optimize and conserve!”
I think there is a happy medium here.
Yes – be a super, duper responsible steward of your life savings.
And yes, give generously with all your heart to charity.
But yes, it’s also okay to set aside a portion of the money you’ve earned, for frivolous spending on yourself and those closest to you. You’re not a bad person for having a few nice things.
It’s okay to pay that extra hundred bucks to sit in the front of the airplane instead of the back if it helps you enjoy your vacation and spend a joyful half hour walking FREE at your destination while the 49 rows of people behind you fuss infuriatingly with their shit in the overhead bins.
It’s okay to buy the frozen berries at Whole Foods even though they cost eight times more than Costco charges, if it spares you from making a second unpleasant trip through parking lot hell.
And as for me, I am calling it okay to, at last, double flip the Autopilot stalk in my new Tesla and lean back as it it shoots me gracefully through even the highest mountain passes, forever leaving the desperately underpowered wheezing and gear shifting and noise* of the gasoline era behind, forever.
Rest in Peace, Vanna – 1999-2023
* A useful tip for more effective splurging:
Try to find the truly negative aspects of your life and focus any additional spending on improving those things. But it’s a subtle art so you have to get it right if you want lasting results in happiness.
You don’t want to just reduce hardship or challenge like hiring someone to take care of every aspect of your house, because overcoming daily hardships and having significant accomplishments provides the very core of our life satisfaction.
You also don’t want to just upgrade the things that are already good in your life. For example, a friend of mine is a gourmet coffee expert, and he suggested that I upgrade my setup at home to include on-the-spot roasting, and fancy grinding and brewing equipment. But I already love the good quality coffee I buy off the shelf from Costco, so it would be counterproductive to invest time or money into changing this part of my life.
But when you have something that causes you regular angst and stress, whether it’s a leaky roof that makes you dread rain, or a long commute that makes you dread the daily traffic jam, or a body that is giving you trouble due to not being in the best of shape – those types of things are probably a good target for improvement.
In the case of my car situation, I had a Nissan Leaf which is wonderful to drive, but doesn’t have the range to travel anywhere outside of the Denver metro area. Then I had the van which is a clunky beast to drive, but is otherwise an amazing road tripper because I could bring along whatever and whoever I wanted. But the van was getting increasingly unreliable in several hard-to-fix ways which was making me nervous every time I thought about long distance travel. Which was causing me to avoid certain trips and miss positive lifetime experiences.
In other words, my lack of a reliable long-range car was a small but consistent source of negative stress.
Finally, Vanna gave me the gift of a final hot and smelly transmission failure on a mountain pass on the way home from my new project in Salida. It was just the nudge that I needed. And now I already feel excitement rather than dread at the prospect of all the road trips in the coming decades!
* Total cost of this Tesla:
Model Y plus options and Tesla fees: $53,630
Subtract $7500 federal EV tax credit
Subtract $2000 Colorado EV tax credit
(Note: this is equivalent to a $44,150 list price if you are cross shopping with other cars)
Add back in $4674 of sales tax
Add in first 3 years of Colorado new-car registration fees: $3000
Net cost: about $52,000
New Tracker Page!
To go along with this article, I started a new page called “The Model Y Experiment” where I can share ongoing findings and Q&A about the ownership experience. I’ve driven and rented Teslas quite a bit in the past, so most of it will be pretty familiar. But as an owner I’ll get to verify the reliability and the quality of customer service, as well as any quirks and modifications and upgrades I do.
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Let’s say you want to build your own stock market index fund based on the S&P 500. Easy: download a list of all the companies in the index (from 3M to Zions Bancorp) and their market cap, and start investing. Every stock in the index will be easy to buy in whatever quantity you want.
Now, after the success of your first index fund, you decide to create an emerging market fund, concentrating on the world’s up-and-coming economies. Again, no problem. We have the internet, after all, and we can just print off a list of all the stocks in China, India, Chile, Hungary, and so on, pull out a pile of Benjamins, and go to town.
That won’t work, says Raman Subramanian, Executive Director of Index Research at MSCI. Subramanian oversees the index underlying the the two largest emerging markets: ETFs, from Vanguard (VWO) and iShares (EEM). “You can go to any of the emerging markets and download the listed stocks there,” says Subramian. “But there can be some potential issues.”
So how do you build an emerging markets index, anyway? And, can it shed any light on how you should invest your money?
Who’s emerging?
The first order of business for Subramanian, or any emerging markets indexer, is to decide which countries count as emerging markets. This is not as easy as it sounds: no two indexes agree on which countries are emerging.
MSCI uses three criteria to classify a country as developed, emerging, or frontier (“frontier” is an euphemism for “not really emerging yet”).
Wealth. A country has to have a GDP per capita above a certain threshold to be considered developed; below that, it’s emerging or frontier.
Market structure. In order to be included in the index, a country has to have an active stock market with many companies listed and few or no limits on foreign ownership.
Accessibility. How easy is it to participate in country’s market? “If you’re a US investor and want to invest in India, how do you go about setting up that account?” says Subramanian. “What are the regulations?” To determine market accessibility, MSCI surveys market participants about their experience.
A wealthy country with market structure or accessibility issues might be classified as “emerging.” MSCI puts Taiwan and South Korea in this category. (They redo the list annually.)
Pick of the list
Now that we have a list of economies to put on our index, we just go out and buy all the stocks, and…. Wait, that won’t work, either, because some stocks are hard to buy. They might be stocks of very small companies or companies closely held by a small number of shareholders, with few shares trading freely. If you include those stocks in your index, it makes it harder to invest in the entire index and drives up the cost of trying.
So MSCI excludes companies that it considers insufficiently “investable.” To be investable, your stock has to trade on at least 4 out of 5 days, and at least 15% of the stock has to trade freely, not be held by controlling interests or otherwise out of circulation.
How much are investors in VWO or EEM missing out on by not owning these companies? Not much. The MSCI index captures almost 98% of the total market cap of the listed countries. “What is excluded is basically very small companies, illiquid companies,” says Subramanian.
In short, emerging markets indexes aren’t easy to build, but they’re constructed on a simple principle: own the most liquid securities in the most accessible markets.
How to beat the index
I became interested in this question of how to build an emerging market index because (a) I am a huge nerd, and (b) recently I interviewed an investment guru who argued that there is great opportunity for active managers to outperform in emerging markets because the markets are inefficient.
That argument doesn’t hold up, because, as I explained, the record of active managers in emerging markets is the same as it is everywhere else: ludicrously bad. Most managers underperform the index; the ones who outperform are an annually rotating cast whose good fortune is mostly indistinguishable from luck.
But learning how the MSCI index is constructed gave me a new idea: couldn’t I start an active fund specializing in those unloved securities that MSCI and the other indexes won’t touch? Small companies, illiquid stocks, frontier markets. Sure, they’re risky. That’s the point: you have to take risks to get higher returns.
Bad idea, says Larry Swedroe, director of research at Buckingham Asset Management and author of the Wise Investing series. “The more inefficient the market is, the higher the trading costs are,” says Swedroe, who has written frequently about active management in emerging markets. “The round-trip in emerging markets is extremely expensive.”
In other words, to pull off my trick, I have to outperform by a margin big enough to cover my costs—the curse of every active manager. Vanguard’s ETF, VWO, charges an expense ratio of 0.2%. I don’t even want to think about what my expenses would be.
Subramanian agrees. “Sometimes active managers will try to capture that illiquidity premium by going into those stocks,” he says. “But then the question becomes, can they sell it?” The big problem is market impact: if my illiquid stocks do well and I try to sell them, I’ll depress the market price, causing a hefty chunk of my gains to vanish.
As for those frontier markets, Swedroe steers clear. “The reason they’re called frontier markets is because generally they don’t have the rule of law and international investors are not well protected,” he says. “If those things are not present, you shouldn’t invest no matter what the risk premium is.”
The bottom line
Costs matter in investing: they compound just as surely as gains, and for this reason, low cost is an excellent predictor of above-average mutual fund performance. If you want to invest in emerging markets, there is no way to do so at low cost other than by using an index fund (or, to be scrupulous, a passive index-like fund such as those from Dimensional Fund Advisors).
Vanguard’s ETF, remember, charges 0.2% annually. Its actively managed competitors tend to charge between 1.5% and 2%. This, more than any arcane argument about market efficiency, is why indexing works in emerging markets: it doesn’t involve throwing away 1.5% of your money every year in pursuit of elusive market-beating strategies.
Matthew Amster-Burton is a personal finance columnist at Mint.com. Find him on Twitter @Mint_Mamster.
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Even as interest rates approach lows last seen in, oh, 50,000 BC, U.S. savings bonds are still a great deal.
I’m an obsessive fan of savings bonds, particularly Series I, or I-bonds, for short. Since I wrote about them last year, a few aspects of buying and giving them have changed, but the basic message hasn’t: if you aren’t buying savings bonds, you’re missing out on a safe, simple, and relatively high-yielding investment available to anyone with a social security number.
Let’s recap briefly what is so great about I-bonds:
– They pay an interest rate tied to the rate of inflation. You won’t lose purchasing power, and if you’re concerned about high inflation in the future, I-bonds will protect your savings. Most savings accounts, CDs, and other Treasury bonds pay less than the prevailing inflation rate. Right now, for example, I-bonds are paying 2.2% APY, which is more than almost any 5-year CD.
– Each person can buy up to $10,000 per year.
– You can set up an account in minutes and start buying I-bonds online at TreasuryDirect.gov.
– You can cash them in after one year or hold them for up to 30 years. (There’s a small penalty for redeeming I-bonds before 5 years.)
– I-bonds are tax-deferred and can be used for a child’s college education tax-free.
The way I always sum it up is: nobody regrets buying I-bonds.
The gift of aaaargh
The big change in bonds since last year: they got rid of paper savings bonds. If you’re buying bonds for yourself, no big deal. Buying online is easy — all you miss out on is the cool pictures of Einstein and Chief Joseph and Helen Keller.
If you want to give a savings bond as a gift, however, the process is about to get a little awkward, because the recipient of the gift has to have their own Treasury Direct (TD) account. For example, say I want to give my niece a $25 I-bond. I can buy the bond right away and keep it in the “Gift Box” section of my TD account. To transfer it to my niece, however, I have to:
– Call or email my brother and tell him to open a TD account for himself, then a subaccount for his daughter (oh, and another subaccount for his son, if I want to give him a bond, too).
– Have him give me the kid’s TD account number. Yes, it is safe to share your TD account number. No, this is not intuitive.
The Treasury has produced a YouTube video, complete with that reassuring “Welcome to your first day at work”-style voiceover, to explain how to give electronic savings bonds as gifts. Honestly, I would rather call my grandmother and ask her if she has any tech support questions for me.
Instead, I called Jerry Kelly, director of the Treasury’s Ready.Save.Grow campaign. His response, in short: Believe me, we know. “There are a lot of things we’re looking at to simplify the process,” said Kelly. “One of the things we keep in mind for simplicity is PayPal, or, for example, or iTunes. We want to get there eventually. It’s going to take us time.”
I asked Kelly whether anyone is using the gifting feature. “It’s certainly not as robust as paper was, and we knew that that would happen,” he replied.
This isn’t good enough for Mel Lindauer, a Forbes columnist, coauthor of The Bogleheads’ Guide to Investing, and a man even more into savings bonds than I am. “The answer is simple,” said Lindauer by email. “Bring back paper I-Bonds and give investors an option. Prior to the elimination of paper I-Bonds, investors overwhelmingly chose paper I-Bonds over TD.”
Stay safe out there
Lindauer ticked off a variety of objections to Treasury Direct, most damningly the fact that, unlike your bank’s website, TD doesn’t promise you’re off the hook in the event someone fraudulently cleans out your account.
“There is an element of truth to that,” said Kelly, but in over ten years and hundred of thousands of TD accounts, no customer has lost a dime to fraud. “We have had people who’ve had problems, but we have not held them accountable for it, because we haven’t deemed them to be negligent with their access information.” He mentioned the guy who put his Social Security number on the side of his truck. If someone did that with their TD password, “we probably would not have a whole lot of sympathy for them.”
And a TD account is not like a checking account: it’s designed to be easier to put money in than take it out. In order to steal my I-bonds, you’d not only need access to my password and my email account (TD sends a one-time passcode via email when you log in on a new computer), you’d then have to link my account to new bank account, which would leave an obvious trail.
In short, it would be even more work than convincing my brother to open a TD account for my niece. Please do not take this as a challenge.
To sum it up
– I-bonds are still an awesome, flexible, safe investment.
– The process for gifting them is too complicated, and no one blames you if you wait until they fix it.
– Buying them for yourself is a snap.
– I’m probably about to get a call from my grandmother asking if she can treat computer viruses with ibuprofen.
Matthew Amster-Burton is a personal finance columnist at Mint.com. Find him on Twitter @Mint_Mamster.
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