Merry Christmas

Yesterday's blog was the last blog of the year. We will be out for the Christmas break. Hope everyone has a Merry Christmas!

The One Action That Will Change Your Financial Life

When I counsel with people who are in financial difficulty, I find one consistent theme. People who are in financial trouble and have no idea as to where their money is going each month or if it is a debt problem usually understand very little about the details of that debt.

I want that to change for everyone. Financial organization is the one step anyone can take that will start the process of getting finances back on the road towards prudent stewardship.

So what does financial organization mean? It simply means knowing the current state of your finances as well as where the money goes each month. Most people don’t know how much they’re spending. What’s worst, there is a lot of spending that goes on behind the other spouse’s back.

There are two keys to successful financial organization. First, you have to be willing to put everything on the table about money and communicate. When you have two people working under the same finances, both individuals need to be on the same page. Tracking your spending is the second key. Your finances would drastically change if you were to take thirty minutes each week to write down your expenses and put them into an expense category and then an additional thirty minutes each month to analyze and discuss.

Now, here is where the problem occurs. First, money is probably one of the hardest things to talk about in a marriage. Second, it is all about finding the time.

Well, I would agree with you about the first challenge. Communication about money is a tough one. However, there are ways to work through these issues. We are going to spend a great deal of time next year talking about this very issue. Second, I can’t buy into the time challenge. When you commit to something, you find the time.

When the clock strikes 12 on December 31st, you will have 525,600 minutes to get things done in 2008. I am talking about committing to 1,920 minutes next year to make a huge difference in your life. That amounts to 0.36% of your time. Now, it almost seems sort of ridiculous that one could not take 0.36% of his or her time to take the steps to make huge differences with their financial life.

This is a process of baby steps. What I am talking about today is the first step, which is to just commit to taking that time. The rest we will talk about next year.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Are Extended Warranties Worth It?

Do extended warranties make sense? You probably have been in that situation before. You have researched and researched a certain item that you want to buy. You finally figure out the make and the model number and you are ready for purchase. You talk to the salesperson, check availability, and get ready to pay.

The whole time you know the dreaded question is coming. “Are you interested in an extended warranty today?” Let me show you how it works. If you have a real aggressive salesperson, then the benefits might be a little exaggerated. Maybe there is a claim of replacement no matter what. In any situation, no questions will be asked and your product will be replaced. Of course, if you read the fine print, you would get a different story.

The problem is one of emotion. Emotions get in the way. You start picturing your brand new item having a problem or getting damaged. You think about the cost. Then you rationalize that it is probably better to not risk it. You see it is human nature to do anything to avoid loss and the salespeople know that to be true.

Retailers bank on that emotional response. The last numbers that I saw suggested that extended warranties are a 15 billion dollar industry where maybe 20% is paid out in claims.

What do the experts say? In the majority of cases, the consumer advocates advise to say “no” to extended warranties. It is just not worth the money. Here are a few points to consider before you say “YES” to an extended warranty.

- How good is the original warranty on the product? How is the extended warranty in conjunction with the original warranty?
- How does the fine print compare to what the salesperson is telling you? Some retailers still pay out commissions for an extended warranty sale. Have them back up their claims with a look at the fine print.
- What is the hassle factor associated with getting something fixed? How long will you be without that product?
- What do reliability ratings say about the product that you are purchasing? If the reliability ratings are high, why even insure a low probability event?

If you really feel strongly about having that added protection, make sure that you do the following:

- Take some time to really study the fine print and understand the terms and conditions
- Create a file to store the receipt and a copy of the extended warranty
- Really evaluate if it is worth the cost and if this is an emotional decision being influenced by an aggressive salesperson
- In most cases, you can always go home and think about it then add it on the next day

I have to admit that I have wasted more money on these warranties in my life and rarely have had to use them. Most of the time, failures in electronics will show up early on during the original warranty. I have also found that the hassle factor is just not worth it.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Are the Proposed Government Solutions Helping the Credit Markets?

Are the solutions presented by the Government and the Federal Reserve Board actually working? Well, if the market were voting, the answer would be no. None of these solutions presented by the Government have given the markets any confidence.

Yesterday was just another example of that as credit fears and potential inflation fears continue to grip the market with the S&P 500 dropping another 1.5%, leaving the stock market up by around 2% for the year.

The Federal Reserve Board has cut rates three times now. Treasury Secretary Hank Paulson unveiled some Super Fund coordinated by banks to stabilize the credit markets. Then the President unveiled a plan that is intended to save homeowners from rising interest rates on adjustable rate mortgages and in turn reduce the number of homeowners who are losing their homes.

There has been a consistency with all three actions. First, they arrive with a big fan fair. Second, the stock market reacts positively to the announcement. Third, the market quickly gets over the fanfare and continues to drop. Fourth, we hear very little about these programs going forward and have very few details to go on.

Unfortunately, there is not much that the Government can do to fix the mess that they sat by and allowed to develop.

For instance, the President’s new plan makes for a great political sound bite. However, in reality, there are too many moving parts and too many parties involved to just announce that all homeowners who fit a certain criteria will have their interest rates frozen. It is just not that easy.

So are there really any good answers? Yes, the best action is to allow the market to work through this on its own. That is the only viable solution so that we can get past this and go forward.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

The Federal Reserve Board Losing Control

There is the behind scenes manipulation, deciphering what the Federal Reserve Board Chairman says and trying to read between the lines. Wall Street has been trying to figure out the Federal Reserve Board for decades. The actions and words of the Federal Reserve Board yield a great deal of power over the markets.

Last week’s Federal Reserve Board meeting was highly anticipated. Wall Street felt strongly that the Federal Reserve Board would come to the rescue and greatly reduce both the discount rate and the federal funds rate. It would be a signal to the Street that the Federal Reserve Board acknowledges the risk in the credit markets and will do whatever necessary to help stabilize the markets.

Unfortunately, it didn’t quite turn out that way. The Fed lowered interest rates minimally and the stock market sold off. There was nothing stated that gave the markets any confidence that the Federal Reserve Board was on the job.

Then the next day, the Federal Reserve Board made a surprise move. Of course, they do so before the opening bell. They take a step back and put together this enormous coordinated global effort to provide liquidity for the banking system. The markets soared on that news.

Why didn’t the Fed just mention it following the Fed meeting? It was almost like they were back-pedaling after witnessing the markets’ reaction to their interest rate decision. It looks like they are losing control of the markets. It also looks like the markets are losing confidence in the Fed. If you look at all of these Federal Reserve Actions of pumping money into the markets and lowering discount and federal funds rates, the market has done nothing but go down.

Confidence is the last hope for this market. Confidence will prevent recession and a bear market. Unfortunately, it appears that confidence is slowly diminishing.

As you evaluate your investments for the new year, consider some of these risks. These are looking like very big risks.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Be Careful Who You Use to Refinance Your Mortgage

The mortgage markets are a mess. Getting a mortgage is a different ballgame today. We are beyond the days when you could just fog a mirror and get the keys to a house.

Credit is tight. Lending standards? Well, there are actual lending standards now. I have always said it is important to make sure that you go to someone who is more of a consultant than a salesperson.

Today, this is even more important. Through their marketing efforts, mortgage companies invite you to just pick up a phone and qualify for a loan. It is important to sit down with someone who is going to look at your situation and consult you. A consultant will look at your credit score, analyze your current mortgage, and help you get into the right type of financing.

I have known Alice White Hinckley for over 25 years and think that she is the best out there. If you are in need of mortgage help, I recommend her with confidence. If you didn’t get a chance to hear the show from yesterday, make sure you listen to the podcast.

Her email address is alwhite@firsthorizon.com.

Copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Be Careful Believing the Overly Bullish Stock Market Commentators

Earlier in the day, a stock market commentator had this to say about the Dow. He said if the Fed did nothing, the Dow would finish up around 16000. If they cut just 0.25%, it would finish at 18000. If the Fed cut 0.50%, it would finish up at 20,000.

With everything that is happening, how can these guys be so bullish? I think that Tuesday’s stock market told us a lot about this environment and what might be in front of us.

In just a matter of moments, the Dow Jones Industrial Average dropped 240 points as the Federal Reserve Board decided to decrease the federal funds rate 0.25%. A disappointed stock market reacted extremely negatively to that news. The stock market felt like the
Federal Reserve Board should do much more in its effort to fight what looks like an inevitable recession.

Should the stock market be so surprised? The answer is both yes and no. Yes, because the Federal Reserve Board has been very market friendly. It has made many decisions and taken actions to continue to prop up this stock market. This is why we have witnessed all of the bad news in the credit markets and yet it hasn’t dramatically affected the stock market.

At the same time, the stock market shouldn’t be surprised because the regulators need to allow these markets to work themselves out without a lot of government intervention. It is the healthiest way for us to get through this credit crunch.

So, after a rough November, what does this say about December? December is typically a strong month for the stock market. This type of weak market activity is a little unusual. However, it also goes along with my outlook for the stock market. I still feel that there is a good chance that we have started into a bear market.

It is important to make sure that you are not taking a tremendous amount of risk. My indicators are still showing that a bear market definitely cannot be ruled out.

If that is the case, go back to the three things that you can do in this type of situation and make a choice. First, do nothing. That is not a good choice. Second, reduce your exposure to stock by investing defensively. Third, invest offensively. There are ways to make money in a declining market.

Now some may think that I am completely off base and overreacting to one day of a sell-off. I am just putting the pieces together and the picture doesn’t look promising.

· Weakening economy
· Consumers facing massive amounts of debt
· One of the most severe credit problems we have seen in decades
· A severe real estate bust
· A market that is losing confidence in the Federal Reserve Board

Bear markets and recession are never announced ahead of time. You just have to look at the clues.

Copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Too Little Return versus Too Much Risk – Choosing the Right Money Market Account

So where is the best place for your money to stay safe? The whole idea with managing money that you might need is to keep it liquid. You always want the ability to get to the money. There is a going rate for that type of risk-free account, which is why it is good to know your options.

Let’s start with the lowest risk and lowest-paying account – the savings account.

We have always been taught to just open a savings account. Unfortunately, savings accounts pay virtually nothing in interest. I checked the going rate at one of the major U.S. banks. They are currently paying 0.20%. They are also using this low-paying account as the main savings account for one of their heavily marketed savings programs.

The second type of account would be a money market account.

Theoretically with a money market account, you position yourself to get a little higher return. Most money market accounts are FDIC-insured. They are considered deposit accounts in banks.

What is the big difference between a money market account and a savings account? The main difference is that a money market account will typically limit the number of withdrawals you can make, while a savings account has unlimited withdrawals.

The rate goes up a little in a money market account. At Bank of America, they will pay 1.75% up to $25,000 and then increases to 2.8% up to $50,000.

The third type of account would be a money market fund.

This is actually a mutual fund that invests in money market type instruments. It is considered a safe investment although you could lose money. Every dollar you place in the money market mutual fund represents one share that is worth $1. The accounts are arranged so that the $1 per share value never goes down.

So, what is a good rate for a money market mutual fund? At this time, Fidelity is paying 4.75%.

Could you lose money in a money market mutual fund? Well in a traditional money market mutual fund, the probability is much lower. It would have to be some type of dramatic situation. I have never heard of a traditional money market mutual fund losing money. However, I am not implying that it cannot happen.

If you are in the fourth category, you could lose money. The fourth category consists of enhanced or strategic money market mutual funds.

These take a little more risk to get a higher return. Unfortunately, it has been discovered that these funds have invested in these mortgage-backed securities and many are in trouble.

Just this morning, Bank of America announced they were closing their 12 billion dollar enhanced money market fund because of problems.

Where is the best place to look? This is not intended as advice. I think that the risk taken with a money market mutual fund makes the most sense. There is a big enough difference in return. However, there is one word of caution.

Make sure you are only using a traditional money market mutual fund and not one of the enhanced funds that are in that fourth category. It just isn’t worth the risk.

Copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

The Mortgage Industry Doesn't Even Understand the Problems

I overheard an interesting conversation one morning as I was sitting at Starbucks. It was between a mortgage broker and a guy who represents a company that sells leads to people in the mortgage industry. The list he gave consisted of people who have adjustable rate mortgages coming due and need to refinance.

It is amazing to me how people in the industry actually understand very little about what is happening in their own industry. We will call the guy from the lead company “lead guy”. We will call the guy from the mortgage company “mortgage guy”.

Lead guy is explaining to the mortgage guy that he can give him all types of leads based on any type of criteria. Mortgage guy states that he read that the Dallas Fort Worth area might be in the top five areas in the country for foreclosures when it is all said and done.

He said that he didn’t want any mortgages below $100,000 or any sub-prime debt. He is going to be paying up to $1 a lead. Unfortunately, he doesn’t realize that this is not just a sub-prime problem. People with good credit as well as bad credit are going into foreclosure. People with all types of balances (both big and small) are going into foreclosures.

The lead guy is selling him a list of the problem. The problem is adjustable rate mortgages. Unfortunately, the mortgage guy has no idea that this goes way beyond sub-prime issues. Even more unfortunate is the $1 he is going to pay per lead.

Speaking of mailers, I received a mailer from Countrywide today showing me how I could refinance my mortgage to a 40 YEAR MORTGAGE and save money each month.

The irresponsibility just never stops.

Copyright© 2007 Prudent Money and Bob Brooks. All rights reserved.

A Sobering View from a Mortgage Insider

“Even before this mortgage mess started, one person kept emailing me over and over saying that this is going to get real bad. He kept saying this was beyond sub-prime, beyond low FICO scores, beyond Alt-A and beyond the imagination of most pundits, politicians and the press. When I asked him why somebody from inside the industry would be so emphatically sounding the siren, he said, “Somebody’s got to warn people.”

This was the beginning of Herb Greenberg’s blog and is one of the more sobering looks at the industry. Although a little long, it is a must read. It has a detailed description from twenty year mortgage veteran Mark Hanson. He ends the blog with this:

What I am telling you is not speculation. I sold BILLIONS of these very loans over the past five years.

Read More……

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Don’t Fall For This Scam

This is a new scam floating around. The other day, I received this email found below. I did a google search and found that they have actually scammed people out of their money.

First of all, let’s say that I did have an outstanding payday loan. These debt collectors use the telephone as a means of collections and not email. Secondly, they cannot just arbitrarily find an account and lawfully take money out of your banking account.

This is a scam designed to scare the recipient. They are hopeful that the person will call. My guess is that they have a pretty good success rate if the consumer actually calls. If you don’t know better, these collection inquiries can be very scary. Many times people will pay something that was never owed.

My reply back to them was:
“You and your company should be prosecuted for running this scam.”
I didn’t get a reply.

Email received reads as follows:

Subject: Check Recovery Notice for Case #2207-26wwd

I am contacting you because you have one or more payday loans that have
been referred to our collection department as a result of return payments by
your bank.

We have made numerous attempts to get in touch with you regarding repayment
of your account. Since you have demonstrated an unwillingness to voluntarily
settle the debt, you have been referred to Check Recovery. This automated system
is actively looking to locate any valid bank account associated with your name
and social security number. If such an account is found, Check Recovery will
move to recover the entire balance due at once.

If you would like to have control over how and when your obligation is
repaid, you need to contact me to put a firm payment plan in place. If I do not
hear from you by close of business November 28, 2007, I will assume you would
rather have my company take back what you owe, rather than paying it back on
your own terms. You may contact me by phone or
email.


Westbury Ventures
Phone: 1-800-859-6439 ext. 3487
Fax: 1-800-859-6450
adaugherty@ltsmanagement.com
adaugherty@dmsmktg.com

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Q and A on Market Timing versus Buy and Hold Investing

I've listened to some of your author interviews via podcast, and have really appreciated the great info, and picked up some of the books. Two questions:

QUESTION: I'm reading John Bogle’s book, "Common Sense Investing,” based on your interview, which really advocates a buy-and-hold index philosophy. His approach makes sense, but I can see from the graphs that if you sold at peaks (before the ten year lows), you would end up even better (some periods take ten years before they return to their previous peak value!). How do you reconcile this "market timing" vs. "buy and hold"? How do you feel about indexing vs. managed mutual funds?

ANSWER: Most financial writers will make blanket statements such as using index funds is a better strategy than using managed mutual funds. The truth of the matter is there are times when indexing works and there are times when managed funds are best. I would suggest that over the past three years, managed mutual funds were the better choice. However, in the late 90's, index funds were tough to beat. In fact, indexing with the S&P could be very tough as we go through this credit crisis (which still has a long way to play out). The S&P 500 is greatly influenced by financial stocks. One other thing you have to be careful of is the financial writer or talk show host who has the answer and claims that it is the only way to go about doing something. Remember, there is no holy grail when it comes to investing. Those are good questions - I wish everyone would think through what they hear and challenge it.

For more information on market timing versus buy and hold investing, listen here.

For more information on an investment program that is more than just buy and hold investments, go here.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

The Band-Aid Approach Continues

Who am I to criticize? I have no idea as to how I would handle this mortgage/credit/real estate mess. Being in a leadership position is a tough one today.

Let’s look at who is really responsible for this mess. Well, you could blame Greenspan. You could even start to fault Bernanke and Paulson to a degree with their extremely risky solutions to handling the current problem. You could blame the mortgage industry.

Ironically, the one person who should be taking responsibility is never mentioned in the blame game. Let me say that I respect President Bush and think that he not only inherited a tough situation, but has also had one of the toughest situations to preside over in decades. At the same time, he is the leader of this country and he sat back just like Congress and ignored it. He also allowed Greenspan to irresponsibly ignite the process through his policy decisions.

Now the Bush administration is practicing moral hazard by setting up a program that will freeze adjustable rate mortgages. Apparently, neither he nor his advisors have a clue as to the domino effect that this type of program will create.

I realize that they have to do something. However, this is not the answer. The answer is to let the irresponsibility work its way through the system. The answer to every problem that the Bush administration has faced has been to put a band-aid on the problem. Band-aid solutions just allow the problem to fester and become an even larger problem later.

I wish that President Bush would look at the reality of the situation. We need to stop tampering with the markets and let them adjust accordingly. We need to set up strict regulation so that the credit industry cannot continue to rip-off the consumer base. Most importantly, someone needs to put politics aside and lead this country.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Be Careful Believing the Numbers from Credit Counselors

Before I get started, there might credit counselors out there that are legitimate. I have seen many of these proposals and pored over the numbers.

I have found 100% of the time that the numbers on these proposals are completely wrong. Thus, they are misleading.

I looked at one this morning and they promised this listener that he would be out of debt in 41 months. He has roughly 10 debts. There are so many errors and misrepresentations on this page that I don’t have enough space to detail it all.

Let’s just start out with one. He has a Bank of America debt of $4,742 that he is paying $208 a month and the interest rate is 32%. The company said that they would lower that interest rate to 18% and he would pay $111 a month. Now they say he would be debt free in 41 months.

It would take him 69 months to pay $111 a month at 18%. That is 28 months more than the proposal states. In addition, he would be out of that debt in 35 months if he just kept on the regular schedule.

It is amazing that the Federal Trade Commission allows these companies to operate. The problem is that anyone can get into this business. People often ask me if this is a good solution. As you can see, it is not!

In addition, you run the risk of getting put in collections while in one of these programs. You also run the risk of penalties. You basically face all types of risks by participating.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Politicians and the Credit Industry

Yesterday, I wrote about how the credit industry is desperately trying to clean up their image because of pressure from Congress. Congress has really been putting the pressure on the credit industry to change their anti-consumer practices of charging outrageous fees and higher interest rates.

Since this makes perfect sense, why does it take an act of Congress (no pun intended) to get this accomplished? Why wouldn’t any self-proclaimed Congressional leader see the unethical nature of these credit practices and just pass legislation to fix them?

Well, it is because they are politicians. Through the years, the big hitters in the credit industry have lined the coffers of many a politician’s re-election campaign. Thus, you scratch my back and I will scratch yours.

They have heavily contributed to the Republican side of the aisle while not really showing much love to the Democrats. As a result, the Republicans allowed this to get completely out of control. Now, the credit industry probably wishes they would have shown a little more love to the Democrats now that they are in power.

So, the Democrats really don’t have a back to scratch so they are going after the credit industry…..or are they? The current legislation by Democratic Senators Levin and McCaskill is excellent legislation that would prohibit these anti-consumer practices.

It is so good that it brings up a red flag for me and begs the question, “Is this piece of legislation a campaign contribution negotiation technique?” In other words, if the credit industry will start scratching my back, we will make sure that this legislation is a little more credit industry friendly.

Sorry to be so critical of our leaders in Congress. However, they are politicians and politics is politics. This will be interesting to track.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

The New Friendly Face of Credit – The Wolf behind Sheep’s Clothing

Congress has been coming down hard on the credit card industry for their use of the universal default clause. This is a clause in your credit card terms and conditions that you sign off on that gives credit card companies to ability to raise the default credit card rates as high as 32% if they determine that you have become a risk.

Chase has just recently announced their clear and simple plan. They are eliminating this practice as of March 2008. In a Dallas Morning News article, Capital One states that they raise a consumer’s rate only "if they pay us more than three days late twice in a 12-month period."

A spokeswoman for Bank of America said, "We do not engage, and never have engaged, in the practice of universal default for our consumer credit cards based on the customer's failure to repay obligations to other creditors."

So are credit companies really becoming more consumer-friendly? Not really.

Bank of America says that they never have engaged in the practice of universal default. However, if you look at their terms and conditions, it says:

We reserve the right to change the APRs in our discretion.

Another company that claims that they don’t engage in the practice has this on their terms and conditions:

In the future, we may increase your non-introductory APRs if market conditions
change.

I would define universal default agreement as the ability to change credit card rates for any reason. If you read the terms and conditions, they still reserve that right. They just don’t call it the universal default clause.

Remember, credit card companies just want the money that they make off of high interest rates, as well as the money that they make off of your mistakes. Be careful when a credit card company wants to be your friend.

My favorite is “a change in market conditions” – what about current credit conditions?

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Are We Already in a Recession and Just Don’t Know It?

Another brutal day on Wall Street. After Friday’s rebound, stocks returned to the intense selling that has been the norm for November. Further fears in the credit markets sent the S&P 500 down 32 points, or 2.32%, and the Dow Jones Industrial Average down 237 points, or 1.83%. It was yet another tough day on Wall Street. This bad period for stocks started just twenty-five days ago on November 1st and it is already down 9% since that time period.

A look at stock prices can give us a real good perspective at how things are in economy. Stock prices are typically a good predictor of things to come.

Financial stocks are reflective of the big problems that we are facing in the credit markets. Citigroup, Merrill Lynch, and Bear Sterns are all close to a 50% decline from their 2007 stock market highs.

If you take a look at retail, it doesn’t get much better. Wal-Mart, a good overall barometer for consumer spending, is down levels not seen since October of 1999. If you were invested in that stock, you would be at the same stock price now that you were eight years ago.

I wrote about retail sales yesterday in my blog and on my stock market outlook because this will give us a very good indication of the health of the consumer. For the most part, retail sales were stronger this year than last year on Black Friday. However, much of this was due to the aggressive marketing of midnight sales and the fact that retailers were practically giving merchandize away.

Retailers have figured out that to get the consumer in the door you have to slash prices. The problem is that retailers cannot afford to continue to sell merchandise at these levels for the next thirty days. Wall Street is dependent upon consumer spending to keep this economy going.

So, taking a look at the housing market, consumer debt, high energy prices, lay-offs, and slowing wage growth, it begs one to ask the question: “Are we already in a recession?” If not, I think that we are getting ever so close to one. If we are, market investors need to take a look at their portfolios and consider battening down the hatches. The stock market does not do well in recessions. The average loss in a recession is over 30%.

So how do you respond? Make sure you review my article on the 3 ways of investing. The bottom line is to have a game plan and know your risk.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Happy Cyber Monday

I cannot stress the importance of this Christmas retail season. This is a big test for the consumer. Wall Street is bracing for the worst, expecting retail sales to be the lowest in five years.

Why is there such an importance placed on this year? I would argue that one of the main factors to keeping us out of a recession is consumer spending. The consumer has not slowed down in a very long time. Through the use of debt, consumer spending has remained vigilant even through the tough years at the beginning of this decade.

Last Friday (Black Friday) was the start of the Christmas retail season. This year, Black Friday was stronger than last year. So, are we in the clear? You have to look behind the headline numbers. I would argue that these numbers don’t even remotely tell the whole story.

1) In order to get customers in the stores, retailers had to give the items away. The discounts were extremely deep. For the debt trapped consumer, these deals were necessary. Thus, they are going to show up in droves.
2) The average amount of money spent per consumer was lower than last year. You could look at that stat in one of two ways. The average could be down because of the low prices or it could be down because consumers are spending less. I would suggest it is a little of both.
3) The marketing of the 3 a.m. and 4 a.m. sales was a huge hit. That, in combination with the low prices, packed the consumers into the stores.

The big question is what happens in the next few weeks before Christmas? What happens after the deep discounts end? This will tell volumes about the state of the consumer. As long as retailers are willing to lend money and defer payments, the sales should be propped up to a certain degree. However, I doubt we are going to see strong retail sales for this Christmas season.

Today is cyber Monday and is the online shopping version of Black Friday.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

More and More Scams

These are two examples that came in today of scams that listeners have received:

Example 1
I seem to be getting a lot of emails stating that I have won various lotteries from different countries from the U.K. to South Africa to Nigeria. These emails do not have my name in them, and I believe they are scams. Also, I keep getting emails about jobs in which I would cash checks and keep a percentage of the money and send the money back (usually to someone in another country) by wire transfer. I know these have to be scams, but I am afraid some people may be fooled by them. I almost got fooled by a check-cashing scheme by someone buying some Avon products from me (from my Avon website). Some of the emails sound very legitimate with official-looking information, but I always remember the saying "if it sounds too good to be true, it probably is." I just wanted to let you know about these check-cashing and lottery scams. I seem to be getting these emails everyday.

Example 2
Bob,
Caught part of your program on Monday and heard about the check scam. We have heard from a company in London called Long-well Textiles, LTD, and he is describing the same set up. Checks mailed to you, you cash, keep 10% and wire the rest to his account in London. The first envelope arrived today and we declined accepting it and he is most upset and saying it is not a scam. We had found some info on this on the internet, however, we have not located it again.

Please be careful – these scammers are working hard to steal your money!!

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

The Government Grant Scam

A few weeks ago, I wrote about financial scams (read blog here) where people would give you a check to cash and tell you that you could keep some of that money just for cashing the check. You then cash the check, send them a part of the proceeds, and then the check bounces and you are out the money that you sent.

Well, there is another scam going right now and these scammers are bold in using advertisements and websites. It is the free grant money scam.

One listener writes in:

I know that this is too good to be true, but I wanted to run this by you....
Have you heard of www.Contactgrantpeople.com?
I just received a letter in the mail from this company stating that they
are a broker at Grant Organization and that I have been selected to receive a
$9960.00 cash grant. This money comes from large corporations and wealthy
individuals that give away money in a form of financial assistance. The
check is for $4980 and if I cash or deposit the check, I must send him his 10%
commission ($498.00) and then they will send the remaining $4980 airmail
express.

Now I cannot speak to whether or not these people are scammers. This is a real website. Everything that they advertise does fit. This is what the Federal Trade Commission had to say about this scam:

"The defendants advertised guaranteed 'free grants.' But the only grant was to
them. They took consumers' money, they did not honor their guarantees, and they
gave consumers nothing more than empty promises of free money," said Howard
Beales, Director of the FTC's Bureau of Consumer Protection. "Consumers should
keep in mind that most sources of grant money have strict criteria; they do not
give individuals money for nothing." (to read article, click here)

Here is a simple rule of thumb when it comes to this sort of thing:
Never take any offer where someone is just going to give you something for doing virtually nothing. There is no free lunch.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Is Your Money Market in Danger of Losing Money?

Are money market funds in danger of losing money due to short-term investments in bonds that hold sub-prime mortgages? The problems with sub-prime mortgages are apparently affecting money market accounts. Depending on what type of money market you have, there could be trouble brewing.

One money market account just recently offered its shareholders a way out of their account by accepting $0.96 for every $1 deposited.

This account was an enhanced money market account, which is an account designed to give a higher return than a normal money market account. In doing this, they take additional risk. Those funds will end up taking the loss. They can also be categorized as ultra-short bond funds, which are intended to be safer investments. However, one of the ultra-short bond funds year to date has had over an -8% loss.

What about money market accounts that have exposure to the risk from sub-prime loans? Of course, this isn’t something that you want to bank on. However, most major money market funds will step in and replenish their money market accounts with money to make up for any losses. A mutual fund or brokerage company that is a big player in the money market arena cannot afford the negative publicity that results from losses in accounts that are assumed to be relatively safe. People count on money market accounts to be safe. At the same time, you have to realize that they do take risk.

Keep in mind that money market accounts are not FDIC insured. Money on deposit in these accounts is insured by the FDIC for up to $ 100,000.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

How To Approach This Market – The Three Ways To Invest

I had a listener send me an e-mail a while back with this message. “You talk about how much risk is in the market. However, you never tell us what to do.” Well, I am here to give my analysis and teach you how to handle most things as a steward of your God-given assets. Most of the advice that I give is to be taken as general direction. It is a little bit tough to give specific advice when I don’t know your particular situation.

Generally speaking, there are three ways to face this stock market right now. Without question, you could find yourself in one of these three places.

1) Invest defensively – This would simply mean reducing your exposure to stocks and risky bond investments and increasing your cash and fixed investment exposure. I put together an entire analysis on this type of strategy. You can find the paper here.
2) Invest Offensively – There are ways to make money in bear markets or declining markets. They consist of investing in bear market type mutual funds and strategic investment strategy. For more information, you can go here.
3) Buy and Hold – This strategy never really made sense to me. If the risk is increasing in the stock market, it has been a longer-than-average time since we have experienced a bear market, and uncertainty is at a high, then just staying invested because you are invested for the long-term makes no sense to me. Investing is a probability game. If the probability of being invested has a potentially high probability of giving you high returns over the next six to twelve months, then stay invested. If the probabilities don’t seem to be that great, then go to either the first or second strategy.

The bottom line is to commit to strategy and have a sound basis for it. There are plenty of people that would disagree with my assessment of the third way to invest. However, keep in mind that it is extremely tough to just bounce back from a loss of -35%, which is the average loss of a bear market. At some point, we will face that situation again. Cycles still occur. Who knows the timing? At some point, it is important for every investor to acknowledge that timing might be sooner than later. Whether it is now or four months from now, I think that we are at that time.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Does It Make Sense To Pay Someone For A Bi-Weekly Mortgage Program?

I had a listener call in last week with a question about bi-weekly mortgage payments. Does it make sense to pay someone to make your payments for you on a bi-weekly basis?

First, let’s go over the concept of bi-weekly mortgages. A bi-weekly mortgage payment is paid every two weeks instead of being paid once a month. As a result of this strategy, you end up paying one additional payment a year and could pay off your mortgage approximately seven years sooner. In most cases, it is almost impossible for you as a consumer to make these bi-weekly payments without the assistance of a biweekly program.

These programs can cost as much as $ 295 to set-up and $ 5.50 a month for maintenance. Are these programs worth it?

There are two other ways to get an extra payment in each year. First, you could increase your payment each month so that at the end of twelve months, you have paid thirteen months’ payments instead of twelve months’ payments.

You could also just make one extra payment at the beginning of the year. Let’s look at the results of these three strategies using a $100,000 mortgage, 30 year fixed, at 7% interest rate.

Strategy 1 – Divide up the extra payment over twelve months
Total Interest Paid $ 105,381

Strategy 2 – One extra payment a year
Total Interest Paid $ 106,660

Strategy 3 – Bi-Weekly Payment
Total Interest Paid $ 103,958.73

It would look like the best strategy is the third one. Remember that I said you would have to use a service in order to make the bi-weekly payments. Therefore, we need to add that cost into the equation.

Costs for Strategy 3:
Total monthly costs of $ 5.50 a month over lifetime of program $ 1,545.50
Total upfront cost $ 295.00
Total Costs $ 1,840.50

So does it make sense to use a service?

Strategy 1 You do it yourself
Total interest $ 105,381

Strategy 3 You pay someone for a bi-weekly program
Total interest plus program costs $ 105,799.23

Why pay someone an additional $ 418.23 to do something that you can do for yourself for free?

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Don’t Fall For The Fake Check Scam

There is a scam sweeping the nation where people are losing an average of $3000 to $4000 if they fall for it. It is a fake check scam. Here is how it works:

This scam takes on many different forms. So the form is not what is important. The important thing is to be able to identify the basis of the scam. It all starts when someone gives you a realistic-looking check or money order and asks you to send cash somewhere in return.

The person will typically have a very sensational story to back up this request. You deposit the fake check or money order, send the cash, and then, just like that, you are personally out all of that money.

The problem with these scams is that the money order and the check look very real. If you present it to the bank, they are going to honor it and deposit it into your account. The problem comes when the bank discovers that the check or money order is a fake. Then you are out the money.

Some examples of the scam:
- The Scammer will ask you to cash a check or money order as a favor.
- If you are selling something, they will write the check or money order for more than the price requesting cash back.
- It might be a company that hires you to work at home, and as part of your job duties, you deposit checks or money orders in your account.
- It could be a check that you receive as part of an advance for winning a sweepstakes or some type of foreign business deal.

Scammers are also looking for victims on Ebay, Craig’s list, online dating sites, etc.

So how do you protect yourself from being a victim? First, don’t just automatically trust someone in any transaction that you don’t know. That is the number one rule of thumb. If it involves money and favors, don’t trust it. Second, there is a not legitimate reason why anyone would have you cash a check for them and then send the money. Third, there has to be risk involved if you are dealing with someone who can’t get a check cashed.

Finally, don’t do anything that involves money or giving personal information in any situation where you are approached. If someone calls you and asks for verification of information, don’t give it to them. If you approached through an e-mail, don’t respond.

That one piece of advice will work to prevent most scams from being successful.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Can You Ever Save Too Much Money? Saving With a Purpose

I received an interesting e-mail from a listener the other day.

“Is there such a thing as saving too much? My husband and I don't have any credit card debt, car loans, etc. We only have our mortgage in the way of debt. I contribute the max to my 401k and also have $75 auto-drafted into a savings account weekly. I think I am doing all the right things, but it often feels like we are ‘scraping by’. I think saving is the right thing to do, but my husband feels that I am ‘rat holing’ money and wants me to loosen up. Is there such a thing as saving too much?”

The answer in short is yes. There always has to be a balance between saving and spending. Most of the time, it is the other way around. The spending is way out of line in relation to saving.

You only want to save the amount of money necessary to help you achieve your goals. Thus, you need to save with a purpose. A saving plan needs direction. Without direction, you could catch yourself overdoing it and experience the feeling of just “scraping by.”

So, go through this process. Determine what you are saving for. For most of us, that would be retirement. So, let’s use that as the example. Determine what age you are going to retire. Determine the amount of money you need each month. Determine how long you think that you will need that money being paid to you each month.

Then add in social security, any pensions, and current investments. With all of that data, a financial advisor can tell you approximately how much you need to be saving each month. If you are achieving that monthly amount, then you are reaching your savings goals. That is saving with a purpose!

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Are These Debt Negotiation Companies Worth It?

This might be too long for a blog. However, I thought it was important to expose the reality of these so-called debt solution companies. Most of these companies will market that they can take your current debt and negotiate on your behalf to reduce that amount by up to 80%. I received a proposal that a listener received from a debt settlement company for $ 48,000.00 worth of debt.

This company proposed that they were going to reduce his debt by roughly 60% and he was going to owe only $ 19,014.27. However, he was going to pay this company $ 7,313.18 for that service.

Here is the reality of these services:

Contrary to what they say, most creditors will aggressively negotiate with anyone past a certain point. This is not rocket science and something that you can do for yourself.

In their proposal, they start with a certain amount of debt. They give you a dollar amount that you are going to pay each month for 48 months to complete their “forecasted” program. However, they cannot guarantee that the penalties and interest on those debts will go away. It is very likely that over the next 48 months, that original $ 48,000 debt will have greatly increased due to penalties and interest.

They get paid the entire fee up-front. The first 13 payments will go to fund their fee. After that, you are at their mercy. They have been paid.

Creditors can still choose to sue you. They will not represent you in a lawsuit. If you are sued, you are on your own. This is the big risk. You have 48 months (in Texas) that you are potentially subject to a lawsuit. Whether you are with a company or not, you are at risk of a lawsuit.

If any of your accounts are current prior to accepting the program, they will go into default and ruin your credit. For this system to work, they have to be extremely behind.

These companies state they will stop debt collector calls. You can stop debt collector calls with a simple letter.

The bottom line is that you are going to pay big bucks upfront to a company that will make sure that your credit goes into the tank, offer no protection from being sued, and negotiate on your behalf something that you can do yourself.

It is yet another smoke and mirrors marketing scheme from the credit industry. Unfortunately, only time will tell if a program like this will work. You sign off that there are no guarantees. As in the case presented above, this listener will be out $ 7,000 within the first 13 months, whether it works or not.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Trading Stocks and Waxing Cars is Easy – Just Ask the Guy on the Commercial

I don’t know whether to take it as an insult to intelligence or marketing genius. I love these late night infomercials or the commercials on satellite radio that market the secret formula for making millions in stocks.

“Hey Bill, where did you get that new car, that new house, and that new speed boat?” “Why Jack, I made that money trading stocks in my spare time.”
“How did you ever learn to trade stocks?” asks Jack.
“I simply went to this website and ordered this CD that tells me everything that I need to know. Anyone can do it.”
(I really cannot make this stuff up)

As I listen to those types of commercials, a few thoughts cross my mind. First, could that type of commercial really entice someone to call and order some informational CD, suckering them into spending thousands of dollars on some bogus stock trading system? Second, if these companies are spending all of this money marketing this garbage, it must work. Finally, this type of marketing is intended to appeal to a powerful emotion.

Show me the Holy Grail, something that is easy, and a slam dunk way to make money.

The problem is that it doesn’t quite work that way. As Michael Covel says in his excellent book called “Trend Following,” there is no holy grail. There is no slam dunk way to make money in trading stocks. Even the greatest of stock traders will tell you that no one has it figured out.

Trading stock is tough. If it weren’t, everyone would be doing it and no one would be losing money. Unfortunately, stock trading doesn’t quite work that way. Always remember marketing often creates a fantasy world that has a slim chance of actually turning into reality.

Don’t become a marketing casualty. The bottom line is that there are no slam dunk solutions.

I wish I would have known that the day I bought a bottle of that miracle car wax at the State Fair. If you have been to the car show, you probably saw the presentation. It is the wax that turns your faded dull car instantly into a brand new shiny car. You can set your hood on fire (I didn’t actually try that one) and nothing happens to the car.

Well, years ago I tried it on an older car with faded paint. Imagine that! My paint didn’t turn out to be a shiny new car again. Why? Because there is no slam dunk solution!

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Why Is The Federal Reserve Board So Concerned?

The Federal Reserve Board is taking unusual actions in the markets in the face of what seems like a healthy economy and a stock market that is up nicely year to date.

In the last twenty four hours, the Fed has taken some very unusual emergency-like actions, as if we are facing some unspoken crisis.

In the past day, the Federal Reserve Board has taken three steps:

1) Lowered in federal funds rate
2) Lowered the discount rates making it easier for banks to borrow money
3) Pumped 41 billion dollars into the U.S. financial system

Why is this so unusual? Let’s look at the federal funds rate first. Typically they lower those rates when inflation concerns are not present and the economy is strong. Well the economy showed good growth yesterday in the 3rd quarter. There are definitely inflationary pressures with oil at record highs well over $ 90 a barrel.

Thursday’s infusion of 41 billion dollars into the U.S. financial system is the largest cash infusion since September 2001. In 2001, we were facing a stock market that was getting clobbered, a weak economy, and a devastating terrorist attack. Today, we have strong economic growth and what appears to be a strong stock market.

However, is everything so strong? This comes back to my central argument about debt. This is a debt problem. It was reported today that foreclosures have doubled over the past year. Other types of loans besides mortgages are going into default at an alarming clip. The record price of oil will start to make its way to the gas price, creating even more pressures on the consumer. Finally, signs are showing that the consumer is getting into trouble and that consumer spending is at risk.

The problem is that a debt bubble is bursting. It is a slow process and it takes a little while for it to spread through the system. Some will argue that the Fed will be able to save the day. Well there comes a day when their life-saving strategies might not work. If you look at these extraordinary measures taken over the past twenty four hours and you look at Thursday’s stock market decline. It doesn’t appear to be much in the way of confidence.

I know that I have been on this bearish bandwagon for a while now. Just because things have not shown up doesn’t mean that they are not there. Please be aware of the risk that you taking.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

The New Under the Radar Newsletter Format

The New Under the Radar Newsletter Format

(to sign up for the newsletter, go here)

We are changing up the format for the newsletter from 2 times a month to every week. We are also changing how we deliver the content. In the past, we would provide you with a few very detailed articles. Now, we are sending out more content in a shorter format. You can pick and chose and decided what is the most important for you to read.

Here is this weeks’ edition:


Prudent Points of the Week

The New Under the Radar – More content + Shorter articles + Weekly = Informed

RETIREMENT ALERT: We are starting to see a great deal of lay-offs occur. If you are facing this situation or know someone who is facing unemployment, please read this article.


God and Money

Is God on the Front, Back, or Missing From Your Dollar Bill?

Investing and Managing Money

Do you need an investment check-up? Just Ask Bob

Consumer Hot Topic

The Best Way to Purchase a Car – Prudent Tip 1

Debt

Credit Monitoring – Why Some Companies are More Expensive than Others

Just thinking out loud….

What is Prudent Money?
Have a Question for Bob?
Weekly Stock Market Outlook
Podcasts

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

The Best 6-Month Strategy For Investing In Stocks – Is It The Real Deal?

Wall Street follows many different time periods in hopes of figuring out predictable trends. There are several of them that occur in December and January that are supposed to predict the returns for the coming years. One of the better known Wall Street trends starts on Thursday.

A trend was detected by the researchers at the Stock Market Almanac that the best time to be invested in the stock market is between November and April and the worst time to be invested is between May and October.

In fact, there is a saying that goes “Sell in May and go away.”

The writers at the Stock Market Almanac conducted an illustration to prove this theory to be correct.

The illustration compares an investor investing in Dow Jones stocks during the best six months of the year versus an investor investing in the same stocks during the worst six months of the year. The illustration showed both strategies starting in 1950 with $10,000 and repeating the strategy until 2004.

What is the difference between the two strategies?

Investor “A” who was invested during the worst 6 months for the 54-year illustration turns $10,000 into $9,498.

Investor “B” who was invested during the best 6 months for the 54-year illustration turns $10,000 into $489,933.

That is an amazing difference! Is that something that always holds true? Well it works until it doesn’t work anymore. It typically works best while it remains a secret. However, let’s take a look at this strategy when the markets are facing huge amounts of risk.

For example, look at the last bear market between 2000 and 2002.

November 2000 through April 2001 -12%
November 2001 through April 2002 -4.9%

Another rough time in the markets would be 1969. The best 6-month time frame netted a loss of -14%.

So what is the moral of the story?

1) If everyone is talking about an indicator that can predict future returns on your investments, the secret is out and chances are the less effective the indicator will be going forward.
2) There is a lot more to the numbers as illustrated above. Risk changes everything. To bet on that 6-month strategy holding true might prove to be a mistake. The risk level is higher than it has been in over 5 years. Determine how you are invested based on prudent principles of investing rather than pop culture trends.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Irresponsible Marketing with Payday Loans

I define “irresponsible marketing” as marketing that leads you to believe something that is just not true.

A good example is a promotional article marketing payday loans. This article was promoting that you should just use a payday loan if you need quick cash rather than borrowing from a credit card. It went through reasons such as a one-time flat fee, avoiding paying long-term interest rates, and fast loan approval.

Then of course at the bottom of the promotional article is a link to a website that will quickly qualify you for one of these payday loans.

What the promotional article doesn’t tell you is that this 14-day loan has an annual percentage rate of 782.14%. The site also promotes renewing the loan. It says you could renew a loan up to 4 times, which they do automatically unless you call them and instruct them to stop.

So let’s say a person borrowed $200 from one of these outfits, renewed it 4 times, and then paid it back in full. You would have borrowed the money for 56 days and that $200 would have turned into $440. You would pay $240 worth of interest for borrowing $200 in just 56 days. In addition, they charge fees every time you renew.

Understand that there is a difference between marketing and good prudent advice and information. Don’t believe everything that you read at face value. Learn the art of being skeptical. It can save you a great deal of headache down the road. Plus it is just good stewardship to do so.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Is a Roth IRA Better Than a 401(k) Plan?

Most people will tell you that you should always put money in a 401(k) first. It is considered conventional textbook wisdom.

Let’s first think about the phrase “most people” or “the experts” or “they.” People who are successful in investing possess a common trait. They think differently than everyone else. They question how things are supposed to be done. They think outside the box.

So, we are going to think out of the box on this one.

I would suggest that the 401(k) plan has only two benefits. The first is the free matching money. You always want to make sure that you take full advantage of the matching money. If they are going to match dollar for dollar up to the first 4%, then you want to at least put in the first 4%. The second benefit is the ability to put large sums of money back for retirement on a pre-tax basis.

If you are able to put large sums of money back, then the 401(k) plan is probably the best route to take. If not, consider utilizing a Roth for the rest of your contribution.

A Roth gives the greatest tax advantage available by allowing you to never pay taxes again on any money that is deposited. What is the disadvantage? You don’t get a tax deduction on the deposit. Choosing between a small deduction on the initial deposit versus a tax free income down the road is a no-brainer.

This is the beauty of the Roth. Everything that is deposited, as well as the investment growth that you experience until retirement, is all tax-free upon withdrawal.

The other advantage is that you will be able to put back $ 4,000 with an additional $ 1,000 if you are over age 50 for 2007. For 2008, that increases to $ 5,000. What is the drawback? If you are single, your adjusted gross income has to be lower than $ 95,000 to get to invest the entire amount allowable. Over $ 110,000 in adjustable gross income, and you cannot participate. If you are married, that rises to $ 150,000. Over $ 160,000 and you lose the ability to participate.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Mutual Fund Cash Levels Are Good Predictor Of Stock Market

When mutual fund managers are very positive on the market, historically they have kept lower levels of cash on hand in their portfolios. Watching these levels has been a very good predictor of where the stock market might be heading. Consider these statistics that date back to 1961.

In 1971, these cash levels went as low as 4% and a -9% decline followed.
In 1972, these cash levels went as low as 3.9% and a -42% decline followed.

Throughout the 60’s, mutual funds held on average 5% to 6% of their portfolios in cash. When the cash levels dropped below 4%, it was a high risk signal and market declines of some sort followed.

Then the cash levels went back up to the average of 8% to 10% again for a very long time until April ‘98. At that point they went back under 5% for the first time in 21 years. Following that dip down to 4.8% of cash, the market dropped -19%.

Then between 1998 and 2000, the cash levels stayed in the mid to upper 4% ranges. March 2000, we saw the first dip down to 4% cash level in almost 30 years. Of course, that occurred at the top of the great bull market run that led to a -47% decline in the stock market.

In September 2005, we set another record low in cash levels of 3.8%. That led to a mild decline of -5.2%.

In March ‘07, we set a new record of 3.7%. Following that record low the stock market dropped close to 10%.

So where do we stand today? It was reported that we are now at a record low of 3.6%.

Now let’s talk about indicators for a moment. Indicators by themselves can offer some predictive value. A group of indicators signaling everything at once is a big red flag that something is really wrong in the stock markets. Unfortunately, this latest reading on mutual fund cash levels is one of many that is signaling risk at the same time.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

How Much Risk Are You Taking?

I think that the almost 400 point drop in the Dow Jones Industrial Average on Friday is a strong reminder that everything isn’t OK in the world of stocks. So how safe are your investments? Everyone has a Plan A when it comes to investing. Invest money and leave it alone. What is your Plan B when Plan A fails?

Most investors don’t have a sell strategy in place. When risk starts to increase, typically nothing is done. So, if the risk level is getting high in stocks, what move do you make?

You look at diversification. Diversification is a strategy where you divide your investments into different types of investment categories that don’t have a tendency to all move in the same direction. This strategy helps you minimize risk in your portfolio.

A diversification strategy would mean having your money divided between stocks, bonds, real estate, gold, alternative investments, and cash. Now you go about diversifying your investments depending on the type of plan that you are in. For example, a 401(k) plan is somewhat limited. You typically only have stocks and bonds and maybe a money market.

However, you have many more options in a general investment account held outside of a company with a financial advisor/broker or directly with a brokerage company. This is where you can diversify your portfolio with alternative investments. These types of investments are something to consider when the stock market risk gets high. However, if you are interested in alternative investments I would encourage you to have someone help you with that type of investing.

For the 401(k) plan, it comes down to how much you have in stocks and how much you have in bonds. For a very detailed look at how to invest in your 401(k) plan, read this article.

You also have to be careful with diversification. Diversification is not based on the number of investments you have in your portfolio. If you have 9 different stock funds, you have very little diversification with everything being in stock. Stocks tend to all travel in the same direction a high percentage of the time.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Dangerous Sales Pitches

"Pay your mortgage off in ½ the time without spending an extra cent monthly! "

"Invest your money, gain stock market like returns and never lose a dime!"

Good Strategies? NO, DANGEROUS SALES PITCHES!

I received a mailer yesterday inviting me to a seminar where they were going to give me a free meal and tell me how to pay off my mortgage in ½ the time without spending one extra cent monthly. The letter starts off by saying “Paying off your mortgage is a mistake.”

There is a dangerous strategy that encourages consumers to take their mortgage, refinance it to an interest-only note, and then invest that money you would have been paying on the principle of the house into an equity-indexed annuity. The only thing about that strategy that is successful is paying out big fees and commissions. In fact, on many financial talk shows in the DFW area, these product and strategy pitches are being made and made very aggressively.

So what is wrong with the approach? It comes down to two things. First, these aggressive strategies are based on a perfect set of assumptions coming true. The likelihood of those assumptions occurring would require the stars align. Second, any strategy that is pitched that involves an equity-indexed annuity is simply dangerous.

Equity-indexed annuities are designed and aggressively marketed by life insurance companies. They are marketed as investments that never lose money. However, when the stock market goes up, they go up as well. They are supposedly the perfect investment. The agents who sell them make huge commissions. They are not regulated by a governmental investment regulatory agency. In fact, over the years the government has started cracking down on these products and many lawsuits have turned up claiming misrepresentation and fraud.

What is so dangerous about these strategies?

The idea on paper is easy to understand and makes total sense. In reality, it doesn’t quite work as advertised. It is human nature to want to believe the sensational claims. The dangerous part of the whole sales process is that it is easy for you to get suckered into it. Always live by one principle. A sales pitch with a sensational claim should be met with a heavy dose of skepticism. If it is too good to be true, it is too good to be true. That alone will work to keep you out of trouble.

Remember there are no slam dunk solutions. If this were so, everyone would be doing it.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

What To Do If You Get Laid Off

So what do you if you think that you are going to get the dreaded pink slip at work? Well it is not a major surprise anymore. Typically companies fire the advanced warning that lay-offs will occur. If this happens to you or you suspect it is going to happen, it is important to take immediate action. Simply, you have to go to work.

1) Determine your staying power – Know the bare minimum that you will need to get by each month.
2) Determine what income will be coming in and for how long.
3) Obviously you want the best possible highest paying job. However, determine at what cost you are willing to pay. You can only hold out so long. At some point, you might have to take a lower paying job. Determine that timeframe up-front.
4) Determine what you will do with your retirement plan – It is important to roll this over to an IRA.
5) Resist taking some time off - When a lay-off occurs you have to go to work immediately finding a new job. Develop a game plan and make a list of everyone you know that might be able to help you.
6) Most importantly, stay in constant prayer and resist the temptation to worry. Getting laid off can be a scary proposition. Always remember that God is and will always be in control. He has a will for you. It is your job to trust His will and do your part by working as hard as possible to get another job.

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

Fund Manager Issues a Warning to Those Invested in the Stock Market

The prediction business on Wall Street is a tough one. The markets are and will always be too unpredictable. In his weekly newsletter, John Hussman of the Hussman Funds issued a stern warning concerning today’s stock market. Although it is somewhat technical, it is definitely worth a read. I wanted to provide this link for you.

John Hussman’s Warning

All contents copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.

New Bill Forgives College Loans for Public Service Employment

The new College Cost Reduction and Access Act just recently signed into law offers some interesting opportunities for college students. Some of the provisions of the law:

- Increase Pell Grant Scholarships over time,
- Provide up-front tuition assistance for students willing to teach in high poverty areas or high-need subject areas
- A landmark investment of $510 million to be made into minority serving institutions
- Reduce the interest costs by 50% over the next four years on subsidized student loans

The most interesting provision of the new legislation is federal debt forgiveness for anyone going into a public sector job. The government will forgive the balance of debt not paid after 10 years as long as the student works in the public sector. The public sector is defined as military service members, first responders, law enforcement officers, firefighters, nurses, public offenders, prosecutors, early childhood educators, librarians, and others.

The program will figure out your monthly payment based on either your salary if you are single or your combined salary if married. The public service employee will make 120 payments and the rest would be forgiven by the government.

So what is the drawback? Well the good news is that the government would forgive the remaining school debt. The bad news is that the employee will now owe taxes on that forgiven money. For example, let’s say that the remaining balance on a note comes out to $100,000. The tax bill due that year could be as high as an additional $35,000. Where someone who is making $45,000 to $50,000 a year is going to come up with $35,000, I have no idea.

Only Congress can take a good idea and turn it into a bad one.

For more information you can go to www.finaid.org.

The Irresponsible Mortage Industry

A recent advertisement read:

“Are you Paying to Much for Your Mortgage?”

Then they show how you can pay $ 1,698 for a $ 510,000 mortgage.

Most consumers don’t understand how mortgages work. In today’s cash crunched economy, consumers are looking for ways to reduce their expenses. There are also those who are buying into the real estate boom and attempting to buy more house than they can afford.

Well, there is a industry that claims to solve all of those problems. It is the Loan Shark Mortgage Industry. Since people don’t understand the ins and outs of mortgages, they go to the “professional” to get advice on mortgages. In reality, they walk into the shark's den and get sold a horrible product that will only make things worse in the future.

These companies are marketing these irresponsible mortgages and taking advantage of people who are in hopes of buying a house when they can’t afford it or people who are in cash flow trouble.

There are some good people in the mortgage business. Alice White Hinckley is someone that I confidently recommend for anyone who is need of a mortgage. The problem is that people like Alice are far and few between.

Keep this mind when thinking about a mortgage.

You don’t pay too much for a mortgage unless your interest rate is higher than the current market for interest rates is paying. Don’t fall for the “pick a payment” scheme.

What Comes First - Debt, Emergency Funds, or Retirement?

What is the most important priority for your money? Should you save for retirement, eliminate debt, or save for emergencies? Should you attempt to do all three? This is a question that I get frequently through the Ask Bob question and answer section on Prudent Money.

In looking at a person’s financial situation, my initial concern is always the strength of their financial foundation. There are two pillars that hold up that foundation and neither of them have anything to do with invested money. First, is there any debt? And if so, is the debt on a schedule to be paid off quickly. Second, does the person have adequate emergency savings readily available, as well as a plan for that emergency account?

If you run into a problem with debt or you have an emergency, it will not matter if you have money locked up for retirement. You have to be able to take care of the here and now.

So here is the strategy that I would recommend across the board:

1) Put a schedule together to determine how you are going to get out of debt. Make that your number one priority before investing in retirement or anything else. The only exception to that rule would be if there is a 401k match available. You don’t want to not accept free money from your company. This is where you really need to determine what is the most important. Getting out of debt is paramount.
2) Start thinking of a way to handle emergencies. What is going to be your game plan if an emergency were to occur? Now if you follow this formula of liquidating debt at all costs, what are you going to do about emergencies? Now this is where it gets tricky. If you are paying off a credit card where you can borrow the money back if needed, then you aggressively pay off the credit card. If you are paying off a credit card and there is no way of borrowing any of that money back in the event of an emergency, then you need to also make building an emergency fund a priority alongside of getting out of debt.
3) Once your emergency fund is built and you are out of debt, it is time to start thinking about retirement.

Obviously, these rules of thumb will not apply to everyone. However, for most, this ends up being a prudent game plan. If you cannot take care of the present, the future doesn’t matter.

Is it a Good Idea to Co-sign or Loan Money?

If you look back through the history books, there have been many countries that have become so indebted and on the brink of financial ruin, that a lender of last resort was needed to come in and bail out that country. Throughout history, we have played that role and I would suggest currently other countries are playing that role to a certain degree for us.

That can also happen on an individual level as well. A person can become so indebted or have such poor credit that they require a personal loan or someone to co-sign for them.

So what should you consider when it comes to co-signing or loaning money to someone?

Co-signing is the worst of all situations when it comes to debt because you are taking on the responsibility of the debt that you have no control over. If you are going to co-sign for someone, remember that it is the same as taking out the debt yourself. How are you going to know for sure that it is being paid back? If it doesn’t get paid back, then your credit is harmed and you will be on the hook for the debt.
I always like to look at the book of Proverbs. The book of wisdom to me is a compilation of wise bits of information that, if implemented, keep us out of harm’s way. Concerning co-signing, King Solomon writes in verse 26 of the 22nd chapter:

(26) Don’t agree to guarantee another person’s debt or put up security for someone else.

It is an important piece of wisdom because the majority of co-signing agreements don’t work out.

With all good intentions, people will lend money to help another out. Now it might be that you feel God leading you to help someone out and lend them money. If you are going to lend money to another, go into the agreement with one thing in mind. If they don’t pay it back, you are fine with considering it a gift.

In most situations, the person borrowing the money ends up in a bigger mess, doesn’t pay the money back, and then a relationship is destroyed. It is just not worth it.

Most importantly where you are co-signing or loaning money to or for another, just know the risk. Anyone that comes to you for either arrangement does so with all good intentions. When either a co-signing deal is consummated or money is given on a personal loan, both parties feel real good about everything working out.

You have to consider the risk. People get themselves in over their head and cannot get money the conventional way. For most people severely in debt, the solution is to create more debt. Thus, as a co-signer or a lender to someone, you become the lender of last resort and assume huge amounts of risk.

Once again, only go forward with either arrangement if you are fine with picking up the tab.

Having said all of that, I was having a conversation with Jeff before we went on air. What about the people who are good for it? What about the people who are good for their word?

There are those good people out there and I also believe that there will be people that God leads you to help. As we always talk about on Prudent Money, the best rule of thumb when it comes to making decisions is simply this:
First, know the risk of the decision.
Second, pray that God will give you peace about saying either yes or no.

The Five Things You Need To Know About Emergency Funds

To any financial question, there are two different answers. There is the textbook answer and the then there is the answer that works best for you. The textbook is the standard answer or the ideal answer. Remember that everyone’s financial situation is uniquely different. Thus, you can use the textbook answer as the starting point. Then move from there.

The textbook answer for funding emergencies is six months of salary. However, you might not need a full six months of cash sitting in a reserve. For some of you, that might be too much. For some of you, that might not be enough. Here are five things that you need to know when it comes to handling emergencies.

1) Unemployment - Determine the minimum amount that you need to get by on. That is the amount of money that you need monthly to cover the bare minimums. That would not include saving money, eating out, entertainment, etc. It would just be for the absolute necessities. Think through how long you would want to give yourself to find a job. Multiply the two numbers and then subtract any money that you think you would get from unemployment insurance.
2) Disability – Disability insurance comes in short-term and long-term. Most employers have disability insurance as part of an employment package. Take a few moments and familiarize yourself with the benefits. Know how long it pays out, determine the amount it pays each month, and finally know exactly when it starts. From a short-term standpoint, we want to know the gap if any between the day the disability occurs and when benefits start to pay. You will want to know that you can bridge that gap through an emergency fund.
3) A Bare Minimum - Have a minimum of $2,000 to $5,000 for those every-once-in-a-while big expenditures that pop up. It could be anything from your car breaking down, something needing to be replaced at your house, or paying a health insurance deductible.
4) Emergency Fund or Debt - Always liquidate the debt first. If you are paying down on a credit card, you can always borrow that money back in the event that you need it. The best case scenario is that you pay the debt down and don’t need the cash.
5) Emergency Fund or Retirement – Contrary to popular thought, I would select emergency fund. You can get that taken care of in a reasonable amount of time. Retirement will not matter if you have an emergency. Emergency funding should take precedence.

The Mortgage Industry Is Still At It

Countrywide is the poster child for irresponsible lending. Their aggressive marketing tactics and lending money at any costs have created huge problems in the credit markets.

A listener sent out a marketing letter that he just received. They are marketing a 40 year fixed rate mortgage and inviting you to also take out cash from your home. So they want to set you up on a mortgage that lowers your payment as well as allows you take money out of your home equity. In other words, they are inviting you to fully mortgage your home to the hilt by taking out all of the equity possible and assuming a low payment that will ensure that it will take forever to pay down the loan.

Then there is a marketing piece from Wells Fargo. Wells Fargo advertises the advantages of using their services as follows:

· Take as much cash out of your home as possible
· Skip your first payment
· Lock in your rate at this low
· Then they show a low payment

The disturbing part of this advertisement is that they advertise a payment that is before fees. It is not based on the APR. Most people don’t understand the difference between the stated rate and the APR. In addition, this is an advertisement that would cover a jumbo loan. There is no way that a consumer could get the advertised rate for a jumbo loan.

At what point does Congress step in and protect us from ourselves and the sleight of hand marketing tactics of the mortgage industry? Granted, consumers are ultimately responsible for the decisions that they make. However, I think that it is the responsibility of Congress to pass regulation that prohibits this type of advertising.

Shades of 1929

Some people get a little irritated when I make references to the great crash of 1929 because:

a) It is different this time
b) Something like that could never happen again
c) We are in a super bull market
d) Our economy is much different than in 1929

You can pick your own answer. I keep going back to 1929 because of all of the similarities. This morning Goldman Sachs announced that some wealthy individuals were going to pump in about 3 billion dollars into their failing funds in an effort to save them. It is a "great buying opportunity."

If you go back and read the history books, the exact same thing happened in 1929. The markets were getting into big trouble and a "pool" of investors would go in and buy tons of stock to prop up the stock market. Investors in the 20's would get a feeling of relief knowing that this group of wealthy individuals were pooling together to save the markets. It was the big name people back then and it is the big name investors this time around as well. Besides, what is a few billion among friends?

Now my favorite part of the press release about this influx of capital was the highlights from the Goldman letter sent to the clients (read: individuals losing a lot of money) into their funds. (read:ponzi schemes). Here is the excerpt:

....according to an Aug. 10 letter to clients from Clifford Asness, the firm's founder and managing principal. Asness blamed the losses on the "strategy getting too crowded,'' rather than the models not working.

In other words, it wasn't our fault that we invested all of your money into sub-prime debt. I would argue the model was terribly flawed from the start.

This is the problem with Wall Street, politicians, the Federal Reserve Board, _____ (fill in the blank) - No one will take responsibility for the irresponsibility that has taken place.

Easy Steps To Take In Life Insurance Planning

One of the most overlooked types of planning I find today when working with people is planning for financial hardship due to death of a loved one. For one thing, it is a topic that most people don’t enjoy talking about it. However, it might the most important. There are few things more tragic then the combination of death and financial hardship. It is a tough combination to overcome.

Fortunately, planning for this financial hardship on a basic level is pretty easy to do by following these next few steps. The first step is to determine the amount that you might need. Just answer the following questions:

Do you want to pay off a house or any other debt?
Do you want to replace an income? If so, for how long?
Do you want to take care of college education for the kids?
Are there any special needs that require additional funding?
Are you responsible for elderly parents?

Once you have the total amount, subtract out the value of any current investments or savings that might also be used in the event of a death. For instance, you would want to subtract out any money saved back for college education funding or any money saved in just a general education account.

Now that you have a net number, you know how much life insurance that you will need. There are all types of life insurance programs available. I would go with term. It is the cheapest insurance available and you should be able to cover your entire need for a good value.

The rule of thumb is to lock in the amount of the insurance for as long as possible. For instance, 30 year term would be preferable. You know that for 30 years, the cost is fixed.

Finally, go and get quotes from at least five companies. This will allow you to shop for the best rate. However, there is one word of caution about looking for the best rate – make sure you consider the quality of the life insurance company.

What Can You Do To Protect Yourself Against Financial Hardship?

Financial hardship can present itself in so many different ways. There are some definite steps that you can take. Let’s talk through these –

1) Make sure that you have an adequate emergency fund – I would even suggest that this is more important than saving for the future. It is vitally important to make sure that you have enough cash on hand in the event that life throws you a curve ball.
2) Make sure that your cash is working for you and make sure that your cash is in a safe place – savings accounts at banks are just not paying the going rate in savings. At some banks the rate could be as low as 0.50%. Check around and make sure that you are getting the going rate on your savings. In addition, make sure that you don’t exceed the FDIC insurance for any bank. The government insures deposits up to $ 100,000 per depositor. Anything over that is at risk.
3) If in the state of Texas, either issue a credit freeze on your credit files and or take out Identity Theft monitoring. I cannot stress enough how important it is to protect your identity.
4) Understand your health insurance and what you might have to pay out of pocket in the event of an illness.
5) Make sure that you have some type of disability insurance policy in force either through your work or through an independent policy.
6) The obvious thing to do is to make sure that you work as hard as possible at getting out of debt. If you have a lot of debt, put together a debt inventory so that you would know exactly the state of your situation.
7) Know where you are spending your money. If someone called me and needed a consultation session regarding a financial emergency, this would be the first thing that I ask for to determine the shape of the situation.
8) If it looks like you are running into a financial problem, be proactive and make sure that you know all of your options. There is a tendency to bury your head in the sand. Make sure that you start checking into every available option.

The Mortgage Environment

On my show yesterday, I interviewed Alice White Hinckley. I have known Alice for over 25 years. She frequently comes on my show to talk about mortgages. She describes the environment right now as very tough. We were really focusing on consumers that are in a position that need to refinance. So, I wanted to go through a few points that she made.

First, if you are having trouble with your mortgage, be proactive. The worst step you can take is to either ignore it or bury your head in the sand. It is best to call the bank and talk over your options. Keep in mind, the bank doesn’t want your mortgage back anymore than you want to face foreclosure.

Second, if you are in a situation where your rate on your mortgage is about to change within the next 6 months, go ahead and start looking at your options now. This is not a situation where a lot of options exist right now. If you are going to face a surprise, you need to be prepared for it. If you need to work on your credit score, you would then have 6 months to do something about it.

Mortgages have drastically changed. Everything is very black and white now. If you don’t meet certain criteria, then you don’t get a loan. As close as a few months back, mortgage companies would consider all types of information when writing a home loan. Now that information is limited to a few important pieces.

If you have any questions about your loan, I would greatly encourage you to e-mail Alice White at alwhite@firsthorizon.com.