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About Richard Barrington, CFA & Senior Financial Analyst
Richard Barrington

Richard Barrington, CFA, is the primary spokesperson and personal finance expert for MoneyRates. He is a 20-year veteran of the financial industry, including having served for over a dozen years as a member of the Executive Committee of Manning & Napier Advisors, Inc. He earned his Chartered Financial Analyst designation in 1991 with the Association for Investment Management and Research (AIMR). Richard has written extensively on investment topics, including investments, money market accounts, certificates of deposit, and personal finance as it relates to retirement.

Richard has been quoted by numerous media publications such as The New York Times, The Wall Street Journal, and Pensions & Investments magazine.[...] Read more Richard can discuss economic and market history in detail and is well respected for his ability to relate to a broad audience from a personal financial standpoint. Richard approaches financial topics with an understanding that fresh perspectives are often more valuable than mainstream consensus. He has written for over 50 financial Web sites, such as Investopedia, Yahoo, MSN, Allbusiness, and Encarta, and is most sought after by members of the media for his niche expertise in these topics: Certificates of Deposit, Money Market and Savings Accounts, Saving for Retirement, Housing and Mortgage Meltdown, Interest rates, Investments, Macro Economic and Government Policy Issues, Historical Financial Events, Discerning Long Term Implications

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How should we handle a jump in mortgage payments?

July 17, 2014

| Senior Financial Analyst, CFA

Q: My husband and I restructured our mortgage a few years ago when we were having trouble making the payments. The mortgage company agreed to reduce the payments for the first 10 years, but after that they are higher than ever. I'm starting to worry about it because things haven't gotten any better for us financially. Our house still isn't worth as much as we owe, so I'm wondering if we should just default on the loan now, rather than put another six years of payments into a property we're likely to lose anyway. What do you think?

A: It's a tough situation, but six years is a long time, and you may not want to give up just yet. Here are some variables you need to consider:

  1. How does your loan rate compare with current mortgage rates? Based on what you describe, you would have restructured your mortgage about four years ago, when mortgage rates were over half a point higher than today's mortgage rates. There may be even greater potential to reduce your mortgage rate if you have since cleared up any black marks on your credit history, so this is one possibility to look into.
  2. How do your mortgage payments compare with rental costs? Never view any financial decision in isolation, but rather in comparison with alternatives. In this case, you have to compare your current mortgage costs with what it would cost you to rent. Unless you would save a lot by renting, it argues for staying in the home at least until the step-up in payments comes closer.
  3. How far is your home's value from being above water? The home may not be worth what you owe now, but if it is getting closer there may be a realistic chance of it getting there within the next six years. That would give you a chance to sell before the higher payments hit, and walk away with some equity.
  4. How are your employment prospects? The job market is getting better, so depending on your health and your skills, there is a chance you could raise your income enough in six years to afford the higher payments.
  5. Is there room for any belt-tightening? You have probably already thought about this, but a ruthless round of budget cuts designed to make your mortgage a priority might allow you to build up enough of a reserve to cushion the impact of the increased payments.

You are right to be thinking ahead to when your payments expand, because you need a plan for dealing with that. However, there is still enough time for improving circumstances to put a viable plan more within your reach.

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Should I trade my annuity for a CD?

July 14, 2014

| Senior Financial Analyst, CFA

Q: I am 83 and I have an insurance annuity. I would like to take it out and put it into an IRA CD at a bank. How do I go about doing this?

A: There are three sets of issues raised by this situation:

  1. Tax issues. Your situation is complicated by the fact that you are over age 70 1/2. IRS regulations stipulate that you have to be below age 70 1/2 and have wage compensation in order to start an IRA. You should probably consult an accountant to make sure there are no adverse tax consequences to accessing the value of the annuity at this time, especially if the option of an IRA is not open to you. However, just because you cannot open an IRA does not mean a CD is not an option for you if you are looking for guaranteed income.
  2. Contractual issues. Your annuity contract should include the logistical details of who to contact about terminating the annuity. Before you do that though, you should also look through the contract to make sure the are no penalties for terminating the annuity at this time. The more recently you purchased the annuity, the more likely there are to be such penalties. Also, you should see what the insurance component of the contract entails, because this is a component of an annuity that will not be replicated by a CD. As for the CD, if you decide to open one, you should consider first what your probable liquidity needs are, because this will help you decide how long a CD term to choose. Typically, you will find the best CD rates in longer term CDs, but you may not want to commit for that long. Another important consideration is the penalty for early withdrawal -- the smaller the penalty, the more flexibility you will have if your liquidity needs change.
  3. Interest rate issues. If you determine that it makes sense in other respects to terminate the annuity in favor of the CD, the next step is to shop for the best CD rates. Not only do you have to compare banks to find the best rate, but you should make sure you can find a CD that offers a rate advantage over your current annuity.

The order in which these issues appear above is probably the best order in which to address them. In other words, you want to start by avoiding any adverse tax ramifications, and then avoid any potential contractual problems. Only when you know you are free of these two issues does the decision essentially come down to comparing interest rates.

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Cosign or lend?

July 3, 2014

| Senior Financial Analyst, CFA

Q: A friend of mine has had some financial problems in the past, but now has a good-paying job and has gotten his budget under control. He needs a car loan but is having trouble qualifying because of his past history. He asked me if I would lend him the money myself or cosign a loan with him. Which do you think would be better?

A: Ugh. Your friend is putting you on the spot by offering you a choice of two unappealing options.

If you cosign a loan, you are agreeing to be fully responsible for the loan if your friend defaults. So, you could be out the amount borrowed, plus any interest and penalties resulting from late payments. Beyond that potential cost, your credit rating could be affected simply by taking on this obligation, and it would certainly be affected if your friend defaults and you have trouble paying back the loan.

In contrast, there are a couple of advantages to lending him the money yourself as opposed to co-signing a loan. Both put you in the position of potentially losing the principal of the loan, but at least if you made the loan yourself, you would not be on the hook for any interest or penalties. In fact, a potential upside is that you would presumably be charging your friend interest, and with interest on savings accounts and other deposits near zero, this could be a way of earning a little more on your money -- if everything works out.

Of course, personal loans are also much more risky than savings accounts, so you should take that into consideration when deciding what interest rate to charge your friend. Basically, his inability to qualify for a loan on his own tells you that lenders consider him a high risk, and friendship or no friendship, you should view him the same way. You should charge an interest rate that takes into account the amount of risk you are taking.

If you decide to make the loan, you should set up a formal loan agreement and payment schedule. This should not be treated casually because you are friends. In fact, one potential problem of making the loan yourself is that your friend might take an obligation to a professional lender more seriously, while he might be tempted to try to appeal to your friendship if he has trouble making payments to you.

Of course, there is a third option here: just saying no. You mention that your friend is getting beyond his past financial problems, but part of becoming financially responsible is accepting the consequences for past mistakes. Your friend may just have to wait and save up for his car.

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Are shipping containers a good investment?

June 26, 2014

| Senior Financial Analyst, CFA

Q: Would it be wise to invest in shipping containers in this economy?

A: This type of investment calls to mind famed Fidelity Magellan investor Peter Lynch, who advocated investing in things you see in use every day. There is some merit to this type of common-sense investing, but it should also be noted that Lynch rose to prominence in the late 1970s. This was a time when the stock market was still recovering from an extended bear market, and international investing was still in its infancy. As a result, valuations were much cheaper than they are today.

Now, investors around the world are constantly on the hunt for the next compelling investment story, and that makes things more complicated. A huge amount of money chasing investment opportunities tends to raise the price of investments, attract competition to growth businesses and create opportunities for scam artists. All of this is exacerbated by the low yields on bonds and savings accounts, which have investors desperate for alternatives.

In today's global economy, there is no doubt that the intermodal transportation of goods that uses shipping containers will be a central part of commerce. So, barring some kind of extended economic slump, you can take demand growth as a given. However, there are some other key questions you have to ask before you assume that shipping containers are a good investment:

  1. How is supply growth? Demand growth may be steady, but if people are building new shipping containers faster than that demand growth, it will diminish the return on those containers.
  2. What is the current yield? Promoters of investments like to cite past returns, but what matters to new investors is the current yield. What earnings are shipping containers generating as a percentage of the price it costs to invest in them? Note that this yield not only has to compete with the yield on savings accounts or bonds, but it should offer a substantial premium to compensate for the greater risk.
  3. Is there a diversified vehicle for investment? The more diversification, the better. This is true for the variety of shipping companies and the range of trading partners in various parts of the world.
  4. Are the fees for accessing the investment reasonable? Diversification is good, but anyone bundling these opportunities into an investment vehicle is going to be charging a fee. You need to consider how much that will erode the return available.
  5. Is the provider trustworthy? This is the most important question. Try to make this kind of investment through a reputable bank or brokerage firm regulated in the U.S.

There are no easy answers in today's investment environment, but good opportunities should be worth doing a little extra research.

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Can the US keep borrowing indefinitely?

June 19, 2014

| Senior Financial Analyst, CFA

Q: My question and concern is about the U.S. debt. It does not seem possible that we can keep borrowing without there eventually being a giant backlash against the U.S. dollar. In that scenario, seemingly safe savings accounts would be the most dangerous thing -- not only would the value of the dollars in those accounts be sinking, but the government deposit guarantee might not be worth anything. So, I'm looking at alternatives like gold and Bitcoin. Do you have any suggestions?

A: Your concerns are well-founded, though you might want to keep working on your conclusions. Let me break your question down into four parts:

  1. Can the U.S. keep borrowing indefinitely? According to the Office of Management and Budget, the official budget deficit is projected to be less than $700 billion this year, down from a peak of more than $1.5 trillion in 2009. So in a way, the government is making progress, but of course simply reducing the annual deficit does not represent repayment of debt outstanding. So why do people keep lending to the U.S.? Because U.S. securities are considered a risk-free source of income, and as long as investors get their interest and principal on time, they will not be overly concerned that the U.S. keeps rolling over its debt.
  2. Are savings accounts safe in the event of a U.S. dollar crisis? If the dollar tanked, it would hurt the relative value of U.S. bank accounts, but it would not necessarily jeopardize the principal of those accounts. The FDIC funds its insurance via levies on participating banks, so it does have a source of funding independent of the government itself.
  3. Are Bitcoin and gold viable alternatives? Looking at the price changes in recent years should be enough to tell you that these are speculative investments, and therefore risky. Regarding Bitcoin in particular, if you are concerned about the backing of the U.S. dollar, why are you not concerned about a form of currency that has no tax base or resources to fall back on?
  4. What are some other alternatives? The U.S. is so important to the global economy that there is no perfect answer to this question. In other words, if the U.S. goes down, it will drag a great many other investments and currencies in its wake. Broad-based international diversification may be the best approach. While there may not be an immediate winner if the U.S. has a currency crisis, some beneficiaries from around the world are bound to emerge eventually.

You have raised an important and complex problem. Given your recognition of its complexity, you might want to be a little more suspicious of seemingly easy answers like Bitcoin and gold.

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