If you’ve been a long-time reader of this blog then you know how important I think it is for our youth to have a meaningful education in personal finance BEFORE they are exposed to the potential perils of credit at the age of 18. I was excited this weekend when I heard that NPR’s Morning Edition is going to have a 5-day series called “Money Counts” focusing on youth & money. Here is the first broadcast which aired Sunday:
Category: Personal Finance
Zweig’s “Your Money & Your Brain”-Post #1
I’ve blogged a few times in the previous months about my recent fascination with the subject of “neuroeconomics”. This is a field of study that looks at the role a person’s pschye, emotions, and/or subjective-self plays in making economic decisions. I’m fascinated by this subject because of the gap between the body of fiscal knowledge that is readily available to households and the widespread lack of financial health. I used to believe that the primary reason for this gap was a lack of significant fiscal curriculum in our schools. The idea being that people were never taught how to properly manage their finances and therefore didn’t practice healthy habits. I still believe that our society could benefit from better education but I now recognize that the issue isn’t necessarily knowledge-based.
The reality is that most households know they should spend less than they make so that they can save for future needs (i.e. retirement, rainy day fund, etc.). Furthermore, most households have a desire to put their financial lives in order. The problem is not knowledge it is pschological. As Jason Zweig points out in his book “Your Money & Your Brain” the human brain has evolved over millions of years and only in very recent history has it been exposed to rational, analytical reasoning. It’s no wonder that despite our understanding of concepts it is still very difficult for us to put theory into practice. Here is an excerpt:
“…our investing brains often drive us to do things that make no logical sense-but make perfect emotional sense….Our brains were originally designed to get more of whatever would improve our odds of survival and to avoid whatever would worsen the odds. Emotional circuits deep in our brains make us instinctively crave whatever feels likely to be rewarding- and shun whatever seems liable to be risky….That’s why knowing the right answer, and doing the right thing, are very different.“
I look forward to completing this book and gaining a greater understanding of the biology of how decisions are made. I plan to share other thoughts and excerpts over the course of the next few weeks so please stay tuned. If you have any interesting thoughts or resources to share on this subject please do so below in the comment section.
Investors jump into housing market
One interesting note in this morning’s Existing-Home Sales report from the National Association of Realtors is that the investors purchasing homes comprised of 23% of January’s total. 
This is up from December’s figures. Given that most of the low down payment investment property mortgage programs have been unavailable for a couple years I speculate that many of these investors are experienced players in the real estate market. Therefore, many of these folks may have been waiting on the sidelines for prices to drop to a certain level and are now entering. Could this be a sign that home prices have bottomed? Or are near bottom? It’s tough to know for sure.
If you are an investor or are a realtor who works with investors I have created a spreadsheet to use in analyzing the financial impact of of owning investment real estate. After inputting the basics of the purchase, financing package, and rental income & expenses this spreadsheet will produce a detailed breakdown of the annual cash flow, net operating income, taxable income (loss), home equity, and wealth impact on an annual basis for 30 years. Click THIS LINK to view a sample report.
Email directly if you’d like me to conduct a no obligation review of an investment property purchase on your behalf.
What is a “cash-in” refinance?
Until recently I had never heard the term “cash-in” refinance nor would I have known what it meant. Intuitively it’s not too difficult to figure out. If a cash-out refinance is a refinance transaction where a homeowner borrows more than their existing loan balance to realize cash in their pocket then a cash-in refinance is the opposite.
Instead of increasing their loan balance they actually bring cash into the transaction to pay down the mortgage balance.
Freddie Mac released this report at the end of January stating that of all the refinance transactions done in the 4th quarter of 2010 46% involved some level of cash-in on the part of the homeowner which is the highest percentage on record. During the height of the mortgage debt bubble cash-in refinances only comprised of 4% of all refinancing. This trend follows a larger pattern across the economy of deleveraging which I had been blogging about frequently back in 2009.
Mortgage Insurance Tax Info
I’ve recently received a few questions regarding the tax deductibility of mortgage insurance. I blogged about this a while back to I thought I would re-post the link. Click HERE.
Are points deductible on a refinance?
If you were one of the many homeowner’s that refinanced in 2010 you are probably wondering if any of the costs associated with refinancing are deductible on your taxes. You can download the IRS’s publication 936 that deals with home mortgage interest HERE. Or, I have included some of the highlights below:
- Points: In general points on a refinance are deducted on a pro-rated basis over the life of the loan. For example, if you paid $3,000 in points on a 30-year mortgage then $100 ($3,000/ 30 years) would be deducted each year in addition to the qualifying interest you paid.
- Per Diem Interest: Chances are at closing you paid some interest on the new mortgage you took out. So long as your new mortgage is replacing qualified home acquisition debt or home equity debt (which it is in most cases) then this interest is tax deductible and you should have received a 1098 from the company you refinanced with. If you’re looking at your final HUD-1 settlement statement this amount is shown on line 901.
- Property Taxes?: Depending on the time of year that you closed your refinance you may have paid property taxes directly to the county your home is located in. In Oregon this would only impact homeowner’s that refinanced in September -November. This would also show up on your final HUD-1 settlement statement.
There are some fairly obscure rules regarding points if you refinanced with the same lender that your previous loan was with. Be sure to speak with your tax professional as I am not a licensed tax preparer.
Tax implications of selling your home at loss
I thought I would re-post a post (can I say that?) I made back in August of 2008 concerning the tax implications of the sale of a primary residence. Most people know that a capital gains exclusion exists for those who meet the ownership & use tests up to $500,000 for joint filers ($250,000 for individuals). But most people who purchased primary residences in the past 5 years and are selling now gains aren’t in the cards. Instead they are incurring losses and I’ve had a couple past clients call me recently asking me if there is any tax benefit. So what is the tax implication of selling your primary residence at a loss? Unfortunately there is none. When it comes to losing money on the sale of your primary residence the IRS takes the position that your home is “personal use property”. So just like when you sell your car for less than you originally bought it for you may not take a capital loss. As my father in law would say “bummer man”.
In fact, if a homeowner had mortgage debt waived as a part of a short sale then they could actually have taxable income to claim. In this instance I would recommend speaking with a tax professional BEFORE you ever put your house up on the market.
BTW, HERE is a link to my post from August 2008.
Tax Summary Sheet for 2011
If you’re looking for an easy reference for some of the general and real estate related tax provisions in the 2010 & 2011 tax code I have put together THIS FORM. Feel free to download it, print it off, share it with friends, or whatever else you can think of. And if you have any questions please don’t hesitate to give me a call. Please remember though I am not a licensed tax professional.
Video Summary of Tax Relief Act 2010
I came across THIS VIDEO today and thought it offered a good concise summary of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. I am currently putting together a flier that highlights some of the general provisions of the 2011 tax code and will post it in the next week.
Unique Perspective on Evaluating Cash-flow
If you’re like most people then you know that your spending habits ultimately determine your ability to generate wealth. If you spend more than you make then you will go into debt which is not a sustainable. If you’re able to spend less than you make then you can set money aside for savings and investment. Do this long enough and you’re almost certainly going to become wealthy. This concept is widely understood yet very few people track their spending. In my opinion it is one of the most important yet overwhelming processes in the financial planning field.
One of my long-term professional goals is to come up with a process for helping households evaluate their cash-flow and provide clarification on the age-old question: Where does my money go each month?
In doing some preliminary reading I came across THIS ARTICLE from the December 2008 “Journal of Financial Planning“. In it the author takes a unique perspective in measuring cash-flow. Most models I see use a fairly simple approach where a person categorizes their spending into different accounts such as “housing”, “groceries”, “entertainment”, etc. With this approach the author views spending in…..
1. The static account is their 30-day
money. This is what it takes to run
their household for a month—the
mortgage, utilities, car payments,
insurance.
2. The control account is their seven-day
money. These are the funds that they
will spend today or within the next
week. These are lifestyle types of
expenses—dining, recreation, hobbies,
groceries, and gas for the car.
3. The dynamic account funds all future
expenses, from trips and gifts, to cars,
education, and retirement.
This perspective is fairly simple and allows the household to see what areas they have control over. I look forward to giving this approach a whirl soon.