No BS Finance

I’m not in the market for a financial advisor. If I were, I would hope I would be able to tell the difference between a good one and a bad one. Here’s one situation that would cause me to find another candidate…

The husband of one of my wife’s friends is a financial advisor. Seeing as though sales is a part of the job, I didn’t mind when she asked if her husband could call. I talked to him for a few minutes and politely let him know I didn’t require any additional help in managing my savings and investments. He understood. So far, so good.

It turns out that knowing what I know now, I wouldn’t let him anywhere near my money anyway. I’m a firm believer that the way you run your personal life is indicative of how you are in professional situations. In this case, his personal finances are handled much more riskily that I would want.

How? An Option ARM.  That is where you get to choose how much to pay on your mortgage each month.  You could make a payment like it was a 15-year mortgage (great!), a 30-year mortgage (fine), interest only (uh-oh), or a minimal payment that causes the amount owed on the loan to actually increase (yikes!).

These loans may have some usefulness, although I’m not a believer. Some situations where income is seasonal or otherwise unpredictable may call for this type of mortgage. The problem comes in when the lower payment options are used to buy a house you can’t afford.

Anyhow, those situations aren’t in play here. They are paying a premium interest rate since you don’t get this Option “flexibility” for free. They could afford a regular mortgage. Instead he is investing the difference between his “minimum” payment and a regular payment trying to beat the mortgage rate.

In effect, he is betting his home that he is somehow smart enough to pocket some extra money.  Given the track record of professional money managers (being unable to beat the market consistently over time), this is a bet I would never be willing to take, given the stakes.

And that is how you can prove to me that you shouldn’t be handling my money.

I moved to the Twin Cities last year for a temporary assignment. Since the job was scheduled to last three years before I would return to our corporate office, we decided to minimize the interest rate on the mortgage for our new home. Given that housing is significantly more expensive here, it made perfect sense. I’ve never been a fan of adjustable-rate mortgages (ARMs), but it seemed like a no-brainer for our situation. So, we took a mortgage that adjusted annually after three years.

All is well…until I accepted a permanent placement at this location. Now the ARM doesn’t look like such a great deal, given the rise in interest rates this past year.

Of course, a lot can happen in the next two years. Interest rates could fall again and the impact wouldn’t be so great. However, fixed rates in 2 years may be significantly higher than a year ago. That will sting if we decide to refinance.

The moral of the story: sometimes you can get too cute trying to maximize every dollar in the short-term and have it cost you down the road. Things change, so stick with what’s simple and comparitively safe, given your level of risk aversion, of course.

Strategy

the long term plan of action designed to achieve a particular goal (source)

Tactics

the actual means used to gain a goal (source)

Assuming a goal of long-term wealth accumulation, what’s your strategy? Here are some possible strategies:

1. Hoping for a large inheritance from a long-lost relative
2. Hitting the lottery
3. Cashing in on high return, “can’t miss” investment opportunities
4. Starting a home-based business based on an infomercial you saw last night. After all, everybody was driving luxury cars, worked less than an hour a day, and that hour consisted of opening up checks that were in the mail.
5. Budgeting, saving, and investing prudently
6. Nothing - Social Security is all anyone needs
7. Nothing - that’s what adult children are for

Don’t laugh. Those are all real strategies that are quite common. Most of them aren’t good strategies, however. Of course, #5 is the only one I’d recommend to anybody. Why bring this up? It’s obvious, right? Not at all, or else everyone would be doing it already.

Now come the tactics - how do we budget, save, and invest? Luckily there are many resources from which to learn. One of the goals of No BS Finance is to become one of them.

Whether you like to read magazines, books, or websites, you’ll find plenty of information on tactics. A lot will seem to be conflicting. One-size does not fit all - pick and choose what makes sense to you and your situation.

Here are some quality weblog resources I read routinely:

• Consumerism Commentary
• Free Money Finance
• My Personal Finance Journey
• MyMoneyBlog

As I find more, they will be added to the Links section (located in the right column as of this writing).