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SH&J Blog

Inside the Economy: Interest Rates & Unemployment

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On this week’s Inside the Economy with SH&J, we discuss the Fed’s latest interest rate increase that occurred last week. The Fed Funds rate is now at 2%. How many more increases can we expect this year and what will happen to bonds when the rate hikes cease? We are near full employment in the U.S. economy, and the recent job numbers may indicate something we have never seen in the job market before. Tune in to find out about these topics and more!

How Much Salary is Needed to Live in Denver?

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As the cost of real estate in Denver continues to creep upwards, we are often asked how much is needed in salary to live here. If you search the web for this answer, you will likely find a salary that necessitates the cost of buying an “average” single family home in Denver. Typically, what is missing in this calculation is the additional savings needed to retire, savings for children’s college education, and the cost of childcare when both parents are working outside the home.

Therefore, we have created a case study for a working couple both age 35 with two children, one in elementary school and an infant. This couple has recently purchased a home that cost $500,000 with a 20% down payment. Together they have already saved $60,000 for retirement and $10,000 for their first child’s college education. Their goal is to save for the cost of four years of undergraduate tuition at CU Boulder for each child. Because each spouse works full-time, they need full-time childcare for their infant, and after-school/summer care for their elementary school aged child. Each spouse has access to benefits through their respective employers, including a 3% match on 401(k) contributions, health insurance, disability insurance, and life insurance. Because their employers offer high-deductible health insurance plans, they also contribute the maximum family contribution to a health savings account. Each spouse is paying into Social Security and anticipates collecting 75% of a projected benefit at age 70. Their goal is to be able to retire at age 65 and access Medicare benefits. In this case study, the couple needs to bring in a household income of approximately $200,000.

There are a couple of key notes:

  1. This couple would have been approved for a much higher mortgage loan based on their income. However, in order to accomplish all their other goals, they needed to keep their mortgage payment (Principle, Interest, Taxes, and Insurance) just under 15% of their gross income (banks typically approve approximately 30%).
  2. If one spouse stays home to raise the children, the cost of childcare is greatly reduced. In this case study, the working spouse would need to earn a gross income of approximately $160,000.
  3. The assumed gross income replacement need at retirement is only about 35% of their current $200,000 household income. This is because the mortgage is assumed to be paid off, saving for retirement is accomplished, the kids are financially independent, and their taxes have reduced.
  4. This case study makes several assumptions and is intended to be based on averages. The figures can be easily argued as too high or too low depending on many factors.

If you would like to speak with a CFP® professional about reaching your financial goals, please call Sharkey, Howes & Javer at 303-639-5100.

Inside the Economy: U.S. Tariffs

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On this week’s Inside the Economy with SH&J, we discuss the potential impacts of U.S. tariffs on Canada and Mexico and the new Italian government. What is the reason many international stock markets have been trending negative over the past few weeks? Consumer confidence is near an all-time high in the U.S., and the personal savings rate has been decreasing. Is this correlation normal or is it a sign of things to come for the U.S. economy? Tune in this week to find out!

Financial Lessons for Your Kids and Grandkids

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The value of a dollar has changed over time and, with it, the financial lessons our children and grandchildren need to learn have also evolved. Many parents and grandparents want to teach children about money, but they don’t always know where, or when, to begin. These five lessons are easy for children to understand and build off each other as your child grows so that they have a wide base of knowledge for their financial future.

3-5 Years of Age:

Around three years of age, children begin to understand that they can ask for things like toys, books, and games. From their perspective, an item moves from a store shelf and into their home simply by asking. According to Carrots are Orange, this age range is perfect for teaching delayed gratification. Teaching the difference between a need and a want is an excellent lesson for this age, along with helping them begin to understand that sometimes we need to save money before something can be purchased.

6-8 Years of Age:

The Huffington Post reports that only 13 of 50 states require a personal finance course for students before they are able to graduate from high school. Because these lessons are not being taught in the majority of our schools, it is important to incorporate financial lessons at home starting at a young age. Children ages 6-8 years old are at a great stage for pretend play that utilizes money along with practical lessons from things like lemonade stands or doing additional chores for money. While playing supermarket, help your child to count out change. During the summer months, help them set up a lemonade stand and teach them how to determine what to charge based on the cost of the products they utilize.

9-11 Years of Age:

A key financial concept that is important to teach children is budgeting. While you can begin to teach the concept earlier, 9-11 year old kids will likely have a little better grasp on the idea. Consider giving your child a set spending amount to purchase snacks or toys from the store. Make a list together of things they would like, and encourage your child to determine the appropriate amount of money for each item. The important piece here, according to US News & World Report is not to bail them out if they make a mistake. Experience is a great teacher and allowing them to work through solving this type of problem is important.

12-15 Years of Age:

Investing has become a necessity for Americans who plan to retire as saving enough money for the golden years has become more difficult over time. Teaching children to invest can be fun and could make a lasting impact if it’s done well. Do some research together and discuss different types of investments and how risk and timing affect an investment. The Mint suggests setting up a fake account with your child or children and then tracking it with them over a year’s time. Not only can this provide a fun bonding experience, but it will help to plant the seed that investing is a long game.

16-18 Years of Age:

The day your child turns eighteen, they are officially eligible to open a credit card in their name. Teaching kids about credit and interest before they have access to it is crucial for their financial well-being. Discover reports that those with credit card debt carry, on average, $7,500 per credit card! With high interest rates and low minimum payments, the total cost over time for items purchased can grow out of hand rather quickly. This issue, along with the consequences of bad credit, can set someone up for a lifetime of financial trouble.

Sit down with your kids and explain how credit cards work. If you are able, consider offering your child credit through you, then allow them to make a purchase and payments with an agreed upon interest rate. Help them to track the total cost, including interest, for the item once it is paid off and compare it to what the original purchase price was of that same item. Helping teens learn this lesson early can potentially save them a lot of money and a lot of headache in the long run.

Inside the Economy: Interest Rates and the Yield Curve

By | Economic Discussion, Economy, Larry Howes, SH&J Blog | No Comments

On this week’s Inside the Economy with SH&J, we discuss interest rates and the yield curve. The yield curve is flattening, and historically inverted yield curves have signaled the start of recessions. How probable is it for us to get an inverted yield curve in the near future? In addition, in many areas around the country, it is a seller’s market in real estate, especially Denver. Does this mean people are actually taking advantage and selling their homes? Tune in to find out answers to these questions and more!

Qualifying for a Mortgage when you have Student Loans

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According to studies, on average college graduates in 2017 walked away with more than $38,000 in student loan debt. Add on graduate, medical, or law school and it’s even more. After you land your first job, the next step may be to buy your first home. How do you start paying down your student loans, qualify for a mortgage, and start saving for a house downpayment all at the same time?

If you have Federal student loans, you may have elected an income-based repayment plan (IBR), which makes it challenging for mortgage lenders to assign a payment amount when calculating your debt to income ratio. This is because your monthly student loan payment could change each year depending on your income, or your loan could be deferred or in forbearance. Your debt-to-income ratio is an important factor in qualifying for a mortgage and is a way for lenders to estimate your ability to make your monthly mortgage payments. The lower the better. When it comes to payments made under an IBR, conventional and federally insured FHA loans have different guidelines for determining the borrower’s monthly payment obligation to be used in their debt to income calculation.

For a conventional loan, the borrower must use one of the following:

  • The student loan payment amount listed on the credit report.
  • 1% of the outstanding student loan balance.
  • The actual standard plan repayment amount reported on the credit report. Your credit report will always show your standard 10-year amount for “Amount Due”, not the amount you actually pay.
  • A calculated payment that will fully amortize the loan over the repayment period (this means that you have to calculate a payment with no forgiveness after 20/25 years).

For an FHA loan, the borrower must use the greater of:

  • 1% of the outstanding balance on the loan.
  • The monthly payment reported on the borrower’s credit report.
  • The actual documented payment, provided the payment will fully amortize the loan over its term.

The ability to save for a downpayment is another factor in determining if a borrower qualifies for a conventional loan or a FHA loan. Conventional loans typically require a minimum downpayment of 5% (10% for condominiums) while FHA loans can go as low as 3.5%. With both FHA and conventional loans, there are premium costs and monthly private mortgage insurance payments to consider. However, for individuals with large student loan balances, it raises the question: should borrowers focus more on paying down student loans or saving for a downpayment? In some cases (and against conventional wisdom) it may make sense to prioritize paying down student loans to take pressure off your debt to income ratio in lieu of targeting a higher downpayment.

If you are considering purchasing your first home but didn’t think it was achievable due to student loans, contact Sharkey, Howes & Javer to meet with a CERTIFIED FINANCIAL PLANNER™ to review your options and how to qualify for a mortgage that best fits your needs.

Inside the Economy: Detroit and Rare Earth Elements

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On this week’s Inside the Economy with SH&J, we discuss the resurgence of the City of Detroit. Detroit is seeing real estate values increase for the first time since 2012. What caused this economic turnaround and are there additional municipalities that could look to the Motor City for inspiration? A fascinating discovery of rare earth elements was found on a tiny island in the South Pacific. What kind of implications could this have on the global economy? Tune into this week’s discussion to learn about these topics and more!

Health and Your Financial Fitness

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When you think about financial fitness, especially as you’re moving into your retirement years, you typically focus on big financial goals: paying down your debt, building up your savings account, and making sure that you have a retirement account that will support your lifestyle throughout the later years of your life. What many people fail to think about, however, is how your physical health has the potential to impact your financial wellness.

Medical Expenses Aren’t Cheap

Health emergencies are expensive. Having the proper insurance in place is extremely important. However, even with insurance, a short hospital stay can quickly rack up thousands of dollars in bills and surgery is even more expensive than that. In addition to copays and deductibles, you may find yourself dealing with out-of-pocket expenses for supplies and medications.

The Cost of Lost Work

A job that includes benefits, such as paid time off for illness and health insurance, can be very helpful in protecting your income during your working years. However, even with that paid time off, the cost of lost work can add up quickly. Depending on the illness, you may find that you’re less productive at work, which could mean that you may be overlooked for bonuses, special assignments, and promotions. While it’s income you don’t realize that you’re missing, it’s also an amount that can add up.

Long-Term Care is Expensive

If you develop a medical condition requiring long-term care, you will quickly discover additional pressure on your finances. This means both your current income and your long-term savings could be affected, depending on the severity of the illness or condition. Furthermore, you may find that you are no longer able to care for yourself the way you once could. Many people find themselves turning to a long-term care facility in order to help maintain their overall quality of life. While this is a great method for keeping your quality of life high, it’s not such a great choice for your wallet: an assisted living facility costs an average of $43,000 per year, while life in a nursing home will run an average of $92,000 for a private room. However, it is vital to receive the necessary care to keep yourself safe, no matter the cost.

Keeping Up with Physical Health For as Long as you Possibly Can

Keeping up with your physical health can go a long way toward helping to decrease your costs, especially as you move into your retirement years. Try to keep your physical health as strong as your financial efforts.

Maintaining your physical health doesn’t have to take all of your time and attention, but making an effort to improve your wellbeing now, can help keep yourself and your bank account healthy throughout your retirement years.

Your retirement belongs to you, make sure you get the most out of it. Contact Sharkey, Howes & Javer today to speak with a CERTIFIED FINANCIAL PLANNER™ about setting yourself up for a healthy, fulfilling retirement.

A Primer on Government Debt and Deficits

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Debt vs Deficit

The federal debt is the total amount of money that the U.S. Government owes, and is a total of all of the deficits on a year-to-year basis. The deficit is simply the difference between what the government spends and receives on an annual basis. For example, if the U.S. Government spends $4 trillion in a fiscal year but only receives $3 trillion in revenue, the deficit for that year would be $1 trillion. Thus, the total government debt would be increased by $1 trillion.

Recent Context of Government Budgets and Debt

The debt balance for the U.S. Government currently stands around $21 trillion, while the 2018 fiscal year deficit is around $833 billion. From 2008 through 2016, government debt ballooned from about $10 trillion to almost $20 trillion and the 2008 Financial Crisis played a large role in this increase. With the U.S. economy in distress after 2008, the government spent the next several years stimulating the economy to get it back on track. This economic stimulus required much more spending and investment from the government than it was receiving in revenue.

According to the Peter G. Peterson Foundation, the U.S. Government has run a deficit in every year except for four (1998-2001). This is evidence that government spending is not as much of a Republican vs. Democrat issue as the media often makes it out to be.

Consumer Debt vs. Government Debt

Many people like to equate government deficit spending to using a credit card. While the government is using borrowed money similar to a credit card, this comparison does not hold up very well when you dive a little deeper. As mentioned earlier, government spending tends to spur economic growth during periods when the economy is not robust. In theory, a stronger economy means more people and businesses making more money, which in turn means more tax revenue for the government. Taking on personal credit card debt rarely produces more income for the individual spender.

Ultimately, both personal credit card debt and government debt must be re-paid to maintain healthy finances. To reduce debt, consumers and governments will generally employ some combination of increasing income/revenue and reducing expenses. When a consumer with outstanding debt passes away, their assets are liquidated to pay off their creditors. This results in fewer assets being passed down to heirs. Unlike humans, Governments exist into perpetuity. When the U.S. Government plans to spend more than what they receive in tax revenues, they issue new debt in the form of U.S. Treasury Securities. Governments, pension funds, mutual funds, and citizens rely on these securities as a substantial part of their investment portfolios. Yet, similar to credit cards, these Treasury Securities eventually need to be paid.

U.S. consumers should be conscious of their spending habits to make sure they are not over-leveraged. While the U.S. Government plays by different rules when it comes to deficit spending and debt, ultimately, the general goal remains reducing debt while stimulating the economy.

Inside the Economy: Trade Tariffs

By | Economic Discussion, Economy, Larry Howes, SH&J Blog | No Comments

On this week’s Inside the Economy, we review the number of new jobs that have been created in the U.S. economy this year. In addition, there continues to be a number of headlines related to the trade tariffs that the Trump administration wants to impose. Listen in as we look at each state’s biggest export/import partner and discuss what implications these tariffs may have on the U.S. economy.