When the Beatles released the song “When I’m Sixty- Four” I was 16 years old. Being 64 years old was unimaginable to me at that time. Now it is reality.

I started this blog over a year ago with a goal to improve the financial literacy of Millennials, 20 and 30 year olds. I focused on topics that I thought were top of mind to that age group. Millennials need to save for retirement today, but it is just as distant an event to them as sixteen year old me reaching sixty-four.

This year I plan to focus on topics that are top of mind to my age group – 50 and 60 year olds. When do I want to retire? When do I start taking Social Security? How do I sign up for Medicare? Do I need a will? Do I have a good financial advisor? Improving financial literacy is relevant for every age group.

You Millennials can mentor your parents and help them become better prepared for retirement with these future blog postings. Many of the posts from last year are relevant for any age group

Here are a few of my MoneyYOYO rules or truisms:

• MoneyYOYO – You’re On Your Own. Only you can take on responsibility for your financial health.

• The Fred Young Rule – Always save something, no matter the amount.

• Start with small goals. Take baby steps to get you on track to meet your financial goals.

• Major life event changes force you to reevaluate your financial goals

• Big and small sacrifices will be needed to save money.

• Prepare a budget and stick to it.

• Everyone spends money differently. What works for you will not work for everyone.

• Rebalance the allocation of investments in your 401k/403b/457 plans and IRAs once a year. Is the risk level of the portfolio still appropriate for you?

You are getting very close to the end of this long and complicated process to buy a home. Now you have to make sure you make it to closing.

Did you require an inspection in your offer? If yes, you need to schedule a home inspection as soon as possible. Your realtor can recommend some inspectors. Ask for referrals.

Inspections frequently result in a long list of things to fix in your new home. Some items on the list will be minor and some may be major issues. You must decide what should be fixed before closing and what can be put off. Is there anything on the list that forces you to consider if you still want this house?

Secondly, you need to decide how much money you want from the seller to pay for these repairs. A new roof, significant electrical and plumbing issues, and/or structural issues can blow up your deal. The seller may be unwilling to pay the price of the repairs. You may be unwilling to take on major issues in the house. Work with your realtor to develop a negotiating strategy to adjust your offer.

Your lender will require an appraisal to make sure that the offer price does not exceed the market value of the home. If your offer price exceeds the appraised value you will need help from your realtor to develop a strategy to modify your offer.

If the inspection issues are resolved and the appraisal comes in at the right price, you can move forward with your lender to finalize this deal. Even though you are pre-approved for your loan there will always be more questions and more paperwork. You may need mortgage insurance and title insurance.

Involve your lawyer to draw up the deed and look over the paperwork for closing.

It would be helpful if the seller is willing to walk through your new home with you to review the HVAC systems, water and gas shut offs, appliances, alarm system, smoke detectors, sprinklers, etc. Work through your realtor to contact the seller.

Closings require patience. There is a lot of paperwork to go through. You will sign your name and your initials more times than you can imagine. Often, there is an error or a missing document that needs to be tracked down. Always schedule more time for a closing than what you are told.

Remember this is the largest amount of money you will ever spend, so you want it to be right.

After closing you should consider having the locks rekeyed. Do you need a security system?

You will need a homeowner’s insurance policy. Make sure you understand the terms of this policy.

Are you going to move your belongings yourself or are you going to hire someone to help you move?

Make sure you get all the utilities turned on and registered in your name when you get possession of the house.

In a few months you might want to check that your property deed is recorded correctly with the proper authority.

Enjoy your success and enjoy your new home!

Your first step is to meet with your real estate agent and clearly explain what you want:

• Your price parameters.
• The features you want in your home,
• Targeted neighborhoods
• The 3 features that you will not waver on
• The next 3 features are nice to haves

Compromise will be definitely be involved in your choice of a home no matter how much money you have to spend. It is guaranteed that nothing is perfect. Compromise becomes more significant if 2 of you are buying this home.

You may look at many houses before you find the one you want. You may look at 5, 50 or 100 properties before you find the right one. So, create a spreadsheet of properties that you look at. It is easy to forget what you liked or disliked about the property. Develop a ranking process to evaluate the properties you are seeing.

If you are having trouble finding the right home, you may consider changing your parameters.

• Consider other neighborhoods
• Consider older homes
• Is this a starter home or a forever home?
• Consider a foreclosed home

You find the right property and you want to make an offer. Your realtor should put together comps (comparisons) for you of recent sales in the area to give you a better idea of what the price should be.

Are there restrictions in the neighborhood or building that limit the following: pet ownership, fence height, RV parking on the property, running a business out of the home, etc. Do any of these restrictions cause you any worries?

Determine the actual costs of owning this property. Your realtor can get you the last year’s utility costs from the seller. Property taxes should be stated in the real estate listing. Are there HOA fees? Remember to build in other costs such as maintenance, insurance & other costs of owing a property. Do you plan to do any renovation to the property?

What is the top price you are willing to pay for the property? Remember don’t fall in love with your home. Stick to your financial requirements.

Does your realtor think the property will appraise to the purchase price? Or will it be difficult to get that valuation? Dodd Frank Act has added rules that take undue influence out of the equation.

Work with your realtor to plot out your negotiating strategy. Is it a sellers or buyers market? What is the best way to get the home for the price you have named or less?

When do you want possession of the house?   Do you have a good handle on how much closing costs will be? Upfront points and fees should be less than 3% of the transaction.

Alert your team that you have made an offer and if it is accepted the closing process will move quickly.

Good luck.

You have tracked listings on Zillow or other real estate listing websites for several months. You have gone to open houses to take a closer look at properties. You have determined what neighborhoods you want to target. You know how much you can or want to spend. You are almost ready to find your home.

Next, you need to form a team of experts to help you find your home.

The first member of your team is your real estate agent. I know you can find listings on line yourself, but homebuyers need an expert to assist you with the largest purchase you will ever make.

Find an agent who works in your targeted neighborhoods. That agent will know the market and will know when new listings come online. Ask for referrals for your agent. Does this agent communicate well with you? Is his or her style work well with you? Remember the agent works for you.

Make sure you understand how your agent is compensated in real estate transactions.

The next member of your team is your mortgage loan lender. It is useful to get pre-approved for a mortgage loan. You will know you qualify for your loan and you will know exactly how much you can borrow. Also, if you find a home you like, you can move quickly.

You will need to gather documents that your lender needs to underwrite your loan – W2, pay stub, tax returns, and bank and investment statements, etc. Credit history is very important in this process. Do you know your FICO score? You need to be above 600 to begin to qualify for a mortgage loan.

The lender will also be looking at your DTI or your debt to income ratio. The Dodd Frank Act DTI cap is 43%. Other lenders may cap it in the 30% range.

Do you want to lock in the interest rate on your loan? Are you concerned that rates will rise while you are looking? Some lenders charge you a fee for locking in the rate, but it is usually reimbursed at closing.

If you are using FHA for your lending partner, you will need to understand what additional requirements are needed in your home purchase.

You also should consider finding a real estate lawyer to join your team. Buying a house or condo is the biggest expenditure you may ever make. It makes sense to make sure that you have real estate legal expertise. Negotiate the fee with the lawyer upfront.

You have assembled your team. You know what your financial parameters should be. Now you are ready to find the right home for you.

You need to become an informed buyer if you decide to w buy your home. This may be the largest purchase you will ever make, so do your homework!

First step is research the areas where you want to live.

• What neighborhoods do you like?
• Have you walked or driven through the neighborhoods at different times of the day?
• Are there good schools nearby?
• Is there a crime problem in the area?
• Is public transportation nearby?
• What amenities are nearby?

What kind of property do you want?

• A single family home or a condo?
• Do you want outdoor space?
• Do you want a washer and dryer?
• Do you need a great kitchen?
• Do you need parking?
• What style of property do you like?
• Is a view important to you?
• Do you need lots of sunlight in your home?
• Are you willing to take on renovation projects?

Know your rights as a homeowner. Consumer Financial Protection Bureau is a good source of information.

What can you afford? Look at real estate listings of your targeted neighborhoods through Zillow, Realtors.com or local search engines. Research listings for several months to give you a feel for prices, what you like and what you can afford.

How big of a down payment is needed to buy the house you want? The Rule of Thumb is you should have 20% down, but this is probably not realistic. In 2013 down payments averaged 7.5%.

So, how big of a mortgage will you need? There are lots of calculators out there. In addition, you need to make a list of costs that come with home ownership – taxes, utilities, insurance, HOA fees, routine maintenance, trash removal, and repairs. Does the mortgage payment and other associated costs add up to reasonable housing costs for your income and your financial plan?

If you still think home ownership is a viable option, you should research mortgage lenders.

You will need to make the following decisions:

• What is the length of the mortgage loan you want – 15, 20, 25, or 30 years?
• How big of a down payment do you plan to make?
• Do you want a fixed rate mortgage or an ARM (adjustable rate mortgage)? Currently ARMS are only about 10% of the market.

Conventional mortgages are sourced from mortgage lenders – banks and specialized mortgage loan lenders. Conforming conventional loans follow the terms of Fannie Mae and Freddie Mac. Required down payments are from 5-20%.

FHA (Federal Housing Authority) also offers mortgage loans. They have a special program for first time homebuyers. The FHA offers lower credit requirements and lower down payments as little as 3%. The FHA also has a program know as HAWK – Homeowners Armed with Knowledge.

When you are well informed about your needs and the housing market you can begin your search for your home.

 

The joys of home ownership have produced many maxims or proverbial sayings. Here are a few of them: Owning your home confers bliss; Owning your home is an integral part of the American Dream.

There are also maxims for not owning your home: Upkeep of owning a home can kill happiness; House rich & cash poor.

It is clear that not everyone is made happy by the same events. There is also no scientific evidence that home ownership makes you happy. So, which maxims ring true for you?

Some people rent, because they like the lifestyle. You pay your rent and someone else takes care of upkeep and repairs.

Others like to move often or plan to move to another city over the next several years. It usually takes 5-7 years to recoup brokerage fees and closing costs included in buying a home.

The real estate market may be the reason you rent. Your local real estate market is unattractive and renting is a better deal in today’s market. You might live in a locality where renting is the norm.   In New York City 70% of units are rentals.

Others rent, because ownership is not viable for financial reasons. You have no savings for a down payment or emergency funds for repairs and unexpected expenses. You have a credit score that would not qualify you for a mortgage.

Others do have adequate savings and good credit, but they still do not want the responsibility of owning their own home. They prefer the advantages of renting.

People who own their home like the idea of building equity in their home. Some like the current interest rate market and believe it is a good time to get a mortgage. Some like the mortgage interest tax deduction. Others have the “HGTV gene” and love to remodel and redecorate.

No matter if your happiness comes with renting or owning your home, you should be disciplined about how much you spend on housing costs. The rule of thumb is your housing costs should not exceed 30% of your income. Like all rules it is just a general parameter. Today 41 million U.S. households spend more than 30% on housing.

Housing costs in a city reflect location – neighborhood, schools, crime rate, access to jobs, access to amenities, public transportation and others. You are probably spending more than 30% if you live in a location that has the best of all of the above.

There is plenty of room in this world for both renters and owners. You need to determine what is comfortable for you at this time.

Recommendation: A book about the behavioral science of money is “Happy Money: The Science of Smarter Spending” by Elizabeth Dunn and Michael Norton.

 

 

 

 

 

 

In 1987 Calvert Funds launched two socially responsible mutual funds that screened out companies with activities in tobacco, alcohol, gambling and weapons – the “sin” stocks. Investors wanted to align their social beliefs with their investment choices. Today SRI (Socially Responsible Investing) and ESG (environmental, social and governance) investing is a growing segment of investment options.

There are many funds that avoid or favor investments for moral, social, environmental or religious reasons. There are 100 SRI or ESG funds in the Morningstar database, but that number does not include religious oriented mutual funds. The market has grown from around $200 billion in 2007 to over a $1 trillion in 2012.

Fund families tend to specialize in SRI or ESG investing. Some of the largest fund families are Parnassus, Domini and Walden. Beyond the sin avoidance categories, the industry has widened out to avoid pornography, poor labor practices, fossil fuels, and countries with poor social and environmental records. Other funds have screens that favor shareholder advocacy, community investing, companies that consider social and environmental issues in their decision-making, countries with good social and environmental policies. Some funds align with the principles of religious beliefs. Other funds are focused on one issue such as alternative energy, environment, clean water, etc.

Most of these SRI and ESG fund families also use shareholder advocacy programs, such as letter writing, proxy voting and resolutions to influence corporate behavior.

Socialfunds.com is a good information source on SRI and ESG funds. Sustainablebusiness.com, Morningstar and Lipper also have information on these funds.

A few funds in the wide variety of SRI and ESG funds are:

Portfolio21 – ESG fund family

Amana Funds – Islamic principles

Praxis Mutual Funds – stewardship investing

Eventide Funds – biblical principles.

Green Century – Environmental fund family

Guggenheim Solar ETF – solar energy companies

WilderHill Index – Clean Energy Index 

So you can invest with your conscience. As always, it is up to you as the CFO of your life to do the research on your investment choices.

There is no good evidence that SRI and ESG funds as a group do better or worse than the market in the long run. Some funds outperform the market and others do not.  Investors need to be satisfied with the balance between social, moral, religious beliefs and financial considerations.

Kowalczyk reminder: If you enjoy this blog, please Follow it, Like it on Facebook or recommend to your friends. 

Kowalczyk reminder: I tweet a topical article several times a week @moneyyoyoblog.

 

If your only long-term savings are in your 401k/403b/457 plan, you choose from investment options your plan provides. Your employer should provide education about those options. Ask your Human Resources representative when the next session is scheduled. A limited universe makes the investment selection manageable.

If you have an IRA or other savings the universe of investment options is much greater. You can research investment options yourself and make reasoned decisions. Mutual fund companies, brokerage firms and others have websites that offer information to help you become an informed investor.

If you have friends, family and/or co-workers that have an interest in investing, form an investment group where you can pool your knowledge and talk out your questions. Discussions of investment books and articles within this group can improve your financial literacy.

There is also the pool of parents, siblings, and close friends who are experienced in investing their money. Remember that you do not act on investment advice until you have done your own research. Your income, spending habits, time horizon and risk tolerance are unique to you and don’t always match up to someone else’s investing strategy.

Many people are overwhelmed by the vast amounts of information out there on investments and they want the help of an expert advisor. The best way to compensate a financial advisor is the payment of an annual flat fee rather than a percent of assets for advice. But with limited savings it is difficult to get personal advice at a reasonable price.   For example, if you have limited assets a $2000 annual fee for financial advice is too expensive. 

So a number of companies have sprung up to give you financial advice that costs you less money.   Many of these companies offer more automated investment advice versus personal advice. Others pair you with a planner in your area. Here is a list of some of these websites 

Betterment                                  Wealthfront

Learnvest                                    PersonalCapital

WiseBanyon                                 XY Planning Network

RebalanceIRA                             MarketRiders

No matter if you go solo on your investment choices or get some help, you still need to be the CFO of your life. You cannot give someone else total control of your investment decisions. You should understand the decisions and be comfortable that the investments match up with your goals and risk tolerance. Don’t be afraid to ask any question.

Kowalczyk reminder: Common mistakes of investing are: trading too frequently, Getting swept up in market euphoria, Freaking out with market changes, Putting all eggs in one basket, Failing to rebalance regularly

Warren Buffet of Berkshire Hathaway maxims for stock investing: Stick with quality names and brands, Buy & hold is often the best strategy, Don’t be swayed by daily market fluctuations, Bearish markets present buying opportunities, Diversity and keep trading costs low

 

 

 

 

 

 

Do you understand the difference in a conservative risk strategy or an aggressive risk strategy? 

In very simple terms cash and money market investments are the most conservative investments. They are conservative, because the objective is to conserve your wealth. You are not risking the principal, so you are paid a very small interest payment. If you need your money in two years to buy a car, a cash or short-term investment strategy may be appropriate. 

Once again in very simple terms investment grade bonds usually carry moderate risk, because a large part of a bond’s return comes from the coupon or interest payment. 

Equities are more aggressive investments.  The return on equities or common stock carries higher risk, because most or all of the return comes from the change in value of the stock itself.   

The goal of both bonds and equities is to grow your investments knowing that you will be taking some risk to your principal. The economy is volatile and bond and stock markets go up and down.

After the recent severe financial crisis, many retail investors lost trust in the investment markets. People were painfully affected by the financial crisis through their investments, their job and/or their home.

Studies show that there is a lack of trust in the investment markets across all ages and wealth levels. A recent study showed that retail investors globally were holding 40% of their assets in cash versus 31% several years ago. So risk levels have become more conservative.

An ICI Investment Company Institute study showed that 74% of people under the age of 35 stated they were unwilling to take above average or substantial risk with their investments. Another study stated that people between the ages of 22 and 32 said they chose to put 75% of their retirement savings in cash and bonds and only 25% in equities.

After living through the financial crisis a conservative approach to investing is understandable. However, if investors’ reluctance to invest in the stock market continues many investors will come up short in retirement.

Let’s go through a very simple example. If you are age 35 and you have $10,000 in savings. You invest another $5,000 each year for 30 years. If you hold these funds in your savings account and earn 1% a year your funds will grow to $189,150.

If you take the same $10,000 plus deposits of $5,000 each year and invest in assets that yield a 5% return per year, your assets will grow to $392,000. Obviously investment markets do not return 5% every year, but over 30 years do you believe the markets can return on average 5% each year?

You need to determine what level of risk you can live with and try to balance that out with the amount of return you want to earn.

Your age, your time horizon for the money, your current financial health, your comfort level with risk, and your knowledge of investments impact the amount of risk you are willing to take.

Determine your own financial identity – what are your goals and what is your investment personality? Do your investments reflect that strategy and the level of risk you should be taking?

Some studies have shown that people do not have fear of the investment markets, but they leave their money in savings, because they are fearful of choosing the wrong investment options.

Now you might know the investment mix of equities, bonds and cash you want in your portfolio, but how do you choose the right investments in each of those categories? You may need investment advice. 

Kowalczyk comments: There are lots of rule of thumbs out there on investment mix. One simple one is 100 minus your age to determine an appropriate mix of equities vs. fixed income. Another one is just split your portfolio into 50% bonds and 50% equities.

 

There are two primary methods of investing. One method is active management where the investment manager attempts to beat the market with investment strategy and actively buying and selling investments.

The second method is passive management where investment managers structure investment vehicles that attempt to mirror market indexes giving you the market return of whatever index you are tracking.

Active management is hands on management and costs more than passive management. Index funds, an example of passive management charge an investment advisory fee of around 1/5 of a percentage point for managing your funds. An actively managed fund can charge 1-2% on your investments. To justify the actively managed fee your investment return must out perform the market to make that fee worthwhile.

The actively managed market remains the largest part of the investment management market. So, there are many people that believe they can choose investment managers that can consistently beat the market.

If you are not sure you can choose the right investment managers, another approach to investment strategy is investing in passively managed funds that give you a market return and risk at a lower cost.

Two primary passive investments, Index funds and ETFs have become a larger and growing part of the overall investment market.

Vanguard created the first index fund for retail investors in 1975. John Bogle, the founder of Vanguard, is a strong believer of “you get what you pay for.”

Index funds are mutual funds that are structured to track the return and risk of a major index such as the S&P 500. Index funds are around 11% of the market.

ETFs or exchange traded funds are securities that track an index, but trade like a stock and have become as large a segment of the market as index funds. ETFs are 70% controlled by 3 firms, BlackRock, State Street, and Vanguard.

Investment advisory fees are only one type of fee that is paid by investors. There are also continuing fees and expenses such as fees for record keeping, taxes, legal, accounting, and audit fees.

Mutual Funds publish an expense ratio that is a ratio of expenses divided by the dollar value of the investments. Morningstar and Lipper both track fund expense ratios to help give you some comparisons. Your 401k/403b/457 plan also publishes the expenses it charges you to manage the fund.

So, do you know how much of your portfolio is actively managed or passively managed? Do you know what expenses you are paying on your investments? Are your investment returns exceeding the expenses you are paying?

Kowalczyk recommendation: Investopedia is an easy way to look up investment terms.

Kowalczyk comment: Many young people gravitate toward target date funds in their 401k/403b/457 plan. These funds automatically keep your account balanced between stocks and fixed income investments to an age appropriate level. These funds start out with a higher percentage of riskier assets when you are young and adjust to a more conservative mix as you near retirement.

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