This article comes from Anthony Fontana from the Quicken Loans Zing! blog.
For some of us, the end of 2013 just signals the beginning of 2014. Not a whole lot changes aside from writing 2014 at the end of a date. However, the end of this year is different. Why, you ask? Because FHA loan limits are set to expire. Beginning in 2014, loan limits will readjust to Fannie Mae and Freddie Mac conforming limits.
Throughout most of the country, Fannie Mae and Freddie Mac conforming loan limits are $417,000, while expensive housing markets such as California and Hawaii increase to $625,000. What does this mean for you? Mortgage applicants who no longer qualify under the revised limits will be forced to shop for a jumbo loan. In many cases, this could present a challenge due to tougher credit score and financial reserve requirements. Also, larger down payments are also a part of the process.
In some cases, clients may have to settle for an adjustable-rate mortgage instead of a fixed-rate mortgage. In others, it may be necessary to get a higher-rate second mortgage to be able to afford the down payment. Edward DeMarco, acting director of the agency that oversees Fannie and Freddie in conservatorship, recently spoke at a meeting in Washington. He stated that there are serious considerations on reducing loan maximums to lessen the federal government involvement in the mortgage market.
While DeMarco didn’t offer any specifics, industry analysts believe the maximum Fannie-Freddie loan size could drop from the current $417,000 to $400,000 in most parts of the country, and from $625,000 to $600,000 in high-cost areas such as coastal California, metropolitan Washington, D.C., and New York City. These changes are in addition to the rules regarding qualified mortgages, also set to be in place in early 2014.
I can already hear the commotion. What this really comes down to is having a sense of urgency. The sooner you act, the better for you. For those of you in high-cost areas, it’s imperative for you to take action before the changes take effect. If you wait, a jumbo mortgage could be your only financing option.
More stories from Zing!
Unless you live under a rock, you probably heard that Twitter just had its IPO. In English, that means you can now, for the first time, buy its stock on a stock exchange. Mere mortals (those without the insider connections to get the stock at its $26 official listing price) had to buy at an opening price of $45. After the initial surge, the price has settled back into the low 40s, and many reputable pundits (here and here) have suggested that buying Twitter as an investment might be a mistake.
You know how they talk about dog years, meaning you have to multiply the actual years by seven to arrive at a “normal” equivalent? Well, just as dogs have a much shorter life than humans, technology companies have a much faster life cycle and shorter lives than “regular” companies. For example, Caterpillar and General Electric have been around for eons, but does anybody still remember Digital Equipment, the tech darling of the stock market not too many years ago? Hotter than Twitter, it was. And who remembers Data General, its close competitor? Distant memories, both.
And what about Palm? Just yesterday it was the hot thing. Today its carcass, along with DEC’s, lies rotting somewhere in the Hewlett-Packard bone yard, which seems to have become the ultimate destination of tech companies when they reach the end of their lives. (Hmmm… where will HP go when its day comes? One can only wonder.) IBM, the granddaddy of all technology companies, has only survived by having more transformations and cosmetic surgery than Joan Rivers. Technology companies just face much shorter life cycles than, say, construction equipment manufacturers because the business they’re in changes at a pace never seen before.
Why does this matter? Twitter is a tech stock, and therefore likely to face a rapid move through the different phases of its business cycle… and it’s starting its publicly listed life as a money-loser. Why? Because it gives away its main product/service for free. Microsoft, on the other hand, has always charged a lot for what it sells, and it gives away nothing, except Hotmail. Therefore it has always been highly profitable. Add to that its high growth and it is easy to understand why it was a popular stock to invest in once upon a time. Apple went from the outhouse to the penthouse only when it made fantastic profits on all of its iThingies.
Earnings, the fancy word for profits, then, is the key to long-term success. But Twitter isn’t making any. Its fans would add “yet.” But this is where the “dog years” thing comes in: How long will it take Twitter to become profitable? And will it be profitable for any length of time before going to tech-stock heaven?
Until profits materialize on a consistent basis, the only reason people are attracted to a stock like Twitter is, well, stories. Stories are wonderful things and I love them myself, mainly because when I’m telling one, I get to write the script to make it say whatever I want. It’s the same with a stock story: I can spin a convincing yarn about how this hot company called Twitter will conquer the earth and achieve riches and fame to dwarf Microsoft. I could just as easily weave a delightful plot that has the company crashing and burning like Enron. At this point in time, you’d be hard pressed to choose between the two stories, because both can be very convincing. But there are still too many unknowns to know which one will play out in real life.
Warren Buffett famously stays away from stocks whose stories he doesn’t understand. And when he means stories, he means the reasons why this or that company will continue to make outsize profits. His examples are companies like American Express and See’s Candies, companies that brazenly charge more than their competitors do, have done so for decades, and look poised to continue getting away with that for eons to come. Twitter and Facebook, which don’t charge for their basic product, those are things he doesn’t understand. And, to be quite honest, most people looking at Twitter don’t understand where their profits will come from either.
Why, then, do so many people froth at the mouth to get their hands on a stock that is clearly overpriced by many magnitudes? The answer is found in something called the Prisoner’s Dilemma, something related to game theory. In a nutshell, it says you try to guess what others will do and figure out how you can profit from that. If you think other people will want Twitter stock, then you buy it in hopes of profiting from the surge. It doesn’t matter why the other people will buy; it only matters that they will. If enough people think like you, you collectively create a rising market. The same principle pretty much drives the gold price: You buy gold if you think others will also buy and drive up the price.
You can see how the outcome for this pricing model depends on how many people take the view that others will also buy. If enough people think that way, you get a nice little bubble going. If they don’t, the price drops instead of rising.
When Facebook went public, its stock lost 20 percent of its value in the first two days of trading. In its first two days of trading, Twitter lost 10 percent after a nice initial spike. This despite an intense effort to avoid the pitfalls stepped into by Facebook last year.
Not all IPOs depend exclusively on PD pricing (Prisoner’s Dilemma). Noodles & Company, the Denver-based restaurant chain, went public earlier this year, but their shares more than doubled after two days of trading and are still there after more than three months. Main reason: The company is profitable and has a proven business model for generating profits. That means the story of its future potential is easier to believe by more people.
Of course, it is way too early to judge whether the Twitter IPO is a success or not. However, until the company generates consistent and sustainable profits, its life cycle may be shorter than hopeful investors foresee.
I’m not buying. Are you?
Don’t worry — this article isn’t going to be as cynical as that title may sound. I don’t even think my sentiments are especially materialistic. However, I do think handling money the right way is one of the most important things one can do for one’s family, and thinking of it that way sets me down a path which leads to several Thanksgiving-related themes.
Here are some of the financial issues that seem to relate to Thanksgiving:
- Celebrating the harvest. Many of us in the financial community spend a great deal of time trying to impress on people the importance of saving for retirement. The harvest is a good analogy for retirement savings. For one thing, it doesn’t happen overnight. A farmer can’t just go out one day with no prior effort and harvest food for a Thanksgiving feast, much less enough to provide for a long winter. It takes a consistent, dedicated effort. It also takes careful planning. Knowing when to plant is like knowing when to start saving and how much to set aside. Knowing which crops to plant for your needs and the conditions you face is like asset allocation. Ultimately, a harvest feast like Thanksgiving isn’t enjoyed simply because it is a great meal — it is appreciated because it has been hard-earned.
- Anticipating the joys of winter. Winter can seem like a harsh time in northern parts of the country, but it helps to find things to like about it. Whether it’s winter sports or a warm fire, the beauty of the snow or simply not having to mow the lawn for a few months, there are upsides to the season. Of course, winter is a natural analogy to the later phases of one’s life, and I think it is similarly important to find things to enjoy about the prospect of retirement. Making retirement saving about building toward positive goals rather than just meeting an obligation can help you stay motivated.
- Leaving the table at the right time. Thanksgiving may be the ultimate food-oriented holiday, and the quality, quantity, and variety of the modern Thanksgiving feast can be literally staggering. It can be a fine line between thorough enjoyment and over-indulgence, and knowing where that line is can mean the difference between a satisfying snooze on the couch or a stomach ache afterward. Similarly, it’s important for investors to know when to participate and when to pull back from getting greedy. This comes to mind especially because the stock market ended October up some 23 percent so far in 2013. Now that many stock portfolios have been fattened up, Thanksgiving may be a good time to think about trimming them back a bit.
- Remembering times past. Thanksgiving is a time for telling old stories and reflecting on our personal and collective histories. Doing so can help us appreciate how far we’ve come. The financial analogy here is that the past is a great teacher for how to get better at handling money. Thinking about your past decisions and getting to know a little something about market history can help you make more informed financial moves in the future.
- Seeing the limitations of material things. Thanksgiving dinner is a good time to look around and realize that the most important parts of your life are the people seated around the table. Material things simply cannot compete with the joy of having loved ones around. Given the massive amount of debt American consumers have accumulated — $3 trillion and rising, and that doesn’t even include mortgages — it’s also important to remember that material things can come at the price of a crushing debt burden. Sometimes, the most luxurious life isn’t the most comfortable one.
- Recognizing the importance of community. Beyond the people around the Thanksgiving dinner table, there are larger communities of neighbors, countrymen, and humans that we belong to. Whatever gifts you are thankful for — your wealth, your personal abilities, etc. — Thanksgiving is a good time to think about how to share them with the larger community. At a time when the gap between the haves and the have-nots is becoming steadily wider, it’s important for the haves to think about digging a little deeper to reduce that gap.
Don’t get me wrong — it’s not like I’m obsessed with finance on Thanksgiving. The most important thing about the holiday is having a peaceful day with family, with the smell of turkey and stuffing in the air and the sound of football games in the background (though have you noticed, those Thanksgiving games are rarely any good — it’s usually as if one of the teams has had its big Thanksgiving meal right before game time). Anyway, home and family are the main things I value about Thanksgiving. It’s just that I will never get so complacent that I’ll forget to be thankful for having had the means to enjoy those things.
Planning done, lists itemized, tasks assigned, routes all mapped out and the game plan is ready to go. I am not talking about a military operation; I am talking about one of the most popular retail holidays in the US - Black Friday, a day when seemingly rational people go mad in the pursuit of deals.
Last year, 247 million shoppers visited stores and websites on Black Friday weekend. What makes people camp out of a store in the freezing cold at 2:00 in the morning? Are the deals that incredible? What makes people lose compassion for fellow shoppers and shove, push or even hurt them? Why do we do it?
What drives the need to shop on Black Friday?
Black Friday is not all about bargains and deals. The motivation to shop on Black Friday has deep roots in consumer psychology. The stores know it and take full advantage of the gullible human mind.
Time pressure: Have you ever seen a sale that was not for a “limited time only”? There is a reason for that. Decision-making itself is a complicated process. If I want a smart phone, there are hundreds of choices in the market right now. I usually do a lot of research before making a big purchase, but add an expiry date to a deal and I will most certainly be tempted to make a decision before the sale’s end date, just in case I end up choosing the phone that is on sale — even if that means I will compromise my usual due-diligence process. Time pressure also drives us into buying something we don’t need. What if we need that item in the future? We can’t get it for this good of a price at that time, right?
Scarcity: Scarcity goes hand in hand with time pressure. The “Limited time only” phrase drives us to the store and the “While supplies last” phrase seals the deal. The scarcity principle adds a rare element to a product. If something is rare, we want to get one before it runs out. And to top it off, we don’t like to lose. So if the product does sell out, most likely we will return home with another similar product just so we don’t have to feel like we have lost.
Social proof: I have fallen for this myself. A couple of Thanksgivings ago, I saw a huge line in front of BestBuy. Even though I had no plans to buy anything, I couldn’t stop myself from reaching out for the BestBuy flyer to see what the deal is and make sure I am not missing out. If everyone wants it, it must be good, right?
Competition and ego boost: Everyone likes a good deal. To know that we have purchased the same merchandise for a lot less than what someone else paid boosts our ego. We get a rush when we beat the system to save money.
Ritual: For some people camping out on Black Friday has become a family ritual. I know a family that spends all of Thanksgiving Day planning and scheming what stores to hit. They take great pleasure in doing this as a family and finish their entire Christmas shopping in one day. Each family member gets a certain portion of the list. Even if there are not that many deals, they still do this, well, because it is not Thanksgiving without Black Friday shopping for them.
What is the point in figuring out the motivation?
Black Friday has been engineered to prey on our weaknesses. The marketers know what makes us open our wallets; it would be wise for us to know what makes us tick to avoid overspending and irrational behavior.
If your motivation is time pressure, make a list of items you really want/need well ahead of time. Research the options for each of your items well before you see the sale flyer and note down the non-sale price for each of your options. This will give you a sanity check on whether you are getting a deal. Check out the leaked ads (you can find those in many deal forums) so that you will have some time to think about it. Most of the time you will find out that you can get the product for a good price throughout the year and not just on Black Friday.
If your motivation is scarcity, prepare your mind to go home empty-handed if the product you want is sold out.
If your motivation is social proof, remember that you didn’t save any money if you wouldn’t have bought the item at full price.
If your motivation is competition, you might want to evaluate who you are trying to please. This motivation could very well push you into keeping up with the Joneses and losing a lot more money. No one cares about your money more than you do and you do not have to prove to anyone how well you did. Be honest with yourself. Your future will thank you.
If your motivation is making a ritual out of Black Friday shopping, make a list prior to Thanksgiving Day; enjoy the shopping, make memories, but stick to the list.
Every avid Black Friday shopper should ask themselves what their motivation to shop is. Having a list, a budget to go along with it and sticking to the list will help curb unnecessary spending and regret.
Do you shop on Black Friday? Do you think the deals you get during that time are better than what you can get throughout the year?
It wasn’t long ago I suggested in this space there was a one-word reason for the colossal indebtedness of Americans. That word, I ventured, was “supersize.” By supersizing everything from combo meals to homes and cars, folks nationwide were ensuring they’d suffer supersized debt burdens and super-slender savings, I wrote.
What I didn’t reveal at that time was that I had embarked on a simultaneous quest, one devoted to unearthing a single word or short phrase far more beneficial, offering Zen-like insights into the secrets of effective money management and wealth accumulation.
After exhaustive research, including forays into dim corridors of Swiss banks, days spent poring over the memoirs of self-made millionaires and furtive meetings in shadowy corners of parking garages with trench-coat-wearing economists, I am convinced the secret of successful money management can be summed up in two words. If you promise not to share this with anyone, I’ll forthwith name those words.
Ready? They are “delayed” and “gratification.”
Once well known
The concept of delayed gratification wasn’t always such a hush-hush, closely-guarded secret. Why, the folks of “The Greatest Generation” and those who came before them were well acquainted with this practice, and put it to work daily. They were constantly scrimping and saving, schooling their children that money didn’t grow on trees, fixing up that old car (or buggy), carefully funneling cash into paying down their mortgage and seeking the best savings accounts rates they could find.
These folks habitually delayed big purchases, instead taking every paycheck and paying themselves, rather than others, first. Unlike later generations, they would have avoided the temptation to be the first on the block with the wall-sized flat-screen, this week’s generation of smart phone, or the Sherman Tank-scale SUV. At least, they would have, had those tempting consumer goods been available at the time.
As a result of placing the idea of delayed gratification over instant gratification, they reaped sizable benefits. They didn’t have to wring their hands with worry about credit card debt, toss and turn each night fretting about making their mortgage payments or sup on a steady diet of antacids to bathe an ulcer borne of a precarious income stream.
So what happened to make delayed gratification such a mysterious and obscure concept?
Well, ever since the dawn of TV, when the American Marketing Machine got cranked into hyper-drive, this notion has fallen further and further out of favor, replaced by ads, TV spots and billboards proclaiming, “Don’t Wait! Buy Now!”
Generations exposed to these exhortations scores if not hundreds of times a day obediently went out and did as they were told, until the concept of delayed gratification was about as familiar a household word as bond drives and 78 rpm records.
Today, if you mention delayed gratification to most Americans, particularly those younger than 80, they react as if you have just spoken a few phrases in Venutian. Delay my gratification? But I want it instantly! Why would I do that?
The reason you would do that is that it is a tried-and-true method of building wealth.
Against the grain
Are you ready to become one of the most iconoclastic and free-thinking rebels on your block by putting delayed gratification into practice? According to a coded transcript I managed to uncover in a long-closed tunnel beneath a road near the London School of Economics, and eventually was able to decipher, here’s how you do it.
Set savings goals. If you have objectives in mind for your savings, you are far less likely to spend now and (try to) save later. Keeping your eye on savings objectives is a way to train yourself to delay gratification and trim your impulse buys.
Gain a support group. As more than one financial guru has advised, if you want to feel rich, surround yourself with people, rather than things. Get yourself a terrific network of friends and family to help you feel fulfilled, and you’re less likely to rely on purchases to achieve that goal. And here’s a bonus: If you let a few of those friends, co-workers, neighbors and cousins know you’re trying to get a handle on your spending, their informal oversight can help you stick to the straight and narrow.
Don’t get stuck in the present. Use your imagination to envision yourself at some future point, taking the vacations and enjoying the lifestyle made possible because you were able to hold off spending today. Develop an ability to visualize your future self at each moment you want to indulge in a $7 latte or a $33,000 entry-level luxury coupe.
Highly-placed sources have whispered to me that delayed gratification can become a habit. Instead of blowing cash at every turn, you hone the custom of asking yourself if you shouldn’t postpone the purchase of those shiny new trinkets. Before long you’ve become a regular money master, going the extra mile and researching zero percent APR credit cards, and how to save on car insurance and life insurance.
What’s clear is that when it comes to gratification, it is those who wait that prosper.
Hurry up and wait!
This post comes from Amanda Pallay at our partner site Quizzle.com.
Most veterans say that some of the more confusing aspects of qualifying for a VA loan are the occupancy requirements. This usually stems from when a service member gets their PCS orders and has to move. Will they be able to rent the house? Will they be able to get a second VA loan at their new location? Are there penalties or fines for not meeting this requirement?
While it can seem daunting, understanding the occupancy requirements of a VA loan is actually quite simple if you break it down.
Primary residence requirements
You must certify that you intend to occupy the property as your home. Second homes and investment properties do not qualify for a VA loan.
The occupancy requirement is satisfied if your spouse will be living in the home while you’re on active duty or otherwise unable to personally occupy the home. A spouse may also satisfy the occupancy requirement if the veteran cannot due to long distance employment issues.
A dependent child may occupy the home while their parent or parents are deployed or on active duty away from the home. It’s important to note that just by having the dependent in the home does not satisfy the requirement. You must take additional action by having your attorney or dependent’s legal guardian make the occupancy certification. Please keep in mind that many lenders will not recognize dependent occupancy as satisfying the VA loan occupancy requirement.
Deployed active duty service members
If you’re deployed after purchasing your home, your occupancy status is not affected by the deployment. You are considered to be in a “temporary duty status” and are able to provide a valid intent to occupy certification. This requirement is met regardless of whether or not your spouse will be occupying the property while you’re deployed.
If you’ll be retiring within 12 months from the date of your loan application, you must include a copy of your application for retirement and proof of requirement stability. Although the VA requires moving in to the home within a “reasonable time,” retiring veterans may be able to negotiate a later move-in date. You have the option to apply for a delay (up to 12 months) in the occupancy requirements.
Typically, a delayed occupancy results from property repairs or home improvements. If extensive changes are being made to the property that prevent you from occupying it while the work is being completed, your occupancy requirements will be considered “delayed.” However, you must certify that you intend to occupy the property as soon as the work is completed.
What is “reasonable time”?
VA loan occupancy requires that the veteran move into the home within a “reasonable time.” But what does that mean? The VA requires that the borrower move into the home within 60 days after the VA loan closes.
As you’ve read, there are exceptions to that rule. The 60-day rule may be waived if you meet both of the following conditions:
- You certify that you will occupy the property at a specific date after your VA loan closes.
- There is a specific event in the future that will make it possible for you to occupy the property on that date.
Generally, the VA does not make exceptions if you want to set an occupancy date for more than 12 months after your loan closes.
Failure to meet requirements
If you do not occupy the home as agreed under the terms of your VA loan, what happens next is at the discretion of the Department of Veterans Affairs.
Even though it seems as if there are a lot of “if, then” rules to define occupancy, it’s really not as complicated as it appears. The VA works hard to help borrowers understand how to fit their situation into these guidelines, and help set you up for success. Understanding your rights and benefits is something that a qualified Home Loan Expert is more than willing to help you with. Remember to always work with a lender who is skilled and specialized in the nuances of VA loans.
More stories from Quizzle:
Sometimes you just get a feeling something is wrong. You can’t put your finger on it, but you know, you just know, something is not right. Maybe you see something and wonder if you’re seeing it right. Then someone else mentions the same thing, confirming what you suspected. Then you read about in a news report or a blog post. And gradually it becomes “common knowledge.”
I’m talking about the growing gulf between the haves and the have-nots. Economists call it the inequality of income distribution; sociologists call it the precursor to social upheaval. We just call it unfair. The smart ones among us just try to learn what we can in order to get on the right side of the growing gulf.
Is It Real?
If there’s something we’ve all learned, it’s that you can’t go by what the media tell you. Just last year, everyone was on the ledge over the “fiscal cliff,” ready to jump. Now, however, you’re surprised someone even remembers “fiscal cliff.” Next came the scare over sequestration. That, too, came and went. Then it was the shutdown and debt ceiling. Media hype, we learn, doesn’t always translate into real change in our daily lives.
So what about this income inequality thing, then? Unlike the “crisis du jour” events above, this one is, if anything, under-hyped — because it is very real. Some smart people, just about a hundred years ago, figured out a way to measure it. It has a name, the GINI ratio or coefficient.
What’s more telling is this is something our illustrious Federal Reserve has been tracking for quite a while now:
A higher number means more inequality. The graph confirms what most of us feel to be true from casual observation: the years after World War II saw a rising in general prosperity as the GINI ratio gradually fell.
However, it started rising around 1968 and hasn’t stopped. There was a temporary dip as the housing boom created the illusion of prosperity for the middle class; but as the recession ended, it is clearly evident that it has been favoring the haves, as the GINI ratio breaks new records every year.
What Do You Do?
The natural, yea easy, thing to do is sit back with a cold one before dinner and figure out whom to blame. Democrats blame the Republicans, who in turn love to blame everything on the incumbent administration. That makes us feel good, doesn’t it? We know the solution — if only the dumb bozos in Washington had us on their speed dial, we’d solve all these prickly problems in a heartbeat.
However, this has been going on for 40 years, through all permutations of who controls each house of Congress and the White House, so there’s no single group, party, or administration to blame.
Here is the reality: No matter how hard we try to assign the blame, none of that helps you improve your position. Instead of figuring out who is to blame, wouldn’t it pay you much better to figure out how to be on the right side of this divide, if there is one and it is widening?
So what should you do?
Get A Degree
This article has a graph which clearly shows that having a degree, while not guaranteeing success, improves your odds dramatically. I know it’s a hot topic, guaranteed to heat up the air temperature, but it is possible to get a degree affordably. (It’s a topic for a post all its own, but if you look past the hype about the burgeoning student debt, you’ll see way more than half of that comes from the publicly owned online universities who have entire departments aggressively hard-selling students to get into their programs with student loans.)
Bottom line: it may not be easy, cheap or convenient; but if you want to be on the right side of that gulf, here’s one of the undisputed keys to get there.
Save and Invest
There’s no question that tax policy has favored the haves. In particular, it favors investing. Nothing puts you on the right side of the widening gulf as having investments, whether they be in bonds, stocks or real estate. For ordinary people to get there, saving and earning extra income are petty much the only realistic ways. Is that convenient? No, it isn’t. But it has come to “pick your poison” — either you’re a have-not, or you pay the price to not be one. Either way, there’s something to be unhappy about, but only the latter option has a positive side to it.
Say what? Well, that was my first reaction, at least. But this article on CNBC last weekend got my attention. Christine Schwartz, professor at the Univesity of Wisconsin says, “There’s the economic reality that people … often feel like they need two earners in the family to meet a given standard of living.”
A further reading of the article reveals that this conclusion may be more due to higher education, but it’s still an interesting read and food for thought.
What Do You Think?
How are you improving your odds of being on the right side of the widening inequality gap in America? Do you think you need to be on the right side of that gap? Is there anything else we all should be doing to get on the right side of the gap?
I was reading recently about endurance swimmer Diana Nyad’s feat of becoming the first person to swim from Cuba to Florida. The physical details of what she went through are mind-boggling, but what struck me also was the psychological element. It reminded me that certain mind games can be very useful in reaching long-term goals, and there are some examples that might be effective when it comes to saving for retirement.
Nyad had to brave sharks, stinging jellyfish, and turbulent seas as she swam the 110 miles from Cuba to Florida in just shy of 53 hours. That would be an extraordinary physical accomplishment for anyone, but what adds another dimension to Nyad’s feat is that she is 64 years old. Significantly, she cited her age as a strength rather than a weakness because it gave her the right mental approach to allow her to keep going through hours of extreme physical hardship.
Retirement saving is a form of endurance challenge. It won’t tax you physically, but it will test your will power over decades of temptations to save less and spend more now. There are no sharks or stinging jelly fish, but there are investment setbacks and judgment errors that will take pieces out of your portfolio along the way. Like Diana Nyad, you will be helped greatly in going the distance if you get pretty good at the right kind of mind games.
Here are four examples of retirement saving mind games:
- Monitor projected income, not asset value. People tend to monitor their progress toward a retirement goal of a certain asset value they need to accumulate, and that can create two problems. First of all, it can make your goal seem impossibly far away, as when you’ve accumulated $30,000 and need to get to $1 million.
Second, that asset value becomes a temptation. There will no doubt be many things you could use that $30,000 for now; and since retirement is so far off, why not spend a little of those hard-earned savings…. Instead of watching your asset value, run that asset figure through a retirement calculator and see how much income it would support in retirement. This way, it won’t give the illusion that you have a nice chunk of accumulated wealth at your disposal, and it will keep you focused on a very candid view of what kind of retirement standard of living you are facing if you don’t continue to save.
- The circuit-breaker. As you start to build up a decent retirement balance, you can get sucked into getting too excited when your investments are up and too frustrated when they are down. These emotional swings can be bad for retirement savings — counting your gains too soon can lead you to skimp on the next year’s contributions, while getting discouraged can cause you to abandon your retirement goals altogether.
The best thing to do the next time you have a good year is build in the assumption that you are going to lose 10 or 15 percent next year. This will keep your retirement projections from getting too far ahead of themselves, and help you take setbacks more in stride. I’ve done this over the past few years, and it has been very effective in keeping my emotions on an even keel throughout the stock market’s ups and downs.
- The “401(k) or paycheck” comparison. When you are struggling to stretch your paycheck, it can seem like a shame to peel off a portion of it every week to go into your retirement fund, but what can help is a side-by-side comparison of what that money looks like going into the retirement fund vs. into your pocket. Let’s say you make $60,000 a year, pay about 20 percent in taxes, and have an employer-sponsored 401(k) plan with a 50 percent match on the first 5 percent of salary deferred. If you defer 10 percent of salary to the plan, that would be $6,000 with no taxes taken out, plus another $1,500 from the employer match for a total value of $7,500. If instead you take that $6,000 straight into your paycheck, you’ll get $1,200 in taxes taken off the top with no employer match added, for a total value of $4,800. Thinking of this as a choice between $7,500 and $4,800 makes it easier to defer money to the retirement plan.
- Look at mistakes as tools to build with. Back to Diana Nyad for a second — she succeeded in her Cuba-to-Florida swim on her fifth try, having failed four times previously. Instead of giving up, she just incorporated lessons from her past attempts into her successful try. Whatever mistakes you make with your retirement savings, let them make your future efforts that much stronger.
So, look out for the sharks, and prepare yourself for a long journey. Like any accomplishment, the difficulty of saving for retirement will make it all the more rewarding when you get it done.
This post comes from Stephanie Halligan at our partner site Quizzle.com
“You want me to do what with my money?”
It’s a natural response from millennials when told they should start investing while their young. Most of today’s 20-somethings, still scarred from the stock market collapse in September 2008, are down-right scared to put any of their hard-earned money into what seems to many as a risky financial move. Compounded by the fact that many millennials witnessed their parents lose considerable wealth in the market crash, it’s no wonder that more than half of millennials reported that they were less-than-confident about putting their money in the stock market.
Yet simple math shows that investing as a twenty-something is the best strategy to help build wealth over the long-term. Even the most conservative estimates of historical returns on the stock market show that compounding returns and investing early can mean a cushy retirement later.
So what’s a first-time, frightened young investor to do? If you’re a newbie investor and you don’t know where to begin, here are a few simple steps you can take to start building a portfolio:
- Sign up for your employer’s retirement plan and max out your retirement match. Your employer’s retirement plan, if that’s available, is a simple way to start investing your money. Most employer-sponsored plans will offer you a diverse set of investment options, which means you may be handed a stack of detailed (and confusing) paperwork to pick out your investments when you enroll. Don’t panic! In the packet, you’ll usually receive a guide or even investment options based on your age and risk tolerance. Don’t let information overload stand in your way of opening up an account. The important thing is to just get started, and you can always re-allocate your money later. If you’re deciding how much you want to contribute to your retirement plan, be sure you max out any retirement match offered by your company. That’s free money!
- Take advantage of tax-advantaged investment options, like Roth IRAs. Roth IRAs provide significant tax benefits, especially as a younger investor. Unlike an IRA (or 401k), where you invest money before taxes, a Roth, let’s you set aside after-tax income for retirement. You pay taxes upfront today and at age 59 ½, your earnings and withdrawals come out tax-free. Why exactly would you want to pay taxes today when you could wait until later? If you’re not earning a lot of money today, you’ll likely earn more when you’re older – which means your tax rate will likely go up as you get toward retirement. Paying taxes today means you’ll likely get more money in the future.
- Invest in inexpensive and well-diversified mutual funds. If you’re scared of taking a risk with your money, consider investing in more diversified, conservative options like mutual funds. Mutual funds tend to have less expensive management fees and your funds are diversified across multiple investments, so you’ll have considerably less risk than you would investing in an individual stock.
- Be consistent. A little bit of money invested overtime can go a long way, especially if you’re consistent. This is where dollar-cost averaging comes in, which means you contribute consistently to your portfolio, regardless of whether the market is up or down. If you contribute $100 to a mutual fund every single month, your returns will even out in the long-run. Remember: investing is a long-term strategy, so don’t let market hype or scary headlines stop you from building your portfolio today.
More from Quizzle:
One of the legendary figures of my high school years was a teacher named Mr. Canova. A burly, balding, faintly simian-looking dude, he was someone you didn’t want to tangle with in a dark alley, or in the brightly-lit classroom where he presided over a senior-year course called Problems of Democracy.
A big reason he was legendary was his unpredictable nature. One day, he departed from his lesson plan to lecture the female members of class on their choices in boyfriends. Why, he asked, was it always the jock or the flashy guys the girls went for? Why didn’t they notice the quiet, studious boys who never got any female attention? Mr. C. went so far as to single out for attention a kid named Rick, a bespectacled blond lad many viewed as the archetypical nerd.
Rick was just the kind of guy the girls overlooked — to their own detriment, the instructor opined.
Canova’s riff was destined to loiter in my memory forever, perhaps due to the image of it being greeted by languid yawns from the classroom’s mini-skirted lovelies, whose evident ennui made it clear his pontifications had fallen on deaf ears. But there was one more reason the recollection has caromed around my brainpan for 40 years. Read on.
Ahead of his time
Mr. Canova proved a visionary, in more ways than one. I was able to keep tabs on Rick, who was the cousin of a college friend of my sister’s, and later learned he’d retired to a Florida beach in his 40s, having salted away multiple millions.
If only those girls in Canova’s class had been able to read tea leaves. Rick hadn’t taken corners on two wheels in a candy apple red 1970 Dodge Charger. He hadn’t been the crazy-legged star wide receiver on the football team, or a long-haired, self-destructive, Jim Morrison-like lead singer in a garage rock band. In short, he wasn’t anything like the guys who got the girls at my, and dare I say many a high school around the country back in those bad old days.
What he had been was a gentle, decent kid and a good student who possessed a later-revealed flair for gathering and saving greenbacks. Scads of them, in fact. Not a bad choice for life partner, had anyone cared to look beyond his pen-filled pocket protector.
As well, Canova may have peered long into the future and somehow foreseen that in 2013, University of Michigan researchers would release a report called “A Penny Saved is a Partner Earned: The Romantic Appeal of Savers.”
Saving is sexy?
Their study revealed that in a reversal of the way things always went in the old days, today’s romantics find thrift, not free-spending, the key to an attractive mate. It’s someone who searches out the best savings account rates, and sifts through zero-percent-APR-credit-card offers that gets hearts racing.
“Males and females find savers more attractive,” says Jenny Olson, a Ph.D. candidate at the University of Michigan’s Ross School of Business, who co-authored the report with an associate professor of marketing at the same institution. The reasons have a lot to do with the appeal of self-control, a fact not likely lost on the very wise Mr. Canova back in the Nixon era.
“Self-control over a variety of issues is important because it prevents partners from saying hurtful things or engaging in infidelity,” Olson reports. Self-control often results in a person who is more pleasant and worthy of trust, as well as one more inclined to take all the steps personal finance experts advise, from paying ourselves first to saving early and often throughout our earning years.
As Jennifer Waters of MarketWatch noted in an article on the University of Michigan study, choosing a partner who is a good saver also is likely to earn you a physically and mentally healthier mate. Waters cited a Northwestern University Feinberg School of Medicine study that discovered direct links between debt levels and health, including both psychological and general health. In the NU study of 8,400 24- to 32-year-old individuals, those with higher debt-to-asset ratios suffered from elevated levels of perceived stress and depression, as well as poorer self-reported general health.
When tested, they also registered a 1.3 percent increase in diastolic blood pressure, a clinically significant number, as reported in the study. “A two-point hike in diastolic blood pressure can be tied to a 17 percent higher risk of hypertension, and a 15 percent higher threat of stroke,” Waters wrote.
Back at the University of Michigan, Olson did admit that if you’re looking for a one-night stand, you probably want a big spender. That’s because savers tend to be a bit boring. But, she added, “Long-term, savers just win across the board.”
The finding that savers are the most sought-after partners should rewrite the rules of romantic best sellers, feature films and popular songs, where the “meet cute” will now take place in the deposit line at the local bank. And in real life, when they’re out to meet a significant other, guys and gals in search of Mr. or Ms. Right will want to avoid singles bars and dances.
The new prime pick-up place? Why, a budget bakery thrift store, of course.
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