Net Worth Update : August 2009 +$15,234

I track my net worth monthly on NetworthIQ.

For August 2009 my Net Worth is $631,524 which is up $15,234 from July.

This is another record high figure for our net worth.

Again the increase in net worth is primarily due to higher real estate and retirement accounts. My retirement accounts were up over 4% and the real estate values increased more than 2%.

My cash balance was down just a little. I had increase in cash due to a sale of stock and cashing in my employee stock purchase shares. We also spent a lot of cash on some home improvements. We spent over $6000 on insulating our home and over $6000 more to landscape our yard. A portion of the insulation costs were paid in last month. I'm surprised that we spent as much money as we did this past month yet still had a substantial increase in net worth.

Unfortunate Example of a Family that got In Over Their Heads

A few nights ago my wife and I watched an episode of the program Flip This House. The episode in question featured a regular house flipper on the show traveling to San Clemente, California to attempt to "rescue" homeowners who were having difficulty finishing their home remodeling job. The homeowners were way in over their head in their home remodel and in serious financial jeopardy. Unfortunately In the end they lost the home along with significant amounts of money they had invested.

Summary of the situation:

The home owners had bought their house for about $600,000. Then put about $500,000 into remodeling the home. Unfortunately they got taken advantage of by a bad contractor and had about $200,000 of their work (or more) go to waste. Then the homeowner lost his job. This put them in a tough spot with a half remodeled house, no contractor, large debt payments and no income. So at this point the show stepped in to try and help. During the show they put another $200,000 into the home and were able to get about $150,000 of debt on a secondary mortgage forgiven. They still owed the banks over $600,000 and owed family about $300,000. During the show they hired a new contractor and got the home completely finished. At the end of the show they were thinking of putting the market on the house for $1,300,000 and the math added up that they would walk away with all the debts paid and a 'profit' of about $50,000. Unfortunately the house didn't sell and they had to drop the price further down to $1,100,000 but it still didn't sell. Eventually they lost the home to foreclosure but walked away with $15,000 cash from their equity.

Basic points:

Family bought home for $600k
Put $500k or more into remodeling
Tried to sell at $1,100,000
Lost home to foreclosure and got $15,000 cash

In the end it seems they lost nearly $500,000 in the deal all together. Ouch.

I should point out that in the 1 hour TV episode you only get bits of the story and the entire picture is not too clear. The TV program is also edited by the producers so we don't now what they chose to show and not show. I'm taking what I saw on TV at face value and I don't know the whole story.


The biggest problems

Job loss: The guy lost his job. If he still had his job he probably would have come out ok. The show didn't go into the couples finances too much and we don't know what his income was, but it seemed clear his problem was currently mainly due to lack of income.

Bad Contractor: The first contractor skipped out and didn't finish the work. Homeowners doing a remodeling job are dependent on the reliability of the contractors and there are a few bad contractors out there.

Bad housing market: The show seemed to be taped late last year and by the time they put their house on the market it was December 2008. If all of this had happened 2-3 years earlier before the housing bust then they may have been able to quickly sell their house for a tidy profit. But the timing was such that they hit the worst of the housing slump when it was not only very hard to sell a house but prices were continually dropping.

Some things that exacerbated the situation

During the show the couple seemed to be living in temporary housing in either some sort of motel or an apartment. So they were paying extra bills for that housing in addition to the mortgage on the home. The couple had pretty high end tastes on some items and the show featured an argument where the wife insisted on getting smooth surface stucco on the home which costs $5,000 extra.

What could the homeowners have done different?

Job losses, bad contractors or housing busts are not entirely within our control and its possible those things could happen to any of us. But what could you do to keep from getting into this kind of situation?

Probably the safest way that they could have avoided this whole mess was to not attempt to build their dream home the way they did in the first place. They should have lived with the $600k home in the state it was and keep their cash in the bank. You shouldn't try and buy or build a >$1M home unless you can truly afford it.

Don't take on too much debt. You really don't want to have a $1M home with a $900k loan on it. That is leveraging too high. You should always consider the worst case scenario such as losing your job and think how you would be able to support yourself. Having high debt level is a invitation for disaster.

Build a bigger emergency fund. He may have had a decent emergency fund but it apparently didn't last a year. If you have a high liability like large mortgage debt then this is a good reason to build up a bigger emergency fund.

Instead of buying a house and undergoing a major remodeling project that you self fund or get additional loans for, they could have just saved up the money and bought a finished home of their dreams. This way they wouldn't get stuck in a bad remodeling effort and theres no risk of having problems with contractors.

Undertake remodeling work in phases rather than attempting to remodel the entire house. They could have redone things a step at a time with cash rather than trying to tackle the entire house at once. Its possible that they did do this in fact, but the show didn't go into much detail on their remodeling efforts previous to the program.

Its unclear how well they investigated contractors but the show did say that they hired the cheapest contractor. Its possible that they could have avoided all their problems by doing more research and hiring a more reputable contractor with a solid established reputation for doing good work at a fair price. Instead it looks like they may have just 'cheaped out' and hired the lowest bidder.

I feel bad for the people but its possible the situation could have been avoided if they hadn't been so ambitious or if they were more careful with things. It really does seem that the problem should have been avoidable.

Should I participate in an Employee Stock Purchase Plan (ESPP)?

At my place of work I have the option of putting a % of my pay towards an Employee Stock Purchase Plan or ESPP. With the plan I can put up to 10% of my pay into a fund and then every 6 months I get to buy stock at a 15% discount. Not only that but they also let me buy at the lower of the price of the start or the end of the period. So if the stock starts at $10 at the start of the period and ends at $12 at the end of the period then I get to buy it at 85% of the lower of the two or $10. I'm also allowed to flip the stock immediately and cash in the profits. I do the ESPP at work to the max then sell it immediately.

Many companies have ESPP plans nowadays. How the ESPP works will differ from one company to another. You may or may not get to buy at prices from the start of the period. Some companies make you hold the stock for a period of time before you can sell.

Should you do it?

Usually I think the answer is YES. A 15% guaranteed benefit is nearly impossible to beat.

You could even borrow money on a credit card to pay for it and end up coming out ahead. I wouldn't really recommend that, but it illustrates how good of a deal ESPP's are.

So generally I think the answer is YES you should do ESPP as much as you can.


Reasons You might Not want to do ESPP

1. If your company makes you hold the stock for a long period of time. If they lock you in for 1-2 years and won't let you sell the stock before then then I would look at this as a problem. Your company might be doing fine and then start to go downhill within 1-2 year period.

2. If your company is financially unstable. I really wouldn't want much of my assets locked into a stock for a company that is on shakey financial ground and might even go bankrupt. Imagine if you had ESPP money tied up in Lehman Bros. or Enron before they collapsed.

3. If the benefit isn't that big. My company does 15%, but the discount rate can vary. If your company only offers a 5% discount then that isn't very compelling to me and you may as well just put your money in savings and keep it liquid.


Should You Flip or Hold

Personally I think flipping ESPP shares is the better option. When I say 'flipping' the shares I mean selling them as soon after you buy them. I'd rather cash in that easy 15% profit than hold the stock and gamble that it will go up further. I also don't think its a good idea to hold too much of your own company's stock at any given time.

What if you cant afford it?

Find a way. A lot of people live paycheck to paycheck and can't see how they could live without 10% of their paycheck. I wouldn't look as an ESPP as living without 10% but instead making a 15% guaranteed profit in 6 months. So, figure out a way to make it work. If you have to shuffle around your money or even accumulate some short term credit card debt it should be worth it to get that extra 15% gain.

Be careful with taxes

The tax implications on an ESPP can be tricky. I'd recommend you talk to a CPA or at minimum read up on how ESPP is treated in taxes.

Best of blog posts for week of August 28th

MoneyNing talks about how they've given up chasing the best savings interest rates with I’m Losing 50 Bucks to Be Happy, and I’m not Crazy

Trent has a guest post Having Enough for Life from Vicki Robin the c0-author of Your Money Or Your Life.

Lazy Man and Money has links for Free Budget Spreadsheets: Over 60 to Choose From