Nicky Oppenheimer, Chairman of De Beers : “Diamonds are intrinsically worthless, except for the deep psychological need they fill.”
Imagine you and your significant other are reliving your first date and you have pulled out all the stops. This night has everything: wine, good music and finally comes the moment you have been waiting for. You get on one knee and say what you have been thinking about for so long: “Significant other, will you marry me? By the way, I am not giving you a ring because the purchase of a ring is a scam courtesy of the De Beers Corporation.”
Haha….. the sad part of this statement is that it is 100% true. This information is also useless my dear reader, because most of our significant others just don’t give a shi****. Google “engagement rings are a scam” or “the diamond invention” if you’re interested in more twisted stuff on this topic.
The reality is this conversation sucks. If you spend too little, you look like a cheapskate, and so many people equate the amount of money you spend with how much you care. So, I guess we will use two months’ salary (originating from a De Beers ad, by the way) as the arbitrary number I should spend? Wait, what? My brain is starting to turn to mush.
Three Guidelines
#1: Find out what your partner values
I am not here to talk about how bad a ring is from an investment perspective (maybe another blog post for another time). We all concede, there’s a huge emotional component that goes along with the engagement ring selection process. What you don’t want to do, is spend your money and then find out later that it was lower on the priority list then let’s say a down payment for a house, 3-6 months of emergency savings, a trip you both could enjoy, auto transportation or the wedding itself (if you said investing in a retirement account and you are female, can we exchange numbers?). If you don’t have an open dialogue you are focused more on the act of getting married then on building an honest and transparent relationship. Thank you, Dad, for that divine wisdom.
#2: The Ring is important, but what does that really mean?
So, you know the ring is important but you need specifics on what that means. This is where you do some research around what it looks like: the setting, the carats, oval vs round etc. If your partner wants something more customized and unique, you can save for something else you both value and still leave them breathless when that proposal happens.
#3: Wholesaler’s Wisdom
If the first two tidbits did not resonate and you only take away three words from this post, then listen carefully: DON’T BUY RETAIL! I spoke with a confidant whose family has made a fortune in the diamond business and they supply retailers across the country. Let’s call him Shayy the Jeweler. Shayy let me in on the intel that people can save thousands by buying directly from a wholesaler or going through the web for the same ring or diamond! He let me know it is very typical for wholesalers to mark-up diamonds from 50-100% when selling to retail. Online diamond merchants (such as Blue Nile) are reducing markups to a rock bottom 18% from wholesale. Common “cents” indeed!
https://www.themoneynudge.com/wp-content/uploads/ring-2405152_1920.jpg12801920themoneynudgehttps://www.themoneynudge.com/wp-content/uploads/Completed-Fiverr-Impressionist-Transparent-300x203.pngthemoneynudge2017-08-09 22:16:492017-08-14 15:18:34Rings & Things
I was a having a spirited discussion with a personal finance blogger the other day regarding credit cards and the “rewards”/ cash back bonuses one can earn by using them. I was in agreement with the blogger, if used correctly credit cards can indeed be used to accelerate your business enterprise and give you extra money on items that are deemed “recurring” in nature. The problem with that last sentence is we are overrating human discipline and its complexities.
Case in point, research suggests that credit cards prompt overspending, with people often overspending for the same product that they could have paid cash for. This so called “credit card premium” helps reduce the pain of parting with our money and may reinforce bad spending habits. Being aware of the biasing effects of credit is more important than what mere numbers would suggest. This post aims to share the mindset I use when thinking about particular spending categories.
Business Spending
If you are a business owner, credit is usually treated differently because purchases are driven for enterprise building purposes. If you are spending for client acquisition or the purchase has a potential return on investment component (building a website for instance) credit is being used to create value. Taking into account the tax considerations, business related budgeting is very different than most personal budgets.
Example: A trip to San Diego for business is not the same as a trip to San Diego to go yachting with your spouse or significant other.
Structuring your Personal Expenses
Structuring your personal expenses into variable and fixed costs is a worthwhile exercise. A fixed cost is defined as an expense that does not change as a function of the activity within a relative period, while a variable expense is an expense that fluctuates according to your spending. Once this exercise is completed I try to put most of my fixed expenses, that are recurring and necessary in nature on a credit card. A big assumption with fixed costs is not only the recurring and predictable nature of the expense, but that you are setting up fixed costs that are reasonable to your budgetary constraints.
Examples of good candidates would be your utilities, and any insurance based payments you may have.
Why Variable Expenses on a Credit Card Can Be Hazardous
This is the bucket where most people destroy themselves. Credit card expenditures on eating out, drinking or shopping are the usual culprits. For most people I would avoid using your credit card in these instances all together and I would instead use a debit card to make these purchases.
Setting up Proper Barriers
Creating a system for your money is very important and most people do not have one. One thing you can do is automate your payroll into a separate bank account just for your eating out money for example. With doing this the debit card has a set dollar amount, which if exceeded will be declined when you try to make excessive purchases.
Want more on creating an accountable money system? Follow me @themoneynudge on Twitter & feel free to signup for my email list for programs and much more!
https://www.themoneynudge.com/wp-content/uploads/credit-card.jpg26604000themoneynudgehttps://www.themoneynudge.com/wp-content/uploads/Completed-Fiverr-Impressionist-Transparent-300x203.pngthemoneynudge2017-07-24 20:01:462017-07-24 20:40:13Why People Underrate Psychology When Using Credit Cards
“If everyone is thinking alike, then somebody isn’t thinking.”
― George S. Patton Jr.
When discussing mortgages there are a lot of preconceived notions and misinformation out there. In today’s low interest rate environment we are so focused on where rates are going we fail to ask the home buyer the most important qualifying question: “How long do you plan on staying in the home?” The whole point of personal finance is that it is indeed “personal” in nature, with one buyer’s situation being very different from another. Although a 30 year fixed rate mortgage may be the best for most people, it may be inappropriate for others. Unfortunately we are seeing too many 30 year fixed rate mortgages being sold to first time home buyers that may not need them. The result is wasted money due to interest.
An example I ran across at a social gathering is a case in point of this phenomenon. My friend, a single guy, had just bought a home. He discussed at length that it was a starter home and his time horizon was more based on fixing it and upgrading within the next few years. After hearing this story, I asked how he financed his purchase, and to my surprise he was in a 30 year fixed rate mortgage. Ouch!
THE REALITY
The reality for first time home buyers and younger adults is that they just don’t stay in their homes or condos very long. It is later home purchases in one’s life cycle that tend to have a longer length of stay as children enter the picture and people stay rooted in their communities in their later years. According to the National Association of REALTORS® and its 2015 Home Buyer and Seller Generational Trends Report, the typical under-40 home buyer expects to live in their home for a period of 10 years. In some urban markets the holding period is even less.
TALE OF THE TAPE
After doing some digging on some industry averages, I looked at the 7-year, and 10-year ARM as well as the 30-year fixed rate loan to provide some illustrative comparisons. The assumptions I made was a $400k mortgage, a duration of 10 years, the max interest rate increase for both ARM products, and that any interest savings in the intro period were reinvested to pay down more principal. The results for the 30 year mortgage after the ten year period was ~$135k in interest paid. The 10- year ARM was ~$122k in interest with the 7- year ARM breaking even with the 30 year around the 9 and a quarter year mark, assuming an interest rate doomsday scenario. The 10 year ARM broke even with the 30 year under the same criterion around the 11 and three quarter year mark. Assuming the a lower end of the holding period (7 years) the ARMs obviously fair better. 30 year interest checking in at 98k in interest, 10 year at 89k, and the 7 at 80k respectively.
CONCLUSION
When looking at mortgages, the duration element is the largest factor to consider. The point of the piece is to raise awareness that the 30 year mortgage is by no means a slam dunk, no product ever is. That is why we must analyze our personal situation prudently and challenge basic consensus if it doesn’t meet our goals and objectives. If you’re buying a house and planning on staying 12 years or less you may want to change how you are thinking when you shop for a mortgage.
Home Purchases Series: This is one post in a series pertaining to the home buying experience. Stay Tuned!
Disclaimer: The article is not a recommendation of any financial products, it is merely for educational purposes.
More: Aaron Connell is a writer and Principal of One Brick Planning & Consulting, a Gen Y focused financial services practice. Have a question for Aaron? Email him at aaron@themoneynudge.com.
https://www.themoneynudge.com/wp-content/uploads/home.jpg334500themoneynudgehttps://www.themoneynudge.com/wp-content/uploads/Completed-Fiverr-Impressionist-Transparent-300x203.pngthemoneynudge2017-07-24 19:59:162017-07-24 20:40:38Why First Time Home Buyers Should Be Wary Of 30 Year Fixed Rate Mortgage Group Think.
Rings & Things
Nicky Oppenheimer, Chairman of De Beers : “Diamonds are intrinsically worthless, except for the deep psychological need they fill.”
Imagine you and your significant other are reliving your first date and you have pulled out all the stops. This night has everything: wine, good music and finally comes the moment you have been waiting for. You get on one knee and say what you have been thinking about for so long: “Significant other, will you marry me? By the way, I am not giving you a ring because the purchase of a ring is a scam courtesy of the De Beers Corporation.”
Haha….. the sad part of this statement is that it is 100% true. This information is also useless my dear reader, because most of our significant others just don’t give a shi****. Google “engagement rings are a scam” or “the diamond invention” if you’re interested in more twisted stuff on this topic.
The reality is this conversation sucks. If you spend too little, you look like a cheapskate, and so many people equate the amount of money you spend with how much you care. So, I guess we will use two months’ salary (originating from a De Beers ad, by the way) as the arbitrary number I should spend? Wait, what? My brain is starting to turn to mush.
Three Guidelines
#1: Find out what your partner values
I am not here to talk about how bad a ring is from an investment perspective (maybe another blog post for another time). We all concede, there’s a huge emotional component that goes along with the engagement ring selection process. What you don’t want to do, is spend your money and then find out later that it was lower on the priority list then let’s say a down payment for a house, 3-6 months of emergency savings, a trip you both could enjoy, auto transportation or the wedding itself (if you said investing in a retirement account and you are female, can we exchange numbers?). If you don’t have an open dialogue you are focused more on the act of getting married then on building an honest and transparent relationship. Thank you, Dad, for that divine wisdom.
#2: The Ring is important, but what does that really mean?
So, you know the ring is important but you need specifics on what that means. This is where you do some research around what it looks like: the setting, the carats, oval vs round etc. If your partner wants something more customized and unique, you can save for something else you both value and still leave them breathless when that proposal happens.
#3: Wholesaler’s Wisdom
If the first two tidbits did not resonate and you only take away three words from this post, then listen carefully: DON’T BUY RETAIL! I spoke with a confidant whose family has made a fortune in the diamond business and they supply retailers across the country. Let’s call him Shayy the Jeweler. Shayy let me in on the intel that people can save thousands by buying directly from a wholesaler or going through the web for the same ring or diamond! He let me know it is very typical for wholesalers to mark-up diamonds from 50-100% when selling to retail. Online diamond merchants (such as Blue Nile) are reducing markups to a rock bottom 18% from wholesale. Common “cents” indeed!
Question for Aaron? Email him at aaron@themoneynudge.com
Why People Underrate Psychology When Using Credit Cards
I was a having a spirited discussion with a personal finance blogger the other day regarding credit cards and the “rewards”/ cash back bonuses one can earn by using them. I was in agreement with the blogger, if used correctly credit cards can indeed be used to accelerate your business enterprise and give you extra money on items that are deemed “recurring” in nature. The problem with that last sentence is we are overrating human discipline and its complexities.
Case in point, research suggests that credit cards prompt overspending, with people often overspending for the same product that they could have paid cash for. This so called “credit card premium” helps reduce the pain of parting with our money and may reinforce bad spending habits. Being aware of the biasing effects of credit is more important than what mere numbers would suggest. This post aims to share the mindset I use when thinking about particular spending categories.
Business Spending
If you are a business owner, credit is usually treated differently because purchases are driven for enterprise building purposes. If you are spending for client acquisition or the purchase has a potential return on investment component (building a website for instance) credit is being used to create value. Taking into account the tax considerations, business related budgeting is very different than most personal budgets.
Example: A trip to San Diego for business is not the same as a trip to San Diego to go yachting with your spouse or significant other.
Structuring your Personal Expenses
Structuring your personal expenses into variable and fixed costs is a worthwhile exercise. A fixed cost is defined as an expense that does not change as a function of the activity within a relative period, while a variable expense is an expense that fluctuates according to your spending. Once this exercise is completed I try to put most of my fixed expenses, that are recurring and necessary in nature on a credit card. A big assumption with fixed costs is not only the recurring and predictable nature of the expense, but that you are setting up fixed costs that are reasonable to your budgetary constraints.
Examples of good candidates would be your utilities, and any insurance based payments you may have.
Why Variable Expenses on a Credit Card Can Be Hazardous
This is the bucket where most people destroy themselves. Credit card expenditures on eating out, drinking or shopping are the usual culprits. For most people I would avoid using your credit card in these instances all together and I would instead use a debit card to make these purchases.
Setting up Proper Barriers
Creating a system for your money is very important and most people do not have one. One thing you can do is automate your payroll into a separate bank account just for your eating out money for example. With doing this the debit card has a set dollar amount, which if exceeded will be declined when you try to make excessive purchases.
Want more on creating an accountable money system? Follow me @themoneynudge on Twitter & feel free to signup for my email list for programs and much more!
Why First Time Home Buyers Should Be Wary Of 30 Year Fixed Rate Mortgage Group Think.
“If everyone is thinking alike, then somebody isn’t thinking.”
― George S. Patton Jr.
When discussing mortgages there are a lot of preconceived notions and misinformation out there. In today’s low interest rate environment we are so focused on where rates are going we fail to ask the home buyer the most important qualifying question: “How long do you plan on staying in the home?” The whole point of personal finance is that it is indeed “personal” in nature, with one buyer’s situation being very different from another. Although a 30 year fixed rate mortgage may be the best for most people, it may be inappropriate for others. Unfortunately we are seeing too many 30 year fixed rate mortgages being sold to first time home buyers that may not need them. The result is wasted money due to interest.
An example I ran across at a social gathering is a case in point of this phenomenon. My friend, a single guy, had just bought a home. He discussed at length that it was a starter home and his time horizon was more based on fixing it and upgrading within the next few years. After hearing this story, I asked how he financed his purchase, and to my surprise he was in a 30 year fixed rate mortgage. Ouch!
THE REALITY
The reality for first time home buyers and younger adults is that they just don’t stay in their homes or condos very long. It is later home purchases in one’s life cycle that tend to have a longer length of stay as children enter the picture and people stay rooted in their communities in their later years. According to the National Association of REALTORS® and its 2015 Home Buyer and Seller Generational Trends Report, the typical under-40 home buyer expects to live in their home for a period of 10 years. In some urban markets the holding period is even less.
TALE OF THE TAPE
After doing some digging on some industry averages, I looked at the 7-year, and 10-year ARM as well as the 30-year fixed rate loan to provide some illustrative comparisons. The assumptions I made was a $400k mortgage, a duration of 10 years, the max interest rate increase for both ARM products, and that any interest savings in the intro period were reinvested to pay down more principal. The results for the 30 year mortgage after the ten year period was ~$135k in interest paid. The 10- year ARM was ~$122k in interest with the 7- year ARM breaking even with the 30 year around the 9 and a quarter year mark, assuming an interest rate doomsday scenario. The 10 year ARM broke even with the 30 year under the same criterion around the 11 and three quarter year mark. Assuming the a lower end of the holding period (7 years) the ARMs obviously fair better. 30 year interest checking in at 98k in interest, 10 year at 89k, and the 7 at 80k respectively.
CONCLUSION
When looking at mortgages, the duration element is the largest factor to consider. The point of the piece is to raise awareness that the 30 year mortgage is by no means a slam dunk, no product ever is. That is why we must analyze our personal situation prudently and challenge basic consensus if it doesn’t meet our goals and objectives. If you’re buying a house and planning on staying 12 years or less you may want to change how you are thinking when you shop for a mortgage.
Home Purchases Series: This is one post in a series pertaining to the home buying experience. Stay Tuned!
Disclaimer: The article is not a recommendation of any financial products, it is merely for educational purposes.
More: Aaron Connell is a writer and Principal of One Brick Planning & Consulting, a Gen Y focused financial services practice. Have a question for Aaron? Email him at aaron@themoneynudge.com.