Controlling Your Financial Destiny

Controlling one's financial destiny can seem impossible in today's world. The idea of buying a home and saving for retirement used to seem so simple. You did it and things worked out. Now things have gotten way more complicated or so it seems. Some obscure lender who makes bad loans can now derail the financial system, your stock portfolio, and subsequently your dreams. Then you get fooled into playing the same game all over again by the Federal reserve which pumps more money into the same bad system in order to get the people who just got screwed to play again. This causes higher debt levels, inflation, higher interest rates, and higher unemployment. The more we seem to complicate things financially the worse the potential outcome if things don't go perfectly. The same is true of personal finances. If you are reading this blog, bought more house then you should have known you could afford, and lost it all the while crying foul I have no sympathy and this blog will not replace common sense. It builds on it. I will however submit that the game is rigged and unfair to the individual. So how do we win at an unfair game and take back our financial destiny? We change the game we choose to play.

In a capitalist society, a successful company is one that makes lots of money. Some do it by selling tangible products, and others sell a concept or a dream that varies from person to person. The companies that sell tangible products like computers and toys seldom get away with charging higher than market prices. Its hard to rip-off the consumer by selling GI Joes and in most cases you deal directly w/ the company and forgo the middlemen that add costs. The companies that sell concepts or dreams however tend to get away with financial murder. Usually the products these companies sell have high price tags, require at least some financing, require dealing with tons of middlemen, are subject to fluctuating market prices, and that market price is based on subjective risk models that may or may not determine the price you pay. Does that sound complicated? That's because it is. And the more complicated something is, the more money can be made selling it. A home purchase fits this complicated profile perfectly.

We've all seen the headlines screaming "MORTGAGE RATES ARE AT HISTORIC LOWS", and if you are a homeowner you've probably refinanced, or contemplated doing so at some point. It probably felt good reducing your payment as low overhead is great in a shaky economy. Whether or not you really benefited your financial situation by doing so is another story. Just because you have a lower payment does not mean you'll pay less overall. If you are looking to buy a home, you may feel a sense of urgency based on this interest rate claim. It may seem as if you don't buy now you are missing a great opportunity. After all the low interest rates will make your payment appear lower. A refinancing or purchase of a home should not be made of the basis of a single variable. However, due to marketing and misinformation you would never know it. It's also amazing that something that you have no control over such as interest rates and the hype behind them can cause us to get ourselves into hundreds of thousands of dollars of debt without thinking of the real consequences.

It all seems simple really. For the companies that it benefits it's real easy. They just complicate the simple things and simplify the complicated things. This practice can really complicate matters for you to say the least. At least that's the way the deck is initially stacked. However, it's just as easy to reverse this scenario. Not only is it possible to use these same tactics against home sellers and financiers, its also possible to never have to deal with them more than once in a lifetime. How is this possible you ask? Well, truth be told you only need to have one mortgage in your lifetime. It used to be that a homeowner would pay the first one off, and never have a mortgage again. Every other home purchase would then be in cash, or at least a substantial portion thereof. Only the modern U.S. consumer believes that rolling over your debt is an acceptable practice. It's because of this that we continue to pay high levels of wealth sucking interest and other transaction costs to financial institutions and middlemen thus keeping them in our lives, complicating them, and leaving us all poorer.

In order to be in control of your financial destiny it's necessary to visit the various components of your financial life and determine who really calls the shots. In the case of your home if it still has a mortgage it's your bank. You may call yourself a homeowner, but if you miss a few payments you'll soon find yourself homeless. The truth of the matter is if you own 99% of your home and default on the last 1% then the bank has the right to seize it. All those payments of you made go down the drain. If you refinance and extend the loan out it may lower your monthly payments, but you just increased the amount of time it will take to pay off the loan therefore increasing the amount of time your house will be bank owned. Also, depending on the loan funding fees and closing costs it may take as much as 5 years (or more assuming a 30yr fixed loan) to pay down those fees to get you back to where you started. You may have reduced your monthly payment near-term, but increased the amount of interest you'll pay in the long run. You can probably convince yourself to do such a thing because the interest you pay is a tax write-off, but you can only write-off 35% (maximum) of what you pay in interest. Why on earth would you want to pay $10,000 in interest to save $3500 in taxes. It doesn't sound like a great move when you put it that way does it?

If you haven't already purchased a home then the explanation as to how to control your financial destiny is a bit simpler. If you are confortable with the payment (use conservative measures), then it's really a matter of finding someplace you want to call home. By home I mean someplace you can see yourself living long enough to pay off the mortgage. So if you are looking to have a family in just a few years a studio apartment may not be the best purchase. If you make this decision correctly then you are in control from day one. You only lose this control when you submit to the misinformation in the media and base your decisions on some arbitrary number (interest rate) instead of using your head. Just because interest rates are lower does not necessarily mean you will have a lower payment. On the contrary, lower interest rates tend to inflate home prices (and most asset prices in general). When this low rate increases the homes selling price the savings you would have achieved due to the lower rate is lost by an increase in the home price. On the flip-side if rates should go higher then the homes price should decline and the total payment should not vary too much. Keep in mind that this price adjustment is gradual, but for the patient buyer this is where you take control. While there are exceptions to this rule this is a good general rule to follow. This theory is illustrated by the recent housing boom brought on by an extended period of low rates, the subsequent tumble of prices as rates rose (along with defaults), and the Federal Reserve trying to support falling home prices by artificially reducing the rates again. The next step is simple......Pay off your new mortgage ASAP.

Controlling your financial destiny means freeing yourself from interest rates, prices, and the uncertainty they cause. The only way to rid yourself of this uncertainty is to pay off the burdensome debt that keeps us chained to the banks and keeps your income going back out the door in the form of interest payments instead of building wealth for you. Your income is the biggest factor in building your wealth. Why would anyone continue to just give that away when they don't have to?

It really is that simple. In order to keep the uncertainty of the financial world from impacting our lives all we have to do is remove ourselves from that world.

What Do You Want?

For most people the question of "What do I want" seems easy to answer. The truth however is that if people knew the "true" costs of their wants they may not want them. The realization that even the things that bring us joy have costs will help us determine if the joy is worth the cost. If it's not then it's called a burden, and who really wants one of those? Most people only have this ah-ha moment after the fact, but if you condition yourself to weigh both the tangible and intangible costs you'll enjoy the fruits of your labor regardless of the size of your garden.

One of the first ah-ha moments you'll have to have is that although some things are priceless, they are not without their costs. I say this because in order to find out what you truly value in life you have to monetize everything. This puts the comparison on an apples-to-apples basis. For example, let's say you have a car payment that's 250 dollars a month. You also make 25 dollars an hour and can work 10 hours. Now to complicate the situation as reality usually does let's imagine you have kids who play baseball 10 hours a month at the same time you would be working. Consequently, watching your kids baseball games also cost you 250 dollars a month. Now here's the question you should be asking yourself. Is watching your kids play baseball making you desire driving that car, or is working to pay for that car making you sorry you're missing the game? I hope for you and your families sake it's the latter, but the dollar cost is the same. You also need to understand that the car will be a heap of trash in 10 years, and your kids will pay dividends for decades. One could make an effective argument that the actual "true" cost of the car is higher.

Now how about hating that 9 to 6 corporate job? You don't like your boss, or making someone else rich? Then start your own business and be your own boss. I hope you hate the 401k match and the cheap employer provided health benefits you're leaving behind too. While you may not have recognized the value they had when someone else paid for them you sure will know the cost when you foot the bill. It will take a lot more hours of work to make up for the unsubsidized benefits you'll have to buy. Whether you want to realize it or not making your own schedule and calling your own shots not only has value, but also costs.

Unfortunately we don't associate things that bring us joy like watching our kids play sports with their respective costs. Nor do we give value to things that don't necessarily bring us joy like our health insurance until we don't have it. What this does is bring an uncontrollable feeling of want and discontentment to our lives. It also causes us to prioritize poorly which ultimately costs us more. We all want to be Tiger Woods the golf champion, and Tiger Woods the billionaire. What most of us don't want is to be the Tiger Woods that gave up his childhood to be a future golf pro, or Tiger Woods the recent paparazzi magnet. The phrase "I wish I was Tiger Woods" usually leaves out the sacrifices he made to be the Tiger Woods we want to be.

If you read my last blog as well as this one you can clearly see where I am going. Financial success and happiness has just as much to do with understanding the intangibles and subtleties as it does bringing home a fat paycheck. What I want is for you to survey you life and work to rid yourself of what keeps you from the things that bring you joy. If you're happy to do the work then it's obviously worth the cost.

The Cost of Ignorance.

I thought I would get the most sensitive (or insensitive) subject out of the way early so we can move on to the educational part of this process. It's widely understood that before you can prepare for the future it's sometimes necessary to revisit the mistakes of the past and see what we learned in hindsight.

Ignorance (or optimism and confidence as it's often called in the world of finance and academe) is what has driven this economy for the better part of a decade. The subjective outcomes of surveys used to measure this state of mind are published monthly and can rally markets which in turn rallies consumers. This intangible feeling of optimism (or foolish optimism) is what has been keeping our economy afloat. It's also hidden our economic problems and ultimately what put us in our current position. For years we spent more than we earned in a hopeless attempt to finance our way up the social ladder. God forbid we not all appear to be in the "middle class". We all knew the explicit price tag of our frivolousness, but there is another cost hidden in every transaction or decision that's usually absent in economic or political conversation. These unspoken and mostly invisible costs are known as implicit costs.

An implicit cost has no obvious price tag. The true amount of implicit costs can only be calculated if you have the education and rationality to methodically think through your decision. Even then it's an estimate at best, but an estimate is better than nothing. A good example of an implicit cost is what happens when purchasing a house you have to work a few extra hours a week to afford. The actually money you've paid to the bank is the explicit price tag. The implicit cost of your decision would be the added stress, higher blood pressure, less time with family, and all the other things doctors tell us are counter productive to our health and happiness. These costs seem obvious now right? If not then they will when those hospital bills arrive. That brings me to my point which is unanticipated implicit costs lead to more explicit costs.

Companies that are leading their industries today know how to calculate these costs and deal with them. Those that don't are no longer in business. The banking industry is the poster child for this. Today's thriving companies are becoming more profitable not because revenues are abundant, but because they learned to control costs. While this crisis has not left a single bank unscathed those who planned adequately for both what they knew, and what they knew they did not know are still here.

The point of all this is that the true costs of your decisions can never be captured on a price tag alone. Since these costs vary by your personal situation it's ultimately up to you to determine them. The ability to estimate them however is going to be directly related to how much you choose to educate yourself on the matter. The first part of this education is knowing that every financial decision you make will have these implicit costs. In this economy more income can be hard to come by, but keeping what's yours by controlling "true" costs is something every man can do.