FrugalJim

I can hardly believe another year has passed. 2008 definitely had its ups and downs, but overall, I think when I look back, I’ll remember some fun things I did…

The wife and I celebrated our first anniversary in 2008, and we made it through a big challenge to not kill each other while painting, installing hardwood floors, and tiling our house.  We traveled three times into the mountains of North Georgia, Cherokee North Carolina, and Laurel Springs North Carolina.  Scooter made it to the last two   And to top it off, we made significant contributions towards savings for the future (even if a lot of it has been lost from the short term down market).

Looking ahead though, I was trying to decide what goals for 2009 I should set.  Of course I automatically came up with a perennial favorite of most people: Make More Money and Lose Weight.

Making more money seems pretty vauge.  What I’ve decided to do is track my investments down to every deposit and withdraw, so that I can calculate my Internal Rate of Return at the end of the year.  I will also track a sample investment of an S&P 500 index fund.  At the end of 2009, if my investment returned less than it would have if I had just put it into an index fund, then I will take half of my money and put it into the fund.  If on the other hand I beat the S&P 500 I will continue to personally manage the majority of my investments.  In essence I’ll really be able to decide if I’m making the most of my money.

Losing more weight has been my goal countless times.  On January 1st, 2009, I weighed myself and discovered I’m tip toeing on the line of “All time highest weight” at around 220 pounds.  My perfect healthy weight according to my height would be 175 (if I used the BMI calculations, they say I should be 140 lbs, but I’m big boneded ).  So again, I am planning on tracking my weight.  I am setting a goal of losing 1 pound a week for 50 weeks.  By cutting 500 calories a day of my current face stuffing, I should be able to do this.

So here they are…  my 2009 Goals:

• Beat the S&P 500
• Lose 50 pounds

Wish me luck!  I’m sure going to need it for the weight loss part.  I have way more confidence in goal number 1

An avid reader of FrugalJim.com, Al, wrote in to ask me a question:

Hi FrugalJim!  I was just wondering your thoughts on a question I’ve been contemplating…  I am currently trying to decide if I should refinance my mortgage.  Currently, I have about $185,000 left on my mortgage at a rate of about 6.5% or 6.75% APR, making my monthly payments around $1,200 with 28 years and 10 months to go.  I recently received a letter from my mortgage holder telling me they would knock 1 point off the fees if I refinance at a rate of 5.125% or 5.4% APR (assuming 1 point).  What do you think?

-Al

Well, the first thing I would do is calculate how much you have left to pay off your current mortgage.  Just multiply the 28 years and 10 months by $1,200, getting $415,200 as the total amount you would end up spending if you kept your current mortgage.

The next thing I would do is determine the monthly payment of the refinanced mortgage.  Just plug the 5.4% APR and $185,000 amount into a mortgage calculator online, and you get around $1,000 for the monthly payment.  This would end up saving you a monthly amount of $200 off your current payment.  If you multiply the $1,000 by the 30 years you would be paying it back, you would get $360,000, saving you a total of about $55,000 over the life of the new loan if you refinanced.

Now right away you think… “This is a No Brainer!”.  But you have to wonder why the mortgage company would want you to do this, if it will save you money (ie: make them lose money) in the long run.  Well the real answer is Fees.  The banks are so hard up for cash right now, that they need every dollar they can get right now, and are only worried about making it through the next couple of years, and not the long run.

So lets figure out about how much the fees would be.  Well, a refinance with 1 point would have a base fee of 1% of the refinance amount.  So 1% of $185,000 is $1,850.  And of course there will be other miscellaneous fees (application fees, title fees, appraisal fees, lawyer fees, etc), and we’ll just ball park it at $2,000.  This brings the total cost at around $3,850.

Does this still make sense?  Well, upfront costs would be approaching $4,000, but over the long run, you would save about $55,000.  So if you kept the home for 30 more years it would definitely be worth it.  Otherwise, we would probably want to know the break even point…  Take the $4,000 and divide it by the monthly savings of $200 and you get 20.  To break even on the refinance you would have to keep paying the mortgage for 20 months.

Well, Al…  If you plan on staying in your house for more than 2 years, can get a loan payment of $1000, and don’t spend more than $4,000 in refinancing fees, I think it would be a good long term move to make.

The stock market gurus out there like to talk about the idea of “rational market”.  It basically says that the market overall is rationally priced based on the information that is available to the public.  The one problem I have with it though, is that it assumes the people behind the market are rational.

As I walked back from the gym with rubbery legs today, I realized that I am totally not rational.  If I was, I wouldn’t have stuffed my face over the holidays and instead would be in exceptional health.  Trying to make sure I am absolutely healthy so that I live the longest most productive life I can makes the most sense over any other factor, yet when someone puts a piece of pecan pie in front of me…

In essence, there is a battle of short term rationality at conflict with a long term rationality that should obviously win, but somehow I make the wrong decision.

Is there a similarity with what’s going on in the economy?  If I keep hearing that the economy is going to hell, yet there are what seem to be good deals on stock prices out there, does the short term security of not buying stocks override the longer term benefit of making a big return?  If I could refinance my mortgage to save tens of thousands of dollars over the life of the loan, yet I’m too scared to spend the money to do so, does that make sense (directed at the wife )?

Anyways, I think that sometimes we get bogged down with what’s going on right in front of our face, instead of taking a step back and looking at the bigger picture.  I’m going to try and remember that.

I’m pretty amazed at what I’ve been able to experience this year.  I keep hearing the phrase “…not seen since the great depression/WW2/etc..”, and I’m wondering what it will be like to look back on this time period in some distant future.

My 401K is officially down 52%.  I can hardly believe it.  The people who I pay an annual fee to manage mutual funds in my retirement account have actually lost more than half of my money.  The only upside is that I’m only in my 20’s and have another 30 years to save for retirement, but I can only imagine the grief that some older people are feeling right now who were getting ready to retire.

My personal investing account is down 20%.  When compared to my 401k, it looks like I’m a genius, but the reality is that I had only a chunk of my money in stocks when this whole event started.  Through the downturn I’ve invested, thinking it must be getting close to the bottom, only to see it keep going down.  Remember the GM stock I bought for $10?  It recently hit the same price it was during the Great Depression in the 1930s at $1.75. 

Both my company and the Wife’s company have gone through layoffs, and at both companies there are rumors of more to come in the next quarter or two.  One of the guys I worked with who has a year old daughter and a wife who just quit her job in order to take care of the kids was let go.  I feel bad for him, but there’s nothing I can really do.  At least I know they gave him a few months worth of a severance package.

And just look at the economic forecast for next year….

I may seem like I’m all depressed about the bad news, but it’s funny.  I’m not really bothered by it, and I’m not worried about myself or the wife getting laid off.  I guess I kind of see how “good” we have it, and I also feel that we could handle anything that gets thrown at us.  One thing they talk about in stock market psychology is that people assume the future will continue as today does (think about how everyone thought house prices were going to keep heading up, or that the stock market will continue going down).  I think we might be close to the worst we’ll see by the end of the year, and I can only hope the investments/401k will be heading up from there.

Last night before I passed out, after watching the election results, the wife told me about a story she heard on NPR.  In it, Eric Janszen, a former Venture Capitalist, talked about how we can re-industrialize the US.

His theme was something I feel like I already knew deep down, but could not quite put into words.  Our economy right now is focused too heavily on FIRE (finance, insurance, and real estate), and we need to shift some of that investment to other areas; mainly ones that focus on making our workers more efficient.

Janszen mentioned that clean energy, telecommunications, and physical infrastructure are areas our government should focus on to help get the economy going again.  Imagine if George W had taken $150 billion and built wind turbines throughout the country instead of sending everyone a check for $600 that they spent at Best Buy?  Imagine if the government would spend a big chunk of the current bailout package on providing a nationwide wireless internet (maybe Wimax?) instead of giving the unallocated funds to banks and car manufacturers?

As the wife said, I hope someone is whispering these things in Obama’s ear right now.

Check out the replay on NPR here.