Friday, November 30, 2007

On Buying a Lifestyle...with a Fixed-Rate Mortgage

Despite all of the back and forth about sub-prime mortgages and the housing bubble, I am feeling just fine. The reason is that when purchasing, I followed some old advice:

Don't expect to flip. In general, I've been told by many people that you shouldn't buy a home unless you plan to hold on to it for 7 years or longer. If the market does well and you decide to sell, fine. But if you want to be sure not to lose money, don't buy something that you only want for a year or two. I've been in my current location for more than 3 years. I like it. And I have no intention of leaving in the short or medium term.

It seems to me, that real estate, like any asset class, has its ups and downs. But as a practical point, I don't look at my home as an asset per se. Rather, I consider it to be a fixed expense that I need to survive, much like food and water. Therefore, as long as the payment is reasonable and it functions to keep me warm and sheltered and comfortable, that is all I need. The real problem has entered when people started looking at homes as truly an asset. I mean, you wouldn't try to "flip" your car right?  To me, its the same thing.

Purchasing a place to live with a fixed mortgage was what allowed me to really make sure that I could buy my lifestyle. Once I got the loan, it had nothing to do with housing markets, appreciation, interest rate cuts etc. Nothing matters anymore. The only way you get the squeeze once you're in a fixed rate mortgage is property taxes and/or insurance rates which can change. But for most people, these don't change much. Rather, their budgets are nice and predictable and I'm grateful to be in that category.

Wednesday, November 28, 2007

A Macro View? Don't Run and Hide. Just Ask The Right Questions

So, its been a while since I've written anything and I think it is interesting to start looking at some macro ideas. I'd like to sum up a couple of conversations I've had recently about the economy.

With a friend over the holidays, we were discussing the economy and people were asking me what the best thing to do was. I told them that I thought that the time to "prepare" and "react" to this situation is long since gone. People that are leveraged in investments or real estate are going to have a hard time unless they have liquid cash to weather the storm. An emergency fund is key here and most people don't have serious free cash flow to save money right now, especially with the cold winter and holidays coming up.

So, the takeaway for people in trouble is to do the same old boring things:
1. Build an emergency/freedom fund to handle these lean times that we're in.
2. Cut spending and increase earnings so that you can have a good "cushion" of free cash flow each month. You might want to aim for 10 or 20% on top of what you're already saving and contributing to retirement. Right now I am at about 5% (plus additional monthly savings and retirement), but I'd like to see that number be even higher.

The second conversation was about foreign trade and how it relates to the economy and inflation. Inflation runs amok when economies run hot for too long and money is too easy to get. In the end, it is easy to understand why the combination of lower housing prices (due to excess demand) and the problems with financial stocks are contributing to a souring of the economy (at least in terms of Market Volitility). But the real question is whether or not we can/will spend our way out of it. I learned something new in this article.

Consumer Spending is the main contributor to GDP. And GDP is the way that we earn money. GDP is what gives our economy stability because it shows that the US is producing and therefore can collect taxes. Our ability to collect taxes shows that our paper dollars are worth something. To me, this number, GDP, is what I am interested in. And knowing that our GDP is 70% based on consumer spending, makes me even more interested to see how consumer confidence is.

This article details that although total spending is up, consumer confidence is at a two-year low.

Instead of asking whether or not Santa Claus is poor this year...the real two questions people should be asking are:
1. (personal) How secure is my job? What sectors of the economy (finance/construction/retail) might cause a possible downsizing?
2. (macroeconomic) Are people going to keep buying large, durable goods like cars, dishwashers, etc that make up large amounts of consumer spending?

Friday, November 09, 2007

Bringing Money on Vacation

So I am about to go on vacation; plane leaves tomorrow. And since this is a blog about money, I thought that I would talk a little bit in this post about my plans for the vacation and how I plan to manage the money.

1. I plan to bring several hundred dollars of american money to convert to foreign currency in an airport exchange.
2. I plan to bring several hundred dollars of travellers cheques in american currency which I will likely exchange at the hotel or a bank during my stay.
3. I plan to use a credit card for major purchases and to pay for parking when I return.

Even though this vacation will be somewhat expensive, it will be quite fun since the money has been diligently saved up in order to really enjoy it. Furthermore I feel comfortable with my progress toward financial goals so this will be a real treat.

Of the options above, here's why I am doing each. First, I like to have some currency on hand. Second, I like to have additional currency that is available in the event of a stolen wallet etc that I should be able to get back quickly. Third, I like to avoid some of the fees that I will likely incur with the first two options. The third has some fees too as I read in this article.

But in the end I am comfortable with this three-prong strategy. What do you usually do when travelling abroad?