Money Talks, LLC Newsletter                                         September 2010
In This Issue
Personal Financial Sustainability
Financial Resilience:
Five Critical Concepts
Don't Bet Your Future on Tax Breaks


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Money Talks, LLC
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Suite 805
Portland, Oregon 97205


Susan Hammitt, AFC, CDFA, Mediator, Life Planning Coach
Susan Hammitt, AFC, CDFA
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Personal Financial Sustainability
Personal Financial Sustainability emphasizes financial resilience in changing economic environments. There are five critical concepts that support financial resilience: 
  1. Eliminate exposure to fees and interest rates imposed at the discretion of banks and other lenders.
  2. Stabilize non-discretionary cash flow requirements comfortably within income projections.
  3. Anticipate and control exposure to inflation.
  4. Avoid making personal financial decisions that are dependent on (stable) tax benefits.
  5. Before committing to financial decisions consider exit strategies using worst case scenarios.

Make a Plan for Financial Resilience!


Autumn Is An Important Tax Season
The last quarter of the calendar year is a great time to revise tax plans for the current year.  At least go to the IRS and state calculators and verify whether withholdings should be adjusted.  It's also a great time to determine if you can save a significant amount of money by increasing retirement contributions before the year-end deadlines. 


Don't Bet Your Future on Tax Breaks
When Congress provides tax incentives for anything; retirement savings, employee benefits, long term care insurance, mortgage interest deductions, charitable giving, or business development they are encouraging specific public action.
Personal Financial Sustainability hinges on actions that support and maintain personal financial priorities. Tax incentives are windfalls when they support our plans.  Otherwise, they may be a distraction.
Tax regulation and code is subject to interpretation.  Congress creates the revenue code.  The IRS is responsible for assessment and enforcement. Even in stable economic environments the tax code is tricky. A local CPA explained,  "Federal tax rules (internal revenue code and revenue procedures) alone are over 70,000 pages, not counting forms, form instructions, publications and then 50 states and local governments." Interpretation of tax code can vary significantly within the IRS and throughout the community of tax professionals. 
Tax code is subject to change. Financial agility is critical just in case tax rates increase, calculations for adjusted gross income shift, deductions are disallowed, and credits disappear. Personal financial plans weighted in tax specific assumptions must be monitored carefully, particularly considering our growing deficits. 
Regardless of how  we feel about taxes they will persist as a critical external factor in personal finance.

Make A Plan That Works For You!

Is This A Good Time To Purchase Real Estate?
Responses continue to mimic pre-crash mantras.  "It's a buyers market." "The prices can only go up from here."  "I need the tax write offs."  "My parents keep telling me to buy a house."  "Interest rates are low."   
There are people who have never purchased a home, choosing instead to rent. They maintain a tremendous (and sometimes enviable) mobility. Some renters do invest in real estate, non-owner occupied or commercial real estate. They keep clear the distinction between homeowner and investor.  
I remember the exact moment when I no longer wanted to be in the mortgage business.  A young couple, well informed first time home-buyers, came to my office to discuss their financing options.  When asked, "Are you excited about buying your first home?" The wife responded, "We want the  lowest possible rate and we only plan to keep this house for two years then we will sell it and buy something better."  From that moment I was acutely aware that a shift had occurred.  Evidence continued to mount; the American middle class dream of homeownership had spun out of control.  I left the mortgage industry, happy to avoid the tidal wave of homeowner/investors that flooded the market over the next 15 years.
I have never been able to reconcile confusion between home and investment.  It still seems peculiar to hear people say, "That's a good investment decision" when they are deciding whether or not to do a badly needed home repair/improvement.   When did middle class American homeowners get waylaid into thinking that equity in a home qualified as an astute investment?  At what moment did residential real estate begin to appreciate at rates supporting homeowners, after one or two years, recovery of the high costs of purchase and sale; still making a profit?  Unbelievable! 
In retrospect we see it was unbelievable, a pyramid scheme.
Investors don't paint bedrooms in nursery pink or blue. They don't build tree houses or mow the front yard and wave to the neighbors.  Investors don't stretch their budget and go into debt for the convenience of a front loading washer/dryer or an ice maker on the door of a refrigerator. Investors don't vote for local school bonds and libraries unless it "pencils out."  Homeowner/investors make many poor real estate investment decisions because their hearts and their calculators spread too thin their capacity.
It's impossible to assess the value of real estate in the foreseeable future. As millions of foreclosures continue to stock pile there will likely develop more Real Estate Investment Trusts (REIT) that will absorb, manage, and sell off properties, maximizing prospective profits.  Legislators have provided no indication they will step in and reconfirm the single most important emblem of American middle class; by regulating the foreclosure process or disposition of foreclosed properties.
Is this a good time to buy real estate?
If you want to buy a home, a place to live, and it meets the test of the five critical concepts for personal financial resilience, WHY NOT?  The two undisputable benefits in homeownership are, buy down of the mortgage (increasing equity) and a vested interest in the place you call home and the community in which you live a valuable life.
  1. Can you qualify for a fixed rate loan based on the assumption that you will eventually pay it off?    
  2. Will the principal, interest, taxes, insurance, utilities, and maintenance fit comfortably in your budget?  
  3. How will the costs associated with homeownership be affected by inflation? 
  4. Does the purchase of a home make sense even if there are no income tax benefits?
  5. What will happen if you are forced to move or the house goes down in value 20 or 30 percent? 
For me the purchase of a home is similar to having a child.  I know it will cost a lot of money but it's something which provides me a valuable life, grounded in stewardship.  Hopefully, it will also provide long-term comfort and financial security.