February 2021 NewsletterSubmitted by Dorval & Chorne on February 1st, 2021
By Keagan Kinsella | February 1, 2021
Welcome to February’s financial planning newsletter! I don’t know about you but during this past month it’s been so interesting to see the way people think and act when it comes to the idea of money! Between the crazy things that happened with Wall Street and Robinhood last week, and the Powerball billion-dollar lottery, it’s clear finances are very personal to how people feel about certain things. Personally, something that boggles myself is how the concept of “why not me?!” changes in different situations. When it comes to winning something like the lottery, or making a fortune day trading stocks on Robinhood – where the chances of “winning” are miniscule, people still buy in so easily and can start to imagine everything they would do when they are the lucky one.
But on the other hand, I think about how easy it is for us to convince ourselves of the exact opposite, “it could never be me?!” For example, when we are on a plane, how we can easily accept the fact the chances of us needing to land on the water and have an emergency evacuation will likely never happen! Just a random thought, as I write this from the airplane…
If you’ve been reading for a while, this newsletter includes an array of topics that revolve around finances, but in a common sense, simple, quality of life focused way. For example, buying shares of Dogecoin (you may need to look that one up), or buying a lottery ticket are best suited for entertainment purposes, rather than legitimate financial planning tools!
Let’s get into the good stuff. This month we are talking about:
- Question of the month: When is the right time to get preapproved for a mortgage, and what are the biggest factors they are considering?
- Just your average $12M Mistake—and how you can learn on a smaller scale
Question of the month:
We are hoping to buy a house within the next year. However, I don’t plan to stay long term at my job, and I also have student loans. Should we wait until things are better to get preapproved for a mortgage, or does that not matter?”
Getting preapproved for a mortgage is the first step in the home buying process. The lender is essentially evaluating several factors to determine how much you would be eligible to take out for a loan on a home. This is a big step because it affects your budget!
It isn’t uncommon for lenders to be a little lenient on how much they preapprove you for, because of course, the bigger loan they give you, the more interest they collect. We think it is a great idea to see a financial planner and talk about what a realistic and responsible budget is before house shopping. Here are a few of the factors lenders look at to see how much you’ll be approved for:
- Credit score: This will impact what loan type you are eligible for, interest rate, and down payment amount required. Being current on all payments and a steady credit score is favorable.
- Employment and income history: Regular salary or hourly is preferred, but lenders also will look at self-employed and nonemployment income with provided documentation to ensure the likelihood of the loan continuance. If you're part of a two-income household, signing on a mortgage with both spouses typically could help you qualify for a bigger loan.
- Assets/down payment: They will look at your assets (ie: bank account statements) which help show the lender what kind of down payment you will have. Certain loans come with a requirement that you purchase private mortgage insurance (PMI) if you put down less than 20% of loan value.
- Debt to income ratio: Lenders will look at your gross monthly income compared to debt payments reflected on your credit report. Most mortgage companies want a debt to income (DTI) ratio less than 40-45%.
If you are truly serious about house shopping and buying a house in the next year, our advice is to talk to a lender regardless of where you are at financially, Since there are various factors that affect mortgage preapproval, you may be surprised that you are in better shape than you think, especially if your spouse is in the picture with you. We believe housing decisions are one of the biggest influences on quality of life, so we love to talk about it from a planning perspective!
Just your average $12M Mistake
If you aren’t familiar with David Dobrik, he is a popular YouTube personality and podcaster who is also a long-time Tesla aficionado. Three years ago (I actually listened to it at the time) he talked about how he had just bought $1M of Tesla stock because he believed in and loved the company so much. At this time the price per share of stock was $305. He’s by no means a sophisticated investor, and it was one of his early experiences with the stock market, so it was a rude awakening for him when the stock fell by a few percent that day (a few percent on a million dollars is still a lot of money!). The next day, he waited until it came back up to the price he paid before selling and ended up still coming out ahead about $7,000. On a following podcast he admitted it was the anxiety of watching the market every day and losing money which caused the panic to sell it all.
A few days ago, he posted on Tik Tok about the decision he made three years ago. If he would have held those shares, his investment would be worth ~$13M today! He calls it the biggest regret of his life. I’m sure it was also an impactful lesson on the power of long-term investing. It’s so easy to get wrapped up in emotions and make rash decisions!
A great rule of thumb is to never put more into an individual stock than you’d be willing to lose. A stock doesn’t have the diversification that a mutual fund or index fund has, so you really are taking a bet on the success…or failure of that company. Sure, $1M would be a lot for most average investors, but it clearly was more than David was willing to lose based on his bail out after the first decline.
In Dan’s most recent blog, he talked about the power of recency bias (which is where we try to predict the future based on the results of our most recent experiences) affecting the decisions we make and how “experts” relentlessly reinforce the same ideas in the media. David experienced recency bias with Tesla, thinking that because it declined…it was only going to keep declining for the foreseeable future! He was wrong…and now it’d be pretty easy to find people who believe the exact opposite—they think Tesla can only go up!
The great thing is, you can learn from David’s mistake. For example, if you have $50,000 in your 401k, and the market declines by 30%, you’d essentially be down $15,000! This is not the time to sell and try to outsmart the market! Your 401k is a retirement plan, meaning it’s there for the long haul. Avoid making emotional decisions that you could regret down the road.
All right, that’s it for this month. Stay tuned for my next newsletter where I will continue to share and inform in new and creative ways. If you want to sign up for the newsletter email, click here (and let others know they can sign up.) Last but not least, let’s connect on LinkedIn!
Advisory services provided through AdvisorNet Wealth Management (AWM). Dorval & Chorne Financial Advisors and AWM are not affiliated.