Should You Refinance Your Mortgage?

Should You Refinance Your Mortgage?

One of the things not mentioned much in the wake of the big stock selloff was the impact on bonds and interest rates.  This has pushed the rate on 15 and 30 year mortgages to levels we haven’t seen since 2012. Today we’ll answer the question, “Should you refinance your mortgage?” (read more below)

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The Coronavirus Is Also Affecting Bonds

Most of us are aware of what has been going on in the stock market in the past few weeks. Lots of volatility. Big down days, big up days. Just crazy swings.

But, something interesting also happened that nobody really talked about. Yields on bonds plummeted. The yield on 10-year treasuries fell below 1% for the first time ever. And for a moment, it fell below 0.5%

Why is this important? Mortgage rates are closely linked to the yields on 10-year government bonds.  And these record low yields have created a surge in demand to refinance loans.  So, should you refinance your mortgage?  Here are some key things to consider. 

These falling yields mean the interest rates for a mortgage have also dropped. Mortgage rates hit an all-time low in 2012. And we are testing those levels again.

Is it time to refinance your mortgage

Is Now The Time To Refinance?

It may be a good time to consider refinancing the note on your house. So what are some of the things that factor into your decision to refinance or not?

Mortgage Refinance

1. How Much Interest Will You Save?

It takes some time and know-how to compute this. But you can compare how much interest you will pay on your current mortgage to what you’ll pay when you refinance. If there is significant savings, it’s worth looking deeper. 

 

Bonus Tip:

Refinancing may reduce your payment. But consider keeping your monthly payment the same. The extra gets applied to your principal. You’ll pay off your mortgage faster. And you’ll save even more in interest expenses.

mortgage refinance

2. How Much Will It Cost?

Refinancing your loan means some upfront costs. You have origination fees, closing costs, appraisal costs, and maybe some other fees. Do those fees justify the potential savings?

Here's an example

Current Loan

Jane and Bob purchased their house about five years ago.  Their original loan was for $150,000.  The interest rate was 4%.  They have made 60 payments on their house.  

Over the rest of their loan, they will pay about $79,945 in interest expenses. 

Refinance

After looking into refinancing at lower rates, they discovered they will pay about $3,000 in origination fees, closing costs, and other fees.  

The interest rate on their new loan is 3%.  They extend their repayment period by 5 years.  Their monthly payment decreases by $130 per month.  And over the life of the loan they will save over $7,700 in total interest expense.  

Is It Time to Refinance Your Mortgage
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But wait, there's more

They keep their payment the same!

Jane and Bob elect to pay their original payment.  This means they pay an extra $130 per month on the new mortgage.  They will pay it off in 22 years—that’s earlier the original loan.  

Also they will save over $28,000 in total interest costs!

refinance your mortgage

3. Do You Need To Do Major Repairs Or Updates To Your Home?

Over time big things need repaired or replaced. A new roof, a new driveway or new flooring are all big-ticket items. For some, the only way to make those expensive repairs is to tap into the equity they have accumulated. This may be a great opportunity to consider that.

The coronavirus scare has created an opportunity to lower your interest costs. But be careful, check your numbers, and make sure it is the right thing for you to do. If you have questions, talk to a financial planner you know and trust.

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Do you have a question about what’s happening in the world of finance or investing?  Is there a topic that has you curious?  We’d love to hear from  you.

 We’ll do our best to answer it in a future episode.  To submit your question, fill out the form.  If you prefer, you can send us an email directly.  That email address is neal@flemingwatson.com

Enter Your Question Here

Financial Planning

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors  He typically works with people who are planning for retirement.  Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio.  Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.

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Still Not A Bear Market

Still Not A Bear Market, Yet

Right now, there is a lot of fear and panic on Wall Street. It looks and feels bad. Yesterday seemed to amplify those fears even more. The Dow fell over 2,000 points for the first time ever. It was a headliner type day.

You can’t brush a day like that aside and say, “It was no big deal.” It is a big deal. The 7.6% decrease was the worst day for stocks since 2008. And it was the 24th worst day ever recorded. And this comes on the heels of two of the wildest weeks I can remember in my 24 years as a financial planner.

It feels really bad. The “fear index” reached its highest level since the Great Recession. Volatility is extreme.

Still not a bear market

Still Not A Bear Market

But here’s the thing that hasn’t gained traction in the financial media. This is still not a bear market, yet. And “yet” is important. Year to date the stock market has dropped 15%. From it’s high in late February, prices have dropped 18.8%. We don’t find the bear until prices drop 20%.

I say “yet,” because we could easily find the bear’s den in the next few days. I believe it is more likely than not. But there is always a chance we don’t cross that line for a while, if at all.

STill Not a bear market

The Second Hardest Thing To Do...

This is the unpleasant part of being an investor. Riding through the waves of big down days and big up days. “It feels like we are riding The Beast at Kings Island,” as one client put it. That’s a pretty good analogy.

Unfortunately, it looks like this wild ride may continue for a while longer. The impact of the virus both to our health and the economy remains unknown. And now an oil price war adds to the hysteria. We have no control over the uncertainty or the attention. But we can control what we do.

Doing nothing is the second hardest thing to do in times like this. But it is often the best course of action. We can look back at the past 20+ years and find many reasons to sell our shares of great businesses. But those reasons can’t overshadow why we hold onto those positions.

Still Not a bear

What's The Hardest Thing To Do?

What’s the hardest thing to do in times like this? Buy more stock. The shares of these great businesses are on sale for a limited time. The prices might get better, but the sale won’t last long.  Remember, you are supposed to buy lower.  We may not see an opportunity like this again in our lifetimes.

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Financial Planning

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors  He typically works with people who are planning for retirement.  Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio.  Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.

Should I Sell My Stocks

Should I Sell My Stocks?

Should I sell my stocks? It was a hot topic during the last week of February. Today on Monday Morning Money, we’ll talk about reacting to extreme volatility in the stock market.  (Read more below)

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The "Stuff" Hit The Fan

At the end of February, the proverbial stuff hit the fan. We were coming off the worst week in the stock market since 2008. Prices dropped over 11% on fears of the Coronavirus. When extreme drops like this happen, our instincts kick in. The urge to protect what we worked so hard to save becomes very strong.

A week ago, had you typed the words “should I” into google, the first auto-generated question was:

Should I sell my stocks?

In our experience, the answer to that question most of the time is “no.”

It's not "sell low, buy higher"

Emotional reactions to these big moves tend to reduce your lifetime returns. The rule says, buy low sell high. When we react to these events we tend to do the opposite.

People wait until prices have dropped and then sell. Then when things look better, they get back in. But many times, they are buying at higher prices.

Should I Sell My Stocks
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The Impact of Emotional Reactions on Real-Life Returns

There is a company that tries to compute the impact of emotional reactions on real-life returns. DALBAR has been conducting their qualitative analysis of investor behavior for several years. The study tries to show the gap in performance between investments and investors. At times, this margin has been significant.

Imagine the impact on your nest egg if the emotional performance gap lowers your returns by 2%. Instead of earning 7% per year on a well-diversified portfolio, you earn 5%. Over a long period of time, the compounded difference will be significant.

The more often you make reactionary decisions, the more chances you have for errors. And those errors can be very costly to your future.

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The Price We Pay for the Growth We Need

Nobody likes to sit through the temporary declines, but they are the cost of the longer-term gains we depend on for growth.

I’ll close with this take I read recently. We don’t know which direction the next 20% move in the stock market will be. But we can be quite certain of the direction of the next 100% move in stock prices. We would hate to miss it.

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What's On Your Mind?

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 We’ll do our best to answer it in a future episode.  To submit your question, fill out the form.  If you prefer, you can send us an email directly.  That email address is neal@flemingwatson.com

Enter Your Question Here

Financial Planning

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors  He typically works with people who are planning for retirement.  Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio.  Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.

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Death of the Stretch IRA: Should You Convert to a Roth IRA?

Death of the Stretch IRA: Should You Convert Your IRA to a Roth IRA?

The SECURE Act killed the Stretch IRA. This could mean a nice tax bill for someone you care about. The big question that has come from this: “Should you convert your IRA to a Roth IRA?”

Watch: Should You Convert Your IRA to a Roth IRA?

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Death of the Stretch IRA

In December, the federal government passed the SECURE Act. And one of the biggest provisions of that bill was the elimination of the Stretch IRA. This impacts non-spouse beneficiaries of your IRA, 401k or other retirement plan accounts. That means your kids, grandkids, etc. It doesn’t affect spouses.

Under the old rules, your kids could spread out the distributions from an inherited IRA over a long period of time. Now, your kids will have to liquidate those accounts within 10 years.

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Converting Your IRA to a Roth IRA

One strategy you can use to address this is to convert your IRA to Roth IRAs. This means you pay taxes on the amounts you convert now, and the money then grows tax-free. And when certain conditions are met, your kids won’t pay any taxes on their distributions.

Should you convert your IRA to a Roth IRA? The answer is very complicated and will be different for everyone. Here are the key considerations

1. Who Pays Higher Taxes?

Who has the higher tax rate? Converting your IRA to a Roth IRA means you pay the taxes. You have to understand who has the higher tax rate. If your tax bracket is the same as your kids, the conversion may not be worth it. But, if your kids pay taxes at a higher rate, the math changes.

State taxes also matter in this.  If your kids live in Florida where there is no state income tax, that needs to be considered.  Likewise if they live in a high-tax state—like New York—it changes the math.

2. Watch the Hidden Taxes

Pay attention to the hidden taxes? Converting your IRA could impact the taxes on your Social Security benefits. It could also trigger taxes on your Medicare premiums due to the income related adjustments. You’ll want to look at those elements too.

3. Can't Convert Your Required Minimum Distributions

If you are older than 72, you have to be careful. The rules won’t allow you to convert your required minimum distributions. You have to satisfy those before you convert.  This may make it more expensive than you think.

4. Know the Total Costs

Look at the total cost of your strategy. There are some complex strategies you can use to preserve some of the “stretch provisions.” They use some advanced trust planning. You have to weigh the cost of the trust, plus the tax costs of setting them up.

Should you convert your IRA to a Roth IRA? It’s a good question to ask and consider in your plans. But there are a lot of complexities. You should talk to a tax expert and a financial planner to help you look at all aspects.

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Do you have a question about what’s happening in the world of finance or investing?  Is there a topic that has you curious?  We’d love to hear from  you.

 We’ll do our best to answer it in a future episode.  To submit your question, fill out the form.  If you prefer, you can send us an email directly.  That email address is neal@flemingwatson.com

Enter Your Question Here

Financial Planning

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors  He typically works with people who are planning for retirement.  Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio.  Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.

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Should You Buy Stocks At the Top of the Market?

Should You Buy Stocks at the Top of the Market?

Should you buy stocks at the top of the market?  This is a question submitted by a listener.  Click below to hear our answer.

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Answering a Listener Question

John asks, “With the stock market so close to all-time highs, should I buy stocks, or should I wait?” 

The stock market is very close to all-time highs. We also keep hearing how this is—arguably—the longest-running bull market in history. And at some point, there will be some sort of major drop.

So, should you buy stocks at the top of the market?

It Can Be A Long Way Down

Here is the root of John’s concern. Nobody wants to be the person with perfectly imperfect timing.  This means you buy at the market’s high right before a bear market.  It can be painful. 

The last four major declines were

  • -49%(2000-2003),
  • -57%(2007-2009),
  • -19.4% (2011), and
  • -19.8% (2018).

Seeing your investment drop significantly and quickly isn’t exactly a good time.  But the bigger question we should ask is:

What would have happened if you had bought stocks right before the last 4 bear markets?

Buy Stocks at The top
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The Dot Com Bust (2000-2003)

Buying at the top in March of 2000, and holding it until the end of last year, your average return would have been 6% per year. And remember, you would have gone through four total bear markets in those two decades, including the worst one since the great depression.

The Great Recession

The next “top” was in October 2007. If you bought then, by the end of 2019, your average annual return would have been 8.% per year.

Buy Stocks Top
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Top of the market
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Spring 2011

 Buying the top in the spring of 2011 resulted in an average of return of 12% per year over those 8 plus years.

4th Quarter 2018

The last one was in the fourth quarter of 2018. Buying the top in late September 2018 resulted in a 10% return at the end of last year.

Market Top BUy Stocks
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Those returns won’t be as good as someone who was able to avoid those bear markets. But the number of people who can correctly guess those events are few and far between.

If Not Now, When?

The next thing you need to consider: if you don’t buy now, when will you? Do you use a rule or your “gut feeling?”

Some people will set a rule. If the market drops 10 or 15% they’ll buy. But what do you do if prices don’t drop far enough? If your target is 15% lower, and the market only drops 12% before it turns around, you miss opportunities.

Or do you use the “gut feeling” method? You’ll buy when it feels right.

When stocks are declining, the prevailing mood will tell you it’s going to get worse before it gets better. Buying low might be the right thing, but it will also be the hardest thing to do.

Lessons Learned

Here’s what I’ve learned over the past 24 years.  If you have the right mindset, the best time to buy stocks is when you have the money. On March 24, 2000, the closing high for the S&P 500 was 1527.  Four bears and twenty years later, the index closed at 3230.  And two of those bears two are two of the worst we’ve ever seen.

Chances are, and I believe this, we are going to see much higher highs in the future.  Trying to miss the trouble will likely mean you end up missing the returns you want.

What's On Your Mind?

This was a great question, and we are glad John sent it to us.  Do you have a question? We try to answer it on a future episode of Monday Morning Money.

To submit your question, fill out the form.  If you prefer, you can send us an email directly.  That email address is neal@flemingwatson.com

Enter Your Question Here

Financial Planning

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors  He typically works with people who are planning for retirement.  Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio.  Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.

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The SECURE Act for the Rest of Us

The SECURE Act for The Rest of Us

For those of us who don’t have to worry about required minimum distributions for a few decades, there are some new things in the SECURE Act for the rest of us. Those include:

  • better access to retirement plans,
  • new provisions for penalty-free withdrawals from your Retirement Accounts
  • and a tweak to 529 plans

We’ll go into some of those things on this week’s episode of Monday Morning Money.

Watch: The SECURE Act for The Rest of Us

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Webinar: Death of The Stretch IRA

The Stretch IRA provisions for non-spouse IRA beneficiaries has been eliminated by the SECURE Act.  We have created a short webinar (7 minutes) that explains the changes in more detail.  Click on the button to watch

   

 

Improved access to retirement plans

The main purpose of the SECURE Act is to improve access to retirement plans for more people. It is an acronym for Setting Every Community Up for Retirement Enhancement.

The primary focus is to make it easier and cost-effective for companies to set up a plan.  So a lot of those provisions don’t really apply to most of us.  

One item which could affect you though is expanded eligibility for part time workers.   The new law makes it easier for long-term, part-time employees to be eligible for a retirement plan. Under the new rules, if you work at least 500 hours in 3 consecutive years, you will now be eligible to participate in your employer’s plan.  This is far less restrictive than in past years.

More penalty free access to funds

You can now take penalty-free withdrawals from an IRA or retirement plan for birthing or adoption costs. If you are having a baby or adopting a child, you will be able to withdraw up to $5,000 to help cover those expenses. For a couple, this means they can withdraw up to $10,000 total–$5,000 each. You will still have to pay income taxes, but you will not face the 10% early withdrawal penalty.

SECURE Act for Us
SECURE Act Student Loans

A new tax advantaged way to pay student loans.

Another provision of the new law allows you to withdraw $10,000 from a 529 college savings plan to pay on student loans. Before this act, student loans were not considered a qualified education expense. That meant you had to pay taxes and penalties if you withdrew money from a 529 plan to pay towards those debts. Now you can access that money for that purpose.

Lifetime income provisions.

Administratively speaking, plan sponsors now have to make annual “lifetime income disclosure statements.” This tells you how much income you could get each month if you bought an immediate annuity. Those will simply be estimates.

There are also some provisions for plan sponsors to make it easier to offer annuities within a plan. This may or may not be a good thing. Annuities are one of the most abused financial products out there, therefore you should be very careful about using one.

Consult a trusted Advisor

Any time we see major changes like this, it is a good idea to review your plans. Talk to a trusted advisor to see if any of these new provisions will impact you.

What's On Your Mind?

Do you have a question about what’s happening in the world of finance or investing?  Is there a topic that has you curious?  We’d love to hear from  you.

 We’ll do our best to answer it in a future episode.  To submit your question, fill out the form.  If you prefer, you can send us an email directly.  That email address is neal@flemingwatson.com

Enter Your Question Here

Financial Planning

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors  He typically works with people who are planning for retirement.  Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio.  Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.

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The Financial Planners 2019 Holiday Gift Guide

What do you get the young adult child who already has everything?  How many gift cards do you really want to buy? Socks?  Really?  Fear not! We have created the Financial Planner’s 2019 Holiday Gift Guide.  And it is sure to be a big hit.   

Watch: 2019 Holiday Gift Guide

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Free Download: The Financial Planner's 2019 Holiday Gift Guide

For that last minute shopper, here is our Financial Planner’s 2019 Holiday Gift Guide.  We cover the basics of Roth IRA’s and 529 Plans.  We’ll also show you—and the lucky recipient—what kind of impact your gift can make on their life.  Click on the button to download your free copy.

The Struggle is Real!

As December rolls around each year, it is always a struggle to come up with gift ideas. And I thought maybe you were having similar problems. So I decided to come up with the financial planners holiday gift guide.

Do you have younger adult children or grandchildren? Tired of buying gift cards to restaurants they hate or ugly socks?

The Perfect Solution: A Roth IRA

What could be a better gift than years of tax free compounded growth? That’s right folks, a Roth IRA makes a perfect gift for that young adult in your life.

Just imagine the riveting conversation you’ll have sitting around the tree. You can talk about compound interest and how “You may not appreciate this now, but one day you’ll be glad you have it. Shoot I wish my parents had started a Roth IRA for me for Christmas. Instead, I got a garage door opener.”   

True Story…

One year, as a twenty-something, my parents bought me a garage door opener.  Not only was it a surprise, it was one of the best gifts I’ve ever received.  You don’t appreciate it until you have to get out of your car in a driving rain storm to open the garage door!

Cam Hardiman

This is Jim’s great grandson (and Neal and Susan’s grandson).  Cam Hardiman was born on November 3rd, 2019.

For the Young Child: Tax Free Growth, for College

We’ve all watched these kids tear into boxes like a tornado. Only to see them spend more time playing with the boxes.

Not this year.  No boxes.  No hermetically sealed plastic packaging you can only open with a blow torch. 

What could be better? You guessed it, a 529 Plan.  This means tax free growth—FOR COLLEGE! 

 

Seriously Good Gifts

Roth IRA’s and 529 plans make terrific Christmas gifts. They aren’t exciting, and you may actually be able to hear  eyes roll.

But, at some point, they will be far more useful than that pair of socks, the remote control car or even a garage door opener.

A Roth IRA offers your kids or grandkids tax free compounding for their retirement. It may not be much today. In thirty or forty years they’ll look back and say, “Wow! Mom and Dad (or grandma and grandpa) did this for me. And look at it now.”

Same thing with 529 plans. The costs of college won’t be coming down anytime soon. At some point. someone will appreciate it more than you may ever know.

Here. We'll show you what we mean.

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2019 Holiday Gift Guide
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What's On Your Mind?

Do you have a question about what’s happening in the world of finance or investing?  Is there a topic that has you curious?  We’d love to hear from  you.

 We’ll do our best to answer it in a future episode.  To submit your question, fill out the form.  If you prefer, you can send us an email directly.  That email address is neal@flemingwatson.com

Enter Your Question Here

Financial Planning

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors  He typically works with people who are planning for retirement.  Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio.  Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.

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Paying Compound Interest

Paying Compound Interest

On today’s show, we talk about paying compound interest.  We’ll discuss:

  • The impact of time
  • The impact of the interest rate

Be sure to scroll down for the charts and graphs that help illustrate how this can impact you.

Watch: Paying Compound Interest

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Free Download: The Impact of Paying Compound Interest

Compound interest is a tricky subject.  So we created this free download to help illustrate how it can impact your life.  To download your free copy, please click on the button.  

Paying Compound Interest Example 1: The Mortgage

How does compound interest make you pay? The best example is the mortgage. Most of us borrow money to buy a house. And one of the common decisions is choosing between a 15 or 30-year loan. So let’s look at how this plays out.

30 Year Mortgage

Click Image to Enlarge

You borrow $100,000. Right now, rates for a 30-year mortgage are about 4%. This means your monthly payment is about $478. Because of the effects of compounding, the total cost of this loan over three decades will be $71,870.

15 Year Mortgage

Click Image to Enlarge

If you borrow the same amount over 15 years, your interest rate is lower—about 3.38%. But your payment is also higher. It jumps to $709, not quite twice as much. But over 15 years, your total interest cost is $27,576.

A 15-year mortgage, if you can afford the payment, will save you over $44,000 in total interest expense. That’s nearly half of the loan amount.

For most people, a lot goes into their decision about whether to do a 15-year or a 30-year loan. And the primary factor is the size of the payment. But this illustrates how powerful time can be.

Paying Compound Interest Example 2: Credit Cards

Let’s look at another common example. Credit Cards. Many credit cards require you to pay 2% of your balance as a minimum payment. And credit cards often have rates which could exceed 20%, but let’s use 20% for this example.

Credit Card Repayment

Click Image to Enlarge

You start with a balance of $5,000 and make no other purchases. Your minimum payment is $100. You pay this each month until you eliminate the debt.

It will take you 9 years, and it will cost you over $5,800 in interest. This means you pay more in interest than your original purchases.

What's On Your Mind?

Do you have a question about what’s happening in the world of finance or investing?  Is there a topic that has you curious?  We’d love to hear from  you.

 We’ll do our best to answer it in a future episode.  To submit your question, fill out the form.  If you prefer, you can send us an email directly.  That email address is neal@flemingwatson.com

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Financial Planning

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors  He typically works with people who are planning for retirement.  Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio.  Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.

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Is Gold A Good Investment?

Is gold a good investment?  We answer a listener question about the shiny metal.  We will discuss:

  • Where gold really shines
  • Some potential costs
  • And things to consider when deciding if it is right for you.

Watch: Is Gold A Good Investment?

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Today, Jerry asks this question, “With all of the wild moves in the stock market, a political mess, and these low-interest rates, should I be using gold?”

All that glitters is gold, or is it? As an asset class, the shiny metal tends to get a lot of attention.  In most cases, it rises to popularity when the doom and gloom sets in. And when pessimism is high, it’s not uncommon to see and hear a lot of advertisements for it.

But is gold a good investment? It’s beauty is in the eye of the beholder.

Where Gold Really Shines

At times gold, does well when stocks don’t. For example, during the dot com bust in 2000-2002, gold generated a total return of a little over 20%. US stocks declined more than 37% over that same three-year time frame.

In 2008, the US stock market was down 37%. Gold increased by 5%.

So it can be a good investment for diversification.

Is Gold A Good Investment
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Where Gold Loses its Luster

But there are a few drawbacks. Many people we talk to believe gold offers a level of safety. The data paints a different picture. Like stocks, gold has some extreme declines. The most recent one happened between 2013 and 2015. During those three years, gold dropped more than 37%. It isn’t as safe as people want to believe.

Is Gold a Good Investment-1315

Be Aware of the Costs

The other issue with gold stems from how you buy and sell it. If you wish to buy coins or bullion, transaction costs can eat into your returns. Those fees and commissions have decreased through the years, but they are still a factor.

One way to reduce those costs is to use an exchange traded fund designed to track the price of gold. Some funds own the metal. And we know of one fund who will actually deliver the metal to you when you redeem your shares.

The internal costs of these funds are small. In addition, the major discount brokers now offer zero commission trades for ETF’s. That also can keep your costs lower.

Buying gold in an individual retirement account can also be a hassle or result in extra fees. Not every custodian will hold the physical metal. And those who do will charge fees for storage and other services. Again this is where using ETF’s can make things much simpler and cost-effective.

Is Gold a Good Investment for You?

Gold can be a good part of your nest egg, as long as you understand the whole picture. It can be a buffer against stock market volatility. But don’t expect it to be completely safe either.

And you have to decide how you want to invest. Buying the actual metal adds costs and complexities to your situation.

After you’ve done your research and understand the ins and outs, you can make the choice.

What's On Your Mind?

Do you have a question about what’s happening in the world of finance or investing?  Is there a topic that has you curious?  We’d love to hear from  you.

 We’ll do our best to answer it in a future episode.  To submit your question, fill out the form.  If you prefer, you can send us an email directly.  That email address is neal@flemingwatson.com

Enter Your Question Here

Financial Planning

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors  He typically works with people who are planning for retirement.  Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio.  Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.

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A Fishy CD Ad

On today’s show, we talk about a fishy CD ad.  It reminds us if things sound too good to be true, they probably are.

Watch: A Fishy CD Ad

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Recently, the Federal Reserve reduced short term interest rates, again. And this move impacts savers in a big way. Earlier in the year, we were able to find short term CD’s—meaning 1 year or less—with an annual yield of 2.3% or higher.

Since then we’ve seen those rates drop significantly. The national average annual yield for 6 month CD’s is 0.91%. The highest annual yield reported is 1.85% to 1.9%.  If you are a saver, this low-interest-rate environment is awful. CD buyers are begging for any kind of yield right now.

A Fishy CD Ad

Recently, a client asked us about an ad he saw in a newspaper in Myrtle Beach. The advertised rate for a CD was over 3.5%. That’s almost 4 times the national average. And it is nearly double the highest reported rate by bankrate.com.

An ad like this is going to get people’s attention.

But things like this also make the alarms go off in our head. What is this company doing that allows them to offer a CD with this kind of yield? So we did a little digging, and to no surprise things look a bit suspicious.

1.  It’s Not A Bank Running The Ad

The first thing of note, this isn’t a bank advertising this. Brokerage firms have access to FDIC insured CD’s. And at times those rates are better than what local banks offer. But, when the advertised rate is this much larger?  It raised an eyebrow.

2.  An Insurance Agency Advertises This.

The second thing which got our attention: The company running the ad primarily sells insurance products. And this made us dig a little deeper.

We found this gimmick has been around for a few years. Here is how it works.

The Gimmick

The agency has an ad for a 3.5% 6 month CD. You want to invest $10,000 in one. The agency buys a CD for 1.3%. After 6 months, the bank issuing the CD pays you $65. The agency then pays you $110. You get your 3.5% yield.

A Fishy CD Ad

CAUTION! High Pressure Sales Tactics Ahead

For that $110, the insurance agency gets a captive audience with a yield-hungry, conservative saver. Then they use high-pressure sales tactics for annuities and other insurance products.

Ads like this aren’t necessarily a scam.  But the tactics push ethical boundaries. These agencies design these ads to get your attention and get you in the door. You see, they’ll only talk to you about this in person. And when they have you sitting in front of them, they can put on the full court press to try and sell you something else.

Many times, what they are selling is not always in your best interest. So, if you see an ad like this, be careful. Remember, if it sounds too good to be true, it probably is. And if you are in doubt, talk to an advisor you know and trust.

What's On Your Mind?

Do you have a question about what’s happening in the world of finance or investing?  Is there a topic that has you curious?  We’d love to hear from  you.

 We’ll do our best to answer it in a future episode.  To submit your question, fill out the form.  If you prefer, you can send us an email directly.  That email address is neal@flemingwatson.com

Enter Your Question Here

Financial Planning

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors  He typically works with people who are planning for retirement.  Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio.  Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.

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