Are You Taking Good Things Too Far?

July 29, 2016

The latest craze that has swept my family is the Pokémon Go app. My kids run around trying to “catch” Pokémon at different locations. I’m happy they are outside and active, but I have to admit that I don’t have the foggiest idea why they consider this even remotely fun. They walk around and occasionally ask me to take them to a nearby neighborhood so that they can catch these things. (I use “catch” liberally because it’s all virtual, with no one really catching anything.)

They can catch their Pokémon thingies while I sit at an outdoor table at a local coffee shop. I find it a little strange, and in a horrible twist to this silly game, criminals are now setting up shop near Pokémon characters and robbing unsuspecting game players. What started as a fun thing has turned into a fun thing that needs to be used with caution because of some unanticipated consequences. A lot of things that start out as a purely positive have some unintended consequences that create some negativity.

I’ve seen that with a few people recently. I’ve had two meetings with people who are doing a wonderful job of saving for retirement. They ran retirement projections and learned that they needed to pick up the pace as it relates to saving for retirement. They cranked their contribution percentage WAY up so that they could catch up to where they think they should be. That is 100% admirable, and they are operating with the best of intentions.

Their unintended consequences? Both of them are saving so aggressively in their 401(k) that they are struggling with day-to-day cash flow. One is depleting his savings account on a monthly basis just to cover basic living expenses, and the other is using a credit card for groceries in the last few days before her paydays. A noble effort to save for retirement has taken a somewhat sinister turn in these examples, and I’ve had to have a few “I applaud your effort, but maybe it’s one step too far….” conversations.

The good news is that they realized that they may have gone a bit too far, and when we talked about bringing the 401(k) contributions down just a bit in order to make day-to-day cash flow a bit more manageable, they were completely receptive. In each conversation, we had a nice laugh at how some good things can be taken too far. (If you don’t believe that, see how many chocolate chip cookies you can eat before you start to feel like it’s been one too many.)

The lesson here for all of us is that after a few cookies, it makes sense to stop and catch your breath. The other lesson is that some great financial behaviors can be taken to an extreme. Are you saving so much for retirement that you aren’t able to enjoy the here and now? I’ve heard so many stories about people depriving themselves of life experiences in order to save for retirement, only to die just prior to retiring. Are you spending so much in the here and now and enjoying life experiences that you are woefully behind the curve for your retirement goals?

Neither is a good place to be. What’s the old phrase? ”In all things, moderation.”

Even good financial behaviors should be used in moderation! If you’re wondering if you’re taking something just a bit too far, chances are that you are. Whether you ask a financial professional or just hit our Facebook page and ask, get another perspective on your situation to make sure that you have all of the moving parts in your financial life working together.

 

How Much is Your Rental Property Earning or Losing?

July 07, 2016

One of the benefits of investing in stocks, bonds, and mutual funds versus in direct real estate is that it’s a lot simpler. A good example is when it comes time to answer a key question: how much money am I actually making or losing in this investment? With stocks, bonds, and funds, this is relatively easy because it’s all spelled out for you on your statement. You can see how much you’ve collected in interest and dividends and how much the investment has gained or lost in value since you purchased it. With real estate, it’s not quite so simple.

After a couple of years of owning rental properties, including having a few big repairs, an eviction, and vacancies that lasted for months, I decided to sit down and calculate what I was really earning (or losing). The good news is that 4 out of my 5 properties have a positive cash flow of about $200/month over the last 6 months, which is about what I expected when I purchased them. The bad news is that the last property had a negative cash flow of about $500/month since it was vacant during most of that time. (Fortunately, I have a tenant there now.) This netted out to a positive cash flow of about $300 per month.

I was glad to see I wasn’t in the red even with a vacant property, but that still didn’t look very encouraging. However, when I annualized it as a percentage of what I spent on the properties, it came out to be a 5% positive cash flow. If you’ve seen interest and dividend rates lately, that’s not too bad. With the tenant in the 5th property, it would come to about a 17% return on cash. If you have rental properties or are thinking of investing in one, here are some of the factors to consider in determining the return on your investment:

Cost Basis: This is the upfront cost of purchasing the property (the down payment and closing costs) as well as the cost of any improvements you make. (Only some of the closing costs are included in the basis for tax purposes.)

Rental Income: This is the easiest part to measure. If you’re thinking about buying a property, assume a vacancy of at least one month per year.

Rental Expenses: This is the toughest part to measure and estimate. If you have a property, be sure to keep records so you can tally them up. Don’t forget to include the costs of advertising the property to prospective tenants and any property management fees in addition to the mortgage, property taxes, and insurance. You also need to separate maintenance/repairs from capital improvements since they affect your profitability (and taxes) differently. For prospective properties, maintenance costs tend to run 1-4% of the property value, depending on it’s condition.

Tax Breaks: In addition to non-improvement expenses, you can deduct mortgage interest, property taxes, and depreciation.

Cash Flow: Take your total rental income, subtract your expenses (including taxes on the rental income), and then add in your tax breaks. This is how much income you actually pocket.

Return on Cash: Take your annual cash flow and divide it by your cost basis. This is the cash return on your investment.

Total Return on Investment: Take your cash flow and add in any appreciation in the value of your property and reductions in the mortgage balance to get your total return. Then divide it by your costs basis to get your total return. This is the most fair comparison to your total return on other investments.

When you look at all the ways you can make money (rental income, tax breaks, and building equity), real estate can have some of the highest investment returns. (You can use this calculator to make the calculations above.) But with high returns, comes high risk. Sometimes those risks are obvious, but other times they come in the form of small costs that can add up to big losses over time. Make sure you do the math on any property to see if it makes financial sense to buy, hold, or sell.

 

 

When “None of the Above” Isn’t an Option

June 17, 2016

As I type this, Hillary Clinton is giving a speech after winning the California and New Jersey primaries and becoming the Democratic party presumptive nominee. This is merely weeks after Donald Trump gave his speech after wrapping up the Republican primaries as their presumptive nominee. Most people I’ve talked to and seen commenting on my social media accounts wish that they had a “D – None of the above” option like there is on standardized tests.

I don’t think I’m going out on a limb by saying that, as a country, we should be able to do better than these candidates.  A lack of great available options isn’t just an issue in politics though. It’s a problem in the financial lives of many people that I’ve talked to recently.

If you are confronted with a bad situation, there are some things you can do. First, try to think of as many potential solutions as you can. Consider consulting with people you know and trust or an unbiased financial planner for ideas. You might be able to come up with a better solution this way. If not, make a list of pros and cons for each potential solution and prioritize what’s most important to you.

For example, one person I talked with was in a bit of a financial jam, and my goal was to help her find a way to a better place.  She had recently gone through a divorce, and her budget included receiving child support from her ex-husband. He has chosen to change jobs and now works “under the table” for cash so that it is not reportable. If it’s not reported, she can’t collect, and now her living expenses exceed her income.

The child support would have been deposited into savings for her kids’ education and for emergencies. Instead, she taps into savings for about $100/month to maintain her current lifestyle. We talked through a few options:

  • Sell the house and downsize. Reduce the mortgage by several hundred dollars per month so that there is wiggle room. (She just refinanced when she bought the ex’s portion of the house, so a simple refi is not an option.)
  • Get a part time job and work when the kids are with their dad in order to generate some income to cover the gap.
  • Cut the cord and get rid of her high end cable package.
  • Get rid of her car with a $500/month payment and get something less expensive.
  • Hire an attorney or investigator to track her ex-husband’s financial life and then go to court in order to get child support dollars flowing in.
  • Suck it up, hope for the best and continue to grind forward as is.

Each option has its downsides and she viewed all of them like many Americans are viewing Trump v Clinton. But just like in politics, there is no perfect solution, and trying to find one can prevent you from choosing a good one or at least the “least bad” one. I don’t know which option she’ll end up picking, but she’s now in a better position to make a decision. After all, sometimes making no choice can be the worst choice of all.

 

 

Your 4 Week Financial Check-Up Challenge: Week 1

May 18, 2015

Live – Plan – Thrive!!! That is the simple and straightforward mantra that I use to explain the financial life planning process. When it comes to getting and keeping others engaged in the financial planning process, the biggest challenge isn’t usually related to financial knowledge. It’s a general lack of planning. As the old saying goes “people don’t plan to fail, they fail to plan.” Continue reading “Your 4 Week Financial Check-Up Challenge: Week 1”

Are You in a Cash Flow Drought?

July 11, 2014

Living on the East Coast but working for a California based company, I get to hear about things that are newsworthy on both coasts. One of the more recent news items that I talked about with my CA coworkers was the drought that they are currently experiencing.  This article talks about the drought and what it has done to the price of water in California. Continue reading “Are You in a Cash Flow Drought?”

When is Borrowing From Your 401(k) a Good Idea?

June 20, 2014

If you ask most financial planners when is the best time to borrow money from your 401(k), the overwhelming answer will be “NEVER”! And, for the most part, I agree with that. But, like almost every rule, there are exceptions.  Continue reading “When is Borrowing From Your 401(k) a Good Idea?”

I Don’t Even Know Where to Start!

May 23, 2014

I just got a new laptop and had to figure out what to do with all of my old files, work and personal, along with music, photos, and video. It was a chaotic mess.  There was my old personal laptop, my old work laptop, an old desktop and an iPad all in one corner.  It was like the land where technology goes to die.  I wasn’t totally sure how to manage the craziness that had become my tech life.  Continue reading “I Don’t Even Know Where to Start!”

What to Look For In an Investment Property

February 13, 2014

Over the last couple of weeks, I wrote about the opportunities and challenges involved with investing in residential rental properties. If you feel ready to take the plunge, you may be wondering what to look for in an investment  property. After all, it’s not the same as buying your home, which is as much if not more of an emotional decision than a financial one. Like all investments,  the less emotion involved with real estate, the better. Here are some things I looked for in purchasing my first rental property: Continue reading “What to Look For In an Investment Property”

5 Myths About Real Estate Investing

October 03, 2013

With interest rates and home prices still low but rising and economic recovery and/or higher inflation possibly on the horizon, the prospects for real estate are looking pretty good. But it’s not an area that I’m as familiar with as other types of investments so I’ve been talking to a lot of people and doing my own research to better understand real estate investing. Here are some common misconceptions I’ve found that could be inhibiting people’s success in this area: Continue reading “5 Myths About Real Estate Investing”

Work More, Stress Less?

November 09, 2012

In several of my recent conversations with employees of companies that have access to our financial helpline, I have talked to people about their monthly budget.  Often, the line between success and failure for their monthly budget has been a matter of a few hundred dollars per month.  In a good month, they have $100-$200 in excess cash flow.  But…it seems like there is NEVER a good month and there are ALWAYS extra expenses.  A car breaks down, kids get sick and need to see the doctor and get a prescription or there is some other expense that blows up the monthly budget. For people who are in this situation, there are a few things you can do to make it more manageable and reduce the stress level of the situation.  The cumulative level of stress was very evident in their voices, and the reason they called the financial helpline was to find a solution to their budget issues but also to drastically reduce the daily level of stress. Continue reading “Work More, Stress Less?”

Is Your Budget Penny Wise and Pound Foolish?

October 12, 2012

I talk to a lot of people about their cash flow, budgeting, and debt and when we dive into the details of their monthly cash flow, we tend to look for relatively easy ways to trim spending.  We will look at things like keeping vs. ditching a land line, cutting back on the premium movie channels, and cooking more and going out to eat less.  These are all worthy pursuits and can all lower your monthly cash outflow for years to come.  But I’ll put them in the “micro” budgeting category.  Micro budgeting can save money, for sure.  But is it possible to make an even bigger impact on your budget?  Continue reading “Is Your Budget Penny Wise and Pound Foolish?”

Money Management: How NOT to Spend Your Money

May 18, 2011

I’ve been arguing that if the government cannot control spending there are some serious implications that you and I need to prepare for.  In my last blog I outlined precautionary steps to take if the government continues on this path.  In this blog I’ll discuss what NOT to do so that you can avoid a similar fate. Continue reading “Money Management: How NOT to Spend Your Money”

Are You Saving Too Much?

March 02, 2011

When was the last time someone asked you if you thought they were saving too much?  Someone recently asked me this question and at first I was taken aback.  How is it that anyone could have money to save, let alone enough to wonder if they were saving too much?  Didn’t we just go through a recession?  Aren’t we all just swimming in debt, living paycheck to paycheck, desperately trying to make ends meet? Continue reading “Are You Saving Too Much?”