This post has taken me a while to get down. Every time I sit down to write it I get so angry. I got to experience first-hand the aftermath of some shoddy asset planning.
We lost a close family member about 1.5 months ago, and since I’m the tax accountant in the family, I offered to help with the inheritance tax and estate processes. It turns out, someone had talked him into setting up a trust many years ago. I can think of three instances where a trust makes sense:
- You have a family member with special needs, and you want to make sure they are taken care of after you are gone;
- You have some sensitive assets, and you don’t want a record of them passing through the court probate system;
- You are bumping up against the inheritance exclusion (currently $5.45 million per person) and want to avoid estate taxation.
Those are the only reasons I can think of off the top of my head, and since this particular estate has exactly zero of these uses, then it was really just a waste of money. The problem is, it doesn’t take any particular training to be able to call yourself a financial advisor or an elder-planning expert. In fact, many of these financial advisors are really just insurance salesmen.
That brings me to the second part of the estate that made me so angry. In addition to being talked into wasting money on a trust, this family member was also sold a series of annuities and life insurance policies. Why do I hate these policies so much?
- Guaranteed rates of return are incredible low (most of the policies were around 3% growth per year).
- Sales commissions on these products are incredibly high, which leads to point number 1.
- These products have named beneficiaries, thereby causing the trust to be redundant, and confirming that it was a waste of money.
A salesman is not a financial advisor. An insurance agent is not a financial advisor. Full stop.
If you go to a financial advisor, make sure you understand how they are paid. If they are paid on commission for the products they sell, how do you know if they are selling you products you actually need, or if they’re just pushing the product that has the highest commission that year?
I don’t think this will fit in the budget for my next house.
While we’re on the subject of housing, there are a couple of points I would like to address. Housing plays a huge role in the area of personal finance, because for many of us, it will be our largest expense in life. As young adults, we are often pushed towards homeownership. There are easily accessible programs that allow you to put as little at 3% down, and some people will even qualify for 0% down loans. These programs are incredibly risky: by design, they are intended to help individuals with no savings or emergency cash. If these people do not have cash now, what will they do if a major component of their house needs replaced, such as HVAC or a roof? All of a sudden they find themselves in even more debt, to the point that they owe more than the house is worth.
As has often been pointed out on the Internet, a house is not always a great investment. In fact, for many people it becomes a financial drain. Our generation seems to think that if you get pre approved for a $300k mortgage, that you should go out and spend every last penny of it. We have grown up with House Hunters shows where the couples often go over their pre-set budget. As a result, our views on housing have become quite skewed.
It also makes me chuckle when I see these shows, and they need to have more bedrooms and bathrooms than they have people, plus a separate man-cave (I hate that term, by the way), a separate play area for the kids, and a separate place for the wife/mother to relax. I don’t know about the rest of you, but I married a woman I love. And while yes, we do occasionally like our time by ourselves, I’m not going to spend an extra $80k just to get more rooms that we are only going to use once a month. I have the same opinion on guest rooms: I’m not going to spend the extra $30-40k for an extra bedroom that will get used once a year. So if you really want to watch your finances, make sure you aren’t paying extra for items that won’t add any benefit to your life – the difference in housing costs could be enormous.
I was reading an article the other day about why you should choose the 15-year mortgage over the 30-year mortgage, so I’m going to skip ahead a couple steps in the financial advice process and give you my thoughts.
If you read through other financial independence/early retirement/financial planning websites, you will see most of them advocate for the 30-year mortgage. Mathematically speaking, the 30-year mortgage has historically been the better choice. With the common advice that “past performance is no guarantee of future returns,” I’m willing to bet the future of stocks will closely mirror the past. This means, that the return you could get by investing your money in the stock market would exceed the interest you would pay on the longer term loan. So in the current low-interest environment, you should always choose the 30-year loan.
That being said, I think there are other factors at play. First of all, most people are not going to be disciplined enough to invest the difference each and every month for 360 straight months. They are going to spend the extra on house decorations, new furniture and newer car – anything except investing it.
For me personally, I do not like the idea of having to write a check to the bank representing my largest monthly expenditure for 30 years. Psychologically, I feel much better not carrying that kind of a debt load. That’s why I will be opting for less house than I can afford, and taking the 15-year mortgage. Mathematically I may come out behind, but the reduction in stress knowing that I’m paying the principal down faster, and not having to write that check after 180 checks, is well worth it to me.
Everyone needs to be honest with themselves and assess which strategy is best for them.
We can always pay for it later – YOLO (right?).
To most people our age, frugal is just another four-letter word. It’s not cool to be frugal, it’s too much effort to be frugal and we’re going to miss out on all the best things in life if we’re frugal – you know, YOLO. Well that’s just a load of crap.
There is more than one level of frugality. There are many people who take it to extremes: they live on $1,000 a month, and were able to retire after 8 years of working. I think that’s awesome, but that’s not necessarily what we’re going for here. This blog’s position on frugality is that you should save and optimize where you can, so you can spend on what’s important to you. If that happens to be early retirement, then great. If that happens to be an international vacation every month, then that’s great too. We’re not here to judge your goals, we’re hopefully just going to give you some tools to help you reach those goals.
So as you read through this blog, hopefully you pick up some good tips. If you have any questions about what you’re doing and how you can improve it, feel free to let me know – I am always looking to help people achieve their goals.
Welcome to the Frugal Grad blog. With all of the financial blogs created over the years, why should you care about this one?
Simple: this one is geared directly to the recent high school and college graduate. As we all know, there are a plethora of decisions that are made right after graduation that affect the rest of your life. So how is a blog created 10 years ago relevant to the unique challenges of the young-adult today? And how practical is the advice being doled out by 40- and 50-year old financial advisors going to help you today? The short answer: not very.
Are you a high school graduate getting your first steady paycheck? Are you a college graduate just getting hit with your student loan payments? Are you a parent or a grandparent trying to set your child/grandchild up for success? Then read along, and hopefully you will learn something along the way. I won’t make promises that you can retire by 30 (full disclosure: I’m several years away from 30 and won’t be retiring by then), or earn a million dollars a year sitting at a desk, but I do promise to help guide you through the decisions that affect us after college, and the trade-offs that each decision will entail.
If you have any questions or suggestions, let me know in the comments, or through my contact page, and I will be sure to address them in future posts. Otherwise, continue reading this blog and take in my wildly unsolicited advice.