Seriously: How low can they go?

These rock-bottom mortgage rates are happening at a time of year during which sales are most brisk: springtime.  Demand for mortgages doesn’t seem to be driving their price up, which could indicate that lenders are still holding on tight to their money, or because there are a lot of properties that are worth less than what’s owed against them.

With the rates as low as they are, any fixed-rate mortgage — even a 30-year mortgage — above 5% is a candidate for a mortgage refinance.  The refinance payback time is reasonable.

The trick then becomes getting the refinance approved, and therein might be the rub.  If the value of the property is less than what is owed against it, a refinance is unlikely because the lender couldn’t recoup its money in the event of a mortgage default.

On the loan origination side, if the prospective borrower’s credit is anything less than stellar, they may have a hard trek to getting the loan in the first place.  Creditworthy people won’t have issues, but the bar has been raised compared to where it was five years ago.

When to pull the trigger?

That is the six-figure question, isn’t it?  Borrowing money hasn’t been this cheap in decades but it doesn’t make sense to buy if you’re not ready.  Don’t worry; it’s okay!  Home ownership has its own set of headaches compared with renting.

On the other side, the low mortgage rates make reasonably-priced homes even more affordable for creditworthy borrowers.  What’s more, there are more reasonably-priced homes around because of the downward price pressure from foreclosures and the like.

One thing is for sure, though: Banks won’t pay people to borrow.  The rates will only go so low, and they don’t have much more room to go down.  We’ve got to be getting close to the bottom.  Then, it’s all uphill from there.

So I recommend keeping an eye on mortgage rates if you’re in the market for a new mortgage or a refinance.

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• People exchange their time for money at their jobs.
• People choose to pay others to do tasks that will take time away from something they’d rather be doing.
• People take time to make lunches, change their own oil, mow their lawn, etc., to save money.
• People pay more to live in a city to cut down their commute time to work.
• And so forth …

There is one big difference between time and money, which is why time is not exactly the same thing as money.  Time is scarce.  Money can be lost, made back, saved, spent, invested, multiplied.  Time can only be spent.  It provides no return, and everyone gets only so much of it.  When it’s gone, it’s gone.

And when your time is almost gone, it becomes incredibly valuable.  The value of money dwindles to nothing at this point.

Which is why that it’s sad to hear that Jerry Meekins, a veteran of the Vietnam War, has decided to make it his “primary goal” to get Spirit Airlines to change its blanket no-refund policy on airline tickets.  The crux of the linked story is that Mr. Meekins bought a plane ticket from Spirit Airlines, found out two weeks later that he was terminal, requested a refund, and the refund was refused, in line with the airline’s (presumably clear) policy that the tickets are non-refundable.  Additionally, the airline offers low-cost travel insurance ($14 for $300 worth of coverage) that pays out if documented “sickness” is provided, so it’s probable that Mr. Meekins would have gotten his money back with this coverage in place.

Why be remembered for a fool’s errand?

It’s Mr. Meekins’ choice how he spends his final months.  (Maybe he’s already quit fighting the airline.  I hope so.)  What I don’t get is that why he chose to waste any time at all on this issue.  Is fighting for the cost of a plane trip — with an airline that has made it clear that it will stand up to the bad press it will get by not issuing the refund — a good use of his time?  Even if he does get his money back — will it be worth his time?  Not at this stage in his life.

The people that know and love Mr. Meekins will remember his war record, his service, and the other good things he’s accomplished with his life.  Lots more people will just know that he had a bone to pick with an airline, and some of them will side with the airline, not him.  (I think the airline did nothing wrong here.)

He should just let the ticket go.  It’s lost.  Fuhgeddaboutit.  (And, by the way, he should have bought the travel insurance.)

I know that this tiff with Spirit Airlines isn’t his life’s meesage.  He should spend his remaining time getting that out, whatever it is.

Time is not money.  Time is way more valuable than money.

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This past week’s topic was debt, and not surprisingly, the Bible doesn’t have too many good things to say about debt and encourages people to avoid almost all kinds of debt, and to get out of debt as quickly as possible.

Part of the discussion within one of the workbooks revealed a nice illustration of how paying extra on debt saves interest expense over the life of the loan.  All that’s needed is an amortization schedule.

Let’s take a 30-year fixed-rate mortgage with starting principal of $100,000 and a rate of 5%.  The monthly payment is $536.82.  Here are the first five payments, split up by principal and interest, and the balance after making the payment:

For the first $536.82 payment, $416.67 goes to interest, and $120.15 goes to reducing the loan principal to $99,879.85.

Now let’s say that I wanted to retire the loan faster by paying extra toward principal reduction.  This saves me interest in the long run, but how much?

Let’s say that I make an extra principal payment with my regular first payment. Let’s say also that the extra principal is $120.65, which is the principal part of the second payment (in bold below).

My balance then is then $99,759.20. So, I’ve arrived at the loan balance I should have after the second payment, without paying the interest part of the second payment. Therefore, I saved $416.17 in interest by making an extra $120.65 payment when I did.

That’s one of the clearer explanations I’ve seen for how you save interest by paying down a loan faster.

One gentleman quoted in the MSNBC article, who bought five tickets for chances at the giant jackpot, had this to say about the enormous payout:

“When it gets as big as it is now, you’d be nuts not to play … You have to take a chance on Lady Luck.”

Well, no, not really, I don’t have to take a chance.

With rare, highly-inspired exceptions — yes J I’m talking about you — lotteries are a tax on people who don’t comprehend astronomical probabilities.  There are 176 million combinations of numbers for the Mega Millions game.  Only one of those 176 million combinations is the big winner.  Here are some roughly comparable odds:

• Flipping a coin 27 times in a row, and getting heads every time
• Rolling twelve dice and coming up with the same number on top
• Warren Buffett picks one person in the country at random to have lunch with, and it turns out to be you

The size of the jackpot accumulating from weeks without winners doesn’t change the astronomical odds against hitting the right combination of numbers.  The odds of winning are exactly the same with a $15 million jackpot as with a $640 million jackpot: really, really lousy.  What’s more, the winners have to split the jackpot; having this much interest in the lottery increases the likelihood that there will be more than one winner, which there was.

Why waste any money at all on these kinds of almost impossibly long shots?  Why not give Lady Luck the finger and actually do something to create your dreams?

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Taking such a strong stance about money talk does prevent news of your riches or lack thereof from spreading. That’s the upside.

The downside of this strong stance is that it precludes conversations with other like-minded individuals. Recently I enjoyed a conversation with a friend about real estate, retirement, debt, and business. We mentioned specific numbers and suggested some options that might be of benefit. It’s one of several conversations like this I’ve had with my friend.

I have a few friends with whom I talk candidly about finances. My wife calls it “talking cha-ching.”

Discretion and trust are the name of the game

Recently I enjoyed a conversation with a friend about real estate, retirement, debt, and business. We mentioned specific numbers and suggested some options that might be of benefit. Notice how vague that is? That was on purpose. It’s similar to statements in a number of other articles on this website. We talk about these kinds of things, but I’m not going to share this with just anyone, and certainly not on a public website.

If I did, my friend wouldn’t trust me anymore, because I lacked discretion. Those are the keys to having discussions about money with other people. Another friend made this point more directly: He was trusting me not to talk about this to anyone else — not even his spouse. If things slipped out, then he’d not speak to me about specifics anymore.

In most cases, the first person to turn to for financial advice should be in the family — typically your spouse if you have one. But sometimes that’s not enough, and you want to get someone else’s unbiased opinion; there’s nothing wrong with that.

Why not turn to someone else that you trust for financial advice?

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Why is finding special coins a treasure hunt?

Throughout the past century in the United states, the purchasing power of a dollar has decreased by 95%.  As a result, the price of commodities, like metals, has increased in terms of dollars.  A coin, which is comprised of metals, has a fixed face value.  At first the value of the metal in a coin is small compared with the face value of the coin.  But, as inflation drives up the price of the metals, the value of the metal content approaches, and then exceeds, the face value of the coin.

Three things typically happen as this occurs.  First, a significant portion of the citizens begin holding on to these coins rather than spending them.  Second, the composition of the coin is changed to cheaper metals (debasement) so that the coins can be minted again for less than face value.  Third, anti-melt legislation is put into place to prevent wholesale destruction of the coins for profit.  Then, as Gresham’s Law runs its course, the “bad money” drives the “good money” out of circulation either into private holdings or back to the government.  The melting ban is typically lifted once the good coins are all but gone.

Silver coins have already been driven out of circulation in the US.  They haven’t been minted in quantity for almost 50 years.  The law that forbade melting silver coins was repealed in 1969.  High copper content coins are still in the process of being driven out.  The composition of the cent was changed in 1982 from 95% copper to 97.5% zinc (a cheaper metal).  Right now there is a market on eBay for junk copper cents above their face value.  It is illegal to melt the coins, as well as export the coins in any appreciable quantity.  Both copper cents and nickels contain metal that now costs more than their face value.

Hunt for the coins, or just buy them?

Since I’ve only found a very small number of silver coins just in my pocket change, and I haven’t really gotten a lot of winners from the times I have withdrawn coins in bulk from my bank account, the payoff to hunt through a bunch of coins for what winners might be there isn’t worth the time to me.  Sure, I can get $2.40 worth of silver for 10 cents if I find a silver dime in my loose change or in a box of rolled dines that I got from the bank.  But spend 2-3 hours, potentially, to find it?  Then my time is worth only a buck an hour for that transaction.  Why not pay $120 for a roll of them, and save myself 100 hours of work?

That’s not the only factor though.  My friends like the thrill of the treasure hunt.  One of them “needs to be doing something” even while watching TV, so this fills that need.  And even if the treasures are only a few, and far between, sometimes the treasures are whoppers.  Another friend found that the stash of half-dollars he was looking at was almost completely silver!  Dozens and dozens of half dollars, each worth at least $5 each.  Happy days are here again.

It all boils down to the tradeoff between time and money, and whether or not the hunt is enjoyable or not.  If plowing through rolls of coins isn’t enjoyable, then just buy the coins you want and spend time doing things that are enjoyable.  But if the thrill of the hunt is fun, go for it!

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If you got a refund but don’t need the cash right away, the IRS will hold on to it for you and let you apply it to next year’s tax return. “It’s called a credit elect,” [About.com author and tax professional William] Perez says. “It’s great for people who are self-employed.”

Getting any refund at all is a bit of a loss, because it means that too much in taxes was paid throughout the previous year either through employer withholding or through estimated tax payments.  The government doesn’t require that you give them more throughout the tax year than what you actually end up owing, but unless you tell your employer otherwise, they will probably over-withhold as a default.  (The amount that is withheld can be adjusted by filling out IRS Form W-4.)  Any money that you get as a refund after filing your tax return is money that you lent to the government, interest-free.

So, I don’t understand why it’s even a good idea, let alone a “great” idea, to let the government hold onto the money for another year on top of that.  For self-employed people, or for anyone else.

I can’t think of any good reasons to do this.  Doing so constrains the amount of your refund to serving one purpose only: reducing next year’s tax bill.  Why not at least get the money now, use it for what you want, and let next year’s tax bill worry about itself?  If there’s a concern that there won’t be enough money for taxes next year, then put the money in a savings account.  At least it will earn interest, and in the case that you do have enough to cover taxes, you can use the money for something else.

This seems to be a bit like making mortgage payments in advance.  (This is different than making extra principal payments, which reduces the amount you pay in interest over the life of the mortgage.)  There’s no savings, but you’re out the money nonetheless.  The bank just holds it and applies the amount when it’s due.  Why bother?

About the only reason I see that this might be good is if there’s an overspending issue, but it seems like there are more effective ways to tackle an overspending issue than to deprive yourself of a refund.

Am I missing something?  Maybe a self-employed person or an accountant can weigh in on the issue and enlighten me.

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My daughter and I play the Zynga game Hidden Chronicles on my Facebook account.  The main game-play part of Hidden Chronicles is finding objects hidden within various pictures.  Each scene has dozens or even a hundred or more objects that can be found, but each game involves finding only a few of them.  Since the objects to find are written out, it’s a good opportunity for my daughter to read and learn more words.

Free games with a throttle

My daughter is also learning about the wonderful world of the “freemium.”  Hidden Chronicles, like many other social games on Facebook and Google+, are free … to a point.  We can indeed play for free, but with catches:

• We can’t play as much as we want.  Each time we play the game, we lose “energy.”  When our energy is gone, we have to wait anywhere from 15-45 minutes depending on what we want to do while our energy gets “recharged”  (This by itself isn’t a bad thing for me, because it gives me an excuse for moving on to something else.)  Zynga is especially good at getting new players hooked on their games by the way they structure when players “level up” and get an instant recharge of energy.  The leveling up happens more frequently at the lower levels, so new players get to play more before the throttling becomes apparent.  Very clever.
• We can’t play all of the scenes immediately.  Unlocking the new scenes requires fulfilling quests like building certain structures on our virtual estates.  These tasks can’t be accomplishing for free unless we wait, or to get my friends to “help” build my whatever.  This is how Zynga and its competitors increase their player base, since to advance in the game (for free) we have to talk about the game publicly and keep our friends engaged in the game, which encourages more talk about the game.

All of the waiting and the tedious “spamming my friends,” of course, can be bypassed if I engage in affiliate offers that throw real money Zynga’s way, or if I purchase credits directly.  I’d be lying if I said that I wasn’t tempted.  The business model is very, very good at pulling the wallet out of your back pocket.  If I were to unlock everything available in the game right now, I could easily spend more than a thousand dollars of real money doing it.

What is really extraordinary about this business model is that even if Zynga never sees a dime from me personally, we can play the game on equal footing with other players.  In other words, the paying players don’t get super powers.  Chris Anderson, author of Free: How Today’s Smartest Businesses Profit by Giving Something for Nothing, puts it this way with regard to buying virtual goods:  “You don’t have to pay, but you may want to.”

Free for profit: This will just get bigger

While my daughter and I are playing the game, we talk about the different aspects of the game.  She understands that when the game bugs me to share things with my friends, ask them for help, etc., that it’s the way we can unlock more scenes without paying money.  She also understands that we can only play so many times in a row without paying money.

Part of discussing this with her is to get her used to looking at how the games work.  The “making money off of free” is only going to get more widespread as bandwidth, storage, and processing power get cheaper and cheaper.  This kind of marketing is going to be for her what commercials during Saturday morning cartoons were for me.

Now, can anyone help build my wedding gazebo?  My daughter wants to play another scene.

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If we look back at some of the circumstances that brought us to the current state of hurt we’re in, things were rosy.  In the first part of the last decade, real estate was no-lose.  Mortgage rates were low (due in part to an easy-money policy by the Federal Reserve that caused lenders to compete) and lending standards were lax which increased the number of homebuyers (and developers) competing against one another.  People were house-rich, and people borrowed against the rising equity in their homes to buy stuff.

This worked great, until it didn’t.  Banks failed, lending standards tightened, home prices fell.  People were trapped.  Adjustable-rate mortgages began to reset, and they continue to do so.  Those that weren’t foreclosed on are strapped, or at the very least unable to move because their homes are under water.

One can say that the economy was moving in the first part of last decade, but it wasn’t really moving on disposable income brought about by people’s labors as much it was brought on by borrowed money, and a lot of it.  Eventually the party stops, and the tab has to be settled.

Frugality is good for what ails a burnt-out economy

Following a season of excess comes a season of thrift.  People went into great debt with their houses because they could, and lots of people got into real-estate-related fields because that’s where the money was.  The problem was this: it was too much money.  A lot of money turned out to be mis-allocated when the housing bubble popped.  A side effect was that businesses all over were seeing a lot more sales because people were borrowing against their houses.  This money isn’t flowing as easily anymore, and when this is coupled with the high unemployment rate, it means harder times for a lot of businesses.

People just don’t have as much money to spend.  Or, more to the point, they have to lower credit card debt and pay off home equity lines of credit.  They have to be frugal.

This is necessary to get the economy humming again in the regular way.  Certainly some businesses are doing well now: debt consolidation agencies, used goods, pawn shops, auctioneers, and anyone else who (a) helps people to get back on their financial footing, (b) sells things that people can buy on a budget, or (c) helps people to liquidate their holdings if the bad economy gets the better of them.  But on the whole, people need to get their purchasing power back, and that means digging themselves out the hole.

Money that was mis-allocated needs to be re-allocated.  Frugality helps to accomplish this.

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This isn’t a bad thing, right?  The cash mobs don’t pretend that they’re going to single-handedly bring the country, or even their city, out of the financial doldrums.  If nothing else, they just plan to go out to have a good time:

We’d help businesses grow, we’d make people happy, we’d get stuff for ourselves, have a great time, and maybe we’d get a drink to celebrate afterward.

It’s the economy — a shifting economy

Brick and mortar stores have lost business with the rise of online retailers, most notably Amazon.com.  Booksellers have been the hardest hit — though to be fair, Borders Books and Music basically handed Amazon the keys to the front door! — mainly because Amazon is cheaper, has more in stock, and can be shopped in the comfort of one’s home.  Why settle for a measly 10% off of new books — with a paid membership, no less — when you can get 30% or more off every day, all the time?  Heck, why not go into a place with your smartphone and do a price comparison right there?  That’s what people have begun to do, and it’s not going to stop.

It’s the USP that will save a business — not charitable shoppers

Price, selection, and convenience can’t be the only reason that people buy things.  If it were, businesses would be worse off than they are now.  People must buy things in stores for other reasons.  The businesses that figure out how to capitalize on the advantages of buying from them over buying from Amazon will succeed.  This requires a crystal-clear unique selling proposition; the USP defines concisely the market it serves, and the key advantage it brings to that market.  For example, we have a local hardware shop.  It’s more expensive than Lowe’s in town for most items, but its key advantage is the personalized attention that the manager and staff give to their customers.  This isn’t at all to say that Lowe’s employees are rude when you find them, but it’s far easier to find a very helpful person at our local hardware store.

What’s more, a USP isn’t forever.  It can’t be.  The advantages of one particular store vs. cheaper alternatives will change, and the store has to adapt, branch out, deliver different value.

Local businesses with a rock-solid USP, a heart for customer service, and a keen eye for delivering value that lower-priced competition can’t, will do fine.  Local businesses that don’t will get eaten alive (though maybe a bit later if a cash mob strikes).

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