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.