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Planning, Saving, Investing & Home Equity

Published: September 2018
Author: Bank of England Mortgage Staff

Live below your means- How much do you save per month?
Generations ago, Americans routinely saved 10% or more of what they made, either depositing those savings or investing them. This kind of thriftiness is still found elsewhere in the world. Today, the average euro area household saves more than 12% of its earnings, and the current personal savings rate in Mexico is 20.6%.

In 1975, the U.S. personal savings rate hit an all-time peak of 17.0%; it has been below 4% since June. Easy credit is one culprit; the tendency to overspend in a strong economy is another. Remember to pay yourself first.

Diversify your investments
What returns 15-20% a year from now may not next year or three years on./strong>
Diversification matters: you never know what asset class might soar or plummet in the future, and allocating your assets across different investment types gives you the potential to reduce overall portfolio risk.

Max out your 401k and leave it alone
Company sponsored 401k programs are a great tax-free investment for your retirement. And if your employer matches at any level, contribute enough to achieve the maximum matching (it’s free money!). Oh, and if you switch jobs or careers, leave that 401k alone. If you’re tempted to take the cash and run, check the tax implications FIRST. There will be penalties.

It’s okay to use a credit card, just pay it off
Generally speaking, US credit standards don’t necessarily align with what is taught or assumed. I am impressed with folks that refrain from using credit cards. However, withdrawing from revolving credit (i.e. credit cards) altogether may negatively impact your credit score. And the lower the credit score, the higher the rate associated with most short-term (car loan) and long-term debt (mortgage loan). I would encourage everyone to visit www.myfico.com to learn some details around credit scoring.

Plan for a 30-year retirement
According to Social Security estimates, the average 65-year-old man is currently projected to live until age 84, and the average 65-year-old woman, to age 87. With advances in health care, living to 95 may become the norm for the average 35-year-old.

Plan for your retirement first, your children’s college education second
Some baby boomers did the inverse, and some who did wonder if they made the right decision for their futures. College students can work and receive financial aid; for senior citizens, it is a different story.

Switch jobs for better pay
Generations ago, people tended to stay at the same job for several years or longer, whether their prospects were promising or not. If a better job lures you, do not be ashamed to leave your current employer for it – you may gain, financially. Payroll processing giant ADP found recently that a job change resulted in an average pay increase of 4.5% for a full-time worker.

Home Equity
A recent online news story showcased American’s wealth through home equity. As the real estate market has rebounded from the recession, it is estimated that 42 million home owners have over $5 trillion in disposable equity. This measure has more than doubled since it bottomed out in 2012. For years, one of the easiest way to tap into this equity is through a home-equity line of credit. However, most home-equity loans are adjustable, and as the prime rate continues to climb, so will those monthly payments. Worst yet, with the recent tax reform, some home owners may lose the tax deduction ability associated with this form of credit. Those two factors combined may fuel a small refinance wave; combining those two mortgage liens into one, favorable fixed-rate mortgage with arguably lesser tax implications.

Consult your tax advisor for tax details and consult your mortgage broker or banker on what lending options may be available to you.