Redefining financial security and other out-of-date financial terms

As many of you know, I don’t approach financial planning from a traditional prospective because we don’t live in a traditional world.  Please consider adopting the following definitions:

“Financial security”:  The ability to weather any financial storm and to take advantage of any financial opportunities.  Notice this has nothing to do with whether you own your home outright.  If you cannot pay your bills if you’re out of work for a year, if you cannot help out your family when they are out of work for a year, when you can’t buy things that are on sale (e.g., income taxes right now when you convert your traditional IRA to a Roth or purchasing investment property), you are not in a financially secure place.  Get your safety net in place, which includes reserve accounts and insurances.  Then go pay off your house.

“Retirement”:  The ability to work for no money and still support one’s health and well-being.  Notice this has nothing to do with whether you own your home outright.  People are living longer and want to contribute to society with their gifts and energy into late adulthood.   They want to try new things.  If you have your house paid off, but no other sources of income to help you make ends meet, you cannot work for no money and pursue those late adulthood activities.  Go get your retirement income accounts in place and then go pay off your house.

“Debt-free”:  When your assets (after liquidation, taxes and penalties) exceed your debts.  Notice this has nothing to do with owning your home outright.  Once you have accumulated assets and can wake up one morning and say, “Hey, you know, today I think I will pay off my house and all my debts,” you are debt-free.  Just because you can do this doesn’t mean that you should.  In many cases, it makes sense to take debt even into retirement.  Go get your assets working for you, use debt intelligently and safely, and someday go pay off your house.  If that’s what you want to do.

What does this mean and why do you care?

Warning:  Remember, this is a blog.  The goal here is to present the big picture on sometimes complicated subjects. By design, I oversimplify.

First, it will likely mean higher rates.  Mortgage-backed securities have bond-like quality.  They sell with a price (what they cost) and a yield (what they earn).  The law of supply and demand drives price and yield.  Sorry to haunt you with Economics 101. If prices are high, the yield goes down (which generally drives people to sell).  If prices are low, yield is high (driving people to buy).  If the Fed stops buying those securities and there is no other buyer, prices will drop to attract those buyers, yields will go up as a result, and those yields are directly correlated to mortgage interest rates, which means—you guessed it—that interest rates on mortgages have to go up as well.  Got it?

Second, understand that just a few years ago, the Fed owned no MBSs.  None.  By March, it will own $1.5 trillion.  Trillion with a T.  This means that $1.5T is now in the marketplace.  Too much money in the marketplace can mean greater inflation (too much money chasing the same amount of goods).  Now, so far, we haven’t seen greater inflation.  It’s the Fed’s job to keep that in check.  Someone also has to pay for these purchases, meaning that the American taxpayer is likely going to have to pony up money to cover it.  That may mean higher taxes—higher income taxes, higher capital gains taxes, and the list goes on.

We can’t predict the future, but we can do our best to anticipate what might be coming around the blind curves in the road.  This might be a good time to consider refinancing into that 30-year fixed-rate loan if you haven’t already.  This might be a good time to consider a loan modification.  This might be a good time to consider retirements and education funding plans that provide a tax-free component.