Wine, Women & Wealth Book

Investment

PERSONAL FINANCE MOVES FOR SMALL BUSINESS OWNERS

July 12, 2022 / All Blogs, Business, Financial Education, Investment

As a small business owner, you’re responsible for everything—from saving on office supplies to making sure folks get paid to know what taxes to file and when.

A big part of success is educating yourself on how your personal finances affect your business and vice versa. Here are a few moves that can help keep your personal finances healthy while you grow your business.

Keep track of your monthly income and expenses.

Your business income can vary dramatically from month to month, depending on the season, number of sales, trends in your market, etc. These could potentially cause your average bottom line to be lower than anticipated.

That’s why it’s critical to track your monthly income and then budget accordingly. As your income grows and shrinks, you can adjust your spending.

Set up an emergency fund.

This money can be used to cover unexpected costs, such as unanticipated repairs or an illness. But, when you own a business, it can also help you make ends meet if the business is slow or, say if a global pandemic shuts down the world economy. Save up to 6 months’ worth of spending in an account you can easily access in a pinch!

Know what you owe, to whom, and when it is due.

Personal debt can be a serious challenge for small business owners. It may motivate them to make foolish financial decisions to pay off what they owe, regardless of the consequences.

That’s why it’s important to manage your finances responsibly so that debt doesn’t become a problem. Adopt a debt management strategy to reduce your debt ASAP. Your business may benefit greatly from it.

Get professional advice if you need help with your finances.

If it’s at all feasible for your business’s budget, get a professional set of eyes on your books. They’ll help you navigate the world of finances, share strategies that can help make the most of your revenue, and show you how to position yourself for future success!

CONSIDERING A HOME EQUITY LOAN?

June 13, 2022 / All Blogs, Debt, Investment

Home prices may be leveling off in some areas but they’ve had a healthy recovery nationwide, leading to massive amounts of untapped equity.

According to a recent report, the average homeowner gained nearly $15,000 in equity in the past year and has nearly $115,000 available to draw.[i]

This can be good news if you need to increase your cash flow to pay for a special project or unusual expense.

Home equity risks
It might be obvious, but a home equity loan is secured by your home, based on the equity you’ve built. Your eligibility for a home equity loan involves several factors, but primary consideration is going to be the difference between your home’s market value and the remaining balance on the mortgage. Keep in mind that missed payments due to a job loss, illness, or another financial setback may put your home at risk from two loans – the original mortgage and the home equity loan. Before you take out this type of loan, make sure you have a solid strategy in place for repayment.

Home equity loan costs
Funds acquired through a home equity loan can feel like found money, but keep in mind that a home equity loan takes an asset and converts it to debt – often for up to 30 years. As such, you’ll be paying certain fees to use the money.

Home equity loans often have closing costs of 2% to 5% of the loan amount.[ii] It might be worth it to shop around, however, to see if you can find a lender who won’t bury you in fees and loan charges. Interest rates may vary depending on your credit rating and other factors, but you can expect to pay about 6% or higher. If you were to borrow $100,000 of the $115,000 the average homeowner now has in equity, the interest costs over 30 years would be $115,000 – $15,000 more than you borrowed. If you can manage a 15-year term instead, this would drop the interest costs down to about $52,000.[iii] Carefully consider what you’ll use the funds to purchase. A new patio addition to your home or a pool with a deck may not add enough value to your home to offset the interest costs.

Tax benefits
Once upon a time, the interest for a home equity loan was tax-deductible, much like the interest on a primary mortgage. Now, there are some rules attached to the tax benefit. If you use the loan funds to make improvements to the home you’re borrowing against, you can usually deduct the interest. In the past, the tax benefit didn’t consider how the funds were used.[iv]

Home equity loans can be a powerful financial tool. But as with many tools, it’s important to exercise caution. Before signing on the dotted line, be sure you understand the long-term cost of the loan. With interest rates climbing, a home equity loan isn’t as attractive a source of funding as it once was.

Depending on how the funds are used, a home equity loan can make sense. If you’re buried in high-interest debt, like credit cards, the math might work in your favor. However, if the money is spent on a shiny, red sports car and a trip to Vegas, it might be tough to make a financial argument for that – unless you win big.

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This article is for informational purposes only and is not intended to promote any certain products, plans, or strategies that may be available to you. Before taking out any loan or enacting a funding strategy, seek the advice of a financial professional, accountant, and/or tax expert to discuss your options.

[i] https://www.cnbc.com/2018/07/09/homeowners-sitting-on-record-amount-of-cash-and-not-tapping-it.html\ [ii] https://www.lendingtree.com/home/home-equity/home-equity-loan-closing-costs/\ [iii] https://www.mortgageloan.com/calculator/loan-line-payment-calculator\ [iv] https://www.cnbc.com/2018/05/21/5-things-to-know-before-taking-out-a-home-equity-loan.html

FIRST TIME HOME BUYER? BEWARE HIDDEN EXPENSES

August 1, 2022 / All Blogs, Insurance, Investment, Life Insurance

If you’re getting into the home-buying game, chances are you’re feeling a little overwhelmed.

Purchasing a home for the first time is exciting but it can also be very stressful! Anyone who’s been through that process could probably share a story about a surprise hidden expense that came along with their dream home.

Read on to help prepare yourself for some common costs that can pop up unexpectedly when you’re purchasing a home.

Emergency fund
Before we get into the hidden costs of homeownership, let’s talk a little about how to help handle them if and when they do arise. If you’re getting ready to buy a home but don’t have an emergency fund, you may want to strongly consider holding off that purchase, if at all possible, until you do have an emergency fund established. It’s recommended to put aside at least $1,000, but preferably you should save 3-6 months of your expenses, including mortgage payments. An emergency fund is the most fundamental personal finance tool you can have in your toolkit. It’s like the toolbox itself that holds all your other financial tools together. So, before you start home shopping, build your emergency fund.

Homeowners associations
If your dream house happens to be in a neighborhood with a homeowners association (HOA), be prepared to pony up HOA fees each month (some HOA’s may charge these fees every quarter, or even annually). HOA fees may cover costs to maintain neighborhood common areas, such as pools or parks. They may also cover maintenance to your front lawn, and/or snow removal from driveways, etc. Typically, a homeowners association will have a board that enforces any agreed-upon property standards, such as having you remove ivy from your home exterior, or making sure your sidewalk is pressure washed regularly.

If you purchase a home with an HOA, be prepared for the added cost in fees as well as adhering to the rules. You may incur a fine for such things as your grass not being mowed properly, or parking your boat or camper in your yard.

Private Mortgage Insurance (PMI)
PMI comes into play if you can’t make at least a 20% down payment on your new home. If that’s the case, your mortgage lender charges PMI which would kick in to protect them if you default on the loan. It can cost 0.3 to 1.5% of your mortgage. However, once you have 20% equity in the home, you don’t have to pay it anymore. (Note: You may have to proactively call your mortgage company and tell them to remove it.)

Maintenance costs
If you’ve been living a maintenance-free life in an apartment or rental home, the cost of maintaining a house that you own may come as a shock. Even new homes require maintenance – lawn care, pressure washing, clearing rain gutters, painting, etc. There’s always going to be something to upgrade or repair on a home, and many first-time home buyers aren’t prepared for the expense.

A good rule of thumb is to budget about 10 percent of the value of your home for maintenance per year. So, if you buy a $250,000 home, you should prepare for $2,500 a year in maintenance costs.

Home insurance
Be prepared for some sticker shock when purchasing your homeowners’ insurance. Homeowners’ insurance is typically significantly more expensive than purchasing a renter’s policy. If you live in an area prone to natural disasters, be prepared to pay top rates for homeowners’ insurance. If you live near a body of water, you may also need flood insurance.

Life insurance
Many first-time homebuyers may not give life insurance a thought, but it’s an important factor that can help protect your investment. You probably need life insurance if anyone is depending on your income. Especially if your income helps pay your mortgage every month, you should strongly consider a life insurance policy in case something were to happen to you. This will help ensure that your spouse or significant other can continue to live in your home.

Home buying is exciting and part of the American dream. But don’t neglect to come back to reality – at least when making financial decisions – so you can budget properly and anticipate any hidden costs. This will help ensure that your first-time home buying experience is a happy one.

QUESTIONS TO ASK BEFORE BUYING A HOME

April 18, 2022 / All Blogs, Budget, Investment

Buying a home is one of the largest investments many people will ever make. 

It’s also among the most complicated and time-consuming transactions. So before you sign on the dotted line, it’s best to ask yourself these key questions:

What are my needs for space?

How much can I afford to spend each month on my mortgage, utilities, and repairs?

Are there pre-existing problems with this property?

How is the neighborhood? Is it safe? Are the schools good? What kind of amenities are nearby (i.e., grocery stores, restaurants, sports)?

How much will I need for closing costs and my down payment?

What’s my strategy for a bidding war?

What are my needs for space? When you’re buying a home, it’s important to take stock of your needs for space. Do you need a lot of bedrooms for a growing family? A large backyard for barbecues and birthday parties? Or would you be happy with a more modest property that will save on monthly mortgage payments?

Planning ahead will help you stay within your budget and find the right property for your needs. Take time to sort through the options and be vigilant to rule out homes that may seem appealing at first glance, but might not truly serve your family.

If you’re unsure about what you need in a home, consult with a real estate agent who can help figure out the amenities that are best suited for you.

How much can I afford to spend each month? It’s important to be realistic about how much you can afford to spend each month on your mortgage. A good rule of thumb is that your mortgage payment should not be more than 30% of your monthly income. And remember—just because you’re pre-approved for a certain amount, that doesn’t mean it’s what you can actually afford to spend.

It’s also a good idea to have a budget for other costs associated with homeownership, such as property taxes, homeowner’s insurance, utilities, maintenance, and repairs. It’s impossible to fully estimate these costs in advance. But by planning ahead, you can get an idea of your potential monthly expenses and weigh them against your income.

Are there pre-existing problems with this property? It’s critical to be aware of any potential problems. This includes checking for any major repairs that may need to be done, as well as researching the surrounding neighborhood. Is this house in a flood plain? How is the foundation? When was the last time the roof was replaced?

It’s a good idea to have a home inspection done before making an offer on a property. This will help you get a better idea of the condition of the property and what repairs need to be made.

If you’re not comfortable with the condition of the property—no matter how beautiful or spacious the house is—it’s best to walk away and find a property that’s a better fit overall.

How is the neighborhood? Is it safe? Are the schools good? What kind of amenities are nearby? When you’re buying a home, it’s important to take into account the surrounding neighborhood. This includes researching crime rates, checking out traffic patterns, inquiring about the schools, and seeing how close you are to stores or activities that are important to you.

If you have children, it’s critical to research the schools in the area. You’ll want to make sure that there is a high-quality education available. You’ll also want to be aware of any negative reviews about the schools in the area.

How much will I need for closing costs and my down payment? There are a number of costs that you’ll need to budget for. This includes the down payment, closing costs, and moving expenses.

The downpayment is the amount of money that you pay upfront when you buy a home. It’s usually between 5% and 20% of the purchase price. So if you’re buying a $400,000 home, you’ll need to pay between $20,000 and $80,000 upfront.

Closing costs are the fees that are charged by the bank and the government when you buy a home. These costs can range from 2% to 5% of the purchase price. So in the example above, you would be paying between $8,000 and $20,000 in closing costs.

Moving expenses can range from $500 to $5,000, depending on how much stuff you have and how far you’re moving.

It’s important to budget for these costs ahead of time so that you’re not surprised when you sign the paperwork and are handed the keys.

What’s my strategy for a bidding war? It’s a problem that’s caught many off-guards in the current housing market. That’s why it’s important to have a strategy in place. This includes knowing how much you’re willing to spend and be prepared to make a higher offer than the other buyers.

It’s also important to have your finances in order. This means that you should be pre-approved for a mortgage and have enough money saved up for your down payment.

If you’re not comfortable with the idea of a bidding war, it’s best to walk away and find a property that’s a lower price.

Buying a home is never an easy decision. That’s why these questions should all be considered ahead of time—preferably with your realtor—so they don’t catch you by surprise when buying a house! What other factors can you think of? Let us know what future homeowners might want to consider when purchasing a new home.

UNDERSTANDING COMPOUNDING IN INVESTMENTS

January 13, 2022 / All Blogs, Financial Education, Investment

Successful investors like Warren Buffett didn’t just hit a home run on a stock pick.

Warren Buffett hit lots of home runs, but compounding turned those home runs into history-making investment achievements.

Compounding doesn’t have to be a big mystery. It just means that the annual increase is added to the previous year’s balance, which, on average, gives each year a larger base for the next year’s increase. The concept of compounding applies to any interest-bearing savings or investments or to average percentage gains.

Here’s a quick example:

Starting investment: $10,000 Interest rate: 7%

Screen Shot 2018-11-06 at 1.32.35 PM

The rule of 7 & 10
There’s a reason a 7 percent return was chosen for this example. You can see that the total interest return over 10 years is about double the original investment. This is an example of the “Rule of 7 & 10”, which says that money doubles in 10 years at 7 percent return and that it doubles in 7 years at 10 percent interest. It’s not an exact rule, but it’s close enough so you can quickly estimate without a spreadsheet or calculator.

The simple interest example above only begins to show the power of compounding. It doesn’t include any additional investments after year one. In investing, compounding can come from more places than one, particularly if the stocks you own pay dividends. (A dividend is a share of the profit that is distributed to shareholders.)

Compounding in investing
Investing in stocks or mutual funds may provide an average annual return in line with the simple interest example, assuming investments are well diversified to mimic the broad market performance. For example, the S&P 500 return over the past 10 years is just over 7 percent annualized.[i] When you adjust for dividends, the annualized return is close to 10 percent. If those numbers sound familiar – like the rule of 7 & 10 – it’s a coincidence, but the past 10 years of S&P returns are very close to historical averages. Knowing what we now know, it’s easy to figure out that $10,000 will double in 7 years, assuming that market performance is aligned with historical averages. In reality, market performance may be higher or lower than past averages – but over a longer time line, short term peaks and valleys usually blend into an overall trend in direction.

If you’re concerned that you don’t know as much about investing as Warren Buffett, don’t think you need to be an oracle to be a successful investor. Many times, the best stock to pick for individual investors may be no stock at all. There are a myriad of investment options from which to choose without buying stocks directly. Talk to your financial professional about what choices may be available for you.

 

[i] https://dqydj.com/sp-500-return-calculator/

This article is for informational purposes only and is not intended to promote any certain products, plans, or strategies for saving and/or investing that may be available to you. Market performance is based on many factors and cannot be predicted. Before investing or enacting a retirement strategy, seek the advice of a financial professional, accountant, and/or tax expert to discuss your options.

HOW MUCH HOME CAN YOU AFFORD?

January 13, 2022 / All Blogs, Budget, Debt, Investment

For most households, buying a home means getting a mortgage, which means lenders play a big role in declaring how much house you can “afford”.

 

Many people take that calculation as a guide in choosing which house they want to buy, but after you’ve signed the papers and moved in, the lender might not be much help in working out the details of your family budget or making ends meet.

Let’s take a look behind the curtain. What is it that lenders look at when determining how large of a mortgage payment you can feasibly make?

The 28-36 Rule
Lenders look closely at income and debt when qualifying you for a certain mortgage amount. One of the rules of thumb at play is that housing expenses shouldn’t run more than 28% of your total gross income.[i] You also may hear this referred to as the “housing ratio” or the “front-end ratio”. The 28% rule is a good guideline – even for renters – and has been a common way to budget for household expenses over many generations. Using this rule of thumb, if your monthly income is $4,000, the average person would probably be able to afford up to $1,120 for a mortgage payment.

Lenders also check your total debt, which they call debt-to-income (DTI). Ideally, this should be below 36% of your income. You can calculate this on your own by dividing your monthly debt payments by your monthly income. For example, if your car loans, credit cards, and other debt payments add up to $2,000 per month and your gross income is $4,000 per month, it’s unlikely that you’ll qualify for a loan. Most likely you would need to get your monthly debt payments down to $1,440 (36% of $4,000) or under, or find a way to make more money to try to qualify.

Buying less home than you can afford
While the 28% and 36% rules are there to help provide safeguards for lenders – and for you, by extension – buying a home at the top end of your budget can still be risky business. If you purchase a home with a payment equal to the maximum amount your lender has determined, you may not be leaving much room for error, such as an unexpected job loss or other financial emergency. If something expensive breaks – like your furnace or the central air unit – that one event could be enough to bring down the whole house of cards. Consider buying a home with a mortgage payment below your maximum budget and think about upsizing later or if your income grows.

A home as an investment?
A lot of people will always think of their home as an investment in an asset – and in many cases it is – but it’s also an investment in your family’s comfort, safety, and well-being. In reality, homes usually don’t appreciate much more than the rate of inflation and – as the past decade has shown – they can even go down in value. Your home, as a financial tool, isn’t likely to make you rich. In fact, it may do the opposite, if your mortgage payment takes up so great a percentage of your monthly budget that there’s nothing left over to invest, pay down debt, save for a rainy day, or enjoy.

Homes are one of those areas where many discover that less can be more. Whether it’s your first home or you’re trading in the old house for a new one, you might be better served by looking at how big of a mortgage payment you can afford within your current budget, rather than setting your sights on the house your lender says you can afford.

 

[i] https://www.bankrate.com/calculators/mortgages/new-house-calculator.aspx

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