Welcome to Spring! It’s snowing in my neighborhood as I’m writing this, but I’ve decided to be an optimist about it. And not just because I have had enough snow this winter to last me a lifetime of Decembers, but because I am a huge believer that optimism works – perhaps not in improving the weather (this week’s book prize to the first Twitter @jeanchatzky and Facebook facebook.com/jeanchatzky followers to tell me what product was associated with the saying: “It isn’t nice to fool Mother Nature”) – but in boosting your wealth. It’s true! A study of 5,000 people I conducted for my book The Difference showed that it’s the more optimistic among us who get the job interviews and the jobs themselves. Once on the job, their performance evaluations are higher – not just from their bosses but from their colleagues. They get promoted and their wealth rises accordingly. Optimists are also a lot less likely than the average bear to be living paycheck-to-paycheck.
The paycheck-to-paycheck cycle is a bigger problem than it was when I wrote The Difference. That was three years ago and 56 percent of the population was living that way. Today, 77 percent of workers live that way, according to a new study (conducted by Harris Interactive, the same firm that conducted my research, though this time for CareerBuilder). To make ends meet, the survey-takers said they were cutting back on leisure activities, couponing and shopping at discount stores, driving less to save on gas (and this was before the recent hikes at the pump), cancelling cable and using more public transportation. All good moves. But try these two optimism boosting exercises, too:
Over the weekend, the New York Times reported that the number of consumers opting for Adjustable Rate Mortgages is up – significantly. At Bank of America, for instance, ARMs now represent one-in-10 mortgage transactions. That’s double the rate of ARMs a year ago. And the increase makes sense. As mortgage rates have edged up, it becomes more compelling to lower your monthly payment by not going with a 30-year fixed rate loan. ARMs, depending on the product, can be priced a full percentage point (or a point and a half) lower. So how do you know if an ARM is a good call for you?
The first thing you have to understand is how ARMs work. These are loans that are fixed for a set period of time (one-year is available, but not popular – the most popular ARMs now are fixed for the first five years or seven years) and after that the interest rate will adjust based on the index (prime or LIBOR) to which it is tied. Generally rates can’t move more than two percentage points in a year and can’t go up more than six points in total. The shorter your fixed period, the lower your initial rate will be because the less interest-rate risk the lender is assuming. So, a one-year ARM will have an initital rate that’s cheaper than a five, which is cheaper than a seven and so on. Right now the average rate on a 5-1 ARM is 3.74 percent, and the average on a 7-1 is 4.74 percent.
The reason ARMs make sense for many people is that Americans are movers. If you have good reason to believe you won’t be in your house more than 5 years, or more than 7, that’s a good guideline to follow when choosing your loan. Why not save a little money on the monthly payment if you don’t have to worry about rates going up? And if you are planning on being there longer? Then, in my book a fixed-rate mortgage still makes sense. As does paying it off before you hit retirement.
Okay, sometimes information comes my way that I can’t believe you don’t already know – my old boss used to say that information like this has a “PhD in the obvious.” But just in case…
If you are considering paying your taxes with a credit card, you need to know that you’re not only going to pay those taxes – you’re going to pay a fee of 1.9 to 3.9 percent to the IRS. (And you’re going to pay interest on top of that if you don’t pay off the balance in full that month.) Evidently, according to the folks at FreeScore.com, two-thirds of Americans are unaware of that. In case you were one of them before, now you’re not. Charging your taxes? A bad idea.
Have a good week!