A New Paradigm for Home Ownership

As long as I can remember, the conventional wisdom for housing was: 1)a home is a good investment; and therefore, 2) own intead of rent. There have been articles about how a home is a "safe" investment that "always" appreciated on an inflation adjusted basis. Renting meant throwing away good money, while owning and paying a mortgage was financially "smart," due to tax deductions and saving through building equity.

The real estate crash of 2007-2009 has significantly revised the conventional wisdom for housing. A home is no longer a guaranteed appreciating investment. For now, I expect housing prices will be flat at best and probably declining for several more years. As more homeowners walk away from underwater mortgages, the growth in available housing supply will keep home prices from rising.

Renting now appears to be the smarter option, especially in markets where home prices have decline significantly. Homeowners can sometimes rent equivalent houses for much less their monthly mortgage payment.

Here's my new paradigm for home ownership:

A home is a place for me to live. I want a home that provides shelter and amenities that make our life comfortable, including good location, good schools and good neighbors.

It's not an investment. It's not retirement savings. It may or may not appreciate. It's probably a liability, since it consumes about 25% of our monthly expenses even though we've paid off the mortgage. Property taxes, untilities, and insurance are still pretty expensive :-)

Owning versus renting is a lifestyle decision. I choose owning because I prefer the lifestyle, even though it may be more cost effective to rent. Owning offers stability while renting provides flexibility. If I were much younger and without children, I would probably be renting.

It will probably be at least 5, and maybe 10, years before our house gets back to the purchase price of 2003. However, since we think of our house only as a place to live, we won't worry about its value until we sell, which is at least 15 years away.

For more on New Beginnings, check back every Sunday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2010 Achievement Catalyst, LLC

Had Enough Change Yet?

"You can fool some of the people all of the time, and all of the people some of the time, but you can't fool all of the people all of the time."- Abraham Lincoln

A lot of Independent voters hoped for a new approach to government with the election of President Barack Obama. Promises of bipartisanship, transparency and elimination of earmarks swayed many Independents to vote for Mr. Obama. After all, they may have thought, what could be worse than the years under President George W. Bush?

Well, we have got change, but not the change that many thought was promised. After a year, we have hyperpartisanship, more government opaqueness, and backroom political deals becoming the norm for our legislative process. While there are some that believe the end will justify the means, I think there may be many more that are appalled at the direction of the change.

A case can be made that Independent voters in Massachusetts have shown they've had enough change. Or perhaps, as the White House has argued, the Massachusetts' election of Scott Brown is not a referendum on President Obama's agenda.

One way to find out is for President Obama to continue pressing his health care reform legislation. I hope he does, so that the 2010 mid term elections can be a referendum on his agenda :-)

For more on Reflections and Musings, check back every Saturday for a new segment.

This is not financial or political advice. Please consult a professional advisor.

Copyright © 2009 Achievement Catalyst, LLC

How Living Only on Base Salary Funded our Early Retirement

In the 10 years prior to retirement, we tried to live on less than 80% of my take home salary. By the time I retired, we had a comfortable lifestyle on a such a budget. However, during that time, I had other compensation, which we consciously ignored and put entirely into our retirement savings. Here were the compensation elements that we did not include in our spendable income:

Stock options. In 1998, I became eligible for 10 year stock options, which vested after one year. Later options vested after three years. Although the options had positive value after vesting, we chose to hold the options until expiration, and and planned to use the proceeds to fund our retirement savings.

When I retired early in 2007, two option grants were worth more than my base salary, and several were worth more than two thirds my base salary. Even with the market pull back, two grants are worth about 90% of my base salary and several are worth a little over half my base salary.

Bonus. In 2000, I became eligible for an annual bonus targeted at 15% of my salary. In the ensuing years, the bonus ranged from 7% to 25%. At first, I took the payment in cash and put the funds into savings. In the third year, I began taking a portion as deferred compensation, in the form of 10 year stock options. After five years, I chose to take all of the bonus in the form of stock options.

Many of my colleagues would use their bonus to buy a new car, pay for vacations or expand their lifestyle. Our decision was to use the money to fund our retirement.

Cost of Living Adjustments. During this same period, we overseas for a several years and were given a cost of living adjustment equal to about 50% of my take home pay. Although we needed the funds initially, we were able to learn to live mostly on my base salary and save most of the adjustment. The secret was to eat and live like the locals, which significantly lowered our daily expenses.

For reference, our housing was paid by the company separately and not part of our cost of living allowance. This was helpful since housing cost seven times more than what we paid in the U.S.

Living well below our means significantly contributed our capability to retire early. When I retired early in 2007, the options were valued at six times my base salary and our savings were nine times my base salary. This was added to the company retirement plan, which provided eight times my base salary, for a total of 23 times base salary.

Of course, the financial crisis has negatively impacted our savings, reducing are savings to 16 times base salary. Although significantly down from the peak, the amount saved is still sufficient to support our living expenses in early retirement.

For more on The Practice of Personal Finance, check back every Wednesday for a new segment.

This is not financial or retirement advice. Please consult a professional advisor.

Copyright © 2010 Achievement Catalyst, LLC

Links To Carnivals From February 16 - 22, 2010

Here are the links to the Carnivals in which My Wealth Builder participated from February 16 to 22, 2010:

Money Hacks Carnival #104

Carnival of Financial Planning #129

Economy and Your Finances Carnival

Carnival of Money Stories 2

For some interesting articles from the blogosphere, check out these Carnivals and give the hosts some recognition for their hard work.

For more on Ideas You Can Use, check back every Tuesday for a new segment.

This is not financial, investment, or economic advice. Please consult a professional advisor.

Copyright © 2010 Achievement Catalyst, LLC

Our Approach to Buying a House

I've only purchased two homes and am definitely not an expert buyer. However, I believe our conservative approach has enabled us to pay a reasonable price, get some appreciation, and not lose too much during the housing crash. Here were the key elements to our approach:

Consider an appreciating neighborhood. Within every city, county or region, there are appreciating, stable and depreciating neighborhoods. In some cases, different types of neighborhoods exist close to each other, e.g. an appreciating neighborhood next to a stable or depreciating neighborhood.

After relocating for my first job, I rented for 2 1/2 years before purchasing a home. I eventually bought in a city neighborhood that was highly desirable among young professionals and had been for several decades. After living there for 16 years, we sold the home for about 2 1/2 times the price that I paid.

For our second home, we chose to live in the suburbs, in a highly rated school district. While we didn't have children at the time, we were planning to adopt and wanted the opportunity for a great public school education. Homes in the school district tended to appreciate more than ones in other school districts. Although affected by the housing crash, I think our home value decline was mitigated somewhat by the strength of the school system.

Consider prices at the lower end for that neighborhood. To me, it's better to buy the lowest priced house in a neighborhood versus the highest priced house. I believe the appreciation potential is better for a house at the lower end, as it will be pulled up by the other houses in the neighborhood. Also, I believe the lower priced house will have higher potential for faster resale.

In both cases, we purchased a house the was at or close to the lowest price in the neighborhood. Our current home is the smallest house in our neighborhood.

Take out a 30 year fixed mortgage, with a large down payment. In my younger days, I preferred a 15 year fixed mortgage, with a minimum down payment of 20%. However, for our latest purchase, we decided that a 30 year fixed mortgage, with no pre-payment was a better option, since it gave us more financial flexibility. In addition, we put 40% down, which kept our monthly payment much lower.

By choosing to make a larger down payment, we consciously focused on homes priced 20-30% less than what we could afford with a smaller down payment.

Even though our home value has probably declined about 20%, we are happy with our choice because of the neighborhood and the quality of the schools. We have lived in our current home for almost seven years and, for now, plan to stay for at least another ten. In the long term, as the housing market recovers, I expect a faster recovery for our neighborhood, which should allow us to recoup our losses.

For more on Strategies and Plans, check back every Monday for a new segment.

This is not financial or real estate advice. Please consult a professional advisor.

Copyright © 2010 Achievement Catalyst, LLC

Staying Even is the New Up

In 2009, I was happy just to not lose money. Having money in CDs and low interest rate money market funds was just fine with us. Buying stocks with low volatility that paid dividends was great. Owning a house that showed zero appreciation was acceptable. Here are some examples of staying even being good:

Keeping the same salary, instead of getting hours or benefits reduced.

Keeping a job, versus getting laid off.

Business revenue flat versus declining.

Gone are the days of big returns on stocks and housing. No longer is changing jobs routinely resulting in a raise. Now, not losing is considered a success.

With the economic recovery likely be slow, I believe that expectations for financial improvements will continue to be low. Unfortunately, for 2010, staying even will probably still be the new up.

For more on New Beginnings, check back every Sunday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2010 Achievement Catalyst, LLC

U.S. Debt and Deficit

Ever wonder how bad the U.S. deficit and debt are? I came across the U.S. National Debt Clock a couple weeks ago. To me, the U.S. deficit and debt are pretty bad. Here's some information from the debt clock as of 2/20/2010:

Over $12 trillion gross national debt and growing

Over $40,000 debt per citizen and growing

Budget deficit of about $1.4 trillion for 2010

In the short term, it doesn't look like the U.S. deficit and debt situation is going to get better. To me, the long term won't be any better unless we make some significant reductions in what government spends. Otherwise, the U.S. may find itself in a financial situation equal to or worse than Greece.

Simply, we need to make the difficult choices now or suffer worse consequences later. I believe it's time we elect officials who are committed to reducing the national debt and improving the economy at the same time.

That would be change I can believe in:-)

For more on Reflections and Musings, check back every Saturday for a new segment.

This is not financial or economic policy advice. Please consult a professional advisor.

Copyright © 2010 Achievement Catalyst, LLC

Contracts - Read and Understand before Signing

I am a big believer that I should read and understand every document before signing, especially when related to financial matters. I never assume that signing is just a formality. That's because signed contracts are usually legally binding, requiring those that have signed to abide by the written elements. Here are my principles for signing a contract:

Read and verify every page. To me, it's important to confirm that what both parties agree to do and not do are documented in what I sign. If something is missing, I ask that it be included. If there is a verbal agreement not documented, I ask that it be included. If the document doesn't reflect what I believe is the agreement, I won't sign.

In our last house closing, I read every document before signing. I was apologetic, since it doubled or tripled the time for our closing, but no one refused my right the read the documents. Fortunately, everything was as we had agreed, and the closing was completed.

Understand the documents. Most contracts are written in terms that I can understand. If I'm not sure about something, I will hire an expert to confirm my understanding. When spending thousands of dollars, it's worth investing a few hundred as insurance against an error.

For most service or purchase contracts, I feel I am able to read and understand the contract myself. A couple years ago, we invested in a partnership, and I hired a lawyer to confirm that our liability was limited to only our investments.

Sign only when I agree completely. If I do not believe the contract properly represents my purchase, I won't sign, even if it means I lose the item. To me, it's better to not sign, than to enter into a contract with unfavorable terms for me.

Of course, I have made my share of mistakes with service and purchase contracts in the past. Once, I was given an additional service verbally by a salesperson, which was not honored by the owner because it was not in the purchase contract. However, based on experience, I have learned to either include an item in a contract, or to not expect to get the item without paying an additional cost.

For more on The Practice of Personal Finance, check back every Wednesday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2010 Achievement Catalyst, LLC

Links To Carnivals From February 10 - 15, 2010

Here are the links to the Carnivals in which My Wealth Builder participated from February 10 to 15, 2010:

Boomers & Seniors - News You Can Use Carnival

Carnival of Financial Planning #128

For some interesting articles from the blogosphere, check out these Carnivals and give the hosts some recognition for their hard work.

For more on Ideas You Can Use, check back every Tuesday for a new segment.

This is not financial, investment, or retirement advice. Please consult a professional advisor.

Copyright © 2010 Achievement Catalyst, LLC

Six Reasons to Consider Consulting a Tax Advisor

When I did my first tax return, it was relatively easy. Today, with numerous deductions, allowances, and tax credits that seem to change every year, a tax return is much more complex. Not applying the tax code properly may have negative financial consequences, either a lower refund or an incorrectly claimed higher refund. Although I believe many people should be able to do their own tax returns correctly, I think there are six situations when it may be worth consulting a tax advisor, because of the complexity of interpreting the tax laws.

Here are my six reasons:

1. Claiming dependents other than biological or adopted children who lived with taxpayer more than 6 months. To claim another blood relative (e.g brother/sister, parent, grandparent, uncle/aunt, etc.) or non-relative (girl/boyfriend, partner or roommate), the IRS has defined several specific criteria that must be met to qualify as dependent. In addition, claiming a biological or adopted child that resided with the taxpayer less than six months requires approval through form 8332.



2. Taxpayer, spouse or dependent is attending school part or full time. In 2009 and 2010, there are threeeducation tax credits and one deduction which depend on whether the student is in a degree program, attending more than half time, or attending for work reasons. Form 8863 is needed to claim tax credits for education expenses. Form 8917 is needed to claim a tuition and fees deduction.



3. Purchased a first home. Of course, there is the first time home buyer's tax credit for 2008 through mid 2010. However, even without the tax credit, home ownership often enables being eligible for itemizing deductions, including charitable contributions, for the first time. In order to be claimed, the IRS requires documentation in the form of receipts, 1098 statements, or other payment records.



4. Starting a small business. Starting a small business is already challenging. A tax advisor can help ensure the tax related aspects are done correctly, e.g. expenses, depreciation and documentation. In addition, understanding the tax implications of a small business can help the owner make better business decisions, e.g. how much to charge clients.



5. Income under $43,279 and claim one or more dependent children under age 19. Earned Income Credit (EIC) provides refundable tax credits to taxpayers below certain incomes thresholds, and can provide up to $5028 of financial assistance for 2009 tax returns. According to Wikipedia, between 3.5 to 7 million households that may be eligible for EIC do not claim the credit, foregoing an average of $1766 in tax refunds.
   
   The maximum incomes eligible for EIC are $43,279, $40,295, $35,463, and $13,440 for 3 or more, 2, 1 and 0 qualifying children, respectively.



6. Thinking about a retirement plan early withdrawal. Pension, 401(k), or IRA early withdrawals may be subject to income tax and a 10% penalty. A tax advisor can help identify possibilities to minimize the penalty, using form 5329.

Here's my list of possible tax experts to consult:

Accountant. This level of expertise is most helpful for people starting a small business, who may need ongoing tax advice. Since accountants charge on an hourly basis, this option can be the most expensive. Some accountants provide a free initial consultation, e.g. one hour, to attract new clients.

Tax preparer. This time of year, there are many tax preparation companies offering their services. Find someone who is able to provide advice, in addition to doing taxes. Then schedule a 2-3 hour appointment to complete a tax return and get advice on one's tax situation.

Tax preparation companies vary in expertise, knowledge and availability throughout the year. This option can be less expensive than an accountant, but there is high variability in expertise and knowledge among tax preparers. To me , it is important to find one that has knowledgeable tax preparers, based on experience and training, and that are available after April 15.

IRS help line, 1-800-829-1040. The IRS provides assistance to taxpayers with questions at this number. The good news is that the cost is free. The bad news is the accuracy rate is 66% based on a 2005 quality survey. When using this service, writing down the name and the ID number of the person who provides an answer may be one way to prove the IRS was consulted, in case the guidance is not correct.

I believe the tax laws are only going to get more complex as the Obama administration and the Democratic Congress continue to make changes. The difference between a correct interpretation and an incorrect interpretation of the above six scenarios can be hundreds to thousands of dollars in a tax refund. For such cases, it is worth considering consulting a tax expert for advice.

Disclosure: During tax season, I have a part-time job as a tax preparer. Therefore, my views may be biased :-)

For more on New Beginnings, check back every Sunday for a new segment.

This is not financial or tax advice. Please consult a professional advisor.

Copyright © 2010 Achievement Catalyst, LLC