Is Home Ownership Overrated?


smhomebuyersFor generations of Americans, It’s a Wonderful Life pretty much sums up the benefits of home ownership. George Bailey takes over his father’s savings and loan in Bedford Falls, builds Bailey Park, an idyllic affordable-housing development, and issues mortgages. In the alternative universe where George never lived, there’s no savings and loan or Bailey Park; the townspeople have fallen into debauchery as tenants of the usurious Henry Potter; and quaint Bedford Falls, now renamed Pottersville, is home to sleazy nightclubs and pawnshops.

Director Frank Capra’s vision has dominated public policy ever since. Republicans and Democrats have competed to extol home ownership as a sound investment and source of moral virtue, stability and community.

Growing up in the small-town Midwest of the 1950s and ’60s, I never questioned those precepts. In my family, mortgage payments were a sacred obligation. The idea of “throwing away money on rent,” not to mention being beholden to the whims of a landlord, seemed anathema. The few neighborhoods where people rented were indeed shabby. After I moved to New York City, it took a decade of savings, but as soon as I had a down payment, I bought an apartment.

In the wake of the real estate bubble and collapse, all of these assumptions have been called into question—and in some cases, are under attack. Decades of policies designed to foster home ownership are being reexamined, from taxpayer support for the giant mortgage agencies to the tax deduction for mortgage interest. In light of this sea change, I decided to reapproach the sacred cow of home ownership with an open mind. Does it make sense financially? Does it promote social benefits?

In some cities, the past decade has been brutal for homeowners. In Atlanta average home prices this year are the same as they were in 2000—11 years ago—according to the Case-Shiller home-price index. Nationally, the rate of appreciation in housing seems likely to return to its long-term historical average, which is only slightly higher than the rate of inflation. Purely as an investment, residential real estate is never going to outperform the stock market or many other asset classes.

Nonetheless, home ownership has historically yielded other financial benefits. “Over 75 years the mortgage system is how the middle and lower-middle class accumulated capital,” John Quigley, a professor of economics at the University of California at Berkeley, told me. “It was a system of forced savings rather than an investment per se. It was never intended to triple your money in three years.”

For the most part, the system worked as intended, enabling Americans to accumulate wealth, put their children though college and retire comfortably. Returns were enhanced by the leverage provided by the mortgage—as long as housing prices rose. But as with any asset, leverage can also magnify losses. No one can borrow 80 percent of the price of a stock, yet that amount of leverage—and even more—became routine with real estate. In the wake of the housing collapse, that notion is being reexamined. “People have not ascribed enough of a risk premium to the leverage,” says Christopher Mayer, professor of real estate at Columbia Business School.

Today, the answer to the question of whether a home is a good investment may well be “not always,” according to Stuart Gabriel, director of the Ziman Center for Real Estate at UCLA. Policies that increased home ownership created what Gabriel calls “transitory owners,” who ended up suffering defaults, evictions, foreclosures and other financial disruptions. “Policy that creates only temporary home ownership is bad policy,” Gabriel adds.

If the financial benefits of home ownership seem elusive in some circumstances, the social benefits are even more so. When it comes to promoting stability and other social benefits, nearly every economist I interviewed agreed that it’s difficult if not impossible to separate home ownership from other variables that correlate with desirable environments, like affluence and levels of education.

The home ownership rate in France is 57 percent; in Germany, 46 percent; and in Switzerland, just 37 percent. By comparison, it’s 67 percent in the U.S. Housing is only one variable, of course, but no one would argue that communities in France or Germany are less stable, less cohesive or more unkempt than those in the U.S. Zurich and other cities in pristine Switzerland are a far cry from Pottersville.

Once you question the notion that everyone should own a home, the policy implications are significant. As Mayer says, “Too much of current policy seems aimed at promoting consumption of housing—ever larger and more lavish homes—rather than ownership itself.” All the economists I interviewed criticized the mortgage deduction as needlessly benefiting affluent taxpayers (most low-income taxpayers don’t itemize, so they get no benefit). Most agreed it should be phased out, perhaps over 15 to 20 years to minimize the effect on housing prices.

But they also agreed that there’s a place for some government support for home ownership, primarily as a way to promote savings. Warren Buffett, who has lived for more than 50 years in a home that cost him $31,500, made a resonant comment on this issue in his latest letter to shareholders of Berkshire Hathaway: “Our country’s social goal should not be to put families into the house of their dreams, but rather, to put them into a house they can afford.”

Source: Smart Money
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3 Ways to Organize Your Financial Life


You Don’t Have to be a Genius to Invest like One : Investment Strategy from Warren Buffett


Warren Buffett is one of thWarren Buffett has built his reputation as a stellar investor by always trusting his gut and making bets with a long-term outlook.e most successful investors in U.S. history: With an estimated personal fortune of $47 billion and a knack for picking stocks that will reap huge dividends, Buffett has followed certain investing principles throughout his career – ones that fledgling investors can learn from.

According to Mark Riddix, investing requires patience. Rather than judging your portfolio’s performance over the short-term, it is best to have a long-term outlook, assessing the performance of your investments on a five year basis. Sometimes it can take two or three years for an investment strategy to pay off – and often times, even longer.

When Buffett invested $5 billion in Goldman Sachs during the recession in 2008, many analysts said that the investment guru had misstepped by taking such a large stake in a bank that was battered by the financial crisis and whose stock had slipped to $115 per share. However, Buffett reaped millions from the deal as the bank has surged back, with a closing stock price yesterday of $165 per share.

Moreover, Buffett is often a contrarian investor, going against popular opinion about the fate of one company or industry. Buffett’s investments, including stakes in Costco, Exxon Mobil and Comcast, have been viewed with ire by analysts in the past, but they have brought highly profitable returns on investment to his company, Berkshire Hathaway.

Lastly, it’s best to keep things simple when investing in stocks. Stock brokers and investment analysts increasingly utilize complex mathematical models to pick “hot” stocks, but Buffett mostly eschews that method, investing in companies with business models that are easily understood. Companies like Target and Apple make their money in straightforward ways, while other companies can obfuscate their models, reaching that volted “hot stock” status without ever producing real results.

If you want a $47 billion fortune and all the perks that come with it, you should probably set your sights a little lower – or set a long-term outlook and be on the lookout for investing opportunities at any given moment.

Source: Young Money Magazine

Will Your Children Inherit the Wealth Ethic or the Work Ethic?


ImageGrowing up affluent is a double-edged sword.  Having your children not have to struggle each day for economic survival is a blessing. Yet, it is easy for them to fall prey to the expensive and frivolous.

More than eight in ten parents surveyed in a Smith Barney Working Wealth poll1 said raising financially responsible children was deeply important, and that they felt more successful and accomplished when their children understood the value of money. Yet 70 percent admitted that having wealth makes the task of teaching that value more challenging. Many expressed fear that they weren’t passing down a strong work ethic.

It takes skill to manage money, even with professional help. It also takes character-a wisdom that grows out of virtue and care for others. Your Financial Advisor can help you find the best way to teach those skills. To impart financial values to your children or grandchildren, consider these expert tips for every stage of childhood.

Up to Age 11
Setting limits is one of the most valuable practices. “It’s key in wealthy families to be able to say, ‘There are ceilings,’” says Judy Barber, a licensed marriage and family therapist with Family Money Consultants LLC in San Francisco. She says that when you “help children learn the difference between needs and wants” you are building a lifelong foundation.  Setting limits also prepares kids for a common occurrence in life: Cash flow, even in wealthy families, goes up and down.

1. Explain what you do: Talk to children about money in an age-appropriate way. Explain how you make decisions about buying things and where money goes when you give it away. Explain why you care for others’ needs. If they don’t see it, they won’t know-so bring children along to the neighborhood center where you volunteer, or at holiday time, bring toys to a local homeless shelter together.

2. Keep it simple and immediate: Young children think concretely, so experts say to keep lessons tangible. Get the child a piggybank and when he or she receives money, talk about using some for spending and setting some aside for savings.  Saving for goals can begin in elementary school. But if saving takes too long, many children lose interest. That’s okay.  Some kids are ten before they’re able to do long-range planning.  Don’t rush it.

3. Learn through play: Preschoolers can learn by pretending to shop or run a store. Encourage games with receipt books to tear off, paper money or a cash register. By elementary school, a pet is an excellent tool for learning money management.

4. Make allowance reliable: Whether allowance is tied to chores or not is a parent’s decision, but experts concur that families should avoid docking a child’s allowance for bad behavior. “Young people need a consistent amount,” Barber explains. A study she ran found children whose allowance was reliable were, a decade later, notably more fiscally responsible. Some experts suggest dividing the allowance into separate jars for saving, spending and charitable giving.

5. Invite a child to give: Giving has its own inherent value, and brings the giver joy. It also carries lessons about responsibility and decision making. Perhaps allow a child to hand over a donation when possible-and help children find causes that matter to them. Sabin says, “It invites them to see how they can be responsible for making financial choices. The lesson is the power of your actions can make the world a better place.”

Tweens and Teens
Emotions run high with independent-minded adolescents, so matter-of-fact education is key. Skip the tales of your youthful privation. “Saying ‘Be like me’ will fall on deaf ears,” says Dan FitzPatrick, CEO of Citi Trust. “Young people have to find their own basis for a sense of self-worth. It’s extremely important in families of wealth.” So mix objective education with a continuing emphasis on values—which teens can now begin to apply.

1. Enlarge allowance-and responsibilities: It’s probably time to discuss increasing tasks and upping allowance to $25 per week or more, as well as increasing the number of items the young person must buy, many experts say. They might include toiletries, birthday gifts, or clothing. Barber cautions, however, against loading that duty onto a highly pressured, tightly scheduled child. It may be too much responsibility.

2. Ratchet up the terminology: By middle school, introduce more sophisticated terms, like “compound interest” and “mutual funds.” In order to give them a larger picture, expose kids (calmly) to financial unpredictability. Offer assurance that you could weather a downturn. “Explain that you get advice from experienced financial planners and the value of that,” Stewart says. Consider visiting a Financial Advisor together. If you have a college investment account, look together at how it’s doing. Explain what college costs and what your current savings will buy.

3. Encourage employment: Some students are too overloaded, but if you have a business or a local office, encourage your adolescent to do some filing, errands, repairs or data entry. It will be harder to squander money that’s taken time and effort to earn.

4. Shape a wise consumer: Continue explaining your thought processes—now at a higher level-ahead of big purchases, and help with research. “My daughter began shopping on the net for clothing,” says Stewart. “No one could believe it when she found a beautiful, barely worn homecoming gown for $24.” When children blow their money, don’t bail them out. Mistakes are learning opportunities.

5. Preserve volunteering time: Allow time for and encourage volunteerism. Research shows that charitable activity makes kids happier as they help others find happiness and teaches self-esteem, teamwork and financial and analytical knowhow.  Direct involvement also helps kids connect to the fate of others. If your child or grandchild isn’t interested, sit tight; it can take time for a young imagination to spark.


Cyber Finance, KID Style

Kids don’t have to look far for a seasoned guide through the world of finance. At the Young Investors Network (smithbarney.com/yin/home), the ins and outs of investing, budgeting and saving come in jargon-free, easy-to- grasp digital doses with real-life examples and fun hands-on tools – including video games. The site helps young people think through their immediate short- and long-term financial goals and provides a “goals calculator” to formalize the experience. After mulling over what they want, they can even use a savings and budget calculator to figure out how to get there.

Getting the terms: One part of the neon-bright Web portal introduces young investors to the terms and meanings of stocks and dividends through a scenario in which a teenage character, Mandy, starts a company selling old clothes from her grandmother’s attic and pays her investors small dividends from her earnings.

Taking part: Young investors can get involved more actively by creating their own “cyber portfolio” for a taste of stock investing. There’s a quick lesson on the difference between short-term investing (saving for your first car, say, over one to three years) and how that can be accomplished with bonds, versus funding an immediate need, such as a laptop, by investing in cash equivalents like money-market funds.

Understanding time: Finally, the merits of long-term (more than five years) investing are noted, such as funding college tuition with growth vehicles like stocks. When it comes to college, there’s also a college-cost calculator. Along the way, they learn the tradeoff between risk and return. There are discussions on philanthropic experiences, risks and rewards and the downside of getting too deeply in debt. And so you don’t miss out, there are areas geared toward parents and classroom teachers as well.

By Ben Proctor (Young Money)

How to Find Thousands in Lost Pension Money


My wife and I were hiking with some friends recently, and as often happens now with people our age, we started talking about retirement — more specifically, about whether we’d have enough retirement income to make ends meet. Our friend, Bill, commented that he had two small pensions from prior employers for whom he had worked more than ten years ago, but that he hadn’t stayed in touch with them. He wondered if it was worth his time to track them down. Here’s how our conversation went after that.

“Huh?”

“Between you and your wife, one of you will probably live 25 years or more in retirement, and $350 paid to you each month for 25 years comes to about $105,000.”

Hearing that, Bill was now on fire to find this money, so he spent the time to track them down. One pension wasn’t hard to find — he called the HR department of his former employer, and they gave him the phone number and website of the plan administrator. One phone call was all it took to find out exactly how much his pension is worth and how to claim it.

Getting information on the other pension took a little more digging. His former company had gone bankrupt, and its pension plan had been taken over by the Pension Benefit Guaranty Corporation (PBGC), a federal agency that guarantees pensions of bankrupt companies. The agency also maintains information on any pension plan that has been terminated, even if the company is still in business. After contacting the PBGC, Bill found that an annuity had been purchased in his name from an insurance company. Then, just one phone call to the insurance company had Bill hitting paydirt.

Bill’s situation was a fairly easy one to resolve; he knew how to contact one of his former employers, and the other employer’s plan was in the PBGC’s database because it had been terminated. It’s more difficult to find lost pensions if your plan hasn’t been terminated in that case, the PBGC can’t help you. And if you no longer know how to contact your former employer because the company has moved, or if your former company has been folded into a larger company, you may have a bit of detective work on your hands.

First, remind yourself that it’s worth the time to track down your pension remembering Bill’s example may just motivate you to pick up the phone or surf the Internet. If you’re in this situation, start with the PBGC. They’ve got a pamphlet, Finding a Lost Pension, posted online that offers a number of good tips that can help you get started on your search.

In addition, when you terminated employment with your former employer, your pension should have been reported to the Social Security Administration. When you apply for Social Security benefits or Medicare, the administration is required to tell you about pensions that have been reported to them.

But what if you want to learn about your pension before you apply for Social Security benefits? You can simply write to the Social Security administration and ask for information about your pension.

Here are a few other things to know about finding missing pensions:

• All of the above information only applies to traditional defined benefit pension plans; they don’t apply to 401ks, profit-sharing plans, or any other defined contribution plan. For information on these latter types of plans, you’ll need to keep in touch with the plan’s administrator or the HR department of your former employer.

• Also, the information here only applies to private employment, not government employment. Hopefully, your former government employer is still in business, although it could be quite a hunt to find the right person who’ll be able to give you the information you need.

This story should reinforce the need to organize your retirement planning documents, and the importance of storing and organizing important papers in your retirement inventory.

Bill estimated that it was worth about $10,000 per hour of his time that he spent tracking down his lost pensions. That’s pretty hard to beat!

Most people need to make every dollar count in retirement, so finding pensions that pay even just a few hundred dollars per month is well worth the time you might spend tracking them down. Happy hunting!

By Steve Vernon (Yahoo Finance)

Things You Might Not Know About Credit


How much do you know about credit? Below are four things you might not be aware of.

1.  You can get a temporary credit card number. If you don’t feel comfortable using your credit card number when shopping online, you can use a short-term number instead. All you have to do is contact your credit card issuer or bank and make a request. A new, temporary number will be provided that is linked to your credit card account. Bank of America offers this option through its ShopSafe [2] program. Citibank also offers this service via what it calls a virtual account number [3]. Temporary credit card numbers are free of charge.

2. A potential employer can’t see everything about your credit. When a future employer orders your credit report, they can’t see your credit score. Employers don’t have access to your credit score, only your report. Employers receive a modified version of your credit report (known as an employment report) from the three major credit reporting agencies, which doesn’t include your score.

3. Depending on the card, you can refuse to show ID when making a purchase at a store. Under the merchant agreements with MasterCard and Visa, a merchant is allowed to ask for your ID, but you’re not required to show it and the merchant cannot refuse the transaction. These rules are listed in MasterCard’s Merchant Rules Manual [4]and Visa’s Rules for Visa Merchants. However, if you’re purchasing alcohol, tobacco, or certain medications, ID is required by law regardless of the credit card you’re using.

4. Having a debt forgiven doesn’t mean you’re in the clear. According to the IRS, (depending on the type of debt forgiven) forgiven debt is taxable because it’s counted as income and the forgiven amount must be reported as such. However, in some cases, you might be eligible for an exclusion. One example is mortgage debt. Under the Mortgage Forgiveness Debt Relief Act [5], if your mortgage is partially forgiven from 2007 through the 2012 tax years, you might be eligible to apply for tax relief and exclude the forgiven debt from your income. Debts discharged during bankruptcy are also eligible for exclusion.

By: Sheiresa Ngo (Black Enterprise)

8 Money Secrets of the Wealthy


What separates the rich from the rest

Think you could never earn enough to be wealthy? Think again. Financial experts say income alone explains just 5 percent of the wealth disparities in the United States. That’s why some of the lowest-earning households in terms of wages have managed to accumulate significant wealth.

So what do the wealthy know that the rest of us don’t? Plenty. But the good thing is, their secrets are far from rocket science. Most are common-sense money managing practices that rely on everything from simple laws of human nature to simple math we all learned in grammar school.

Here are eight secrets of the wealthy:
They have spending plans, not budgets. Believe it or not, the wealthy also budget their money. But rather than an unrealistic detailed budget that lists every purchase, such as morning coffee, dry cleaners and gas, they employ a strategy of weekly or monthly spending plans or smart estimations. The wealthy know that budgets get blown, and spending plans don’t.

They understand the power of compounding. The wealthy almost always start saving and investing at a young age. By starting early in life, they usually are able to reach their savings goals without breaking a sweat. They let the magic of time and compounding interest do the heavy lifting for them.

They see beyond the obvious. Call them visionaries, but the wealthy see beyond what normal people see. And they usually have the ability to create something out of nothing. They are not like everybody else, and are not apt to copy what other people have done. Wealthy people are doers, not doubters. They know how to make things happen, and never think something is impossible.

They spend less money than they earn. The wealthy will underestimate their incomes and overestimate their expenses to create a favorable bottom line. They use their net worth as the ultimate scorecard to determine how well they are doing.

They borrow money as leverage. The wealthy are constantly looking to increase their assets and reduce their liabilities. They borrow money only as leverage to invest and help them make more money. In other words, they use debt and do not let debt use them.

Read the complete story in the December/January issue of EBONY! On newsstands NOW!

By: By KEVIN CHAPPELL (Ebony)

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