Today's Financial Tidbit

So what has been the result of inflation during a recent 10 year period and what does that mean to me?

According to an article in Morningstar dated January 21, 2010, the federal government has released information that inflation 2001 through 2009 was a cumulative 124.5%, or about 2.5% per year.

What does this mean?

• If I had $10,000 in the bank in January 2000, it would have had to accumulate sufficient interest that on December 31, 2009 the bank balance would have been $12,450, to retain my purchasing power. In other words, to purchase the same goods in services on December 31, 2009 would cost 24.5% more than they did in 2000.
• If I had purchased a unit in January 2000 for $149,000 it would have to have had to increase in value to $185,505 as of December 31, 2009.
• If I had purchased $10,000 worth of an index mutual fund in the S&P 500 it would have had to be worth $12,450  as of December 31, 2009.
• My $200 monthly fees at BLMH would have had to increase to $249 as of December 31, 2009. This just to keep up with inflation, but includes no fees to make up for accumulation shortfalls in reserves.

So how did it turn out?

• That investment in the S&P 500 decreased in value from $10,000 to $9,040 according to Morningstar and the federal government, that's a loss of 9.60%.
• My fees increased  to about $300, which is a increase of 25.5% over inflation. That increase is to fund roofs and driveways, etc. According to public record, in 2000 this association had reserves of about $300 per unit. Not nearly enough!  Comment: Let me say it this way; if our funding of reserves in 2000 was "adequate", as some believe, and no fee increases above inflation are necessary, then that same $300 would today be $373.50, if it were accumulating at the rate of inflation. Would this be enough to replace a roof today? Well, a little arithmetic provides this answer. Each building would have about $2,988 in reserves for a new roof. Hmm, that's a few tens of thousands of dollars short! As our professional management has stated, repeatedly, our fees are what they are to make up for past underfunding of reserves. For the past year our "board" has been officially mute on this subject; i.e., when this comes up during association meetings, they make no comment and appear as deer's in the headlights of an automobile, preferring to stare blankly and allowing the "professionals" to address the unit owners. From this I assume the board do not agree. "Brian" says they don't read this blog. So I wonder where they get the information they use to make their evaluations, and upon which they base their conclusions?

I suggest in reading this that you keep in mind that many experts suggest that purchasing a "home" as an investment is not a good idea. The primary purpose of a "home" is to provide a place to live. It also gets one into a situation where they can paint the walls any color they choose, can put nails and hang paintings wherever they choose, and install the appliances of their choice. Here at BLMH I have the best of both worlds; I can control my unit and am responsible for its maintenance and I can avoid most of the unpleasantry associated with exterior maintenance. These same experts state that investment should be a secondary objective.

The New York Times has a wonderful calculator which provides a great tool for incorporating costs into the home ownership and buying equations. It applies also to condominium owners. I have found this calculator and others like it, to be useful for budgeting purposes. It provides me with some idea of "minimum" costs of ownership and also allows me to make some projections 10, 20 and 30 years into the future. The calculator includes features that allow adjusting fees, taxes, annual costs such as maintenance and renovation, and so on, many available through the "Advanced Settings" tab on the site.

New York Times "Buy versus Rent" Calculator