Don’t Drown In Sunk Costs

January 23, 2013
This activity makes no sense. Unless the guy in the Oxfords is placing the penny down to see what cheap soul picks it up.

This activity makes no sense. Unless the guy in the Oxfords is placing the penny down to see which cheap soul picks it up.

 

It’s amazing how many people will congratulate themselves for such money-saving machinations as calling the cable or phone company to get their monthly bills reduced by a buck or two, yet won’t expend similar effort to save themselves tens of thousands. Here’s an example:

You borrowed $200,000 to finance your house 5 years ago at 6.57%, after putting 20% down. Should you refinance?

Yes.

30-year rates are now 3.47%, 15-year rates 2.84%.

Your balance should now be $187,124.51. (That’s right. After 5 years, 94% of your balance remains. Pretty impressive, huh? Sorry, but this is how interest works. It’s why you should be a lender.)

You can pay 6.57% on the $187,124.51 for the next 25 years, continuing to make monthly $1,273.36 payments. But if you refinanced, you’d pay:

$1,277.90 a month for the next 15 years. For an extra 4½ bucks a month, you could burn your mortgage a decade quicker. Would that be worth it?

Depends on how much refinancing costs are.

We’re assuming that your credit is good. If your credit isn’t good, refer to page 33 in Control Your Cash: Making Money Make Sense and treat consumer debt like the hantavirus that it is. If you’re carrying balances on your credit cards, balances that you pay the minimum on and don’t expect to pay off for years, dig deeper. You’re an individual, not a government. You can’t do this indefinitely, and better you endure brief sharp pain than enduring dull pain. In fact, you shouldn’t even be wasting your time reading blog posts. Go out and get a second job, and stop spending money beyond the essentials. Once you’ve done that, and you’ve eliminated your consumer debt, come back.

(Good. With those folks out of the way we can get down to business.)

So what are the costs of refinancing, anyway?

The largest expense is the loan origination fee, which will almost always be 1% of the new loan. $1,871.24.

Appraisal fee. The lender doesn’t want to refinance your lean-to at Windsor Castle prices. Call it another $500.

Inspection fee. Even if it is a lean-to, it needs to be habitable. Pencil in another $225 or so. You’ll also need a pest inspection. Maybe $50 if you live somewhere like North Dakota, $75 if you’re in Florida, The Palmetto Bug State. You might also need a flood certification, $75, to prove you live (or don’t) in a flood zone.

There are also credit reporting fees at around $150. Plus recording – formalizing and registering the transaction documents with your county assessor’s office or whomever. Call that $35.

Depending on which state you live in, a reprobate lawyer might need to get his piece of the action. $750 for attorney review, because reading a series of boilerplate documents requires someone with an advanced degree and a goodly amount of self-loathing.

There may be other fees too. When you ask your lender to quote a rate, make sure they include a breakdown of all closing costs, including the costs charged by any closing agent. Compare the interest rates of any “no-cost” refinance to one with costs. Lenders will usually increase the loan’s interest rate by 25-50 basis points to cover the costs not collected up front.

Tally it up, and that’s $3,681 for the privilege of paying another $230,022 over the next 15 years, instead of paying $382,008 over the next 25 years. An investment that pays 41-fold, maybe minus a few multiples for the accelerated payoff. Hopefully you don’t need to be convinced further that that’s a fantastic deal.

Last week we wrote Part I of how we manage to remain liquid, comfortable, and reasonably affluent in Year 5, maybe 6 of The Recession That Politicians Wouldn’t Let Wither. Some people thanked us for and were inspired by the first-person perspective. Others decried us as out-of-touch and haughty with no understanding of the world beneath us, Mitt Romneys in a sea of 47-percenters.

The secret to building wealth is that you don’t need to shoot superlatively high. Sure, Sergey Brin and Larry Page beat you to the idea of creating a search engine that could metastasize into an entire online ecosystem, where hundreds of millions of people willingly share personal information that can be monetized. Brin and Page are billionaires several times over, while you aren’t and never will be unless Obamanian/Bernankite hyperinflation becomes reality. Does that mean you should look for the next cosmically resonant opportunity instead, which simple probability dictates that you’ll probably fail at?

NO. There are other choices beyond aiming that high, and aiming small. Taking a few hours to save $152,000 over the period of a home loan is what people with a wealthy mindset do. The ones who don’t, don’t because it:

  • Is more involved than just picking up the phone and calling Verizon Wireless’s billing department.
  • Involves using the services of other people, some of them experts who charge fairly for those services.
  • Requires a little math.
  • Might result in nothing. (If there were less of a difference between current mortgage rates and what you’d borrowed at originally, for instance.)

Cursing the darkness might make you feel briefly better, but that’s not what we do here at Control Your Cash. Instead, we prefer to take aggressive, intensive steps to significantly increasing revenue (or significantly reducing expenses.) If you’re going to chase pennies, chase them tens of thousands at a time.

Filed Under: Estate Planning, Finance, Real Estate Tagged With: , , ,

How Do You Guys Do It? Part I

January 18, 2013
We're so rich, we can hire people to portray us in our featured photos.

We’re so rich, we can hire people to portray us in our featured photos.

 

We try to keep things nice and impersonal on here, for several reasons. The primary one is that it’s 2013, and a resourceful person with patience and a vendetta can find out more about you than you might be comfortable disclosing, so why make it easier for them?

But without sharing too much with you, we’ve managed to position ourselves so that we don’t have to work. And believe us, we don’t. At least not at conventional jobs with a boss, and a workplace, and a regular schedule, and a break room (“This yogurt is Michelle’s. Please do not touch”), and a sexual harassment policy and an annual employee picnic. We can live off our passive income, and have no desire to go back to the real world. Those of you who have regular jobs and enjoy them, we might not understand you, but we salute you. Thanks for keeping our gross domestic product high.

We wouldn’t give up this lifestyle for anything. We get to travel extensively, live in a nice house, drive serviceable if not ostentatious cars, and never have to worry about creditors taking any of it away. So how do we do it?

That’s easy: we sponge off the government!

Kidding. Sure, there was some serendipity along the way, but the vast majority of our success can be credited to not doing stupid things. We could write a book (heck, we did) about all the stupid things you could build wealth by avoiding. Here are a few of the biggest culprits in this, the inaugural post in an irregular series:

Tobacco, alcohol, drugs. As best we can tell, the median price of a deck of smokes is around $7. We’re not going to do the math for you, as any idiot can multiply $7 by 365, but the good news for those of you who are scarfing down a pack a day is that you’re probably keeping the weight off. No wait, on further examination a lot of you are fat. Also, any weight you’re failing to gain is that of healthy pink lung tissue, and why would you want to cultivate that?

A “gram” of pot costs $15 to $20, given that your dealer probably isn’t arranging it on a scale calibrated in grams, nor operating under the purview of your state’s Bureau of Weights and Measures. That’ll get you one or two joints, but hey, none of you are serious pot smokers, right? Just once in a while, just to get a good buzz, I hardly ever smoke, only when there’s no beer around, it’s better for you than alcohol you know, etc.

So yeah. If you can put it in your mouth and emits smoke, it’s keeping you from being as rich as you’d otherwise be. Pointing that out hardly counts as thought.

Okay, fine. But you expect me to give up alcohol, too? That’s crazy talk.

We don’t “expect” you to give up anything. We wrote about this on Money Funk a couple years back and the commenters told us we were being judgmental, which is ludicrous. As if pointing out that alcohol purveyors expect money in exchange for their sweet brown liquids is somehow heresy.

The major booze trade organization’s own estimates say it’s close to a $400 billion industry. Divide that into the number of people who live in the United States (subtracting the kids and the people on dialysis, of course) and then try to determine which side of average your own alcohol expenses are on.

The catcalls are starting already, we can hear them. Fine, you need it to relax. Some of us don’t. You can’t imagine being in a social setting and not drinking. We don’t dispute that, but some of us have broader imaginations.

You know what’s funny? Even The Cheapest Man on the Planet, the guy who would rather do indoor craft projects 30 nights in a row with construction paper he dug out of his neighbor’s garbage than go to a movie once a month, can’t bring himself to say that drinking is about as unnecessary as expenses get. And it’s not as if our hero is some socially well-adjusted extrovert, either.

Education. “The Greatest Investment You Can Make”. An utter lie, and maybe the more we repeat this the faster it’ll sink in. Why is it a lie? Because formal college education is not uniform. Here’s where people love to cite studies showing that people with bachelor’s degrees earn more than high school dropouts, and people with advanced degrees earn more still.

Amassing college credits, without respect to what subject they’re in, is like consuming calories without respect to what food they’re coming from. That Bachelor of Arts in comparative literature will benefit you even less than eating a diet consisting exclusively of chocolate will. At least the chocolate doesn’t have to be financed to the tune of tens of thousands of dollars, nor does it take 4 years to eat.

The arts in general: bad, at least financially speaking. (Last we checked, while several universities promise significant non-financial rewards, their admissions offices still expect payment in legal tender.) Math and science: good. Marvel at the works of Degas and Milton all you want, but if you must, don’t spend years and (borrowed) money for the privilege. Because it’s not a privilege, it’s an expense.

That doesn’t mean you’ll be ready to take on the world with a high school diploma. You probably won’t. But you can learn a marketable, worthwhile trade without committing huge money nor huge time to the endeavor. Those studies referenced above? For some reason, they never specifically compare liberal arts graduates to steelworkers or machinists. To some effete people, there’s a stigma to working with your hands. To us, there’s a stigma to incurring pointless debt that you’ll take decades to pay off. Ceteris paribus, the $52,000-a-year electrician with a contractor’s license is a better human being than the $30,000-a-year retail clerk who can parse Noam Chomsky’s theory of universal grammar.

That wasn’t so hard, was it? None of that stuff is painful, or even inconvenient. It’s not like we’re telling you to go without sleeping or shaving. But it’s a start. More next time.

Filed Under: Education, Entrepreneurship, Estate Planning, Finance Tagged With:

Everyone Lies

November 9, 2012

 

Don’t count your chickens before they come home to roost, or something

 

Because there just aren’t enough stories about Apple as an investment, we’re adding our own. Why not? Apple is to personal finance as Tim Tebow is to ESPN First Take. Even if nothing of note is happening with the subject at hand, we still need to not only talk about it, but do so until the readers/viewers weep and beg us to discuss any other topic.

You’re going to have to wait a couple more days. In the last few months Apple has gone from in danger of passing ExxonMobil to become the biggest corporation on Earth, to passing ExxonMobil, to Apple’s stock price setting an acme, to it losing 10% off that high and therefore still being a topic of concern. You know, because no stock in the history of the world has ever reached its lifetime peak and then fallen 10%. Only Apple. Groundbreaking as usual.

A couple of weeks ago USA Today used an effective gimmick for a) attracting readers and b) continuing to give Apple undue attention: the misleading headline. Even better, USA Today posed the headline as a question so that no one could accuse them of sensationalism.

Do too many people own too much Apple stock?

Which not only has less zing than

Too many own too much Apple stock

But isn’t even news. Heck, it isn’t even research. The writer, Matt Krantz (subject of a recent post), starts with a conclusion and works his way back to the premises. Which is what journalists all too often do.

Sparing you from Mr. Krantz’s breezy introduction, we get to the meat of his “argument” a few paragraphs in. (This isn’t an inverted pyramid, it’s a pyramid that’s been ransacked and left to rubble.)

(I)nvestors have found that zeroing in on this one company is their ticket to a big Wall Street score. The stock has been a winner despite its recent decline, which briefly pushed it into a 10% correction. At its close of $635.85 Tuesday, it’s still up more than 50% this year, which compared with the 15% gain in the broad Standard & Poor’s 500 index makes it a runaway winner.

Get rich from a single stock? Without having bought it before everyone else did? Sure, sounds at least as solid a strategy as playing blackjack is. Diversity is overrated, anyway. Here’s the next fanciful line:

“I don’t want to diversify that much when I have one stock doing just fine,” says Matt Loud, a 28-year-old security worker in Bellingham, Wash., who has upwards of 38% of his retirement accounts in Apple.

We were going to track down Mr. Loud and ask him if what he said is true. Failing that, we’d find Mr. Krantz and ask him how he just slipped that into his story without asking Mr. Loud how hard a surface the delivering doctor dropped his head on. Fortunately, Twitter did the work for us.

Here’s a Tweet from @MatLoud to @MattKrantz dated October 2 (before the story ran, but whatever):

@mattkrantz apple plays a key role in my investments but I don’t have a substantial amount of outright shares.

So what does the USA Today quote even mean? How can you have 38% of your retirement savings in a company’s stock but “(not) have a substantial amount of (its) outright shares”?

Using Aristotelian logic, the only possibility is that Mr. Loud was referring to Apple stock in absolute terms, rather than relative ones, in the tweet. A standard lot of Apple stock is 100 shares, which would be worth $63,585. That’s 38% of $167,328, which would be a snappy nest egg for a 28-year-old unskilled worker with a disjointed Twitter account.

The other possibility is that Mr. Loud made the numbers up and/or doesn’t know what he’s talking about, and a journalist with a deadline and a conclusion needed something to flesh out his story.

Loud is part of a crowd of investors who have become infatuated owners of Apple — and richly rewarded as a result.

Then why wouldn’t you tell us how much he bought his stock for? Sounds like an important point, doesn’t it? Is he dollar-cost averaging? Did someone will him the stock? Did he buy it at its 2002 bottom? No, none of this is important.

Personal finance is useless unless you quantify. It’s not “I feel pretty good about my 401(k) balance.” It’s “I’ve got $145,342.99 in there, split between Vanguard’s Admiral Treasury Money Market Fund and its 500 Index Admiral Shares Fund. I contribute $1,950 monthly and my employer matches it.” If you don’t quantify, you don’t have any business investing.

Imagine Al Michaels telling us, “It seems like it’s been a lot of games since Drew Brees didn’t throw a touchdown pass.” Or Paul Ryan saying, “Our national deficit sure is big.”

It gets much worse. The author interviews a 35-year-old San Francisco housewife who claims she first bought Apple in 2007 (it ranged from $85 to $200 that year) and now holds ¾ of her portfolio in it. This is assuming she’s telling the truth. Later in the story she says she doesn’t like the new 9-pin connector, and what that has to do with investing, rather than consuming, we’re not sure.

The same housewife “worries…how much higher can it go”, then contradicts that worry by claiming that if it hits $750, she’ll sell. And will then have at least 78% of her portfolio in cash, assuming her other investments stay constant.

There’s a similarly depressing story about a retired soldier who has “nearly 40%” of his portfolio in Apple.

At Control Your Cash, we treat journalists with slightly less disdain than we do pederastic college football coaches. Check your sources? Not when there’s popular folklore to reinforce. We don’t believe that any of the interview subjects indeed have the listed percentages of their retirement savings in Apple, because we doubt the interview subjects even know what buttons on the calculator to press to divide their Apple holdings by their total holdings, let alone know how much Apple they hold.

The lies don’t stop there, either:

Nearly 17% of all individual investors own Apple shares

According to SigFig, a site Mr. Krantz contacted for his story.
Really? Every 6th individual investor in the country holds AAPL?

From Apple’s latest 10-K, and if you don’t know what a 10-K is, just buy our book already:

As of October 14, 2011, there were 28,543 shareholders of record.

Which would mean that there are only about 168,000 individual investors in the country. Also from the 10-K,

929,409,000 shares of Common Stock Issued and Outstanding as of October 14, 2011

Okay, now we’re the ones playing with facts. There are more than 28,543 individuals who own Apple. It’s just that most people own their shares via brokerage accounts. As far as Apple knows, your shares are under the name “Morgan Stanley” or “Charles Schwab”, not “Jane Doe”. As are your neighbors. It’s impossible to tell exactly how many people own Apple at a given time.

But we can estimate, and we can start by comparing apples to apples. Microsoft has 128,992 shareholders of record.  Alcoa has 319,000. Exxon Mobil has 486,416. Apple isn’t America’s most widely held stock, or anything close to that.

We could pick apart more of this story, but that’s not the point. The point is –
Alright, one more folkloric quote:

Apple investors, on average, have nearly 17% of their portfolios riding on that one stock.

That’s either impossible, or it includes the Apple directors and officers who have enough of the stock that they’ll be rich no matter what. (We’re guessing SigFig didn’t interview them.) Commonplace, you-and-me investors don’t have anywhere near 17% of their holdings in Apple. And if they did, the examples cited in the story wouldn’t be remarkable.

Alright, we’re back. The point is that if you read the financial news, even from a trusted outlet, even from the nation’s biggest newspaper, be skeptical. Nowhere near 1/6 of individual investors have a piece of Apple. No one who has ¾ of her money in Apple knows anything about anything, especially if she’s a dilettante with no coherent investing strategy.

And to answer the author’s rhetorical query? No, not too many people own too much Apple stock. Not even close. After 3 decades, the stock finally started paying a dividend, which will reduce liquidity. It’s trading at less than 15 times earnings, which is not only less than the S&P 500 average but hardly indicative of a bubble that’s reached maximum surface tension.

Would we buy it? No, because the $63,585 initial investment is a little too much for us to commit to when there are other investments available. Doesn’t mean you shouldn’t bite, though. Nor does it mean you shouldn’t invest in a mutual fund that prominently features Apple. Like PowerShares QQQ Trust, which is comprised 20% of Apple and is up 19% this year.

Question everything. Think about whether a quantitative claim makes any sense. And don’t take investment advice from 20-something security guards, impulsive housewives, nor the journalists who indulge them.

Filed Under: Bad Examples, Finance, Investments Tagged With: , , ,
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