Personal Finance 101

Where Are The Bargains This Holiday Season?

Saving money around the holiday season is a very common theme this year and retailers are doing their best to entice consumers to open their wallets with sales and discounts that many thought we would never see.
Many, if not all, online stores are offering free shipping and the savings on non-essential items like video games and electronics is virtually unheard of.

Holiday Incentives

Many traditional retailers are offering incentives on financing. Just what a nation that has lived on credit for the last ten years needs – more debt. I do believe that the main stream media, with a the constant barrage of negativity toward the economy, has scared the average person into saving more money. (The only good thing the media has accomplished over the last few months.)

Some recent statistics show that many Americans are not taking on any credit card debt this holiday season and that is certainly something that has changed from recent years. With mortgages getting harder to qualify for, the importance of a good credit score has finally hit home with American consumers.

Many consumers have also said that they are planning to spend significantly less money this holiday season overall. Again, a profound change from the overspending that plagued recent years.

Will this Be  Lasting Change?

One has to wonder if these changes will become habits that will last and be ingrained in the generation like the spendthrift and frugal survivors of the great depression era, or if the ideals of the recent “have it now” ideology will return with a vengeance at the end of this economic downturn.

I must say that I personally do not know which one is the lesser of the two evils? There must be a reasonable balance between spending and saving that will both benefit the economy and businesses as a whole and the individual. That is the balance that we seek as a society.

Today’s Investors Will Benefit

I am certain that this economic downturn will offer today’s young investors, who continue to buy stocks, an opportunity at wealth in their later years.

No matter how much money you spend this holiday season, I urge you to not only look in your favorite stores, but look at them as well. Who knows, the best bargain you find this season may be that beaten down retail store stock you’ve always shopped at!

Posted in Saving Money | 3 Comments »

Finally, Good News For Investors

As we saw on Friday, the current financial crisis has investors all over the world living in fear now. And this time, it’s the government who is helping businesses to bring down what is crippling markets – the credit crunch precipitated by the U.S. housing collapse.

Governments in North America, Europe and Asia have provided bailouts to troubled financial institutions, liquidity to money markets and guarantees to banking systems. And all of this is in addition to drastic interest rate cuts. Fortunately, there are some very encouraging signs that these initiatives finally are starting to work.

Some Good News For A Change

Indications that credit is starting to flow

•  The rate at which banks lend to one another known as the London Interbank Offer Rate (LIBOR) decreased from a peak of 6.88% earlier this month to less than 1.3%.
•  The spread between 3-month LIBOR and U.S. Treasuries (the risk-free rate) decreased from a record high 4.65% earlier this month to 2.7% on Friday. A narrower spread means that banks are more willing to lend to each other.

Good news for U.S. housing

•  U.S. fixed-mortgage rates decreased helping more borrowers qualify
•  Variable rates continue to decrease due to Fed rate cuts
•  Oil and gas price declines result in more affordable heating costs for homeowners as we head into the colder months
•  Data from August and September shows reduced inventory of U.S. homes. The 10.6 months supply of homes in August slipped to 9.9 months supply in September
•  The FDIC and the U.S. Treasury are working on a proposed plan to prevent avoidable foreclosures by offering guarantees to lenders and companies that service mortgages

Despite these encouraging signs, we will continue to see volatility as investors react (or is that overreact?) to every new piece of information released.

Facts About Stocks and Recessions

There’s a lot a worry about the recession now. But what’s important to remember is that equity markets tend to be leading indicators of the economy.

Looking back through history, equity markets have typically retraced prior to, and in the early stages, of recessions. Once equities have reached their lows, they tended to rise quickly preceding the broader economic recovery.

So, make sure you don’t let yourself  fall into the mob mentality or you may find yourself missing the upturn in equities.

We don’t know exactly when the recovery will commence, but over the long-term equities has still been the top-performing asset class. And out of all the equities, the dividend growers have been the most stable.

Posted in Investment News | 4 Comments »

Media Adding Fuel To The “Panic” Fire

Is it just me, or does it seem like the media is playing a large part in the widespread financial panic that has consumed the globe?

I know the media is in the business of selling “papers” but still I wonder why they always seem to play up the negative? This only serves to feed the panic and thus make an already irrational market further disconnect from the fundamentals.

Is there any time when they should consider playing up some of the positive stuff, like companies that continue paying dividends, increasing liquidity, interbank credit easing etc. instead of feeding the panic.

Is A Balanced Representation Too Much To Ask?

I am not suggesting for a moment that they hide the truth. However, all we are really getting is an opinion and interpretation on what is happening – but does anyone really know what is happening?

The average person on the street panic and because of the sensationalism of the situation portrayed by the media, cannot differentiate between opinion and facts. The average Joe may panic and liquidate his 401k and not even really know why he is selling, other than the fact that the media is bombarding him with messages of companies going bankrupt and people losing their life savings etc.

Worse yet, a study found that increased suicides and homicides are linked to the financial “crisis”.

An out-of-work money manager in California loses a fortune and wipes out his family in a murder-suicide. A 90-year-old Ohio widow shoots herself in the chest as authorities arrive to evict her from the modest house she called home for 38 years.

In Massachusetts, a housewife who had hidden her family’s mounting financial crisis from her husband sends a note to the mortgage company warning: “By the time you foreclose on my house, I’ll be dead.”

Then Carlene Balderrama shot herself to death, leaving an insurance policy and a suicide note on a table.

I certainly don’t have all of the answers, if any at all, to these issues.  However, I am becoming very disheartened with the mainstream media as they continue down a path that leads to more destruction that good.  The above shows the outcome ofpeople feeling hopeless about their situation, financial or otherwise. Media outlets fuelling such hopelessness certainly doesn’t help.

Front page headlines do not necessarily need to be filled with hope, but I believe the media owes the public the opportunity to receive sound and relevant news about the state of the economy and their personal finances. 

What Would It Take?

What would it take for the major media outlets to band together for the greater good of our global society and present quality information that would help to instill the appropriate (read: more rational) level of confidence in our monetary system(s)?

I know that much of the turmoil in the financial markets is real. However, for media outlets to portray this as the “financial apocalypse” is absurd, and in my opinion, unethical.  Yes, there is cause for concern about the economy and the financial markets, but the infusion of undue fear on to the public is shameful. 

At a time when media sources could be encouraging us to learn more about our economy and educate ourselves on personal finance, credit, and investing, they choose instead to churn out headline after headline proclaiming the next depression and the longest deepest recession in history etc.

 One must wonder if there will ever be something bigger at stake than selling papers?

Posted in Investor Education | 6 Comments »

Are You Saving Too Much For Retirement?

I recently came across an old article from the New York Times offers us a view of retirement planning that we don’t often hear…are we saving too much?

According to them, the financial industry, with its ostensibly objective online calculators, overstates how much money someone will need in retirement. Some, in fact, contend that financial firms have a pointed interest in persuading people to save much more than they need because the companies earn fees on managing that money.

The more realistic amount could be as little as half the typical recommendation made by Fidelity, Vanguard or any number of other financial institutions.

For a middle-income couple, that could mean trading $400,000 in retirement money for about $3,000 a year more during prime working years to spend on education or home improvement. For a middle-class household, that’s a lot of money, said Laurence J. Kotlikoff, a Boston University economics professor, who is on the forefront of this research into spending and savings, and is selling his own retirement calculator.

Andrew Behla is a case in point of someone who is not saving enough. Mr. Behla, a Los Angeles graphic designer and consultant, is at age 38 just starting to think about retirement. He and his wife, Michele Krolik, a payroll manager, together have just $70,000 squirreled away for their old age.

I think we will have to save a lot more, he said, a point on which the economists and the financial planning industry would agree. Even so, the couple recently bought a house and put extra money they had into improving it, figuring that over their lifetimes it will add handily to their net worth.

But other people like Beverly Alexander, 49, an energy consultant in Marin County, Calif., might be able to slow down. Her financial planner has her retirement finances mapped out to age 105 (her parents are still alive in their 90s), a plan that gives Ms. Alexander, a former utility executive, the freedom to quit her corporate job and live on her consulting income.

One reason I could retire, she said, was that I saved and I always lived below my means.

The findings of the economists are being met as most challenges to orthodoxy are: with stony silence or extreme umbrage.

I count myself as deeply skeptical, said Christopher Jones, the chief investment officer at Financial Engines, a financial planning software company.

The big financial services companies refused to comment on the research but they did say that their use of simple rules of thumb keeps the process of retirement planning less complicated, and thus, less daunting.

After the recent events in the market, we might be hard pressed to find anyone who thinks they have saved too much for retirement.
Nevertheless, I think the key factor in the entire article was the quote from M. Alexander who simply stated the most basic tenet of financial success…”I saved and always lived below my means”.

I don’t think that we need a “professor” to tell us that!

Posted in Saving Money | 8 Comments »

Cheap or Frugal – You Decide

I certainly consider myself to be a frugal person.  Not obsessively frugal, but my money and I are fairly close.  From time to time in my life I have been called cheap, a term which I have some dislike for.  My belief is that there is a difference between being cheap and being frugal.

Putting my personal ideas of ”cheap” and ”frugal” aside, I’d like your opinion on whether or not I crossed the line on this one.
In the interest of fairness, let’s visit Wikipedia to get neutral definitions for both terms.

Cheap: Wikipedia re-directs the word “cheap” to Miser

A miser is a person who is reluctant to spend money, sometimes to the point of forgoing even basic comforts. The term derives from the Latin miser, meaning “poor” or “wretched,” comparable to the modern word “miserable”.

Frugal:

Frugality includes the reduction of waste, curbing costly habits, suppressing instant gratification by means of fiscal self-restraint, seeking efficiency, avoiding traps, defying expensive social norms, embracing free (as in gratis) options, using barter, and staying well-informed about local circumstances and both market and product/service realities.

The Scenario

Yesterday my office had a guest speaker in during lunch hour to discuss a product that we have been under utilizing in our office.  It was very apparent that the product provides the company with significant revenues and provides great value to a certain number of our clients.  One of the rare instances that these “learning” sessions provide significant value.

Due to this session being held over lunch hour, the company picked up the tab for lunch and had sandwiches and refreshments delivered to the board room for the meeting. We all enjoyed the food and refreshments as well as the information that was delivered during the meeting.

Honey, Supper Is On Me Tonight

At the end of the day I noticed a few sandwiches left over and asked our administrative assistant what she was planning to do with them. When she responded that they were likely going to be thrown away, I asked (maybe too quickly) if I could take them home.

To make a long story short, my wife and I enjoyed sandwiches (me for the second time that day) for supper yesterday evening.

It wasn’t until after we finished eating that I told her how I had obtained the sandwiches, to which she responded “you are soooooooo cheap”!
(Expletives have been removed in the interest of good taste)

I pose this question to you

Did I cross the line from being frugal to being cheap?

Tell me your cheap vs. Frugal stories or leave a comment and let me know if I crossed the line.

Posted in Saving Money | 12 Comments »

Build An Emergency Fund Or Pay Down Debt?

How about doing both at the same time

Many financial writers will claim that everyone needs to build and emergency fund of some kind that is kept in a liquid vehicle such as a high interest savings account ( I prefer ING DIRECT ) a money-market fund, or some other readily accessible investment like a cashable certificate of deposit.

While I am a fan of financial leverage and will swear up and down for as long as I live that leverage is the ONLY way to build exponential wealth, I still believe in making extra payments on my mortgage versus having excessive funds in a savings account.

First off, I do have a savings account but it is hardly at the level of 6-12 months of living expenses.  In fact, it consists of about 3 months of living expenses and possibly less from time to time.   What I do have is a mortgage with an attached revolving interest-only line of credit.

The reason that I make extra payments on my mortgage (after funding all of my tax advantaged investment accounts) is that I reduce the amount of interest that I pay on the principal of the mortgage amount.  My mortgage interest rate is currently at 4.25%, while my savings account interest rate is just over 3.0%.

Therefore, because all payments made against my mortgage simply increase the amount available to me through the line of credit, it is financially smarter to pay down the mortgage and borrow the money back for investing (When and if I find an appropriate investment) rather than pay the 4.25% interest on the mortgage and collect 3+% interest on my savings.

P.S – In Canada Interest paid on loans for investment purposes is tax deductible, while mortgage interest on a principal residence is not.  Check with your personal tax advisor for an explanation of the advantages.

Psychology of Money

Of course there is the psychological factor of knowing you have cash in the bank in case of an emergency.  However, there is also a psychological advantage to reducing your mortgage (or other debt – I only have mortgage debt left).

For most folks it is a good idea to have a “rainy day fund”.  However, if you can mange credit wisely it may be in your best interest to set up an appropriate line of credit for emergencies.  In addition, you will then also have the ability to pounce on investment opportunities that might come out of the blue.

Remember, strike a balance that is right for you and always due your due diligence!

Posted in Investment News, Investor Education | 1 Comment »

Mortgages 101: A Survival Guide For Today’s Homebuyer

I have recently received a few e-mail comments from readers asking me to expand on my previous article Understanding Mortgages, this article will answer many of the questions that were posed to me in those e-mails.

Mortgage and Housing Markets

Today’s housing market in most of the United States is a virtual candy store for the homebuyer. The sheer selection of properties on the market in most cities allows today’s homebuyer a tremendous selection at prices we have not seen in many years. There is only one problem however – lenders are tightening the purse strings on mortgage financing!

With lenders becoming more and more risk-averse, obtaining a suitable mortgage these days can often be a daunting task. There are numerous types of mortgages to choose from, and because of some previous “shady” lending practices, you need to make sure that both your lender and your mortgage are on the up and up.

With that said, there are several different types and structures of mortgages with various options to consider before committing yourself to such a large obligation.

Once you have settled on a legitimate mortgage with acceptable terms and conditions, there is the issue of the interest rate. Which option you choose will depend on your circumstances, but visiting your lender armed with the knowledge of the basic differences in terms and conditions will give you the confidence to get the best deal.

Here’s a quick guide to some different types of mortgages:

Fixed Rates

With a fixed rate mortgage, you agree with the lender on a set period of time – usually between two and five years – during which the interest will not change. The benefit here is that you will not suffer an increase if rates go up. Similarly, you won’t benefit if rates go down, and the borrower will likely face stiff penalties in order to pay out the mortgage early. As intriguing as a low, fixed rate interest plan may seem, you must check how long you are required to remain with the lender before you can pay out the mortgage without penalty.

Variable Rates

The amount you pay for your mortgage alters in line with national interest rates. Normally, the interest reflects the changes in the base lending rate of the central bank; this is decided by the Federal Reserve whom control the monetary policy for the country. Every time the Fed raises the overnight rate, the lenders eventually follow suit because their cost of funds increases. And in order for the lender to make money there has to be a “spread” between its cost of funds (the rate the bank pays to borrow money) and what the back charges to lend that money to the consumer.

Capped Rates

The idea behind capped rates is to offer the best of both fixed and variable rates. A “cap” is set on the interest so that it will never rise above that level, but if national rates fall, your interest will go down accordingly. The benefit of these is that you know the maximum interest rate that you could end up paying. However, the capped rate is not generally very competitive.

Discounted Rates

Discounted rates will fluctuate in line with the lender’s variable rate, but are obviously cheaper to tempt customers in. After the discount term has ended, the rate will then revert to the normal variable rate.

Banks and companies offering mortgages are now required to supply customers with a key facts document that provides all relevant information relating to the loan, and clearly sets out the total cost of the loan, not just the interest.

What Else Can affect My Mortgage Rate?

Along with the various types of mortgages available, there are a few other things that can affect the rate of interest that you will be charged on your mortgage.

One of the major factors that will affect the rate of interest that a lender will charge for your mortgage is the risk that they perceive they are taking by lending money to you. The major tool that lenders use to judge risk is your credit score. A better credit score will result in a lower mortgage interest rate because you are determined to be a lower risk than someone who has a lower credit score.

Do Your due Diligence

Whichever mortgage you choose, make sure you thoroughly research every option and compare lenders. You are, after all, bound in to the agreement for a long-time, and it’s sensible to make sure you get it right first time as switching lenders can involve hefty penalties. Lenders may have significantly different terms and conditions for their mortgages.

Remember, that it doesn’t matter how low an introductory rate is if it will significantly increase in 6-months or 1-year. Be sure that you read the fine print and calculate the actual costs of the mortgage over the entire amortization period.

There are plenty of great homes out on the market right now and there are a ton of reputable lenders who will be happy to lend money for home purchases. The key is to be knowledgeable and well prepared when applying for a mortgage so that you ensure that you get the best mortgage for your situation.

Happy house hunting!

Posted in Debt | 2 Comments »

Using Historical Averages Can Make You Money In Stocks

A concept that I’ve explored lately in this recent volatile market is reversion to the mean, which suggests that prices have a tendency of eventually moving back towards their long-term historic averages.

A good example of this could be the price of oil. After rising 47% in the first half 2008 and hitting a record high of $147 per barrel on July 11, the price of oil has dropped more than 20% in less than eight weeks as supply-demand dynamics adjusted (Not including the speculative bounce last week). Albeit $120 oil can still be considered high by historical standards, the point is that dramatic increases over short periods of time represent imbalances that are likely to self-correct.

Using The Reversion Theory In Your Portfolio

Within the context of recent history, many people might associate reversion with a downward movement so the first thing that comes to mind is something that’s overpriced. However, if we turn this concept over in order to highlight value as well. For example, while oil has soared to new heights, at the other end of the spectrum global equities have been punished and U.S. stocks in particular have struggled amid the credit crunch and a deteriorating economic backdrop.

Over the last 12 months, the return on the S&P 500 Index has been about -11%. Consider however that the average annual return on U.S equities over the past 25 years is 11.4%. On this basis, investors (especially those sitting on the sidelines in cash) might want to ask themselves whether they think stock prices in the world’s largest and most diverse economy will stay at current levels indefinitely, or whether it’s more reasonable to think that at some point, they’ll revert to more historically normal levels.

Analysts spend many hours and a boat-load of money determining what they perceive as fair value for equity markets. Their valuation models incorporate long run averages for inflation, interest rates and growth and based on current levels for these factors, U.S. equities appear to be trading below fair value. Another way to interpret the reversion theory essentially is a version of the “stocks on sale” message.

Reverting To Positive Returns

If U.S. equities are trading below where they should be based on historic averages for similar environments, then it follows that at some point, they should move back towards fair value, meaning stock prices should eventually rise.

Now, I am NOT forecasting what the price of oil will be or where U.S. stocks will be trading six months from now or when reversion will happen – I’ll leave that to the “experts” . The message to take from this is that amid 200 point swings in the stock market or $10 spikes in oil prices, it’s prudent to think about where prices are in relation to historic long run averages.

In a volatile market it becomes very difficult to predict which individual stocks are going to be most successful. However, buying a broad index such as the S&P 500 will offer significant exposure to a US equity market that has become oversold and is valued at well below historical averages. Not to mention that the S&P 500 has a dividend growth rate of about 11%. So, buying this index offers you an average of 11% raise each year while we wait for valuations to return to the mean.

Posted in Investor Education | 5 Comments »