Podcast: Insurance For Homeowners and Real Estate Investors

Insurance For Homeowners and Real Estate Investors

For this podcast about insurance I chatted with Matt Kincaid of Meridian Captone.  In the podcast we discussed insurance for homeowners and real estate investors.  Topics included first time homebuyer tips for arranging insurance, insurance for real estate investors with long term tenants and insurance for investors working in the short term rental space.

I hope you enjoy the podcast and find it informative.  Please consider sharing with those who also may benefit.

Listen via YouTube:

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You can connect with Matt at LinkedIn,  You can reach out to Matt for more information on their insurance products by emailing him at mkincaid@meridiancapstone.com.

You can connect with me on Facebook, Pinterest, Twitter, LinkedIn, YouTube and Instagram.

About the author: The above article “Podcast: Insurance For Homeowners and Real Estate Investors” was provided by Luxury Real Estate Specialist Paul Sian. Paul can be reached at paul@CinciNKYRealEstate.com or by phone at 513-560-8002. If you’re thinking of selling or buying your investment or commercial business property I would love to share my marketing knowledge and expertise to help you.  Contact me today!

I work in the following Greater Cincinnati, OH and Northern KY areas: Alexandria, Amberly, Amelia, Anderson Township, Cincinnati, Batavia, Blue Ash, Covington, Edgewood, Florence, Fort Mitchell, Fort Thomas, Hebron, Hyde Park, Indian Hill, Kenwood, Madeira, Mariemont, Milford, Montgomery, Mt. Washington, Newport, Newtown, Norwood, Taylor Mill, Terrace Park, Union Township, and Villa Hills.

Transcript

[RealCincy.com Insurance Podcast]

[Beginning of Recorded Material]

Paul S.:             Hello everybody, this is Paul Sian with United real estate home connections. Real estate agent licensed in the state of Ohio and Kentucky. And with me today is Matt Kincaid with Meridian. Hi Matt, how are you doing today?

Matt K.:            I’m doing great, Paul, thanks for having me.

Paul S.:             Great to have you on here, and looking forward to our podcast today. Where we’re going to discuss insurance for homeowners, for investors as well as looking in-depth into the insurance policies and how that’ll help out buyers and investors, so why don’t you tell us a little bit about your background? When did you get started in insurance?

Matt K.:            Yes. It really started in junior/senior year of college. I went to NKU, graduated in 2015. My best friend actually dropped out of school and started selling commercial trucking insurance to long-distance truckers. So he thought it might be a good part-time job for me to do, do some customer service work.

So that’s what I did my senior year mostly. And picked up on it pretty quickly, and after I graduated, I started selling full-time, and it just happened to be when I stuck with. Ended up transitioning to more personal lines. So I still do a lot of commercials, but our main focus is personal. So we’re typical home auto landlord insurance that sort of thing, so that’s kind of how I got started.

Paul S.:             Great. And you’ve been with Meridian ever since?

Matt K.:            Yes. I’ve been with Meridian. It’ll be four years in September; I’ve been in the industry for about six years now.

Paul S.:             Nice. So I understand a lot of people don’t know that you’ve got your insurance brokers, which I believe Meridian is an insurance broker, and then you got your insurance agents. Can you explain a little bit the difference between an insurance broker and an insurance agent?

Matt K.:            Yes. So in the insurance world, there’s independence and captives; captives are just what it sounds are captive to one product, one company. Whereas with independence Meridian particular, we have about 15 different companies that we’re able to shop around through. So one of our companies is, for example, is Allstate. A lot of captives also have Allstate, but we have the same exact product.

But we also have 12 other companies that we can shop around through, to make sure that you’re getting the best. So it’ll really benefit to the customer and me as an agent, or I’m not if I was just one company, I know I have to stand behind that product 100% no matter what. Whereas being a Meridian, I can just do whatever is best for the customer.

Paul S.:             Yes. So the ideal then I guess is that you can shop around from multiple policies. Just like going into the store, you can compare different types of bread, and whatever price works best for you, whatever flavor works best for you. That’s similar to what you’re able to provide.

Matt K.:            Yes, that’ll be a good example. For like your typical, this may not be what we’re talking about but, but for like your home and auto, most of time, it’s best to be with one company, but not all the time. So I’m able to mix and match if need be, whatever is going to save the customer most money, whatever they’re company is having.

Paul S.:             Great. So let’s move on to first-time homebuyers. Insurance is a, especially for homeowners, insurance is the new thing for first-time homebuyers if they don’t really know what they’re looking for. When’s a good time for them to start having that conversation with their insurance person?

Matt K.:            So I think whenever you get in contract is a good time to start looking. Getting a quote is never going to hurt, you’re not bound to any coverage, or you’re not going to be paying. 90% of time, you’re not going to be paying the full 12 months up front.

So it’s good to start getting your quotes shops around, getting some final numbers to give to your lender if you have one. So they can finalize numbers and give you a good picture of what you might be looking at going forward. So it’s never too early in my opinion, but once you get into contract, I think is an ideal time.

Paul S.:             Yes. That’s something I agree with too. And it should be pointed out for those first-time homebuyers who don’t know, I mean insurance is required if they’re financing the purchase, and the lender is going to require homeowners insurance.

Matt K.:            Yes. A lot of people know that it’s not a law that have home insurance, but the lender can make that stipulation that you have to have it upon closing.

Paul S.:             Great. And when a homebuyer first time, whether homebuyer existing or first-time homebuyer. What exactly is the insurance company looking at when they’re pricing out policies?

Matt K.:            So a big one is, you’ll hear this term going out a lot, insurance score. It’s a credit-based score; you don’t need a social to run it. But they’re able to calculate a similar score based on the amount of claims you’re turning in, your payments.

Are you making your payments on time? That sort of thing. So they’re able to get a good a good picture of the type of risk that the insurance company is taking on so that I mean if you’re looking at the property itself, the construction of the property, how old it is, the exterior that sort of thing.

Paul S.:             So does that involve a hard credit pool or a soft credit pool?

Matt K.:            It’s soft; you won’t see it on your credit at all.

Paul S.:             Okay, great. So that’s something that doesn’t have, even though during the home shopping process there’s going to be a bunch of credit pools, whether from a couple of lenders. But insurance it’s not one of those things that the buyers have to look at.

Matt K.:            No, absolutely not. Especially, that would be a big pain. Especially if I’m shopping through 15, and I’m running NVR and insurance score. But no, it won’t even show up on your score.

Paul S.:             Okay. So what are some of the best ways that homebuyers can improve their chance of getting a better insurance rate?

Matt K.:            Right. So prior insurance history is a big one, making your insurance payments on time. The area that you are in is going to be a big factor. The zip code, there’s different what’s called protection classes based on where the home is. So that’s based on how far you are from the fire hydrant, and also how far you are from the fire department.

So the highest protection class you can have is ten, that’s a maximum risk. You’re over five miles away from the nearest fire department, and your insurance rate is going to be higher. Simply do the fact if there was a fire or total catastrophe, it’s going to take longer for them to reach you.

Paul S.:             Okay. Let’s talk about the risk; you mentioned risk in there. How does risk play into it? Let’s say whether of the buyer themselves and if they’ve had past history of claims or the house even if they’ve never been in the house before what about the risk associated with that.

Paul S.:             Yes. So like I said before pass to insurance, history is big. With these landlord policies, it’s hard to tell what the price is exactly going to be. Because obviously, they’re going to rate it based off the buyer’s insurance score.

But they don’t know who’s going to be living in there. They don’t know the type of risk for who’s going to occupy that home. So it’s very limited; there’s more of a baseline price just based off the buyer’s insurance score and the protection class and the age and the property itself.

Paul S.:             Okay. In terms of the property itself, there’s a CLUE report which a lot of buyers probably have not heard about. Can you explain what the clue report is, what does it stand for, and what does that exactly provide?

Matt K.:            Yes. So I kind of describe it as a moto vehicle report for your home.  So it stands for the comprehensive loss underwriting exchange. So a lot of times, LexisNexis, you’ll get your reports from there. It’s just a big aggregate of claims that are turned in by insurers, and obviously, when I’m running your clue report, it’s going to pull up based off your name, your date of birth and the address if there are any claims that correspond to you, the insurance company can grade it importantly.

Paul S.:             Okay, great. Is there any cost for you pulling a clue report for a buyer?

Matt K.:            No, absolutely not. So for a personal policy, so if we’re talking landlord, that’s four units, four family and under. Most of the times, the company can run that itself. If it’s a commercial policy, it’s a little bit more different.

For example, if this is not a new purchase, maybe you’ve had this property for a few years, and you’re shopping right around, you may have to order that from your prior insurance company. But if it’s a new purchase, a lot of times it’s not going to be necessary, if it’s a commercial risk.

Paul S.:             Okay. Let’s talk about a homeowner who’s been in their house for a few years now, and they had a policy in place with an insurer. Do you have any recommendations or suggestions for them? I mean, do the rates get better? Do the rates get higher if they get another quote?

Matt K.:            So it’s kind of a cache one to it. It’s almost impossible to know what the insurance company is going to do. Obviously, you want to find a company that is A-rated or higher, that means they have a good financial stability, so they’re not just going to raise your rates for no reason.

But insurance is kind of like the stock market in some ways. If a company is taking big losses a certain year, they may try to recoup by raising rates, and that’s just going to be across the board based on your zip code. But I always just say just keep track of your rates. I know Meridian we have somebody who’s dedicated to be shopping if your policy goes up a certain percentage. So I think that’s great to have. But just pay attention to it, and re-shop it every couple of years if need be.

Paul S.:             Okay. By the fact of them, somebody re-shopping it, that’s not necessarily going to increase their rates, will it?

Matt K.:            No, absolutely not. Companies like to see that you’ve been insured, they don’t want to see you bounce around all the time, because that means they’re probably going to lose that risk in a year. But to answer your question, there’s no harm in re-shopping. I have customers that will call me each and every year to make sure that we have the best rate, that’s totally fine by me.

Paul S.:             Okay, that’s great and helpful information. To move on to investment real estate, can you talk about the differences in commercial versus residential investment real estate insurance?

Matt K.:            Yes, so kind of hard to describe the four. Commercial is going to be the five units and above, personal is going to be four and under. Coverages on that, the only differences that you’re going to see with commercial, instead of having a one hundred thousand or three hundred thousand liability limit, most of the time they’re going to include a general liability policy, which is going to include one million in liability.

A bunch of different other things that fall under that, so that might look different. Other than that, the forms are fairly similar. You just want to make sure that you have replacement cost, or if you want actual cash value, deductible, loss of rent. So those things are going to be similar, it’s just a matter of how many years you have, that sort of thing.

Paul S.:             Okay. In terms of investors who are owner occupying, they’re buying a duplex or four-unit, and they want to live in one unit. Are the insurance rates generally better for that type of situation?

Matt K.:            There’s not a clear answer for that, I mean it’s still going to be written on the same type of form. There might be some discounts being that the insurance company is able to calculate their risk, maybe a little bit more accurately. I mean, that could be a good thing or a bad thing for the customer.

But really, you just want to make sure that you’re asking those questions, make sure the agent is writing the policy correctly. So down the road, if there are any changes or let’s say the insurance company audits you and that information is inaccurate, that could then raise your rate.

Paul S.:             Okay. So I guess the answer is it depends?

Matt K.:            Yes. With a lot of insurance, it just depends, unfortunately.

Paul S.:             That’s still good to know. So let’s talk a little bit about insurance riders, I guess insurance riders applies both to regular homeowners as well as investors. What can you tell me? I guess first, let’s explain what’s an insurance rider, and why would somebody want one or need one.

Matt K.:            Yes. So with any insurance policy, there’s going to be a lot of things that are automatically included. Like if we’re talking landlord policy wind, hail, fire, that sort of thing. And then if you want to have personal property protection, let’s say you’re furnishing some of the items may be the appliances in the home can have that. Otherwise, the writers are going to look fairly similar to what you’re going to see on a typical homeowner’s insurance policy.

Or do you want water and sewage backup? Do you want replacement cost on your belongings or the roof? So those are going to look fairly similar. If the agent is asking the right questions and going over it thoroughly, there should be no question on how you want it covered. Some other things that might be on there is earthquake that’s not included; flood insurance it’s a totally separate policy, so there’s always that misconception that flood is included in the homeowners; it’s never included.

Whether it’s a landlord policy or homeowner’s policy, the way to differentiate that with water coverage is where the water is originating from. If the water originated from outside the house, that is flood. If the water is originating from inside, let’s say you have a pipe that burst, or a toilet that overflows or some pump that’s water inside the house and that’s something that could be covered either automatically or with a rider.

Paul S.:             Okay. And just look a little further into flood insurance that applies to both regular buyers and investors, but that’s also like you said this based on external factors close to a river, close to the lake. Where would somebody find out if their property falls under that, or requires flood insurance?

Matt K.:            So a lot of the times, the lender may have an idea if it’s required or not. Otherwise, just asking your insurance agent. There’s not like an automatic identification that is going to tell you. In the loan process, it will probably come up that flood insurance is required, and then at that point, the insurance agent can find out what flood zone you’re in, what kind of rate impact that’s going to have on you, and that sort of thing.

Paul S.:             And then flood insurance too is not something you provide directly, I believe that’s provided from the government, correct?

Matt K.:            Yes. So it’s a FEMA based product, but we do also have a private flood company if your loan accepts that, which can be up to 40% off of a FEMA back product, and it’s the same exact coverage.

Paul S.:             Okay. So let’s talk a little bit more about the private insurance coverage you said for flood insurance, as opposed to FEMA. That’s something you said the lender would have to allow it. Otherwise, they have to go through the government program?

Matt K.:            Yes. So I mean the laws are changing for this all the time, most of the time if it’s a Government loan, they’re not going to allow private flood insurance. But that could depend on a bunch of different factors.

So the best thing to do is just ask your lender if private flood is acceptable because if it is, that’s going to save you a ton of money. I just did one a couple of weeks ago, where FEMA wanted 1,500 bucks, and my private flood carrier came back at like 700. So that could be a big difference, especially if you have a certain down payment you need to make for the home, and just cut cost in general.

Paul S.:             That’s 1500 versus 700 is that a yearly cost?

Matt K.:            Yes, flood is always going to be a 12-month policy, just like your homeowners.

Paul S.:             Okay. Is it worth it? Let’s say somebody’s not listed as a; the property is not listed in flood zone, so they don’t require flood insurance. Is it worth it for them to maybe they happen to live behind a, there’s a small lake behind them? Is it worth it to get flood insurance for them?

Matt K.:            I think it’s at least worth having that conversation, you know everybody’s different. You know there are some customers they’re going to want all the bells and whistles, they are going to want earthquake even if you’re not even close to a fault, that sort of thing.

So it’s just having that conversation, I mean you can never be too covered. It’s never a bad idea to cover all your paces, but it’s just a matter of what the insured is willing to spend, and if they think it’s worth taking that risk or not.

Paul S.:             Okay. Most of the insurance policies we’re talking about, and I shouldn’t say most, I should say all the policies we’re talking about right now are generally applied to like long term whether you as a long term owner-occupant or as a long term investment property, where you have a one continuous tenant may be staying a year after a year or long-term leases basically.

Let’s talk a little bit about short term tenants like your Airbnb, your VRBO, I mean, are there different insurance requirements for that, different insurance policies? What would you recommend? And what have you seen for other people who are looking for that type of insurance?

Matt K.:            Yes. So honestly, I’ve ran across it a few times. The one thing you want to make sure of is most companies will either not write it, or they’ll have an endorsement done for a short-term rental. So that’s going to be a surcharge for you. Other than that, it’s going to be fairly similar. You just want to make sure if you’re going through air Airbnb or VRBO make sure what they are going to cover.

They’re going to include an insurance policy, so you don’t want to have any overlaps, we also don’t want to have any gaps in the insurance. I know Airbnb will, for example, not cover bodily injury or property damage, so that’s something that’s going to fall under your insurance policy. So it’s just making sure that you understand the verbiage. So if you do have an Airbnb home that you want to get insured, take a look at that policy, send it to your insurance agent. Have them write over it, and make sure that you’re fully covered.

Paul S.:             Okay. That’s something that you’d provide if somebody’s coming to look for a policy through you for a short term rental that you would be able to assist them with too?

Matt K.:            Yes, absolutely. I did one last week; the customer was very concerned about the pricing. He was coming from USAA; they wanted like 2,500 bucks on the year for a single-family Airbnb.

I have a great company called Berkshire Hathaway; they have a product specifically for Airbnb or VRBO. I was able to cut his price almost in half. So we definitely have products for it; off the top of my head I probably have three or four that I can quote through.

Paul S.:             Okay, great. And just to go back to your company’s footprint, Meridian, basically, are you able to offer insurance all 50 states? Are you limited anywhere?

Matt K.:            So yes, we’re not available in all 50 states, but we are available in the Tri-State as well as Tennessee, Illinois, a lot of the southeast. So if you have any questions about that, please give me a call.

That being said, I have a lot of property investors that are coming from either across the country or overseas. That is totally fine, as long as the property that they’re buying is within our scope, we can definitely accommodate.

Paul S.:             Okay, great. And what’s the best way for somebody to reach out to you if they want to get some more information?

Matt K.:            So you can reach me either by phone or email. I’m also very active on Facebook. My phone number is 513-503-1817. Or you can reach me by email that is MKincaid@Meridiancapstone.com.

Paul S.:             Okay, great. That’s all the questions I have for you today, Matt, thanks for being on.

Matt K.:            Yes, thanks for having me.

[End of Recorded Material]

Source: cincinkyrealestate.com

How Interest Rate Hikes Affect Personal Loan Investors – SmartAsset

How Interest Rate Hikes Affect Personal Loan Investors – SmartAsset

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In December 2015, the Federal Reserve raised the federal funds rate by a quarter of a percentage point. That was the first time the Fed had raised rates in nearly a decade. While federal funds rate changes don’t directly impact peer-to-peer (P2P) loan interest rates, lending platforms may begin increasing their rates. If you’re investing in peer-to-peer loans, it’s important to understand how that may impact your portfolio.

Rising Rates May Mean Better Returns

Personal loan investors make money by claiming a share of the interest that’s paid on the loans, in proportion to the amount that’s invested. If the platform you’re using raises rates for their borrowers, that means you’ll likely see higher returns.

That’s especially true if you’re open to funding high-risk loans. Peer-to-peer platforms assign each of their borrowers a credit risk rating, based on their credit scores and credit history. The loans that get the lowest ratings are assigned the highest rates. For example, Lending Club’s “G” grade loans (the loans that go to the riskiest borrowers) have interest rates of 25.72%.

Assuming borrowers don’t default on their payments, these investments can be more lucrative than lower-risk loans. Using Lending Club as an example again, F and G grade loans historically have had annual returns of 9.05%, which is nearly double the 5.22% return that investors earn from low-risk “A” grade loans.

The Downsides of a Rate Increase

While rising interest rates may put more money in investors’ pockets, there are some drawbacks to keep in mind. For one thing, it’s possible that as rates rise, borrowers could decide to explore other lending options. If that happens, there would be a smaller pool of loans for investors to choose from.

To compensate, peer-to-peer lenders may resort to issuing lower-quality loans as rates rise, but that could be problematic for investors who prefer to steer away from riskier borrowers. If the platform you use no longer offers the kinds of loan products you want to invest in, you’ll have to reallocate those assets elsewhere to keep your portfolio from becoming unbalanced.

Finally, rising interest rates could result in a higher default rate. Increased rates mean that borrowers have to pay a lot of money for taking out personal loans. If the personal loan payments become unmanageable, a borrower may end up defaulting on their loan altogether. Some platforms refund the fees that investors have paid, but they usually don’t refund their initial investments after borrowers default.

What Investors Ought to Consider

If you’re an active P2P investor or you’re thinking of adding P2P loans to your portfolio, you can’t afford to overlook the risk that’s involved. Financing the riskiest loans is a gamble, so it’s important to consider the consequences of putting money into those kinds of investments.

A good way to hedge your bets is to spread out your investments over a variety of loan grades. That way, if a high-risk borrower defaults you still have other loans to fall back on.

If you want more help with this decision and others relating to your financial health, you might want to consider hiring a financial advisor. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with top financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.

Photo credit: ©iStock.com/Ondine32, ©iStock.com/Tomwang112, ©iStock.com/xijian

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She’s worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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5 Things to Consider Before Getting a Personal Loan

Consider This Before Getting a Personal Loan – SmartAsset

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It’s a new year and if one of your resolutions is to get out of debt, you might be thinking about consolidating your bills into a personal loan. With this kind of loan, you can streamline your payments and potentially get rid of your debt more quickly. If you plan on getting a personal loan in 2016, here are some key things to keep in mind before you start searching for a lender.

Check out our personal loan calculator.

1. Interest Rates Are Going Up

At the end of 2015, the Federal Reserve initiated a much anticipated hike in the federal funds rate. What this means for borrowers is that taking on debt is going to be more expensive going forward. That means that the personal loan rates you’re seeing now could be a lot higher six or nine months from now. If you’re planning on borrowing, it might be a good idea to scope out loan offers sooner rather than later.

2. Online Lenders Likely Have the Best Deals

The online lending marketplace has exploded in recent years. With an online lender, there are fewer overhead costs involved, which translates to fewer fees and lower rates for borrowers.

With a lower interest rate, more money will stay in your pocket in the long run. Lending Club, for example, claims that their customers have interest rates that are 33% lower, on average, after consolidating their debt or paying off credit cards using a personal loan.

Related Article: How to Get a Personal Loan

3. Your Credit Matters

Regardless of whether you go through a brick-and-mortar bank or an online lender, you  likely won’t have access to the best rates if you don’t have a great credit score. In the worst case scenario, you could be denied a personal loan altogether.

You can check your credit score for free. And each year, you have a chance to get a free credit report from Experian, Equifax and TransUnion. If you haven’t pulled yours in a while, now might be a good time to take a look.

As you review your report, it’s important to make sure that all of your account information is being reported properly. If you see a paid account that’s still showing a balance, for example, or a collection account you don’t recognize, you’ll need to dispute those items with the credit bureau that’s reporting the information.

4. Personal Loan Scams Are Common

As more and more lenders enter the personal loan arena, the opportunity for scammers to cash in on unsuspecting victims also increases. If you’re applying for a loan online, it’s best to be careful about who you give your personal information to.

Some of the signs that may indicate that a personal loan agreement is actually a scam include lenders who use overly pushy sales tactics to get you to commit or ask you to put up a deposit as a guarantee against the loan. If you come across a lender who doesn’t seem concerned about checking your credit or tells you they can give you a loan without doing any paperwork, those are big red flags that the lender may not be legit.

Related Article: How to Avoid Personal Loan Scams

5. Not Reading the Fine Print Could Cost You

Before you sign off on a personal loan, it’s best to take time to read over the details of the loan agreement. Something as simple as paying one date late could trigger a fee or cause a higher penalty rate to kick in, which would make the loan more expensive in the long run.

Photo credit: ©iStock.com/DragonImages, ©iStock.com/Vikram Raghuvanshi, ©iStock.com/MachineHeadz

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She’s worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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Source: smartasset.com

What Is Quantitative Tightening?

What Is Quantitative Tightening? | SmartAsset.com

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In the past two years, investors have taken an unusual interest in the Federal Reserve Bank. That’s mostly due to a Fed policy known as ‘quantitative tightening’, or QT. Effectively, QT was the Fed’s attempt to reduce its holdings after it bought huge amounts of debt during the 2008 Great Recession. While some details will interest only economists, QT  may have implications for financial markets and regular investors. It’s useful to explore the backstory, but a financial advisor can be helpful if you’re concerned about how Fed activity can impact your investments,.

What is Quantitative Tightening?

To understand quantitative tightening, it’s helpful to define another term, which is quantitative easing. To do that, we need to go back to the bad days of 2008.

When the Great Recession hit, the Fed slashed interest rates to stimulate the economy. But it was evident that wasn’t nearly enough to stave off crisis. So the Fed provided another jolt of stimulus by buying Treasury bonds, mortgage-backed securities and other assets in huge volume. This combination of slashing interests rates massive government spending was qualitative easing, or QE, and fortunately it worked. Banks had more cash and could continue to lend, and more lending led to more spending. Slowly, the economy recovered.

But in the meantime, QE exploded the Fed’s balance sheet, which is a tally of the bank’s liabilities and assets. Prior to the crisis, the balance sheet totaled about $925 billion. With all the purchased debt, which the Fed categorized as assets, the balance sheet ballooned to $4.5 trillion by 2017. Years past the financial crisis and with a strong economy, the Fed decided to shrink its balance sheet by shedding some of its accumulated assets, effectively reversing QE.

That reversal is quantitative tightening. QE had poured money into the economy, and through quantitative tightening, the Fed planned to take some of that money out again. First it raised interest rates, which it had plummeted to zero during the financial crisis. Then, it began retiring some of the debt it held by paying off maturing bonds. Instead of  replacing these bonds with new debt purchases, the Fed stood pat and let its stockpile shrink. This effectively reduced the quantity of money under bank control, thus quantitative tightening.

Did Qualitative Tightening Officially End?

There was no official beginning or end to quantitative tightening. The Fed began to ‘normalize’ its balance sheet by raising interest rates in December 2015, the first hike in nearly a decade. In October 2017, it began to reduce its hoard of bonds by as much as $50 billion per month. But after four 2018 interest rate cuts and some stock market downturns, many observers worried the Fed aggressive normalization was too much of a shock to the economy.

In response, the Fed ended the interest rate hikes and slowed down on debt retirement. By March 2019, the cap on reductions reduced from $30 billion a month to $15 billion. By October 2019, the Fed announced it would once again start expanding its balance sheet by buying up to $60 billion in Treasury bills a month.

However, the Fed insisted this was not another round of quantitative easing. Some market observers reacted to that announcement with skepticism. But whether this was or wasn’t a new round of QE, the Fed’s action effectively stopped quantitative tightening.

How Quantitative Tightening Impacts Markets

Many investors worry that quantitative tightening would negatively impact markets. During the past decade, returns have shown a relatively high correlation with the Fed’s purchases. Conversely, the Fed’s selloff of assets was a contributing factor to the market dip in late 2018, which left the S&P 500 about 20% below its top price.

Quantitative tightening definitely made some investors nervous. That said, there are a few things to consider if the Fed shrinks the balance sheet in the future. First, it’s unlikely the balance sheet will contract to its pre-2008 level. The Fed hasn’t indicated where a ‘happy medium’ might be, but the balance sheet remained well about the pre-2008 figures when expansion began again in October 2019.

Additionally, it’s unlikely that quantitative tightening will reverse quantitative easing’s impact on long-term interest rates. In part, the Fed purchased long-term bonds and mortgage-backed securities to move money into other areas, like corporate bonds, and lower borrowing costs. Also, the Fed hoped this activity would encourage the productive use of capital. According to the Fed’s research, the use of quantitative easing reduced yields on 10-year treasury bonds by 50, to 100 basis points (bps).

While quantitative tightening may have reversed some of this impact, experts believe it will not undo long-term interest rates by 100 bps. Ultimately, it comes down to the comparative impact of the expansion and contraction of the balance sheet. In October 2019, the contraction was not nearly sufficient to reverse the expansion.

Other Considerations of Quantitative Tightening

Many investors worry that quantitative tightening will have a big impact on inflation and liquidity. This is because changes in inflation and liquidity may occur when there is a discrepancy concerning supply and demand. During the financial crisis, the Fed increased the money supply since the economic system desperately needed liquidity. A decade and strong recovery later, there’s less liquidly preference. In response, the Fed has decreased  cash reserves. In a strong market, this should have no real impact on liquidity and inflation.

The Takeaway

Quantitative tightening is a monetary policy that increased interest rates and reduced the money supply in circulation by retiring some of the Fed’s debt holdings. After qualitative easing expanded the money supply for several years to bring the economy back on track, the Fed used qualitative tightening as a means to normalize its balance sheet.

While quantitative tightening did not completely reverse quantitative easing, it did shrink the Fed’s balance sheet. This strategy left many investors uneasy about future returns and interest rates. That said, balance sheet normalization did not prove to be as disruptive as many investors feared.

Tips for Investors

  • The Fed’s monetary policy quickly becomes complex, but it’s still useful for investors to keep an eye on the bank’s actions. Since interest rate changes can have direct impact on major purchases and investment plans, understanding the Fed’s reasoning for these decisions can be helpful.
  • Financial advisors can help their clients cut through the noise and translate technical analysis of market observers into plain language. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.

Photo credit: ©iStock.com/drnadig, ©iStock.com/claffra, ©iStock.com/Duncan_Andison

Ashley Chorpenning Ashley Chorpenning is an experienced financial writer currently serving as an investment and insurance expert at SmartAsset. In addition to being a contributing writer at SmartAsset, she writes for solo entrepreneurs as well as for Fortune 500 companies. Ashley is a finance graduate of the University of Cincinnati. When she isn’t helping people understand their finances, you may find Ashley cage diving with great whites or on safari in South Africa.
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Source: smartasset.com

15 Of The Best Money Books For Young Adults – Learn How To Live The Life You Want

Are you looking for the best money books for young adults?

best money books for young adults

best money books for young adults

Today, I want to talk about the best money and life books for new high school graduates, college graduates, and other young adults. These would be great for graduation gifts, or just for yourself!

I wasn’t always good with money when I was younger. I bought more clothes than I needed, financed a new car, spent a lot going out to eat, and spent a lot of money on things I didn’t need. It took me several years to realize how my spending habits were affecting the rest of my life.

I think this is fairly common when you’re younger, and there are lots of great financial books for young adults that can help you understand how money works and how to prepare for the future. 

The best money books for young adults explain personal finance topics like saving, investing, making more money, and more. And, reading them when you’re young can help you get on the right track with your money from a young age. 

Rather than spending years playing catch up with your money, you can get started on a great path now. 

I often get questions from young readers who are looking for help with their money, and I also get questions about how to help a young person with their money. These books are a great gift for yourself or someone you know.

For me, I love to give books as gifts, especially personal finance books for high school and college graduation gifts. And the best money books for young adults on this list make for great gifts – I’ve even given some of these books as gifts.

If you want to change your life, then I recommend that you start reading personal finance books. Yes, money is not everything, but improving your financial situation can help you gain control of your life.

Related: 6 Simple Steps That Will Teach You How To Write A Check

There are many different books listed below, so you will be sure to find at least one or two that meet your needs.

The best personal finance books may help you learn how to:

  • Understand basic financial concepts in an easier way
  • Reach financial independence or retire early
  • Take on your own yearlong shopping ban
  • Deal with and pay off debt
  • Better manage the 168 hours a week you have
  • Become more confident
  • Invest for your future
  • Choose your own dreams and adventures
  • Find the best path to pay off your student loans

And more!

Here are 15 of the best money books for young adults.

 

1. Broke Millennial

Broke Millennial was written by Erin Lowry, and is a must-read for young adults. She makes the topic of money entertaining, fun, and relatable for young adults. You won’t be bored with this money book!

Erin gives readers a step-by-step plan to stop being broke, and she discusses many topics, from tricky ones like how to manage student loans, how to discuss money with your partner, and more.

Please click here to check out Broke Millennial.

Another one of the best money books for young adults is Broke Millennial Takes On Investing. Erin recently published this one and it’s a great read, as it covers the topic of investing without making you feel dumb.

 

2. Work Optional: Retire Early the Non-Penny-Pinching Way

Work Optional is another one of my top picks for best money books for young adults, as it was written by one of my favorite writers, Tanja Hester. This personal finance book will show you how to reach financial independence so that you can live the life you want. 

I know retirement feels very far away when you’re younger, but this book explains how early retirement is a possibility if you start saving money now. Yes, retiring before the traditional age of 65 can happen, and it starts with the kind of guidance you’ll get in this book.

Please click here to check out Work Optional: Retire Early the Non-Penny-Pinching Way.

 

3. The Year of Less by Cait Flanders

If you’re looking for one of the best financial books for graduation gifts, check out The Year of Less by Cait Flanders. In this book, Cait writes about her yearlong shopping ban which will inspire you to simplify your own life and address your relationship with material possessions.

Cait talks about how for a full year, she only bought groceries, toiletries, and gas, and how it impacted her life. This is a great read for young adults as it is so easy to get into a spending cycle when you get your first real job and start earning larger paychecks.

Please click here to check out The Year of Less by Cait Flanders.

 

4. Dear Debt

Dear Debt was written by Melanie Lockert and focuses on people’s relationships with debt in a funny and endearing way.

Dear Debt is a must read for anyone who has debt or is taking on debt. Melanie shares her personal experience paying off $80,000 of student loan debt, how it affected her mindset, and more. This is one of the best money books for young adults because it’s a personal story about overcoming debt. There’s also tons of great money advice that will help others overcome the debt that may be holding them back.

Please click here to check out Dear Debt.

 

5. 168 Hours: You Have More Time Than You Think

Do you ever wish that you had more time in your week?

This book, written by Laura Vanderkam, focuses on helping people manage their time better so they can focus on what really matters.

Laura writes about tips and tricks to live a more efficient life. She teaches you how to prioritize things in your life, from how to get enough sleep every night to finding time for hobbies you’ve been wanting to try. You will learn how to use your 168 hours a week to make your life better, as you’ll learn many great life-changing strategies.

Please click here to check out 168 Hours: You Have More Time Than You Think.

 

6. How to Win Friends and Influence People

How to Win Friends and Influence People was written by Dale Carnegie in 1936 and has sold over 15,000,000 copies worldwide. This is one of the most best-selling books ever, and for good reason!

This book will show you how to approach situations differently, become more confident, and get people to like you. This is one of the best money books for young adults that people of all ages will benefit from, because this book is all about living a happier and more successful life at any age.

Please click here to check out How to Win Friends and Influence People.

7. Quit Like A Millionaire

Quit Like A Millionaire was written by Kristy Shen and Bryce Leung, who are well-known people in the FIRE community. And, if you’re not familiar with FIRE, it stands for Financial Independence Retire Early. Everyone approaches FIRE differently, but the point is to stop letting money hold you back from living the life you want.

Kristy retired early at the age of 31 with a million dollars, and has a very inspirational story. In this book, she explains how that was possible and how it can be a reality for you too. This is a great guide on how to save more money, retire early, and live the life that you want.

In this book, you’ll learn a step-by-step guide on how to reach success, whatever that may mean for you. This is a fun and inspirational book that will open you up to new possibilities and opportunities.

Please click here to check out Quit Like A Millionaire.

 

8. Get Money

Get Money is a book by Kristin Wong, and it’s an engaging read that will teach you how to manage your money.

Kristin gives you a step-by-step personal finance guide that will show you what you need to do in order to stop letting money control your life. You will learn how to create a budget, pay off your debt, build a better credit score, negotiate, and how to start investing.

Please click here to check out Get Money.

 

9. Financial Freedom: A Proven Path to All the Money You Will Ever Need

Financial Freedom was written by Grant Sabatier, who decided that he needed to change his life by learning how to make more money.

Here’s a bio I found about Grant to show you how awesome he is!

“In 2010, 24-year old Grant Sabatier woke up to find he had $2.26 in his bank account. Five years later, he had a net worth of over $1.25 million, and CNBC began calling him ‘The Millennial Millionaire.’ By age 30, he had reached financial independence. Along the way he uncovered that most of the accepted wisdom about money, work, and retirement is either incorrect, incomplete, or so old-school it’s obsolete.”

In his book, Grant writes about how to reach financial freedom through steps such as building side hustles, traveling the world for less, building an investment portfolio, and more. 

Please click here to check out Financial Freedom.

 

10. The Simple Path To Wealth

The Simple Path To Wealth was written by JL Collins, and it’s one of the most popular and best money books for young adults that’s available.

Collins writes about many important financial topics in his book, such as how to avoid debt, how to build wealth, what the 4% rule is and how to use it to your advantage, and more.

This is an easy book to read, and it makes complicated personal finance topics much easier to understand. Many people have said that JL Collins is the reason why they were able to retire early, thanks a lot to his website and book.

Please click here to check out The Simple Path To Wealth.

 

11. Student Loan Solution

Student Loan Solution was written by David Carlson, and it’s a great book for anyone who has student loan debt.

Student loans can be extremely difficult to understand, as there is so much different terminology as well as different ways to pay them back (such as loan forgiveness, consolidation, and so on). This book explains a 5-step process that will help you to better understand your student loans, the best ways to pay them off, and more.

Please click here to check out Student Loan Solution.

 

12. The Millionaire Next Door

The Millionaire Next Door is another classic personal finance book, and it was written by Thomas J. Stanley.

In his book, he writes about the common traits of those who are wealthy, and how the wealthy can be even someone such as your neighbor, even though you might not realize it. This book shows readers that anyone can retire with wealth, not just your traditional multi-millionaires living in huge mansions with airplanes.

This is one of the best finance books for graduation gifts because it will make you rethink what it means to be rich, which is important to understand from a young age.

Please click here to check out The Millionaire Next Door.

 

13. The Infographic Guide to Personal Finance: A Visual Reference for Everything You Need to Know

The Infographic Guide to Personal Finance, written by Michele Cagan, is one that I learned about from my readers. What’s great about this book is that it gives you a visual guide to important personal finance topics, and many people learn better from visuals.

This book is different in that it is full of infographics, which make it fun and easy to read. You will learn how to find a bank, build an emergency fund, how to pick health and property insurance, and more.

Please click here to check out The Infographic Guide to Personal Finance.

 

14. Choose FI

Choose FI was written by Chris Mamula, Brad Barrett, and Jonathan Mendonsa. These guys are behind one of my favorite Facebook communities, Choose FI, and they explain how to reach financial independence and retire early. 

While retiring early may seem out of reach if you’ve just graduated, this book teaches you how to “choose your own adventure” and improve your financial situation.

Please click here to check out Choose FI.

 

15. I Will Teach You To Be Rich

I Will Teach You To Be Rich was written by Ramit Sethi and is a excellent book for beginners. It would make a great gift for a recent high school or college graduate.

Ramit’s I Will Teach You To Be Rich is packed full of great lessons, and it is written in a fun way. He covers the basics of personal finance such as budgeting, saving money, investing, and more.

Please click here to check out I Will Teach You To Be Rich.

What do you think are the best money books for young adults?

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Source: makingsenseofcents.com

How My 401k Loan Cost Me $1 Million Dollars

401k loan

401k loan

Today, I have a great guest post from a reader, Ashley Patrick. She asked if she could share her story with my audience, and I, of course, had to say yes! This is her personal story about how her 401k loan cost her a ton of money and why you shouldn’t take be borrowing from your 401k.

You’ve been thinking about getting a 401k loan.

Everyone says it’s a great loan because you are paying yourself back!

It sounds like a great low risk loan at a great interest rate for an unsecured loan.

But you know the saying “if it sounds too good to be true, it probably is”.

So you’re thinking, what’s the catch?

I take out a loan without having to do a withdrawal and I pay myself back. I’m paying myself back at a low interest rate right, so what’s wrong with that?

Well, I’m about to tell you how our 401k loan cost us $1,000,000 dollars.

You see, there are a lot of reasons to not take out a 401k loan and they all happened to ME!

Related content:

How My 401k Loan Cost Me $1,000,000

Let me start at the beginning….

My husband and I bought our dream house when we were just 28 & 29 years old. This was our second house and honestly, more house than we really should have bought. But you know, it had a huge 40×60 shop and we loved the house and property. So there we were buying a $450,000 house with a 18 month old.

This house was gorgeous on 10 acres of woods with floor to ceiling windows throughout the entire house.

So there we were with a $2200 a month house payment, an 18 month old in daycare, and both of us working full-time. Within 2 months of us buying this house we found out I was pregnant again! We had been trying for sometime so it wasn’t a surprise but there was a major issue with our new dream home.

The layout didn’t work for a family of 3. It was a small 2 bedroom with an in-law suite that didn’t connect to the main house.

There was a solution though. We could enclose a portion of the covered patio to include another bedroom and play area and connect the two living spaces.

The problem was this was going to cost $25,000. We certainly didn’t have that much in savings and the mortgage was already as high as it could go.

So what were we to do? We have numerous people that were “financially savvy” tell my husband that we should do a 401k loan. We would be paying ourselves back so, we weren’t “really borrowing” any money. It was our money and are just using it now and will pay it back later.

Our first issue with the loan

This seemed like a perfect solution to our problem. So we took out a $25,000 401k loan in the summer of 2013. I checked the 401k account shortly after the loan and realized they took the money out of the 401k. I was very upset about this and thought there must have been some mistake.

Come to find out, they actually take the money out of your 401k. So, it’s not earning any compound interest. I thought that the 401k was just the collateral. I didn’t realize they actually take the money out of it.

So, nothing else seemed like a good option so we just kept the loan. Construction was finished just in time for the arrival of our 2nd child. The layout is much better and much more functional for our family.

Everything seemed fine and the payments came out automatically from my husband’s paycheck.

Then issue #2 with 401k loans

Then came the second issue with the 401k loan…..

In January 2014, my husband was laid off from his job. So there we were with a newborn and a 2 yr old in an expensive house and my husband, the breadwinner, lost his job of 7 years. You know the one he never thought he would lose, so why not buy the expensive house? Ya, that one, gone.  

I cried about it but figured out how long our savings and severance package would last and knew we would be okay for several months.

Well, then we get a letter stating we have 60 days to payback the 401k loan, which at this point was over $20,000. We had made payments for less than a year out of the 5 year loan.

My husband didn’t have job yet and we didn’t have that much in savings. I certainly wasn’t going to use what was in savings to pay that loan either. I may have needed that to feed my children in a few months.

So, we ignored it because we couldn’t get another loan to pay it at this point.

Luckily, I married up and everyone loves my husband. So, he was able to find another job rather quickly.

We were thankful he had another job and didn’t think about the 401k loan again.

Then came issue #3

That was until a year later in January of 2015. Here came issue number three with 401k loans.

We got a nice tax form in the mail from his 401k provider. Since we didn’t/couldn’t pay back the loan in the 60 days, the balance counted as income. You know, since it actually came out of the 401k.

Then I did our taxes and found out we owed several thousand dollars to the IRS. We went from getting a couple thousand back to owing around $6500. So it cost us around $10,000 just in taxes. It even bumped us up a tax bracket and cost us more for taxes on our actual income as well.

I ended up putting what we owed on a 0% for 18 months credit card and chalked it up to a big lesson learned. I will never take out a 401k loan again.

The silver lining

In reality, my husband losing his job has been a major blessing in our lives. He is much happier at his new job. This also started my journey to financial coaching.

You see, when I put the taxes on the credit card, I didn’t have a plan to pay that off either. When I started getting the bills for it, I realized I had no idea how we would pay it off before interest accrued.

That led me to find Dave Ramsey. Not only did we have it paid off in a couple months, but we paid off all of our $45,000 debt (except the mortgage) in 17 months!

The true cost of 401k loans

Just recently I did the math and realized what our 401k loan really cost us.

It cost us $25,000 from our 401k and roughly about $10,000 in taxes. So that’s already $35,000 from the initial loan.

We were really young for that $25,000 to earn compound interest. If we had left it where it should have been, we would have had a lot more money come retirement age.

The general rule of thumb for compound interest is that the amount invested will double every 7 years given a 10% rate of return. And yes, you can earn an average of 10% rate of return after fees.

We were 28 and 29 years old when we took that loan out. If we say we would retire or start withdrawing between 65-70 years old, then that $25,000 cost us around $1 million dollars at retirement age.

Now yes, I could try to make up for the difference and try to put more in retirement but I’ve already lost a lot of time and compound interest. Even if we had $25,000 to put in retirement today to make up for it, I’ve already missed a doubling. 

But that won’t happen to me, so why shouldn’t I take out a 401k loan?

Life changes and now I am not working full-time and have an extra kid. So, thinking that you will pay it back later doesn’t always happen as fast as you think it will.  

Something always comes up and is more important at that time. So learn from my mistakes and don’t take out a 401k loan.

Actually, start saving as much as you can as young as you can. 

You may even be thinking that you aren’t quitting your job and will pay it all back, so no big deal, right? Actually you are still losing a ton of compound interest even if you pay the entire thing back.

The typical loan duration is 5 years. That’s almost a doubling of interest by the time it’s paid back in full. So, it may not be as dramatic as my example but you are still taking a major loss at retirement age.

The thing is, you have to figure in the compound interest. You can’t only look at the interest rate you are paying. You are losing interest you could be gaining at a much much higher rate than what you are paying on the loan.

Lessons Learned from my 401k loan

Some lessons I learned from taking out this 401k are:

  • Don’t miss out on compound interest
  • It’s not a loan, it’s a withdrawal
  • If you want to change jobs or lose your job, it has to be paid back in 60-90 days depending on your employer
  • If you can’t or don’t pay it back, it counts as income on your taxes

So if you are considering a 401k loan, find another way to pay for what you need. Cash is always best. If you can’t pay cash right now, wait and save as much as you can. This will at least limit the amount of debt you take on.

Determine if what you want is a need or a want. If it’s a want, then wait. A 401k loan should be used as an absolute need and last resort.

It keeps you tied to a job for the duration of the loan which is usually 5 years. This could limit your opportunities and put you in an even bigger hardship if you lose your job.

I hope you will learn from my mistakes and make an informed decision about these types of loans. Don’t be like me and make an ill-informed decision.

Ashley Patrick is a Ramsey Solutions Financial Master Coach and owner of Budgets Made Easy. She helps people budget and save money so they can pay off their debt.

What do you think of 401k loans? Have you ever taken one out?

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