Tips for Sound Preparation in a Not-So-Sound Economy
We've seen a lot over the last few years. From the collapse of the housing market to large financial institutions closing their doors, our economy is going through unprecedented change. If this state of flux has you wondering about your financial future, we urge you to read on. A little insight and a lot of helpful advice await you.
Our Experts
Enter Terrence Meyer, Jr. and Ed Conarchy.
Meyer is a financial representative for the Strategic Financial Group, Northwestern Mutual, in Los Angeles.
He asserts that for Northwestern Mutual, the goal is not to find the hottest new product. Instead, the philosophy is one of long-term and conservative approach, something he ascribes to as well when he works with clients.
Ed Conarchy is a nineteen-year veteran of the mortgage industry outside the Chicago area. He is also the founder of National Advisors Network, a registered investment advisory firm, and part of the Mortgage Success Source Faculty. Wearing two hats allows Conarchy to give both mortgage and investment advice holistically, something he sees as the future of financial planning.
"As a mortgage planner I was constantly being asked about both," Conarchy explains. Considering the fact that mortgage advisors have access to client information such as income, credit score, taxes and assets, Conarchy felt it made sense to bridge the gap by earning his investment advisor credentials.
The State of the Economy
Over the last several years, people have seen that economic conditions, as well as the housing market, can change quickly.
When asked about his thoughts on rebuilding the economy, Meyer believes it would take a very long time. In his words, "The playing field has changed, and it's not done changing."
Conarchy agrees with Meyer's sentiment. Relating it to the subject of the housing crisis, he says the drop in home values and the overly large inventory of foreclosures are not going away overnight.
Meyer believes that more accountability and government scrutiny are sure to come, something he sees as being positive, but hopes will not have unintended negative effects. While he believes more stringent barriers need to be put in place in order to prevent this type of collapse from happening again, he says it would have to be done in a way that does not "crimp the engine that makes the economy go."
Conarchy feels that while a correction in the supply and demand of homes needs to take place, another necessary component to preventing any further collapse in the housing market is a change in how we view our mortgages and our homes.
"We've always been taught our home is one of our greatest investments," says Conarchy. "And the key to financial security was our ability to pay our mortgage down as quickly as possible." The problem, however, is that the paradigm for financial freedom has changed.
Mr. Conarchy says that while lenient loan requirements started the ball rolling with the housing crisis, what got many people in trouble was they bought too big of a house. According to Conarchy, the idea of buying a home with the intention of selling it at a higher price when the time calls is the equivalent of putting the majority of your money into one stock.
Unfortunately for many people, occurrences such as layoffs, injuries, or the inability to refinance an adjustable rate mortgage put them in a position where they could no longer afford their home. For any potential home buyer, Conarchy suggests they go into it, "Planning for the worst and hoping for the best."
Conarchy believes you should start by looking at a home as the place where you live, as opposed to the investment that is going to bring you financial freedom. Look for a home you can afford if times were to get tough, and at that point search for the best long-term loan you can find. After you purchase your home, concentrate less on paying off the mortgage and more on using any non-essential income for the following goals: saving for retirement, paying off high interest/non tax-deductible debt, creating a 12-month fixed-expense rainy day fund or investing into diversified investments that carry some form of liquidity.
Mr. Meyer believes there are two perspectives every family and business owner should focus on.
The first is offense, or the use of your income directed at financial goals such as buying a home, sending a child to college, and ensuring a comfortable retirement. The second is defense, which beckons the following question: in the event of injury, layoff, or premature death, what measures can you put in place to protect against the interruption of your financial goals? According to Meyer, not having adequate insurance coverage and retirement resources are examples of his point.
While these two methods should go hand in hand, Meyer says for many people it is difficult to strike the right balance and they become entangled. The role of a financial professional is to help clients untangle these priorities, understand their individual needs, and provide them with solutions in conjunction with sound principles and expert advice.
Speaking of the individual, we asked our experts about the financial concerns of their clients.
"It's all about trust," Meyer claims, referring to their trust in him and his company. People want to know that the company helping them achieve financial security will likely be there in the long haul when the need is realized.
Mr. Conarchy says for his clients during this recent downturn, "It's been all about going upside-down on their mortgage." But, he claims that type of worry only occurs when people view their home as an investment, rather than a residence. He urges us to think of our homes like we do our cars, choosing them for lifestyle and need, not as our investment accounts.
The way Meyer sees it, balancing your offense and defense is more important than ever before. It's all about taking personal responsibility for your financial security.
"The myth," Meyer says, "is many people think they will need less income at retirement. The reality is they would want to maintain their same lifestyle and often experience little change in expenditures."
Parting Advice
Meyer suggests meeting with an educated and experienced individual (or team) to do a needs analysis for your family or business. It is also important to work with a strong company and do your research on financial strength.
The key here is to start and take action. Review your goals periodically and stay vigilant about your preparation. The objective is to remove the emotion from your financial decision making. In doing so, you are taking a step forward to securing your financial security.
Conarchy urges people to not give away their liquidity by prepaying their mortgage. Instead of focusing on debt elimination, turn your efforts toward wealth accumulation, but without trying to predict the future of the market.
"Manage your mortgage," says Conarchy. Make sure you have a competitive rate and that you are paying it on time. Don't think of your mortgage as the lump sum bank debt. Rather, think of it as a monthly bill. In terms of refinancing, pay attention to the net monthly after-tax savings in relation to what the refi will cost and how long it will take to break even. If the refi can pay for itself in less than one year then it's a good deal.
Conarchy wrapped things up by stating you should have one major goal with your personal finance - obtaining financial security. This he says has nothing to do with not having a mortgage payment. If you can't sell your home or get money out of it when you need to then what good is it? "I'd much rather have a big mortgage and a big bank account than no mortgage and nothing in my bank account," he claims.
"Our parents didn't have investing tools like IRAs, 401Ks and 529s like we do," says Conarchy. All they knew was to use their house as an investment, so paying it off made sense. He points out that the rules have changed, but somehow the mantra didn't. "Always remember," he says, "Banks will never loan you money when you really need it."
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