September 2018 Newsletter

If some random person off the street handed you $10,000 in cash, no strings attached, and would pay the taxes on this windfall, what would you do with it?

Researchers asked this question of people who they categorized in the Millennial generation (age 18-34), Generation Xers (age 35-54) and Baby Boomers (over age 55), and charted the responses. (You can see the detailed chart here.)

The most common answer was: “pay down debt,” which is a commentary on the fact that most Americans, including a surprising number of Baby Boomers, are carrying debt rather than building wealth. 33.1% of the Baby Boomers would apply the windfall to (presumably) their credit cards and home mortgages, while 25.3% of the Generation Xers would apply the money to their debt, and 22.4% of Millennials would pay back (presumably) some or all of their student loans.

Another 11.5% of Baby Boomers would invest the money in their 401(k) or Roth, and roughly 10% the Millennials and Gen Xers agreed. So basically 44% of one cohort and 35% of the others would be quite prudent with their windfall.

But that was about all they agreed on. 9.2% of Millennials would “invest” in a virtual currency like Bitcoin, an option that was shunned by their elders. Similarly, 9.9% of Millennials would re-invest in their own education, an option which attracted virtually zero response from older citizens. Just over 17% of Baby Boomers would invest the money in boring old CDs or cash equivalents, while younger citizens were less enthusiastic, preferring real estate (15.1% of Millennials and 14.6% of Gen Xers). And you can see that life stages played a role: 11.3% of the Gen Xers, who are in their child-raising years, would put the money toward their children’s education, vs. 5% of Millennials and practically zero Baby Boomers.

The graph offers a quick view of different preferences among generations—and you should note how few people of all generations would invest in their own small business (the axis that is roughly ten o’clock on the circle). Baby Boomers, as a group, appear to be much more conservative in their money habits than their younger cohorts, and have different priorities.

_{Source: http://ritholtz.com/2018/09/}

It’s interesting to watch economists and tech prognosticators go back and forth over whether artificial intelligence, robots and other thinking machines will kill or create jobs.  Most recently, the McKinsey Global Institute and India’s Tata Communications have come out with reports that are more optimistic about our ability to earn a living in a world where machines are doing a lot of the thinking.

Today, a remarkable 61% of all businesses are implementing artificial intelligence, up from 38% in 2016.  The artificial thinkers are engaging in computer vision and creating natural language; they are becoming virtual assistants and facilitating machine learning and better decision making.  McKinsey expects the world to experience an additional 1.2% a year in GDP growth over the next ten years due to these enhanced business capabilities—equating to $13 trillion in additional wealth for the global citizens.  At the same time, skilled jobs will be in higher demand—and therefore, skilled workers will be able to demand higher income, and the companies will be able to pay it.

Tata’s report predicts that, just like software did, the AI-enhanced computers will create a lot of new ways of working—essentially meaning new jobs and careers. The McKinsey report basically agrees, but says that there will be a challenge for today’s less-computer-literate workers; they will need to be retrained to use or work alongside automation—called “reskilling” in the HR lingo.  Otherwise, their opportunities will fall to 30% of all jobs, down from 40% of all jobs today held by people who are not computer literate.

To take an example, chances are you’ve waited in an endless line to return an item at your favorite store, and there was a lot of time and trouble once you got to the front of the line.  Now companies have staffers approach people in line with iPads in hand.  They can look up the customer’s purchase, instantly identify or scan in the item they’re returning, and even look up buying history and make recommendations on whether to exchange or get a refund.  The whole customer service model changes with technology.  The McKinsey report also talks about unexpected demand for skills.  Its previous report did not predict today’s massive demand for mobile app developers.

The picture of the world that emerges from these reports is similar to the changes that software brought about a generation ago: machines and people will collaborate to handle more data faster and in increasingly creative ways to innovate and solve problems.  The key skillset will be the ability to continually learn and adopt new skills.  For those who already have this important facility, it sounds like an exciting future.

_{Source: AI Weekly, 9/7/2018}

Paying extra on your mortgage can be a good idea. It can shave years off your home loan and save tens of thousands of dollars in interest charges.

The one thing you should not do, however, is sign up for an accelerated payment plan from a mortgage service company that costs hundreds of dollars. There are better ways to cut that home loan down to size.

Here are three free and easy options, and one that isn’t free but can still save you tons of money.

1. Increase your monthly checks by one-twelfth.

The additional money you’re sending reduces the balance of your principal, which is the actual amount you owe on the house without interest. The biggest share of your early mortgage payments goes to paying interest, so paying a little extra on principal now makes a huge difference in the years ahead.

2. Make one extra payment a year.

This works especially well if you get an annual bonus or always receive a sizable income tax refund. Just add the money to your next monthly payment.

Once again, you’re chopping away at that principal ahead of schedule.

3. Pay half of your regular monthly payment every two weeks.

Although a few lenders allow customers to switch to biweekly payments at no charge, most won’t do that, nor will they accept partial payments.

But you can have the money automatically transferred from your checking account to a savings account every two weeks and then transferred to your lender at the end of every month. Ask your bank or credit union for help setting up online transactions, if necessary.

By the end of the year, you’ll have made 26 half payments, which adds up to 13 full payments — or, again, one full extra payment.

Caution: Paying down the principal on your home loan more quickly will never reduce the minimum monthly payment or allow you to skip a payment. It simply shortens the length of the loan and reduces the total amount of interest you have to pay.

How much could you save?

Extra payments add up!

A $200,000 30-year home loan with an interest rate of 5% would cost $186,512 in interest with the traditional 12 payments a year. Make the equivalent of 13 monthly payments every year, and the loan will be retired in 26 years and you will pay only $153,813 in interest — a savings of $32,699.

Of course, you don’t have to keep your home loan for decades to benefit from extra payments.

You’ll immediately begin adding to your equity (the difference between what your home is worth and how much you owe on your loan). That lets you ditch private mortgage insurance sooner, saving you as much as a couple hundred dollars a month.

If you ever have an emergency, you’ll have more equity to take out a home equity loan. And, of course, the less you owe on your mortgage, the more money you pocket if you sell your home. The biggest challenge to following through with a faster payoff plan is maintaining self-discipline. It’s easy to start paying extra — until you have extra expenses or you forget an extra payment.

That’s where mortgage service companies say they can help. When you buy an accelerated biweekly payment plan from one, you’re essentially asking the company to make you pay off your loan early. They collect your biweekly checks and fine you if you miss one of your voluntary payments.

According to them, the threat of those penalties and the hundreds of dollars they charge in setup and maintenance fees are worth it to save tens of thousands of dollars in the long run.

But they’re not.

Start-up fees begin at $300, and many service companies also charge processing fees of anywhere from $2.50 to $10, plus monthly or annual maintenance fees.

Some service companies pay interest on the money they’re holding, but that won’t come close to covering the fees.

The U.S. Consumer Financial Protection Bureau sued one company, Ohio-based Nationwide Biweekly Administration, in 2015, accusing it of misleading consumers about the potential savings from its plans.

Nationwide was charging a start-up fee of $995, plus yearly administrative costs of up to $101. The protection bureau noted that someone who signed up for the plan with a 30-year mortgage of $160,000 at 4.5% would have to stay in the program for nine years to recoup their fees. (Nationwide suspended operations after the suit was filed.)

Even if you only pay a $300 initial fee and then $10 a month, you’ll spend $420 in the first year and $2,700 over 20 years. If you don’t make all 26 payments a year on time, you’ll have late fees added to that and wind up paying even more. That’s the kind of help you don’t need.

This brings us to the option that isn’t free but can potentially save the most money. If you really want to discipline yourself to pay off your home loan sooner, consider refinancing for a shorter time period. Most fixed-rate mortgages are 30 years, but you can get loans that last 20, 15 or even just 10 years.

Loans that run for shorter periods generally come with lower interest rates. The combination of a lower rate and less time can really add up.

Let’s look at that $200,000 mortgage again, this time for only 15 years. A 15-year loan runs about one percentage point cheaper than a 30-year loan. With a 15-year mortgage at 4%, you’d pay about $66,288 in interest over the life of the loan. That’s a savings of more than $120,000 in interest over a 30-year loan at 5%.

Of course, your monthly principal and interest payments would go up significantly, from around $1,074 to $1,479, so you would need to make absolutely sure you could handle that increase. You’d also have to pay some loan closing costs, although most usually can be wrapped into your loan.

But if you’re positive you can swing it, shortening the time of your mortgage can be the shortcut to huge savings — even the day you own your home free and clear.

_{By: Reed Karaim, September 4, 2018}