Boston fintech firm Knox Financial plans to expand its lending business and loan products with $50 million in funding it received from a real estate advisory firm.
New York-headquartered Saluda Grade provided the funding in forward flow capital which Knox will use to expand its lending business into Georgia, Knox representatives said Wednesday. The fintech also will offer additional loan products, including home equity lines of credit (HELOCs), new purchase loans and cash-out refinancings.
“A homeowner’s best investment is the home they live in — far better than the returns we’ve seen from the stock market in 2022, and a great hedge against record-high inflation,” said David Friedman, co-founder and CEO of Knox Financial.
Established in 2018, Knox aims to help manage residential rentals with its algorithm-based platform. Its rental pricing and projection model also calculates the rate of return an investment property is expected to produce over time. When a property is enrolled in the platform, Knox automates and oversees the property’s finances and taxes, insurance, leasing, banking and bill pay, according to the company’s website.
The funding comes shortly after Knox launched its first mortgage product, dubbed the Knox equity access program (KEAP), in April. KEAP loans give homeowners access to capital, based on the equity in the home, to turn it into an investment property with Knox. Homeowners can then use their KEAP loan to fund a downpayment on their next home and to pay for repairs on their investment property.
In return, Knox charges an origination fee and third-party costs to the borrower. Knox also keeps 10% of the rental income generated from properties listed on its platform.
Prioritizing home equity solutions in a rising rate environment
The 2022 housing market has been underscored by interest rate spikes and refi decline and lenders are working hard to adjust to new borrower trends. HousingWire recently spoke with Barry Coffin, managing director of home equity title/close at ServiceLink, about the ways lenders can capitalize on these trends by revving up their home equity solutions.
Presented by: ServiceLink
Knox’s expansion comes amid a shrinking mortgage origination market. As mortgage rates began increasing this year, lenders, mortgage tech firms and real estate brokerages started laying off employees, often citing rapidly declining market conditions.
With rising mortgage rates, company representatives said Knox has seen growing interest in second lien products such as home equity loans or HELOCs from borrowers who have tappable equity but don’t want to refinance.
“As mortgage rates have risen, more inventory will become available at more competitive pricing,” said Matt Marra, chief growth officer at Knox.
Knox Financial raised $10 million in Series A funding in April 2021, led by G20 Ventures, following a $3 million seed round in January 2020. The largest markets for Knox are metropolitan areas of Boston, Atlanta, Houston, Dallas and Austin, Texas. According to Marra, Knox oversees a portfolio of $150 million in combined value.
One thing I love about Millennials and Zoomers is how freely we share advice.
Case in point, there are now countless wealth coaches and personal finance gurus on TikTok recording their best tips on saving, investing, and achieving financial freedom faster.
And we’re hungry for their advice. According to CNN, the hashtag “#personalfinance” alone has a total of four billion views, with “#financialliteracy” and “#financetiktok” not far behind.
However, while the intent is always sound, the tips themselves aren’t. There are some misguided and potentially devastating personal finance myths being perpetuated on TikTok these days, so I am here to address them head-on.
Let’s debunk seven of the most common TikTok money myths before you make a potentially dangerous financial move.
What’s Ahead:
1. “You can (and should) get rich quick”
The implication
“Get rich quickly and easily by following my personal finance advice.”
Here’s how to instantly spot a personal finance influencer who abides by a “get rich quick” philosophy: just look for the lime green Lamborghini in the background.
Once they’ve given you a few seconds to lust after their six-figure Italian whip, they’ll start telling you how they “turned $5,000 into $723,000” by following “three simple rules of investing” or some such promise. Sounds appealing.
The reality
Multiplying money on that scale, in that little time, always involves a staggering amount of risk, luck, or both. This is assuming, of course, that the influencer is even being 100% truthful – and that background Lambo isn’t a rental.
It’s entirely possible that this person really has gotten extremely lucky on some clandestine investing opportunity, but lottery winners aren’t financial advisors.
Actual financial advisors, and their very rich clients, will give you this advice:
“Get rich slowly.”
If you wouldn’t spend your life savings on lottery tickets, you shouldn’t get your financial advice from TikTok influencers who got lucky, either. The key is to get rich without the risk, and here’s exactly how to do it, step-by-step.
2. “Day trading is easier than you think”
The implication
Historically, only the rich and well-connected could make money on the stock market. But now that we have apps like Robinhood and Webull, everyday investors like you and me can buy, sell, and trade stocks ourselves, getting rich in the process just like day traders on Wall Street.
The reality
97% of day traders lose money.
That’s according to a large-scale study of day traders, where the researchers concluded:
“We show that it is virtually impossible for individuals to day trade for a living, contrary to what course providers claim.”
By contrast, “only” 70% or so of gamblers in Vegas lose money, according to the Wall Street Journal. So your money is safer on the roulette table than taking a TikTokers’ investing advice (but still, don’t gamble).
3. “Rich people look rich”
The implication
Earn big, spend big. As your income level rises and you start to feel “rich,” it’s time to start acting like it. Get a luxury apartment, lease a Mercedes, and don’t hesitate to buy that $2,000 purse.
Besides, what’s the point of working hard if you’re not playing hard?
This one is definitely more of an implication than a direct piece of advice. I don’t know of any TikTokers who are outright saying “spend all of your money” – but there are certainly plenty who are leading by example.
The reality
Rich people become rich precisely because they don’t spend money – they invest it. There’s a saying by famous-yet-frugal YouTuber Scotty Kilmer that I think about all the time:
“Broke people buy BMWs, and rich people buy Toyotas.”
Rich (or soon-to-be-rich) people know that if they buy a Toyota instead of a BMW at age 30, and invest the $30,000 difference at 10% APY, they’ll have:
$77,812 when they’re 40.
$201,825 when they’re 50.
$843,073 when they retire at 65.
The point of this anecdote isn’t to throw shade at Bimmer, but rather, to highlight how rich people think differently before making a purchase. They don’t think:
“How much can I afford?”
But rather:
“How much can I save and invest?”
In short, rich people don’t lead extravagant lifestyles – they lead frugal, yet comfortable lifestyles now so they can live however they want later.
4. “Live on a shoestring budget”
The implication
On the complete other side of the spectrum, there are TikTokers who advocate a shoestring lifestyle, where rigorous budgeting and extremely limited pleasure spending are the only viable pathways to financial freedom.
The reality
It’s totally OK to buy nice things and treat yourself.
In the previous example, yes, a BMW costs $30,000 more than a Toyota – and if you invest that money instead of buying a fancier car, you’ll have a fortune waiting for you by retirement.
That being said, if the BMW brings you joy and makes you happy (and you can afford it), buy it.
The key to achieving financial mindfulness isn’t to spend less – it’s to spend more mindfully on the things that truly matter to you. There are influencers out there who say you should stop going out to eat cold turkey because a restaurant meal for two can easily exceed $60 or even $100.
But financial mindfulness says that if that meal helps you build a relationship with someone, it’s worth it.
Draconian saving can be just as misguided as wanton spending. The key, then, is to determine how much you can safely spend each month, and then to spend that money on the people and things that bring you the most joy.
5. “Cryptocurrency will make you rich”
The implication
This one’s pretty straightforward, and I have heard it straight from countless TikTokers’ mouths: crypto will make you rich.
Forget the corrupt, manipulated stock market – Bitcoin, Ethereum, and Dogecoin will bring prosperity and financial salvation to Millennials and Zoomers.
I mean, what other investment vehicle has provided anything even close to the 750,000,000% ROI that Bitcoin has since 2011?
I got rich off crypto and you will, too – hop aboard before it’s too late.
The reality
Cryptocurrency is like a fast-moving, rickety roller coaster at the county fair. The foundation hasn’t completely crumbled, but the wooden boards and screws holding it up are falling off with each passing car.
Hop aboard the crypto train at your own peril.
It’s true that Bitcoin has had a miracle run since 2011, rising from $0.008 to a peak of around $65,000 in April 2021 and making a lot of people very, very rich. But even diehard crypto fans have acknowledged that a “Bitcoin winter” is coming – that is, if it hasn’t already.
The Bitcoin winter is just one of the many huge risks to a crypto investment. The others (like China’s clampdown on mining) are fast approaching the roller coaster’s foundation with a sledgehammer.
Can Bitcoin still make you rich? Maybe, but there are plenty of safer rides at the carnival.
6. “Just copy the investments of rich people”
The implication
You can’t copy athletes to win gold medals, nor can you copy New York Times Best Sellers to sell more books.
However, you can totally copy the investing strategy of rich people to get rich.
In fact, they want you to copy them – either because your investment makes their investment more valuable, or simply out of the goodness of their heart. Warren Buffet famously shares his trades with the public so they can borrow and benefit from his wisdom.
So why spend 14 hours a day researching good trades when you can just copy someone else’s homework – especially when they ask you to?
The reality
Rich people can afford to make extremely risky investments and lose money that you and I can’t afford. For that reason, they shouldn’t always be followed into battle.
Warren Buffet is also famous for admitting when he’s made a mistake. In 2014, he confessed that he’d held onto shares of Tesco for way too long, costing him and his investors $444 million. Berkshire Hathaway’s investors may have been able to shrug off the loss, but any outsiders emulating Buffet’s moves may have been screwed.
Copying the investments of rich people may be a viable strategy if their investments fit within your financial goals and risk tolerance. For help determining whether that’s the case, you want to talk to a wealth advisor.
7. “You don’t need a wealth advisor”
The implication
Thanks to zero-commission trading platforms, you no longer need to buy and trade stocks through a sweaty stockbroker in some Manhattan office.
By that same logic, the emergence of robo-advisors and the fountains of free financial advice on TikTok have eliminated the need for old-fashioned wealth advisors. After all, why give someone 2% of your hard-earned gains when it’s never been easier to invest your money yourself?
The reality
The recent trifecta of online brokers, robo-advisors, and personal finance gurus on social media has done wonders empowering Millennials and Zoomers to handle our money better. The TikTok DIYers certainly have one thing right: it’s never been easier to make your own trades.
However, despite birthing a renaissance in financial literacy, nothing on TikTok can replace the tailored, one-on-one advice you’d get from a professional wealth advisor.
Robo-advisors can personalize your investing strategy to an extent, but they can’t play a direct role in helping you navigate the markets and make good decisions.
Summary
There’s plenty of sound personal finance advice on TikTok, but it only takes one bad tip to cost you money.
For that reason, it literally pays to separate the wheat from the chaff. Not everyone who’s made money is a skilled investor – some are just lucky.
You want to started investing but aren’t sure what steps to take. No worries. Let me walk you through the basics and you’ll soon be on your way.
Before we start, you should know that the stock market offers a great way to grow your wealth. However, with the reward of earning 5%, 8%, or even 12% per year on your investments comes with the risk of losing money.
That means the value of your investments may drop one year. It may also take several years to recover from that loss. If you aren’t ready for the risks, then investing is not for you.
Think about These Issues Before You Start Investing
Investors are urged to invest for long term gain. This is due to changes in the market (those gains and losses you will see).
If you will not need your money for a minimum of 5 – 7 years, then you are the perfect candidate for investing. The between now and when you need your money is called the time horizon. For example, if you are investing toward buying a small cabin on the lake in 15 years, then your time horizon is 15 years. However, if your child will be heading off to college in 4 years, your time horizon would be 4 years.
Your time horizon is not the only thing you should know. Ask yourself a few other questions as well:
Am I investing for retirement, education, or another purpose?
How much do I have to invest, and is that money available in a lump sum, a regular monthly amount, or both?
Am I wanting to spend my time managing these investments?
How much money do I want to spend in investment fees?
What amount of fluctuation from the U.S. stock market performance am I willing to accept?
Your responses will guide your investing decisions, not only for the types of investments but also the brokerage firm you choose.
Consider Investing for Retirement with Low-Cost Index Funds
Let’s say you are investing for retirement, have an initial investment of $3,000. The plan is to add $100 each month to your account. You goal is to spend little time managing your investment. In addition, you would like to closely match U.S. stock performance (either the S&P 500 or the entire market). What should you do?
You can open an IRA with an online brokerage firm such as E*Trade, Fidelity, Schwab, TD Ameritrade, or Vanguard. To get started investing, you will need to fund your account. Funding is how the money moves from your account to your investment accounts.
In most cases, funding is arranged by setting up a link between your checking account and the brokerage account, and making transfers. The initial process can take a few days but after the connection is established, you can move funds to purchase shares of stocks, mutual funds, or ETFs.
Next, purchase either commission-free, market-index exchange-traded funds (ETFs) or no-load, no-transaction-fee market-index mutual funds. For example, you can buy shares in Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) for a minimum initial investment of $3,000 and additional investments of at least $1. You will want to make sure you sign up for paperless statements so you can get the $20 account fee waived.
Or, you could purchase shares in commission-free Schwab U.S. Broad Market ETF (SCHB) for $1,000 (or any multiple of its market price, which is about $50 at this writing); and make additional minimum purchases that equal the fund’s share price.
Buy Individual Stocks If You Are Comfortable with Greater Risk
Alternatively, you may be interested in growing your wealth more aggressively and are willing to accept risks (and losses) associated with potentially greater rewards. You have plenty of time to spend evaluating and selecting individual stocks plus you don’t mind paying transaction fees associated with the purchase and sale of stocks (or sector or specialty mutual funds or ETFs).
Again, you could open a regular brokerage account with any of the online brokerage firms. You might look at investing with Acorns, E*Trade, Schwab, or Fidelity. Keep in mind that each on-line firm has minimum investment thresholds that you will need to meet. You could choose stocks on your own or find ones using screening tools available on each firm’s website.
After determining what you’d like to buy and the approximate quantity, you’ll want to set a price to indicate how much you are willing to pay for shares and then place your order. Fees to place orders typically run about $9.99 or less.
Decide Whether Innovative Brokerage Firms Are Right for You
You might also consider investing with a newer firm, such as Betterment, Motif Investing, or Loyal3; these companies all have unique approaches to serving customers that may or may not meet your needs.
Betterment makes investment decisions on your behalf and charges an account management fee rather than individual transaction fees; you may like this approach if you don’t have time to invest on your own. Motif Investing offers fee-free investing through its Horizon Motifs, which are comprised primarily of market index ETFs, along with its specialty motifs that trade for a flat $9.95 fee. Loyal3 has a totally fee-free platform in which you can buy shares (or even fractional shares) of certain stocks with an investment of as little as $10.
If you are ready, now is the time to get started in investing, regardless of whether the market is up or down today. The sooner you start, the more your money can grow.
Julie Rains is a freelance writer specializing in personal finance, mortgages, and investing. She writes for her own blogInvesting to Thrive as well as other media outlets including Wise Bread and Loans101.
Julie holds a Bachelor of Science in Business Administration with a concentration in Finance from The University of North Carolina at Chapel Hill. Julie started investing soon after graduation and has continued to invest and learn over the past 20+ years. In her free time, she enjoys cycling with friends and spending time with her husband and nearly grown sons.
Typically, you pay a premium if you select a 30-year fixed mortgage versus an adjustable-rate mortgage.
The reason is simple – the interest rate is locked in and will not change during the entire loan term, which is a full 30 years, or 360 months.
Conversely, if you choose to go with an adjustable-rate mortgage, such as a 5/1 ARM or a 7/1 ARM, you only receive the benefit of a fixed rate for the first five or seven years, respectively.
It is then subject to change annually during the remaining 23 or 25 years of the loan term.
As such, you should be entitled to a discount on your mortgage rate during that initial fixed period to make up for the risk of the interest rate resetting higher once the fixed period ends.
This spread can change over time depending on what’s going on in the economy and secondary market, along with lender/investor appetite for certain products.
Today’s Menu: 30-Year Fixed or Bust
Mortgage rates are usually highest on the 30-year fixed
Because borrowers receive a fixed interest rate for a full three decades
Discounts are typically given on riskier products like ARMs or shorter-term loans like the 15-year fixed
But right now lenders aren’t passing along the usual discounts
At the moment, anything that isn’t a 30-year fixed mortgage is basically out of favor.
This is probably even more true with nonbank lenders and those who sell off their mortgages, as opposed to keeping them in their own bank portfolio.
This explains why you’re no longer seeing the usual discounts offered for loan products like ARMs, and in some cases, even shorter-term fixed-rate mortgages, including the 15-year fixed.
Once again, I traveled across the internet to see what mortgage lenders were advertising for their popular loan programs, and this trend is pretty clear.
Lender
ARM or 15-Year Fixed Rate
30-Year Fixed Rate
Bank of America
3.375% (10/1 ARM)
3.375%
BB&T
3.375% (15-year fixed)
3.375%
Chase
3.49% (7/1 ARM)
3.125%
Citi
4.75% (7/1 ARM)
3.875%
Citizens Bank
3.375% (7/1 ARM)
3.375%
Navy Federal
2.375% (5/5 ARM)
2.875%
Quicken Loans
3.125% (10/1 ARM)
3.375%
USAA
*3.50% (VA 5/1 ARM)
3.50%
Wells Fargo
3.625% (5/1 ARM)
3.375%
Bank of America is advertising a 30-year fixed for 3.375% with 0.786% discount points, and a 10/1 ARM for the same rate with 0.971% discount points. In this example, it’s actually more expensive to take the riskier loan product.
BB&T is charging the same 3.375% for a 30-year or 15-year fixed refinance rate, yet the APR is slightly higher on the 15-year.
Chase will give you a 30-year fixed for 3.125%, or a 5/1 ARM for the same price. If you want a 7/1 ARM, the rate jumps up to 3.49%. More risk for more money…that’s a sign of a messed-up mortgage market.
Citi is showing super wild mortgage rates, with the 30-year fixed 3.875% with 0.125% points, and the 7/1 ARM pricing at 4.75% with a full point charged. You’d be crazy to go with the ARM.
Over at Citizens Bank, they’re advertising a 30-year fixed for 3.375% with .50% discount points. Meanwhile, their 7/1 ARM features the same exact rate with .125% discount points.
So slightly cheaper in terms of closing costs, but the same exact rate. It wouldn’t make much sense for most folks to go with the ARM unless they absolutely knew they’d be selling before those seven years were up.
And right now, there’s not a whole lot of certainty in terms of what’s next for anyone.
Some mortgage lenders aren’t advertising or possibly even offering ARMs at the moment, including Better Mortgage and Guaranteed Rate.
Navy Federal seems relatively normal, with their 30-year fixed 2.875% with 1.25 points, and their 5/5 ARM pricing at 2.375% with 0.25% points.
That’s a discount of a half a percent, which is more of what you’d expect to see based on the risk profiles of both loan programs. This might be because they keep the loans they originate.
At Quicken Loans, you can get a slight discount on a 10-year ARM vs. a 30-year fixed, 3.125% instead of 3.375%.
Then there’s USAA, which is advertising a 30-year fixed VA loan for 3.50% with negative mortgage points of 0.375%, and a 5/1 ARM with “APR typically around 3.500%.” You have to call to get the scoop, but it doesn’t sound much cheaper.
Lastly, Wells Fargo is offering a 5/1 ARM for 3.625%, and a 30-year fixed for a cheaper 3.375%.
So again, you’d be better off taking the 30-year fixed, not only because the interest rate is lower, but it’s also fixed for the full mortgage term.
It’s All About the Plain Vanilla Home Loan Right Now
Mortgage lenders are very skittish at the moment like all other businesses
As such they’re sticking to their safest products like the 30-year fixed while also tightening underwriting standards
This is partially because it’s easier to sell these types of loans on the secondary market to investors
Expect it to be more difficult to find a home loan with exotic features for the foreseeable future
In summary, mortgage lenders are grappling with a lot of uncertainty, just like everyone else thanks to the coronavirus (COVID-19).
And when that happens, they flock to the safety and security of the 30-year fixed, similar to how investors flee the stock market and head toward government bonds, which are guaranteed to be paid back.
Speaking of being paid back, the Fed’s QE4 program targets agency mortgage-backed securities, such as those backed by Fannie Mae and Freddie Mac.
At the moment, banks and lenders are eschewing anything that isn’t super vanilla, aka basic and low-risk.
Those who are offering ARMs, jumbo loans and other traditionally riskier products are charging a premium in many cases since they don’t have the benefit of the Fed as a buyer.
Others are just removing them from their product menu, perhaps until the dust settles.
It’s reminiscent of the mortgage crisis that took place in the early 2000s, when lenders only originated boring old fixed-rate mortgages and ditched all the aggressive option ARMs, interest-only loans, and so on.
To make matters worse for some borrowers, they’re also upping minimum credit score requirements and getting tougher with their underwriting, whether it’s a lower max DTI ratio or a lower max loan-to-value ratio (LTV).
The name of the game is less risk, so if you’ve got a questionable loan scenario, it might be difficult to get funding right now.
Hopefully this is a short-term phenomenon, but no one knows for sure how long it will last.
Read more: What mortgage has the best interest rate?
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The question of whether a car is an asset or a liability has been debated for decades.
The reason for the debate is that there are many types of cars in the world and each car serves different purposes.
In the past, many people bought cars that were used and old to save money, because they believed it was cheaper in the long run than purchasing new ones every few years. This mindset shifted after some studies showed that replacing your car more often actually costs you less over time in terms of maintenance cost and depreciation on your vehicle value when compared to keeping a newer model longer.
Nowadays, most consumers are aware that the car is an asset and are more willing to pay for a new one.
However, there is a huge caveat on how you purchase the car, the age of the car, and the purposes of the vehicle.
All in all, depreciation can eat into your car’s worth.
What’s your take on this debate?
What is Considered an Asset?
The definition of an asset is broad and includes most things that have value. Assets are tangible or intangible property such as land, buildings, equipment, intellectual property such as patents and trademarks, or stocks.
This can be anything from a physical asset such as a house or equipment, to a more intangible asset such as a strong brand name or a loyal customer base.
Is a car an asset or liability?
A car is an asset to its owner because it took money to buy the vehicle. It is also a liability in that the cost of maintaining the car can be high, and depreciation on a new vehicle can eat into a person’s savings.
There is no definitive answer as to whether a car is an asset or a liability. It depends on the specific situation and the person’s circumstances.
For example, if someone needs a car to get to work, then the car would be considered an asset. However, if someone only uses their car for recreational activities, then the car would be viewed as a liability.
On the whole, cars are considered liabilities. They require regular maintenance, insurance, and other associated costs. However, there are a few exceptions. For instance, in some cases, a car can be used as collateral for a loan or as an investment vehicle.
Is a Car a Depreciating Asset?
A car is a depreciating asset because its value decreases over time. The depreciation of a car is based on a number of factors such as the age of the car, the make and model of the car, the condition of the car, and the miles on the car.
Cars are assets, but not smart investments as they will depreciate over time.
Reason # 1 – Wear and tear
Cars require a great deal of care and maintenance in order to keep them running smoothly. This includes everything from regular oil changes and tune-ups, to replacing worn-out parts and fixing dents and scratches.
In addition, cars depreciate in value over time due to normal wear and tear.
Reason # 2- Higher Mileage
The value of a mile decreases the more it is used. This is because the value of something depends on its rarity and when something becomes common, its value decreases.
The average car is only good for 200,000 miles. This is because of both the increased mileage and the cost of repairs as a car gets older.
Reason # 3- Cars become obsolete
Cars are becoming obsolete because new models and makes are constantly being released. This means that people want the newest and latest model, so they trade in their old car for a newer one.
Plus many of the parts for older cars become harder and harder to find. Thus, causing the cost to repair to escalate.
Reason # 4- Cars are not investments
Some people may argue if a house is an investment as well.
When you think of an investment, you want a certain rate of return on your money.
Most people use the stock market as a benchmark of earning 8% of the initial outlay of money. Thus, a car is an investment that depreciates over time. It will lose value as it gets older and the parts wear out.
If you want a return on your money, you should be asking is now a good time to buy stocks?
Can a Car Appreciate?
Yes, vintage cars and luxury sports cars have always been the exception. There are select vehicles that are in pristine condition with little to no mileage. These collector cars have a special fan base willing to spend money on these appreciating collections.
However, for the average car, the answer has always been a resounding NO!
Well, that was up until 2020, when used vehicles started to increase in value due to lack of microchips availability has been scarce causing the production of new cars to be halted. Thus, the supply and demand for new cars have been skewed causing an increase in car worth.
As the supply chain gets back to normal production, this appreciation in our sedans, trucks, and SUVs will be short-lived.
How To Calculate Car Value
Car value is the estimated worth of a car. There are two main methods for calculating this:
The trade-in method, which takes your vehicle’s current market value and divides it by its estimated remaining life span.
The resale method takes your vehicle’s current market price and then subtracts the depreciation rate from that value to get a car’s market value.
To calculate the value of a car, you need to know its make, model, year, and condition.
Personally, I like finding the worth of a car based on its Kelley Blue Book (KBB) value. This is the resource my dad used when he worked in the car industry, so I can trust the information.
The KBB value is updated monthly and takes into account recent sales and modifications.
When it comes time to buy, sell, or trade-in your car, you’ll need to know a fair price.
You can use a variety of methods to calculate your car’s worth, including using online tools, checking with dealerships and other buyers in your area, and looking at recent sales data. Remember to factor in your car’s condition and mileage when calculating its worth–prices will vary depending on the location and condition of your car.
Car Value Deprecation Curve
Before you head out and purchase your car, car value depreciation is a real consideration in your decision.
As KBB states, the first year of owning a brand new car will depreciate the most. While it feels great to drive off the lot in a brand new SUV, you can watch hundred dollar bills float behind you with how quickly the car depreciates.
To calculate the depreciation of a car, it varies depending on the make and model.
However, here is a car value depreciation chart to estimate based on.
In year one, most models will depreciate at least 20% or more.
From years 2-4, the car depreciates about 10% each year.
After five years, a car will depreciate about 60% of the original purchase price.
Car Value Deprecation Curve Example
For example, let’s take the average price of a new car of $47,077 according to Car and Driver.
1st year = car lost $9415.40 in value and is now worth $37,661.
2nd year = car lost another $3,766 in value and is now worth $33,895.
3rd year = car lost another $3,389 in value and is now worth $30,505.
4th year = car lost another $3,050 in value and is now worth $27,464.
After 5th year, the car has lost an estimated $28,246 in value and is now worth about $18,830
That is the reason most people do not believe a car is an asset.
That is a depreciating asset. Would you consider an investment if you knew 60% would be wiped away in less than five years? Probably not.
This is why most thrifty people look for cars that are at least 5 years old and lost most of the depreciation. Personally, I have never purchased a new car; everything I owned was new-to-me used vehicle. Even growing up as a daughter of a car salesman and manager, my parents never purchased a brand new car due to deprecation.
Another reason beater cars are super popular!
How Your Car Is An Asset
There are a variety of ways to define what an asset is, and whether or not a car falls into that category depends on the definition used.
In general, most people would say that a car is an asset because it has value and can be sold for money.
However, there are other definitions of assets that may not include cars. For example, some people might say that an asset is something that generates income or increases in price.
A car can be an asset for someone who is making money off of it. For instance, an Uber driver uses his or her car as a business asset. The car is providing them with income, and thus it can be considered an asset.
On the other hand, most people use their vehicles for personal use as a mode of transportation and do not make money off of it. If your car was purchased with cash or paid off, then you can consider it an asset.
Is a paid off car an asset? Yes.
Why is a car not an asset?
A car is not an asset because it depreciates in value the moment you drive it off the dealership lot. While it may be a necessary expense, it is not an asset that increases in worth over time.
Is a leased car an asset?
No, a leased car is not an asset because the asset (car in this case) is the asset of the leasing company. This is 100% liability for you and a monthly payment which you must make.
Leasing a vehicle allows you to drive it for the length of your lease term without the risk of buying and then selling or trading in at the end of your lease. Once the lease expires and if you decide to purchase the car, then it would be considered an asset on your net worth.
How Your Car Is Considered A Liability
The car is considered a liability if the debt exceeds the car’s value.
Simply put… If you have an auto loan, your car would be considered a liability.
Given that most people believe car loans are a part of being an adult, many view cars as a liability and monthly payments normal.
In addition, a car is a liability because, like any other depreciating asset, it will lose its value over time.
The longer you own it, the more money you will likely have to spend on repairs and general upkeep. This means that your car is not only costing you money every month in terms of payments and insurance, but also in terms of the decreasing worth of the asset itself.
Is a car loan an asset?
A car loan is a type of debt that is incurred when borrowing money to buy a new or used car. Thus, the car loans are considered liabilities and the car itself would be considered collateral.
Should I Include My Car in My Net Worth Calculation?
The answer to this question depends on how much your car is worth.
Personally, at Money Bliss, we recommend counting the vehicle as an asset and any auto loan as a liability. That means you would include both in your net worth calculations.
The reason why to include in net worth is if you had to sell your car immediately, you would be in one of two situations:
You have instant access to cash if needed.
You owe more in your car loan and thus, have negative equity. Meaning you would have to pay additional money to get out of your car loan and sell your car.
To keep your net worth accurate, you should adjust the price of your vehicles as they decrease over time.
Is Having a Car the worst investment of your Money?
There are a lot of factors to consider when answering this question.
Owning a car can be a major expense, and there are a lot of costs that come with owning a car, such as insurance, registration, and maintenance. However, a car can also provide a lot of benefits, such as convenience, freedom, and security.
Ultimately, it depends on your individual circumstances.
Know someone else that needs this, too? Then, please share!!
Long, long ago, in a mystical forest with good Wi-Fi, Goldilocks opened an investing account with $3,000 to invest.
At first, she considered pouring more money into her retirement accounts (which only holds mutual fund investments). But her Roth IRA was already maxed out for the year. Moreover, she knew that she would need this money sooner than age 65.
“Too cold!” she said.
Next, she considered investing in individual stocks. But even though she’d done her due diligence, she knew that investing in individual securities can be very risky. She didn’t need to become a millionaire overnight – she just wanted to make enough money to buy a cottage in a few years.
“Too hot!” she said.
Finally, she began browsing ETFs. ETFs are generally more stable, diverse, and safe investments than individual stocks, but they’re also more accessible than your retirement account.
“Juuuuust right!” she said aloud.
10 years later, Goldilocks’ investment had paid off – thanks to a steady 10% APY, her $3,000 investment had become nearly $8,000, so she was finally able to pay restitution and legal fees to the family of bears down the way.
Thanks to inherent diversity and steady returns, ETFs are a great place to stash a few grand to help you save for a big expense years or decades down the line.
What’s Ahead:
Large-cap stock ETFs
Large-cap ETFs typically bundle together blue-chip stocks or even an entire index, providing steady, sizeable returns. Warren Buffet once famously said:
“I just think that the best thing to do is buy 90% in S&P 500 index fund.”
So I’ve included two such options on the list.
You’ll also see a lot of Vanguard funds on this list because, well, they’re just awesome all the way around. Vanguard funds are extremely popular among investors because they combine industry-leading returns with incredibly low expense ratios.
ETF
Symbol
Fund info
Expense ratio
Schwab US Large-Cap Growth ETF™
SCHG
The fund’s goal is to track as closely as possible, before fees and expenses, the total return of the Dow Jones U.S. Large-Cap Growth Total Stock Market Index.
0.04%
SPDR S&P 500 ETF
SPY
The SPDR® S&P 500® ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500® Index (the “Index”).
0.0945%
Vanguard S&P 500 ETF
VOO
The Vanguard S&P 500 ETF invests in stocks in the S&P 500 Index, representing 500 of the largest U.S. companies.
0.03%
Vanguard Russell 1000 Growth ETF
VONG
The investment seeks to track the performance of the Russell 1000® Growth Index. The index is designed to measure the performance of large-capitalization growth stocks in the United States.
0.08%
Mid-cap stock ETFs
Goldilocks’ choice – mid-cap ETFs – bundle together companies that have an exciting growth curve before them, but are established enough not to fold overnight.
If you can tolerate a little more risk in exchange for higher potential returns than an index fund, consider these top picks:
ETF
Symbol
Fund info
Expense ratio
Vanguard Mid-Cap Growth ETF
VOT
VOT seeks to track the performance of the CRSP US Mid Cap Growth Index, which measures the investment return of mid-capitalization growth stocks.
0.07%
iShares Core S&P Mid-Cap ETF
IJF
IJF seeks to track the investment results of an index composed of mid-capitalization U.S. equities.
0.05%
Vanguard Mid-Cap ETF
VO
VO seeks to track the performance of the CRSP US Mid Cap Index, which measures the investment return of mid-capitalization stocks.
0.04%
Schwab U.S. Mid-Cap ETF
SCHM
SCHM’s goal is to track as closely as possible, before fees and expenses, the total return of the Dow Jones U.S. Mid-Cap Total Stock Market Index.
0.04%
Small-cap stock ETFs
If you’ve looked at your asset portfolio recently and thought “hmm… needs a little more spice,” then a small-cap ETF might add just the right amount of kick.
These ETFs track small companies with big potential, so they present higher risk but higher potential reward than large- or mid-cap ETFs.
ETF
Symbol
Fund info
Expense ratio
Vanguard S&P Small-Cap 600 Growth ETF
VIOG
VIOG employs an indexing investment approach designed to track the performance of the S&P SmallCap 600® Growth Index, which represents the growth companies, as determined by the index sponsor, of the S&P SmallCap 600 Index.
0.15%
Vanguard Small-Cap ETF
VB
VB seeks to track the performance of the CRSP US Small Cap Index, which measures the investment return of small-capitalization stocks.
0.05%
iShares Core S&P Small-Cap ETF
IJR
IJR seeks to track the investment results of an index composed of small-capitalization U.S. equities.
0.06%
Schwab U.S. Small-Cap ETF
SCHA
SCHA’s goal is to track as closely as possible, before fees and expenses, the total return of the Dow Jones U.S. Small-Cap Total Stock Market Index.
0.04%
International stock ETFs
ETF
Symbol
Fund info
Expense ratio
Vanguard Emerging Markets ETF
VWO
VWO invests in stocks of companies located in emerging markets around the world, such as China, Brazil, Taiwan, and South Africa.
0.10%
Vanguard Total International Stock ETF
VXUS
VXUS seeks to track the performance of the FTSE Global All Cap ex US Index, which measures the investment return of stocks issued by companies located outside the United States.
0.08%
SPDR® MSCI EAFE Fossil Fuel Free ETF
EFAX
EFAX seeks to offer climate-conscious investors exposure to international equities while limiting exposure to companies owning fossil fuel reserves.
0.20%
Vanguard FTSE Developed Markets ETF
VEA
VEA provides a convenient way to match the performance of a diversified group of stocks of large-, mid-, and small-cap companies located in Canada and the major markets of Europe and the Pacific region.
0.05%
Fixed income ETFs
ETF
Symbol
Fund info
Expense ratio
iShares Core U.S. Aggregate Bond ETF
AGG
AGG seeks to track the investment results of an index composed of the total U.S. investment-grade bond market.
0.05%
Vanguard Total Bond Market ETF
BND
BND’s investment objective is to seek to track the performance of a broad, market-weighted bond index.
0.035%
Vanguard Intermediate-Term Corporate Bond ETF
VCIT
VCIT seeks to provide a moderate and sustainable level of current income by investing primarily in high-quality (investment-grade) corporate bonds.
0.05%
Schwab 1-5 Year Corporate Bond ETF
SCHJ
SCHJ’s goal is to track as closely as possible, before fees and expenses, the total return of an index that measures the performance of the short-term U.S. corporate bond market.
0.05%
What does large-cap, mid-cap, etc. mean?
To start, “cap” refers to market capitalization, or the total value of a company’s shares on the market. For example, if a company has 1 million shares on the market valued at $10 a pop, their market cap would be $10 million.
Large-cap ETFs are comprised of companies each with a market cap of $10 billion or higher. The Vanguard Mega Cap ETF (MGC), for example, contains around 250 of the biggest companies in the USA, from Amazon to Apple. Since they’re often full of blue-chip stocks that provide slow-but-steady returns, large-cap ETFs are considered a safe, long-term investment.
Mid-cap ETFsare comprised of companies each with a market cap in the $2 to $10 billion range. All ETFs are designed to succeed and make money, so mid-cap ETFs are filled with midsized companies that are in the middle of their “growth curve,” so to speak – they’re high-performing, high-potential companies that may become the next blue-chip, so mid-cap ETFs balance risk and reward.
Small-cap ETFsare comprised of companies each with a market cap of “just” $300 million to $2 billion. Fund managers who design small-cap ETFs cast a wide net, aiming to scoop up “the next big thing.” As a result, these ETFs have higher growth potential than most ETFs, but also steeper downside if the smaller companies within end up folding.
International ETFsare, as the name so subtly hints, full of non-U.S. stocks and securities. There are country-specific ETFs, foreign industry ETFs (think non-U.S. automotive stocks), and even ETFs representing emerging markets like sub-Saharan Africa and Brazil.
Fixed income ETFs, aka bond ETFs, give you access to diverse bond investments. For the uninitiated, bonds are like loans you make to companies or governments that they pay back with interest. You can read more about bonds here, but the bottom line is this: fixed-income ETFs provide steady income in the form of dividends, so they’re a good choice if you want a safe investment that gives you a paycheck!
Read more:How To Invest In ETFs
Which type of ETF is right for you?
Well, it depends on both your goals and your risk tolerance.
If you can tolerate some risk in your portfolio, and want your ETF investment to pay off sooner than later (within five years), you may want to consider small-cap and mid-cap ETFs. They’re riskier, but have higher upside potential.
If you’re looking for a safer investment that will multiply your money over a longer horizon (5+ years), a large-cap ETF is probably a fit.
If you’d like your ETF investment to provide a trickle of cashback each month, fixed income ETFs are probably your best bet.
And finally, if you don’t mind doing a little research or believe strongly in the economic performance of a foreign market, you’ll be a fan of international ETFs.
Read more: How To Determine Your Investing Risk Tolerance
About our criteria
With hundreds of commission-free ETFs available, how did these become the winners?
To make this list, ETFs had to impress in all of the following categories:
Earnings potential.Naturally, the first thing looked at was the ETF’s performance over the past five years. A good sign of a healthy ETF is how quickly it bounced back in Q3 2020 after the market panic surrounding the COVID-19 pandemic. Springboarding back and surpassing Q1 levels are a sign of investor confidence, and helped solidify the ETF’s place on this list.
Expense ratio.Next, I looked at the ETF’s expense ratio. Your expense ratio is the percentage of your investment you pay to the fund manager for having shares of the ETF. Although measured in fractions of a percent, expense ratios make a difference – 0.80% of $10,000 is $80 and 0.04% is just $4, so ETFs with an expense ratio below 0.20% were favored.
Fund reputation. You’ll see a lot of repeated names on this list because funds like Schwab, BlackRock (iShares), and especially Vanguard have a proven track record of building well-crafted, reliable ETFs with low expense ratios. Fund reputation matters in the long run because big funds attract big money, which helps to generate higher returns for you!
Solid fundamentals.ETFs aren’t just random grab bags of stock and securities – each one is a carefully curated list, with selection criteria driven by both AI and human logic. There are some wacky and unique ETFs out there – such as Millennial ETFs and Space ETFs – and I’ll cover more of them in an upcoming piece. But this list isn’t for the experimental, exciting stuff – it’s for safe, dare I say boring, places to stash and multiply your savings.
Conscious investing.Finally, this was more of a small thing in the back of my mind, but I wanted each ETF on this list to score average or above average for “conscious capitalism.” No fossil fuels, no sin stocks (learn more about sin stocks here) – and not just because it’s not the way of the future, but because investments in conscious capitalism generally outperform “sinful” investments in the long term.
Commission-free ETFs solve a big problem for young investors
Commission-free ETFs aren’t just great because they’re cheap – they actually solve a pretty serious problem plaguing young ETF investors.
You see, ETFs have heftier commissions and trade fees than stocks because ETFs can be resource-intensive to create. Let’s say you’re a fund manager and you have an idea for an ETF. The process to get your ETF approved by the SEC isn’t unlike getting your new drug approved by the FDA; you have to research a ton, understand the risks, and propose your ETF to the government.
Once your ETF is approved and available, you probably want some additional compensation for your work beyond just capital gains from your ETF.
You don’t want to charge a high percentage trade fee, because big-ticket investors will be turned off. So, instead, you charge a $10 to $20 fee per trade of your ETF.
Big-ticket investors who drop $50,000 on a trade couldn’t care less about a $20 fee, since that represents just 0.04% of their investment. But if you’re a young investor, investing maybe $50 to $100 out of each monthly paycheck, a $20 per-trade fee is way too high – basically pricing us out of ETF investing. 🙁
Thankfully, many brokerages have realized that their per-trade fees are too high for young investors and have eliminated commissions on trades of certain ETFs. At first, funds like Vanguard and Fidelity only let you trade commission-free on their own platforms, but now, they’ve expanded their commission-free goodness to wide platforms like J. P. Morgan Self-Directed Investing.
And it’s not just the junk ETFs that get traded commission-free – in fact, it’s often quite the opposite. Firms like Vanguard and Fidelity will let you trade their most successful ETFs for free – presumably because they don’t really need the commission.
Disclosure – INVESTMENT AND INSURANCE PRODUCTS ARE: NOT A DEPOSIT • NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE
Summary
If you’re looking for an investment vehicle falling somewhere between your boring retirement account and your exciting individual stock purchases, ETFs are an excellent choice. And now that the big funds are waiving commissions on their top-performing ETFs, there’s never been a better time to dive into the world of ETFs and inject some low- to mid-risk into your portfolio.
ETFs are also an excellent investment if you’re looking to multiply your money and cash out within 2 to 10 years. You can even leave your ETF investment until retirement, if you want, so it has plenty of time to multiply under compound interest.
Not all ETFs are made the same, however – and the SEC has approved some stinkers over the years, for sure. These ETFs, on the other hand, are universally considered top-ranked and well-supported within the investor community – and are a superb place to start.
Mortgage rates fell slightly this week, staying almost flat ahead of the Federal Reserve’s closely watched interest rate-setting meeting next week.
The 30-year fixed-rate mortgage averaged 6.13% in the week ending January 26, down from 6.15% the week before, according to data from Freddie Mac released Thursday. A year ago, the 30-year fixed rate was 3.55%.
“Mortgage rates continue to tick down and, as a result, home purchase demand is thawing from the monthslong freeze that gripped the housing market,” said Sam Khater, Freddie Mac’s chief economist. “Potential homebuyers remain sensitive to changes in mortgage rates, but ample demand remains, fueled by first-time homebuyers.”
After climbing for most of 2022, spurred by the Fed’s harsh interest rate hikes to tame soaring inflation, mortgage rates have been trending downward since November, alongside data that continues to show inflation may have reached its peak. Last week’s mortgage rates hit the lowest level since September.
The average mortgage rate is based on mortgage applications that Freddie Mac receives from thousands of lenders across the country. The survey includes only borrowers who put 20% down and have excellent credit. Many buyers who put down less money upfront or have less than ideal credit will pay more than the average rate.
All eyes on the Fed
The Fed is expected to continue its rate-hiking campaign at its two-day meeting on January 31 to February 1. The central bank is likely to announce a smaller increase in the fed funds rate, with a quarter-point hike, compared with the half-point and three-quarter-point increases in the meetings last year.
The Fed does not set the interest rates borrowers pay on mortgages directly. But its actions influence them. Mortgage rates tend to track the yield on 10-year US Treasury bonds, which move based on a combination of anticipation about the Fed’s actions, what the Fed actually does and investors’ reactions.
When Treasury yields go up, so do mortgage rates; when they go down, mortgage rates tend to follow.
“The Freddie Mac fixed rate for a 30-year loan rebounded slightly this week, following the trajectory of the 10-year Treasury,” said Jiayi Xu, an economist at Realtor.com. “While businesses and investors are watching the market closely, the recent large-scale layoffs in the tech sector combined with Monday’s stock market rebound have created mixed signals.”
On one hand, she said, many cash-burning tech companies are struggling with the Fed’s rate hikes. On the other hand, investors are happy about slowing inflation and anticipate that interest rate hikes may begin to moderate or stabilize in the months ahead.
Economic indicators like the low unemployment rate and the cooling inflation rate do not point toward a recession, Xu said. “However, it’s important to keep in mind that monetary policy takes time to have an impact, and these economic indicators might not yet show the full effects of the restrictive policy,” she said.
While the Fed may continue to raise rates this year, Xu said, the slower pace will help to create a soft landing for the economy by balancing the risks of bringing down inflation without pushing up the unemployment rate.
“Despite slowing inflation, the expected ongoing restrictive monetary policy may keep mortgage rates in the 6%-7% range in the short term,” she said.
Mortgage applications rise
The downward trend for mortgage rates since November has had a positive impact on home affordability for mortgage borrowers.
Homebuyer affordability improved in December, with the national median payment decreasing 2.9% to $1,920 from $1,977 in November, according to the Mortgage Bankers Association.
Many buyers are taking advantage of the relatively lower rates of the past few weeks: Applications for mortgages were up 7% last week from one week earlier, according to MBA.
“Borrower demand, thanks to lower mortgage rates, continues to rise in early 2023,” said Bob Broeksmit, MBA president and CEO. “Mortgage applications increased for the third straight week. Purchase demand is still below year-ago levels, but lower rates and improving affordability are favorable developments for the housing market heading into the spring.”
Buyer traffic is picking up in many markets, even if inventory is slow to improve.
“High costs and concerns about economic uncertainty had many buyers pausing their purchasing decisions and led to fewer transactions,” said Xu. “However, decreased competition may have presented opportunities for some first-time home buyers.”
By Craig Ford9 Comments – The content of this website often contains affiliate links and I may be compensated if you buy through those links (at no cost to you!). Learn more about how we make money. Last edited July 22, 2014.
What The Government Can Teach You About Personal Finances
When it comes to the government and money there are a lot of diverse opinions. No matter what you think about the government’s fiscal responsibility, one thing is for certain. Many Americans could learn at least one lesson from the government that will transform their personal finances.
What the Government Knows About Taxes
In the book, The Automatic Millionaire, David Bach spurs the question, How does the government always get their taxes?
The government takes their tax payments off the top before you even have access to it. This is true unless you are self employed and the government then requires you to make a quarterly tax payment.
The government wants to have access to the money first. They don’t trust you with the money because you might just blow it all before you get it. So they make you to complete a W-4 and they take their money before you get your money.
Sometimes we even get generous and pay more income tax than we should.
Do you trust yourself with money? If the government takes taxes out as soon as you get paid and you have paid all your taxes, don’t you think that would be a good strategy for saving?
Almost every banks and investment broker have some automatic savings features.
6 Advantages of Automatic Savings
Simplicity – Many great financial plans fail because they are too complicated. It is far better to have a financial plan that works than one that just looks good on paper. If you are not disciplined enough to maintain the plan, it is too complicated. As an example, many people fail at budgeting because the budget is too complex. A simple budget is the solution.
Compensates for a lack of discipline – Many people acknowledge that saving money requires discipline. Discipline that too many openly admit they do not have. When it comes to automatic savings you only need to be disciplined enough to initiate the process. From there, the less attention you pay to your savings the better. Once you have set up your budget all you need to is cruise.
Emotional benefits – Some people find it emotionally burdensome to save. They think about how they could have got this or that. They then feel bad that they are saving so much for tomorrow without the chance to live it up today. However, when you ‘forget’ you are saving money you can mentally disconnect from the process. In addition, when it comes to saving with the stock market you’ll have less worrying, analyzing, and fretting about the right time. When that predetermined day for your deposit arrives, it will be the right time.
Better for smaller accounts – If you are trying to save into something like a mutual fund or index fund, then smaller frequent payments actually give you access to funds that you might not otherwise have been able to buy. Many funds decrease their minimum amount required when you set up an automatic purchase plan.
Results – Don’t argue with results. This is a proven and effective method for saving money. Since it has worked for generations there is no reason to think it is going to stop working now.
Time savings – Time is becoming an increasingly valuable commodity. Automatic savings help you have a larger rate of return and saves you time, energy, and effort in the process. Just think about it like a ball at the top of the mountain. You just need to give it a little push and it will do the rest by itself. All you need to do is organize your finances and then you no longer have any additional time investment.
Do you do automatic saving or investing? Why or why not?
Investing isn’t unlike a martial art. Victors are decided not by brute force, but by reaction time and technique.
Call options are one such technique that when applied correctly can lead to a nice profit. BUT (and that’s a big but), like any investment, if you miscalculate (which is easy to do), you’re out a lot of money.
That’s exactly why call options are for advanced investors that know how to time the financial markets better than your average newbie buyer.
What’s Ahead:
What is a call option?
Source: WHYFRAME/Shutterstock.com
A call option is a contract that gives you the option, but not the obligation, to purchase a stock, bond, commodity, or other security at a locked-in price within a certain time limit.
Here are a few of the various terms you’ll need to know when it comes to buying calls:
The strike price is the price of each share within the call option.
The premium is the price of the call option contract itself.
The expiration date is the date on which the call option expires, usually a week, month, three months out.
Let’s say TSLA is selling at $100. You think it’s going to go up to $120, so you purchase a call option for a strike price of $100 and an optionpremium of $3 per share.
Remember, you’re not buying the stock yet, just the right to buy 100 shares at $100 per share. So you’ve just paid $3 x 100 = $300 for the call option. The expiration date is three months out, so you have some time to watch the market’s volatility.
TSLA rises to $120 as you had predicted, so you execute on your call option and purchase your 100 shares at $100. Let’s do the math to see how you made out.
Your premium total for the call option was $300.
Your strike price for the TSLA shares is $100 x 100 = $10,000.
So in total, you’ve paid $10,300.
Your shares are now worth $120 x 100 = $12,000.
So you’ve made $12,000 – $10,300 = $1,700.
If you’d put more serious money on the table and purchased 10 call options for $100,000 plus a premium of $3,000, your profit would’ve gone up by 10x = $17,000. Maximum profit right there.
How is a call option different from a put option?
A put option is simply the reverse of a call option. It’s a contract that you pay a small premium for in order to get the right, but not the obligation, to sell the underlying shares at a certain price point within a certain time limit.
What is a covered call?
A covered call is when you sell call options on stocks that you actually own. Covered calls are used to make a little extra income on the stocks in your portfolio that you think will remain steady or even drop, while others think they’ll increase.
For emphasis, covered calls are “covered” because you actually own the shares and are able to sell if the holder of your call option chooses to execute their right to buy (in contrast to a short call, defined below).
Let’s say you own 1,000 shares of AAPL at $100 and sell call options for a strike price of $110 and a premium of $3. Another buyer thinks that AAPL is about to skyrocket, so they purchase all 10 of your call options.
Remember: you haven’t sold them the shares yet, just the right to buy them if they choose to execute on the option. You’re betting that shares of AAPL will stay steady or drop and the buyer won’t buy. The buyer, by contrast, is betting that your shares will increase in value enough to offset his premium and strike price.
Turns out, AAPL doesn’t rise above $105 by the expiration date, so your buyer allows the options to expire. Your covered call paid off. You keep your shares and the buyer’s premium of $3 x 1,000 = $3,000.
What is a long call?
A long call is when you purchase a call option because you believe that prices will eventually rise before the expiration date.
In the example above, the buyer of your call options was making a long call. They believed that the prices of AAPL would rise high enough to offset both their premium and the strike price by the expiration date. In this case, the strike price was higher than the current market value, meaning the call option was “out of the money”.
If AAPL had risen to, say, $150 before the expiration date, they would’ve executed on their call options to purchase 1,000 of your shares at $110 = $110,000. Factoring in their premium of $3,000, they paid you $113,000 for 1,000 AAPL shares now worth $150. Their total profit is $150,000 – $113,000 = $37,000. Their long call paid off.
What is a short call?
If a covered call is selling options on shares that you currently own, a short call is selling options on shares that you don’t currently own. It’s a high-risk strategy that advanced investors and hedge funds might use to sway the market, make premiums, and lower a stock price.
To use a realistic (if unscrupulous) example, let’s say the market indicates that shares of Xeris Pharmaceuticals are about to skyrocket in value from $100 to $200 thanks to a new miracle drug. You believe that the drug will get rejected by the FDA, so you offer 100 short calls for $150 at a premium of $5 and an expiration date of 1 month.
You’re telling the market “I promise to sell you 10,000 shares of XERS at $150 within the next month, for an upfront premium of $50,000.”
The market thinks you’re nuts and buys up all 100 of your call options. You immediately net 100 x 100 x $5 in premiums, or $50,000.
In Scenario one, let’s say the drug gets rejected and XERS shares plummet to $50. Nobody executes on your calls, so get to keep the $50,000 of premiums.
In Scenario two, let’s say shares of XERS did rise to $200 by the expiration date. All of your buyers execute on their options, but you don’t have the shares to sell them. You now have to buy up 10,000 shares at $200 and re-sell them for the strike price of $150 to your call buyers. Your net loss (minus commissions et al) is 10,000 x ($200 – $150) = $500,000, minus your premium of $50,000 = $450,000.
This example illustrates why short calls are so risky. The maximum upside of short calls is the premium only, or in this case, $50,000. But the downsides are limitless; if XERS had skyrocketed to $1,000 per share, you’d be out millions.
Are call options safer than other investments?
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Call options are often considered a very risky asset. They’re inherently complex, and because they’re more commonly traded by advanced investors and institutions backed by limitless market data, amateurs can quickly find themselves in the red facing a lot of potential losses.
While it’s great to understand the basics of call options, don’t consider them until you’re a more experienced investor. There’s a lot of money on the line if you don’t know what you’re doing. You’re better off sticking with a less risky asset such as a mutual fund.
Read more: How To Invest: Essential Advice To Help You Start Investing
When are call options useful?
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There are three common reasons why more advanced investors might leverage call options (again, I need to reiterate that this is not the right investment for beginners).
Income
Selling options is a quick way to make a few bucks off of your existing assets. As illustrated in the example above, you can sell a covered call on stocks in your portfolio that you believe will stay steady or even lose a little value. There are tools out there like E*TRADE‘s Options Income Finder that can help you ID shares in your portfolio that are ripe for passive income generation.
Plus, selling calls with a strike price above the current market price is a low-risk income-generating strategy; even if your buyer’s long call pays off and they execute their right to buy, you’ve still netted their premiums plus the difference in your purchase price and strike price.
Low-risk speculation
Call options also give you the ability to “invest” in a stock without having to purchase shares upfront.
Let’s say you foresee shares of TSLA skyrocketing, but you need some time to save or sell off your other positions to afford some TSLA. You can lock in a decent strike price by paying a few hundred bucks in premiums today and buy yourself some time. Later, if TSLA doesn’t rise like you thought it would, you can simply let your options expire.
Tax management
Call options are also a common way a buyer can prevent a “taxable event” through realized gains.
Let’s say you need to squeeze some income out of your 100 shares of AMZN. You could sell, but you’ll be subject to commissions and capital gains taxes on your newly-realized gains.
Read more:Gains And Losses: What Will Be Taxed And What Can I Claim?
So instead of selling your position, you can sell a covered option on your shares. In this case, the only cost to you, the buyer, is the time and legal bill for setting up the options contract. Many option sellers (aka, online brokers) can set up options contracts for a low fee, and once your buyer picks them up, you can reap in the premium right away.
Summary
Call options are financial contracts that can be leveraged to squeeze a little extra income out of your existing portfolio and help you invest in the stock market without having to purchase shares upfront.
Make no mistake; options trading is an advanced investing technique (maybe not a black belt, but perhaps a yellow belt right in the middle). It’s worth reiterating, too, that short calls can put you at unlimited risk for little immediate upside, so they’re not at all right for the beginner trader.
But if you learn the ropes and take it slow, options trading can make your portfolio go a little further.
If you want people to read your investing-related post or book, you’ll increase your chances by mentioning Warren Buffett in your title. After all, I just did it — and it might be why you chose to read this. Every financial media company does it, including us at The Motley Fool.
His investing skills while the chairman and CEO of Berkshire Hathaway have made him the fourth-richest man in the world. Most of the articles and books about him attempt to dissect his investing strategies and explain how you can use them to identify your own winning stocks. So it was a bit surprising when Larry Swedroe wrote Think, Act, and Invest Like Warren Buffett. He’s the director of research for the BAM Alliance of independent financial advisers, the author of several books, and a blogger on CBS Marketwatch. He also thinks that picking individual stocks — as opposed to investing in index funds — is a really bad idea.
I’ve chatted several times with Larry over the years, because he’s as smart as they come on the topics of asset allocation and financial planning. Recently, we had a conversation about why he would write a book singing the praises of the world’s most famous stock picker. Of course, that whole “increase sales by including Buffett in your headline” thing probably had something to do with it. But it’s not just a gimmick; Larry has three main arguments for why the index investor should still listen to the Oracle of Omaha, and he uses actual quotes from Buffett to back them up. And it starts with…
1. Warren Buffett recommends index funds
It may not be widely known, but Buffett is actually a fan of index funds. Here’s what he wrote in his 1996 annual letter:
“Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expense) delivered by the great majority of investment professionals. Seriously, costs matter.”
Buffett’s a smart fellow, and he knows his history and his statistics; both establish that it’s pretty darn hard (though not impossible) to outperform an index fund over the long term. Obviously, he doesn’t think this applies to him — he still keeps picking individual stocks (or buying companies outright). But he recognizes the great value of the index fund. The same goes for us at The Motley Fool. My colleagues devote a great deal of time and energy to finding great stocks. But we also have a room named after John Bogle, the founder of the Vanguard family of mutual funds and one of the primary progenitors of the index fund. (Next to the entrance to our Bogle room, we have a picture of Mr. Bogle wearing a Motley Fool cap during one of his visits to our office. It’s pretty cool.)
2. Warren Buffett ignores market forecasts
Wade into the waters of the ever-flowing financial media, and you’ll see an endless flotilla of gurus offering their assessments of where the market is headed. Buffett thinks you should pay them no heed:
“We have long felt that the only value of stock forecasters is to make fortune-tellers look good. Even now, Charlie [Munger, vice chairman of Berkshire Hathaway] and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.”
In case you need some stats to back that up, CXO Advisory Group analyzed the predictions of 68 “experts” from 2005 to 2012. As a group, they were right less than half the time. You would have been better off flipping a coin than listening to these people.
During our most recent discussion, I asked Larry Swedroe why these people still have jobs. He had a few reasons, but one in particular stood out: “I have come to the conclusion, after my long years of experience both as an adviser to some of the largest corporations in the world on managing financial risk and as adviser to individuals and endowments, that there’s an all-too-human need for us to believe that there’s somebody out there who can protect us from bad things.” I think he’s on to something. Unfortunately, market predictions just create — rather than offer protection from — bad things.
3. Warren Buffett doesn’t try to time the market
You won’t see Berkshire Hathaway buying and selling its stocks or businesses too often. Once a company joins the Berkshire family, it’ll likely be in there for quite a while — decades probably. Here’s what Buffett said about it:
“Our stay-put behavior reflects our view that the stock market serves as a relocation center at which money is moved from the active to the patient.”
My very first post on Get Rich Slowly was about attending the 2009 Berkshire Hathaway annual meeting. It happened in May, just two months after the stock market hit bottom after dropping more than 50 percent. It was a dang scary time.
During that annual meeting — and at just about every annual meeting over the past several years — the topic of Buffett’s and Munger’s successors came up. After all, Buffett is 82 and Munger is 89. They didn’t name names, but they have some people in mind. However, it won’t be someone who tries to move in and out of the stock market. Here’s what they said:
Munger: I don’t think we’d want an investment manager who would want to go to cash based on macro factors. We think it’s impossible.
Buffett: In fact, we’d leave out someone who thought he could do that.
The important three questions
The main argument that Larry makes in his latest books is this: If you agree that Buffett is one of the greatest investors of all time, then take his advice. And the next time you’re inclined to act according to some expert’s forecast market forecast, Larry has three questions you should ask yourself:
Is Warren Buffett acting on this expert’s opinion?
If he isn’t, should I be doing so?
What do I know about the value of this forecast that Buffett and the market in general doesn’t?
As Larry told me, “If someone has already told you that they think Buffett’s the greatest investor, it’s hard for them to say that they should do the opposite of what he’s advising them.”