rowyn | Entries tagged with financial

I don't know why I felt like doing the Vi quest this morning.

I've been working diligently on the outline for The Jewel-Strewn Night, my next WIP. Terry has been in an adult family care facility for a few weeks now; it's better than the hospital but it's not actually good. He's not up for gaming most nights, so I've been hanging out in CoffeeQuills's stream instead. They run multi-player battles and I fight in a three or so each night, usually writing fifteen hundred words or so on the outline. Even on week nights, which historically have been my time for slacking off. I always thought that was because I was too tired after work to do anything useful. I guess that Terry had always been there conveniently to keep me company and play games was also a major factor.

Today, I don't particularly want to play games alone, except for 4thewords.com, which -- as I have told myself many, many times, is not actually a game. It's just writing. But I can write whatever I want and it all counts the same, which is sort of a change of pace from my habitual editing and outlining and drafting stories. The "Vi quest" is a daily quest to defeat five Vi, which amounts to "write for 25 minutes total without any significant pauses." I normally dislike the endurance monsters, but I should probably give them more of a chance.

Anyway, I have today off since it's a Wednesday. I normally only work Monday, Tuesday and Friday, since I'm part-time. I have been waffling about dropping to Even Fewer hours -- there's a "seasonal" status that I'd drop to if I worked less than 20 hours a week. Seasonal workers get zero benefits: as part-time, I can't get health insurance through my employer, but I do get a 5% match on my 401(k), and there's an annual bonus that adds up to around 10% of my annual salary. And I get a lot of PTO, like five weeks a year. Since my weeks are 20 hours each, that's only 100 hours, but even so. It's time I get paid for not working.

I have a lot of money in retirement savings. It'd be enough to cover my general current expenses for the rest of my life. I have a friend whom I've long discussed retirement and planning for retirement with, and one of his thoughts has always been "I want to save extra money so that I can afford cool new tech that comes out after I retire", kind of the way that fiber internet and smartphones didn’t exist thirty years ago but have become a ubiquitous expense in my life.

I am not super worried that there will be cool new technology that I can't afford. I'm more concerned that I will become disabled in some fashion that will be much more bearable if I have lots of money to compensate for it. My parents, who are thankfully wealthy, are increasingly dependent on services: they have their groceries not only delivered, but the delivery person puts them away. They have a housekeeper because neither of my parents are healthy enough to do regular household chores. My father just got a home health aide to help with some additional issues. My mother will probably need a home health aide in the next year or so too, for one reason or another. They can afford all of this: my father made excellent money before he retired, which he invested well, and he worked for a company that provided a good pension plan. But my retirement savings -- perfectly adequate to my present needs -- will not be enough to provide me with full-time home care in thirty years. It probably wouldn't even be enough to pay for a nursing home.

So I will keep puttering along at twenty hours a week for some years to come, I suppose. It's disheartening how difficult it is to anticipate future expenses when looking at retirement. Maybe I'll get hit by a bus and none of it will matter, and maybe I'll live the last thirty years of my life requiring full-time care, who knows? But the thing is that you can literally have millions of dollars* in savings and still end up having your life depend on needing more money than you have. This is somewhat more likely in America, with our healthcare payment system that is such a disaster it doesn't even work well for the top 5%. But you can be living anywhere and know that there's a treatment available that could save you, or substantially improve your life, but that your healthcare system won't pay for, for whatever reason. Having the government pay for healthcare changes who can deny it to you, but it doesn't guarantee that you won't be denied. Everything has a cost, and someone will always have to decide when the cost is too much. Leftists like to blame it on capitalism, but the systemic issue is "the laws of physics." Healthcare is not an artificial scarcity. Maybe someday we'll figure out how to get around entropy but that day has not yet come.

*to be clear, I do not have this much

I am about a hundred entries back on LJ, because it's annoying to read on my phone these days, but I still look at it on the weekends. So I'm reading Kristine Rusch's business blog post from a week and a half ago now, and the advice in it made me laugh. She advised that if you have a financial windfall as a writer -- a big advance or good sales or whatever -- you should pay off your mortgage.

I didn't laugh because it's bad advice -- it's reasonably good advice for many people -- but because it's exactly what I did with the money I made from A Rational Arrangement in the first few months (when it was a large enough sum to make a difference in my bank account). But I did not pay down my mortgage because it is the highest and best use of my money.

Rusch goes on to write:

[Standard financial advice says] you should never ever pay off your mortgage, because—at least in America—you can use the mortgage tax deduction and it’ll be better for you than…oh, shit. This is where it breaks down for me. Because I have no clue how a tax deduction is better for a person than owning something outright. Especially something like your home. Shelter. The place you live.

I am pretty sure I have written about this before, but I feel like writing about it again, so I will. I don't expect to teach Rusch about finances, but I imagine it's a point unclear to many other people, too.

Let's say that you either acquired or refinanced your mortgage back in 2012, when mortgage rates hit their low. Your interest rate on a 30-year loan is 3.5%. We'll say your mortgage is $100,000 to make the math easy. You're paying $3,500 in interest* per year. Let's assume you can take advantage of the tax break (this is a big assumption) and your top marginal tax rate is 25%. So you get back in taxes 25% of your $3,500. That makes the cost of the mortgage interest $2,625 per year.

* OK, you're not, because your principal will go down slightly over the course of the year, but in the first 15-20 years of a mortgage, you are not paying much principal, so we'll just pretend it's zero.

So, let's say you get a $100,000 windfall and you decide to pay off your mortgage. You are now richer by $2,625 a year! You also don't have to pay the escrow for taxes or insurance or repay the principal, but you still have to pay taxes and insurance and you already paid for the principal (that's why your $100,000 windfall is now gone) so that is not money saved. Only the interest, net of your tax deduction, is saved.

There are many other things you could do with your windfall! You could spend it on a world cruise. You could buy a new and bigger house. You could commission oil paintings of every major and minor character in your book. You could buy a thousand pairs of expensive shoes. Etc. These are all options that leave you poorer than paying off your mortgage: you are still spending $2625 per year on the mortgage instead of $0. Paying off your mortgage is by no means a bad idea!

But let's say you don't want to pay off your mortgage but you don't want to fritter the money away either. You could put it in a CD at your local bank and make like 1.25% interest. That makes you $1,250, but you are still spending $2625 on mortgage, so your net spending is $1375. From a financial standpoint, this is not necessarily a mistake. You can't get 3.5% on a new mortage made in in 2017. So if you think you will need to spend $100,000 on something in the next year or two, you'd want it accessible: you don't want to pay off your mortgage only to get a new mortgage in a year. But if you don't need that money for a near-term expense, a savings account of CD is not as good as paying off a mortgage.

Real estate, including your house, is an investment. Let's say that instead of investing further in real estate (yes paying off your mortgage is an investment in real estate),, you want to invest in something else. Howabout stocks? Let's not make a bet on a specific stock: we'll put your money in the Vanguard Total Stock Market Index Fund, which is designed to mimic the performance of the entire US market. If US stocks go up, VTSMX goes up. If they go down, VTSMX goes down. The US Stock market as a whole has done very well for the past 15 years, and VTSMX's average rate over that period is 7.75%. (Over any shorter recent period, it's actually higher, so even granting that 2002 was one of the market troughs this isn't ridiculous.) So let's say that investing in VTSMX returns 7.75% for the next year and let's also say that you take that net return out of stocks after a year. You will have made $7,750, and have to pay 25% of that in taxes*, for $5,812. You'd still spend a net $2,650 on mortgage interest, so your net profit is $3,162.

* This is wrong because capital gains taxes are different from income tax and you'd probably pay 15 to 20% but let's just keep faking it.

So you've gone from spending $2,650 a year if you fritter away the windfall, to spending $0 by paying off the mortgage, to making $3,162 a year by keeping the mortgage and investing the windfall in a stock index fund.

And that is why it can be a better idea to keep your mortgage and invest in something else than to pay off the mortgage. The relevant phrase here is "opportunity cost": when you pay off your mortgage, you lose the opportunity to do other things with the money, like put it into stocks. Sometimes that cost is substantial.

Stocks are risky, Now in particular is not a great time to buy stocks: they are at an all time high. There is no guarantee that you would make this money in the next year. But over the long term, historically stocks have returned more than mortgage interest rate cost. So you are very likely to make more money long term -- over 15+ years -- by investing in stocks than you would pay in mortgage interest. Keeping your mortgage and investing in stocks is a good idea. It gets even better if you use a tax-advantaged account, like a Health Savings Account (if you are saving for medical expenses or retirement) or an IRA or a 401(k) (if you are saving for retirement), because you can lower your tax expense that way.

So: if I know that my money is better invested in the stock market than in paying off my mortgage, why did I decide to pay down my own mortgage?

Because I hate owing money.

Not every financial decision you make has to be the highest-and-best-use. You also have to take into account your own psychological limitation and quirks. One of the most common weaknesses among would-be investors is obsessing over their current returns. If you're the sort of person to panic and sell your stocks when you see their value drop 20% over the course of a day, then investing in the stock market is not a great idea for you. It turns out I have plenty of risk tolerance in that respect: I weathered the big drops from 2000-2002 and from 2006-2009 with nary a change in my investing behavior.

But I do hate fussing with my money. I don't want to refinance my mortgage to get the best interest rate, or figure out whether or not the fee cost is justified, or cash out my stocks if I have a financial emergency and need it to pay my mortgage payment, or any of that nonsense. My hatred for it doesn't necessarily justify the opportunity cost of paying off my mortgage rather than investing in stock, but I do lots of things with my money that don't necessarily justify the opportunity cost. I am okay with this. It is my particular investing weakness.

All of this is to say: it is always good to know what the best strategy is. But you don't always need to follow it, if for whatever reason it doesn't work for you. Sometimes there are really good reasons why it wouldn't work for you, like the above one about "I will need this money for something else very soon." Sometimes they are kind of iffy reasons and you may want to reconsider. Or you may find that, like me, you make all the calculations and think about the differences and then go "screw the probabilities, I want the mortgage paid off already." That's all right too.

[Standard financial advice says] you should never ever pay off your mortgage, because—at least in America—you can use the mortgage tax deduction and it’ll be better for you than…oh, shit. This is where it breaks down for me. Because I have no clue how a tax deduction is better for a person than owning something outright. Especially something like your home. Shelter. The place you live.

Eight years ago, I took out a mortgage and purchased a house.

As of today, that loan is less than half the original balance.

I still have five or six years left to go before it's paid off, but still. Yay!

Posted via LiveJournal app for Android.

Several months ago,

ladyperegrine asked if I'd write something about the US debt situation. I tried to wrap my mind around it enough to say something coherent. It's very big and complicated and I don't entirely know how I feel about it. So instead, I started this piece about something I understand better: debt in general. I finally decide to finish this up and post it today.

There are a multitude of reasons to borrow money, but I'll break them down into four categories:

Investment

By investment, I mean 'spending money now to increase your wealth in the future'. If you're a legal assistant making $40 an hour and you want to be a lawyer making $200, paying for law school is an investment. If you're paying $1000 rent & utilities now, and a comparable house would cost $900 a month for rent + utilities + maintenance + insurance + real estate taxes, then buying a house is an investment. If you need a car to get to work, buying a car can be an investment. If you run a restaurant, buying cooking equipment for it is an investment.

But it's important to recognize that these things are not necessarily investments, at least not in the economic sense. If the car you get won't let you earn more money than the costs of loan payments and car costs, it's not a good investment. If a fancy new appliance doesn't save/make you more money than it costs in your restaurant, it's not a good investment. I also want to distinguish investment from:

Speculation

It's hard to define 'investment' briefly in a way that excludes 'speculation'. In general, investments are long-term, or you are adding value to whatever you've purchased, or you are gaining a monetary benefit through ownership. In general, with speculation you are not adding value to your purchase and you derive no monetary benefit from ownership. Speculation is often but not always short-term. Day-trading in stocks is speculation. Buying collector's items or art to sell later is speculation. Buying a piece of land to sell it later is speculation. I tend to regard anything with a high likelihood of no return but a high potential upside as speculation as well. For a business person, an MBA can reasonably be viewed as an investment, because most people with MBAs are able to get high wages working in that field. For an actor who wants to be a movie star, a degree in the performing arts is more akin to speculation: most people with degrees in that field do not end up working in it for high wages.

Discretionary

This means 'stuff I want but don't really need and which will not bring me greater wealth in the future'. A vacation, a luxury car, a 2500 sq ft house for you and your spouse, a work of art for you to hang on your wall, are all discretionary spending.

Necessities

Much of what we think of as 'necessities' are not necessary to human survival: electricity, air conditioning, phone service, housing that conforms to American standards, etc. So I will define this as 'things needed to maintain your present level of wealth'. Living in a homeless shelter is not conducive to keeping a job, so a home that conforms to building codes can be considered a necessity. I would still discourage people from confusing 'luxury' with 'necessity'. Needing a place to live does not mean needing an upscale three-bedroom apartment.

On Spending and Borrowing

I want to emphasize that all four categories are perfectly valid ways of spending money. There are lots of reasons other than economic gain for purchasing something. Life is not a contest and money is not how we keep score. There is absolutely no reason that people shouldn't pursue a degrees in the fine arts if doing so will bring them happiness. I have an MA in English literature and I don't for a moment regret the expense or the time I spent getting it. (In my case, scholarships covered most of my college tuition, and my parents and I paid for the rest of tuition and expenses without borrowing).

That said, I would not recommend borrowing money for any purpose other than investment. Because only investment will allow the borrower to make money at the same time that the lender makes money. Only investment can create wealth. Borrowing money for other purposes means owing more money later when no extra money was gained from whatever the borrowed funds were spent on. It's losing proposition that generally leaves the borrower worse off economically.

Of course, sometimes circumstances force suboptimal behavior. It may well be better to borrow $1000 for necessities today and give up $1200 of luxuries to pay it back in a year. But borrowing money for necessities is inevitably a short-term fix.

And sometimes speculation is rewarded. A lot of people who sold houses in early 2007 were rewarded for speculating that housing prices would rise. People buying houses in early 2007, however, were the big losers on that bet. Speculation is at best a zero-sum game: for every person who buys low and sells high, there is another person who has sold low, another person who has bought high.

The Place of Debt

The point I most want to emphasize is this: debt has a valid place in the economy. It can let borrowers and lenders both enrich themselves, by giving borrowers the means to invest in goods and services that will increase the borrower's long term wealth. If you're going into debt for this purpose, that makes sense.

But if you are going into debt for some other purpose, I would encourage you to consider your other options instead.

I cannot recommend that you take on $50,000+ of debt to get a master's degree in English literature. It is not an economic investment. For that matter, I don't recommend that you go into debt getting an engineering degree if you hate engineering. You need to consider your own interests as well as what the labor market is looking for.

If you can rent a house for $1000 / mo, or buy it for $1500 / mo, buying that house is speculation, not investment. I'd recommend renting -- or if you want to speculate, or want to own for other reasons, then put enough money in as a downpayment that you can reduce your monthly cost of ownership to that of renting.

Banking institutions may well be willing to extend you credit for any of the above-mentioned purposes, and I do not favor legislating that away. I would like people to have the option of borrowing for a variety of reasons, even when I think many of them are foolish. I may be wrong. My position to judge your behavior and circumstances is generally not as good as your own.

That also means that we all must judge for ourselve the wisdom of our own choices. I cannot assume that a loan is a good idea for me just because I can get one, because even the best-intentioned lender doesn't know my circumstances as well as I do. So these are my guidelines on when I am willing to borrow money.

Krud tweeted, "There are now mobile apps to deposit checks by taking pictures of them. So... watermarks and all that are no longer relevant? o_O *confused* !"

And I started to respond in Twitter, then realized that this was going to take more then 140 characters.

Most money is transfered point-to-point by electronic transfer rather than by paper money. Just as the cash doesn't change hands, neither do the physical checks. A few years ago, all banks were required by federal regulation to switch entirely to sending imaged checks to the clearinghouse, rather than physical ones. You probably got a notice about this, if you used to get your checks back with your statement and started getting photocopies instead. The chain works like this:

a. You give me a check drawn on your bank, GiantNational, to pay me back for your half of the groceries.
b. I give your check to my bank, Toddler, to deposit in my account.
c. A human being, usually a teller, looks at the check. This person usually looks for obvious signs of fraud, like the check says it has watermarks and doesn't, or it looks like a photcopy, or whatnot. If the teller doesn't think it's fake, then Toddler gives me credit for your check in my account.
d. The teller scans the check and encodes it with routing information as necessary. The check already has GiantNational's routing number printed at the bottom (that's the nine digit number on the bottom left), and if it's a preprinted check, it'll have your account number and check number. The teller will still need to encode the amount. Many banks have OCR software on their scanners, in which case the teller will just glance at the totals to make sure they're right when she finishes scanning all the items she's processing. Division of labor varies, so the teller might hand it off to someone else to scan, and a third person might verify the encoding on the scanned checks, for example. The original check gets put in a bin and held for some period of time, probably 90 days.
e. The scanned copy of your check goes to the automated clearinghouse. The automated clearinghouse credits Toddler Bank for the funds, debits GiantNational, and sends the scan to GiantNational.
f. GiantNational debits your account for the funds. Depending on how GiantNational handles it, a human being may look at your scanned check to match the signature to your signature card, or -- more likely -- a computer will review the scan for signs of fraud: an amount larger than the usual, for example, or the signature doesn't match according to its pattern recognition software. If the computer doesn't think it matches, it'll flag the item and a human will review it to make the final decision.

You'll note that there are two fraud-prevention steps in here, one at each bank. Only one of the banks gets to look at a physical check, though.

Looking at physical checks is inl send the check to the bank) and the bank (they have to scan it anyway).

It's also not the only way to transfer money between bank accounts at different banks. Many of you have direct deposit for your pay checks. Some of you have autodebits authorized to pay your bills automatically. You might have a Paypal account that's tied to your bank account.

All of these transactions are handled by electronic ACH. That generally means that you signed a piece of paper at some point, possibly in the far distant past, wherein you gave your employer/editor/Paypal your bank account number and routing number and told them they could debit and/or credit that account. (I don't know if Paypal actually makes you sign anything or if they use some other method to verify your identity; I'm guessing the latter.)

Here's a secret: no one at your bank ever sees that piece of paper. Here's another: they don't actually need your signature, or anything else from you, to take money out of your account. Anyone who knows your bank account number and the bank you use can take money out of your account. There are half a dozen easy ways to do it. Which is scary!

The good news is that you have 30 days after you receive your statement to contest *any* transaction on it. And if that company doesn't have your signature on a piece of paper, or some similarly good way to prove that you authorized that transaction, then you get your money back. The majority of the risk of fraud is born by banks and businesses (who only have a couple of days after the transaction is made in which to contest it). But it is, nonetheless, a *very* good idea to check your statement for erroneous or fraudulent transactions. In my experience, errors are more common than fraud.

In the last few years, some banks have started allowing what's called "merchant processing". This is when a business that receives checks turns the checks into a file of ACH transactions. The business sends that file to the bank, and the bank processes the file in the same way that autodebit transactions are processed. The impact on your account is the same -- you get a debit for whatever amount you wrote the check for -- but your bank never sees the check. If you've ever written a check at Wal-Mart and noticed that the check cleared your account, but you didn't get a copy of your check with your statement (this assumes you normally get copies of your checks), that's why: Wal-Mart turned your check into an ACH debit.

Your bank will let you block ACH debits if you find them too scary. They may also let you filter them: "Debits from my power company are okay but block everyone else". I don't know what the impact of that is on merchants that turn checks into ACH items.

I don't know whether the proposed mobile app is intended to converts checks into ACH items or if it's sending the scanned check to your bank for processing in just the same way a teller scans it for processing. The latter is a bit more secure, since there's still a signature to check and a check to view. So that seems more likely.

That the physical check is not presented to a bank doesn't mean watermarks have no value: they're still useful to merchants and check-cashing services when they determine whether or not to accept a check as payment.

But *your* main safeguard against fraud is "do not give your bank account number to anyone you do not trust, which includes not sending it through unsecure channels (like email)" and "review your statement for unauthorized activity." Most other protections against fraud are more for the benefit of banks and businesses, who (because of consumer protections) are generally the ones who lose if they honor a fraudulent transaction.