Debit versus Credit

When Will The Bailouts End?

Maybe it’s just me, but these bailouts seem to be happening more and more frequently these days. Six months ago it was Bear Stearns. Just two weeks ago we bailed out Fannie Mae and Freddie Mac. Now, as you’ve undoubtedly heard, the U.S. government has taken it upon itself to bail out American International Group, otherwise known as AIG. What was their reasoning this time around? What does this mean to us as taxpayers? Will the bailouts ever end? These are all questions that you have probably found yourself asking. I’d like to attempt to answer them for you.

Why Did We Bailout An Insurance Company?

To be fair AIG is involved in more than just insurance. That is, however, their primary business. Unfortunately they have had large levels of exposure to the credit crisis through an insurance-like product that protects the purchasers of the product from bond defaults. Essentially they insured investments. As so many of these investments are going south so is the cash of AIG as they are forced to pay out to their customers. The problem lies therefore with their current level of capital. They were unable to raise enough in time and their credit ratings were dropped. This may have forced them to declare bankruptcy because they did not have enough cash coming in. The fed stopped this though by offering an $85 billion dollar loan and agreed to taking an 80% stake in the company. Essentially they just bought AIG.

Will This Affect Our Taxes?

More than likely this will not have an impact on our taxes. But it may. There’s something that a lot of American’s don’t know about the Fed and our government. They have been running a budget deficit for a LONG time. That much is common knowledge. But think about it. Where did they get the $85 billion to loan to AIG? It wasn’t sitting in a vault somewhere twiddling its thumbs. That much is for sure. No. When the government needs money they print it. Just out of thin air. They fire up the money machine and call it cash. Of course if I tried to do this I’d be arrested for counterfeiting. They ought to be arrested for causing high inflation.

So rest assured this money did not come from our taxes. It may not either. If AIG can pull through this ok the Fed hopes to sell their portion of the company back to the general public, at a gain. But that doesn’t help the damage that’s already been done. The fact is that the Fed and the treasury have thrown billions upon billions of dollars into the economy. Dollars that didn’t exist before. Is it any wonder why gas costs so much? It shouldn’t be.

When Will The Bailouts End?

I’ll be perfectly honest with you. I was surprised when the Fed let Lehman file bankruptcy. I was pleasantly surprised in fact. Don’t get me wrong. I feel terrible that such a large business with so many employees was allowed to fail. But it has to happen. We are supposed to have a free market system. There will be ups and there will be downs. Right now we’re facing some serious crisis’ on wall street and in the financial system as a whole. Things will eventually get better, but in the meantime there will be pain and there will be losses.

Right now WaMu looks like it may be the next target for failure. They’re currently shopping themselves around for a buyer. Their problem is also a lack of capital. Cash truly is king. Like I’ve been telling all of you, make sure you have an emergency fund for when a crisis comes into your personal life.

On that note I don’t think we’ve seen the last of the bailouts. The Fed and the Treasury department have been too forgiving and too quick to pull the trigger. These companies more or less deserved what was coming to them. I hope that these bailouts will not create an attitude of “we can’t fail” in companies. I hope that our country will be stronger after this crisis. Unfortunately it’s looking to be quite the opposite.

What are your thoughts?

September 18, 2008
The 3 Dumbest Financial Decisions I’ve Made

We’ve all been there and we’ve all done it. We’ve made stupid financial decisions. Decisions that have haunted us – haunted us for years after they were made. It’s not unavoidable, but sometimes it feels that way. Looking back we always feel stupid and wish we would have made different choices, but by that time it’s usually too late.

I’ve made several mistakes with my money over the years. They’ve varied pretty widely as well – all the way from failed business opportunities to an impulse auto purchase! I’d like to share these mistakes with you for two reasons. First I’d like to think that by doing so you’ll be able to avoid making the same mistakes as I have. I’d also like to invite discussion on the topic; what mistakes have you made with your finances? With that being said I’ll continue on with the 3 dumbest financial decisions I’ve made!

#3 – I bought into the “own your own vending machine route” craze (if you could call it that)

About four years ago I got myself caught up in a ‘fantastic new business prospect’ where I thought I could earn a decent amount of money every month just by working about 4 hours a week. I don’t really recall where I heard about it or how I got caught up in it, but I ended up buying six small candy vending machines which I planned on placing in high traffic locations nearby. Unfortunately after six months I was only able to place one candy machine. Three years later and I still have these damn machines. Anybody want to buy some candy machines REAL CHEAP?

#2 – I did as so many people do and tried to live beyond my means.

When I was in my very early 20’s (I’m not that old yet!) I was not very responsible with my money. I worked part-time while going to a community college and most months I spent more than I made. Granted some of that is not my fault – school books are ridiculously expensive after all. The fact is though that I bought things that I did not need just about every month and I constantly found myself charging things on my credit card because I did not have enough cash in my checking account to pay for them. Eventually I was forced to pay down my credit card debt by taking out student loans. It’s a better form of debt for sure, but debt is still debt.

#1 – I bought a brand new and (relatively speaking) very expensive car

I know I’ve already mentioned this in a previous post, The Worst Years of My Financial Life, but it is definitely the dumbest financial mistake that I’ve ever made. This is my car:

She’s a beaut, ain’t she? That right there cost me about $27,000 dollars. Keep in mind that at the time I was making about $900 a month. With my new auto loan that pushed my car payment up to about $400 dollars a month (my old one was half that). I literally had just gotten my credit cards completely paid off and then I went and bought a car that I couldn’t afford. As I mentioned earlier this is by far the worst mistake that I’ve ever made when it comes to my finances.

Please don’t fall into the same traps. Debt is a terrible cycle and if not taken care of it will drag you into the depths of hell (or maybe your Mother-in-Law’s).

What financial mistakes have you made? I asked this months ago with the post I previously mentioned. I’d like to get a discussion going. The more that we share the more we can learn from others mistakes. So who’s first?

instant approval

September 17, 2008
Investing in Rentals

Today we’ll be featuring a guest post from Ed Kirkland, who is a Realtor in Florida. He’ll share with us some ideas and tips for investing in rental properties.

Investing in rental properties has proven over the years to be a fantastic way to make money. Not only does owning rentals increase your equity and thereby your ability to acquire additional properties but it also provides a nice monthly income. So what is the best way to go about securing the right property and finding the right tenants? There are a few agreed upon steps that one can observe, the rest is up to you.

The first step of proper investing is the same as any other home purchase: ensuring that your finances are in order and your debt load is minimal. If you have a high debt load then this may not be the right time to start investing. High debt = less mortgage options, and finding the right mortgage for an investment property is going to be critical. You will want to try to find a mortgage that has a reasonable monthly rate that will still allow you to see a monthly profit and have funds left over if there are any repairs that need to be done. After all if you are not seeing a profit on a monthly basis then something is amiss.

Be careful in selecting the location for your rental. Be sure to spend some time investigating the areas first. Many areas and complexes have strict rules regarding rentals, this is especially true in condos. Some places do not allow vacation rentals at all, so be sure to do your homework The kind of location you choose will vary depending on your target market. Here in Florida, the vacation rentals market is thriving like never before and this type of rental accounts for a huge percentage of the market. That being said, there is a definite security to long-term renters. Vacation renters are going to be looking for access to major attractions, things such as theme parks, beaches, restaurants and shopping. On the other hand; long-term renters will be more interested in things like proximity to major business centers, schools, sporting activities and quality of the neighborhood.

One thing to make sure of is no matter which type of rental property you choose, that you have written agreements with the tenants. This is especially important in long-term rentals as a tenancy agreement can go a long way to the protection of your investment. It also protects your rights as a landlord, and the tenants rights as a renter. It simply makes things easier and safer all around.

Ed Kirkland is a realtor specializing in the Destin, Florida real estate market. For years Ed has made it his life’s work to bring buyers and sellers together. Contact Ed today for more information or visit the team at www.edkirkland.com

September 15, 2008
The Importance Of Planning And Ideas For Fundraising Activities

In any given community there are a number of organizations and associations who rely heavily upon fundraising methods. Often the success that they have in fundraising allows them to stay operational, provide services, purchase needed supplies, etc. In fact, if looking at the budget of any not-for-profit in your community one would find that their reliance upon public donations is a major percentage of their revenue.

In order to be successful in this important endeavor, fund raising plan should consider a number of components. These components could include having sufficient resources, does the fund-raising match the organization’s mission and drawing from a pool of specific ideas.

Sufficient Resources

Before undertaking any fundraising plan it is important to evaluate the capability of the fundraising group. One of the major considerations before embracing specific ideas for fundraising activities is to evaluate whether there are sufficient resources.

One critical resource to being successful at any fundraising event is to determine whether there are a sufficient number of volunteers. For example, many special events require a large number of personnel to plan and prepare for the event. In addition there is the selling of tickets and the actual staffing of the event on the day that the fundraiser will be held.

Another resource that may be required to be successful with implementing ideas for fund-raising activities is money. The old axiom is true that it takes money to earn money. Therefore, before undertaking any ideas for fundraising activities, it is important to understand that there will be costs associated with fundraising. Those costs may include the use of office supplies, transportation, purchase of consumables, insurance, etc.

Matches The Organization’s Mission

Another major consideration before undertaking any ideas for fundraising activities is does the fundraising activity match the mission statement of the organization? For example, if the organization is against alcohol consumption, then a wine tasting party would certainly be a mismatch as an idea for a fundraiser.

One other example of appropriately matching a fund-raising activity with an agency’s mission would be holding a banquet rather than a golf tournament. This would be especially powerful if that agency was a health providing agency and the individuals that were being honored at the banquet had saved a life. A fundraiser honoring these individuals and promoting the agencies mission would be better served in the dining room rather than on the golf course.

Specific Ideas

There are many tried and proven ideas for fundraising activities. Some of these activities include walk-a-thons, carwashes, selling of candy and magazines, auctions, fundraising dinners, etc.

However, it is important to note that with the increase of not-for-profits it is becoming increasingly difficult for these agencies to raise the needed revenue to meet their operating costs as well as providing services to others. Therefore, it is important that new and creative ideas for fundraising activities are generated.

One of the more creative and newer ideas for fundraising activities could be a no-show ball. The concept of this no-show ball is that the donors are sent an invitation and are allowed to check off their excuse for not attending. However, the beauty of this no-show ball concept is that no one shows, but the donor still sends in their donation. This speaks loudly to the donor in that the agency appears to be very creative and understanding in regards to the time demands placed upon the donor’s time.

September 12, 2008
Using Your Credit Card (Wisely) Can Save You Money

I’m no fan of credit card debt. It’s just about the easiest way to ruin your life, financially speaking. However I am an advocate of using credit cards when they can benefit you financially. Believe it or not there are several ways that using a credit card for purchases can actually save you money. It only works however if you don’t carry balances over from month to month – otherwise all that money you saved by using your card will have just gone right back to your credit card company in the form of interest payments.

As I mentioned when you use your card for certain purchases it can actually save you money by providing coverage such as warranty extensions and insurance free of charge. Let’s cover just a few of these savings. As a disclaimer you may want to verify that your credit card offers these benefits. With that being said I have noticed that they are pretty standard benefits.

Skip The Car Rental Insurance

When was the last time that you rented a car? Did you pay for the extra car rental insurance? This “protection” usually adds a decent amount of money to your bill. Did you know that your credit card offers the same protection just by using your card to reserve and pay for the car rental? This insurance usually covers around $50,000 worth of damages caused by collision and theft. So next time you rent a car say no to the rental company and just use your credit card.

Watch Out For Falling Prices

Let’s say that after careful consideration you’ve decided to buy yourself a brand new HDTV. You’ve shopped around and found the lowest price and decide to spring for said TV. You’ve heard, however, that there is a chance that prices could be dropping on these types of TV’s in the next several months. Should you wait? You could. Why not just charge it on your credit card though? By doing so they guarantee that if the price drops they’ll refund you the difference (as long as it’s within 60 days). Of course there are limitations such as a maximum refund amount (probably $250) and it does not apply to Internet purchases, etc.

Don’t Buy The Extended Warranty

Let’s say that you go ahead and buy that HDTV that we talked about just a second ago. As you’re checking out the cashier asks you if you’d like to buy an extended warranty on the TV. The damage? It’s going to cost you $90 to do it. While I feel that these warranties can be useful for certain purchases they are most often just too expensive to justify the extra warranty. But did you know that if you use your credit card to pay for it that they will often double the manufacturers warranty up to a maximum of 1 year? So you can still feel peace of mind and save money by turning down that extended warranty offer from the store.

Travel (Or Don’t) With Peace Of Mind

Have you ever tried to get a refund from an airline company because you are unable to take the trip that you’ve planned due to an illness, death, layoff or some other issue? If you have then you know how frustrating it can be trying to get your money back. The airlines will do anything they can to avoid giving you a refund. Next time you book your tickets make sure you do it with your credit card because if you do your credit card company will refund your money up to $1,500 dollars if you are unable to take the trip. They provide trip cancellation/trip interruption coverage at no extra charge.

How many of these perks were you aware of? There are still several more perks that credit card companies offer, which are usually pretty standard. However you may want to check with yours before you try to take advantage of any of the perks I’ve listed.

Related Links: Find a great card with great credit card rates at Credit Card Specialist!

September 11, 2008
The Secret to Building Wealth
I’ve had many people ask me over the past several weeks what the secret is to building wealth. Today I am going to share the answer with you. Before I do though, I want to tell you what it’s not. It’s not a great investing tip. It’s not a can’t-lose business idea. It’s not even related to how much money you bring in or how you can bring in more. It’s simply the idea that wealth building is a state of mind and cannot coexist with poor financial choices, especially those related to debt.

Let me explain.

Many of you may be aware that I currently work in banking. I help anywhere from 10 – 50 people in any given day and quite often they are in some sort of financial distress. Whether their situation is as extreme as the inability to make their loan payments or as simple as not having enough cash to pay for gas for their car, they all have one thing in common. They don’t have any cash set aside for emergencies. The fact that they haven’t put any cash into an emergency fund tells me something else about them. They aren’t building wealth. Quite the opposite in fact. They’re living paycheck to paycheck always saying that next time they’ll save a little, but next time never comes.

It’s a sad situation really. It’s a never ending cycle of all talk and no action. Just as I said earlier, it’s a state of mind.

Let me throw out a blanket statement here (which as anything might have some rare exceptions). If you can not manage your money well enough to save six months worth of expenses in an emergency fund and keep it there, you will never be wealthy. The emergency fund is critical in any wealth building program because it accomplishes two important goals.

Building an emergency fund will help keep you out of debt.

Building an emergency fund will get you into the habit of saving.

A Credit Card Is Not An Emergency Fund

Many people use credit cards as an extension of their paycheck. Do not do this. If you can not afford to live with only your paycheck then you need to cut back on expenses. Likewise do not think of a credit card as an emergency fund. This type of thinking will get you into debt and take away from your financial well-being every single time. Start building an emergency fund now so you don’t have to resort to using your credit card if something goes wrong.

Start Saving Now So You Can Save Your Future

The sooner you begin on building an emergency fund the sooner you will become financially independent. All it takes are a few good habits and some emergency reserves to avoid unnecessary debt and you will be well on your way to riches. Don’t talk yourself out of it with excuse after excuse. Start small if you have to, but start saving right now. If you don’t you’ll never reach your goals and you’ll never get to go on those vacations or buy those toys that you’ve always wanted. By setting aside money today you’ll get yourself into the habit of saving and once you’ve built up your emergency funds then the real wealth building can begin.

For some further reading on wealth building check out My 33% Savings Plan and Starting On The Road To Wealth.
September 11, 2008
The Bailout of Fannie and Freddie

The United States of America has officially become a nation of bailouts. With the government takeover of Fannie Mae and Freddie Mac on Sunday, September 7 they have also become the nation’s largest mortgage provider. They now own (or back) around $5-6 trillion in mortgage loans, which is roughtly half of the existing mortgages in the U.S. What does this mean for the taxpayer? For the homeowner? For the investor? For the financial markets as a whole?

Expect To Pay More In Taxes

Fannie Mae and Freddie Mac are HUGE companies. They alone service over half of the mortgages in the U.S. They have trillions of dollars worth of liabilities as well. In fact according to the former president of the Federal Reserve Bank of St. Louis, William Poole, they have up to $6 trillion dollars in liabilities (as reported by the Wall Street Journal Online). He believes that it would not be unreasonable to assume that they may end up taking a loss on as much as 5% of their loan portfolio which would provide taxpayers a burden of some $300 billion dollars. While this would more than likely just be added to the national debt of almost $10 trillion dollars it would eventually have to be paid off and those who are ultimately responsible for this debt are the taxpayers. You, me and your neighbor.

Mortgage Rates May Finally Drop

The rising level of defaults on mortgages over the past year or two has forced Fannie and Freddie to get more defensive and stop buying up so many mortgages. This has led to an increased risk for mortgage originators, as they might not be able to sell off their risky loans. It has also decreased the amount of cash flowing through the mortgage market and as such has had a strong effect on mortgage rates. Because of the increased risk and the limited capital mortgage lenders have been forced to raise mortgage rates and keep them high. Now that the U.S. has virtually guaranteed the success and liquidity of Fannie and Freddie mortgage originators are likely to have a less difficult time securing cash and selling off their loans. This should lead to a drop in mortgage rates over the next six months or so.

Start Investing Now If You Haven’t Already

The markets rebounded on Monday with the Dow Jones Industrial Average ending up almost 300 points (or 2.59%). Investors are excited about the future now that they don’t have to worry about Fannie and Freddie. If the Treasury Department and Paulson are right (and I personally doubt they are) then this bailout should fix everything. After all the housing market is the primary cause of the “recession” that we are currently facing. By shoring up the two largest mortgage companies and providing much-needed capital to the mortgage industry they’re hoping to end this downturn once and for all. Things aren’t quite that black and white however but we’ll come back to that in the next section. In the meantime for the purposes of investing they (the feds) may be right about one thing. By taking over Fannie and Freddie they should increase investor confidence and lower mortgage rates. This should have the effect of a declining bear market if not the return to a bear market.

The Financial System Is Nowhere Near A Full Recovery

It is true that the primary cause of the economic turmoil that the U.S. is currently facing is due to the uncertainty in the mortgage markets. It’s also true that the decreased cash flowing into these markets due to Fannie and Freddie’s cutbacks was having a negative affect on the entire market. However one would have to be nieve to assume that by taking over Fannie and Freddie and providing capital to the mortgage markets that this mess will clean up quickly. The fact is that homeowners are not walking away from their houses because their mortgage lender was unable to sell their mortgage to Fannie – they are walking away because they are upside down on their house by a lot of money and they are unable to afford the payments. Losses will continue to come. The process may be slowed down and stopped sooner than it might have without this bailout (due to the increased affordability of purchasing a home) but unfortunately home values have not reached their lows, as most would-be homeowners are not ready to jump into the market even with today’s home prices!

The fact is that homes are STILL unaffordable in many markets across the U.S. Homeowners are losing money and are bailing ship which is slowly decreasing home prices but there is probably quite a ways to go still before the buyers start to line up. Bailout out Fannie and Freddie may help some, but as I stated already, the financial system is nowhere near a full recovery.

Technorati Tags: Fannie Mae, Freddie Mac, mortgage news, stock market, investing, taxes

September 9, 2008