Another finance secret finance professionals won’t tell you (but I will)

One of the more successful finance posts I have on my blog is a finance secret I shared that industry professionals wont. You can find that post here.

Today I have another secret for you, it’s not a true secret as its not actually hidden but unless you are astute in finance you aren’t necessarily going to catch it. It has to do with mortgages, which in the U.S. right now is a hot finance topic. House prices in the U.S. have risen over the last 3 years anywhere from 8-25% depending on what market you are in.  House prices traditionally do not go down, they level off. If we look at a 100 years of house price data, we can only find 2 years where the median average price drops in comparison to the prior year. Again, this is largely aggregated meaning a market like Manhattan is an extreme, a rural town in Montana might be an extreme as well but on average that is where it stands.

So what is the secret? When you go for a mortgage your ability to borrow money is based on your GROSS income, not your net. It’s a trick banks use to be able to lend you more. So your ability to borrow is based on the amount you earned, not the amount you actually have to spend. The bank/lender does not account for health insurance cost, taxes, child support on and on. The good news is people who would otherwise not qualify for a mortgage can based on their gross income.

Borrowing the max amount, is a foolish move.

The bad news is exactly the same as the good, you can qualify for mortgages you would not have the ability to afford because it was based on your gross income, not your net. So you get situations where people borrow too much, you get terms like “house poor” because most of your income goes to paying your mortgage. The kicker? (well there is two) you pay for the privilege to borrow more than you can afford via interest. The other? You pay for PMI (Private Mortgage Insurance) which essentially protects the lender if you cannot pay the mortgage THEY gave you. You know the one they based on your gross not your net.

No lender is going to tell you it’s too much house, unless its WAY overpriced for your income. You have to be the one who figures this out. You need to estimate the mortgage payment and look at how much you actually TAKE HOME a month. You don’t want your mortgage payment to be more then 25-35% of your take home pay. Additionally, you don’t want a 30-year mortgage if you can absolutely avoid it because the interest alone is a killer. Banks want to lend you money, that’s how they make THEIR money via interest. It’s a tough real-estate market out there you have to be extra careful.

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Historic Inflation – The most important # you need to know is 3.22%

So another finance piece today. I am not going to go through my normal disclaimer hopefully by now you understand you should be diligent about your finances and obtain information from multiple sources. I’m thankful you consider me one, today we are going to talk about inflation. Yes, its real, and it isn’t exclusive to one region we have global inflation. The numbers I will use in this post will be U.S. numbers but in my research it tracks, mostly, globally.

You are probably wondering what the 3.22% is, that is the historic average inflation rate over the last 108 years. That’s ON AVERAGE, which is important. We have years in there where we have 13.5% inflation (1980) so it’s really important to have good perspective here. Historic inflation isn’t as important as “life time” inflation. That metric is the inflation rate in YOUR life time. For me? Its 3.95%. None of the numbers I am throwing at you include 2022 which right now is approx. 8.5% (give or take). As it isn’t a full year of data we can’t use it for these purposes.

Here is a link to the historic chart I am using. So a few important things to remember.

  1. The distinction between historic and life time inflation rates.
  2. The likelihood of sustained inflation.
  3. Globalization

I distinguished the 1st item already, but items 2-3 are intertwined. We had a sustained period of high inflation in the U.S. from 1973 – 1983 (roughly) that’s a long time. That was in my life time, it might be yours too. What normally happens, and is happening now is wages increase as inflation increases but rarely at the same rate. As an example, it’s likely that in 2022 we will come in between 6-10% inflation for the year, it’s unlikely that your income increased by that same amount. The thing that is a killer about sustained inflation is multiple years where your income doesn’t match or exceed inflation = less wealth overall.

Inflation decreases your purchasing power.

You may make more but it doesn’t buy as much, basically. Globalization is a fairly new phenomenon in the inflation equation. In the 70-80’s it was far less then it is now. So what happens in one major country affects the global consumption and production metrics. If China can’t produce as much of X as it normally does, the price of X goes up, or inflates. Add in a pandemic here and there and well you get the picture.

There is only one sure fire way to combat inflation for you personally and that is increase your income by more than the current inflation rate. The problem is most can’t do that. So the second best way to combat inflation is to ensure your income and investments are increasing more than the average inflation rate in your life time. So for me, that means I need to increase my income and investments every year by 3.95%. Now that is just to remain as is, if I want to improve my financial situation (my ability to consume more) I need to increase my return by MORE THAN 3.95%.

Take a look at the link above and see what your life time inflation rate is. This is the minimum target you should be striving for in all of your investments and your income. Trying to figure it out monthly or on an annual is probably not going to work, but hey if you can make 8.5% in these markets I tip my hat to you. For now, shoot for 4% minimum, 6-8% would be ideal and reasonably attainable if you have investments.

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Am I contagious?

Personal Finance – 3 journeymen (not advanced) finance tips

Like every finance piece I do on this blog this is my personal opinion based on 30 years of working in the finance industry. You should research thoroughly any advice you receive before making any financials decisions. The tips in today’s piece are moderate, they aren’t for beginners and those advanced in their financial journey probably have already encountered these concepts.

  1. Reviewing your insurance profile: Regularly you should be reviewing and understanding your insurance profile, likely twice a year. Now insurance is to mitigate disaster/negative situations. This is more than auto insurance or homeowner’s insurance; this should include things like long term disability insurance to replace income. Long term care insurance to mitigate costs of nursing homes or assisted living and umbrella policies that give another layer of coverage for you beyond specific policies (like home owners or auto)
  2. The care of loved ones: This extends to your elderly parents or your children. Do you have a plan for either? What if your parent becomes sick? Who will assist them? This can take on many forms, maybe you have siblings who can help as well. Point is, have a plan here because it’s when you don’t then it presents itself. Kids? Anything can happen here. From the unthinkable of devastating medical injury to helping them pay for college. You should have some plan in place to set aside some money “just in case” hopefully you can help your kid get a head start in life financially, worst case you have to support them for the rest of your life because of a medical issue. Yes, that happens.
  3. Running your finances like a business: This is the hardest one to pull off, but your check book (or whatever you use to ledger your money) is like a Profit and Loss statement for a business. You have to review this regularly, really be clear on how your business is running and call in the executives for meetings regularly on spending and revenue. I know it sounds silly doesn’t it? What this does is, it takes the “personal” out of it and all the stake holders (spouses, kids) become officers of the company who have a vested interest in its success. If you can get to this point on your personal finance journey you are one step closer to expert status, not many people get to this point.
How much is this going to cost?

In the end, a strong personal economy = better outcomes. You can be more generous, you can have things you want, you can afford a good life. When you don’t know where your money is going and you don’t assign a mission to every dollar you place yourself in a weaker position mentally and financially. Anyone can win with money; your income level doesn’t matter you just have to get a handle on where everything is going. This takes maybe an hour a week to do and over time it will take less and less, you can do this.

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3 questions you have to answer before you invest in Crypto Currencies

Yes, today is another finance piece. As with all financial information given on this blog I want to stress that these are my opinions only. You should do as much research as you need to make sure you are educated and comfortable before making any financial decisions. I have been working in finance for nearly 30 years, I have a lot of experience and knowledge but I am one person, and I don’t know you.

Now disclaimer out of the way let’s talk a minute about crypto currencies. Unless you have been living under a rock you know generally what these are. Let’s get the formal definition out of the way first.

  What Is Cryptocurrency?

A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers. A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation. Source:

What does that mean in actual application? It means simply that groups of people agree that a virtual currency is worth “X” that group can be you and I, or you, me and your friend Rachel, or the 3 of us and 8 million other people. We can then exchange this currency for goods and services like you would any other currency (like dollars or pesos). It is virtual though, you don’t carry it in your wallet and it is not backed by a government.

Is this guy serious?

That’s how crypto is used, as an investible commodity though should we begin to entertain the notion of investing in crypto’s to diversify our portfolios? The answer is yes, with caveats, three questions need to be answered first.

  1. Are you risk averse? Simply put, does the risk of losing money scare you? Cryptos are a new asset class, unregulated and highly volatile. Yes, you can make a lot of money, you can also lose a lot.
  2. Do you already have a diverse portfolio? Are you just starting to invest, or have you been investing for years with a good spread of mutual funds, cash, other assets?
  3. Do you understand what Crypto is and how it works? Beyond my article have you used it yourself and understand its current application and can logically think about its future application?

These three questions are critical. If you answered yes to question 1, you should not invest in crypto. If you answered no to question 1 move on the question 2. If you answer no to question 2, you should not invest in crypto build up your other asset classes first. If you answer yes to question 2, go to question 3. If you answer no to question 3, do not invest in crypto. If you answer yes, green light go for it.

Summary:

Question 1: Yes Answer = Do not invest in Crypto. No Answer = Move to Question 2

Question 2: Yes Answer = Move to Question 3, No Answer = Do not invest in Crypto.

Question 3: Yes Answer = Go ahead and invest in Crypto. No Answer = Do not invest in crypto.

This is a very simple formula/questions that should provide you with very basic guidance to whether or not you are ready to invest in crypto. Like any financial advice, do as much research as you can and always trust your instincts.

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Finance Lesson: Many of you are going to see this for the first time

What is “this”? It’s called inflation. Many of you have never seen it and don’t really know what it is. You will begin to, if you haven’t already, hear more about inflation. As your Gen X friends will tell you, in the 70’s and early 80’s inflation was high. Mortgage interest rates at 15%+, yes that’s right you know those rates that are 3% or less now? Goods and services, in proportion to income was very expensive. Gallon of gas in 1980? $1.19 a gallon. I know doesn’t seem like much does it?

Not a lot of corollas back then, hybrids? Didn’t exist yet. You had gas guzzlers that were getting horrible gas mileage. Median income for a family in 1980? 21,000.00 Annual. However, the consumer price index from 1977-1980 increased 13.5%. That means, basically (not precisely) that the item you bought in 1977 was 13.5% more expensive just 3 years later. Now this wasn’t everything of course but it was inflation that was out of control.

Enter 2021. Notice the housing market is hot? Have you been to Home Depot to buy some plants or fencing for your yard? Prices are on average 6.5% higher than 2 years ago (for many goods and services not all). Now this is a result of covid, plus people going back to work plus government stimulus. So we have the trifecta of an inflationary period, increased government subsidy (more money in the market) more people working (more money in the market) and industries shut down for extended periods.

Am I contagious?
High amount of money and less goods and services = costs rise.

That in essence is inflation. Inflation is a good monetary solution to one or both problems. Meaning if prices are going up, demand is high (or goods are in shortage) that induces economic activity in those areas. A deep freeze in Florida kills the orange crop, oranges go up in price. Everyone gets 1000 in cash from the government, you are willing to spend more for the oranges now because someone gave you more money to spend. That gives the person producing the oranges more money to reinvest in orange production, increasing the supply and driving the cost down, overtime.

The issue here is time. The simple examples I have given are all in the abstract of time meaning the end game, increased production of oranges as I exampled, could take years. Now if the money supply decreases (the gov stops sending stimulus) you still have to pay the higher price for the oranges. This ushers in the inflationary period. The other lever that mitigates this scenario is increased wages, this is likely to happen as more and more of the world opens up.

In the short term you should expect to pay more for goods and services. It is a sellers’ market so to speak and if you have a skill or service that is in demand (construction, physical labor, lawn care etc.) this is an opportunity for you to make a lot of money. On the flip side, things you want are going to start costing more. That coffee you love every morning? The trucking company delivering to your shoppe is paying more in gas now, it’s likely that cost will transfer to how much your coffee costs.

Inflation is the reality of a good economy going through a natural ebb and flow. It’s not fun when things go up in price, unless you’re the one selling the item and making more money. I believe we are entering into an inflationary period, many of you have never seen it and will wonder what the hell is going on. $3.00 a gallon for gas? Very likely. Remember to keep an eye on your spending and keep an eye on wages for your chosen profession. It’s likely that as costs go up, so will wages but you must be willing to leverage your skill set (and possibly move jobs) to make more to mitigate the costs.

I think we are heading for a good period for workers, things are opening up and there will be good jobs to be had. The down side is inflation is starting to creep in and it’s been so low for so long I don’t think we can escape it this time.

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Do this to ensure your financial success in 2021

2020 is over its time to move on from it and get back on track and become more disciplined. We are in January, and it’s likely that you will have a credit card bills coming in from the holidays. Did you overspend? You aren’t alone if you did, many people who were at home found it easy to shop online and spend. Even if you didn’t overspend below is how you can ensure financial success in 2021.

Step 1: List all your debt’s smallest to largest. (total owed)

Step 2: Next to each debt, if you know it, list the minimum payment for each.

Step 3: Next to each Minimum payment, list the type of debt. (credit card, Auto loan, house payment.

Step 4: next to each debt, if you know it, list the minimum payment for each.

You should now have a matrix of 4 columns, if you did it in Excel even better, paper is fine too. You now have a list of the all the items that are crippling you financially and holding you back from obtaining wealth and freedom. It’s at this point you should take a break from this task. To this point it likely took you from 15-30 minutes to organize but emotionally you might be exhausted.

Now we start on ensuring your financial success in 2021.

Come back to your list when you are ready, but no longer than a week. (you should work on this for at least ½ hour a week, you can do that). Add the column of minimum payments, this is how much you are spending a month on debt. This is IN ADDITION TO your rent, food, utilities, travel. Calculating those are a separate exercise. For now, stick to the total number in column “minimum payment”.

Total DebtMinimum PaymentType of DebtInterest Rate
1$128,000.00($1,500.00)Mortgage4.25%
2$97,000.00$0.00Student loans8.00%
3$17,500.00($585.00)Car Payments5.50%
4$2,500.00($50.00)Discover21.00%
5$800.00($25.00)Master Card17.50%
6$750.00($25.00)Visa18.00%
Total Debt($2,185.00)
Total Fixed($1,815.00)
Grand Total($4,000.00)
Income$4,250.00
Net$250.00
A simple spreadsheet is enough

For my example it is $2185.00. Now add to this your other fixed expenses for the month. Rent, food, utilities all the things you have to have to live, not the things you want. Let’s say that number is $1815, add those two together = $4,000.00 below the 4000.00 put your monthly take home pay.

Your half hour is up, take a break and come back when you are emotionally ready. You now have the blue print to ensure you financial success in 2021. If your monthly take home pay is less than your total expenses your pay has to increase or your expenses have to decrease. You can increase your take home pay by working more, reducing your retirement contributions as an example. Expenses can be reduced by moving to a cheaper apt, less food as an example.

We now start the methodical work of eliminating debt smallest to largest. In my example I have a surplus of $250.00 per month. I am going to take that surplus and ADD IT TO the minimum payment of the smallest debt, my $750.00 visa. In 3 months that card should be paid off. At that point I would then have a surplus of $275.00 a month, which I ADD TO the minimum payment of the next smallest debt the $800 master card which would be $300.00 a month payment. In 3 months that should be paid off.

You rinse repeat for every debt. Eliminating credit cards along the way (you only need one) and revisiting this matrix for ½ hour a week, every week through 2021. You will begin eliminating debt and increasing your net surplus every month. THAT is financial success. You have more money every month to live on, imagine when there is no debt? You have a surplus of 2K plus a month?

Vacations, retirement, new clothes, vehicle upgrades are all on the table at that point. The key to ensuring your financial success in 2021 is becoming debt free ASAP. Then instead of working to send your money to someone else, you get to keep it. ½ hour a week is all it takes. Focus on it, make it a ritual and really invest in your personal economy.

Any questions along the way ask and if I can I will help you.  

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Finance and Anxiety: Back to basics

So with 2021 right around the corner it’s a great time to review some basics for finance. If you are a regular reader of my blog you know I have been a finance professional for nearly 30 years. I give finance advice on this blog from time to time specifically for people with anxiety. You should always get as much information you can before making financial decisions, hopefully this blog and post is one data point you use.

There are basics everyone has to take care of, regardless of your financial situation. This year has been tough, maybe you lost a job, maybe you are out of income, maybe you are working but living paycheck to paycheck and just need direction. Below are ALWAYS the things you do first financially.

  1. Buy food: If you don’t eat and drink water, you die. Food is number 1. This doesn’t mean $50 dinners, it means you get paid, you go get huge bags of rice cheap, but you get food first.
  2. Pay Rent: You need shelter, even if it’s a rat hole its better than being out in the elements or sleeping in your car.
  3. Utilities: You need heat, you need electric, you need water. All of these things cost money and they should be top priorities for you.
  4. Clothing: You need clothes. Now you don’t need designer clothes but you need basics to be warm, basics to be presentable so you can obtain a job (if you don’t have one).
  5. Transportation: You have to have a means to get around. It can be public transportation BTW (yes this costs money too) and it can be a cheap vehicle but you have to be able to get to and from work.
The Sun will come out again.

The five things above are basics, I know they seem obvious but when you are on the ropes financially it’s hard to put things in order mentally. Maybe you are out of work and or out in the cold. What do you do first? Follow this list, even if you only get to say item 3, you are fed, you have 4 walls, you have heat.

Again this is very basic info but these are the things you take care of first every month when you are in financial straits. If you have money left over after these 5 items? Start banking it to build up an emergency fund. Many people who have anxiety and mental health issues find themselves in serious financial distress especially on or around the holidays.

Take a deep breath and get back to basics. If you have these 5 things covered you are okay, and you will make it. Take it one month at a time, and as time goes on the 5 basics above happen and you can start to build a vibrant financial future.

Thank you for coming by and supporting my blog I really appreciate it. Want to see another post like this one? Click here.

Finance and Anxiety: Back to basics

So with 2021 right around the corner it’s a great time to review some basics for finance. If you are a regular reader of my blog you know I have been a finance professional for nearly 30 years. I give finance advice on this blog from time to time specifically for people with anxiety. You should always get as much information you can before making financial decisions, hopefully this blog and post is one data point you use.

There are basics everyone has to take care of, regardless of your financial situation. This year has been tough, maybe you lost a job, maybe you are out of income, maybe you are working but living paycheck to paycheck and just need direction. Below are ALWAYS the things you do first financially.

  1. Buy food: If you don’t eat and drink water, you die. Food is number 1. This doesn’t mean $50 dinners, it means you get paid, you go get huge bags of rice cheap, but you get food first.
  2. Pay Rent: You need shelter, even if it’s a rat hole its better than being out in the elements or sleeping in your car.
  3. Utilities: You need heat, you need electric, you need water. All of these things cost money and they should be top priorities for you.
  4. Clothing: You need clothes. Now you don’t need designer clothes but you need basics to be warm, basics to be presentable so you can obtain a job (if you don’t have one).
  5. Transportation: You have to have a means to get around. It can be public transportation BTW (yes this costs money too) and it can be a cheap vehicle but you have to be able to get to and from work.
The Sun will come out again.

The five things above are basics, I know they seem obvious but when you are on the ropes financially it’s hard to put things in order mentally. Maybe you are out of work and or out in the cold. What do you do first? Follow this list, even if you only get to say item 3, you are fed, you have 4 walls, you have heat.

Again this is very basic info but these are the things you take care of first every month when you are in financial straits. If you have money left over after these 5 items? Start banking it to build up an emergency fund. Many people who have anxiety and mental health issues find themselves in serious financial distress especially on or around the holidays.

Take a deep breath and get back to basics. If you have these 5 things covered you are okay, and you will make it. Take it one month at a time, and as time goes on the 5 basics above happen and you can start to build a vibrant financial future.

Thank you for coming by and supporting my blog I really appreciate it. Want to see another post like this one? Click here.

Another financial tip for people with Anxiety

So if you have frequented this blog you know that from time to time I give financial tips for people with Anxiety. I have been working in finance for nearly 30 years now (yes I am ancient). This is by no means a financial blog, you should take any advice you see on my blog as my opinion only.

This will be a very quick post. Why? Because many articles/posts on financial advice are very long and unnecessary. Simply put, it doesn’t take several paragraphs or a short novel to impart financial advice. We are in uncertain times, the market still marches on. The underlying economic foundations, are still pretty strong. Supply and demand is still there it has been bottle necked for months, it will come back.

That said, the financial cycle has many ups and downs. Timing is critical when investing. What about when you have anxiety? How do you navigate this atmosphere? Protests, pandemics, Presidential Elections…. What do you do?

Answer: You don’t invest.

*Gasp* I know crazy talk right? The finance industry will always tell you to invest, its how they make money. IF you are unsure what to do, you pile up cash in your checking and savings account. It’s better to stockpile cash then move into a risk position when you are risk adverse. Basically, if you are not comfortable investing and it is giving you anxiety, you pile up cash, and you can invest later.

Now you will not get rich this way, but you certainly will not go broke either. “Ya but those accounts get ..5% interest” yes that’s true but there is nearly no chance of you losing your money. The last thing you want to do as someone with anxiety is enter into new endeavors that increase your anxiety. Take your time, educate yourself and when you are ready you can invest.

The market will be there when you’re ready. Hang in there you are doing great.

Interested in more finance tips for people with anxiety? Check out my post here

5 things I have learned in my 30+ years of working

We all have work experiences, right? I started working when I was 14, I am now 50. I have seen a lot and been through a lot at work. I have picked up a lot along the way, here are 5 things I have learned while working that I feel are super important:

  1. Advocating for yourself: If you are lucky, you have a great boss who will go to the wall for you. If you are like most of us, you don’t have that luxury. When its your review, when you have completed a project and when the company is going through transitions, you have to advocate for yourself. Ask for good raises, point out you did project “X”, affirm why you are an asset.
  2. Keeping the boss happy: This will be very unpopular but its an important lesson to learn. It requires a pretty large degree of humility but if you can keep your boss happy you will be happy at work. I mean this of course within reasonable context, but the bottom line is when my boss at work asks me to do something I try and do it as quickly and efficiently as I can. This simple thing, while challenging at times, has resulted in my getting good raises and bonus’s over the years.
  3. Keep showing up: Excessive absences create negative conditions as work still has to get done. If you are out a lot, someone else has to pick up your slack. If you show up everyday chances are, you’re picking up slack for others. This is extremely valuable, at the end of the day companies want work done they are less concerned with how you feel about it. If you show up everyday this enables the first item, advocating for yourself to be an easier sell.
  4. Deal with issues early: When you put a group of people together inevitably something happens, or people don’t get along. The last thing you want is someone bad mouthing you behind your back. If you have a problem with someone at work, even if its not your fault get it resolved. I’ve seen several examples of people being undermined at work but unhappy people. Deal with it quickly.
  5. Its about the money: You are 1 of 2 people in my opinion when it comes to work. You love what you do and are thrilled to do it, or you go to work to get money to do the things you love. Know your value, at all times. Every quarter you should be looking up online what someone with your degree and experience is being paid in your area. Don’t be lulled into benefits packages (they are nice, don’t get me wrong) or “corporate culture” memes from HR. Money is why you are working, the more you have the more things you can do with it.

I’ve got another 10-15 years left of work, how long do you have and what are your biggest take away’ s from working?