Surgeon's Bulletin Board

May 25, 2007
Surgical Rounds®, May 2006, Volume 0, Issue 0

The automatic millionaire homeowner?

When thinking of the term "automatic," most people envision an action or behavior that occurs involuntarily and without conscious thought. This concept is applied to finance through tasks such as automatic bill payments and automatic deposits. As seamless as these transactions are, they do involve an initial setup and an investment of time. But can you become an automatic millionaire through real estate? David Bach proposes this concept in his book, The Automatic Millionaire Home?owner: A Powerful Plan to Finish Rich in Real Estate (Broadway; 2006). Bach examines every aspect of the home-buying pro?cess, including the difficult task of coming up with a down payment for your first home. Borrowing themes from his bestseller, The Automatic Millionaire (Broadway; 2005), he asks prospective buyers to consider all the unnecessary small purchases made throughout the day?what he coined The Latte Factor??and redirect that money into savings. While this point does address Amer?ica's problem with overspending and debt in general, The Latte Factor oversimplifies the difficulty that many individuals and families face, namely, saving enough for a down payment while simultaneously paying rent.

To remedy this problem, Bach suggests moving in with parents temporarily and even borrowing money from them for a down payment?propositions to which many parents may not be receptive. The author also recommends obtaining a mor?t?gage with only 5% or even $0 down as a solution; however, he does not mention that such creative mortgaging usually involves percentage rates as high as 4% and 5% above the prime rate. Balancing this optimism, Bach thoroughly warns of the dangers of mortgages with no and low down payments and adjustable rates, and he outlines how prospective homeowners can avoid paying private mortgage insurance. Although the author stresses that The Automatic Million?aire Homeowner is intended for individuals looking to make long-term real estate purchases and that your home is the best investment you will make in a lifetime, the book makes buying a first home seem too "automatic." Although it oversimplifies the major hurdle of obtaining a down payment, the book's strongest message is that a first home should not be your dream home, but rather a means to fulfill your dream in the future.

Make the right decision on Social Security

Timing the acceptance of your Social Security benefits is critical in order to live comfortably in your retirement years. But for married couples, deciding which spouse should take the benefits and when can be complicated. This is especially true for surgeons, who may have earned significantly more than their spouse during their working years. According to MarketWatch, the spousal benefit is affected by the ages of both spouses when they decide to retire. For example, if a wife is the lower-earner and she retires at age 62, before the Social Security Administra?tion's full retirement age of 66, then the spousal benefit of her husband's retirement benefit will be 35%. But if she does not retire until age 66, then she will be able to collect 50% of her husband's benefit. While this may seem like an obvious choice and could mean a difference of hundreds of dollars a month, not all retirees take advantage, be?cause they can't hold off on claiming their benefits. If a couple can afford to wait, they should have the lower earner take his or her benefits early and have the higher earner wait until full retirement age, so they can get the highest monthly benefit possible. Then, when one spouse passes away, the surviving spouse can choose the highest monthly amount.

Understand the various types of CDs

Certificates of deposit, commonly known as CDs, come in three different types: callable, step-up, and bump-up. According to Bankrate.com, if you plan to invest in CDs, it's important to know the differences between them before you spend your money:

? Callable?A callable CD can be called away from an investor after the expiration of the call-protection period but before the maturity of the CD. Callable CDs are offered by banks to put interest-rate risk on the depositor, thus giving the CD a higher yield than a CD without a call provision. Interest-rate risk means that if rates go higher, there is no gain for the investor, and if rates go lower, the CD can be called away by the bank. Therefore, it is a risky option that's not the most attractive.

? Step-up?Step-up CDs also have call provisions, but if they aren't called away, the interest rate steps up to a higher rate. Step-ups are more desirable than callable CDs because they alleviate in?terest-rate risk; however, these CDs are not widely offered.

? Bump-up?Normally, bump-up CDs aren't callable. The depositor can in?crease the yield at some point in the CD's life to current market yields for that maturity. This allows the depositor to be more comfortable in investing in long-term CDs because they can receive higher yields if interest rates rise. Some banks require that investors deposit additional money when they bump up the interest rate, and the yield can typically only be bumped up during the first half of a CD's life.

Look at emerging markets without rose-colored glasses

While the rest of the developed world should experience a 3% growth in 2006, the International Monetary Fund predicts that emerging-market economies will double that rate. A recent Wall Street Journal article maintains that there is no guarantee that rapid economic growth will translate into stellar stock market performance. Because the fastest growing economies are spurred by private, entrepreneurial businesses and not publicly traded companies, high-growth economies may not have the highest returns over long periods of time. Comparing the performance of 17 international markets over the past 105 years, it seems that low-growth economies experience the greatest returns. If you had invested your money in the top 20% of countries with the highest 5-year economic growth rate, you would have earned the lowest returns. However, you would have had the greatest returns if you had put your money into the bottom 20% of countries with the lowest 5-year growth. For example, China has had the fastest economic growth but it has also had the worst stock market returns. While the article maintains that it is not forecasting inferior returns for emerging-market economies, it does caution against putting all your eggs in one basket. Earmark 25% to 30% of your total stock portfolio for foreign markets, with 5% to 8% for emerging markets.

Choose the right first car for your teen

While most teens would love a flashy sports car or luxury SUV for their first vehicle, chances are it will be a used economy car. But which used cars are the safest and most reliable for your child? According to MarketWatch, half of US parents foot the bill for their child's first car and 23% share part of the cost, giving mom and dad a say in which car their teen drives. The Honda Civic, particularly the 2001 DX model, is the number one choice for both teens and parents. It's popular and youthful among kids, while still safe and reliable enough to put parents' minds at ease. It also gets great gas mileage, which is helpful considering 83% of teens pay for their own gas. Other cars that made the grade include the 2002 Toyota Corolla CE, the 2001 Nissan Altima XE, the 2003 Hyundai Elantra GLS, the 2003 Suzuki Aerio S, the 2001 Mercury Cougar, the 2003 Ford Taurus LX, the 2000 Chevy Blazer, the 1998 Toyota 4Runner, and the 2003 Ford Ranger.

Shop online for the best deals on electronics

When it comes to shopping for electronics, such as TVs, DVD players, and digital cameras, big retailers like Best Buy don't necessarily offer the best deals. Internet retailers are gaining ground on the traditional brick-and-mortar stores with a dedication to customer service, wider product selection, and low prices. Consumers rate Crutchfield.com, Amazon.com, and Costco.com among the best Web sites for electronic purchases. Online stores also make it easier to comparison shop because consumers can simply look up the product on different Web sites, as opposed to driving around to several different stores to find the best deal. Nevertheless, traditional stores still have a few advantages. Buying online usually means you'll have to pay shipping costs, which can be significant if you're buying a large product such as a big-screen TV. Online retailers may also have stricter return policies. If you need to return something to a regular store, you just put it back in the box and take it there. If you have to return something you bought online, you'll have to package it up and mail it back, costing you more money and time. Also, store chains offer installation services, which you may need when purchasing certain products.

Rental properties trying to catch up to homes

The recent real estate boom has affected not only homeowners, but renters as well. According to the Wall Street Journal, US apartment vacancy rates dropped to 5.8% in the third quarter of 2005. Also, average effective rents?rents that landlords actually collect compared to what they request?went up 1.2% to $895. Many landlords have discounted rents to keep their apartments full and to dissuade consumers from home-buying. In the coming years, owners of rental properties are counting on the children of baby boomers, who are more likely to rent than to own, to consider an apartment as an affordable housing alternative. Fortunately for property owners, in many parts of the United States it is considerably cheaper to rent than to buy. For example, on average it costs 58% less to rent in San Francisco than to own.

Call on Internet phoning for exceptional service

While trading in your traditional home phone line for a relatively new and unknown technology like Internet phoning may seem daunting, Web-based calling has become inexpensive, easy to set up, and reliable. According to US News & World Report, Internet phone services provide unlimited long distance and local calls for around $20 to $25 a month, including such services as voicemail and three-way calling, which could cost $40 or more per month with a regular telecom line. Companies that offer Internet calling include Vonage (www.vonage.com), Voice?Pulse (www.voicepulse.com), Packet 8 (www.packet8.net), and BroadVoice (www.broadvoice.com). Upon purchasing service from such a company, you are sent a startup kit. The kit includes a small box that plugs into your broadband modem, and once you plug your phone into that box, you're all set to talk. Web phoning companies may also offer such services as having your voicemail available on the Internet and electronic screening of certain callers. You can also take the box on the road with you so that your phone number is available wherever you go. One drawback is that unlike traditional land lines, Internet phones do not work when the power goes out.

Looming bust hits vulnerable loans hardest

The recent drop-off in new construction coupled with the National As?sociation of Home Builders' gloomy as?sessment of market conditions have spurred an ongoing debate on whether the housing boom may finally be ending. Amid talks of what this might mean for the economy, BusinessWeek reports that one area in particular is of worry to economists: the subprime mortgage market. Aimed at borrowers who do not have the income or credit to qualify for a conventional loan, subprime mortgage originations grew seven-fold between 2000 and 2005. The average loan is nearly $200,000, and these loans account for 9% of all mortgage debt. Moreover, 82% of subprime loans are adjustable-rate mortgages, with rates that fluctuate in accordance with the prime rate and can rise quicker than fixed-rate mortgages. According to the article, JP Morgan Chase estimates that if the Federal Reserve raises its rate to 5%, then fixed-rate mortgages will rise to 6.75%. The initial rate on a subprime loan would jump from 9.5% to 10%, which translates into an extra $250 per month for existing borrowers. Experts predict that the vulnerable nature of subprime loans will contribute to a slump in housing sales.

Travel in frugal style with money-saving tips

Even the most lavish trip you can imagine has the potential for exercising prudence. Bankrate.com offers the following tips to save your pesos, rubles, francs, or whatever you will be spending on your next excursion:

? If your schedule is flexible, you can save money by purchasing airline tickets to fly midweek, which is traditionally cheaper than flying out on weekends.

? Forget about hailing a taxi. It's more cost effective to use other means of local transportation, such as a bus, subway, or trolley. Or, if you don't have to travel too far, try your own feet.

? Avoiding tourist traps, especially in places like Europe, will prove to be much less expensive. Plus, you'll have more authentic cultural experiences, which will enhance your trip.

? Keep your spending in check by taking only enough cash for what you need, so you won't spend money frivolously on superfluous knickknacks. Also, don't use your credit card unless absolutely necessary.

Did you know. . .

400,000?Estimated number of child??ren under age 18 who are identity theft victims each year. (Money, 2005)

14,000?Number of FedEx ground drivers, all of whom are classified as independent contractors. (Business-Week, 2005)

$250,000?Gross salary earned by 300 FedEx ground drivers who handle multiple routes. (BusinessWeek, 2005)

$300 billion?Amount of unpaid taxes each year. (Money, 2005)

$36 billion?Amount that Ameri?cans spend each year on their pets. (BusinessWeek, 2005)

$4,072?Current average amount of debt for a US consumer. (Experian-Gallup poll, 2005)

$9.15?Average weekly allowance of the typical 9- to 14-year-old. (Nickelodeon and Youth Intelligence Survey, 2005)

Hot tips for buying in a hotter condo market

According to the Wall Street Journal, the median price of a condo surpassed single-family homes for the first time in 2005 at $216,600, up 9% from the previous year. Will the condo boom last? Experts are not sure. Even though the condo market has increased at a record pace, much of the demand has been due to speculative buyers and not occupants. The following tips will help you make the right condo purchase in a hot market:

It goes without saying that location is the most important factor when buying real estate. Look to buy in popular neighborhoods and new or emerging markets. End-unit, waterfront, and beachfront properties are also hot commodities.

What's in a name? Recognition can help you reap a premium price when it's time to resell. Because condo projects are executed by renowned builders and architects, the condo's quality usually speaks for itself.

Buying a new condo, especially in an initial offering, will help you gain the most appreciation for your investment. An older condo that needs work is a great value, if you are willing to do the work. Just make sure that the building and grounds are in good condition, even if the inside is not.