The Economics of Renting vs. Buying

As the housing market continues its long crawl back, it makes sense to ask whether it really is a better idea to rent than to own a home. But it’s a decision that goes beyond the current state of the market.


One of the best first stops is a visit to a financial planner, someone who is trained to look at the big picture of an individual’s finances. The decision to rent vs. buy is an important financial decision due to the sheer amount of money most of us spend on housing – but some people think of it as the only major financial decision they should make. Whether to rent or buy is only one part of a complete financial picture – in some regions, housing prices might make buying and all its requisite tax benefits a better deal. In others, it might be better to rent and put the extra expenses related to property ownership in other investments or toward other purposes.


The bottom line – the decision to buy or rent doesn’t exist in a vacuum. It should always be tied to other factors – lifestyle, community, and where your personal investments stand. And most lenders are now sticking to that old caveat that you shouldn’t spend more than 28 percent of your monthly income on a mortgage payment.


That said, there are some interesting resources that have surfaced to help you start the decision-making process. A website called Trulia.com and research from the Center for Economic and Policy Research in Washington, D.C. have reported their opinion that homes are fairly valued in a city when they cost about 15 times a year’s rent. In simpler terms, if you’re spending $18,000 to rent a place and the house costs more than $270,000, then think twice about buying. The New York Times also has an interesting rent vs. buy calculator that’s worth checking – it goes beyond what prices are doing in an area and adds other factors like how long you plan to stay in your home.


Here are other factors to consider:

Understanding neighborhoods: If you’re seeing pricing capitulation in a neighborhood you really like, it’s going to be a tighter call between renting and buying. But if a neighborhood takes a turn for the worse or you see an opportunity to move somewhere else, a renter can make a move much quicker than an owner.

Understanding the responsibilities of ownership: The condominium movement has created a class of homeowners who never have to trim a bush or mow a lawn, but they obviously have to pay for those services. Renters don’t have to care about painting a home or paying an assessment – they don’t have ownership, but they have freedom. And with a look at motivation and financial considerations, it’s possible to make a more informed decision.

Understanding what it really costs to buy a home: Assuming you can’t pay cash, it costs money to get a mortgage -- closing costs can run into the thousands at the start of the game. A financial planner can help you detail the typical financial outlay at the start of home ownership and advise you on how not to get into spending trouble once you get the keys.

Understanding risk: Homeowners today understand risk as never before. Most have seen the value of their property stagnate or fall in the past three years. As with any investment, the question with homeownership is the same – can you handle the risk of an extraordinary drop in value? If not and other factors work, it might be better to rent.

Understanding your lifestyle: Lifestyle means different things to different people, but renting can be a relatively low-headache lifestyle with the right property. It also allows for relative freedom to move and away from the financial responsibilities that come with ownership. People often say that if you expect to live in a community for a short time, renting might be the best choice; age is also a factor. Only you know what will be the best indicators based on your life situation.

Understanding your savings and investment picture: The high cost of home ownership may limit travel, lifestyle or other opportunities. Renting may enable a more comfortable life from a financial perspective for some people. But this is why it’s so important to examine this question with a financial and tax expert – because everyone’s experience is different. Big financial decisions need to be made with the widest selection of variables.


July 2010 — This column is provided by the Financial Planning Association® (FPA®) of Puget Sound, the leadership and advocacy organization connecting those who provide, support and benefit from professional financial planning. FPA is the community that fosters the value of financial planning and advances the financial planning profession and its members demonstrate and support a professional commitment to education and a client-centered financial planning process. Please credit FPA of Puget Sound if you use this column in whole or in part.

The Financial Planning Association is the owner of trademark, service mark and collective membership mark rights in: FPA, FPA/Logo and FINANCIAL PLANNING ASSOCIATION. The marks may not be used without written permission from the Financial Planning Association.

Understanding the New Overdraft Law

Being financially smart means keeping an eye on fees – all fees.


Starting July 1, new federal rules kicked in that require banks to require customers to opt in for overdraft coverage. Overdraft coverage is a line of credit that kicks in when account holders make purchases that exceed their available checking and debit account balances.

To get customers to sign up, some banks are slashing their overdraft fees. Under the new law, if account holders don't opt in, banks won't be able to cover their charges when their account balances fall short. The charge simply will be declined, and the customer won't be charged an overdraft fee, which at some banks had gone well over $30.

Yet if you have overdraft protection, that means you will have to pay a fee, sometimes on a rising scale that takes you back to the fee you were paying when you didn’t opt in for such coverage.

So how do you avoid overdraft fees entirely? Start acting responsibly.

Don’t join, but keep an eye on that balance: If you don’t opt in, you won’t be charged overdraft fees, period. But then it becomes your job and your job alone to make sure your accounts are covered. Redouble your efforts to record transactions and double-check those balances. If you bank online, you can do this every day if you choose.

Keep a particular eye on debit transactions: Many in-store debit transactions will not automatically be rejected, so that’s why checking your account often is so critical. That’s why that if you don’t use financial planning software to download your transactions on a daily basis, it might be time to do so. Checking your banking statistics at regular intervals will not only help you keep an eye on overdrafts, it will help you spot bank or personal errors and possibly I.D. theft.

Sign up for bill payment alerts or keep a reliable calendar: Most banks and credit card companies will give you the option to have bill payment alerts sent to you five or more days before they’re due. Even if you write these dates in a calendar, it’s not a bad idea to have backup.

What about other fees? Keep in mind that overdraft fees are not the only bank charges you need to watch. Last September, Bankrate.com released the following data on ATM and checking account fees:

• NSF or bounced check fees rose to a record high of $29.58 in 2009, rising 2.7 percent annually on average over the last decade.

• ATM surcharges – fees for when you use an out-of-network ATM – rose 12.6 percent from 2008-2009 with an average fee of $2.22. According to Bankrate, ATM surcharges have gone up at an average rate of 7 percent a year since 1999.

• Interest-bearing checking accounts had fees averaging $12.55 a month, up nearly 5 percent from 2008 levels, though non-interest bearing accounts hit a new low of $1.77 a month.

And don’t forget these other nagging fees you should watch:

Credit card fees: Late fees, processing fees, and surcharges on cash advances are just some of the fees that banks and credit card companies use to increase their revenue. Just as you become more diligent in examining your banking options, apply the same standards to your credit cards.

Retirement plan fees: If you work for a company, it makes sense to ask your human resources department how much they’re paying in fees to your 401(k) plan manager – or managers. As for your personal retirement investments, check your portfolio management fees: Also known as assets under management (AUM) fees, these are various fees that might be assessed against professionally managed portfolios. It is always important to understand these fees, see how they compare with competing types of portfolios and investments and keep an eye on what triggers them.

Restocking fees: Avoid retailers who charge restocking fees, particularly for electronics. While certain chains have dropped them due to customer protests, make sure you call the store or check their sales policies online before you spend.

If you do a financial checkup every six months, it might not be a bad idea to start examining the fees you pay to all sources and determine whether there’s a more affordable way to save, spend, shop and invest. Weigh these options against any incentives you might gather along the way.



July 2010 — This column is provided by the Financial Planning Association® (FPA®) of Puget Sound, the leadership and advocacy organization connecting those who provide, support and benefit from professional financial planning. FPA is the community that fosters the value of financial planning and advances the financial planning profession and its members demonstrate and support a professional commitment to education and a client-centered financial planning process. Please credit FPA of Puget Sound if you use this column in whole or in part.

The Financial Planning Association is the owner of trademark, service mark and collective membership mark rights in: FPA, FPA/Logo and FINANCIAL PLANNING ASSOCIATION. The marks may not be used without written permission from the Financial Planning Association.

10 Ways to Cut Your Debt Now

For many, the decision to get out of debt is preceded by weeks, months or possibly years of worry about these obligations. But it’s important to know that getting rid of debt can actually start with some very small steps and strategies that you can begin today.


Advice is a good first step. A meeting with a professional financial planner can help you investigate all sources of income and total up all your obligations – most will make you bring all your bills with you – and tailor a plan that matches your needs and circumstances. But in general terms, here are 10 steps you should follow:

1. Get a grip on the amount of debt you have: You can’t overcome a debt problem without knowing how much you owe. Start pulling together every bill with a balance where you’re charged non-tax-deductible interest – credit cards, auto loans for a start – and get a total. If you’ve missed any payments on any of these balances, bring those current first. Then organize the rest of the debt along interest rates and set a payment order that attacks your highest rate balances first. Also, this is a good time to check your credit reports to make sure there are no other surprises in your credit picture. For the three credit reports you are entitled to for free each year, go to this site: www.annualcreditreport.com. Any other credit report with the word “free” in its name that asks for a credit card number will likely charge you – avoid those.

2. Put the credit cards away: Cut up your cards if you have to, but at the very least, put them in a safe place where they’re far away from your wallet and your phone or computer (so you don’t use them for catalog or web orders). Once your debt is paid off, then you can consider which accounts you will use – sparingly – in the future. (Hint: The cards with the lowest rates.)


3. Now get a grip on spending: It’s time to make a budget. For a month, start tracking your spending – every dime. You can do this on paper or on a computer-based solution like Quicken or Mint.com. As you go through the numbers weekly, start identifying things you can live without – coffee and doughnuts, expensive lunches (carryout is a huge budget-buster) and any other frills that can be cut or eliminated. Once you start to suspect that a particular spending item isn’t absolutely essential, cut them immediately – don’t wait for the end of the month. When you get to the end of the month, build a spending plan that covers the essentials, a few small treats and then directs any additional savings you’ve identified toward paying off the debt.

4. Try to refinance your home debt: If you have not recently refinanced your mortgage or home equity debt, see if there’s an opportunity to do so while rates are still low. You’ll need at least 10 percent equity in your home and a credit score exceeding 740 to qualify for the best rates, but start negotiating with your current lender first and see how well you do.


5. Try to refinance your credit card debt: If you are facing an overwhelming amount of credit card debt, talk to each credit card company directly to see if you can lower rates or monthly payment amounts. Don’t fall for the 2 a.m. come-ons from debt resolution companies – they generally charge high fees and take the payment process out of your hands, which may mean late or missed payments. It’s not easy to negotiate a better deal and you may need to insist to speak with several supervisors. But if you succeed at getting a more favorable deal, it’s better if you keep the payment process in your hands so you can keep a constant eye on how your situation is improving.

6. If you need outside help, use some smarts: The provisions of the new Credit Card Accountability, Responsibility and Disclosure Act that took effect in February 2010 require that credit card issuers print a toll-free number for a nonprofit credit counseling service on every bill. It’s important to know that the credit card companies fund these nonprofits, so they’re not acting completely in your interest. Nor are they foolproof in making sure bills get paid on time – any time you let someone else handle your finances you face that risk. But if you are looking for outside assistance and negotiation with your balances, these agencies are a better option than those credit-repair agencies you’ll see advertised on TV. Yet a financial planner may be able to offer specific negotiation tips that can help you keep better control of your debt issues.


7. Learn to use cash or debit: Try to migrate as much spending as you can to cash as long as you get receipts that help you track that spending. A more efficient solution – particularly if you download your bank transactions into a financial tracking computer program – is the debit card. Debit cards wearing a bankcard logo are typically welcome at most stores where credit cards are accepted. This way, you pay cash without carrying cash. If you don’t have such a card, you can probably get one from your bank to replace your traditional ATM card, but remember to tell them to limit your buying power on the card to only what you have in your account. Then keep a close watch on spending so you don’t overdraw.


8. If you can do it safely, DIY: You don’t have to pay for a hand car wash or a lawn service if you can do such things yourself. For any home or auto maintenance chores you may have during the year, learn as much as you can about those tasks and how much skill, money and time it takes to do them. Previous generations made do-it-yourself a necessity. See if that option is right for you and you might save considerable money doing it. Also, for bigger jobs, pair up with friends and family and you can help each other save money.


9. Plan your shopping in advance: Impulse buying had its own role in the debt crisis. It’s time to stamp it out at least until your debt issues are fully under control. Start making a centralized list of necessary shopping items – keep the list for grocery, discount store and other locations on one page if you can so you can see everything you’re considering. Mark off what seems less than necessary. And use coupons and other discounts – the same goes for online purchases. Always do a search for coupon and discount codes to save money on shipping and overall purchase price. Oh, and when you can, buy used – recycled clothes, furniture and home goods will save you money, and if you’re making smart purchases, no one will care. Again, direct all savings toward debt.


10. At the end of the rainbow, don’t restart the problem: Once the slate is clean, don’t start spending again. Start saving and investing.



July 2010 — This column is provided by the Financial Planning Association® (FPA®) of Puget Sound, the leadership and advocacy organization connecting those who provide, support and benefit from professional financial planning. FPA is the community that fosters the value of financial planning and advances the financial planning profession and its members demonstrate and support a professional commitment to education and a client-centered financial planning process. Please credit FPA of Puget Sound if you use this column in whole or in part.

The Financial Planning Association is the owner of trademark, service mark and collective membership mark rights in: FPA, FPA/Logo and FINANCIAL PLANNING ASSOCIATION. The marks may not be used without written permission from the Financial Planning Association.

Things You Should Do Before Working for a Startup Company

In a tough economy, it’s understandable to wonder if you might have a better chance of holding down a job in a startup where you’d at least have a stake in growing something new. Indeed, the Kauffman Foundation reported in 2009 that based on U.S. Census Data, startup companies are a major contributor to job creation even in the worst recessions.



But even in the most desperate employment situations, the risks – and potential rewards -- of joining a startup should be carefully considered no matter what your age. Whether you’re presently employed or unemployed, it’s a good idea to check in with an experienced financial planner or tax expert to get their feedback on where you stand financially. It’s not a bad idea to grill them about questions they’d ask if they were in your shoes.


Anytime you look for a job, it’s your responsibility to kick the tires of the organization before you join. With a new company, that’s particularly important because they don’t have a track record, and remember that the U.S. Small Business Administration estimates that half of all new businesses fail in the first five years. So be prepared to ask the following:


Who’s running the show? If you’re fresh out of school, you’re not as likely to have the networking experience of someone who’s been working 5-10 years longer than you have. But that’s no excuse not to do your homework. An enthusiastic founder with an interesting business idea isn’t enough. Consult professors, professional associations, news reports, experienced friends and colleagues in that industry and any other resource you can find to find out about the key people in this venture, their experience, and most important, their funding.


Are they selling something their customers can’t wait to buy? Whether the startup is creating a product or service for consumers or business, don’t go with the founder’s praise of his/her creation. Become a student of that industry – see what companies currently lead the market, understand why they’re ahead now but what their vulnerabilities might become later and where the startup fits in. If you can’t figure out why this new company will blow away the market, maybe lenders and customers can’t either.


What’s the new company’s financial position right now? If you get in for a formal or informal interview, don’t be afraid to ask how well the company is funded and be prepared to confirm it through back channels. The best way to start is to ask the founder about funding. However, expect some generic responses. Most founders want to keep their financing and other matters confidential to all but the most senior or desired hires. Many startups struggle with getting capital which is why you’ll see companies close their doors before they even have a product in the marketplace. If they say they’re waiting for funding from investors, be very wary unless you know this is a team that’s had unusual success securing funding in the current tough economy. And don’t believe just what you’re told. Use whatever resource you can to back up this information.


See where the future money to operate the business is coming from: It’s not unusual to see young firms “bootstrap” their operations in the early days – that means plunging in personal savings or family contributions. Afterward, startup companies may approach angel investors (generally, rich strangers who invest less than $1 million of their own money in young, “early stage” companies that look promising) and afterward, venture capitalists (VCs) that pool even more substantial sums that look for specific industries to support. While some VCs invest in early-stage companies, they tend to look at slightly more mature firms that look like good candidates to go public, which means a big payday for everybody involved. What does this mean for a job seeker? Ask who these investors are, and check to see if they’re known for a good track record in the industries where they focus. Also, learn the language of “rounds” of financing (successive infusions of capital that help the business through all of its pre-profit growth stages). Bottom line, good companies attract smart investors that stick with them.


Who’s on their board? Boards of directors exist for companies as small as a couple of people, and it’s a good idea, even if they’re known only as “advisory” boards. It’s always a good idea to ask about them just to see who’s on the board, what function the board serves and whether it’s a good mix of investors and industry experts. You want to see smart people on a board (not just cheerleading friends and family members) who understand the company’s business and can provide tough advice that helps companies grow.


What will I get out of this besides a paycheck? Startups are risky ventures. You need to understand what personal and professional rewards you’ll get from joining up. And while people dream of getting in on the ground floor of the next Google, you may gain greater value from the chance to hold a more senior leadership position in an organization that’s trying something completely new. You ultimately will have to decide what value this new opportunity has for you and what safety nets exist if it fails.



June 2010 — This column is provided by the Financial Planning Association® (FPA®) of Puget Sound, the leadership and advocacy organization connecting those who provide, support and benefit from professional financial planning. FPA is the community that fosters the value of financial planning and advances the financial planning profession and its members demonstrate and support a professional commitment to education and a client-centered financial planning process. Please credit FPA of Puget Sound if you use this column in whole or in part.

The Financial Planning Association is the owner of trademark, service mark and collective membership mark rights in: FPA, FPA/Logo and FINANCIAL PLANNING ASSOCIATION. The marks may not be used without written permission from the Financial Planning Association.