Double Dipping Social Security – The Little Known Loophole

I interviewed Pam Villareal from the National Center for Policy Analysis (www.ncpa.org) about a recent white paper that they put together. It was about Social Security and the little known loophole. The basis of this loophole is that someone can start taking their Social Security payments at age 62 for the reduced amount. Then at age 70, they can reapply for the higher amount.

The couple would have to pay back the benefits that have been paid to them for those eight years. It is basically getting an interest-free loan. In the article, they give an example of a couple that is taking out a benefit at age 62 that totals $13,250 each. However, if they had waited until age 70, they could take out $20,693 a year. That is a pretty big jump.

So they take out the benefit at age 62 for the next eight years. Then they pay back that benefit and then get a $7,000 raise. If you didn’t need that benefit, you could have taken the money and put it in an interest bearing account, made money off of essentially an interest-free loan from the Government, and then started collecting a much higher benefit at age 70.

Keep in mind, there are a lot of assumptions being made and this isn’t for everyone. However, it might be a good deal if the assumptions fit.

For more information, go read Double-Dipping Social Security.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

Politics are Working Against Some Very Good Credit Card Legislation

Regulators are finally doing something about the abusive practices of the credit card companies. The Federal Reserve Board has a proposed set of rules that should level the playing field and make things a little easier for the highly indebted consumer. These new regulations could go into effect by the end of the year.

Here are some of the proposed rules (a sampling):

- Prohibit credit card companies from raising interest rates on money already borrowed with the exception of variable rate cards, the ending of promotional periods, and the minimum payment being made more than 30 days late.
- Prohibit credit card companies from charging a late fee if the bill is mailed to the consumer less than 21 says before the due date (a trick used by the industry).
- Prohibit two-cycle billing (another trick credit card companies use that creates additional interest charged to the consumer).
- Prohibit credit card or overdraft fees where the fee itself creates the overdraft.

If you ask me, that is a good start for regulating the credit card industry. Unfortunately, due to the high probability of these new regulations going into force, there are reports that credit card companies have started to aggressively raise rates on credit balances for no good reason at all.

Of course, they can get away with this because of the universal default clause, which states that the credit card company can basically raise rates for any reason. Unfortunately, consumers sign off on this in most cases when they sign the dotted line of a credit application.

The clause was originally intended to protect the credit card company against the risk of a default. If the credit card company suspects that the consumer is getting in trouble due to late pays on other cards and the accumulation of too much debt, then they can raise the rate. Essentially, this would do away once and for all with the universal default clause.

This set of regulations is also good in that it gives the consumer a full 30 days in the event that a bill does not arrive on time. Unfortunately, life does happen and sometimes mistakes are made. A consumer should not be punished for an occasional mistake.

Ironically, the Office of the Comptroller of the Currency, who regulates and supervises all national banks, is urging the Federal Reserve Board to not be so harsh with these rules. In other words, they want the Federal Reserve Board to soften up regulations so that banks and credit card companies can continue abusive lending practices. They maintain “that restricting these unfair practices would hamper the ability of banks to offer credit to consumers.”

One of the regulations that they want changed as to do with the late payment period. Credit card companies have been making a fortune because of raising rates to penalty rates when a credit card payment is one day late. They want the 30-day window to be limited to 5 days.

So, here we go again with a prime example of why things don’t get done in Washington. This is politics as usual. You would think that the Office of the Comptroller of the Currency would encourage these new regulations since it is their job to regulate the banking system. Of course, if the Office of the Comptroller of the Currency would have been regulating the banking system in the first place, these abusive practices wouldn’t be taking place.

Another one of the agency’s objectives is to ensure fair and equal access to financial services for all Americans. It really does appear that yet another Washington agency is taking care of big business rather than looking out for the best interest of the American consumer.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

Is Children and Identity Theft Overblown?

The identity theft stats show a large percentage increase. Identity theft solution companies are marketing that you need to protect your kids from identity theft through a monitoring service. Yes, it is true. Identity theft can occur with children. Yes, the statistics show a large percentage increase. However, the total number of cases of identity theft with children is low.

In addition, the vast majority of these cases involve a family member and/or someone close to the family. Most of the cases that are being reported occurred at a time when it was much easier to have your identity stolen. Although still possible today, it is a little tougher for that to occur.

Having said all of that, this doesn’t mean that we shouldn’t be pro-active as parents. In fact, it is a culture that we should all create within our families. So, here are some tips to make sure that your children don’t become part of the statistic.

1) Don’t give your child access to his or her Social Security number. Besides, what good is it for your children to have that information?
2) Don’t carry any Social Security numbers with you in your wallet, purse, phone, or PDA. I see this all the time. With clients, we need Social Security numbers for establishing accounts. I cannot tell you the number of times someone has just reached into their wallet and pulled out that information. If you lose your wallet, you will have major problems.
3) If asked for a Social Security number, make sure that the person or entity you are giving that information has a secure system. Also, be careful of the manner in which you give that information.
4) Always shred any personal information about your children.
5) Keep all personal information about your children in a secure place. Don’t leave papers lying around in the house.
6) Attempt to run a credit report at the end of each year. If something has occurred, it will show up. If the child is over the age of 13, you can get a free credit report through www.annualcreditreport.com.
7) Be suspicious if pre-approved credit offers start arriving in the mail. That might mean some credit activity has been occurring.

When monitoring your own credit reports, do as much as possible which includes credit monitoring. As for your kids, I have never felt it made sense to pay a company monthly fees for any type of identity theft monitoring for kids. In all cases, being aware and pro-active is always the key.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

The Category 5 Hurricane That Has Not Yet Hit

By the grace of God, we dodged a major bullet with Hurricane Gustav. It was great to see the country come together, to see the levies hold, and to see the Government pull off a successful massive evacuation. Unfortunately, there are still people who are negatively impacted by nature’s wrath and our hearts and prayers go out to those affected.

Anytime a massive hurricane builds in the Atlantic, the forecasters are pretty gloom and doom. Fortunately, we have continued to dodge major bullets. New Orleans under water would have been a major bullet. It makes you wonder, “At what point, do we face the big one? At what point are we not so fortunate?”

I feel the same way with the banking system. We see all of the ingredients for the Category 5 hurricane. We have thus far been able to dodge the big bullets. Yes, we have had some casualties (to name a few…Bear Sterns, Country Wide, and the list of banks that have not made it). However, we have been fortunate to avoid facing anything horrific.

We are right at the height of hurricane season. With two other major storm systems in the Atlantic, this has the potential to be a tough stretch. At the same time, we are also entering into a tough stretch for the stock market with all of the ingredients of a Category 5 hurricane.

The last four months of the year have the potential to be explosive one way or another. In bull markets, the last four months of the year have proven to be great investing opportunities. In bear markets, the last four months have proven to be problematic.

This should be an especially interesting four-month stretch. Let’s take a look at the dynamics going into the last four months.

- A barrel of oil has dropped -25% in about 1 ½ months. This is the bright spot as gas prices continue to fall. Ironically, politicians complain about the speculation effect driving up the price of oil. What about the manipulation effect of politics driving down the price of oil?
- Banks remain in crisis mode. Last week, the FDIC reported that their list of problem banks increased by 30% in the second quarter.
- Going into this Friday’s job report, we have had seven straight months of job losses. Call it what you want – with or without the official negative growth numbers, this is a recession.
- The S&P and the Dow Jones are down roughly -11% for the year.
- Most importantly, we have one of the most important and tightest elections in our history in November. We are also a nation that is extremely divided.
- We have what looks like 3 monster storm systems that have developed in the Atlantic. This looks to be an active hurricane season.
- We are locked firmly in a bear market.

What is my take? Although there remain many factors to be concerned about, my greatest concern is the banking system. Banks are having a tough time raising capital. Banks have billions of dollars of debt coming due in the final four months of the year. The ability for an economy to produce and supply credit to individuals and businesses is crucial for future development and growth.

Therein lies the problem. The credit markets are still in lock down mode. There has never been a greater need for credit. The only credit available comes with high interest rates. Thus far, we have been able to get by in this high risk situation. How long does that continue?

This is the financial storm that concerns me the most for those who are not prepared.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

Was the Obama Nation Interview Appropriate?

Dear Bob,

I'm seriously confused with how Prudent Money shifts to political forum. To be honest, I was uncomfortable with how your program became a medium for political authors to use in fighting political rivals. Do you think it was appropriate to allow that? I may be wrong, but I think your good program is aimed something higher than partisan politics. I lot of my friends have reacted to what they think is wrong. I'm sure you'll understand what I'm trying to communicate.

I really appreciate your e-mail and your thoughts. For those of you that have followed me through the years, you know I have a dislike of the actions of those who play politics. Politics has a way of shading the truth. Just like politics, marketing can also shade the truth. It creates a reality that is more of an illusion than anything else.

When you combine marketing and politics, you have created a dangerous combination. I brought Dr. Corsi on the program and did the interview, not because I am making a political statement for or against anyone, but I brought Dr. Corsi on the program for two main reasons.

First, this is one of the most important elections of our generation. As a voter you need to read and see everything about these candidates in order to get some resemblance of the truth. This is also an election that could drastically affect your money. In the last election, only 68% of voters showed up to vote. Guess what, politics won. If we are ever going to start to get a voice in Washington and get politics under control, we have to get out and vote and politics ARE affecting our financial future.

Second, we need to vote for the right reasons. I believe that voting just for the sake of change is not a good reason. Both politicians want to change things. However, we need to get a good hard look at what they want to change. As Christians, we also need to be in sink with the politician that mostly reflects Christian values.

I have my concerns about both candidates. I think Senator Obama is a dynamic leader that could inspire America again. At the same time, I also wonder whether Senator Obama might not have enough experience for the job. I don’t think that Senator McCain is going to inspire this country for four years. At the same time, he has the experience.

We are in difficult times. As voters and as Christians, we have a responsibility to understand the facts and get as much information as we can. I realize that having Dr. Corsi on my program talking about a controversial book is not going to sit well with 100% of my audience. Then again, I would like to think that what I talk about each day doesn’t sit well with all of my audience. I want to challenge you to think and get beyond the marketing and the politics and see who we are looking at today for political office.

Included in Dr. Corsi’s book are statements of fact and quotes from Senator Obama. Some of the book I thought to be sensationalized and information that is not as worthwhile. I will also interview someone that tells the other side of the story of Senator McCain.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

Dealing with Debt Collectors

By Dean Malone – www.deanmalone.com

Many consumers are shocked at the tactics used by some debt collectors. While there are likely many debt collectors that seek to comply with the law and treat consumers with respect, there are also many others that seem to care little about the law. A consumer must understand the motivations behind and the mechanics of debt collection in order to intelligently deal with a debt collector.

Money is the Motivating Factor

Debt collection is about one thing: money. Debt collection agencies exist to extract money from consumers and give a portion of that money to their "clients." Collection agencies' "clients" are the alleged creditors of the consumers from whom the collection agencies are attempting to collect. If a collection agency fails to satisfy its clients by collecting a large enough percentage of the dollar amount of the accounts placed with the agency for collection, then the agency's clients will recall their accounts.

The pressure to collect money begins with an agency's clients. Clients purportedly hold debts for which they are the creditor, and they want as large a portion of the debts collected as possible. A large, corporate client might place its defaulted credit accounts for collection with several different collection agencies. This enables the client to play the debt collection agencies against each other and threaten to retain only the agency that produces the greatest results.

A debt collection agency owner understands that she will only be able to remain in business if her agency satisfies her clients by collecting more money than other agencies. Therefore, she puts pressure on her upper level collection managers to collect as much money as possible. Those managers realize that their management positions, and ultimately their jobs, depend upon their ability to motivate their employees to collect the most money possible. Further, those managers might have "leads," or mid-level collection managers. Upper-level managers put pressure on the "leads" to collect as much as possible.

When a call is finally placed by an individual debt collector, it is placed with the understanding of and in response to the pressure brought to bear by clients, the agency owner, upper-level managers, and the debt collector's "lead."

The debt collector understands his goal: collect money from the consumer - now. The debt collector does not want money later. The debt collector wants and needs money now. Further, the debt collector understands that he will keep his job and earn bonuses only by collecting money in as large amounts and as fast as possible.

Bob’s Comments on Dean’s Article

This is why debt collectors go to any extent to collect debt. Harassment is a very effective way of collecting debt. Listen to the pod-cast of my latest interview with Dean Malone – Prudent Money Show – August 27, 2008.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

Tackling College Savings Issues

So how are you doing for saving college education for your kids? A recent survey shows that the ones who are saving are cutting back due to tough economic times. The survey also asked parents what they felt public college, as well as private college, tuition would cost. Of the parents surveyed, 57% thought that college would cost up to $15,000 for a public school; 67% thought that a private college would cost up to $25,000 a year.

Well, apparently there is a little misinformation. Let’s talk about some real numbers as well as what you would have to save today if your child is 10 or younger.

According to Finaid.org, the cost of a public school costs $17,336 a year and $35,374 a year for students at a four-year private college.

If that is not bad enough, it is the inflation rate that makes sending your child to college so expensive. Since 1971, the average inflation rate has been 7.7% per year. The good news is that today, it is estimated to be around 5 to 6%. That 7.7% figure took into consideration the inflation filled years of the 70’s.

So, how are you going to tackle those big costs? I think that every parent wants to put their child through college. At the same time, it is important to really figure out how that is going to happen. It is extremely expensive and takes a pretty big monthly investment to pull it off.

For instance, if you had a 2 year old and you knew you wanted to put your 2 year old through a 4 year private college, it would take a monthly savings of $792.66 to handle that cost. For a public college it would take a monthly savings of $388.47.

For a 5 year old, you better start saving $985 a month for a private school and $482 a month for public education. As you can imagine, those numbers just get larger.

For a chart of approximate monthly savings for children ages 1 through 10, click through to this article.

So, how do you tackle this objective? It is important to put a game plan together and determine how much you are willing to cover of those expenses and how much you expect your child to pay for either through working or student loans.

If you start saving for college and it is your plan to pay for the whole thing, determine ahead of time what other goal that is going to compromise.

Be realistic about how you are going to fund college for your kids and to what level. This is a planning event that needs to take place way ahead of time. In the event that you don’t have the luxury to pay for all of the college costs, then start preparing your child now and start figuring out how college will be paid for. This can be great incentive for better grades and/or for your child to get a part-time job to help out with costs.

Now in the event that college is going to be paid for by the use of a loan, make sure you educate your child on how the student loan works and the awesome responsibility and liability that awaits them down the road.

If you as a parent are going to borrow for college, make sure that you have a game plan to pay that loan back and that it doesn’t become a problem.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

New Report about Banks and Overdraft Charges Shouldn’t be a Surprise

In their latest report, the Consumer Federation of America showed that banks are still gouging consumers with overdraft fees. Overdraft fees have their place. If a consumer doesn’t have enough money in their account, then the bank should not authorize payment and charge a service fee. Of course, if a debit card is not honored, then the consumer knows right away that they have a problem and can take the steps to fix it.

How about the consumer that overdrafts and doesn’t know it? Well the top 10 banks certainly aren’t taking the necessary steps to keep you informed. Technically, when you overdraft and the bank covers it, a loan has been made. However, banks do not have to disclose fees or how the system works. They don’t have to go through the process of providing a Truth in Lending disclosure. The bank customer just thinks that the account has overdraft protection. Little do they know that it can be a much bigger nightmare if this were to occur.

Think about it for a second. The bank could allow a number of overdrafts on small items through a few days. If you were to use a debit card for ten items over a two day period and be in the overdraft, you could rake up $340 in fees plus the money that you spent that you did not have in the first place.

For consumers who are running tight in cash, that could produce a huge problem. However, that is not the biggest problem. Banks can process your payments in whatever order they choose. So, they could choose to pay the largest to the smallest, the smallest first, or pay in any order. Seven of the top ten banks reserve the right to pay in any order that they choose.

Depending on how items are paid, it could mean the difference between hundreds of dollars of additional fees.

Six of the top ten banks charge daily overdraft charges after a certain amount of days. Seven of the top ten banks pose no maximum amount of fee charged.

So, why shouldn’t this be a surprise? Banks are hurting and need to raise capital. Who is the best to get that capital from? Over 17.5 billion dollars were raised last year in unauthorized overdraft loans with many of those fees triggered by small debit card purchases.

Is there any reason why banks love for you to use debit cards? Once again, debit cards carry the highest liability in so many areas and do absolutely nothing for your credit.

For a listing of the ten major banks and their practices, click here.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

A Very Good Scam – Be Careful

The scam is convincing. If you are hurting for money, you will want to believe is true. You receive an authentic looking check in the mail along with this notice.

FINAL NOTIFICATION

Congratulations.

We wish to notify you of the release of the Consumer's Reward Program Lottery held on June 20, 2008. Your name, attached to ticket number 976033 drew the lucky number of 3, 7, 11, 15, 23, 28, 36, and 49 which ultimatly WON the lottery in the second category.

Please read the following carefully.

You have been approved for the lump sum payment of $39,000 credited to an account with the above Claim Number. This amount is drawn from the total prize of $480,000 shared among the North American Winners in this category. Previous attempts to contact you directly on May 29, 2008 failed, resulting in this final notification. For security reasons, we advise that you keep this award from public notice until your claims have been finalized. This will help us prevent fraud and double claims.

THE DRAW
All participants were selected randomly through computer from Consumer database directory system, drawn from a pool of 98,000 customers provided by various department and chain stores and other services institutions across North America.

CLAIMS
In order to facilitate speedy and hassle free processing of your claim, we have deducted $3,900 from your total prize to enable you pay for the applicable Tax. Please contact one of your agents Nicole Wilson or Ron Springs at 1-905-598-1826 as soon as you receive this notification. They will assist you in finalizing your claim.

ALL PRIZES MUST BE CLAIMED BY AUGUST 16, 2008

Office Hours
Monday to Friday 9AM - 9PM, Saturday 10AM - 5PM, Sunday - Closed

CONGRATULATIONS ONCE MORE!!

Sincerely,

Sara Dose
Vice President

What’s the catch? You call the gentleman at the number listed and he tells you to do two things. First, deposit the cashiers check. Second, go ahead and send a wire to him for the money that you would owe in taxes. Remember that the cashiers check was an advance that they send you in the mail to help you pay the taxes. The scammer gets the money and the check you deposited ends up being no good and you have officially been robbed.

They even cleverly tell you to keep this secret until the deal is finalized.

The cashiers check that they send you is as authentic as it gets. They conduct this scam out of the country, making it even more impossible for United States officials to get the stolen money back.

Keep a few things in mind when it comes to scams –

1) Never send money to anyone so that you can get money sent back to you
2) If it sounds too good to be true, it is too good to be true.
3) Always do a Google search on the net if you are unsure – people will frequently report scams on the internet.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

How Much Should Someone in Retirement Have in Stocks?

A recent article in a major publication had some disturbing advice. This article was advocating a larger percentage of retirement money invested in stocks in retirement due to people living longer. The article stated that the old rule of thumb says to take your age and subtract it from 100 to come up with the total percentage of your portfolio that should be invested in the stock market at retirement.

Then the writer quoted the four most dangerous words in the world of investing – “Things are different now.”

Here is the reality about investing. Things are different now regarding our environment. Let’s face it! From a cultural perspective, today does not look like the 1920’s. Times have definitely changed. However, there is one thing that has not changed and that is risk. Risk still works today the same way that it worked 100 years ago.

Your risk level increases as you increase the percentage of your portfolio that is invested in stock. It is that simple. Thus, it makes no sense to gamble away your retirement by increasing the amount of money that you have invested in stocks.

Yes, you increase the probability that you will have a better return on your investments. However, you also position yourself to where you could get hit with some big losses. Big losses are damaging to a retiree’s portfolio for several reasons. First, they are taking money out of their portfolio while their investments are losing money. This is one of the quickest ways to run out of money. Second, and most importantly, some in retirement do not have the time to make up big losses.

Let’s look at some examples.

Strategy 1 60% S&P 500 (Stocks) and 40% in Lehman Brothers Aggregate Bond Index

Strategy 2 40% S&P 500 (Stocks) and 60% in Lehman Brothers Aggregate Bond index

Strategy 3 20% S&P 500 (Stocks) and 80% in Lehman Brothers Aggregate Bond index

The investor retired in December 1999 right before the bear market. The newly retired has a $500,000 portfolio and will be taking out $2,000 a month.

Strategy......12/31/99.....12/31/02.....06/08

Strategy 1.....500,000......364,444......386,548

Strategy 2.....500,000......465,021......484,314

Strategy 3.....500,000......502,615......517,600

If a retiree were to take the advice of the writer of the article, his portfolio would have been decimated. It didn’t even matter that the stock market went up between 2002 and 2008. Just look at the difference between having 60% or 30% or 20% in stock in a portfolio.

So, why did I use the 2000 bear market as a starting point? First, bear markets will occur in an investor’s lifetime. Thus, you should have an idea of how a strategy will perform in the bad times. Second, you can never predict when a bear market is going to happen. Timing could either be to your advantage or work against you.

This is all based on a buy and hold approach. If you have your retirement money professionally managed for growth and risk, then having a little higher percentage in stocks can make sense.

Numbers were calculated using CDA Weisenberger Software. Past performance is not an indication of future performance. This blog is not intended to be advice. Before making any changes to your portfolio, seek the advice of a financial professional.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

Does Your Advisor Protect You Against Loss or Just Invest for the Long Term?

What is your investment advisor’s investment strategy? Unfortunately, for most advisors, the strategy is all the same – just buy and hold for the long-term ….no matter what.

If you called your investment advisor over the last few months, I bet I can guess what type of advice you were given.

“Don’t worry we are long-term investors. Markets will go up and markets will go down – however, they always go back up.”

So, why is that the standard line when the market is going down? Why does it seem that most advisors don’t take an active approach when it comes to guarding against investment loss?

The biggest problem with the financial services industry is that the industry is a one-trick pony. The financial services industry can show you all day how to make money. The industry can talk about performance numbers and average annual returns. However, they don’t have a strategy for protecting your money.

They use the misguided concept of “time” as a strategy. As long as you have time on your side, you can weather the storm. A prudent investment approach consists of strategies that will help you grow money and protect money. What I want to suggest to you today is that protecting money is as important to your overall growth as are the strategies for growing it.

If your investment advisor is willing to allow you to continue to take losses and not offer up a strategy for protecting against loss, then consider if those fees you are paying are really worth it. After all, you can invest your money with a no-load mutual fund company for free and just buy and hold with no strategy for the bad times. Investing for growth can be done by most. The value in a financial advisor comes when they are working to protect your money as well.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

Investing Quotes in my arsenal (by Ashley Hodge)

Today's blog was written by a guest contributor, Ashley Hodge. For more information, go to his website at www.stewardshipmandate.com.


I was reading Psalms 62 this morning. Psalms 62:1 states, "My soul finds rest in God alone." That got me thinking that this verse probably inspired Saint Augustine's famous words in Confessions, "My heart was restless until it came to rest in Thee, O Lord."

I put together a list of quotes that I have found helpful in advising people on money issues- specifically investing. A well-timed quote can say a lot without having to rely on excessive words.
So here are some of my favorites. Some of these I have heard attributed to Warren Buffet. Some to John Templeton. But they probably borrowed many of them from their mentors. They are helpful reminders after the continued rash of bad economic news.

- Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.
- There is no cure for high prices like high prices.
- You make your money in bear markets, you just don’t know it at the time.
- There are old pilots and bold pilots. But there are no old, bold pilots.
- Your money is like a bar of soap. The more you play with it, the smaller it gets.
- Gambling is investing for people who are extremely bad at math.
- You don’t know who is swimming naked until the tide rolls out.
- Economists have successfully predicted 14 of the last 3 recessions.
- The four most dangerous words in the English language: ‘this time is different’.
- Be fearful when others are greedy and greedy when others are fearful.
- Successful investing is anticipating the anticipation of others.

Perhaps the most important thing one needs to remember as it pertains to investing or anything in life- God is in control of all things in this world. Psalms 84:12, "O Lord Almighty, blessed is the man (or woman) who trusts in You."

For His Glory,

Ashley Hodge

Obama Nation

Last Tuesday, I had the opportunity to interview Dr. Jerome Corsi. His book, Obama Nation, is the new #1 best seller on the New York Times list. This is a look at Senator Obama from a different angle. It is an inside look at Obama the politician and how an Obama Presidency would effect America.

Why would I interview Dr. Corsi on Prudent Money? It is very simple. We are at a crucial point in this country. Politics are completely out of control on both sides of the aisle. Unfortunately, we are the reason that politics are out of control. We have given the power over to the politicians and not utilized our greatest power - the right to vote.

During the last election only 68% of Americans voted. We need to get out in masses and vote our views and hold these politicians accountable. The problem with politics is the aggressive marketing. Both candidates are marketing sensationalism to garnish your vote.

I want to look past the marketing and see who these candidates are and how they really will stand up to the challenges of being President. So, I first bring you Dr. Corsi's view. Next, I will find someone to give a different look at Senator McCain.

We need to become a country of informed citizens that exercise the right to vote. This next President could really effect your financial situation. We need to make sure (either one) that the right candidate gets elected.

For me, I want a third choice. I think that Obama just doesn't have the experience. I also don't agree with his stance on Christian value issues such as abortion. Unfortunately, he is extremely far to the left on that subject.

At the same time, we need a real leader that will inspire and bring this country back together. I don't think that Senator McCain is the man for that position.

For me, I think that National Security is the BIG issue. This gives Senator McCain for me an advantage.

As far as taxes go, you can complain about what Obama is going to do all day. The reality is that taxes will probably be increased regardless who is President. Unless we have a huge money tree beyond the printing press, we have no way of paying for all of our liabilities.

Take some time and listen to the interview - click here

Borrowing from Your 401(k) Plan Could Cost you $100,000’s of Dollars

On my program yesterday, I interviewed Pam Villarreal, policy analyst with the National Center of Policy Analysis. They have completed a project on the long-term effects of borrowing against your 401(k) plan. The results are disturbing.

They developed a 401(k) borrowing calculator that shows the long-term impact of borrowing from your 401(k) plan. Let me give you a good example:

$100,000 account balance
$10,000 borrowed
24 months pay-back
8% return on investments
Retire in 30 years

What was the difference in retirement savings? By borrowing $10,000 the retirement plan was short $229,445. There are many bad assumptions that are being made when borrowing from your 401(k) plan.

For a few good resources, check out their white paper on 401(k) borrowing. Also go check out the 401(k) borrowing calculator.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

If your Company is Bankrupt, is your 401(k) Plan in Jeopardy?

A listener posed a question yesterday regarding the Bennigan’s Restaurant closing and whether or not employees lost money in their 401(k) plans because of it.

After doing some research on the story, I discovered a few sound bites from some of the employees mistakenly stating that their 401(k) plans had been tapped for money. The reality is that with extreme exceptions, your 401(k) plans are very well protected in the event that your company files bankruptcy.

If an employer goes out of the business, the 401(k) plan is terminated. When a plan is terminated, affected participants are 100% vested (they own their employer match) in all employer money in their account, regardless of the plan's vesting schedule. Participants are always fully vested in their own contributions. Participants always own their own investment accounts. This means that the money in the plan is now available to be distributed to the plan participants. Under the law, the employer, even in bankruptcy, can't touch the money in the plan. The 401(k) plan money can't be used for any other purpose except to pay benefits and expenses related to the plan.

The 401(k) assets are also protected by law from creditors.

Are there times when money is taken out of a 401(k) plan illegally? Yes, there have been instances in the past where fraud and illegal activity have occurred. However, it is much tougher today to get away with that type of crime.

In extreme cases, the Department of Labor steps in where there is abuse of the retirement funds, but that rarely happens.

What about pension plans? Well those are protected as well but by different means. Pension plan assets are protected up to certain limits by the Pension Benefit Guaranty Corporation. In this case, certain pension plan benefits could result in a loss due to a company going bankrupt. However, for the most part, everything should be covered.

Now there are stories such as Enron where employees lost everything in their 401(k) plans due to a company going bankrupt. That had nothing to do with a company taking the money out. Those losses were a result of an employee being heavily invested in their company stock. As a result of the company going into bankruptcy, the stock plummeted and was virtually worthless. Thus the employee lost their future.

As a rule of thumb, you never want to have more than 10 to 15% of your company stock inside your 401(k) plan. It is just too much risk.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

Are 401 K Plans the Best Place for your Money?

Since the development of the first 401 K plan back in 1979, these retirement plans have been the first choice for investors. However, are they the best choice for your retirement money? Well, let’s take a look at the advantages of a 401 K plan.

I can really only think of three. First, you do receive an up-front tax break on your annual deposits. I think that this is one of the main reasons most investors invest into the 401 K plan and it is the tax break. However, is a tax break a good enough reason?

Second, and the only reason to invest into a 401 K plan, is the employer match. It never makes sense to pass on free money. If an employer is giving away money, it makes sense take advantage of it.

Third, and maybe a stretch, it is a convenient way to invest money. There is a great convenience factor of the money never making it into your checking account and going directly into your bank.

So, what are the downsides?

First, the high expenses associated with investing in a 401K plan. Expenses inside of these plans are higher than most people think. Unfortunately, they are not fully disclosed and hidden.

Second, and the biggest drawback with 401 K plans, is options. Most 401 K plans don’t have enough of the types of investments that really help you an investor to properly diversify.

So, what is the verdict? In most cases, I have always believed that you take advantage of the match that an employer is will to give for investing into the 401 K plan. That is a key advantage. Beyond the match, I don’t see a good enough reason for investing into a 401K plan. Once again, this is in most cases.

Most investors would still argue that the tax advantages make it worth it. I would argue that the lack of options in most 401 K plans is a much bigger disadvantage.

So, what would be the alternative?

Consider investing the maximum amount possible into a Roth IRA. A Roth IRA will not give you a tax advantage up-front. However, it potentially gives you an enormous tax advantage when you withdraw the money. All of the money that you earn is never taxed during the growth stage and never taxed when you take it out. This is a tax-free distribution. In my opinion and in most cases, that will be a much greater tax advantage than getting a small up-front tax deduction.

Plus, you have the flexibility and all of the options that are afforded to you in a regular IRA brokerage account. You would no longer be restricted with limited options.

What if you don’t meet the requirements to invest into a Roth IRA? Well if you are a couple and your adjusted gross income exceeds 160,000, you cannot make a contribution. Instead, you make an after-tax contribution into an IRA. Then in 2010, new regulations take effect that will remove those restrictions on the Roth. You then transfer the money from the IRA into the Roth.

The only downside to this strategy is that you might owe taxes on some of the money that you convert to the Roth. However, the Government is giving you more than 1 year to pay the taxes back.

This is an example of how to get the best of all worlds while investing for retirement.

This is one way to invest for retirement. The key before implementing any strategy is determining if it is right for you.

Are Target Funds more Aggressive than Advertised?

A recent commercial by a major fund company was marketing the easy approach to investing by using their target funds. The commercial starts off with a couple trying to explain their approach to investing as they approach retirement. The wife looks at the husband and says, “You tell them.”

The commercial makes both out to be very clueless about their investments as the husband declares, ”Well they move the money around at the right times for retirement…I don’t know, I just let the company take care of it.”

Welcome to the world of easy investing as marketed by the mutual fund industry. These target funds were designed for you not to think. You are instructed to figure out when you are going to retire and pick the fund that is closes to your retirement date. For example, if you were retiring in 2020, you would pick the 2020 target funds. If you were retiring in 2035, you would pick the 2035 target fund.

The whole idea is that the fund is intended to change risk levels as you get closer to your retirement. However, are these funds making the appropriate changes?

According to a Chicago-based Morningstar Inc. analysis of the 25 largest target date funds, some had between 20% and 30% of total assets invested in mortgage bonds and/or financial stocks. These are some of the riskiest investments you can own. So, can you imagine retiring in 2010 and taking some substantial unintended risk in your portfolio?

One 2010 target fund is -11% year to date. This fund has a 67% stake in stocks. So someone retiring in less than 2 years has a 67% stock exposure while in this fund. The fund brochure says it is designed for investors in their 60’s about to approach retirement.

How about a 2005 target fund? This is for someone already invested. One very popular fund from a large fund company is -8% year to date. That is for someone already in retirement.

Here is the bottom line when it comes to investing.

First, you can never go on autopilot as the mutual fund industry would like you to think. You need a system that will help you establish what is acceptable and what is not when it comes to your investment returns. For instance, there could be as much as a 10% difference between one of the worst target date funds and the best.

Second, if you are going to have a buy and hold type portfolio, you need a great deal more diversification than a target or lifestyle fund will provide.

Third, when investing in anything that is earmarked conservative, take a great deal of time investigating what it is that makes that fund conservative. There are too many examples of conservative funds that have lost a great deal of money.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

Steps to Take in a Tough Economic Climate

“Stop whining,” says former Senator Phil Gramm. “This recession is all in your head.” Well, with all due respect to former Senator Gramm, I think that it is a little more than just in my head. It is coming out of my wallet every time I turn around. I think that this recession we are facing (and yes, I do believe we are in a recession) is starting to get to people. We are paying more at the pump, at the grocery store, and in utilities. However, he is right. It is time to stop whining and do something about it.

I believe that there is a series of steps that you should take right now to make sure that your financial house is in order. Who knows what the future will bring. However, I like to live by one verse when it comes to money and future risk.

"A prudent person foresees the danger ahead and takes precautions; the simpleton goes blindly on and suffers the consequences” (Proverbs 22:3 and 27:12).

Most people fall into the simpleton camp. We have no way of predicting where the economy is headed. However, we do have control over our actions. If we take the right actions right now, you can provide for whatever is coming down the pike.

1) First things first – Give this process over to God. I believe that the most important priority in our life is the one that we typically forget. You cannot be prepared with getting your financial house in order without God being in charge.
2) Start tracking your expenses – It is so important to know where you are spending money. How are you going to know where to cut back if you don’t know what you are spending?
3) Be proactive – Look ahead and anticipate future expenses. Sit down and anticipate one time expenses that will occur in future months and figure out how you are going to pay for them.
4) Check your insurance coverage – This is something that you should do regardless of the economic climate. There is no excuse for not being prepared for the curveball life might through you or your family. Understand how your health insurance works. Especially know that you have enough life insurance. Life insurance is inexpensive and is one of the most important coverages you can buy for your family.
5) Know the risk level that you are taking with your investments – Talk to your financial advisor or your 401(k) representative. Prior to talking with them, pray that you will have a sense of peace. If you don’t get that sense of peace, get a second opinion. The bottom line is that most advisors are not equipped to handle these types of environments. Thus they will just tell you to hold on for the long-term and not worry about it. Just remember that big losses are tough to come back from. It never makes sense to put yourself in harm’s way when it comes to investing.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

We should worry eight percent of the time?

Tomorrow I am going to post a step by step game plan on how to handle this current economic environment. Today, I want to start off by laying a foundation. It is so important to get our heads straight. My pastor, Dr. Jim Dennison at Park Cities Baptist Church, wrote the following essay. I have kept this close and refer to it often. I wanted to share it with you. If you want to read more of Dr. Dennison’s daily work, go to www.godissues.com.

The first step to living in the now is wanting to. So, why should we live in the present? For three reasons. First, worry over the future is pointless. A survey regarding worry revealed these facts: 40 percent of things most people worry about never happen; 30 percent of what we worry about has already happened and cannot be changed; 22 percent of what we worry about regards problems which are beyond our control; only eight percent of what we worry about are situations over which we have any influence.

Mickey Rivers, former New York Yankees outfielder, was right: "Ain't no sense worrying about things you got control over, 'cause if you got control over them, ain't no sense worrying. And there ain't no sense worrying about things you got no control over, 'cause if you got no control over them, ain't no sense worrying about them." Any questions?

A wise man once said, "The biggest troubles you have got to face are those that never come." It has been observed that the bridges we cross before we come to them are almost always over rivers that aren't there.

Winston Churchill once quoted a man on his deathbed who said that he had a lot of trouble in his life, most of which never happened. Don't live in tomorrow, for such anxiety is pointless.

Second, refuse to worry about the future, because tomorrow doesn't exist. The Greeks pictured history as a line, and made five-year plans. The Jews knew better. They saw time as a dot, the here and now. "Yesterday" is gone, and "tomorrow" doesn't exist. It's just a word with no substance. We live in the past and the future; they lived in the present.

Take Paul's experience on his second missionary journey. He thought he was to turn back East when God called him West. The result was his ministry in Macedonia and Europe, and the movement of the gospel to the Western Hemisphere. The apostle had no idea this was his future; he was simply staying faithful in the present.

Third, choose to live in the now, because it's the only way to know God. He is the great I Am, not the I Was or the I Will Be. He cannot help you with the future, for it doesn't exist. If you want to know God, you must live in today, for this is the only day which is. God does not live in our guilt over the past or fear about the future, but in our present faith and trust.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

When is a Recommendation to Change a Good One? Part II

Yesterday, I wrote about being careful about just taking an advisor’s recommendation to making a change in your portfolio. Bear markets create emotional investors.
The salesperson who is acting as an advisor recognizes that emotion and uses it to make new sales. Of course, there are also the advisors who do things the right way.

The problem is that it is not easy telling the two apart, so you have to look at other factors.

If you are working with a salesperson, a change to another advisor is strongly recommended. What if you don’t know?

Let’s take a look at some situations when it makes sense to change advisor relationships.

- There is no solid professional relationship of any kind

When I say the word “relationship,” I am not talking about the type of relationship where the advisor takes you to lunch 4 times a year. I am talking about the type of relationship where you are kept informed and know that you can depend upon your advisor in any situation. An advisor who can relate to you well on a personal basis might be a good friend candidate and maybe someone that is not a good advisor candidate. Yes, the personal aspect is extremely important. At the same time, the professional relationship is vitally important. After all, all of those lunches will not help you retire one day.

- Your advisor calls you frequently with new investment ideas and recommendations

A red flag occurs when an advisor calls you frequently with different investment ideas requiring you to frequently move money around creating new fees. It has been my experience that there are very few times when it makes sense to make changes that require penalties or new fees.

- Changing advisors would mean a complete change in investment philosophy

Many times changing advisors from one to another because of investment strategy ends up being a parallel move and doesn’t create any value. Moving from one buy and hold advisor to another needs to be carefully investigated to determine the real benefit.

Moving from a buy and hold account to an account that is managed with a fee based advisor is another story. These are two totally different investment styles. The buy and hold strategy is passive and the managed investment account is actively managed for risk and reward.

The only word of caution is the definition of a fee based advisor. There are many people who set up fee based investment management accounts that charge a fee and really do nothing to earn that fee. They basically charge a fee to just buy and hold your investment account. Personally, I think that a fee based arrangement where the money is actively managed is the best strategy. At the same time, you need to make sure that the fee is creating value of some kind.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

When is a Recommendation to Change a Good One?

When markets are tough, emotions run high. Investors want change and advisors are willing to give that to them. You have to be careful when making changes to your investments. There is no room for mistake.

So, when should you make an investment change that is recommended by your advisor? That depends on two things. First, it depends on whether or not you are working with an advisor that is selling investment products and this is just the latest product. Second, it depends on whether or not this makes the most sense for you as a client.

The problem is that, for most people, it is tough to know whether or not you are being sold a product or given a good recommendation. So, to keep the playing field even and your money protected, let’s take a look at some of the recommendations that don’t make sense.

1) Be suspicious when the recommendation is based on selling an investment and investing it into the next great investment product that is going to revolutionize your life.

If a recommendation is really questionable, it will need to be dressed up. So, the recommendation ends up being over the top. This is what I am seeing today with the equity indexed annuities. These are being aggressively marketed as the cure all to everything. Here is what you need to know about investments – there is no one sure slam dunk way to invest money without taking risk. If there were, then you wouldn’t have thousands of money managers working that hard to figure out markets.

2) Be suspicious when the recommendation is to sell one commission based mutual fund and invest it into another commission based mutual fund.

For you to pay a commission a second time on the same investment money, there needs to be a good reason. If there is not a good reason and this is just to create commission, it is unfortunately going to be tough to recognize. The sales pitch is going to be pretty convincing. So, the key is to spend time making the advisor really explain the reasoning. Ask some very tough questions. Most importantly, pray about making a good decision and don’t go forward until you are 100% at peace with the decision.

3) Be suspicious when the recommendation is to move your money from one investment to another one and take a penalty when you do so.

You typically see this with annuities. I cannot think of any reason to sell an annuity to move money into another annuity and restart a new surrender charge penalty. These recommendations come with big justifications for selling the annuity and taking that loss.

Here is what typically happens when you are receiving the offer. Let’s say that you have $100,000 in an annuity. However, if you sell it, you are going to take a 5% loss. The recommendation is to sell the annuity, take the penalty, and then reinvest that money into this new annuity that gives you a 5% bonus for investing. Thus, you are reimbursed for that penalty.

Unfortunately, what most investors don’t realize is that you don’t get something for free. In this case, the investor will not only take the big penalty hit, but they will also be unknowingly paying for the 5% bonus that they just received in the new annuity.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

Are you Proactive, Inactive, or Living on Blind Assumptions?

I have had a lot of interesting conversations over the past few days. The same theme kept coming up over and over again. I would catch myself talking about the same subject in each conversation. It wasn’t about bear markets. It wasn’t about the economy. It wasn’t about investment gains or losses. It was about state of mind, which is critically important today when it comes to stewardship of your money.

At any given time in your life, you could be proactive, inactive, or living on blind assumptions when it comes to your money. I was talking with a client who was just about to turn 74. She stressed the importance of making good decisions with money and being informed, of being pro-active rather than inactive with money.

I then had the pleasure of having a conversation with another client who really values education. She reads all of the time and asks a lot of questions. From the first day that I met her, she has always put a priority on education and just cannot get enough. She is the definition of proactive.

The key to being a successful steward of what God has given to you is to be proactive. A proactive person values being informed and strives to learn as much as possible. A proactive person knows the pros and cons behind the decisions that are being made. A proactive person doesn’t just take advice or recommendations blindly. They understand the significance of a full understanding of the basis for the advice that is being given.

During my second conversation, my proactive client then told me the story of a woman who just lost her husband. This couple lived in an expensive home and lived a pretty expensive lifestyle. To the world outside, they had everything. In reality, her husband died, leaving them with nothing but a stack of debt. He was living on blind assumptions that he would live for a long time and had plenty of time to make things up. Unfortunately, life was not so fortunate for him. The reality is that no one is promised tomorrow. It is always important to prepare today for tomorrow’s unknowns.

Being inactive is managing God’s money with your eyes closed. You check in every once in a while and make sure that all is working well. You rely on the advice of others, never fully understanding why it is that you believe that way.

Basically, inactive people create a lot of risk. For example, with investments, there is always the possibility that you working with a financial advisor who is a sales person that is disguised as a qualified investment advisor. I see this type of situation often. The problem is that it is often too late and the damage is done when you realize that what seemed like a qualified recommendation was nothing more than a mere sales pitch designed to benefit only one person. Time is a precious commodity when it comes to investing.

Living on blind assumptions is just assuming everything will work out without a basis for that belief. When managing God’s money that way, there is a huge risk that these assumptions without merit are a mere gamble and your chances of failure are greater.

There is only one way to live when it comes to stewardship. It is about being proactive. It is about being and staying informed. It is a commitment to education. It is an understanding of risk and how it works, which is critical when making any financial decisions. The wrong risk can set you back for a long time.

I bring this up today because there are a lot of investors who are inactive and living on blind assumptions. We just don’t have the luxury of driving blind when it comes to stewardship of God’s money. This is a tough investment environment. The decisions that you make today concerning risk will either be a home run or a disaster.

Check and double check what you are doing with God’s money today. Understand the reason behind the investment strategy that is being presented to you. Invest the time to learn. Pray for understanding and seek confirmation of that feeling of peace that you are on the right track. If you don’t get that feeling of peace, it is probably a sign that you are on the wrong track.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

The Top Questions and Answers Concerning Debt

1) Will my credit score go up once I have paid a debt in collections off? What if I don’t pay it in full and just settle it?

It might go up a little. It all depends on everything else that is on your report. Keep in mind that the majority of the damage is done to your credit score at the point it goes into collections.

2) Why are the credit scores different at the 3 credit reporting agencies?

First, they all have their own tweak to the FICO score. Second, it is rare that all three reports have the same information. That can make a difference.

3) Is it smart to just not use credit at all?

This is a financed based society. You need to have a credit score. Using credit each month and paying it off each month is good for your credit score.

4) Can credit card companies legally change your interest rate?

Yes, they can change any detail to the credit contract that you signed. By signing on the dotted line, you are agreeing to the fine print which gives them the right to make changes.

5) Why does your credit balance increase so much when it gets to a collection agency?

Basically, it comes down to bogus fees. Collection agencies add a ton of fees and penalties.

6) Do these companies that advertise that they can repair my credit score really work?

There is no magic to improving your credit score. Thus, there is nothing that they can do for you that you cannot do for yourself. Then there are companies that guarantee they will get everything removed, but that is not possible. If a consumer lies to the credit reporting agency and tells them that an item shouldn’t be on the report and the consumer reporting agency cannot find anything to refute that claim, then the item gets removed. These companies basically advocate that you lie about everything in hopes that they get removed.

7) What is the quickest way to improve my credit score?

There is no quick way. It takes time and positive credit activity

8) If I want something correct on my credit report, do I need to contact all three credit reporting companies?

You only have to contact one. If they make changes, they are to contact the other two and have it corrected.

9) I have no debt and feel like I am on track for my financial goals. Do I really need a credit score?

Dave Ramsey says that the credit score is not important. In a financed based society, it is imperative to keep your credit score strong. Plus, you cannot ever say that in your lifetime you will not need to take out a loan. You need a credit score for insurance scoring and you might even need it for a job interview.

10) Can anyone just check my credit file?

Creditors don’t need your permission to check your credit file. They just need a permissible purpose and there are a lot of permissible purposes. A credit inquiry is just a statement of fact that someone inquired about your credit.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

A Big Promise from a Mortgage Consultant

Ask Bob

Hi Bob,

Remember I talked with you over the radio about the mortgage lender suggesting that I contact their "credit repair" person, well the web for this particular one is "xxxxxxx" the lender guaranteed me a score of 640 within 35 days if I worked with her, their fee to start is $199. sounds really good for a guaranteed score improvement that high, I don't know if I could do that on my own by submitting letters to the credit bureaus do you?

Thanks for giving me an opportunity to talk you through this one. First of all, it is impossible to guarantee that type of performance. Secondly, the web-site states that they don't use meaningless guarantees. Once again, they are doing the same thing that you would be doing.

The credit reporting agencies don't speed up the process just because it comes from a credit repair agency. They investigate it at the same rate as if you would have sent those letters in yourself. The site also says that it will take 30 to 60 calender days. The credit reporting agency has 30 to as much as 45 days (if new information is presented) to investigate.

The reality of credit reporting is this:

You have negative and inaccurate information on your credit report - if that is the case, you dispute it requesting it be corrected or removed.

You have negative and accurate information on your credit report - it will stay on your credit report for 7 1/2 years past the first missed payment - there are no exceptions regardless of what anyone says.

So, if you have anything on your credit report that is inaccurate, get it removed or corrected by following the instructions on my web-site. You can do that for free.

http://www.prudentmoney.com/adminnm/templates/abiz-conresources.asp?articleid=1124&zoneid=67

If you want to have some fun with the mortgage person, request that she put the guarantee in writing with her signature as well as the owner of her mortgage company. Then ask what you get in the event that the 640 is not reached. I will say that is the first credit repair type web-site that was actually legit.

Keep the Faith

Oh Great Another Chance to Buy a Plasma TV

Have you heard the news? You might be receiving Round 2 of the desperation, I mean, rebate checks that Washington so desperately wants you to take and spend. Wait a minute. Didn’t Congress also say that they were concerned about the saving rates in America? Oh yeah, that was a sound bite for another time. Today, we need spending at whatever cost.

Congress is actually considering sending out another few billion in free money. I am no historian, but I would challenge anyone to find a time in history where so many extraordinary things are being done to save an economy that every lawmaker says is strong and has good fundamentals. If everything is in good shape, why the heroic measures? Let’s face it, we haven’t even seen a negative quarter of growth and they want to send out more money. I guess that’s one more band aid before November in order to boost those numbers.

Is it just me, or are the politicians completely out of control? When I think about it further, maybe they are not out of control – maybe Congress is so desperate that they are trying everything possible to postpone the inevitable.

Then there is Treasury Secretary Hank Paulson and his bail-out, oh sorry, I mean confidence building plan for Freddie Mac and Fannie Mae. Let’s see…everything is fine with the two companies. They are well funded with no problems. However, we need to make sure that we can give (read: print) all of the money that they need to carry out business in the event that they do get into trouble.

Then there is our Federal Reserve Board Chairman. I cannot believe I am going to write this. Is he the only realistic guy in Washington? He is the only one that has anything negative to say about our economy right now. There was a time that if the Federal Reserve Board Chairman said real negative things about the future of the economy the markets would tank. This happened this past week and the stock market took off as if someone captured Bin Laden. Could it be that no one really cares anymore about the Fed Chairman?

Maybe the new voice of manipulation is Treasury Secretary Paulson. Over the past year, he is the one who has moved markets by arranging for the bail-out of Bear Sterns, announcing many different housing bail-out plans (none of them have worked), and now his words moved the markets on the bail out plan for Freddie Mac and Fannie Mae.

Lots of desperation and reassuring words. Watch their actions and ignore their words.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

What You Might be Assuming about Your Financial Advisor Versus the Reality

I am convinced that there are a lot of people who have invested their money with financial advisors that are operating under the wrong set of assumptions. Assumptions are dangerous. You can assume something for a long time and then realize that is was all wrong. Then you lost one of your greatest assets – time.

When the market is going up, these assumptions aren’t so dangerous. However, in a tough stock market environment like today, these assumptions are very detrimental to your long-term financial goals.

My advisor is watching my investments – Unfortunately, your advisor might be just watching your investments go down. Keeping an eye on the investments is not a management strategy. It is just something that an advisor might say to calm the nerves of clients.

My advisor has me properly diversified – Diversification is the difference between accounts that are losing money and those that are surviving the bear market. I looked at someone’s portfolio just the other day. They felt like they were properly diversified, or at least that is what they were told. The portfolio consisted of 12 mutual funds. There were a lot of funds. Unfortunately, the portfolio had no meaningful diversification. Roughly 88% was in stocks and 12% was in bonds. Not nearly enough diversification for this type of bear market. Diversification isn’t defined as number of investments. It is how your money is spread amongst many different types of assets.

My advisor is moving my money around – I see this often and it ends up being an unfortunate mistake for the client. The advisor calls the client and tells the client that changes need to be made in the portfolio. The advisor wants to sell one mutual fund and buy another. Unfortunately, the advisor is just selling one stock mutual fund and buying another, earning a commission in the process. It is nothing but a parallel move.

My advisor says not to worry the market is coming back – In bear markets, this might not be for a long time. I refer to this investment philosophy as the philosophy of hope. Hope is not a good investment. If risk is real high, you take less risk…not just stay invested in the HOPE that things are just going to come back.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

Loans are Getting Much Tougher to Get

I had Alice White Hinckley on the show with me yesterday. She is a mortgage consultant that I have known for over 25 years. If you are in the market to refinance or finance a new home purchase, I would highly recommend her. She is very good at what she does.

The mortgage markets are really changing. Credit scores are incredibly important. The bottom line is that anything north of 680 is going to get you a good rate. However, the further you fall from 680, the rates start to go up. Alice said that they will increase at every 20 point interval as you decline below 680. Then there comes a point where you don’t qualify at all.

The biggest problem is the lack of equity in homes. Due to the small percentage that was placed as a down payment during the initial purchase as well as the declining values of homes, many homeowners find themselves upside down in their home (owing more than the house is worth). Banks and lenders want to see some type of equity.

Private mortgage insurance has also increased in price. Beyond the monthly price increases, often times lenders are requiring an upfront cost to be paid at closing. In other words, not only are interest rates higher, so are the closing costs.

So, here are a few tips:

1) Plan ahead – If you know that you will need to refinance, talk with a mortgage consultant ahead of time so that you know your situation. Even then, things could change between today and the time you are going to refinance. It appears that things are changing daily as banks attempt to keep up with this credit crisis.
2) Know your credit score – This is also important. Work to keep that credit score high. If your credit score is low, do whatever is necessary to increase your credit score (beyond calling one of the credit repair companies that advertise on the telephone pole).
3) Find a mortgage consultant and stay away from the sales people – In this environment, you need someone who is going to act as a consultant and not someone who is going to pretend to be a consultant but really is nothing more than a slick salesman.
4) If fees at closing seem excessive, they just might be – Some of these mortgage brokers are charging outrageous fees and getting away with it. Most fees are standard across the board. Then some try to charge points (additional fees) stating that there is no way around it. Remember you can always get a second opinion.
5) If you have an adjustable rate mortgage, don’t just assume you should re-finance – Look the numbers over very carefully. Your rate might not increase to the point where refinancing makes sense. If you can buy another year, it makes sense to do so. The credit markets might be in better shape a year from now.

To listen to yesterday’s show, click here.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

ICBA Debunks Deposit Insurance Myths

I wanted to pass this on in today’s blog. This press release came from the Independent Community Bankers of America. Incidentally, this is why I like the smaller community banks versus the big banks.

Washington, D.C. (July 17, 2008) – The Independent Community Bankers of America (ICBA) is challenging unfounded concerns raised about the safety of bank deposits. Federal deposit insurance guarantees your deposits are safe in every financial institution insured by the Federal Deposit Insurance Corporation, including community banks. Don’t believe the hype. Get the facts.

Myth: Your money is safer in big banks.
Fact: No one has ever lost a penny of FDIC-insured deposits held in community banks. The FDIC insures deposits up to $100,000 per depositor and $250,000 for certain retirement accounts. If you have more than $100,000 at a community bank, you can still be fully insured if your accounts meet certain requirements. For example, accounts owned by a single person are separately insured from joint accounts or retirement accounts owned by that person. The FDIC’s Electronic Deposit Insurance Estimator (on the web at http://www.fdic.gov/edie) can determine your coverage.

Community banks focus on the needs of local families, businesses and farmers, and their top executives are generally available on site to answer your questions directly and make timely decisions. Many of the nation’s largest banks are structured to serve large corporations and have CEOs headquartered in office suites, not local banks.

Myth: Your money is stored in a vault at the bank.
Fact: Community bank deposits are reinvested in your local economy. Your money on deposit will be used to make loans in the community that help your neighbors start a nearby business, purchase a home, or send a son or daughter to college. Continuing to hold deposits in community banks ensures the neighborhoods where you live and work will continue to grow and thrive.

Myth: Community banks are undercapitalized.
Fact: The vast majority of our nation’s banks, especially community banks, are strong, safe and stable. Community bankers are common sense lenders that don’t engage in high-risk activities. Instead, they stick to the longstanding fundamentals of responsible banking, and always seek to serve the long-term interests of their customers and communities.

Myth: The FDIC takeover of IndyMac Bancorp means my bank is at risk.
Fact: IndyMac Bancorp was taken over because, in part, depositors became fearful and attempted to close their accounts at once, destabilizing the bank. The overwhelming majority of the nation’s banks are safe and well capitalized. As stated by FDIC Chairman Sheila Bair, IndyMac is only one of nearly 8,500 depository institutions operating in the United States and represents just 0.2 percent of banking-industry assets. There is little chance your bank will be taken over by the FDIC. And if that does happen, you will continue to have virtually uninterrupted access to your insured deposits.

Myth: Community banks are involved in problems with subprime mortgage lending.
Fact: Community banks are common-sense lenders that have avoided subprime lending. There is no mortgage-lending crisis for community banks because they are well-run, highly capitalized, tightly regulated and more risk-averse than big banks. Community banks have money to lend homeowners for new purchases and to refinance existing mortgages. In spite of talk of a credit crunch, community banks are open for business.

About ICBA
The Independent Community Bankers of America, the nation’s voice for community banks, represents nearly 5,000 community banks of all sizes and charter types throughout the United States and is dedicated exclusively to representing the interests of the community banking industry and the communities and customers we serve. For more information, visit www.icba.org.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

Is the Bear Market Over?

I was talking to my assistant this morning and she said that someone on one of the news stations was declaring an end to the bear market. I tell you what concerns me about this type of news casting. Of course, this guy might be right on the money and his guess (because no one can predict the future) might be lucky enough to be right.

Before I go on, I don’t want to always come out as the one who throws cold water on the party. Let’s face it – the stock market has had a few good days. That is the good news. At the same time, a few good days in the stock market don’t make for the end of a bear market.

Anyone who has taken the time to study bear markets, and especially anyone who is going to make predictions, would know that you not only look at bear markets from the standpoint of how much the stock market has lost, but you also look at it from the standpoint of time. The average length of the last three major bear markets has been 447 days. We are currently at day 268. If history is any indication, we still have a ways to go.

So, it is a little too early to be putting on the party hats and declaring an end to the bear. This is not the time to be complacent. In fact there is never a good time to be complacent when it comes to your investments and the subject of risk.

I have done quite a bit of research on the structure of this bear market. My analysis would suggest that the bear market actually started July 17, 2007. That would make this bear market one year old. That was the date the two Bear Sterns hedge funds were declared for the most part worthless because of all of the credit losses. That was the first of a year’s long series of problems in the credit markets which takes us to where we are today.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

Are You Prepared for a Bank Failure?

The IndyMac bank failure was certainly a sign of the times. It was sobering to see bank customers lined up outside the bank just trying to get their money. Of course, this leads to speculation that hundreds of banks could potentially fail.

Of course, thus far, it is tough to tell which banks are in trouble. Most companies tell you that they have plenty of money and that there are no concerns up until the day that they close their doors. Companies always put a brave face on in the midst of potential collapse. If you think back to Bear Sterns, just four days before their collapse, the CEO stated that everything was just fine.

Regardless of whether hundreds of banks fail or not, there are general principles that you should follow. The number one principle in this situation is to have your money diversified. This principle also applies to bank accounts.

You should always have your money in the forms of bank and savings accounts and CD’s only in FDIC insured banks. In addition, you should always stay within the limits of the FDIC regarding FDIC insurance.

The Federal Deposit Insurance Corporation (the FDIC) was created by Congress in 1933 to protect consumers against bank failure. The FDIC protects depositors against the loss of their insured deposits if an FDIC-insured bank or savings association fails.

The FDIC insures up to $100,000 per person per bank. So if you have $105,000 in a CD, it will insure that you will receive $100,000 of that back in the event of a bank failure.

If you have a joint account, that joint account is insured up to $200,000. Remember the rule of thumb is $100,000 per person per bank. If you have an IRA, that $100,000 increases to $250,000 due to legislation passed by Congress.

The FDIC doesn’t insure investment accounts or money market accounts. This only applies to savings, bank, and CD accounts. It also applies to various other cash type instruments.

So it makes no sense to go beyond those limits whether or not we are facing a banking crisis. Go only with FDIC insured banks and stay under those limits and you should be just fine.

Incidentally, the FDIC fund has a value of $53,000,000. The IndyMac bail-out is estimated to cost $4 to $8 billion.

What about brokerage houses where you have your investments? The Securities Investor Protection Corporation, commonly known as SIPC, provides customers with limited protection. The SIPC, a non-profit, non-government membership group, is the insurance body for the brokerage industry.

It protects up to $500,000 per customer and of that amount, $100,000 protection of cash. It only protects customers in the event the broker firm fails and or the broker steals the customer’s money. It doesn’t protect against investment value loss.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

Another Bank of America Story

Dear Bob,

Bank of America allowed someone to take out a credit card in my name signing themselves on as an ‘authorized user.’ I knew nothing of the card. Bank of America filed a lawsuit against me, and then withdrew it when they knew they would lose the case. They sold the file to three different debt collectors, which also withdrew when sent the court documents.

Bob, I disputed this with the credit bureaus, but they returned with an answer also adding another $2,000 to the debt. They have defamed my name and assassinated my character in the credit world. My attorney told me to send them a letter and get aggressive with them. My question is - what department would I send this letter to at Bank of America? I know to send it where it is recorded on my credit report, but what department? God Bless You and Your's, Bob!!!

These are tough situations. First and foremost, this is an identity theft case. The proper sequence of events needs to be followed as a means for protection when identity theft occurs. In an identity theft case, you are a guilty victim. You are a victim and you are guilty until proven innocent, which is up to you.

Then you need to watch your credit report like a hawk. The minute something shows up, it is important to put a detailed case together and dispute the item. If any type of legal situation occurs because of the identity theft, don’t just assume it will go away because you know you are an identity theft victim. Get an attorney immediately and fight it.

As this listener describes in this painful story, the events can get quickly out of control. Unfortunately in his case, it has gotten way out of control and might be tough to crawl out. I always encourage anyone to fight for their rights. At the same time, you have to be realistic as to the time, stress, and energy you spend. Fighting the mistakes of a company such as Bank of America might end up being fruitless.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

Fannie Mae and Freddie Mac – Where There is Smoke, There is Fire

The rumor mill has been circulating about the potential collapse of the two mortgage giants Freddie Mac and Fannie Mae. This has been the reason for a lot of the loss in the stock market over the past week. Let’s take a look at what all of this means

Freddie Mac and Fannie Mae are Government-sponsored entities that were originally created as a means to help low income homeowners experience the American Dream of Home Ownership.

In the 1930’s, Congress created the Federal National Mortgage Corporation, or Fannie Mae, to encourage banks to make loans to low-income Americans by agreeing to purchase those mortgages from banks. If Fannie Mae, who was created by the Government, could step in and take the risk away from the banks by insuring the loans against loss, then the dream of home ownership would become more of a reality.

In 1970, Congress created a second agency called the Federal Home Loan Mortgage Corporation, or Freddie Mac. By the late 1980’s, these two companies were responsible for around 30% of the loans that were being written.

The two entities would buy or federally insure the loans from the banks. Then they would either own the mortgages themselves or they would take the loans and package them up into a bond and let Wall Street sell them to clients as income-producing investments.

Well what started out as a way to help low income Americans expanded to insuring loans up to $417,000. Of course, this “Government-backed” mortgage machine got completely out of control along with everyone else during the last 5 years and now has big problems.

According to a Wall Street Journal article from last Friday, together these two companies insure or own over 5.8 trillion dollars worth of loans. They are involved in roughly 70% of all mortgages written today. The mortgage markets desperately need these two companies to stay functional. If either were to fail, the implications would be disastrous for the economy.

The problem for these two companies is the same problem that Bear Stearns encountered. They are trying to raise money just to exist and no one wants to give them any. The investors who are willing to give them money will only do so at very high interest rates.

If these two companies are involved in some way with 70% of the mortgages, then anything that would prevent them from being that involved would mean big problems for the markets, the real estate industry, and the economy.

So the Federal Government steps in and announces on Sunday that they will in a sense bail out the two mortgage giants. They are expanding the line of credit or amount of money that the two mortgage giants can borrow. A short-term fix for sure. The Government is depending on one thing to occur – the real estate and mortgage markets to improve. Unfortunately, that could still be way off into the future. Will this bail-out attempt prove to be an exercise of throwing good money after bad or a real solution?

The bigger problem is that the Federal Government continues to interfere with markets that are intended to be free. They have been doing this behind the scenes for years. However, in recent months, they are doing it in a big way right out in the open.

Not only are they making money available to the two mortgage giants, but Paulson also wants to be granted authority to buy stock in both of the companies if needed. I can understand opening up the line of credit. However, the Government intervening to buy stock? That is getting a little out of control.

What are the ramifications for this move by the Government? I would suggest that it only pushes the problem further out into the future. When it is all said and done, these problems that we face in our credit markets have to be corrected and the only way for the problems to be truly corrected is to allow nature to take its course, losses in the market to be realized and not postponed, and most importantly, for the Federal Government to stay out of the way.

What this does for the stock market is creates large amounts of uncertainty. I am sure that much to the surprise of Treasury Secretary Paulson who created the bail-out plan, the markets didn’t care today as the stock market had another losing day. It is a message being sent to the Government that there is an extreme lack of confidence in the Federal Government.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

Even If Interest Rates Go Up, Keep Payments Current

Dear Bob,

I was 2 days late on my credit card bill. My interest rate went from 3% to 24%. That means my monthly payment went from $30 to $175. I all ready contacted the credit card company and they are not willing to do anything, they said after 45 days maybe. I am have been disabled for the past 2 years, on a work related injury, and we are on a strict budget, yet they said that they have to follow policy.

I am unable to make the payments. I have contacted a company to help but they said that I should stop payment on all my credit cards. I am current on all to this date, but for the previous mentioned, we cannot make the payment. What course of action should I take since they are not willing to work with us? We have been current on the bill since 2005 and this is the first time that the payment went out late.

What a potential disaster. This is a great email with a good ending. However, it could have been a disaster. First, anytime you go to one of these credit solutions companies, they are going to tell you to go ahead and wreck your credit. This is some of the most irresponsible advice given to this listener from this company.

His credit was good. He was just late on a payment. Had he followed their advice, he would have done 7 ½ years of damage and been dealing with debt collectors for a long time.

The key in any situation like this one is to stay current with the payment regardless of the interest rate. If at any point you default, the consequences are much worse. It always makes sense to do whatever you have to do to keep paying and look for alternatives.

Fortunately, his alternative was to go to http://www.penfed.org/ where he was able to transfer the balance to a 5.9% for life credit card. That quickly solved his problem.

Remember, a good credit score gives you all of the options in the world.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

It was all in my head! – Thanks Phil Gramm

Dear former Senator Gramm,

I am so thankful that you helped me get some peace about all of these (what I thought were) economic problems we are facing today. Yesterday you said that this whole recession thing was in our heads by referring to it as a “mental recession.” I will also officially stop whining. You are right when you say we have become a country of whiners.

All of those foreclosures, the real estate crisis, all of these companies going belly up, unemployment increasing, the 20% plus loss in the stock market, $4 plus gasoline, the increase in food prices, consumers folding under massive debt problems, etc – you are so right! That is just in our heads. Those are not real problems.

Thanks to you, I am going to stop complaining. I see the light. The next time I put $90 worth of gas in my car, I am just going to remember what you said, realize it is all in my head, and resist the urge to complain. When I have to pay higher prices for all of those necessities, I am just going to remember it is all an illusion. When my neighbor goes into foreclosure, I am just going to conclude that it was their decision to do so, they didn’t like the house, and someone is going to give them credit to buy another with nothing down.

Wow, I feel so free. I can see where you could come to that conclusion. Being a politician (both Democrat and Republican – I guess you couldn’t figure out which party served your best interest) off and on for 14 years, I could see where you come to that conclusion looking down from your “perch.”

I mean there is no one more qualified to address the reality of America than someone who has served as a politician as long as you have.

I am sure that Senator McCain feels better knowing that he shouldn’t whine (following those remarks) having selected you to advise his campaign. Don’t worry Senator McCain, the potential fall-out from comments from Mr. Gramm and others that you call advisors are just in your head as well.

Just like a politician to tell us to ignore the problems and stop whining because it is all in our heads.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.