10 Things to Know Before Applying for a Mortgage

Applying for a Mortgage

Remember our rent vs. buy debate discussed in previous episodes of The Money-Guy Show? While that episode covered the arguments for and against both renting and buying, it didn’t take a deep dive into the actual process of financing a home. Today, Brian and Bo look at the ins and outs of applying for a mortgage and cover what you need to know before you borrow money.

Mortgage financing can be tricky (especially if it’s your first time going through the process), but Brian and Bo share 10 things to know so you can come to the table prepared.

Know What You Need Ahead of Time

It’s important to take inventory of what your house needs are before applying for a mortgage. Otherwise, someone else will fill in that blank for you, and it’s easy to fall for possible traps when you’re not informed.

Mortgage brokers and realtors might suggest you can afford a house that’s around 35% of your salary, for example, (while Brian and Bo suggest keeping it at 28% or less), and they may try and convince you to purchase more house than you actually need.

Vision Plan the Future

The Money Guys return to vision planning, and for good reason. You need to sit down and figure out what you want your future to look like. How long are you planning on staying in this house for? Will the desire to have a family mean you need more space in the future?

What stage of life are you in right now? If you’re close to retirement, you might want to consider a house you can pay off in 15 years so you enter retirement debt-free. If you’re younger, you might be okay with a 30 year mortgage as you’ll have time to pay it off.

Understand Your Down Payment

A down payment of 20% is optimal to avoid private mortgage insurance, of course, and the more you put down the lower your monthly payments will be over the life of your loan. But the guys say that if you have to get creative with your financing, it’s okay to have a lower down payment. PMI, while not an ideal expense, is at least deductible. And if a lower down payment means more cash in your pocket which you can then invest in other ways, that might make more sense for your situation.

What’s the Lock Period?

Underwriting can be a lengthy process when applying for mortgage financing. As such, you want to make sure your rate is locked in longer than you’ll be in underwriting for. Brian recommends looking into a 45 day lock for refinancing, and at least a 60 day lock for purchasing.

What About Points?

Brian briefly touches upon mortgage points, and suggests doing a break-even analysis to judge whether or not paying is worth it. Figure out what you’ll be saving per month, and divide that by what you’d be paying for the points. Then see how long it will take you to recoup the cost.

Plan for Contingencies

You don’t want to end up house-rich and life-poor. You must plan for contingencies (which should be part of your overall vision planning process). Leave yourself with enough breathing room so you can handle any curveballs life throws at you.

Overall, make sure you shop around and get the best rates. Know that most mortgage brokers and realtors aren’t going to be looking out for your best interests — that’s your responsibility. Get information from unbiased third parties, and save as much as you can.

Want to pick up the full 10 things you need to know before applying for a mortgage? Make sure you tune in to this episode of The Money Guy Show!

12 Mistakes to Avoid Making With Your IRA

Mistakes to Avoid with IRA

Individual Retirement Accounts (IRAs) are critical in securing financial independence in retirement. Because of this, Brian and Bo took the opportunity to discuss what mistakes they see clients make — and how you can avoid them. This episode was inspired by an article published by Morningstar back in February called 20 IRA Mistakes to Avoid.

These mistakes are also applicable to other retirement plans as well! If you’re contributing to a 401(k) or 403(b), you’ll want to listen in and understand the 12 mistakes the Money Guys say you must avoid making.

Here’s a quick rundown of the errors Brian and Bo cover in this podcast:

Procrastinating on Making Contributions

The Morningstar article cites the fact that if you’re investing later rather than sooner, you could be losing out on growth thanks to compound interest.

Many people also think they can take their time if they’re getting an extension on their taxes. That doesn’t apply to traditional and Roth IRAs — those contributions need to be in by April 15th.

Not Understanding Tax Bracket Implications

Do you understand the retirement account options you have and the impact each can have on your taxable income? Brian and Bo explain when you should invest in a Roth IRA over a traditional IRA, and which retirement vehicles you should prioritize.

Not Understanding Roth Conversions

If you’re looking to retire early, you’ll be able to plan your tax strategy in advance. Once you retire, you don’t have any earned income, and converting to a Roth IRA might prove to be a good decision as there are no required minimum distributions.

Being Retirement Rich and Liquidity Poor

Having a 7-figure portfolio and nothing in reserves won’t do you any good in the present should something go wrong. Plus, if you retire early and can’t start withdrawing until you’re 59 ½ years old, you’ll need money to tide you over.

Ignoring Spousal Contributions

If you or your spouse work while the other doesn’t, you can still take advantage of spousal contributions. The non-working spouse can use the other spouse’s earned income to make contributions for themselves.

Buying an Annuity

Purchasing an annuity within a retirement plan is usually a bad idea as you’re doubling up on tax shelters. Make sure buying an annuity actually makes sense for your situation.

Treating Your IRA as a Piggy Bank

Say you do leave your job – that technically means you have a distributable event. That doesn’t mean you should make the most of it and buy a new pool or TV. Ignore the temptation to withdraw funds and roll your money over.

Not Updating Beneficiary Designations

Have you divorced or remarried? Then you should update your beneficiary designations – you wouldn’t want your ex-spouse inheriting your money, would you?

Want to grab more tips and understand the mistakes you need to avoid with your IRA? Be sure to tune in to this episode of The Money Guy Show for advice on how to better manage your IRA!

5 Habits of 401(k) Millionaires

401(k) Millionaire

Today on the show, Brian and Bo are discussing an article from Fidelity on the 5 habits of 401(k) millionaires. It’s an important topic to talk about, as the responsibility of securing a financially stable retirement is largely in the hands of employees these days. Knowing what habits can help you save is crucial.

Many people don’t think it’s possible to become a millionaire, especially when you’re making less than $150,000. Brian and Bo go through each habit and state how it is possible to achieve millionaire status if you follow these 5 guidelines.

The Parameters of Fidelity’s Study

The average age of the millionaire in Fidelity’s sample pool was 59. They had been working for over 30 years, and they had earned less than $150,000. Fidelity looked at their accounts from 2000-2012.

1. Save Early On

We all know the importance of compound interest. It can’t be stated enough. If you contribute to your 401(k) steadily for 30-40 years, you’ll amass a nice nest egg to retire on.

The counterpoint? Most people aren’t staying at the same company for 30 to 40 years. But while it’s unlikely most people will stay with a company that long, as long as you have a steady, lengthy career and always make it a point to contribute, you can get there.

2. Contribute a Minimum of 10-15%

Fidelity found that the average employer contribution was 5%, and that millionaires deferred 14% of their salary on average ($13,300 annually). The employee contribution + the deferred salary = an annual 19% savings rate.

The counterpoint argued a 19% savings rate is completely unrealistic for most people. That may be true if you struggle to identify your financial needs and separate them from luxuries and wants. Saving 20% — or even more — of your salary is necessary if you want to have enough saved up to retire on.

3. Meet Your Employer Match

This is common advice and for good reason. Any time you’re not contributing up to the amount your employer will match, you’re leaving free money on the table.

Fidelity found that of the millionaires they studied, 96% were in a plan that offered an employer contribution, but not all employees opted in. If you want to reach millionaire status, rethink that: 28% of contributions in the average millionaire’s account came from an employer.

And again, the argument against this point: people can’t control if their employer offers a 401(k) match. While true, it’s something you need to take into consideration when figuring out whether or not you want to work for a certain company. Your retirement benefits are part of the total compensation package.

4. Consider Mutual Funds that Invest in Stocks

The average 401(k) millionaire had 75% of their assets invested in company stock and mutual funds. They were able to get a 4.8% annualized return.

The counterpoint said the 4.8% return required these millionaires to have outperformed the stock market by a factor of 3, given there were two market crashes during the 2000-2012 period. Brian and Bo disagree, and offer a sample portfolio that could achieve the same results.

5. Don’t Cash Out When Changing Jobs

Fidelity admits the average employee tenure of their millionaires was 34 years, so they didn’t encounter the issue of people cashing out retirement plans when they experienced a job change. If you do change jobs, it’s important to figure out alternative solutions for your funds.

It’s also common advice to not borrow from your 401(k) at all, to which the counterpoint was — it’s not that easy. Some people need the money.

(And this is why it’s critical to develop an emergency fund during good financial times, so you can rely on that first when things get tough.)

As you can tell, becoming a 401(k) millionaire is easy in theory, but many people aren’t willing to commit to the work it takes to build such wealth. What will your path look like? Will you commit to what is necessary to reach millionaire status?

5 Ways to a Happier Financial Life

Have a Happy Financial Life

This week on The Money-Guy Show, Brian and Bo review a piece from The Wall Street Journal’s Jonathan Clements. Clements shares the 5 keys to living a happier financial life in his recent article from a Sunday edition of WSJ.

Who doesn’t want to learn how to live a happier financial life? Money can be the cause of so much stress, but financial success isn’t as complicated as some think it is. Read on or listen in to find out what you can do to be happier.

Commuting Is a Huge Waste of Time

The first point Clements writes on: commuting destroys our happiness. Many of you can probably relate! Who enjoys being stuck in traffic for hours on end?

Clements cites a Swedish study that concluded longer commutes increase the risk of couples separating by 40%. He concludes the trade-off of dealing with a stressful drive into the city for a larger house in suburbia isn’t worth it.

Have Humility When Investing

Clements highlights that, as investors, we need to have humility. So many get caught up in trying to beat the market — but remember that “before costs, we collectively earn the market’s return.”

There’s also the issue of encountering high internal expenses when actively trading, although Bo and Brian note that fees have been decreasing over the past few years. They’re no longer the end-all-be-all when it comes to choosing what you invest in. Be smart about it.

Focus on Lowering Fixed Expenses

Clements says a third of the money typically spent in a household goes toward housing. By keeping housing and transportation costs down, we’ll have more money to spend on discretionary expenses, and we’ll be able to save more for retirement. Ideally, housing shouldn’t be more than 25% of your gross income.

Spend Money on Experiences

The guys are huge fans of spending on experiences rather than things, and couldn’t agree more with Clements on this point.

Brian touches upon the fact that when loved ones pass, we’re only left with memories. Similarly, when we pass, we can only take our memories with us. Make them count!

Don’t Work Just for a Paycheck

We all need to get paid, but working solely for a paycheck can be draining when you hate your job. Plus, what we enjoy doing early on in life might not make us happy later on.

Going back to the previous point, if we keep fixed expenses low, we can save enough to retire early, or at least take a paycut to transition to a better job in the future. Brian and Bo recommend doing what you love so it never feels like you’re working.

What Are You Doing to Live a Happier Financial Life?

These 5 keys to living a happier financial life aren’t extreme  or hard to live by– they’re common sense. If any of these issues resonate with you, then maybe it’s time to make a change so you can increase your happiness.