Friday, August 22, 2014

Is Buying A House a Good Investment?

I read a lot about a house being a "good investment", but is that really true?  A house is not really a true investment, since you live in it.  Try living in a mutual fund, you could get really wet and cold.  So I have compared the costs and benefits of renting and buying the same Townhouse in Lansdowne Virginia, a suburb outside Washington DC.  The housing market here is fairly balanced, with most houses on the market for 30 to 60 days, few foreclosures, and many similar houses for rent.  I was able to find almost the exact same townhouse for sale and rent within 50 yards of each other for a decent comparison and I used Zillow to get the asking price and asking rent.

The referenced spreadsheet here shows the details of my analysis.  It assumes that you either buy or rent the townhouse for 25 years and then move out/sell it.  You could make it more accurate by adding other factors like closing costs, HOA fees.. but I doubt it will dramatically change the outcome.

The cost of renting for 25 years in current dollars is -$780,000

The cost of buying and paying off the mortgage in 25 years is -$215,000, assuming income tax effects or -$315,000 if you ignore the effect of US income taxes.

So, I conclude:
  1. Your personal house is a lousy "investment" since you lose money.  But it is not really an investment anyway since it is your home and you live in it.
  2. Buying a house today in Virginia is superior to renting as you spend over $500,000 less to house your family.  Even if you ignore income taxes, you still save 45% over renting.  This is true if you plan to stay more than 5 years in the house.  So why are people still renting?  My guess is that people are still in shock over the housing crash and do not see the advantages of buying.
  3. Google spreadsheets are OK and they are free but not as sophisticated as expensive Microsoft Excel.  Let me know if you find any errors in the spreadsheet.
For another view, check out this New York Times Calculator.

Acknowledgements: JR of blog for mortgage spreadsheet

Monday, August 18, 2014

How Much Do You Pay Per Year for Your Car?

One of the advantages of being retired or semi-retired is that you may not need a second car anymore for commuting to work.  This can be one of the primary savings when you retire.  But how much can you really save?

There are good studies online from AAA and others on the cost of a car per year or per mile, but I thought I would do the math myself with this spreadsheet.  We are currently getting by with one car and an occasional rental car after having two cars for the last 30 years, so I have some experience.

Depending on what you assume, the cost works out to about $7000 per year or about $0.60 per mile.  There are other estimates on the web of about $6000, but this does not really change the magnitude of the cost to a family.    If your estimated living expenses in retirement are $100K, this represents a 6% to 7% saving per year or $165,000 (present value) savings over a 25 year retirement.  Aside from the money aspect, you are also being kind to the planet by saving on energy and pollution and kind to your neighbors by not clogging the roads.

But I need a second car, right?  You might need two cars if you and your spouse are regularly going to separate locations that are not easily accessible by other means.  However, with the advent of the "sharing economy", there are lots of alternatives to owning a car:

  • The old reliables: bicycles, public transit, taxis, car rentals
  • Car sharing services like Zipcar
  • New wave taxis like Uber and Lyft
  • Bike sharing services like Citibike
So think carefully about that second car in the driveway.  You could save a lot.

Thursday, August 14, 2014

Controlling Expenses in Retirement (or while not working)

Someone asked me the other day how we work the family finances now that I am not working aka retired aka looking for second career?  We are using the same system that we used when I worked, except money only goes out the door, no money comes in.

First, we set a budget for all common household expenses like mortgage, insurance, groceries, entertainment, etc.  The budget can be by week, by month, bimonthly, whatever suits you.  In the case of retirement, the budget amount should be set at or below the expense level in your retirement plan.  Our "allowance" for personal items like clothes and hobbies is also included in the budget.

Second, we accumulate all paper receipts and I also get them downloaded into Quicken on my PC.  At the end of each budget period, we total them all up and compare them to our budget.  Any savings are accumulated in an account that we use to pay for house taxes and vacations.  Any extra spending has to either come out of the tax and vacation account or it is carried over to the next budget period.

Third, monitor spending and decrease it if you are running over too much, cut discretionary things like restaurant meals etc. If you are spending too little, you can increase spending or go on a big vacation.

If you have a sound retirement plan, and follow this approach or something similar, you should be able to enjoy a long and stress-free retirement.

Monday, August 11, 2014

NII Holdings Warns of Bankruptcy

My last employer, NII Holdings, just announced its earnings and warned it could go bankrupt.  The details are in this Bloomberg article.

The company went through a difficult transition from the old business using older wireless technology with Push-to-Talk (PTT) to a new 3G business with new IT systems, new geographic markets, more competition, new platforms, new business models like outsourcing, and new people.  It is too bad as a lot of good people worked really hard to make the company a success and a lot of them were laid off recently.

However, this is the way business works in the USA and the world in general.  Sometimes you win, sometimes you lose, and the market is always the judge and jury.

Friday, August 8, 2014

How to be A Better Husband With No Effort

My father shared with me one of the secrets for getting your wife to believe you are a better husband.  My friends and I have tried this technique and it really works.  There is no effort involved.

First, you need to identify one or two married men who are known to your wife and who are considered to be "bad husbands".  Perhaps they are lazy, arrogant, argue a lot, drink too much, or have some other non-criminal bad characteristic.  These men must be well known to your wife, and it is even better if your wife is friends with their wife.  Don't pick someone who is getting divorced because they are useless for comparison purposes.  Virtually all ex-wives think their ex-husbands were bad spouses.

Second, you need to make sure to bring up these bad husbands and their faults in casual conversation to bring them to your wife's attention.  Something like "..Honey, I fixed the loose boards on the deck, is Bad-Husband's daughter out of the hospital yet after falling through the rotten boards on their deck?.."  Don't feel bad about throwing them under the bus, they probably deserve it and your wife lives with you, not with them, so no harm, no foul.

The comparison between you and your minor flaws and these "bad husbands" will make you look like a shining star in the Husband Constellation.

Here are two examples of my father's chosen bad husbands:

Mr. C: He had 5 kids, but said he only wanted the first 2, so he did not support the other 3.  He really did not support any of them, because he hardly ever had a job, except for being a ski-touring guide occasionally.  His wife worked two teaching jobs to support this big family.  He often went on solo vacations.  He was a primo bad husband.

Mr W: He was too cheap to buy a car but would make his wife drive him around as she needed a car due to her terrible arthritis.  As a cheapo, he would also water down the vodka at his parties.  He also tended to blurt out whatever came into his head, even if it was downright insulting.  Not a perfect bad husband, but good enough.

So I encourage you to try this well proven method, and, it goes without saying, don't tell your wife about this.  Keep it quiet and pass it on to your sons when they get married.  They will thank you.

Thursday, August 7, 2014

Scared Canadian Bankers

Yesterday my wife wanted to renew a GIC (CD for Americans) inside her RRSP (IRA for Americans) with the Royal Bank of Canada.  A very routine transaction for a Canadian bank.  As usual, she called the telephone banking number and spoke to a young man, who freaked out when he found out she lived in the USA (the address is in their computer system).  He insisted he could only give her "the regular interest rate" on her GIC but his manager could give "the bonus rate" when he called back in the afternoon.  The bonus rate is a little extra that they give for a particular maturity, say 0.1% extra.

We got the call from the manager who repeatedly said, in a voice tinged with fear, " cannot ask me for investment advice..".  He kept repeating this as he asked some basic questions about risk tolerance, net worth, do you work, etc etc.  He said that as a US resident, he cannot give us any investment advice but my wife kept saying she did not want any advice, she just wanted to renew her GIC.  If he asked a question, he said something like "..what is your risk tolerance, understanding that you cannot ask me for investment advice..?"  Because I like to stir up trouble, I kept wanting to ask him for investment advice like "..should I buy Canadian Gold Mine stocks or keep my money under my mattress?"  Maybe this would cause him to hang up the phone, cancel all our accounts, have our passports revoked, and a bunch of Mounties would be sent to Virginia on horseback to arrest us.  I resisted the urge and the bonus 0.1% interest was given to my wife after a last admonition to "..not ask for investment advice..".

Wednesday, August 6, 2014

Consultant? Maybe Not Yet

A while back I wrote about perhaps doing some part time work as a consultant or as a service worker.

I can report that my efforts to be a consultant are still ongoing, but not successful yet.  After going through a long process to get a part time assignment with the federal government, I was not successful.  After inquiring on the reason, I was told that the US federal government does not give reasons why it does not hire a specific consultant.  Maybe it is the aftermath of the Richard Snowden incident - he was a consultant to the NSA.

Anyway, onwards and upwards.

P.S. Check out my newest blog on quadcopters, drones, and remote piloted vehicles.

Tuesday, August 5, 2014

Did You Rebalance?

A few weeks ago, I wrote about rebalancing your portfolio since it was mid-year, and the stock market was up since the start of the year.  I hope you followed my advice, as the market has suffered losses since then and is basically flat or down now compared to January.  Keep in mind, 88% of your portfolio's movement comes from your allocation, versus only 12% for timing and picking stocks (see below).

Whatever you decided, it is still a good idea to rebalance your portfolio so you hold a diversified portfolio of low cost index stock, bond, and international funds along with a safety stock of cash.  There are plenty of articles on the internet about what should be your portfolio composition given your age, goals, and risk tolerance.  The following video by Vanguard gives you some good information.

Friday, August 1, 2014

Lifeguard Is No Longer A Desired Summer Job

When I was in my teens, we tried to pick up Summer jobs during our school vacations to supplement our allowances.  The ideal job was at Dad's company office (good pay, indoor work), followed by government jobs like being a lifeguard or working at the recreation center (good pay and conditions), followed by manual labor jobs.  Back then, kids were not often employed in retail or restaurants, as these were mostly well-paying jobs with full time employees - hard to believe but it's true.

Needless to say, I usually ended up with the manual labor jobs like delivering telephone books or helping make truck deliveries in sweltering heat for minimum wage.  I envied those cool kids sitting there on the lifeguard stands in their bathing suits and sunglasses watching the girls and occasionally yelling out to some kid "no peeing in the pool!"

Nowadays, they obviously cannot get local kids to be lifeguards.  Our community pools are primarily staffed with students flown over from Eastern Europe.  A company in the US recruits them, flies them over and back, puts them up in rented apartments, rents bicycles to them, and pays them.  Every day after 8pm I see them all in their company uniforms (red shorts, white tops) riding their rented bikes (with asset stickers from the company) back to the apartments and talking in accented English.  I don't begrudge them the jobs, someone has to do it if you cannot get locals, and I am sure it is a lot of fun.  But it does seem strange.