Potential Refi trap

I see a lot of web sites extolling the virtues of refinancing your mortgage, and not just because I am currently contemplating it myself.  In all of their examples showing the amount of money you can save over the life of the loan they make one dangerous and huge assumption.

They compare the new loan to the existing baseline assuming the baseline has a 30 year term.

If you are 5 or 6 years or more into your existing loan, refinancing to a sparkling new 30 year mortgage with lower interest rates and lower payments may seem like a fantastic idea.  But that is increasing the number of payments you still need to make by 60 or more payments.  Those paper savings promised by the calculators just evaporated.

If you really want to see the impact, open up excel and use the ppmt function that allows you to enter your current rate, the original balance, term, and most importantly the payment you are currently on.  This will show you how much of your P&I goes to principal.  From there it is real easy to copy the formula down enough rows to generate a remaining amortization schedule.

Even simpler, multiply your P&I by the number of remaining payments and compare that to the total cost of the new loan.

Either way, unless you are desperate to free up cash flow and are willing to accept the long term price you are most likely going to increase the amount you owe by taking a new 30 year term compared to the note you have paid on for several years.

Long Term Financial Decisions

Forget the Latte Factors, real savings come from long term decisions. Let's say you cut your coffee costs by 5 bucks a day for 250 days a year over 15 years.  Net savings is just shy of 19 grand.  That's nothing to sneeze at but its peanuts if you have a mortgage.

Of course there is a catch, you have to have pristine credit and a solid job history to take advantage but rates have continued to drop to unheard of levels.  Your mileage may vary but lets say you are 5 years into a 30 year fixed at 5% on a $300k note.  The sum of your remaining payments would be $483k and change.

So far you have paid ~$25k towards the principal and you decide to move to a 15 year fixed at the going rate of 3.25%.  Your monthly payment will increase by $321 but when you are done paying the loan off 10 years earlier than plan you will have saved a little over $135,000.

That will go a long way to helping cover college costs for the kids.  Then again if 300 bucks a month puts your budget in the red you're better off waiting until you can swing it.

Fundemental Shifts in Consumer Perceptions?

CNNMoney has an article about household debt and consumption.  I especially keyed in on the following:

"Consumers know they've overspent, they know they've under-saved and they know they've over-borrowed and they're adjusting," says Stephen Roach, non-executive chairman of Morgan Stanley Asia and a faculty member of Yale University's School of Management. "My guess is that we're 14 quarters or a little over three years of what will easily be a 5 to 10-year [deleverage] process. That's what it will take to repair the damage."


In the context of my model of consumption C = EI -[min(DT,DS)] - DSR both Debt Tolerance and Debt Servicing have fallen.  That means for a given level of Expected Income consumption or Desired Savings Rate must rise.

Back in November 2009 when I discussed the impact of discharging consumer debt I predicted consumption would increase as households deleverage.  It may be that I overestimated the American Consumer.  It may be that we as a nation have in fact learned our lesson and rather than re-burdening ourselves with  new toys and cars and homes we can't afford we are finally saving for a rainy day.  In fact the BEA shows the personal savings rate is up to 5% these days.

This doesn't bode well for the immediate strength of the economy but long term it is good news.  While individual investment can be leveraged, the economy as a whole can only invest what has been previously saved in addition to any excess of income over expenses. 

I'm in the wrong business

I've been sitting on some heirloom jewelry in my safe deposit box for the past decade.  With gold prices at record highs I figured I'd go ahead and sell it.  Then I got some quotes.

A few years back I had them appraised for insurance reasons and since that time gold has increased by 2.5x.  I was expecting to be able to sell the pieces for 75%-80% of the appraised value adjusted for the new gold price.  Color me ignorant.  Apparently appraisal value and scrap value are not the same.  Not only is scrap value lower, it is lower by about 15x. 

Upon learning this I called my wife and told her I would never buy her expensive jewelry again.  Trips, kitchens, cars, sure.  Jewelry no fucking way.

I've worked in a number of industries either directly or as a consultant.  At no time did I ever see margins approaching anything that the jewelry business has.  I'm starting to wonder if it's not worth taking a couple design courses and opening up a shop myself.  When you can turn $100 worth of scrap gold into a $1,500 piece, it wouldn't take too many sales to compete with my salary.

I also found myself thinking about moral hazard as I did my research.  Insurance pays 15x more than scrap and 4-5x what I can eBay the items for.  Needless to say, that is a strong incentive for the ethically challenged to have their house broken into at worst, or just be very careless at least.

Fortunately I'm not desperate for cash and am happy to put the pieces back in the bank to trot them out as gifts for my kids when they are old enough.  It makes you wonder how bad people have it that they are willing to fund the huge number of cash for gold operations around the country.

I am Agnostic and I have reason to fear

This post is not about modeling, business, economics, or finance, it is about me. I write this full well knowing that I may suffer discrimination for it. So be it.

I am Agnostic.

For the vast majority of Americans there is no difference between me and an Atheist. The reason I bring this up now is because I picked my son up from summer camp yesterday and he informed me that he was not allowed to eat lunch unless he said grace. Then he quickly followed up with the classic “God is good, God is great”. He clearly learned that at camp. This morning I asked his camp if he could sit silently while the other kids prayed. It was a tough decision because kids can be very mean to those seen as different. So while I have been ambiguous about my beliefs in the past I feel I owe it to my children that I am as open as I expect them to be.

I have reason to fear.

Atheist and Agnostics are discriminated against on a regular basis. We are reviled in a way no other minority is. If you want proof read the following

http://blog.lib.umn.edu/edgell/home/Strib%20Atheist%20Faith%20and%20Values.html

It doesn’t help that some atheists such as Richard Dawkins can be inflammatory in their rhetoric either.

Agnostics vs. Atheist

Atheists believe there is/are no God(s) which is different from the Agnostic acceptance that we do not have the answer one way or another. The first requires just as much faith as a believer, the latter takes courage.

Agnosticism requires courage because it is not easy to accept that as intelligent as one may be they will never be able to know the answer of why and how we came to be. I personally follow Science but even if the quantum mechanics that makes the silicon chips in your computer operate, your cell phone work, the thermodynamics that powers you car or any of the other physics disciplines solves the riddle of the Big Bang we are still left with how did the Big Bang’s predecessor come into being.

Aristotle tried to tackle this problem and created the “Unmoved Mover”. The alternative to that is perpetuity. Neither answer is truly satisfactory; both can be applied to physics or God.

Agnostics are not sitting on the fence.

Atheists have been known to accuse Agnostics as lacking conviction. They argue there is no proof that God exists and therefore it is only rational to accept that God does not exist. This is flawed logic. Lack of proof of existence is not the same as proof of non existence. Nicholas Taleb demonstrates this with his book “Black Swan”. Until Europeans settled Australia every swan they had ever seen was white. There was no proof that swans could be other colors. It clearly did not prove all swans are white. This is why I state that Atheist require faith just as believers do. There is simply no concrete evidence either way. Both sides can debate examples but they have yet to be subjected to criteria of testability and replication required.

Believers will sometimes attack Agnostics with “Pascal’s Wager”. They will state since you don’t actively disbelieve why not just believe. That way in the event you are wrong you will still benefit from claiming a belief in God. This is also flawed logic assuming the Judeo/Christian/Muslim god does exist. It is claimed that God is omniscient and should that be true he would see right through the reasoning of Pascal’s Wager and likely not reward you for it.

One Life to Live.

Part and parcel of accepting that one can’t know whether there is a god or not means you also must accept that heaven, hell, or any other form of afterlife may not exist. My personal belief is this is the reason most Christians distrust non believers. They are afraid that since non believers feel they will not be held accountable for their actions on their death, what incentive do they have to be ethical or moral in life.

Hedonism and Ethics.

When you don’t expect an afterlife, you tend to want to enjoy the current one as much as possible. This leads to hedonistic view of life. I realize that these days that tends to have negative connotations of drunken debauchery but at its core it is simply an attempt to enjoy life to its utmost. Properly employed a person is constantly trading off enjoyment now for enjoyment later. If I want to enjoy my old age I better save for it. I want to avoid negative interactions with my fellow humans I better not start fights with them. The golden rule means more to me knowing that if I treat others well they will reciprocate. My self interest is benefited by being “good” to others. One can easily ascertain right from wrong without recourse to a higher power.

The fact is, and I hope my life would serve as evidence; the lack of belief in a higher power does not preclude me from knowing what is right and what is wrong. What hurts my fellow humans and what benefits them.

This post even serves proof of that. I am putting this out there and subjecting myself to possible discrimination, hatred, ridicule, and other negative reactions just so my children know that I would not expect them to potentially suffer while I run and hide. It was easy to be ambiguous when the repercussions only affected me. In this case ambiguity hurts my children who are unable to defend themselves. Therefore clarity is the only right thing to do.

Some thoughts should not be broadcast

I've been very quiet of late and that has been intentionally so. I am changing jobs soon, going back in house rather than working for an Agency. The work will involve modeling marketing mix and promises to be very exciting. What I'm not sure of yet is how much of that will be considered IP. In other words I may not have much I can say. In the meantime since today is April first I will leave you with a thought on not being foolish with your money when you change jobs. Don't cash out your 401k. After years of saving it, why give the feds an extra 10% over and above the income tax you've been deffering?

Selling your customer lists

As a 3rd party vendor myself working with my clients customer data I am always concerned how it used. It is important we listen to our clients customers and respect their wishes regarding contact.

I bring this up as one of my credit card providers has contracted with a 3rd party agency to purchase their customer lists then sell them life insurance. This in itself is no big deal.

When I politely inform the company I am not interested and to please remove me from their lists I think nothing of it. When they call back the second time I get a little miffed.

Now they've called 6 times and in order to send the message that I am not only not interested in the 3rd parties life insurance but that I am extremely frustrated with their unwillingness to listen to my request to not be contacted I have canceled my card.

I have carried this particular card for over 10 years and I can only assume I was profitable for them. But now they will not receive any additional monies from me because of the policies their 3rd party vendor held.

The take away of all this: when sharing your customer data with another company make sure their policies dealing with your customers support how you wish to do business.