A Peak into the World of Homeownership

This is a topic of great personal interest to me. It’s something I’ve discussed with family and friends on numerous occasions, and it’s something that I’ve looked into quite a bit. I’ve even touched upon it briefly on this blog in the past.

It truly amazes me how many people choose to buy a house simply because that’s what the world, or their real estate agent tells them to do. BHTraditional wisdom says that buying a house is the smart thing to do. The thinking has always been that you buy a house with a mortgage and eventually, once the mortgage is paid off, the house is all yours. It’s called building equity.

This is presumably better than renting because at the end of the mortgage, you own the house and can simply sell it to recover most of your money. In the case of renting, you are not working towards owning the house. You are simply paying on a monthly basis for the privilege of being able to live in that house.

On the face of it, it all seems to make perfect sense. Why waste money renting, when you can use that same money to build equity and eventually own a valuable house? But things are not always as they seem. There are a number of factors underneath the surface that need to be considered.

Let’s run through an example. Assume you buy a house for US$ 250,000. You make a standard down payment of 20% (=US$ 50,000). In addition, there are closing costs that need to be paid. Conservatively, let’s say these costs are around 3% (=US$ 7,500) of the home value. So, the total value of your mortgage is US$ 200,000 + US$   7,500 = US$ 207,500. Like most people, you get a 30 year mortgage with a moderate annual interest rate of 5%.

The bank gives you the money, using which you buy the house and start to live in it. Every month, you pay the bank US$ 1,142 towards your mortgage. Annually, that adds up to US$ 13,704.

Now it starts to get interesting …

You realize you have spent so much on buying a house, you should probably protect it. So, you buy homeowner’s insurance. This typically costs 0.3% of the home value and is paid annually.

A few months in you realize that the community you live in has its own dues. Typically, homeowners’ association dues go towards the upkeep of the hhccommunity. Let’s assume 0.2% of the home value annually.

A year in, you get a bill from the government telling you your property taxes are due. That’s right. You have to pay taxes annually on the value of your house. Conservatively, let’s say 1% of your home value annually.

Life starts happening: your washing machine breaks down, the drain gets clogged and parts of your home suffer small amounts of water damage. You might also have a number of small repairs that need to be carried out. In addition, routine maintenance is also required like mowing the lawn, changing the lights, cleaning the air conditioning filters, etc. These costs are typically in the range of 1.5% the annual home value annually.

So, let’s review how much we spend annually on the house:

  • Mortgage payments: US$ 13,500
  • Homeowner’s Insurance: US$ 750
  • Homeowners’ Association Dues: US$ 500
  • Property Taxes: US$ 2,500
  • Maintenance, Repairs, etc.: US$ 3,750

That’s a grand total of US$ 21,000. Now, you might say to yourself, that this is turning out slightly more expensive that you had thought, but it’s okay because you’re building equity. But have you thought about the alternative? Over a 30 year period, the total cost of buying and owning that US$ 250,000 house add up to US$ 680,000. That’s almost 2.7x the cost of the house. Renting for 30 years @ US$ 900/month would have cost you US$ 324,000 and you wouldn’t pay anything else. The landlord would take care all of the maintenance, repairs, property taxes, etc. That’s a saving of US$ 306,000. If you invested these savings at 5% annually, that’s another cool US$ 15,300 in your pocket every year.

Now, you might be wondering how you ended up paying so much for the house. Well, let me give you a breakdown.

You paid a total of US$ 404,879 on your mortgage. That’s right. Over the 30 year period, you Cost Splitpaid US$ 404,879 on your US$ 207,500* mortgage. Even though 5% interest might seem low, it adds up to almost US$ 197,000 over the 30 year period. And it doesn’t end there. Even after having paid off your mortgage in full, the ongoing expenses continue. Between insurance, property taxes, maintenance, etc., you will continue to spend a minimum of US$ 7,500 every year.

As for the equity you’ve built, let’s take a look. You want to sell the house, but before you do, remember that there are costs associated with selling your home. These so-called closing costs are about 5% on the value you sell your home for. All things considered, the only way you can make a profit on your home is if its value has increased 266%. That means your home has to be worth at least US$ 662,500 30 years after you bought it. That’s an increase of about 3% annually. I’m not saying that’s not possible. It’s possible that it might even increase more than that. But, there also exists the possibility that the value might decrease, and if market conditions are bad, you might even end up selling it for less than you paid for it. While a lot of people have made a lot of money off their homes, there are also many who have lost everything because of it. In an ideal world we would all have enough money to simply buy a house outright without a mortgage, and the economics would then make a lot more sense.

I don’t mean to discourage anyone from buying a house.  Everyone’s situation is different and everyone needs to evaluate for themselves whether they are taking the right decision. The point of this blog post is simply to help increase awareness of all the moving parts and intricacies involved in buying a house and not get swayed by popular myths.

 

 

 

*For the sake of simplicity, I have:

-rolled the initial closing costs into the total mortgage

-ignored the cost of furnishing the house

-ignored the potential tax implications of selling your house at a profit

-ignored the effect of inflation

-ignored tax deductions you might receive for interest on your mortgage because more often than not, people don’t qualify for the deduction, and if they do, the deduction is relatively minimal

 

 

Food for thought: The Hamster Wheel & You

Yesterday, the world celebrated a relatively new phenomenon: Prime Day. Or, as I like to call it, another excuse to entice people into spending their hard-earned money on things they don’t really need day.

This leads me to a subject that the Honey Bee and I have discussed on various occasions.

Growing up as a child, you understandably want things. That new toy in the market, that cool new remote-controlled car, or that hot new video game that all your friends have. As a child, you can’t really be expected to filter your wants based on whether it is something you really need. As an adult however, you can and that’s what parents are for. That being said, not all adults are able to distinguish their own wants from their needs.

Think about it…how many times have you been to the mall, or been browsing Amazon’s website and you see something that you’ve never seen before and suddenly, you really want it. You want it more than anything, even though you’ve never really ever felt the need for it, until this very moment. What happens next? Consider two scenarios:

WMScenario 1: You give in to your impulses, and spend your hard-earned money on a whim. You receive the article in a few days (or hours) and play with it for a Couple of days. Then you forget about it. The next time you see it is when you’re decluttering your home. You probably don’t even remember buying it and it eventually ends up in the trash.

Scenario 2: You behave like a responsible adult and separate your needs from your wants. You are able to discern that this is not something you have ever wanted before. In a couple of days, or even hours, your life goes back to being the way it was before you saw the article and you probably forget about ever having wanted it.

Note that both scenarios end in the same way: with you not having the article anymore. The only difference is that the first is the more expensive route.

Throughout our lives we spend so much on accumulating useless stuff which maybe give us a few fleeting seconds of “happiness” and then eventually gets thrown away. Imagine instead:

  • spending it on trips & holidays making memories you will relish forever
  • saving it and being able to afford to quit your job and dedicate yourself entirely to doing something that you really love and that really matters to you
  • paying down your debt with it and working your way towards a financially stable and debt-free life

These are just a few examples off the top of my head, but imagine all the possibilities if you save that money, or better yet invest it.

“I make myself rich by making my wants few.”
–Henry David Thoreau

It’s funny but every day I see people complaining about how much and how long they have to work, but I just don’t get it.

People’s expenses increase because they spend on things they don’t necessarily want or need. Consequentially, they have to work harder to support that more expensive lifestyle.
Or vice-versa, lifestyle inflation occurs: People make more money, and then the expenses go up. Nonetheless, the end result is the same: you work harder and longer, make more money, and at the end of it all save less. And, all you have to show for it is a bunch of useless stuff cluttering up your life.

It’s an endless cycle that results in you running faster and faster just trying to keep up. Doesn’t it instead make more sense to simply get off the hamster wheel, or at least slow it down? If you want less, you will spend less. If you spend less, you will need less and consequently won’t waste your whole life exhausted from running after some senseless and irrational goal.

HW

Instead, you can be richer (in every sense of the word) and have more free time to spend doing the things you love and with the people who matter to you.

“The less you want, the richer you are. The more you need in order to be happy, the more miserable you’ll be.”
–Yanni

Think about it. Henry D. Thoreau and Yanni certainly did.

 

 

The secrets to saving on air travel

One of the most expensive elements of any vacation is the travel. Specifically, the flights. According to ValuePenguin, “The typical vacationing U.S. family spends about 44% of their travel funds getting to, from, and around their destinations.”  Instead of breaking the bank trying to get to where you want to go, why not save on travel costs and put a part of that saved money towards entertainment on your trip?

When we typically travel (and we travel a lot), we try to book as far in advance as possible. I’m talking about 4-8 months in advance. Not just that, we monitor flight costs on a weekly basis. This way if prices suddenly drop for any reason, you’re ready to jump in. Certain websites even allow you to set up price alerts and receive the notifications direct to your inbox. Timing our purchases has allowed us to save close to 40-50% on long haul flights.

Apart from booking early, the airline you choose to fly will also make a difference. I’m not saying you should fly low-cost on 8 hour flights (although that might be worth considering depending on the price). I’m saying it’s worth flying for relatively shorter flights in the 1-5
hour range).

WLow cost flights seem to have gained a bad reputation, but that is undeserved. People’s biggest complaints are that they get nickel and dimed by these airlines. But, that is just not true. If you read and follow the instructions and go well prepared this never happens. Here are some of the most common complaints people have about low-cost airlines and my solution to each:

1. The airline charged me for checking in at the airport: I have seen people crying about this at the airport on multiple occasions. It’s just silly that people don’t read the instructions that they are supposed to check in online. I think it’s entirely fair to charge passengers € 45 to check in at the airport.

The entire idea is that if you check in online before coming to the airport, the airline needs to hire less staff, which translates into lower expenses and more savings, part of which the airline passes onto you in the form of cheaper tickets. So stop complaining! You booked that flight because it was cheap.

2. The airline charged me for printing my boarding pass at the airport: The logic remains the same. If you print your boarding pass in advance, everyone saves money, including you. So if you don’t want to print it at home, be prepared to shell out an additional € 15.

3. How can they charge me for checking in 1 piece of luggage: Most low-cost airlines
allow one free carry-on item. Some even charge for that. The idea is that a lighter plane burns less fuel. Also, lesser luggage implies fewer baggage handlers and logistics. All of which generate significant savings and result in more ka-ching in your pocket.

CB.jpgIf you absolutely have to check in luggage, notify the airline in advance. Luggage allowances purchased in advance (before arriving at the airport) tend to be significantly cheaper than at the airport. For example, Ryanair charges € 15 for a 15 kg bag on a flight of less than 2 hours if purchased online. At the airport, that will cost you € 25. That’s a direct 40% savings on the total price you would have paid had you not purchased in advance.

4. My carry on won’t fit and they want to charge me for checking it in OR my check-in is too heavy and now they want to charge me more: It is ridiculous the amount of money airlines make through oversized/overweight bags.

There is a simple answer to both problems: fit.jpgBefore leaving home, simply check the dimensions on the airline’s website and measure your bags. Also check the weight restrictions and weigh your bag before you leave to avoid an unpleasant shock at the airport. For the return flight, you may not have access to a weighing scale. And chances are your bags might be overweight due to all the shopping you indulged in while on vacation. The solution: A simple portable weighing scale. Amazon has hundreds of options. Investing € 10 today could save you hundreds (or even thousands) over the next few years.

5. No free food or drink? Nope! Less food means lower expenses, which translates into more savings. Apart from the cost of the food itself, it means lower logistical costs of getting the food to the airport, and onto the plane, and keeping it fresh on the plane. Less food also implies a lighter plane and you know what that means: less fuel burnt= more savings.

On a personal note, I love airplane food. Even on low-cost airlines, if you pick the right items they’re not half bad. I’ve also discovered that buying a meal on board actually turns out marginally cheaper than buying it at the airport.

6. Randomly assigned seats? Wtf?! It’s actually not such a big deal. But if it matters to you, you can shell out an extra € 5-10 for your choice of seats. And if you’re traveling with others, nothing to worry about. Passengers booked on the same ticket are usually assigned seats together.

7. No in-flight entertainment? Nope! No free headphones, no music and no personal or common entertainment screen. But that’s an easy one to solve. Just carry a book or a tablet.

We always carry a tablet loaded with movies and TV shows. When you’re at cruising altitude, IFE.jpgsimply power it on, plug-in your headphones, and watch your favorite show at 35,000 feet. The best part, the entertainment doesn’t pause for in-flight announcements. Since there are 2 of us traveling together, we bought an audio splitter (less than € 5) that allows for 2 headphones to be connected at the same time. And when we get bored with watching shows, the tablet doubles up as an e-reader.

With all the money you’ll save following these tips, you won’t mind the non-reclining seats and the occasional advertisements announced through the in-flight system.

Now go ahead, and enjoy your vacation! Happy travels!

Fitness and Gym Memberships

 

For most people, the start of the New Year marks a new set of mostly bound to fail resolutions. For me, it also included recycling of resolutions from years past. One of them: to get into better physical shape.

After having signed up for a 6 month membership at the fanciest gym in town the year before last, and barely ever having visited the place, I decided to not waste my money on gym memberships. Instead, I started jogging, occasionally exercising at home, and walking to work whenever possible. However, as the weather got colder, I found my activity levels decreasing. My jogging frequency dropped from multiple times a week, to only the weekends, to once a week, to almost nothing. Walking to work had a similar fate. It wasn’t so much laziness, (yes, okay, maybe a little bit) but more so the cold weather.

For those of you who haven’t tried it, running in windy weather with temperatures of 10º C and below really takes its toll. While you’re running, it’s manageable, sometimes even fun. But even a short 10 second pause to catch your breath, or stop for a changing traffic light results in a dizzy, light-headed feeling. I often found myself having to sit down until I felt better.

This is when I started re-considering the possibility of joining a gym. However, before signing up, I wanted to ensure I would attend regularly and make good use of the membership. I tried to study my patterns and history with gym memberships to eliminate any excuses I might make for not wanting to go.

  • Too crowded: I visited the gym on a trial membership at the hours I would normally visit to ensure that it wasn’t too crowded and that I didn´t have to wait very long to get the machine I wanted. Excuse eliminated!
  • Too hot/Too cold: Again, visits during the trial membership and a sweatshirt solved that. Excuse eliminated!
  • Too far away: This time, instead of a signing up for a membership at the high-end gym that was a 20 minute drive from home, I found a more modest gym that is a short walk. That way, come heat, cold, rain or hail, the gym is only a stone’s throw. Excuse eliminated!
  • Too expensive: An excuse I used last time to not renew my gym membership was that it was too expensive. This was compounded by the fact that I barely visited the gym because of the distance. This new gym is more modestly priced. Excuse eliminated!

GmembershipI finally took the leap and signed up. For the first time ever, I signed up for a month by month membership instead of the cheaper 6 month membership because I figured seeing the money leave my bank account every month might incentivize (or guilt me) into going more often. I even managed to negotiate away the registration costs.

I am proud to say I attended and worked out with gusto both days of the weekend. The high one gets after a good workout is unbeatable.

Let’s see if that high is enough to keep me coming back for the rest of the year.

Happy workout! Let’s keep the endorphins flowing!

 

To feel the air of India…

Today’s blog post doesn’t really fit into any category of blog posts. However, just because I know you’re going to love what I have in store, I categorized it as a personal finance entry. Why? Because once you’re done reading, you won’t want to waste your money, or risk your life flying this airline.

Most Indians are already well versed with Air India, India’s national carrier. There is a common derogatory phrase that goes: To feel the air of India, fly Air-India. I’ll leave the interpretation up to you. The company, which is owned by the government, has been running in financial losses ever since I can remember, and has received multiple cash infusions or ‘bail-outs’ over the years. Multiple attempts at returning to profitability have been unsuccessful. But today’s post is not really about the company’s finances either.

In the past few days, I have noticed the airline receiving quite a few mentions in the media. Sometimes for sad incidents, sometimes for serious but how-in-the-world-did-they-let-that-happen kind of funny incidents, and other times for downright stupid incidents. I decided to investigate this. A quick google search brought up so many incidents it was hard to choose. Heres a selection of the top 10 chronologically, going backwards. Click on the related date to read more about the incident:

1. December 2015: This one is downright unfortunate. An airline staffer on the tarmac was sucked into the plane’s engine while he was performing his duties because the co-pilot mistook a signal for engine start and activated the engine.

Bus2. December 2015: A shuttle bus carrying the crew for another airline crashed into an Air India plane that was preparing for take-off. To give due credit, this time the airline was not at fault. It seems the driver fell asleep at the wheel while driving on the tarmac that was full of planes that were either parked, landing or taking off!

3. July 2015: A suspected rat sighting on a plane bound for Milan forced it to turn around after 2 hours of flight and return to Delhi. Rats pose a serious threat as they can chew through wires and damage internal controls. Apart from this incident, the news article also mentions 2 other rat related incidents. If that doesn’t engender confidence, I don’t know what does!

4. June 2015: While the airline claims this was a media hoax and its official position is that this was never Lizconfirmed, I found enough specific articles about it to warrant a mention. Apparently, a passenger onboard a flight to London spotted a Lizard on their in-flight meal tray. Hmmm…I wonder if he was a vegetarian.

5. September 2014: A flight to Hong Kong had to make an emergency landing at Kolkata Airport because passengers reportedly complained of smoke inside the cabin. That’s one interpretation of the phrase I mentioned at the beginning.

6. July 2014: This one takes the previous incident one step further. A trans-Atlantic flight from New Jersey was forced to return after one of the engines caught fire. Apparently the pilot “could see flames shooting from it.” All I have to say is thank God they spotted the problem early on, instead of when the flight was half way across the Atlantic.

7. November 2013: A flight from the Middle East was forced to land soon after take-off because one of the doors was not properly closed. Apparently, as soon as the plane was airborne, a warning light went off in the cockpit indicating that one of the aircraft doors was open. How can someone not close the door properly, especially when their life depends on it?

8. October 2009: This one is my second favorite. The cabin crew got into a fist fight mid-flight with the pilots over sexual harassment. The fight started in the cockpit, and spilled into the cabin for all the passengers to see. A pilot and a flight attendant suffered bruises as punches were thrown. Talk about live in-flight entertainment!

9. May 2009: This one was clearly not the airline’s fault, but worth a mention anyway. After the aircraft was fully boarded, the ground crew started the process of retracting the aerobridge. However, instead of retracting, they extended it further causing it to smash into the aircraft door, resulting in serious damage.

10. May 2008: This one is my absolute favorite. It perfectly embodies what I mentioned earlier about how-in-the-world-did-they-let-that-happen kind of funny incidents. A domestic flight started moving before closing the plane’s door. Apparently the captain ordered push-back (the aeronautical term for towing the plane to the main taxiway) from the parking bay while the flight was still coupled to the aerobridge. Fortunately, the plane’s second door was closed. If it wasn’t, “both the doors and the aerobridges would have broken down, rendering the aircraft immobile.”

That’s all folks! I hope reading this article will make you think twice about the airline you choose to fly. Remember, the cheapest option is not always the best one.

The Rising Cost of College

 

Recently, I was browsing the website of my alma mater, and chanced upon the cost of attendance for a 4 year undergraduate degree. Every so often, I have heard people complain about the rising cost of college, but this was the moment the gargantuan scale of the problem hit me.

I have very fond memories of my undergraduate experience – It is where I met some of my best friends and had some of the best times of my life. It is also where I learned to be independent and deal with my problems, to think and make decisions for myself, to build a professional career…I can go on and on. Suffice it to say that my undergrad experience helped shape and make me the person I am today.

At the time, the average annual cost of attendance for a 4 year undergraduate public college as an out-of-state/international student was expensive, by any measure. But it was worth it. The idea was that spending this large sum of money on education would give you the ability to be self-sufficient in the future. That’s a great investment on any day! However, I decided to dig a little deeper, and what I found was truly shocking.

But before I go into that I’d like to lay the groundwork by explaining the difference between in-state and out-of-state students. In-state students are typically students from State A who choose to attend college in State A. For the purpose of these calculations, we assume that they decide to not live with their parents, presumably because they want the “complete” college experience. An out-of-state student is one that lives in State B, or another country, and chooses to attend college in State A.

The typical arrangement is that the in-state student pays significantly lower tuition & fees because that student and his/her family live and pay taxes in that state, part of which presumably goes towards funding public universities. So an out-of-state (or international) student pays significantly more to attend the same university as in-state student. An analysis of the data from my alma mater during the 2000-2015 period reveals out-of-state students pay between 1.9x to 2.4x more than in-state students.

Additionally, there are tons of scholarships and financial aid options available. In-state students have access to the most scholarships and funding, then out-of-state students. Very few such options exist for international students. No wonder then that most universities are doing whatever they can to attract increasing number of international students. International students are the proverbial golden hens that pay full price, receive minimum financial aid, and as a kicker, even help with “diversity” related statistics. Which university wouldn’t like to use buzz words like global and diverse and talk about the number of countries their student body represents in their information brochure?

Cost Chart

The annual cost of attendance for out-of-state students has increased close to 150% since the year 2000. This represents a 6.2% annual increase every year since 2000 (CAGR). As can be seen in the graph above, that number today stands at close to US$ 50,000. Assuming a continued annual increase of 6.2%, that means someone entering a 4 year undergraduate program at a public university as an out-of-state student today (in 2015) can expect to have paid close to have paid US$ 221,000 for their degree on graduation.

In-state students have seen an increase of close to 125% during the same period, which represents an annual increase of 5.5% (CAGR). Extrapolating the data, someone entering a 4 year undergraduate program at a public university as an in-state student today (in 2015) can expect to have paid close to have paid US$ 106,000 for their degree on graduation.

Forget students, most average families can’t afford these prices. Hence they turn to loans. Close to 70% of graduating students in 2015 had education related debt. According to a recent Wall Street Journal article on student debt, the average 2015 graduating student will have a little over US$ 35,000 of student loan debt. The author goes on to write “…adjusted for inflation, that’s still more than twice the amount borrowers had to pay back two decades earlier.” As is the case for of a number of students, parents also take out loans to help pay for college. According to the article, that average number has reached close to US$ 31,000 this year.

 “All together, total education debt–including federal and private education loans–will tally nearly $68 billion this year for graduates with a bachelor’s degree and their parents.” 

-Wall Street Journal article

A Forbes article on the subject best explains why this is Ed Dharmful for young students: “Debt costs you time in savings, pushes back when and whether you can buy a home, start a family, open a small business or access capital…not to mention the opportunity cost of the education itself….” Additionally, a large portion of student loans are backed by the U.S. government through banks like Sallie Mae, or since 2010, the Department of Education. With current student default rates at close to 12% and expected to rise, and more debt forgiveness programs, it is the tax payer who will end up on the hook for these loans.

Like I mentioned at the beginning of this post, investing in a good education is always a good investment, but the question that now arises is: For how much longer will this stand true? For how much longer are these increases sustainable?

Not to beat a dead horse, but to drive the point further I continued the cost of attendance extrapolations. An out-of-state student graduating in 2040 from a standard 4 year public college will have paid a total cost of attendance of US$ 824,000, versus US$ 344,000 for an in-state student.

The solution is NOT temporary Band-Aid fixes like lower interest rates, higher taxes to subsidize education, or higher availability of loans. The answer lies in a fundamental restructuring of the way the educational system works and is funded, without losing the high quality education that most American colleges represent.

 

 

 

 

 

 

Notes:

  1. My alma mater is a well-known public university. After having compared its costs to other public colleges, I feel confident using its numbers as a benchmark for public colleges.
  2. The cost of attendance analysis focuses exclusively on 4 year undergraduate programs at public universities. Private schools, community colleges, etc. are excluded.
  3. In the graph, the year 2000 represents the 2000-2001 academic year, and so on.

 

 

Creating Multiple Income Streams (Part 2)

 

-Continued from Part 1…

Apart from the vast array of savings and deposits offered, one of the best and most impactful long-term investments you can make is in the equities market. A well-diversified portfolio (in terms of both geographies and industries) can do wonders for you over the long-term. Warren Buffet, and a number of long-term studies point to long-term annual returns of 7% on the US markets alone. Given the growth in emerging markets, a smart investor could potentially make more.

But all of this centers on the assumption that you EIhave the courage to ride out the dips, and not make stupid investment decisions based on emotions. Most normal investors panic when they see their portfolio down 10-15%. In their pain stricken state of mind, they decide to sell, take the loss and “salvage” whatever they have left. But this is the worst thing you can do for your portfolio. In fact, with stock prices so low, this may be the best time to invest further and buy more. An easy way to remember this is to memorize the famous investment adage: Buy low, Sell high. Not the other way around!

If you’re not sure about investing in individual stocks or bonds, you might consider mutual funds, or ETFs. As with most things in life, it’s always best to stick with ETFs from well-known or firmly establish brands to avoid other kinds of risks. I personally like ETFs because they:

  • Are relatively cheaper: Mutual funds typically come with all types of fees: management fees, administrative fees, ongoing fees, loads, etc. Depending on the type of mutual fund, these fees can even cross 3% and some even reach 10%. ETFs on the other hand tend to have lower expense ratios. Higher fees reduce returns. Just to give you an idea of the numbers, a 1% fee, compared to a 0.25% fee on a US$ 10,000 portfolio over 20 years reduces returns by US$ 30,000! How ‘bout them apples?
  • Trade like stocks: The price of mutual funds is typically determined at the end of the day. However, ETFs trade like stocks, and the price is always current. Also, since they trade like stocks they tend to have much higher liquidity, meaning they might be easier to sell when you want to.
  • Offer diversification: Buying a single region/country or sector focused ETF can give you exposure to a range of companies, thus protecting you from the risk of investing in any single company. Thousands of ETFs available offer a multitude of diversification options.
  • Offer tax benefits-This may or may not apply depending on your situation.

On a personal note, I think there is a lot of money to be made from event based investing and strategies like it. But let’s leave that for another time.

All said and done, everyone needs to decide for themselves the amount of risk PPFRthey are willing to take based on their personal situation. The only thing that stands true today, as it did 100 years ago is the little line that reads: past performance is not indicative of future results.

Creating Multiple Income Streams (Part 1)

 

Going off on a tangent from recent posts, anyone that has even a very basic idea of personal finance will tell you the importance of creating multiple streams of income for yourself. Nothing riles me more than when I try to talk to someone about investments and they tell me “I just have a savings account” or worse “Oh, I don’t understand finance.”

Multiple income streams will not only help you during hard times, they Pantswill also help your bank account, by layering it with extra money! And everyone knows there is nothing better than extra money! Think about how good you feel when you find money that you forgot about in your pocket. If finding such a small amount can make you so happy, just imagine how ecstatic you’d be if you checked your bank account in a few years and found that the money you had in there had doubled!

While there are lots of ways to generate additional income streams, this blog post focuses on the basic financial ones.

One of the easiest ways is to simply open a high yield savings account. A number of banks (such as ING) offer online accounts, generally with limited features, which can be attractive because they tend to offer higher interest rates than most traditional banks. While typical interest rates in emerging markets are relatively high (6-8%), the high inflation ensures this is not enough to have as the only additional source of income. Conversely, the low inflation in the developed world ensures that even the best known online banks only offer APRs of around 1%. Good enough to hold your emergency fund, but definitely not good enough to consider it an additional income stream. In any case, with things going the way they are and customers being charged for keeping money in the bank, perhaps we should look further for more options.

If you are an expatriate from a developing country working abroad, you might consider opening a non-resident savings deposit in your home country. This allows you to take advantage of the much higher SPL160138_010interest rates at home, while living in a place with little to no inflation. The biggest caveat with these accounts is not to lose the high interest earned in these accounts to badly timed transfer decisions when exchange rates are not in your favor. As long as you have a basic idea of exchange rates and no urgent need for that money, you can benefit greatly from the close to 8% annual yields offered. Add to that the magic of compounding over the medium-long term, you can make off with a boatload of additional money by taking advantage of international finance. You might even venture to call yourself an international man of finance.

For those that aren´t savvy with exchange rates and don’t want to take that risk, there are also non-resident deposits that allow you to deposit your savings in their original currency (USD, EUR, GBP, etc). Of course, in exchange for mitigating the exchange rate risk, you end up sacrificing a couple of points in the interest rate. No such thing as a free lunch.

—continued in Part 2…

101 words on financial wellness

Most people think financial wellness means having lots of money. Incorrect.Peace

Financial wellness means having your personal finances in order and the sensibility to have a financial plan. It means knowing where your money comes from, and where it goes.

It means having, or building a well-nourished savings account, and a balanced investment account. And a practical plan to pay off debt, or ideally not have any.

It means having the financial resources to be able to take care of all of your family’s needs, and some/ most of their wants. And most importantly, being able to sleep peacefully at night.

Employees vs. Entrepreneurs

 

I’m sure you, at some point, have had the occasional whim to just up and quit your job. To become an entrepreneur and start something new. To have what you do make some sort of impact on the world. Heck, who hasn’t?Stick it to the man

Based on current research, close to 48% of Americans want to be entrepreneurs. I mean who wouldn’t? You hear about the benefits all the time: flexible work hours, get to be your own boss, unlimited vacation time, (potentially) more money, a chance to stick it to the man…the list goes on and on.

However, I’d like to dedicate this article to playing the devil’s advocate and supporting the other side. I’m going to shine the spotlight on the rarely discussed topic of why working for someone can be more beneficial. Again, this varies on a case by case basis, but most things I touch upon in this post are focused towards the general white collar, and some parts of the blue collar population.

Vacations/sick days

Whether you’re going on vacation, or simply unwell, working for someone gives you peace of mind from Paid Leaveknowing that your company won’t likely cease to function. In fact, it gets better- you don’t have to choose between making money and taking a few days off. Paid leave lets you do both!

Even if you don’t have paid leave, you can still take unpaid leave without having to worry about the company shutting its doors. Being forced to choose between attending your kid’s graduation and keeping your company afloat is not a decision you’ll have to make often as an employee.

Predictable cash flows

Depending on your source, you will find that 8-9 out of every 10 starts ups fail. That is after burning through a ton of money for a couple of years. It’s not too hard to deduce from such statistics that working for a startup generally implies little to no initial remuneration, followed by:
-the high probability of eventually finding yourself either with a failed enterprise/ bankruptcy on your hands, or
-the low probability of not-so-great remuneration, or
-a very very very low probability of making it big and receiving sky high remuneration.

On the other hand, working for someone gives you certainty and stability. When you sign up, you know howFailing to plan much you’re going to be paid. At times, you can even negotiate for more. You know exactly how much money you will receive in your bank account. This allows you to develop some sort of plan for your personal finances. Never underestimate the importance of planning- failing to plan, is planning to fail.

It also means cash flow stability. Meaning, you know with certainty that said known quantity of money is going to hit your bank account on a certain date, month after month. This allows you to develop your personal finances and plan into the future. It also gives you peace of mind, and allows you to live your life without the constant worry of where you next paycheck is going to come from.

For the haters out there, yes I know there always exists a small chance of your employer going bankrupt, or you being let go off, but compared to a startup I’d say that probability is infinitesimal.

Office perks

Working for an employer comes with its perks. Depending on the employer, these can be lavish benefits like top of the line recruitment packages, free meals and an office vehicle, or more modest perks like tickets to exclusive events, occasional office lunches, and Christmas dinners. Generally, most employers’ perks will fall somewhere in between.

Whatever they may be, they are more than the perks you will probably receive as a young, budding entrepreneur.

Benefits

Apart from the stability of cash flows addressed earlier, employers also offer health care coverage or some sort of subsidized group health insurance program that you can’t access directly. Some even offer stock options, performance based remuneration, etc. Directly, or indirectly, every one of these translates into more money in your pocket. Benefits that most real startups can’t offer.

In fact, benefits are fairly important to most employees. Some quick desktop research shows that health benefits are amongst the most highly valued benefits by employees.

Collegial atmosphere

Personally, I like entering/exiting the office and walking the corridor to my desk greeting or being greeted by High 5everyone with a cheerful Buenos Dias/Hasta Mañana! I like grabbing the occasional lunch or beer with coworkers and chatting about work, or about where they are headed for their summer vacations. I hate to admit it, but I even occasionally enjoy partaking in a bit of office gossip.

All these are things that bring you closer to your fellow workers, and allow you to develop camaraderie and build personal & meaningful relationships. Also, these are all things that you can’t do if you go it alone and be an entrepreneur.  

Role that you want

Another benefit of working for someone is that you can choose the role you want to play. You can apply for the kind of position you want. If you like to travel and meet people, you can find a role that lets you do that, and likewise if you’re an introvert or a desk junkie.

If you don’t like what you’re doing, you always have the option to either negotiate a promotion/change in position to move towards what you want to focus on, or simply quit the company and search for what you want elsewhere.

On the contrary, as an entrepreneur you are all in and stuck with what you started. Your only “out” is shutting down the company. Additionally, as an entrepreneur you have to focus on everything, and not just the aspects of the business that interest you, which brings me to my final point…

Don’t have to sweat the small stuff

Working for someone gives you the benefit of not having to sweat the small stuff. I’m referring to things at a basic level, things related to infrastructure like daily office space, office consumables, electricity, internet, registrations, etc. are not things you need to deal with. As an entrepreneur, in addition to trying to launch your business, you have to waste your time juggling all these mundane issues.

Those are just the basics- then there are more complicated issues. Your employer, for example, deducts your payroll taxes for you. Your employer also pays a large part of your social security taxes. As an entrepreneur, you’d have to file quarterly tax estimates, and pay taxes for your employees’ social security benefits. Both of which are expensive and time consuming activities. Just to give you a sense of the numbers, on average in Spain 38% of the value of your gross paycheck needs to be paid every month towards social security. The employee shoulders 6.4% of this burden. The employer pays 31.6% over and above what they pay you in salary.

Coming away from reading this post, you might have the impression that I am a company man and anti-entrepreneurship. Well, I am not. In spite of my rant about why entrepreneurship sucks, I am not against it. WeekendNot even close. I just wanted to take the opportunity to support the rarely discussed other side of the discussion and bring it to the debate table.

Entrepreneurship is not a bad thing. To be an entrepreneur takes courage. Not everyone can leave the safety and stability of a well-paying job. It takes foresight and the ability to manage a thousand things small and big, all at once. Without entrepreneurs who risked everything, there’d be no companies that have changed the world like Apple or Microsoft. Heck, there’d be no one to employ the non-entrepreneurs.

Entrepreneurs and non-entrepreneurs depend on each other and share a well-balanced mutually beneficial relationship. At the end of the day, each person has to evaluate their own life situation and risk appetite, and decide for themselves which path suits them better.

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