Debit versus Credit

Go Green, Save Green

In today’s “green-centric” world some companies are beginning to offer incentives to their employees for going green, the most common being related to alternative methods of transportation to and from work. They encourage their employees to ride a bike, walk, take a bus or even carpool to work. As an incentive they may offer rewards in the form of a raffle contest or may even pay employees just for taking an alternative transportation method to work.

Ask Your Employer

Does your employer offer such benefits? You may want to call up your HR department and ask them; if they don’t offer benefits for carpooling or other alternative means of traveling to and from work you might suggest that they look into it. It could benefit them to offer such programs, maybe through positive publicity or even healthier employees (if said employees chose to walk or bike to work). If they do offer benefits then why not take advantage of them? Not only can you save money by taking alternative transportation to work, but if they pay you for every day that you do it then you can actually increase your cash flow! How’s that for creative budgeting?

Practicing What I Preach

I just recently found out that my employer not only offers a stipend for carpooling, but they also hold monthly raffles for prizes such as gas cards! Since I just recently moved into the same apartment as another employee we’ve begun to carpool on days that our schedule is the same. I’m doing my part to go green – and practice what I preach. Here’s the great thing about it. On days that I carpool to work I get paid $3 by my employer. I’m also entered into a monthly raffle for a gas card every single time that I carpool. On days that I ride with my coworker I actually increase my bottom line by $6.16 (gas savings of $3.16 plus the $3 from my employer) and on days that I drive I just about break even.

July 15, 2008
IndyMac Bank Falls
It’s not every day that a multi-billion dollar bank fails and is taken over by the FDIC. However last friday (July 11th, 2008) IndyMac Bank was seized by federal regulators after it was deemed illiquid and unable to continue on with business as usual. As you may have read elsewhere The Office of Thrift Supervision has said that it transferred IndyMac’s assets to the FDIC because it did not think the lender could meet its depositors’ demands. Here are some interesting facts about the bank and its failure:

IndyMac had $32.01 billion in assets as of March 31

The bank is the second-largest financial institution to close in U.S. history

IndyMac specialized in Alt-A loans – loans which required very little proof of income or assets

Why Did It Fail?

I could argue until I’m blue in the face about what caused IndyMac Bank to fail, but I’d like to stick to the facts here. First of all we’ll focus on the fact that they specialized in Alt-A loans. These loans, although not subprime, are essentially “liar loans” considering that income and assets did not really need to be proven. It would be safe to say that those who were applying for this type of loan did not have the means to legitimitely purchase the real estate that they were interested in, but caught up in the hype of the housing boom decided they could handle it for six months until they were able to sell said property for a nice hefty gain. Of course we all know what happened then – and is still happening. The “boom” turned into a bust. Property values have been dropping drastically and as people were unable to unload these properties many of them have been forced to either foreclose or walk away from their purchases. This in turn has taken a nasty toll on IndyMac Bank and their income statement & balance sheet. To put things into perspective this bank lost $614 million last year, mostly coming from losses related to these Alt-A loans.

Of course huge losses are going to take a toll on any financial institution, no matter their size. When banks are faced with liquidity crises they have to turn to several places in order to build up their cash deposits. They need new depositors, they need investors and they often turn to the Federal Reserve to take advantage of their term loans, such as the discount window. It would be safe to assume that IndyMac Bank had been following all of these channels in order to remain liquid enough for daily operations. Somewhere along the line, however, something went wrong and they lost over $1 billion of their customers’ deposits. Usually always the cause of bank failures IndyMac Bank experienced a run. Within a matter of weeks customers had pulled out $1.3 billion in deposits. This unfortunately was the root cause of their inability to function and hugely related to their failure.

The Irony Of Self-Fulfilling Prophecies

The part of this story that I was most interested in was not the fact that such a large bank failed but that it ironically was faced with this run after a politician issued a public letter (released on June 26) essentially stating that regulators should have been more focused on IndyMac and that they were facing collapse. In the 11 days following this letter IndyMac Bank was stampeded with customers demanding to withdraw their deposits. Hence the run on the bank. It’s debatable whether IndyMac would have been faced with this run if this politician would have said nothing publicly. He of course later followed up saying that the run on IndyMac was not his fault and that it was due to long-standing practices by the bank. Obviously the root cause of their failure was their business practices, but it seems to me that if it weren’t for these remarks that IndyMac would as of today still be standing as a business. They probably could have made it through these rough times with a little help from outside investors and The Fed. They didn’t however. I’m calling irony and self-fulfilling prophecy. What do you think?
July 14, 2008
The Automatic Millionaire: Ch 6
Chapter 6 of The Automatic Millionaire is entitled Automatic Debt-Free Homeownership

David Beck stresses three principle goals in The Automatic Millionaire. As we’ve previously covered the first two goals are to decide to pay yourself first 10 percent of your pretax (or gross) income and the second is to make it automatic. The third principle goal which he stresses as very important to the ultimate goal of building wealth and financial independence is to buy a home and pay it off automatically. As David says this chapter of The Automatic Millionaire is all about why you should own a home and “how you can pay for that home automatically so you can be debt-free before you’re too old to enjoy it.”

The fact is, you aren’t really in the game of building wealth until you own some real estate.

Mr. Bach is so passionate about his belief that owning your own home is most important to becoming financially independent that he even went so far as to say: “The fact is, you aren’t really in the game of building wealth until you own some real estate.” I will be quick to point out that I have a problem with this statement of his, although I do agree with the idea that owning your own home can be beneficial to building wealth. I’ll come back to this later.

Six Reasons Why Homes Make Great Investments

David brings up six reasons why he thinks that homes make great investments. I’ll list them here for your reading pleasure.

Forced Savings

Leverage

OPM (Other People’s Money)

Tax Breaks

Pride of Ownership

Real Estate Has Proven to be a Great Investment

Some of these are easier understood than others. I’ll briefly explain what he says about each of these reasons for homeownership. Forced savings refers to the fact that (in a good market anyway) buying a home forces you to save in that as you pay down the principle balance of the loan you’ll gain equity in your home. Leverage is the ability to use money that is not yours to your advantage. Basically if you purchase a home for $100,000 but only put 10,000 down and then five years later your home is worth $150,000 dollars you’ve gained $50,000 off of only a $10,000 dollar initial investment. OPM is essentially the same as Leverage in that it refers to using other people’s money to your financial advantage. Tax Breaks are relatively obvious: the government allows you to write down interest and other related home ownership expenses from your taxes. Pride of Ownership is not exactly fiscally related, but nonetheless a nice benefit of home ownership. David’s final reason that Real Estate is a great investment is disputable by many especially during hard times such as those we’re currently experiencing. However it should be said that I believe that over the long run it is at least a good investment, but not necessarily a great one.

I Can’t Afford To Buy A House

So many people have used this excuse that it has become old and tired. If you can afford rent there is a decent chance that you might be able to afford a house as well. I won’t go into the specifics here for the sake of space and time, but basically David makes the point that with mortgage rates so low owning a home doesn’t cost (usually) much more than typical rents in your city or town. He tries to back this thought up with informational charts showing how much a typical mortgage would cost for a certain amount spent on a house. He also makes the point that there are several government programs in place which help first-time home buyers in their quest to own their own home. These programs range from informational to actually providing help with a down payment or closing costs. In short? Research before you decide that you can or can’t afford to buy a house.

Why This Logic is Partially Flawed

As I mentioned previously David said that “you aren’t really in the game of building wealth until you own some real estate.” This logic is flawed. I agree that owning real estate can build wealth, but the act of building wealth does not require the ownership of real estate. If someone preferred to live in a luxury apartment, for example, over owning their own home there would be nothing to stop them from building wealth. They could still save a good chunk of their income and wisely invested there would be no reason that they could not build even more wealth than someone who chose to own a home. It’s all circumstancial and basically I think it’s wrong to assume that unless you own real estate you won’t really be building wealth.

The Rundown

Essentially the point that Mr. Bach is trying to make throughout this chapter is that with just a little bit of planning and hard work anyone can become a homeowner. He also brings up that if you make it automatic and pay even 1 extra payment a year towards your mortgage that you can cut off somewhere between 5 – 10 years off a traditional 30 year fixed mortgage. If done with a little bit of foresight and planning owning a home can allow you to be able to build more wealth than you normally might.
July 11, 2008
Do You Really Need Cable?

It’s not always easy to admit that there are certain things in our life that we splurge on unnecessarily. I’ll be the first to admit that I love technology and that I probably spend too much money on “tech toys” such as my beautiful MacBook Pro or my game systems or those Bose headphones that I bought just about a month ago. It’s nice to be able to spend your hard-earned money on things that you want, but it’s becoming increasingly important to be able to differentiate between needs and wants. When you are unable to pay your mortgage, loans or utility bills because you spend too much money on your latte at starbucks or on the newest video games you have a problem. I’ve compiled a list of a few “wants” that people often confuse with “needs.”

Cable TV

I don’t watch a lot of TV, but when I do I can often be found watching the Food Network, the Discovery Channel or HGTV. Up until recently (my wife and I just moved into our own place) I have never had to pay for TV service before. I almost decided to forgo cable entirely but decided to go ahead and subscribe to basic cable service. I have 70 channels for (the first six months) an extra $10 a month (on top of my internet bill). Do I need cable? Abolutely not. If I could not afford it I would drop it in an instant.

I will say that basic cable is not terribly expensive but once you start to subscribe to premium channels the bill can really start to add up. A digital cable package through Cox with 1 premium movie service costs $65.90 a month. Throw in a HD receiver and a DVR and your bill goes up to $88.90 a month. Compare this to the cost of basic cable at $19.95 and you start to realize that maybe it’s not really worth it.

For a potential savings of $1,066 a month (mas o menos) consider dropping cable altogether and hooking up a good old antenna to get your local channels.

The Daily Starbucks

How many people do you know who absolutely can not live without their daily latte from Starbucks? Are you one of them? Did you know that if you spend $4 a day 5 days a week x 52 weeks a year that you’re spending $1,040 a year on coffee? Do you really NEED a latte from starbucks? Why not consider making your own coffee and save yourself a huge chunk of that $1,040.

Cell Phone

How much does your cell phone bill cost every month? Mine is typically in the $90 dollar range (that’s for two phones sharing 700 minutes with 1000 text messages). Are you paying for premium services such as unlimited text messages, unlimited data or even unlimited talk? Now here’s a kicker: Do you really truthfully honestly NEED unlimited text messages and unlimited talk? My guess is no. If this is the case then why are you paying for something you don’t need and probably don’t use. Consider lowering the number of minutes you’re paying for a month or the number of texts. If worse comes to worse maybe you can just, oh I don’t know, wait to talk to your friend until after you get out of work or class. Maybe you’ll do better on your next test or on your work project. Who knows.

Booze… Lots of Booze

How much do you pay for that drink when you go out to the club or the bar? $5 – $6 dollars? I went to a club down in Mexico and I had to pay $3 just for a bottled water (I don’t drink), so I know that the alcohol has to cost a pretty penny. Why not save yourself some cash and have a drink or two before you go out (don’t forget to use a DD), and then finish off the night with some of your own alcohol. I’m willing to bet you can save yourself hundreds of dollars a year by doing this.

Clothes

I consider myself to be a fairly fashion-minded person. I often receive compliments on the way I dress and I manage to do this while spending very little on clothes. Over the past six months I’d say that I’ve spent just a wee bit less than $100 dollars on clothes. I still wear clothes today that I purchased 4 years ago, and on a regular basis as well. I buy clothes that will hold their style well because they are less trend-driven and have more of a classic look. I also look for sales before I purchase my clothes so I don’t have to pay full-price for them. With this being said it’s obvious that (unless you’re a full-time nudist) clothes are a necessity. However keeping up with the latest trends and fashions and spending hundreds of dollars a month on clothing is not. For savings of hundreds (maybe even thousands) of dollars a year you might reconsider your clothing purchasing habits.

What Do You Have To Say?

I want to hear your opinions. What do you think about my list and what other “wants” can you think of which people often confuse with “needs?”

July 9, 2008
Time For A Financial Checkup

It’s midway through the year. How have you done with the financial goals you set for yourself in January? If you never set any that’s ok. It’s never too late to start. It’s a good time to check your finances and make any necessary adjustments to keep yourself on the right track to financial independence. For a great starting point check out the following list.

Emergency Funds: Here’s a pop quiz for you. How many months worth of expenses have I managed to save up so far in my emergency fund? If you answered “3 months” then pat yourself on the back. You deserve a cookie. Enough with the cliches. A well prepared personal finance portfolio should have AT LEAST three months worth of expenses. Most financial advisers recommend six months worth, as do I.

Net Worth: A net worth that’s holding steady or rising is a good sign and you’re doing well. To calculate your net worth add up your assets and subtract your debts. Pretty simple right? You should calculate this number on at least a semi-annual basis to make sure that your Net Worth is increasing. If it’s not you need to change your financial habits.

Insurance Policies: In this day and age insurance is as much a necessity to a healthy financial policy as is a 401(k) or emergency savings. You don’t want to pay for more coverage than you need, but even more so you don’t want to be underinsured in case of a catastrophe. Another thing you want to review is your deductibles. If you have a substantial amount of cash on hand to cover a high deductible you might consider increasing your deductibles in order to lower your annual insurance premiums. Assuming nothing goes wrong this should pay for itself within a few years (or less).

Retirement Planning: Are you ignoring free money? Does your employer offer a 401(k) or similar retirement plan? If the answer is yes then are you contributing to it? If you answered no, then start now. Most employers that offer a 401(k) retirement plan also offer matching contributions up to certain amount. These can range anywhere from 1-10% of your contributions. If you’re lucky enough to get a matching contribution on the upper range then it’s even more reason why you need to be contributing to such a plan. For more information check out a previous post of mine: Are You Ignoring Free Money?

Investment Portfolio: It’s always a good idea to review your investment portfolio on at least a quarterly basis. If you are not comfortable with self-managing your portfolio then call your financial advisor to review it for you. If a large portion of your investments are in bonds or other fixed-income investments you might consider putting more into stocks, especially considering they are down sharply this year. This should lead to a higher return over the long run. On a side note, if you are in your twenties or even thirties and you have more than 5-10% of your investment portfolio in bonds then get them out. Bonds – as my friend Ramit from iwillteachyoutoberich says – are not for young people.

July 8, 2008
Building Great Credit
I’m sure you’ve heard it before either from a friend or a spouse or maybe a family member. Heck, maybe you’ve heard yourself say it a few times before. “My credit isn’t that great” or maybe “You require good credit for this? Oh, nevermind, I have bad credit.” If this is you, or you know someone like this then listen up. Building great credit is not a difficult thing to do. You heard me. It’s not difficult. In fact, with some patience and just the tiniest amount of dedication it’s actually quite simple.

Changes To The FICO Score

The Fair Isaac Company (the company who came up with the FICO score) just recently updated their FICO scoring model for 2008. They’ve made several changes which are supposed to make their score more accurate at predicting risk (and thus more competitive). For detailed information on how the FICO score is calculated check out another post of mine: How Your Credit Score Defines You.

Some of the biggest changes in the FICO score are as follows:

Applying for new credit accounts will hurt your score less

Having high balances on your credit cards will hurt your score more

Actively using open credit accounts will be more important

“Piggybacking” on others credit is much more difficult to do

Single serious setbacks will be less devastating to your score

Tips On Building Great Credit

Building good credit or even great credit is not that difficult. Now that you’re an expert on what sort of things affect your credit score let’s cover some basic tips on how to build great credit.

Check your reports: Your credit score is based completely on the information in your credit reports. If any of the information is incorrect on your report it may negatively affect your credit score. You are entitled to dispute any incorrect information on your report. It’s easy to get a copy of your report nowadays. Just go to annualcreditreport.com and follow the steps in ordering your report.

Pay on time: Don’t be late with your loan payments and especially don’t miss a payment. This can have a substantial negative effect on your FICO score.

Keep Accounts Active: Make sure to actively use all of your open credit accounts. This will ensure that none of your inactive accounts are closed by the lender, which can negatively affect your score. On this note it’s also important to keep your accounts open and not close them.

Keep low revolving balances: Using more than 30% of your credit card limits at any given time can lower your credit score. If you regularly use your cards and use more than 30% of your credit limit then you might want to consider asking your lender to increase your credit limit.

Use every type of credit: There are two main types of credit: revolving accounts (such as a credit card) and installment loans (the most popular being a home mortgage or an auto loan). In order to maintain a high score you will want to be actively using both types of credit.

There you go. You have the knowledge on how these scores are caclulated, how they are used by lenders and other companies and even what to do to boost your score. Now get out there and prove me right by building great credit!
July 7, 2008
Sponsor Me For The CMN Bowl-A-Thon

My employer is a big supporter of the Children’s Miracle Network and their One Darn Cool School program which they support in conjunction with the Phoenix Children’s Hospital. Every year we hold numerous fundraisers in order to raise funds for this program, which provides educational materials and instruction for children unable to attend school regularly due to their stay at the Phoenix Children’s Hospital. It’s a great program and really provides a lot of fun and educational opportunities for the children who, due to health conditions, are unable to attend their regularly scheduled classes.

Every year for the past several years my employer has held a CMN Bowl-A-Thon in an attempt to raise funds for the Children’s Miracle Network. It’s been very successful for the past few years and this year will hopefully be better than ever. I have the opportunity to participate this year in the CMN Bowl-A-Thon and I’m hoping that I will be able to raise a nice sum of money to donate. I’m looking for people to sponsor me in the CMN Bowl-A-Thon. In return I’ll be sure to take plenty of pictures and maybe even a video or two of the Bowl-A-Thon and post them here at Debit versus Credit. You’ll be able to get a good laugh out of it and you’ll feel good for helping to brighten a child’s life.

All you have to do to donate is either send me money via PayPal or if you’d prefer to donate via cashier’s check or money order you can do that as well by sending an e-mail to joseph[at]debitversuscredit[dot]com and letting me know you’d like to donate. If PayPal is your preferred method (you can send payments through paypal with either a credit card or your bank account information) then you can send the money to [email protected]. If you have any questions at all then feel free to send me an e-mail.

For more information on the Phoenix Children’s Hospital and their partnership with the Children’s Miracle Network please visit their website.

July 3, 2008