by David Bach
Furthermore, what do the two of you spend most of your time worrying about? If you’re like most couples, it’s paying the bills. And what’s your biggest bill? If you are homeowners, it’s most likely your mortgage payment. Now imagine not having to make one. People always tell me that one of their most important values is security. Imagine the security you would feel knowing your mortgage was paid off, that you owned your home “free and clear.” No matter what happened at work or with the economy, you would know you were safe.
Believe me, debt-free home ownership is a goal worth striving for—and all it takes is an extra 20 percent on your monthly payment to make it a reality a decade or more early. And you know what else happens when you pay your home off in 15 years instead of 30? You retire earlier—on average, seven to ten years earlier. As your financial coach, that’s an option I would like you and your partner to have.
With this in mind, beware of the brokerage or insurance salesperson who suggests you should pull equity out of your home and “reposition” it in some mutual funds or insurance products where it supposedly can grow faster. Don’t fall for this. The only reason these salespeople suggest this sort of thing is because of the commissions they can earn off your gullibility. Remember…you can’t park your car or sleep inside a mutual fund. That’s what your home is for, so don’t risk it.
WHAT ABOUT PAYING OFF YOUR MORTGAGE RIGHT AWAY?
If you’re fortunate enough to enjoy some huge windfall—say, a lump-sum inheritance or a big bonus at work—you may be tempted to take the money and pay off your mortgage in one fell swoop. But before you do anything like that, first get some professional financial advice. While I believe in paying off your mortgage more quickly than the bank would like, it doesn’t always make sense to pay it off all at once. There are a lot of variables involved—such as the interest rate on your mortgage, how long you intend to stay in your house, how much money you have, and when you were planning on retiring—and the right course of action isn’t always obvious.
MISTAKE NO. 2
Not taking credit-card debt seriously.
Credit-card debt can destroy a marriage. I don’t care how much two people may love each other, if one of them is constantly spending the couple into debt, I can promise you that eventually the relationship will fall apart. If both parties are running up debts, it will simply end that much sooner.
Why do I say this? First of all, carrying credit-card debt is stressful. Knowing that you owe a company money and that you’re being charged as much as 20 percent interest on the outstanding balance will make even the most laid-back person anxious. Second, the anxiety never goes away; it’s there—all day, every day—until the debt is paid off. And not only does it hang over your relationship, it hits you smack dab in the face every month when the bill shows up. A stressful relationship is not a happy relationship—and unhappy relationships usually don’t last.
DON’T WAIT TO FIND OUT ABOUT YOUR CREDIT RECORD!
Nothing is worse than finding out that your partner has credit problems just when you’re about to make a major purchase—say, when you’re ready to buy your first home together. It’s an exciting time. You decide you’re ready for the responsibility that goes along with home ownership, and it looks like you’ve finally got the money to swing it. So the two of you go to a mortgage company to get preapproved and—wham!—they run a credit check on you and out comes all this information that you never knew about your own credit and your partner’s credit.
This happened to one of my closest friends, a guy named Alan, who makes a good living as a computer executive. When he and his new wife, Renee, started to look for a house in San Francisco a few years ago, he called a mortgage broker to get preapproved for a loan. This, he figured, was a no-brainer. He’d already asked Renee if her credit was clean and she’d said of course it was.
So imagine his surprise a few days later when the broker called him back and asked if he was sitting down.
“What’s wrong?” Alan asked the broker.
“Well,” he said, “Renee has some credit problems. In fact, her credit rating is so bad that there’s no way the two of you can qualify for a loan together.”
Alan was stunned. “How can that be? My credit is perfect, isn’t it?”
“Sure,” the broker said, “but hers isn’t.”
The problem was those nice companies that give away the free T-shirts and make it so easy to get a credit card when you’re a student. With their encouragement, Renee had opened a couple of those accounts when she was in college, charged a few items, and then forgotten about them. Unfortunately, those nice credit-card companies don’t forget. Instead, they had placed nasty little “no payment” flags on her record. And even though the amounts in question were relatively small (less than $200 on two accounts), that was enough to ruin her credit rating—and along with it, any chance she and Alan had of getting a mortgage together.
Fortunately for them, Alan’s credit rating was strong enough to qualify him for a home loan on his own, and so they were still able to buy a house. Anyway, the point here is not to single out Renee, but to demonstrate how easy it is to be blindsided by a bad credit report. Even when you think you have your act together, you may not. The moral…
FIND OUT YOUR CREDIT RATING NOW!
Don’t wait to be surprised. This week go and get yourself a copy of your credit score and your credit reports. Since I originally wrote this book, things have dramatically changed. The government passed the Fair Credit Reporting Act (FCRA) that requires each of the nationwide credit reporting companies—Equifax, Experian, and TransUnion—to provide you with a free copy of your credit report if you request it. They have to do this by law once every 12 months.
There is only one legitimate website to go to and get these reports for free: www.annualcreditreport.com. Lots of websites say “get your credit report/score for free,” but they are imposter sites designed to start charging you for this information 30 days later, so be very careful if you use any site besides this. If you find mistakes you can then go directly to the three major credit bureaus.
Here’s how to contact these companies:
Equifax
P.O. Box 740241
Atlanta, GA 30374
(872) 284–7942
www.equifax.com
Experian
P.O. Box 2002
Allen, TX 75013
(888) 567–8688
www.experian.com
TransUnion LLC
Consumer Disclosure Center
P.O. Box 100
Chester, PA 19106
(800) 916–8800
(800) 888–4213 (if you have been declined credit)
www.transunion.com
If you discover any inaccuracies or mistakes in any of your credit reports, get them fixed immediately. The procedures for fixing mistakes in your credit report are relatively simple, and the individual companies will tell you exactly what’s required on their websites. Basically, if you tell a credit-reporting company that your file contains inaccurate information, the company must look into your claim (usually within 30 days) and present all the relevant evidence you submit to whoever provided the information you’re disputing. If this does not resolve the dispute, you may add a brief statement to your credit file, a summary of which will be included in all future reports. Read the latest updates on the procedures for fixing mistakes on your credit file on the companies’ websites, as things may have changed since the Equifax data breach of 2017.
If you discover that you’ve got some legitimate black marks on your credit reports (for example, some old unpaid bills that you’d forgotten about), do whatever you can to correct the situation. In general, that means paying off those old debts and not letting any new bills go past due.
Beware of companies that say they can “fix” a bad credit report or give you a new, “clean” one overnight. There is nothing that will fix a bad credit report except the passage of time, a consistent record of responsible bill-paying, an
d contacting the credit-report companies to work with them to get your credit record clean.
Want more help? The largest nonprofit referral source for credit counseling is the National Foundation for Credit Counseling, reachable online at www.nfcc.org (800) 388–2227.
MISTAKE NO. 3
Trying to time the market.
Trying to time the market DOES NOT WORK. The idea that you are going to figure out when to move from stocks, bonds, and other investments to cash and avoid the next market downturn is a myth. You’re not going to successfully time the market. At best you may get lucky once. You may be able to go to cash right before the market goes down but then you’ll be sitting in cash when the market quickly recovers and leaves you behind in the dust. Most people move to cash after the market corrects and they DESTROY their retirement. The graphic shown here depicts this mistake.
Investors who moved to cash in record amounts in 2009 then sat in cash and watched their retirement earn nothing after losing 50 percent. Then, to add insult to injury, the market turned around and went up for eight straight years. Ironically, many of these investors are now getting back into the market at the all-time high. Please seriously listen to me on this: you will not succeed in timing the market.
What works when you invest in the market is TIME IN THE MARKET, NOT TIMING THE MARKET. Sorry, we’re not done here because this issue is too important to blow by.
3 REASONS TIMING THE MARKET DOESN’T WORK
1. HISTORY SHOWS TIMING THE MARKET DOESN’T WORK.
I show this chart in my seminars. Look at it closely. Read it twice. Let it sink in.
MISSING THE 30 BEST DAYS COULD CUT YOUR RETURN TO A LOSS
If you had invested a hypothetical $100,000 in the S&P 500 on December 31, 1996, by December 31, 2016, your $100,000 would have grown to $439,334, an average annual total return of 7.68%.
But suppose during that five-year period there were times when you decided to get out of the market and, as a result, you missed the market’s 10 best single-day performances. In that case, your 7.68% return would have fallen to 4.0%. If you had missed the market’s 30 best days, that 7.68% return would have dropped to –2.42%. Of course, past performance cannot guarantee comparable future results.
THE PENALTY FOR MISSING THE MARKET
Trying to time the market can be an inexact—and costly—exercise. S&P 500 Index: December 31, 1996–December 31, 2016
Source: Sterling Capital
2. TAXES COST YOU WHEN YOU TIME THE MARKET.
The problem with moving from stocks and bonds to cash is that if you have profits, you pay taxes (assuming the money was in a taxable account). You’re either going to pay ordinary income if it’s a short-term gain or long-term capital gains tax if you’ve held the investment long enough to qualify. I think about this a lot with the markets at an all-time high right now. Here’s the basic math. Let’s say I have an investment that is up $10,000. If I sell it to prevent losing money when the market goes down I’m personally going to pay at least 33 percent in taxes on long-term capital gains (that’s the brutal reality of living in New York City; I will have state and city taxes on top of federal). That means the market has to drop 33 percent to equal my decision to sell the investment and protect my gains to be even. Well, markets rarely drop 33 percent. The tax math makes selling to protect my gains against a short-term correction pretty silly to even try.
3. MARKETS RECOVER FAST—AND YOU CAN EASILY MISS THE RECOVERY.
Stock markets experience declines—and these declines are normal. They’re not fun, but they are normal. Over the past 50 years there have been 14 market corrections (a market that declines by more than 10 percent) and 11 bear markets ( a decline of more than 20 percent). The average recovery took 107 days. That’s basically three months. See the two great charts that follow. So why do investors bail out of markets consistently after declines? Because they believe it’s going to get worse, not better. History shows that the markets ALWAYS RECOVER. There has never, ever been a declining market that has not ultimately recovered. Please remember this at the next downturn. If anything, when you see the next stock market decline ask yourself and your financial advisor whether that is the time to add to your investments. Are things on sale? They just might be. Most important, remember that it pays to stay invested. It’s expensive to panic.
MISTAKE NO. 4
Buying stocks on margin.
Brokerage firms like to make investing as easy as possible for their customers. Among other reasons, this is why they are incredibly nice about lending you the money to buy more stock than you have the cash to purchase. As a rule, they will lend you up to 50 percent of the value of your account in cash or 100 percent in stock. In other words, if you currently own $10,000 worth of stocks, your brokerage firm will probably be happy to let you borrow $5,000 in cash or purchase up to another $10,000 worth of stocks “on margin”—that is, without your having to put up any additional cash. They’ll simply advance you the money to buy the extra stocks.
Let’s say Microsoft stock is trading at $80, and you want to buy as many shares as you can because you think at that price Microsoft is a steal. If you can come up with $10,000 in cash, your broker will let you buy $20,000 worth of Microsoft—meaning instead of just 125 shares, you can get 250. That’s definitely a good deal if the stock goes up, because owning more shares means you’ll make a lot more money.
But what happens if the stock falls in price? Let’s say Microsoft suddenly collapses by roughly 50 percent, from $80 a share to $40 a share. All of a sudden, your $20,000 investment is worth only $10,000. From the brokerage’s point of view, the $10,000 loan it granted you is now a lot riskier. Brokerage firms don’t like being in this kind of position. Each firm has its own policy, but the general rule is that once the equity-to-margin ratio on your account begins to approach 50 percent, the brokerage firm will start getting concerned—and you will more than likely get what is known as a “margin call.” All of this will be stated in the brokerage’s margin agreement.
Again, the specifics vary from firm to firm, but typically you will be given approximately 72 hours to pay off—in cash—enough of your margin debt to lower your equity-to-margin ratio to a level the brokerage firm finds more comfortable. If you can’t come up with the money, the brokerage will “sell you out”—meaning it will sell off as much of your Microsoft stock as it takes to meet the margin call.
“But wait,” you say. “I don’t want to sell Microsoft at $40. That’s way too cheap. I’m a long-term investor. I bought to hold.”
Well, not on borrowed money you didn’t.
The moment you borrow money from a brokerage firm to finance a stock purchase, you give up control over your account. Brokerage firms have the right to “sell out” margined positions in all sorts of circumstances, and they are not shy about exercising those rights. In the volatile markets of 2000, countless investors were sold out of their positions without even the courtesy of a telephone call. For many of them, April 14, 2000, will forever be remembered as “margined-to-death day.” On that particular day, good stocks saw their prices cut in half, and all sorts of unsuspecting people discovered the hard way how dangerous investing on margin can be. History repeated itself seven years later as the market corrected from 2008 and again people got crushed. As I write this, the market has been on a bull market since 2009 and is now up over 265 percent. So, of course, now would not be the time to borrow against your account, right? Unfortunately, we have record amounts on margin again! Right now, as I write this update, margin debt is up over $582 billion! The last time it hit records like this was in 2000 and 2008—both times before market crashes.
My rule of thumb when it comes to this sort of thing is simple: never buy stocks you can’t afford to pay cash for. If, for some reason, you simply have to margin your account, never let your margin debt exceed 10 percent of your account’s value.
One more thing: if your broker is constantly urging you to buy on margin, you’ve got a broker who
is willing to take too much risk with your financial future. Find yourself a new one.
MISTAKE NO. 5
Not starting a college-savings plan soon enough.
You can’t talk about financial planning for couples and not address the issue of college costs. But before I get into the details, there is an important point I need to stress. You shouldn’t even consider putting aside money for your kids’ college costs unless you are already putting at least 10 percent of your income into a pretax retirement account.
Your security basket comes first. College funding comes second. I see too many parents sacrificing their financial security for the sake of their children’s college education, and that’s a mistake. The greatest gift you can give your children is to ensure that you won’t be a financial burden to them. If worse comes to worst, your kids can always get a part-time job when they’re in high school and start putting aside their own money for college. There are also countless scholarships and loan programs for deserving students.
Now that I’ve let you off the hook emotionally about what you owe your children in terms of paying for their college education, let’s consider something all of us already know.
COLLEGE IS EXPENSIVE…AND GETTING MORE SO EVERY YEAR
According to the College Board, the average cost (including tuition, room and board, books, and transportation) of attending a state college in the 2016–2017 academic year was $20,090 (in-state) and $35,370 (out-of-state) For private colleges and universities, the figure was $45,370. And that was just the average. The most expensive institutions—a group that includes Ivy League schools—carry price tags topping $60,000.