We get just one shot at making the journey from birth to retirement. Flirting with financial disaster is not advisable.

This Week/Oct. 22-28

FREEZE YOUR CREDIT. This will prevent data thieves from taking out loans and credit cards using your identity. But it also means you’ll need to contact the three credit bureaus and unfreeze your credit temporarily whenever applying for credit. Sound like a hassle? As an alternative, consider setting up an initial fraud alert and then renewing it every 90 days.

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Money Guide

Everything you need to be smarter about money—all in one place.

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Amortizing Loans

IN THE PREVIOUS SECTION'S example, we assumed you didn’t pay the interest on a loan or repay any of the sum originally borrowed. Instead, the amount owed was allowed to balloon in value. This is unrealistic. Most loans are amortizing, meaning that each month you pay not only the interest charged, but also repay part of the sum originally borrowed. A classic example is a 30-year fixed-rate mortgage. The payment each month stays the same. That payment is set so that not only do you pay the interest incurred each month, but also you gradually reduce the loan’s principal balance, with the goal of repaying the entire sum borrowed after 30 years. While the monthly payment stays the same over the 30 years, the amount that goes to interest and principal changes each month. In the initial years, most of the monthly payment goes toward interest. But as the loan balance shrinks, less interest is owed each month and more money gets directed toward paying down principal. To see what this sort of amortization schedule looks like, try the Mortgage Calculator at Bankrate.com. Let’s say you take out a $200,000 30-year fixed-rate mortgage with a 6% annual interest rate, equal to 0.5% per month. The mortgage payment would be $1,199.10 per month. In the first month of the loan, when the loan outstanding is $200,000, you would pay 0.5% of that sum in interest, or $1,000. That leaves $199.10 that can be put toward principal. In the second month, the loan outstanding has shrunk to $199,800.90, thanks to the prior month’s principal payment. The 0.5% interest cost on that amount comes to $999. That means a slightly larger sum—$200.10—can be put toward principal. And so it goes for another 358 payments, or 29 years and 10 months. Next: Main Menu Previous: How Interest Is Calculated
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Losing Interest

SEVERAL OF MY CLIENTS took advantage of low interest rates earlier this year and refinanced their home mortgages for the second or third time. I alerted them to the tricky tax rules on deducting mortgage interest. Here’s the gist of what I told them.
Let’s say Amy Brown owns a personal residence. Her lender is willing to let her refinance for more than the balance on her existing mortgage. Under the tax rules, she’s allowed to deduct interest payments on the refinanced loan,

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Bought and Paid For

STOCK BUYBACKS are here to stay. The Securities and Exchange Commission opened the door in 1982, when it ruled that companies could repurchase their own stock without triggering accusations of share price manipulation. Ever since, more and more companies have taken advantage. Indeed, in recent years, U.S. corporations have spent more money buying back their own shares than paying out dividends.
Good news? I see both plusses and minuses. Here are the plusses:

Once you figure in buybacks,

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We Know Jack

THE BOGLEHEADS had their annual conference this week in the Philadelphia area, where Vanguard Group’s headquarters is located. Devotees of Vanguard’s 88-year-old founder John C. Bogle, the Bogleheads usually meet online at what’s probably the world’s best investment forum.
The star of their annual meeting was, of course, Jack himself. His latest book, an extensive revision of The Little Book of Common Sense Investing, just came out. What was on Jack’s mind?

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Money Guide

Everything you need to be smarter about money—all in one place.

Start Here

Amortizing Loans

IN THE PREVIOUS SECTION'S example, we assumed you didn’t pay the interest on a loan or repay any of the sum originally borrowed. Instead, the amount owed was allowed to balloon in value. This is unrealistic. Most loans are amortizing, meaning that each month you pay not only the interest charged, but also repay part of the sum originally borrowed. A classic example is a 30-year fixed-rate mortgage. The payment each month stays the same. That payment is set so that not only do you pay the interest incurred each month, but also you gradually reduce the loan’s principal balance, with the goal of repaying the entire sum borrowed after 30 years. While the monthly payment stays the same over the 30 years, the amount that goes to interest and principal changes each month. In the initial years, most of the monthly payment goes toward interest. But as the loan balance shrinks, less interest is owed each month and more money gets directed toward paying down principal. To see what this sort of amortization schedule looks like, try the Mortgage Calculator at Bankrate.com. Let’s say you take out a $200,000 30-year fixed-rate mortgage with a 6% annual interest rate, equal to 0.5% per month. The mortgage payment would be $1,199.10 per month. In the first month of the loan, when the loan outstanding is $200,000, you would pay 0.5% of that sum in interest, or $1,000. That leaves $199.10 that can be put toward principal. In the second month, the loan outstanding has shrunk to $199,800.90, thanks to the prior month’s principal payment. The 0.5% interest cost on that amount comes to $999. That means a slightly larger sum—$200.10—can be put toward principal. And so it goes for another 358 payments, or 29 years and 10 months. Next: Main Menu Previous: How Interest Is Calculated
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Enough Already

“WHEN YOU’VE WON THE GAME, stop playing with the money you really need.” That’s something my longtime friend and fellow author William Bernstein is fond of saying—and lately it’s been on my mind.
There’s been much handwringing over 2017’s stock market rally. Looked at objectively, it hasn’t been that startling. As of Sept. 29, the S&P 500 was up 14.2% for the year-to-date, with dividends reinvested—a good year, but nothing compared to the 25%-plus years we saw in 1991,

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Jonathan Clements

About Jonathan

Jonathan Clements is the founder and editor of HumbleDollar. He spent almost two decades at The Wall Street Journal, where he was the personal finance columnist. His latest book: How to Think About Money.

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