Get Ready Millenials – Mom and Dad are Coming Home, to your Home

Hey millennials, glad that those in your generation, who came home after college and stayed another ten years, are finally getting their own place.  Sure, Mom and Dad are footing the down-payment, but at least you’re finally starting to venture out on your own like your parents probably did when they were 18 or maybe 21.  I’m sure that plenty of you also moved out and got a modest apartment when you graduated college or high school like your parents did – it is unfair to stereotype an entire generation – but there are more millennials living at home at age 28 than there were in any of the past generations, at least since about 1950.  There are also a lot of 30-somethings who still have their parents paying their phone bills or helping with other expenses, even when they are adult children living mainly on their own.

Many of us in GenX were worried about this development of delayed maturity.  The hashtag, #adulting, is truly assinine.  Note that Jack Daniels started his brewery at age 14, so it is possible to become self-sufficient and even do some pretty remarkable things way before you turn 25.  We wondered what would happen when your parent’s generation started to retire and people were needed to do all of the important jobs that they had done.  I’m sure your grandparents were also worried about who was going to pay for their Social Security if no one was working.  Also, what would happen if your generation never grew up and moved out before your parents retired or died and were no longer able to take care of you.  Solar Charger, 8000mAh 3-Port USB and 21LED Light Solar Power Bank Portable Battery Cellphone Charger, Solar Panel for Emergency Outdoor Camping Hiking for IOS and Android cellphones (Black)

But this morning I realized that we were worrying about the wrong people.  I’m sure that while 35 is the new 20, eventually those student loans will be paid off and you’ll be working your way up the corporate ladder.  I know that many of you are just waiting for your parent’s and grandparent’s generation to retire and get out-of-the-way so that you can advance.  I’ve also got to believe things like having kids will make you want to get your own space and a refrigerator on which to hang artworks from your elementary schoolers.

The real issue is your parent’s generation.  They don’t have anywhere near enough money to continue to live on their own all the way through a 30 or 40-year retirement that the are expecting to have.  To generate a $50,000 per-year income, which is probably about what it would take for them to continue to live in their home and continue to live about how they are now, they will need to save up about $1M by the time they retire.  Really they should have about $2M since there are also medical bills and a lot of retirees want to do some traveling when they retire.  The trouble is that the average person approaching retirement has about $135,000 saved up.  And that is the average, which includes some people who have several million saved tipping the scales.  There are a lot of people who have $50,000, or $20,000, or $2,000 saved beyond their home.

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In the past, many in their situation would have had the option of selling their home and moving somewhere cheaper.  If they were to move to a small apartment in a safe but unspectacular neighborhood, and not a condo on the beach or in a high-rise in downtown, that would help them get maybe a decade or more before they ran out of money. The issue is that a lot of them still don’t own their home.  They refinanced their mortgage and took out money to put you through college, or upgrade the kitchen, or pay off your student loans or credit card bills.  Many people bought bigger homes in their late forties or fifties and started all over again with a 30-year mortgage.  That means their home won’t be paid off until they’re 80, and they’ll only have maybe 20-30% equity when they hit retirement age since you pay mostly interest at the beginning of a loan.

So what happened with your parent’s generation that didn’t with your grandparent’s?  The issue is that your grandparents had a pension plan where their employer put money away for them and paid them less in salary.  Because they had a lower salary, they had smaller homes, took fewer vacations and cheaper vacations, and cook at home most meals.  Your grandmother is probably a much better cook than your mom, and that is because she has had 30 years of practice.  She didn’t do take-out unless it was a casserole she took to a church potluck.  Your grandparents also probably didn’t have two cars, the expense of two sets of work clothes, the daily lattes, and the cost of childcare.   They also had college tuition costs of about $3,000 per year in today’s dollars since they could not afford any more than that so universities kept frills to the minimum and didn’t ask for high tuitions.   In exchange for this more meager living, they had a pension plan waiting for them at retirement.

Your parents instead got higher salaries with the expectation that they would then save up for their own retirement.  This was actually a better deal since the returns on pension plan investments aren’t as great as returns one can get investing for oneself since the pension plan manager needs to be conservative (and get lower returns) all of the time to ensure there is enough money to keep the payments for current retirees flowing, but an individual can be aggressive during the first 30 years and then shift to a more conservative mix near the end.  The trouble is that your parents used the extra salary to buy bigger houses, take more lavish vacations, pay high college tuition costs and living costs for their college students, and eat every meal out.  Retirement was always something that they would worry about later when they didn’t have this need or that crisis to take care of.

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With $130,000 in savings, living in a standard home even without a mortgage, they’ll probably be able to eek out 5-7 years before they’ll run out of money.  This is assuming that they don’t have any major medical expenses, don’t travel the world, and that the stock market cooperates to a good extent.  A bear market, a mortgage payment, or a big medical bill could cause them to run out much sooner.  And what will happen then?

The most likely thing is for them to give you a call.  At that point you’ll be over at their place, having a big yard sale to sell off all of the stuff they’ve collected over the years (some of it will end up at your house), then they’ll be moving into that home office, guest bedroom, or workout studio you’ve made at your home.  Maybe you’ll still be living at your parents home, so you’ll just take over the mortgage payments and the grocery bills.BarksBar Original Pet Seat Cover for Cars – Black, WaterProof & Hammock Convertible (Standard, Black)

It will be nice to have them around to help out with watching the kids, assuming they’re interested in that.  But the house will suddenly feel a lot smaller, and there will be the inevitable power struggles and in-law struggles that come with multi-generation households.  Meals out will become a lot more expensive, as will vacation since you’ll be getting extra hotel rooms and tickets.  This is not a terrible arrangement, with many advantages such as your children getting to really know their grandparents, the ability to share some of the household chores (assuming your parents don’t decide it is your turn to take care of everything), and an easy transition when they become old enough to need a lot more help with things.  It is actually very common in Asian countries, especially in areas where housing prices are astronomical, and was the standard in the US for many families when most people were farmers.

Still, you had better start thinking in terms of how you will handle having a full household, both in managing expenses and living arrangements.  In the next post, I’ll go into some steps to take to get ready, starting with having a frank conversation with your parents about their finances.

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Have a question?  Please leave it in a comment.  Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

A Simple Way to Save Thousands on your Mortgage

HousePerhaps one of the hardest things to understand is an amortization schedule.  In setting up a mortgage people talk about things like points, prepaid interest, principle payments, and other aspects.  There are companies out there that claim they can switch you to a 26 week mortgage payment (for a fee) and save you thousands.  Unfortunately, this lack of understanding makes people pay thousands more than they need to on a mortgage.  Here are some things to know before you sign on the dotted line.

Avoid the 30-year mortgage if you can

Perhaps the worst mortgage in existence (assuming you don’t live in California where they have 50-year mortgages) is a 30-year mortgage.  If one faithfully pays the monthly payments it will take about 20 years to reduce the balance of the mortgage by half.  The reason is that in the beginning the whole value of the house is owed, so the amount of interest that builds up each month is large – most of the payment.  As the mortgage is paid off the interest that builds up is less and less, meaning that the payment includes more and more principle – you’re paying off the house and reducing the loan balance faster.

Pay more early – you’ll save on interest later

The trick to saving thousands is to pay more at the beginning.  Making extra payments during the first few years of a mortgage will takes years off of the schedule.  Given that each year’s payments will be $10,000 or more, this would mean saving tens of thousands of dollars.  Making extra payments at the end will make little difference.

A good way to do this without a lot of math is to look at your mortgage statement and study the principle and interest that was paid during the previous month.  The amount of principal that is paid during the current month will be slightly more than the previous month.  Likewise, the amount of interest paid will be slightly less (since the total of principal and interest adds up to the payment, which is constant).  For example, assume a $1000 payment was made, of which $50 was principal and $950 was interest.  The next month the balance due would be reduced by just $50, despite the $1000 payment.  During the next month, $55 might be principal and $945 interest.

Putting a plan into action

So how do you put this information to use?  If you pay an additional amount the next month equal to the principal amount from the previous month, you will be reducing your payment schedule by one month.  In our example, instead of sending in $1000, send in $1050.  By adding just $50 to your payment, you have avoided one $1000 payment.  That $50 has just saved you $1000!  When looking at things that way, it gets a lot easier to pay extra.   If you could pay an extra $1000, you would take almost 20 payments, or almost two years off of your mortgage.  This would be a savings of about $20,000!

As the mortgage starts dwindling the amount of principal paid off with each payment will increase and the interest decrease.  During the last few years your payment may be $950 in principal and just $50 in interest.  At that point extra payments make little sense since paying an extra $950 will just save you $50.  Sending extra cash to a mutual fund or stock account may make more sense when the mortgage is only a few years from being paid off.

It’s easiest to pay more when it does the least good

Sadly, as with all things, you’ll probably have a bigger income near the end of your mortgage and be more able to make extra payments than at the beginning.  The same holds true with savings where the amount you invest when you are young with a low-income makes a lot more of a difference than what you invest when you are old with a high income.  Luckily though, even if you are only able to send in an extra $50 per month at the start of a mortgage, it will make a big difference.

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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing

Is your Home an Investment?

We often hear that our home is our biggest investment.  In fact, many people are told to buy the biggest home that they can afford since that is the path to financial freedom.  Really?

In fact, a home is often a liability.  There is upkeep, property taxes, and insurance.  You forget about all of the money spent on paint, lawn equipment, plants that die and need to be replaced, and repairs.  And, if you want to be fashionable, there are the kitchen and bathroom upgrades every ten years or so.

Still, when you reach retirement age, assuming that you have paid off your home, you now have this big stack of cash you can get if you sell your house and move somewhere cheaper.  For many people this will be all of the money they will have.  So it must have been a good investment, right?

Well, in my case I have lived in my home for about 13 years.  In that time it has increased in value by about $34,000, which sounds like a lot of money.  But here is a list of my expenses:

Property Tax: $23,400

New kitchen floor (linoleum) $1500

Windows (because the old ones leaked) $3000

New Roof: $5000

New AC/furnace:  $3000

Replace patio (built wrong, flooded crawl space): $6000

Yard upkeep: $500 per year = $6500

Home Upkeep: $500/yr = $6500

Property Insurance:  $13,000

Total: $54,900

Note that both the yard and home upkeep are probably a bit low.  Also note that there are no expensive kitchen remodels or the addition of a whirl pool tub or anything.  Everything we have done has pretty much been replacement of what has worn out.

So, over that 13 years, even with only fixing what needed to be fixed, I have a net loss of $33,900 (the difference between the amount of money I’ve made on the place from appreciation and my costs).  Of course, I have saved money on rent, right?

Well, if I had rented an apartment for about $500 per month, which would rent a fairly nice 2 bedroom where I live, I would have spent about $72,000 in rent, so I have saved about $38,000, right?

Unfortunately, I have not included the interest I paid on the loan.  I took out the lowest interest loan I could find, put 20% down, and then refinanced into a 15 year loan with a lower rate when I could.  Most people would have put 5% down, paid more in interest, and paid mortgage insurance.  Still, I paid about $54,000 in interest, so that more than wipes out my whole savings from not renting!

Of course, I did pay a lot less owning than I would have paid had I rented an equivalent house for all of that time, but if I were renting I probably would have been happy with a 2 bedroom apartment.  I would have also saved all of that cost for yard work and repairs.  I also have lived very frugally compared to how most homeowners live.  Many people by now would have redone the kitchen twice and added onto the home, probably spending about $80,000 in the process.  And yet, I still have not gotten a substantial return on my “investment.”

The point here is not that you should not buy a house.  It is that you should realize a home will probably cost you more than you get out of it when you sell.  It is true that you will build up a lot of equity, but you will put far more than that into the home.  You should therefore only buy as much home as you need (or, once you have enough wealth that it doesn’t matter anymore, as much home as you want).  Make your investments in things that you actually make money on – not in your home.

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Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.