Stanford Works to Improve Financial Literacy

Over the years, various steps have been taken to improve the financial well-being of the average American family.  None of those programs, however, have addressed the lack of financial literacy within a vast segment of our society.  To this day, many people still do not know the basics of personal financial planning, what retirement planning is, or everyday concepts such as “stocks” or “interest rates”.  This lack of financial literacy in no-small way contributes to the income inequality we’ve all been hearing, since facility with basic concepts separates the populations into those who plan wisely and those who simply try to survive day-to-day.

Am glad to see Stanford GSB taking a lead role in tackling this problem.  Finance professor Joshua Rauh has prepared a set of financial planning videos aimed not at high-flying MBAs, but ordinary citizens with limited understanding of important financial concepts which impact them.  They are great videos: communicating information clearly and directly, and accurately without any hint of condescension.  They are very well done, and bravo on Stanford for making these readily available.

Am hoping other business schools and universities, as well as large financial organizations like UBS take on a role in promoting broad financial literacy.

— Tim Shields, UBS


Pay Off the Mortgage?

It’s a question which has long plagued homeowners, at least those homeowners fortunate enough to have additional funds leftover at the end of a month:  “Should I paydown my mortgage?”

I think the way to approach answering this question starts with another one: “What happens to the money if it is not applied to the mortgage?” If the answer is “I don’t know” or some variant, or if the money disappears down a rabbit hole of unnecessary purchases, then I come squarely down on the side of using those funds to pay down the mortgage.  The rate of return on early payoff of a mortgage is almost always low: namely, the interest rate on the loan minus the rate of tax benefit being sacrificed.  So in today’s environment, the return might be about 3%.  That is not great at all, but it beats bank interest and it beats new clothes with the tags still on hanging in the closet.

It is probably not a bad idea if you are a cautious investor.  If you want to invest in something but are wary of the stock market, real estate, or other investment options, paying down a mortgage is not a bad, extremely low-risk alternative.  The key assumption I am making is that you have no other debt. If there are credit card balances out there, they should get top priority, since they are almost always linked outrageously high rates.

If none of this describes you, and you are comfortable with riskier investments in more promising markets, than paying down a mortgage is not a great idea:  better to use that money for an index fund, a particular stock that seems attractive, or a piece of real estate that will appreciate and/or generate rental income.

I ran some scenarios through UBS investment models on my desktop, and they pretty much nearly always recommend a market investment over a paid-down mortgage.  Still, few things create as much piece of mind as having no debt and owning the roof over your outright.

Tim Shields

Of Wills and Trusts

Recently participated in a discussion where an older gentleman was reviewing his estate papers, and was wondering if — in addition to a will — he should also set up a trust.  Specifically, a living revocable trust, since one of his children had been pushing for it based on watching the Suze Orman show.

Personally, I just don’t see the need in most cases.  Most people have modest estates with wills that clearly express their desires.  That should be enough to properly and fairly settle the estate and transfer the assets according to the deceased’s wishes.  An irrevocable trust is more appropriate for very large estates (>$5 million), or those where privacy is paramount.  A will is a public document, whereas a trust is private.

A will goes through court-supervised probate whereas a trust does not.  This is supposedly one of the advantages of a trust.  But probate is a fairly routine court activity; it’s not a big deal.  Furthermore, a trust has its own costs.  At UBS we offer this service to customers, as do peer banks and estate lawyers.  Any of these will charge a trust establishment fee.  There will also be a maintenance fee to keep the trust up and running and complete any necessary filings.  Finally, when you create the trust you must put assets in the trust.  At that point, the assets are no longer yours– they belong to the trust.  Certainly, in a revocable trust you can reverse course and take back the assets, but there is both time and cost associated with those actions.

My general rule of thumb is this:  if you are not sure if you need a living revocable trust, then you almost certainly do not.

–Tim Shields’, UBS