Making Money Work

Some context:

I am basically a one-man design team for a bimonthly magazine.

As a startup, I was never really making much money here. About $48k.

In fact, marketwise, I was barely getting paid what a single designer should make even tho I am doing the job of at least two people.

I havent received a raise since fall 2007, even for cost of living.

In the time since then, my work (and remember that there is only one designer here) has won us about 6 industry awards.

In fact, in 2010 we won 3 awards and they were all design awards.

The reason I bring all this up is because one would hope that a performance record like that would merit a certain amount of base respect. However since this is the first business my boss has owned, I feel like they are simply spoiled into thinking that this work is just a given. Maybe they just dont know any better.



So now, with the industry souring and ad sales dropping a bit, I have taken a significant pay cut and am now doing all of the advert design that they once jobbed out to freelancers. Ad to that our rush to launch an iPad version and I am now doing far more work for even less money.

I wasnt offered flex time. I wasnt offered furlough days. In fact, for a salaried employee that ends up working heavy deadlines once every two months, my bosses still treat me like an employee that needs to saty til the very end of his "shift" regardless of whether I have work to do at the time.



Another issue (more context) is that they seem to think they have some kind of exclusivity with me. At first they asked that I let them know if I was doing any freelance work, as a "courtesy". But the very first time I mentioned that I was doing a poster on my own time on a dead weekend for a friends band for FREE, my boss acted very butthurt. AS if he should wield a veto power over my work on my own time. This has had the effect of me simply hiding the freelance I do from them. I really dont feel its their business.



So annnnnnnyway. Ive had enough and I am building my portfolio site to hopefully begin shopping myself around. I know the economy sucks, but Im not planning to leave until I get a better offer.



Knowing all that you know about the attitude of my boss presented above, should I worry about them trying to prevent me from using the work Ive created here the last 5 years in my portfolio? CAN they prevent me? Should I be worried?



BONUS: am I being treated unfairly? Ive been in this industry for 15 years and Im giving up hope that Ill ever not work for knobs. Does it suck everywhere?

I know that memories are short on Wall Street. But are they short on Main Street too? Reading Linda Stern’s latest paean to leverage and housing risk, it certainly seems that way. Saving for a down payment is hard, she says. It can take time!

And that doesn’t seem to pay. If you think about the cost of paying rent for five or more years, you may be better off jumping into a home with a low down payment now. That’s true even if you have to spend more money on fees and mortgage insurance to get one of those low down payment loans.

Well, yes, let’s think about the cost of paying rent for five or more years. In fact, let’s plug all our numbers into a rent-vs-buy calculator and see where we’re at after five years. The problem with Linda’s formulation here is that it helps to reinforce the common fallacy that 100% of rent payments are “wasted,” in a way that mortgage payments are not. But that’s simply not true. In both cases you’re paying money every month for your shelter; in the rental case that money goes to the landlord, while in the ownership case it goes to the bank.

Some small part of your monthly payment may or may not end up helping you build equity in your home, if house prices move up rather than down and depending on how much of your payment goes towards principal. But remember that the alternative here is saving up for a down payment — which is essentially the same thing as building up equity in a future home. If you save up $250 per month for five years and then put down $15,000 as a down payment, then you immediately start off with $15,000 of equity in your home. By contrast, if you buy today with no money down and start making mortgage payments, there’s a good chance your equity will be much less than $15,000 in five years’ time.

But Linda’s on a roll here, and manages to come out with one of the most astonishing pieces of personal-finance advice I’ve seen since the crisis hit:

Even if you have the money for a bigger down payment, there can be good reasons to save your cash. Mortgage rates continue to skirt all-time lows: Why not put your money to work for yourself and borrow as much as you can reasonably afford, on a monthly basis, at today’s rates? You can put the money you’re not paying into a down payment to work elsewhere. If home values rise, you will have done your best to leverage a small down payment into bigger equity. If they fall, you’ll have less skin in the game, and that could put more pressure on your banker to improve your loan terms lest you walk away.

This, in a nutshell, is everything that was wrong with the housing market before the crash — everything that we want to avoid going forward. Can’t Linda look around at the current devastated state of many people who bought with little or no money down, and see the dangers here? Evidently not. Instead, she seems to think it’s a bright idea to borrow more money than you need, to the point at which you’re pushing the envelope of what you can reasonably afford. And then take the cash you’re not using for a down payment, and “put your money to work for yourself.”

I barely know where to start on this. Here’s one way of thinking about it: banks are not charities, and that they expect to make money from their loans. They have a cost of funds which is lower than the mortgage rate that you’re paying; the difference between the two rates is their profit. You, however, if you follow Linda’s advice, have a cost of funds which is your mortgage rate: if you wind up getting a lower return on your savings than you’re paying on your mortgage, you would have been better off just using the money for a down payment. Needless to say, if there was an easy way of getting a higher return on capital than the mortgage rate, the banks would have done it already, rather than lending you the money. And it’s pretty delusional, frankly, to think that you can invest better than say JP Morgan. Yes, there are tax benefits to having lots of mortgage-interest payments. But they’re not sufficient to make the difference here.

Here’s another way: let’s say you own your home outright. Would you take out a mortgage against 95% of your home’s present market value, and then invest that money in the market somehow, trying to “put it to work for yourself “? Of course not: you don’t have remotely that kind of risk appetite. Borrowing money against your house to invest in the market is, always, stupid. But that’s exactly what Linda’s proposing you do.

And here’s one more: shit happens. Sometimes, you end up needing money, in an emergency. If you’re already borrowing as much as you can reasonably afford, that’s a big problem. If you have a bit of fiscal breathing room, you’re much better off. If you end up in a situation where you’re in a position to put pressure on your banker to improve your loan terms lest you walk away, that’s not a good situation to be in. It means you’re broke. It’s something you want to avoid, whereas in Linda World it seems to be something to actively court.

Linda’s also convinced that house prices are going to rise: if you buy now rather than later, she writes, that means you’re buying “while housing prices are low.” That’s debatable — they still seem quite expensive, on some measures: the price-to-rent ratio, for instance, is still well above its historical average. And more generally, buying low doesn’t help you in the slightest if prices just continue to grind lower.

Linda’s conclusion is that “the less you put down, the better off you are.” Which is true so long as you keep on making all your mortgage payments without any problem, and nothing goes very wrong either with your personal economic situation or with the US economy as a whole. That’s the way that leverage works: it makes everything sunny, so long as things go right. And then it plunges you into misery when things go wrong.

The scariest part of Linda’s post, for me, is when she talks about how it’s a good idea to “do your best to leverage a small down payment into bigger equity.” It’s not the dollar amount of the equity she’s talking about here, it’s the leverage used to get there, and the higher the leverage the better off you are. Following that advice got us into our current mess. And taking it now is a recipe for disaster.

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