Personal Finance Blogs and Saving

I took some time yesterday to look at a few personal finance blogs.  My daughter has been telling me about those that she follows, so I checked one out.  That blog is The Simple Dollar.  The author has a “picked myself up from financial ruin and improved my life” theme and he appears to post good common sense - which as you recall, is not so common anymore.  Reading his blog made my always synergizing brain start pumping out ideas for posts.  The real life of someone else is always a touch stone for others, whether they shake their heads in disbelief or nod because they relate.  The particular post I found interesting concerned snowflaking as a method to reduce debt or increase savings.  It is all about forming positive long term habits.

My Method for Saving While Still Having Fun

I always encouraged my daughters to save.  And those lessons carry forward because they are both still savers and investors.  That doesn’t mean they don’t have fun and spend money.  It just means they are intentional about their spending.  Being frivolous was not a way of life in our household.  It is something you do once in awhile to have a fun moment that you remember with glee.

So what is the savings lesson?  When I was a financial advisor I taught that there are 3 types of saving - one for short term or emergency needs, one for midterm needs (3 - 10 years) and one for long term needs (10 years or further away).  I am no longer an advisor and this column is not intended as professional advice.  I just know a lot about it and like to share ideas that can be helpful.  It is always important to have money tucked away in very safe accounts to meet those short term needs.  If your car breaks down or you have to go to the dentist, or some other non-negotiable event occurs, you need to be able to pay for it without racking up debt on your credit cards.  This money can’t be risked.  General guidelines will tell you to have 3-6 months worth of living expenses.  I say work towards a year’s worth of cash, especially with the employment situation the country is in right now.  Wouldn’t you like to NOT have to worry about where your money would come from for a year if you had no income coming in?  If you are retiring, it is good to have 2-3 years of income in cash just in case the market does what it did in 2008 and you will have some time for your longer term investments to try to recover.

Mid Term Savings and Long Term Savings

What things would you save for that might be out as far as 10 years?  How about paying cash for a new car or at least putting down a large down payment so you can pay it off in 2-3 years?  How about a real estate investment that you would like for an income stream from rentals or a lake house to use on weekends?  How old are your children?  Will they be going to college within 10 years?  Wouldn’t it be nice to have a cushion to help with those expenses?  I’m sure you can think of other desires you have for the next 10 years.  For retirees, these investments should include your less volative investments that provide income or future appreciation that you can tap into 5-10 years down the road.  Investments that won’t be needed for 10 years or more can be positioned to generate higher returns but they also typically incur greater risk.  Many people who are retiring soon think they need to get rid of all risk in their investments.  But the bigger risk is inflation.  Ask yourself this question - are you going to USE all your money within the next 10 years?  I didn’t think so.  So think differently about risk and read some good books on the topic.  You can start with titles in my Recommended Reading List on this site.

Saving for Fun

Well this is all well and good, but we did mention fun at the beginning of this post.  I’d like to share a story about my youngest daughter’s savings habits when she was still in elementary school.  She was perusing her savings one day and I stopped to chat with her about how she was doing.  She was a very wise child and said “Mom, I have 3 jars of money.  The first is for fun cheap stuff, like candy.  The second is for things that cost more, like a video game.  And the third jar is for the money I’m saving for something special I might want that is more expensive.”  I thought that was a pretty good plan for an elementary age saver.  She had already decided that some money wasn’t to be touched unless it went towards a specific financial goal.  We eventually put her “more expensive” jar of money into a money market account and she left home with it intact when she went to college.  And 8 years later I would bet she still has most, if not all of it.  That’s the way long term money is supposed to be handled - as if it doesn’t even exist.  And she still had the freedom to spend her short term (candy) and mid term (video game) money because she made a plan.

So make a plan.  Check out some good personal finance blogs (The Simple Dollar) has links on the home page to Blogs I Read), read some good books from the library, and keep coming back here for more insights to help you create wealth and breathe a sigh of calm because you are putting away 3 types of money.  You can afford a fun reward to celebrate all your efforts.  If you need to tackle debt first, read some of Dave Ramsey’s books to get you started.  Create good habits to replace the old bad habits.  Now, go out a buy yourself a little treat because a fun reward doesn’t have to be expensive.

I’ve read articles by The Mortgage Professor, George Mantor, over the past several years, but his articles have taken a very different direction recently.  I believe his research is probably right, that banks pushed products to keep money flowing which benefitted financial intermediaries and the financial intermediaries found a way to skim off a lot of money from credit default swaps as things went very wrong.  The result is that retirement plans have changed for almost everyone, especially those in retirement or getting close to retiring.  Here’s a link to a recent article on George’s blog.  To be honest, his posts depress me and I prefer to be an eternal optimist, but perhaps this is information that someone can use to improve their situation, so here it is for you to read.  Actually, George’s posts segue right into one of my top pet peeves.  Why is it that we don’t provide financial education in US schools?  This is something that I’ve always felt is missing and plan to be involved in during my retirement years.

Financial Education

We make sure kids can read and write and do minimal math, but we don’t train them to understand finance.  They leave high school and fall into the trap of easy credit and not saving and lack an understanding that they are the ones ultimately responsible for their financial well being.  They become buried in debt at too early an age and don’t know how to dig themselves out.  If we had been educating our children on how our markets work and on how to manage money wisely, do you think more mortgage borrowers would have made a different decision about the loan they signed for?  Maybe they would have had a better understanding of what was really going to happen with their loan.

Affordability

When I first became aware of the increasing use of interest only loans being used for home purchases after I became a Realtor in 2003 , it made my skin crawl, because I knew these products were intended to be used for cash flow management by wealthy investors, not mom and pop homeowner.  Builders in states where prices were unaffordable by the masses worked with banks to provide loans that made their homes “affordable”, at least in the short term.  With the dream of homeownership twinkling in their eyes, many people signed up.  We’ve seen the result in places such as California, Florida, Arizona, and Las Vegas.  Is it any coincidence that these are all areas where new construction was a huge part of the economy?  These were communities where warm temperatures and vibrant lifestyles drew new residents.  They are all areas where home values shot up 30-40% a year and where foreclosure rates now top the list year over year.  The high appreciation rates were unsustainable because they were eventually going to run out of buyers who could afford the homes, even with tricky loan products.  But without a basic understanding of how the financial markets work, the average home buyer didn’t have a clue.

The Solution - Supply and Demand

Since I hate to discuss a problem without trying to find a solution, what is the solution?  It’s not going to be easy.  One in four mortgages is underwater in the country.  The good news is that 3 of every 4 is not.  But without jobs and people having a sense of stability, more home value decreases will come.  Hopefully many of the go-go markets have hit bottom or near it so that they can recover.  Supply and demand is real and it is the solution.  With low real estate prices now in places where homes were unaffordable until 2008, people who want to buy, can.  The tax credits that end April 30, 2010 have provided an extra incentive for those sitting on the fence to buy, and they are.  What happened in the housing market had to happen for anything to change.  Over time those who lost their homes to foreclosure will recover as well and be able to buy again, hopefully with a better understanding of what happened so they can avoid it a second time.  We are already seeing people who qualified for a short sale being able to buy again.  We can all hope that this next wave of home appreciation will be more tempered so that we don’t hit a wall again anytime soon.  With 40% of baby boomers selling and moving somewhere else (somewhere warm, like CA, AZ, FL, and Las Vegas?), there will be a lot of big homes available to the next wave of move-up buyers.  Lots of supply, probably not as much demand, so that prices stay steady.  In Colorado Springs, we usually have steady growth with a few hiccups along the way.  We saw prices decrease in 2008-2009, but most homeowners are okay.  Foreclosure and short sale properties are selling and many other sellers are sitting on the fence waiting for things to improve.

The Future

When I look back in 5 years I expect to see that things settled out, prices started to go up slowly once again, and sellers who really want to sell and move will put their homes on the market increasing supply and keeping prices from becoming overheated.  In areas where supply is limited, prices will go up faster, but without loan products that trip them up, buyers will have to save before buying a home and that will keep demand in check.  During the height of the market, 25% of sales nationwide were for second homes and investment properties.  I wouldn’t expect to see that same ratio going forward because investors will have to bring larger down payments to the table.  But investors are part of the solution too.  While they are saving up a down payment, buyers need to live somewhere and if they aren’t living in mom and dad’s house, they’ll be renting and investors who bought real estate during this perfect storm of low prices and low interest rates, will be able to make a profit renting them out.  Rental income may become a cornerstone for some retirees so that they have enough income to retire.  Property managers will manage those properties, make money, hire people to help manage them, hire people to make repairs and improvements, and a new cycle will start.  Whew, what do you know, I get to be an optimist afterall!  Right now things feel dire to many people and we still have a lot of issues with government debt and the elitist, arrogant thinking in Washington, but this is America and when we know what needs to be done, we do it.  If you are financially able to, go out, buy a house or some land, and get the economy moving.  You’ll be the one who benefits down the road.

Realtor.org posted this article and I thought it was interesting to see which communities seem to be the most attractive to today’s retirees.  Top of the list is Ft.Collins/Loveland, Colorado.  Both great smaller affordable communities with Colorado’s temperate climate - milder, sunny winters, and pleasant summers.  We do get a lot of retirees in Colorado Springs too.  I love Honolulu (tropical weather and island beauty), Tucson (great winters, lovely desert terrain, but hot summers), Santa Fe (great SW food and shopping, mild summers, but cold winters), and San Diego (gorgeous ocean vistas, great climate, but expensive).  I would consider some of the other cities  but…Michigan??  Those retireees must like cold and snow, but… property is probably very affordable there now.  Here’s the list of the top 15 cities provided by AARP and CNBC.  Looks like you can still catch the Tom Brokaw story on March 4th on CNBC to hear all the details.

15 Top Retirement Cities - Boomers are willing to move farther than previous generations when they retire, and they are choosing places unlike stereotypical retirement hotspots, says Tom Brokaw in his report on Boomer retirement, airing on CNBC, Thursday, March 4 at 9 p.m. ET.The top places listed by AARP and explored on the show are:

1. Loveland/Fort Collins, Colo.
2. Las Cruces, N.M
3. Rehoboth Beach, Del.
4. Portland, Ore.
5. Greenville, S.C.
6. Sarasota, Fla.
7. Ann Arbor, Mich.
8. Tucson, Ariz.
9. Montpelier, Vt.
10. Honolulu
11. Santa Fe, N.M
12. Atlanta
13. Charleston, S.C
14. Northampton, Mass.
15. San Diego, Calif.

Source: CNBC, Paul Toscano (02/05/2010)