Car dealers thrive on advertising the low payment. They focus on two different types of programs. First, there is the smart buy. Second is the lease arrangement. This is how a dealer can get you to the lowest monthly payment on a vehicle. They will tell you if you buy and sell cars a lot this is a much better deal.
Smart Buys
The whole idea is to get the payment down low for a period of time. Then at the end of that period there is either a trade in value for the car or there is a value at which you could purchase the vehicle. You can also walk away if you chose.
So let’s take a look at a smart buy example.
$ 21,795 sales price
$ 5,500 down
$ 279 a month for 48 months
12,000 miles a year limit
So, what if you took my advice and got pre-approved through Pentagon Credit Union? Let’s look at this deal in two ways, focusing on keeping the payment low. I am not advocating the low payment. I am just showing you what you can do on your own.
(1) $ 21,795 sales price
Nothing down
$ 350 a month for 72 months
$ 7,098 owed at the end of 48 months – should have equity in the car
No excessive wear penalties, etc.
(2) $ 21,795 sales price
$ 5,500 down
$ 262.35 a month for 72 months - should have equity in the car
Now let’s say that you chose option 2 and financed it on your own. If you were to pay $279 instead of $262.35 a month, you would have had the same low lease payment. However, the balance at the end of the 48th month would be $5,079. Do you think that you could sell the car for some equity at that point?
Now they also add to the equation that you would get a guaranteed trade-in value. However, that has a higher probability to not be a good deal because you lose all bargaining power. The reply to any attempts to negotiate could be – “We cannot give you that trade-in amount unless you buy this car at full MSRP.” That would not be a good deal.
In addition, you are limited to 12,000 miles a year. Beyond that limit, you will pay more. You also have the possibility of being docked additional money for excessive wear and tear.
Leasing
It is tough to find a lease that I can analyze. In looking through the Dallas Morning News, all I could find were the monthly payments. They never tell the value of the car. For the prudent buyer, that would be important information to know. So, that is left out of the marketing material.
I did find all of the information on a Porsche Cayman online. Here is the deal:
$51,390
$4,170 down
$650 a month for 36 months
10,000 miles a year limit
Penalties for excessive wear and tear
You could take out a Pentagon Federal Credit Union note at 4.99% for 72 months (remember this is about longer term notes to keep the note down). You would put down the same amount of money and finance the rest.
The payment would be $110 more a month with a balance at the end of year 3 of $25,370.27. A 3 year old Porsche with less than 30,000 miles should have a value much more than $25,370.27.
By not leasing and going with conventional financing, you paid an additional $3,960 over three years. If you were able to sell that car for at least $ 25,370.27 plus the $3,960 at the end of the three years, the lease deal made no sense. A three year old low mileage Porsche would probably command at least in the middle $30,000 area. You would definitely come out ahead.
CONCLUSION:
A marketing strategy that focuses you on the low payment is hardly a good deal. Auto dealerships are not out there to do you any favors. They are out there to sell cars. Their job is made easier by the fact that most people don’t research ahead of time.
Their smart buys and leases are determined by an end value and an interest rate. The key is to get the lowest rate of interest. You will need to do that on your own before you go shopping.
Let me also say that I am not advocating you take out 72 month loans. I am simply showing you how the deal works.
Finally, I am not trying to imply that auto dealerships are evil. They are in business to sell cars and help you fulfill that desire. If is up to you to know whether something is a good deal or not.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Wednesday, March 26, 2008
Tuesday, March 25, 2008
Buying a Car the Right Way
The low monthly payments and the big rebates are out in force again. Dealerships are financing at low rates and/or giving out 2,000 to 5,000 rebates to entice you to come in and buy a new car. Remember, their intention is to not actually give you something for free without getting something on the back-end.
Let’s review my top car buying tips:
(1) Compare the benefits of the rebate versus the low interest rate
Dealerships will entice you with either a rock bottom low interest rate or a big fat rebate on the front-end. It is never their intention to give you both (unless they can figure out another way to make up their “gift” to you.) Evaluating the two is real easy. If you didn’t follow my most important advice (see tip 2) and get pre-qualified before going into the dealership, you will depend on the finance department to arrange for a loan.
Compare the total cost of the car after paying it off with the normal interest rate plus the rebate versus the low interest rate and no rebate. That will tell you which one is the better deal.
(2) Get pre-qualified for financing before going to the dealership
To me, this is the most important car buying tip. It has been my experience that you don’t get the best interest rate at the dealership. There are too many people making money off of your interest rate. Therefore the rate is higher.
My greatest loan source is the Pentagon Federal Credit Union (http://www.penfed.org/). You can get 4.99% up to 72 months on a new and used car loan (up to 60 months on used car). Now take that rate into the dealership and the rebate. That could be an awesome deal.
(3) Look for a new car that is the prior year
This is one of the greatest ways to get a good deal. If you were looking today for a car, look for an ‘07 instead of an ‘08. If a car dealer still has an ‘07 on their lot, they are probably very motivated to get that car sold. Better yet, if the model changed in any way in ‘08, that ‘07 becomes an even better deal.
(4) Look for a demo
Demos are one of the best buys you can get. The dealership takes the depreciation hit because of the miles. Yes, you are buying a new car with some miles. However, it is that initial depreciation hit that costs you so much money. Plus, dealerships can get pretty motivated if they have a demo sitting on the lot that is not selling.
(5) Research ahead of time
If you are taking my advice in #4, then go to http://www.autotrader.com/ and find comparable cars that you want with low miles. This will tell you how the market is valuing the car and give you a baseline as to what is an acceptable deal.
Buying a car the wrong way can be a huge mistake. Make sure you prepare well before you start the process.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Monday, March 24, 2008
Advice Needs to be Responsible
I have a lot of respect for CNBC anchor woman Maria Bartiromo. I started watching her when she first started with CNBC well over 10 years ago. She has been a huge success in a business, especially back then was considered a “man’s world.” I have enjoyed seeing her succeed.
Right now there is a lot of advice given to the average investor when it comes to investing money in difficult times. What concerns me is that most advice is given by the industry and is really not accurate advice.
Maria was being interviewed by Tim Russert on Meet the Press. While getting ready for church, I happened to have the sound turned up on the television.
They were talking about the credit crunch and everything this country faces. Tim Russert looked at her and asked, “An investor with their portfolio today, what should they be doing?”
I was a little surprised at the response. I feel like a journalist in her position should have a better answer. First, she said that anyone who has money in a bank will be fine. Your money is fine because it is insured by the FDIC. Well, that isn’t entirely accurate. Accounts are only FDIC insured up to $100,000.
Second, she talked about that investors should always assess the risk that they are taking. Then she started discussing the importance of diversification. My initial thoughts were that she was really going to deliver some sound information for listeners to consider. Then the wheels fell off the bus.
She stated that she thinks that investors should invest in “three buckets.” Keep in mind that this example was further explaining diversification.
The first bucket is a simple savings account. You should have money set back for a rainy day. Second, you should have money invested in a 401(k) plan. Third, you should have money invested in stocks because stocks will outperform all asset classes in the long-term.
Here is the problem – the industry keeps distorting the important definition of diversification. Diversification is THE KEY to managing risk. Her definition of diversification is investing in a 401(k) plan and then investing in stocks. So the average investor would listen to that and think…..Well, I have a savings account. I have stocks. I have a 401(k) plan. I must be OK. Those three have nothing to do with diversification.
The most important concept that I can relay to you is diversification. Most investment strategies are far from diversification and invested way too much in stocks. If you have not done so, please read my report on diversification.
Oh and incidentally, stocks have not outperformed ALL asset classes over the long-term. Of course she was suggesting that long-term was 10 years or more.
The Citigroup Corporate Bond Index over the last 10 years has earned 7% while the Dow Jones has earned a 4.81% average. Over the last 79 years, the Dow Jones Industrial Average earned 4.94% and the Citigroup Corporate Bond Index earned an annual average of 5.88%.
Remember, ALWAYS is not a good word to count on in the wonderful world of investments.
Copyright © 2008 Prudent Money and Bob Brooks.
Right now there is a lot of advice given to the average investor when it comes to investing money in difficult times. What concerns me is that most advice is given by the industry and is really not accurate advice.
Maria was being interviewed by Tim Russert on Meet the Press. While getting ready for church, I happened to have the sound turned up on the television.
They were talking about the credit crunch and everything this country faces. Tim Russert looked at her and asked, “An investor with their portfolio today, what should they be doing?”
I was a little surprised at the response. I feel like a journalist in her position should have a better answer. First, she said that anyone who has money in a bank will be fine. Your money is fine because it is insured by the FDIC. Well, that isn’t entirely accurate. Accounts are only FDIC insured up to $100,000.
Second, she talked about that investors should always assess the risk that they are taking. Then she started discussing the importance of diversification. My initial thoughts were that she was really going to deliver some sound information for listeners to consider. Then the wheels fell off the bus.
She stated that she thinks that investors should invest in “three buckets.” Keep in mind that this example was further explaining diversification.
The first bucket is a simple savings account. You should have money set back for a rainy day. Second, you should have money invested in a 401(k) plan. Third, you should have money invested in stocks because stocks will outperform all asset classes in the long-term.
Here is the problem – the industry keeps distorting the important definition of diversification. Diversification is THE KEY to managing risk. Her definition of diversification is investing in a 401(k) plan and then investing in stocks. So the average investor would listen to that and think…..Well, I have a savings account. I have stocks. I have a 401(k) plan. I must be OK. Those three have nothing to do with diversification.
The most important concept that I can relay to you is diversification. Most investment strategies are far from diversification and invested way too much in stocks. If you have not done so, please read my report on diversification.
Oh and incidentally, stocks have not outperformed ALL asset classes over the long-term. Of course she was suggesting that long-term was 10 years or more.
The Citigroup Corporate Bond Index over the last 10 years has earned 7% while the Dow Jones has earned a 4.81% average. Over the last 79 years, the Dow Jones Industrial Average earned 4.94% and the Citigroup Corporate Bond Index earned an annual average of 5.88%.
Remember, ALWAYS is not a good word to count on in the wonderful world of investments.
Copyright © 2008 Prudent Money and Bob Brooks.
Thursday, March 20, 2008
Happy Easter
Due to the holiday, the next blog will be posted on Monday, March 24th. Have a great Easter weekend!
Tuesday, March 18, 2008
Stewardship: God’s Economic Plan
From guest blogger Ashley Hodge. Please visit his website at http://www.stewardshipmandate.com/
These are difficult economic times. The economy is either in recession or likely to be in recession. There are some significant strains on the economy to work out - housing; credit; weak dollar; high commodity prices. But some things never change. God has His ways. His wisdom works in any economic environment.
What are some keys from God’s Word that help us focus our attention on Him and the plans that He has for us during economic uncertainty?
I have 3 keys from the Bible that never change. They work in times of recession and economic calamity. They work in times of great prosperity. If you practice them, you will have peace. If you neglect them, you will invite stress.
1. Simplify
Ecclesiastes 7:29 tells us that God has made us simple, yet we seek out our own complexities. The Scriptures encourage us to store our treasures in Heaven not earth- where moths, thieves and rust cannot destroy them (Matthew 6:20). We are told to pursue godly character and not riches - I Timothy 6:6-20. If money comes as a byproduct of pursuing godliness, so be it. But our focus should never be possessions.
He who dies with the most toys is not a winner in God’s economy. We are encouraged to travel light and to use things for our enjoyment and God’s purposes. But we are never to worship things by spending our time, money and energy on accumulating unneeded stuff. This is why it is easy for the Christian who shares a biblical worldview to scale down quickly in times of economic downturn.
2. Work Hard
Jesus declares in John 9:4, “We must work the works of Him who sent Me while it is day; night is coming, when no one can work.” Retirement is not a biblical concept. God gives each of us a unique gift set. Our job is to use, hone and refine our unique gifts towards work that is beneficial to mankind. If we are blessed enough to be in a position where working for pay is optional, we should still seek productivity.
I was watching an old Super Friends episode with my 3-year old son. These episodes required the combined talents of Superman, Aquaman, Batman, Robin, Wonder Woman and the Wonder Twins to thwart some evil force’s attempt to destroy the world. When faced with one dilemma Superman said, “Our motto is to always choose the course of action that produces the greatest good to the greatest amount of people.”
This is a good motto to live our lives by. Our time of permanent rest is not here. We have work to do. We want to burn out bright. As long as our minds and bodies are active, we should be engaged in useful, productive activities. This is a recession proof philosophy. Proverbs 10:3, “The Lord will not let the righteous go hungry.”
3. Be Hopeful
We should seek to be biblical progressives. What do I mean by that? Some Christians want to be thrown back to the good ol’ days before all the modern problems complicated our lives. The Amish are an example. They shun electricity, computers, washing machines, etc… because they believe in a return to the Garden of Eden before mankind ruined the earth.
But the problem is not modernization. The problem is sin. Computers are an invention that can be used to destroy lives by leading to pornography or enhance lives by allowing us to work more effectively any place, any time. When we waste our time or resources because of modernization, it is a problem. But the biblical story moves from an undeveloped pristine garden - Genesis - to a developed, complex city of God - Revelation.
God has called us into a stewardship relationship with the earth and all of its resources. We are given a mandate to be fruitful and multiply the resources that God brings our way - Genesis 1:28. This should give us great hope. Heaven will be a period of great mental and physical activity and unlimited prosperity.
But we won’t get tired like we do now. In the meantime, the story of humankind is one of progress and ingenuity as people fulfill God’s stewardship mandate. God will sort out the wasteful from the useful at the end of time. We should do this in our lives as well and spend our time on useful pursuits.
Economic cycles come and go. There are times of scarcity and times of plenty. But we can have peace if we follow God’s ways: live simple; work hard and be hopeful. We know how it all ends. Let’s make sure others can see Christ - our hope of glory - in the way we live.
Ashley Hodge, CFP®
These are difficult economic times. The economy is either in recession or likely to be in recession. There are some significant strains on the economy to work out - housing; credit; weak dollar; high commodity prices. But some things never change. God has His ways. His wisdom works in any economic environment.
What are some keys from God’s Word that help us focus our attention on Him and the plans that He has for us during economic uncertainty?
I have 3 keys from the Bible that never change. They work in times of recession and economic calamity. They work in times of great prosperity. If you practice them, you will have peace. If you neglect them, you will invite stress.
1. Simplify
Ecclesiastes 7:29 tells us that God has made us simple, yet we seek out our own complexities. The Scriptures encourage us to store our treasures in Heaven not earth- where moths, thieves and rust cannot destroy them (Matthew 6:20). We are told to pursue godly character and not riches - I Timothy 6:6-20. If money comes as a byproduct of pursuing godliness, so be it. But our focus should never be possessions.
He who dies with the most toys is not a winner in God’s economy. We are encouraged to travel light and to use things for our enjoyment and God’s purposes. But we are never to worship things by spending our time, money and energy on accumulating unneeded stuff. This is why it is easy for the Christian who shares a biblical worldview to scale down quickly in times of economic downturn.
2. Work Hard
Jesus declares in John 9:4, “We must work the works of Him who sent Me while it is day; night is coming, when no one can work.” Retirement is not a biblical concept. God gives each of us a unique gift set. Our job is to use, hone and refine our unique gifts towards work that is beneficial to mankind. If we are blessed enough to be in a position where working for pay is optional, we should still seek productivity.
I was watching an old Super Friends episode with my 3-year old son. These episodes required the combined talents of Superman, Aquaman, Batman, Robin, Wonder Woman and the Wonder Twins to thwart some evil force’s attempt to destroy the world. When faced with one dilemma Superman said, “Our motto is to always choose the course of action that produces the greatest good to the greatest amount of people.”
This is a good motto to live our lives by. Our time of permanent rest is not here. We have work to do. We want to burn out bright. As long as our minds and bodies are active, we should be engaged in useful, productive activities. This is a recession proof philosophy. Proverbs 10:3, “The Lord will not let the righteous go hungry.”
3. Be Hopeful
We should seek to be biblical progressives. What do I mean by that? Some Christians want to be thrown back to the good ol’ days before all the modern problems complicated our lives. The Amish are an example. They shun electricity, computers, washing machines, etc… because they believe in a return to the Garden of Eden before mankind ruined the earth.
But the problem is not modernization. The problem is sin. Computers are an invention that can be used to destroy lives by leading to pornography or enhance lives by allowing us to work more effectively any place, any time. When we waste our time or resources because of modernization, it is a problem. But the biblical story moves from an undeveloped pristine garden - Genesis - to a developed, complex city of God - Revelation.
God has called us into a stewardship relationship with the earth and all of its resources. We are given a mandate to be fruitful and multiply the resources that God brings our way - Genesis 1:28. This should give us great hope. Heaven will be a period of great mental and physical activity and unlimited prosperity.
But we won’t get tired like we do now. In the meantime, the story of humankind is one of progress and ingenuity as people fulfill God’s stewardship mandate. God will sort out the wasteful from the useful at the end of time. We should do this in our lives as well and spend our time on useful pursuits.
Economic cycles come and go. There are times of scarcity and times of plenty. But we can have peace if we follow God’s ways: live simple; work hard and be hopeful. We know how it all ends. Let’s make sure others can see Christ - our hope of glory - in the way we live.
Ashley Hodge, CFP®
Monday, March 17, 2008
Dissecting Hillary Clinton’s Press Release (Political Spin)
I get these at least every day. They actually provide some humor in the middle of the day. It is just amazing what a politician will say. Let’s take a look:
FROM THE PRESS RELEASE:
For a year now, I have been speaking out on the need to address our nation’s housing crisis. (What took you so long? This problem has been going on a lot longer. Oh and what were you doing to help prevent this problem in the first place?)
In March 2007, I first called for a “foreclosure timeout” that would bring together servicers, lenders and government actors to help keep families in their homes. In August 2007, I called for increased regulations to protect borrowers and rein in rampant mortgage industry abuses. (Nice thought - a little late. Americans needed protection from the mortgage industry about 6 years ago - I do hope that you and your colleagues enjoyed the nice artificial growth created by the real estate boom and easy credit.)
In December 2007, I proposed a framework to keep families in their homes with a moratorium on foreclosures for 90 days and a voluntary freeze of at least 5 years on adjustable rate subprime mortgage rates. (With all due respect Senator, it just doesn’t work like that. If it were that easy, President Bush would have done that a long time ago and we wouldn’t have that problem. Being an attorney, you should know the huge ramifications that would be had if interest rates were frozen for 5 years – I will give you Kudos for the great political sound bite.)
And in early January of this year, I called for $30 billion in immediate assistance to help states and cities mitigate the foreclosure crisis. (Senator Clinton, if you had $10,000 in debt, would a gift of $1 from the federal government really help? Although $30 billion is a big number, it wouldn’t put a dent in the problem.)
While I was heartened today to see the Administration acknowledge the need for greater federal oversight of the mortgage industry, this news comes seven months and 1.6 million foreclosure filings after I first called for similar steps. (see above comments – what took you so long?)
And while the Bush Administration has belatedly acknowledged that both a foreclosure moratorium and an extended rate freeze are important components of an eventual solution, their approach to-date has been far too narrow to address the scope of the crisis. (That is because President Bush has to play politics as well. He knows that it is important to say they are important components. He also knows that he can’t use them.)
That’s why today, in addition to my proposals for a voluntary moratorium and rate freeze, I am supporting a plan to help millions of families restructure their mortgages on affordable, sustainable terms. I am co-sponsoring legislation with Senator Dodd to expand the Federal Housing Administration’s (FHA) capacity to guarantee responsible, restructured mortgages. This legislation will give lenders new incentives to work with homeowners who have seen the value of their homes fall below the principal on their loans, and put them into more affordable, secure long-term mortgages.
This approach is not a bailout. (Of course not, nor is that program that freezes interest rates - did I just type that out loud?) It is a sensible way for all actors (hey another word for politicians) – lenders, investors, servicers and borrowers – to share responsibility, keep families in their homes and stabilize our communities and our economy.
I first championed FHA reform over a year ago, and offered legislation to help modernize the FHA infrastructure to make the investments in personnel and information technology to help meet market demand and offer safe and secure alternatives to subprime mortgages. (Alternatives to sub-prime mortgages? I wonder if she is referring to 30 year fixed rate loans?) Today, I am expanding that approach so that the FHA can help stabilize the current housing crisis. (I didn’t catch the solution. What can they do besides restructure loans to 30 year fixed loans where people still cannot make the payments?)
Finally, I am calling on Congress to immediately establish a $30 billion Emergency Housing Fund for states and localities struggling with mounting foreclosures. While the recently passed stimulus bill provides much-needed support for struggling workers and seniors (Yep, that $ 600 check is going to go a long way. Maybe a family of four can put enough gas in their car to take a trip and stay at a Motel 6.), it fails to address the housing crisis (You think?), which is at the heart of our economy’s problems. This Emergency Fund would give governors, mayors, and community organizations the resources they need to stem the downward economic spiral that accompanies concentrated foreclosures. (What a relief – I didn’t realize throwing 30 billion dollars is all that you needed to fix the problem.) These resources could be used to buy, rehabilitate and put foreclosed properties back into constructive use (Wow – too bad no one can afford to buy these refurbished homes due to lack of money and the inability to get credit), expand foreclosure prevention and counseling programs (Read: Consumer Credit Counseling-throwing consumers to the wolves), and support community-level efforts to combat blight.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
FROM THE PRESS RELEASE:
For a year now, I have been speaking out on the need to address our nation’s housing crisis. (What took you so long? This problem has been going on a lot longer. Oh and what were you doing to help prevent this problem in the first place?)
In March 2007, I first called for a “foreclosure timeout” that would bring together servicers, lenders and government actors to help keep families in their homes. In August 2007, I called for increased regulations to protect borrowers and rein in rampant mortgage industry abuses. (Nice thought - a little late. Americans needed protection from the mortgage industry about 6 years ago - I do hope that you and your colleagues enjoyed the nice artificial growth created by the real estate boom and easy credit.)
In December 2007, I proposed a framework to keep families in their homes with a moratorium on foreclosures for 90 days and a voluntary freeze of at least 5 years on adjustable rate subprime mortgage rates. (With all due respect Senator, it just doesn’t work like that. If it were that easy, President Bush would have done that a long time ago and we wouldn’t have that problem. Being an attorney, you should know the huge ramifications that would be had if interest rates were frozen for 5 years – I will give you Kudos for the great political sound bite.)
And in early January of this year, I called for $30 billion in immediate assistance to help states and cities mitigate the foreclosure crisis. (Senator Clinton, if you had $10,000 in debt, would a gift of $1 from the federal government really help? Although $30 billion is a big number, it wouldn’t put a dent in the problem.)
While I was heartened today to see the Administration acknowledge the need for greater federal oversight of the mortgage industry, this news comes seven months and 1.6 million foreclosure filings after I first called for similar steps. (see above comments – what took you so long?)
And while the Bush Administration has belatedly acknowledged that both a foreclosure moratorium and an extended rate freeze are important components of an eventual solution, their approach to-date has been far too narrow to address the scope of the crisis. (That is because President Bush has to play politics as well. He knows that it is important to say they are important components. He also knows that he can’t use them.)
That’s why today, in addition to my proposals for a voluntary moratorium and rate freeze, I am supporting a plan to help millions of families restructure their mortgages on affordable, sustainable terms. I am co-sponsoring legislation with Senator Dodd to expand the Federal Housing Administration’s (FHA) capacity to guarantee responsible, restructured mortgages. This legislation will give lenders new incentives to work with homeowners who have seen the value of their homes fall below the principal on their loans, and put them into more affordable, secure long-term mortgages.
This approach is not a bailout. (Of course not, nor is that program that freezes interest rates - did I just type that out loud?) It is a sensible way for all actors (hey another word for politicians) – lenders, investors, servicers and borrowers – to share responsibility, keep families in their homes and stabilize our communities and our economy.
I first championed FHA reform over a year ago, and offered legislation to help modernize the FHA infrastructure to make the investments in personnel and information technology to help meet market demand and offer safe and secure alternatives to subprime mortgages. (Alternatives to sub-prime mortgages? I wonder if she is referring to 30 year fixed rate loans?) Today, I am expanding that approach so that the FHA can help stabilize the current housing crisis. (I didn’t catch the solution. What can they do besides restructure loans to 30 year fixed loans where people still cannot make the payments?)
Finally, I am calling on Congress to immediately establish a $30 billion Emergency Housing Fund for states and localities struggling with mounting foreclosures. While the recently passed stimulus bill provides much-needed support for struggling workers and seniors (Yep, that $ 600 check is going to go a long way. Maybe a family of four can put enough gas in their car to take a trip and stay at a Motel 6.), it fails to address the housing crisis (You think?), which is at the heart of our economy’s problems. This Emergency Fund would give governors, mayors, and community organizations the resources they need to stem the downward economic spiral that accompanies concentrated foreclosures. (What a relief – I didn’t realize throwing 30 billion dollars is all that you needed to fix the problem.) These resources could be used to buy, rehabilitate and put foreclosed properties back into constructive use (Wow – too bad no one can afford to buy these refurbished homes due to lack of money and the inability to get credit), expand foreclosure prevention and counseling programs (Read: Consumer Credit Counseling-throwing consumers to the wolves), and support community-level efforts to combat blight.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Friday, March 14, 2008
Irresponsible (Self-Serving) Advice Given by Advisor
I met with a very dear lady the other day who had just recently retired. Prior to retirement, she sat and down and talked with an Edward D. Jones broker to get advice regarding whether or not she could retire.
She had roughly $348,000 at the time. After looking at the situation and maybe even the commissions that would be made off of the rollover, he tells her that she definitely should retire.
The problem is that she would need an annual withdrawal from that IRA of $27,000. That would require her money to earn at least 7.7% a year just to meet the withdrawal. With inflation hovering between 2 and 3%, she would actually need between 10 and 11% a year just to keep up.
So, based on the horrible (irresponsible) advice, she leaves a company that she has worked for for 41 years. She didn’t necessarily need to retire. She was happy working. It would just be nice if she could retire. So, the broker gives her bad advice, she retires, and he makes a fat commission.
If that is not bad enough, this is how he invested the money:
28% One Stock – Categorized as Aggressive
10% Fixed Income – Through Mutual Funds
62% Stocks – Through Mutual Funds
That is 90% stocks and 10% bonds. From my standpoint, that is very aggressive. Thus far, she has lost roughly $40,000 or 14% in just a few short months.
Now she will have to go get a job to help support her monthly expenses.
There are three things to know about the financial advisor community.
1) Just because a person calls themselves a financial advisor, planner, consultant, doesn’t mean that they are qualified to give advice.
2) Always get more than one opinion.
3) The financial advisor community is working for commissions. After the sale, there really is no incentive to do anything for you unless you have more money to invest. It is a SALES BUSINESS.
Of course, there are exceptions to the rule. You just need to be careful of the ones who just sell product.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Wednesday, March 12, 2008
What to Start Your Own Business?
Do you have an idea that you think would be the next great business? Are you already a business owner and you just need some help and assistance getting to the next level? Do you have an invention you would love to get off the ground?
I want to make sure that you know about a resource here in the DFW area. On yesterday’s program, I interviewed Mark Langford, the Director of the North Texas Small Business Development Center – here are a few facts I want to start off with today.
A new business is opened by an SBDC in-depth client every 27 minutes.
A new job is created in the US by a DBDC in-depth client every 6.5 minutes.
$ 100,000 in new sales is generated by SBDC in-depth clients every 5.5 minutes.
$ 100,000 in financing is obtained by SBDC in-depth clients every 14.5 minutes.
Now you know how I feel about “free.” What is the catch? This is a non-profit entity that is funded by the Small Business Association, local community colleges, etc. It is here as a resource.
They will take you through the entire process of going into business for yourself. They even cover the financing end of things.
I did ask Mark about obtaining government grants. Unfortunately, there are websites like this telling you that the Federal Government routinely gives out grants for small business owners. Mark stated that in 15 years of working with clients through the center, he has never seen such a thing. The Federal Government doesn’t just give out money to go start up a restaurant.
The Small Business Development Center also helps people with invention ideas. There are also a lot of companies that will claim to do this for a fee. The center does this for you for free. In addition, they will take an unbiased approach since they do not have any financial interest.
I would encourage you to go check out their website at http://www.ntsbdc.org/.
You can also listen to the entire Prudent Money Interview with Mark by clicking here.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Tuesday, March 11, 2008
The Other Side of the Story of Market Timing
Market timing is a misunderstood concept when it comes to investing. The mutual fund industry defines market timing as a process of attempting to perfectly time the tops of markets (before a market declines) and perfectly time the bottom of stock market declines (before the stock market goes up).
In other words, an investor is trying to sell at the perfect time and buy at the perfect time. The mutual fund industry doesn’t want you to time the market. Thus, they came up with a perfect example of why market timing is a disastrous strategy.
The basis of their argument is that if you try to time the market you might miss the best days of the month or year. If you miss those days when the market has big gains, then your overall investment return will really suffer. So they publish these studies.
Barron’s Magazine published an article that showed what an investor would have made if invested in the S&P 500 index from February 1966 through October 2001. During that 36-year period, an initial investment of $1,000 would be worth $11,710.
A study done by Birinyi Associates performed a complement study to the one in Barron’s. They stated that if an investor missed the five best days every calendar year, the $1,000 would have shrunk to $150.
That is pretty convincing. An average investor would look at that statistic and conclude that market timing is a horrible strategy. Why would you want to try and pick when to be in the stock market and when to be out of the stock market? If you just missed a few good days, you might miss the entire opportunity.
I ran my own study. I wanted to know what would happen if you missed the worst months to be in the stock market. So, I took a look at the S&P 500 between January 1950 and December 2007.
If you invested $1,000 January 1950, it would have grown to $613,013 by December 2007.
If you missed the 30 best months, that $1,000 would have turned into $35,404. If you would have just stayed invested and not tried market timing, your $1,000 would have turned into $613,013. Instead, you tried to market time and ended up with only $35,404.
What if you would have missed the 30 worst months between January 1950 and December 2007?
If you missed the 30 worst months, your $1,000 would have turned into $9,509,094.
Which do you think is more important? Being in there for the gains or protecting yourself in the bad markets?
This isn’t about market timing and trying to pick tops and bottoms of the market. This is about protecting your investments when stock market risk gets high. Remember you reduce risk as you reduce the amount of money invested in stocks.
When you experience excessive losses, it just takes so much time to gain back the loss.
Loss..........% Required to Break Even
-10%........ +11%
-20%........ +25%
-30%........ +43%
-40%........ +67%
-50%........ +100%
-60%........ +150%
-70%........ +233%
If you were to lose -40%, it would require a return of 67% just to get back to even again. It would take a long time to achieve that return. This is why risk matters and having a risk strategy is extremely important.
Now obviously neither you nor I are going to be able to look into the future and pick good and bad days in the market. This is just to illustrate the impact of loss on a portfolio. This is primarily directed towards investors who stay heavily invested in stocks. At some point you have to start taking profits and get your portfolio balanced and properly diversified. The problem is that most people are not properly diversified.
If you’re concerned about your investments, you can email me through AskBob.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
In other words, an investor is trying to sell at the perfect time and buy at the perfect time. The mutual fund industry doesn’t want you to time the market. Thus, they came up with a perfect example of why market timing is a disastrous strategy.
The basis of their argument is that if you try to time the market you might miss the best days of the month or year. If you miss those days when the market has big gains, then your overall investment return will really suffer. So they publish these studies.
Barron’s Magazine published an article that showed what an investor would have made if invested in the S&P 500 index from February 1966 through October 2001. During that 36-year period, an initial investment of $1,000 would be worth $11,710.
A study done by Birinyi Associates performed a complement study to the one in Barron’s. They stated that if an investor missed the five best days every calendar year, the $1,000 would have shrunk to $150.
That is pretty convincing. An average investor would look at that statistic and conclude that market timing is a horrible strategy. Why would you want to try and pick when to be in the stock market and when to be out of the stock market? If you just missed a few good days, you might miss the entire opportunity.
I ran my own study. I wanted to know what would happen if you missed the worst months to be in the stock market. So, I took a look at the S&P 500 between January 1950 and December 2007.
If you invested $1,000 January 1950, it would have grown to $613,013 by December 2007.
If you missed the 30 best months, that $1,000 would have turned into $35,404. If you would have just stayed invested and not tried market timing, your $1,000 would have turned into $613,013. Instead, you tried to market time and ended up with only $35,404.
What if you would have missed the 30 worst months between January 1950 and December 2007?
If you missed the 30 worst months, your $1,000 would have turned into $9,509,094.
Which do you think is more important? Being in there for the gains or protecting yourself in the bad markets?
This isn’t about market timing and trying to pick tops and bottoms of the market. This is about protecting your investments when stock market risk gets high. Remember you reduce risk as you reduce the amount of money invested in stocks.
When you experience excessive losses, it just takes so much time to gain back the loss.
Loss..........% Required to Break Even
-10%........ +11%
-20%........ +25%
-30%........ +43%
-40%........ +67%
-50%........ +100%
-60%........ +150%
-70%........ +233%
If you were to lose -40%, it would require a return of 67% just to get back to even again. It would take a long time to achieve that return. This is why risk matters and having a risk strategy is extremely important.
Now obviously neither you nor I are going to be able to look into the future and pick good and bad days in the market. This is just to illustrate the impact of loss on a portfolio. This is primarily directed towards investors who stay heavily invested in stocks. At some point you have to start taking profits and get your portfolio balanced and properly diversified. The problem is that most people are not properly diversified.
If you’re concerned about your investments, you can email me through AskBob.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Friday, March 07, 2008
Problems on Wall Street Are Mounting
Credit worries were upfront and center yesterday as stocks took foreclosure news very hard. Today’s problem is the loss of 63,000 jobs. This is what happens in bear markets and I firmly believe that we are in a bear market.
My greatest concern, which I have voiced for a long time now, is how the consumer is going to fare in this mortgage meltdown. The problems this time around go deeper than normal type recessions. In normal type recessions, consumer spending slows down to unemployment. In addition to unemployment problems this time around, we have huge consumer debt problems.
In previous programs, I have pointed out that I believe that we are in the early innings of this foreclosure problem and that maybe the roughest patch is still in front of us.
Yesterday the stock market was greeted with some very sobering news about what is happening to consumers and their mortgages. The Mortgage Bankers Association announced today that foreclosures hit a record high in the fourth quarter.
Now you have to love the chief spokespeople for these associations. Years ago the lead economist for the National Realtors Association was assuring consumers that there was no way we were in a real estate bubble. No one wants to admit that there might be some irresponsibility occurring within their industry.
Well the chief economist for the Mortgage Bankers Association says that these foreclosure problems aren’t a result of adjustable rate mortgages (read: not resulting from the irresponsible loans that the mortgage industry sold to consumers). It was a result of the poor credit condition of the borrower. Yeah right……
The reason people are going into foreclosure is primarily a direct result of these adjustable rate mortgages that should have never been written in the first place.
So, let me go through this with you. I want to keep this very simple. Adjustable rate mortgages (ARMs) are the source of the problem. These ARMs were originally written for the consumer as a low introductory interest rate and payment. At some time in the future, the interest rate and payment “reset.” The payment skyrockets and the consumer can no longer afford to make it, oftentimes resulting in foreclosures.
My concern is that we are now seeing the real damage from these foreclosure problems and we are potentially still in the early innings. The problem is the delayed effect. The original problems with these adjustable rate mortgages started in April of last year. We still have well over a trillion dollars of these adjustable rate mortgages ahead of us set to reset over the next two years. March is the largest month for resets with over 120 billion dollars.
This is why the risk level for this particular recession remains high.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Thursday, March 06, 2008
Credit Card Companies Changing Due Dates – What You Need to Know
“A heads up if you haven't seen this yet. Our VISA card moved our bill due date up by a day per month over the last 5 months. It looks like an attempt to make us late. We had to call and get it set back to where it belongs. I think listeners will need to constantly check that. Bet we aren't the only ones that had it happen. They told us something like it "increases our buying power" - an outright lie in my book.” – Prudent Money Listener
Another almost identical situation occurred with a national retailer and the due date on a deferred payment plan. Retailers have been offering all types of no deferred interest payment plans. They set you up to make a minimum payment each month. If you pay off the card during the interest deferment period, then you don’t owe the accumulated interest.
Well, this one retailer changed the due date from the original agreed upon date. In this particular case, the consumer had a 2 year deferral charge. This consumer took the total cost of the item and made the appropriate payment each month so that the total amount due would be paid before the deferral period ends. This past month which was the 16th month of the 24 month deferral period, a bill was received showing all of that deferred interest due. Somehow, the deferral period magically changed from 24 months to 16 months.
The consumer went to the retailer and disputed it. The retailer said it would investigate it and that corporate had to approve having the deferral period extended giving the consumer the ability to pay off the balance without the deferred interest.
So why would the retailer do such a thing when it is the consumer’s word against theirs? The manager replied, “It would be considered store error and that they typically correct it.” That consumer incidentally was my wife. It left me wondering….are they changing those deferral periods hoping that the customer will just pay the money?
Ironically, my wife almost had the whole thing paid off. Her balance was $200 after the payment. However, when the interest was added back, the balance turned into over $500. All I know is that they were real quick to take my word and get the problem resolved.
Due dates – you really have to be careful with your due dates on any type of loan and or credit card. I am convinced that credit card companies count on consumers having problems with due dates. They make billions of dollars on penalties as well as from charging high penalty rates.
So here are a few tips – First, always check the due date each month when you get the bill and make note of it. Send the check to the company at least 10 to 15 days prior to the due date. Most importantly, follow up a day before and make sure that the bill was actually paid. Automatic bill pay from your bank account to the company is the best way to go.
If possible, pay the bill the day you receive it. You can’t go wrong with that system.
If you buy an item on an interest deferred program, have documentation of the deferral date and put it in a file. Watch your statements closely and make sure that due date is not changing.
The credit industry is not looking out for you nor does the phrase “how can I provide you with excellent satisfaction today” mean they are going to take care of you. If you are late, you will pay.
One of the keys to avoiding problems with your finances is staying very organized. If you do not have a system set up, take care of it today.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Another almost identical situation occurred with a national retailer and the due date on a deferred payment plan. Retailers have been offering all types of no deferred interest payment plans. They set you up to make a minimum payment each month. If you pay off the card during the interest deferment period, then you don’t owe the accumulated interest.
Well, this one retailer changed the due date from the original agreed upon date. In this particular case, the consumer had a 2 year deferral charge. This consumer took the total cost of the item and made the appropriate payment each month so that the total amount due would be paid before the deferral period ends. This past month which was the 16th month of the 24 month deferral period, a bill was received showing all of that deferred interest due. Somehow, the deferral period magically changed from 24 months to 16 months.
The consumer went to the retailer and disputed it. The retailer said it would investigate it and that corporate had to approve having the deferral period extended giving the consumer the ability to pay off the balance without the deferred interest.
So why would the retailer do such a thing when it is the consumer’s word against theirs? The manager replied, “It would be considered store error and that they typically correct it.” That consumer incidentally was my wife. It left me wondering….are they changing those deferral periods hoping that the customer will just pay the money?
Ironically, my wife almost had the whole thing paid off. Her balance was $200 after the payment. However, when the interest was added back, the balance turned into over $500. All I know is that they were real quick to take my word and get the problem resolved.
Due dates – you really have to be careful with your due dates on any type of loan and or credit card. I am convinced that credit card companies count on consumers having problems with due dates. They make billions of dollars on penalties as well as from charging high penalty rates.
So here are a few tips – First, always check the due date each month when you get the bill and make note of it. Send the check to the company at least 10 to 15 days prior to the due date. Most importantly, follow up a day before and make sure that the bill was actually paid. Automatic bill pay from your bank account to the company is the best way to go.
If possible, pay the bill the day you receive it. You can’t go wrong with that system.
If you buy an item on an interest deferred program, have documentation of the deferral date and put it in a file. Watch your statements closely and make sure that due date is not changing.
The credit industry is not looking out for you nor does the phrase “how can I provide you with excellent satisfaction today” mean they are going to take care of you. If you are late, you will pay.
One of the keys to avoiding problems with your finances is staying very organized. If you do not have a system set up, take care of it today.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Wednesday, March 05, 2008
What You Need to Know About Credit Inquiries and Renting a Car
Credit scores are extremely important in our society. A good credit score saves you money in the long-run. One of the items that can lower the credit score is an inquiry. Of course, this occurs when a creditor or employer runs a credit check.
There are two types of credit inquiries. There is the soft inquiry. This occurs when you check your own credit file and score. Soft inquiries do not affect your credit score. There are no deductions for points.
What about a hard inquiry? When a company runs a credit check, points will be deducted from the credit score. The amount really depends on how many inquiries have been made and in what time-frame. For instance, consumers can run many inquiries within a 14-day time period and it only counts as 1 inquiry. The credit reporting agencies understand that a person might need to shop rates when buying a house or car. So, the credit reporting agencies allow for that over that 14 day period.
Who can arbitrarily check your credit scores and for what reason? Well the law reads that a company or individual must have a permissible purpose. They have to have a valid business reason for checking your scores. Unfortunately, if you don’t agree with a credit check and want to dispute it to have it removed, the credit reporting agencies typically side with the creditor. Most inquiries have legitimate permissible purposes when it comes to checking credit.
Only in cases of fraud could you have it removed.
Some examples of permissible purpose would be:
- To obtain credit
- Employment purposes – must have consumer permission
- To assess credit risk by a creditor
- Underwriting of insurance
- In connection with a business transaction
- Eligibility for a state license
Here is one that you probably would never think of. If you are renting an automobile with a debit card, the rental car company most often will check your credit to make sure that you are not a credit risk. With a credit card, they know that their risk is covered if you damage the car or keep it an extra day. With a debit card, there is a risk that they will not get their money.
This offers them a way to collect. So, if renting a car, always use a credit card. If you are going to use a debit card, present a credit card in order to prevent them from checking your credit report.
Tuesday, March 04, 2008
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.
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.
Friday, February 29, 2008
Boy, I Feel Much Better – Bernanke and Bush Agree – No Recession
Politics are funny. Candidates running for President are telling you how everything is a train wreck and how they will fix it. President Bush and Fed Chairmen Ben Bernanke will tell you that everything is fine.
Yesterday, President Bush and Ben Bernanke, in separate speeches, acknowledged (the obvious - that we are in an economic slowdown. However, they both assured the country that we are not heading into a recession. Of course, this is the same set of politicians that was assuring the country that this real estate bust would not be a problem.
You are never going to hear a politician acknowledge something until it is obvious. Until the economic growth numbers come out negative, it will be the same old political spin. Does anyone actually think that we are going to avoid a recession?
Let’s look at the reality of things:
Personal income for most consumers is not increasing and has not increased in a long time
Corporations are hesitant to invest money to expand because of the uncertainty
Investors are hesitant to invest money because of the uncertainty
Consumer spending is vanishing
There is no solution to the foreclosure crisis in America
Oh year….. $ 100 plus oil
Yep, things look good to me.
I really hope that our next President handles things more effectively and realistically. It is the policies of this Administration that has landed this country in the mess that we are currently facing. It is the same Administration that continues to tell the American people “all is well.” Unfortunately, the reality of the pain that is being felt by consumers is telling another story.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Yesterday, President Bush and Ben Bernanke, in separate speeches, acknowledged (the obvious - that we are in an economic slowdown. However, they both assured the country that we are not heading into a recession. Of course, this is the same set of politicians that was assuring the country that this real estate bust would not be a problem.
You are never going to hear a politician acknowledge something until it is obvious. Until the economic growth numbers come out negative, it will be the same old political spin. Does anyone actually think that we are going to avoid a recession?
Let’s look at the reality of things:
Personal income for most consumers is not increasing and has not increased in a long time
Corporations are hesitant to invest money to expand because of the uncertainty
Investors are hesitant to invest money because of the uncertainty
Consumer spending is vanishing
There is no solution to the foreclosure crisis in America
Oh year….. $ 100 plus oil
Yep, things look good to me.
I really hope that our next President handles things more effectively and realistically. It is the policies of this Administration that has landed this country in the mess that we are currently facing. It is the same Administration that continues to tell the American people “all is well.” Unfortunately, the reality of the pain that is being felt by consumers is telling another story.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Thursday, February 28, 2008
Prudent Investing is a Combination of Growing AND Protecting Investments
If you listen to the financial services industry, there is only one way to invest. The only strategy that the financial advisor community has focuses on is growing investment accounts. It is a performance-based system for investing.
The problem is that there is very little emphasis placed on protecting investments when the markets go through rough times. What happens when if a bear market comes along? The advisor community doesn’t have a strategy for that type of environment. Thus, they remind you that you are a long-term investor and to just “ride it out.”
This strategy is dangerous for one reason. You make money in the bull markets and you give most of that money back during the bear markets. That is the danger of the one strategy investment process.
The focus is always on the good years. It is all about performance. Now the financial services industry bases the notion of performance on an illusion. If you were to look over the last 79 years, the stock market (represented by the Dow Jones) gained money 66% of the time and only lost money 44% of the time. Therefore, the conclusion is that the emphasis should be on the positive good growth years because there were as much 1/3rd more good years. Why care about the loss years since there are more growth years?
Well there in lies the illusion. The stock market might have lost only 44% of the time. However, the negative years had much more of a negative effect on investment values than the benefit gained from the positive years. The reality is that there is major importance to be placed on protecting your investments from the bad investment years.
Think about these percentages for a moment:
If you lose: % required to break even
-10% +11%
-20% +25%
-30% +43%
-40% +67%
-50% +100%
-60% +150%
-70% +233%
You could easily lose 50% of your money in a bear market over a short time period. Unfortunately, it would take an investment return of 100% just to break even. It would take a long time to recover.
Take for instance the greatest stock market crash of all time. The 1929 stock market crash created an 88% loss in just a mere 3 years. It took 3 years to wipe out 8 years of investment gain. Then it took another 22 years just to get back to even again.
This is why it is important to have a strategy to protect against loss. Negative years in the stock market can be much more devastating then the benefit from the good years.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
The problem is that there is very little emphasis placed on protecting investments when the markets go through rough times. What happens when if a bear market comes along? The advisor community doesn’t have a strategy for that type of environment. Thus, they remind you that you are a long-term investor and to just “ride it out.”
This strategy is dangerous for one reason. You make money in the bull markets and you give most of that money back during the bear markets. That is the danger of the one strategy investment process.
The focus is always on the good years. It is all about performance. Now the financial services industry bases the notion of performance on an illusion. If you were to look over the last 79 years, the stock market (represented by the Dow Jones) gained money 66% of the time and only lost money 44% of the time. Therefore, the conclusion is that the emphasis should be on the positive good growth years because there were as much 1/3rd more good years. Why care about the loss years since there are more growth years?
Well there in lies the illusion. The stock market might have lost only 44% of the time. However, the negative years had much more of a negative effect on investment values than the benefit gained from the positive years. The reality is that there is major importance to be placed on protecting your investments from the bad investment years.
Think about these percentages for a moment:
If you lose: % required to break even
-10% +11%
-20% +25%
-30% +43%
-40% +67%
-50% +100%
-60% +150%
-70% +233%
You could easily lose 50% of your money in a bear market over a short time period. Unfortunately, it would take an investment return of 100% just to break even. It would take a long time to recover.
Take for instance the greatest stock market crash of all time. The 1929 stock market crash created an 88% loss in just a mere 3 years. It took 3 years to wipe out 8 years of investment gain. Then it took another 22 years just to get back to even again.
This is why it is important to have a strategy to protect against loss. Negative years in the stock market can be much more devastating then the benefit from the good years.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Wednesday, February 27, 2008
Are Your Investments Protected Against Risk?
One of the areas that I will be covering at my seminar is the concept of diversification. Diversification is your main tool to combat risk in your investment portfolio.
So what is diversification? It is the process of spreading your investment risk across all types of investments that historically don’t move in the same direction. The key is that the investments balance each other out. For instance, if stocks are going down, bonds are hopefully going up. Maybe you are using alternative investments or real estate investment trusts. It is all a balance.
Unfortunately, most investors confuse diversification with quantity. The thought is that they are covered for risk as long as they have their money spread out over many different investments.
I was meeting with an individual and he made the comment that his 401(k) plan was well diversified. He showed me his portfolio. His money was spread out over nine different mutual funds. The problem is that his money is 100% invested in stock. The probabilities are high that in the event of a market downturn, all nine of those mutual funds will move in the same direction. That is absolutely no diversification at all.
If you are going to use a buy and hold approach with your investments, then you will need to use a strategy that I call extreme diversification. This would require you to spread out money over all many different types of investments so to balance out risk.
Another way to diversify your money is simply looking at it from the standpoint of how much you have invested in stocks, bonds, and money markets or fixed type of investments. The percentages that you use will greatly impact the amount of risk that you are taking.
For more information about the seminar go to this link – there is very limited seating left.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
So what is diversification? It is the process of spreading your investment risk across all types of investments that historically don’t move in the same direction. The key is that the investments balance each other out. For instance, if stocks are going down, bonds are hopefully going up. Maybe you are using alternative investments or real estate investment trusts. It is all a balance.
Unfortunately, most investors confuse diversification with quantity. The thought is that they are covered for risk as long as they have their money spread out over many different investments.
I was meeting with an individual and he made the comment that his 401(k) plan was well diversified. He showed me his portfolio. His money was spread out over nine different mutual funds. The problem is that his money is 100% invested in stock. The probabilities are high that in the event of a market downturn, all nine of those mutual funds will move in the same direction. That is absolutely no diversification at all.
If you are going to use a buy and hold approach with your investments, then you will need to use a strategy that I call extreme diversification. This would require you to spread out money over all many different types of investments so to balance out risk.
Another way to diversify your money is simply looking at it from the standpoint of how much you have invested in stocks, bonds, and money markets or fixed type of investments. The percentages that you use will greatly impact the amount of risk that you are taking.
For more information about the seminar go to this link – there is very limited seating left.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Tuesday, February 26, 2008
Is Alan Greenspan Responsible for the Real Estate Problems?
Yesterday I had the opportunity to interview Bill Fleckenstein on his book Greenspan’s Bubbles – The Age of Ignorance at the Federal Reserve Board. Throughout the book, Bill goes through the almost arrogant attitude of Alan Greenspan and how he thought that he could control everything through the Federal Reserve Board and the manipulation of interest rates.
In the book, Bill writes about some of the financial catastrophes that Alan Greenspan had a part in which include:
The Stock Market Crash of 1987
The Savings and Loan Crisis
Y2K
The Tech Bubble
The Housing Crisis and Credit Crunch
The book is a disturbing account on how things really work at the Federal Reserve Board and how out of touch they are with reality.
At one point during the real estate boom, Alan Greenspan actually encouraged the use of adjustable rate mortgages as a way to finance real estate. Now adjustable rate mortgages are the problem today and I would suggest that they are the main reason so many people are losing their homes.
The irresponsibility of that ringing endorsement of adjustable rate mortgages by Alan Greenspan came at a time when interest rates were at historic lows. Translated, they had no place to go but up. That would make an adjustable rate mortgage a horrible mortgage for new home or a refinance.
I asked Bill (who has closely followed Greenspan’s career), “What was Greenspan thinking when he endorsed the use of adjustable rate mortgages?” It was real silent on the other end of the phone line. I could just picture Bill shaking his head and then saying, “Who knows?”
Unfortunately, Ben Bernanke is equally as overconfident that the Federal Reserve Board can just fix things. I think that in time we are going to discover that the Federal Reserve Board has very limited power over this current credit crunch.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
In the book, Bill writes about some of the financial catastrophes that Alan Greenspan had a part in which include:
The Stock Market Crash of 1987
The Savings and Loan Crisis
Y2K
The Tech Bubble
The Housing Crisis and Credit Crunch
The book is a disturbing account on how things really work at the Federal Reserve Board and how out of touch they are with reality.
At one point during the real estate boom, Alan Greenspan actually encouraged the use of adjustable rate mortgages as a way to finance real estate. Now adjustable rate mortgages are the problem today and I would suggest that they are the main reason so many people are losing their homes.
The irresponsibility of that ringing endorsement of adjustable rate mortgages by Alan Greenspan came at a time when interest rates were at historic lows. Translated, they had no place to go but up. That would make an adjustable rate mortgage a horrible mortgage for new home or a refinance.
I asked Bill (who has closely followed Greenspan’s career), “What was Greenspan thinking when he endorsed the use of adjustable rate mortgages?” It was real silent on the other end of the phone line. I could just picture Bill shaking his head and then saying, “Who knows?”
Unfortunately, Ben Bernanke is equally as overconfident that the Federal Reserve Board can just fix things. I think that in time we are going to discover that the Federal Reserve Board has very limited power over this current credit crunch.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Monday, February 25, 2008
New Credit Card Legislation in Congress – Political Sound Bites or Actual Laws?
I am seeing a trend in Washington. It seems that Washington is falling into this habit of introducing real strong legislation aimed at helping consumers against credit card companies as well as programs to help people who are facing foreclosure. They are announced with big fanfare. Then, as if nothing were ever announced, you hear nothing about them again.
There was a strong piece of legislation aimed credit card company reform that was being discussed on Capital Hill last year. I made the statement then that it would be a miracle if it ever became law because it was a good piece of legislation that would regulate the unethical practices of credit card companies and help the debt strapped consumer.
Either politicians have good intentions and actually think that they can get good consumer legislation passed or our politicians are just going through the motions in order to look like they are actually representing the people of their district. Realistically, it is a little bit of both.
Politicians, regardless of their intentions, will come up with pretty common sense solutions that really would help consumers. The problem is that good solutions for the American voter and consumer don’t make good political solutions. After all, it is big business that lines the coffers of politicians. Thus, these pieces of legislation fall by the wayside.
The latest is a bill of rights for credit cardholders designed to level the playing field between credit card companies and consumers. The bill is aimed at preventing major credit industry abuses while fostering fair competition between card issuers.
Most of the bill is fluff. They want to force credit card companies to be clearer about the terms and conditions. Of course, that is really not going to solve anything. The right credit card legislation has two important details.
First, it would not allow credit card companies to arbitrarily raise interest rates. This is referred to as the universal default clause where you sign on the dotted line, giving the credit card companies the right to raise rates for any reason.
Second, it would forbid excessive fees charged by credit card companies.
Those are the two fixes that are needed in the credit card industry. If those two simple laws went into effect, we would have made some real good progress.
To take it a step further, Congress should limit how high credit card companies can raise your credit card rates. Currently, they shift that burden to state government. This is a real serious issue for consumers. I wish someone in Congress could tell me why 30% plus interest rates are fair to the consumer?
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Friday, February 22, 2008
Watch out for the Salesperson who Guarantees a Return
When the stock market is losing money, companies come out of the woodwork promoting investment products that guarantee returns. People are much more susceptible to “guaranteed” investment products when the market is an emotional roller coaster.
I had a client email me today asking about an outrageous claim that one radio host was making this afternoon as she was guaranteeing an 18% return in a year in her investment program.
Legitimate investment strategies are highly regulated by both the Securities Exchange Commission and the National Association of Securities Dealers. There are very strict laws the prohibit anyone licensed to represent securities to make implications or outright guarantees of investment returns.
If that is the case, then how do these programs broadcast on the radio and make outrageous claims? Well most of the time, they are not true investment products but actually insurance products that look like investment products.
So, if you are approached by the next great guaranteed investment, ask the following questions:
- If the return is guaranteed over a period of one year, ask if you will receive your original investment at the end of the period plus the guaranteed return with no strings attached. So, for the lady claiming the 18% guaranteed one year return, I would want to know that I could get back my original investment plus that 18% in a check with no strings attached.
- If the return is tied to one of those equity indexed annuity products where they promise you will never lose money and you will also make money when the stock market goes up, ask them if you are guaranteed to get the investment balance that you see each year on your statements with no strings attached.
- If you get the answer of yes to any of these questions, then ask to get it in writing with a written explanation of the guarantee.
The reality of the situation is simple. The only guarantee that can be made when it comes to investing are risk-free investments such as a CD. If you are attempting to make a return greater than what you can make above and beyond a risk-free investment, then you are taking risk of some type. There is no free lunch. However, there are promises and guarantees with many strings attached.
By the way, if anyone can provide an investment with a huge return and guarantee, please let me know. I would stop taking risk and trying to manage money and just sit back and reap the rewards of a nice fat guarantee. Of course, so would everyone else in the investment business and no one would take risk.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Thursday, February 21, 2008
Is Long-Term Care Insurance Worth It?
Let’s face it, you can insure just about anything these days. There is insurance for just about everything. You could even find yourself in a situation where you had so much insurance coverage that you are barely able to make the premium payments.
The best case scenario is to have insurance and never need it. However, when tragedy does strike, you are thankful for every premium payment that was made. I had a first-hand experience with long-term care coverage for my mom. My mom, who has Alzheimer’s, spent about a year and a half in a nursing home prior to her death. Fortunately, the long-term care insurance paid for everything.
With or without my personal experience, I have always though that long-term care insurance should be a part of a person’s retirement plan.
You have to address the question – How will you pay for a long-term illness that requires a nursing home stay? Do you have enough money in investments or in monthly pension benefits to cover $ 4,500 to $ 5,000 a month in nursing home expenses? Do you really want to push that burden on your family? These are some tough and important questions.
So, here are some things to consider when evaluating long-term care insurance:
Can you self-insure? I have some clients who have plenty of income each month from social security and pension plans, so that if a long-term care expense were to occur, they could pay for it. Of course, they can easily pay for the long-term care insurance as well. It might be that you figure you could self-insure part of the cost. Thus, you take out a smaller insurance policy to take care of the gap between the cost and what you can pay.
What are your family members’ thoughts? It is important to consult with family members about long-term care. It is the family members that can end up suffering the most when these things are not taken care of ahead of time. It might be that a son and/or daughter might be willing to help pay for some of the long-term care just to make sure that everything is covered. This ends up becoming a family risk. Make sure everyone gets input.
What long-term care benefits are the most important to you? You can get a long-term care policy loaded with all of the bells and whistles. You also get a big fat premium payment. I think that the must-have benefit is the inflation rider. You definitely want the insurance to keep up with inflation. However, other parts of the policy are negotiable.
When applying for a policy, you get to choose the waiting period. This is simply the number of days that you wait prior to the coverage starting. If you think that you could afford 180 days without coverage, your premium could be much lower. Of course, the most expensive policy would provide coverage from Day 1.
The other benefit is length of coverage. The most expensive is coverage for a lifetime and then it goes down to coverage for just a year or two.
Make sure that you customize your policy to where it makes sense for your needs and your pocketbook.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Wednesday, February 20, 2008
The Government’s 30 Day Mortgage Bail-out Band-Aid
Treasury Secretary Hank Paulson announced yesterday that 6 of the major banks have come to an agreement to freeze the foreclosure process for 30 days. This is for borrowers who are more than 90 days late. The program is called Project Lifeline.
Now how is that for a plan of action? Are things that bad that the Government has to recommend halting the foreclosure process for a measly 30 days just to figure out what to do next? For most homeowners that are in trouble, an additional 30 days does nothing more than postpone the inevitable.
Well, the foreclosure problem is that bad and looks to get much worse. The Government has a real problem on their hands that could have been prevented if they would have done their job.
Let’s look at this for what it is at face value. We could face an alarming number of foreclosures in 2008 and 2009. Of the homeowners that are in trouble or will be in trouble, a percentage were victims of predatory lending. I would suggest that the vast majority understood they were taking out a loan based on a low payment and buying more home than they could afford.
The system is way too complicated for a government intervention and bail-out. The consequences would be enormous. Someone should tell the Democrats about the consequences. Senator Clinton, with all of her “I told you so”s, chimed in again today saying that she is the only one that has been warning about this and has been for a year. Of course, her solution is to freeze interest rates for years and save the day. Oh Hillary, if it were that easy. Incidentally, this has been a news story for well over a year now. Just like Al Gore didn’t invent the internet, she didn’t warn the world of the impending foreclosure problem.
Then there is my favorite. Now Senate Banking Committee Chairman Christopher Dodd is a real piece of work. He thinks that the Government should buy these loans and re-work them. Seems to me that if his committee was overseeing the banking industry effectively, these irresponsible loans and loose lending standards would have never happened. Just like every other good politician, his solution is to just let the government flip the bill for the problem.
How about pointing to the banking community who created this problem? How about forcing them to rewrite these loans at today’s rates on 30-year fixed notes, regardless of credit? If the homeowner cannot still afford the payment, then nature must take its course. Is Congress protecting the banks or doing its best to protect the consumer? It really is tough to tell.
A program should also be set up to help those who can prove that they were a victim of predatory lending. That group would include everyone who was allowed to buy a home without proof of income. That is a clear example of predatory lending. This problem and solution should be on the shoulders of the banking community.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Now how is that for a plan of action? Are things that bad that the Government has to recommend halting the foreclosure process for a measly 30 days just to figure out what to do next? For most homeowners that are in trouble, an additional 30 days does nothing more than postpone the inevitable.
Well, the foreclosure problem is that bad and looks to get much worse. The Government has a real problem on their hands that could have been prevented if they would have done their job.
Let’s look at this for what it is at face value. We could face an alarming number of foreclosures in 2008 and 2009. Of the homeowners that are in trouble or will be in trouble, a percentage were victims of predatory lending. I would suggest that the vast majority understood they were taking out a loan based on a low payment and buying more home than they could afford.
The system is way too complicated for a government intervention and bail-out. The consequences would be enormous. Someone should tell the Democrats about the consequences. Senator Clinton, with all of her “I told you so”s, chimed in again today saying that she is the only one that has been warning about this and has been for a year. Of course, her solution is to freeze interest rates for years and save the day. Oh Hillary, if it were that easy. Incidentally, this has been a news story for well over a year now. Just like Al Gore didn’t invent the internet, she didn’t warn the world of the impending foreclosure problem.
Then there is my favorite. Now Senate Banking Committee Chairman Christopher Dodd is a real piece of work. He thinks that the Government should buy these loans and re-work them. Seems to me that if his committee was overseeing the banking industry effectively, these irresponsible loans and loose lending standards would have never happened. Just like every other good politician, his solution is to just let the government flip the bill for the problem.
How about pointing to the banking community who created this problem? How about forcing them to rewrite these loans at today’s rates on 30-year fixed notes, regardless of credit? If the homeowner cannot still afford the payment, then nature must take its course. Is Congress protecting the banks or doing its best to protect the consumer? It really is tough to tell.
A program should also be set up to help those who can prove that they were a victim of predatory lending. That group would include everyone who was allowed to buy a home without proof of income. That is a clear example of predatory lending. This problem and solution should be on the shoulders of the banking community.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Tuesday, February 19, 2008
Successfully Disputing Information on your Credit Report
Making your credit score the best that it can be isn’t rocket science. Fortunately, you really don’t need to pay those services big dollars to do something that you can easily do yourself. However, you do need to know how to go about the process the right way.
Remember, that on your credit report (and you have 3 of them – TransUnion, Equifax, and Experian.), all items should be classified in one of three ways.
1) Correct
2) Inaccurate – information is correct; however parts of it need to be corrected
3) Mistaken – the information is not yours and needs to be removed
There really is nothing that you can do if it is correct. If you have a bankruptcy or a collection item on your credit report, then it stays until it serves its time. Each negative item has to stay on that credit report for 7 ½ years past the first missed payment.
The information is inaccurate (balance or date is incorrect, etc.) then it is important to dispute the information and request that it is corrected.
Mistaken information definitely needs to be disputed and requested to be removed on the basis of mistaken identity.
As you would guess, the three credit reporting agencies all have their own ways that they want you to go about the process.
TransUnion – They have three different ways to dispute. If you mail it in, they have a form that needs to be filled out. For complete information including forms and addresses, click here.
Equifax – They also have 3 different ways to dispute information. They are the easiest to deal with because they don’t require any additional forms. For complete information including forms and addresses, click here.
Experian –They have one way to dispute. In order to dispute an item, you must buy a credit report from them so that you have a credit report number. They are running a racket. Then you dispute everything online. What a rip-off!! For more information, grab your credit card and go here.
So, here are a couple of tips:
1) If it is a minor item, dispute online or over the phone. If it is a big item, always dispute through the mail using certified mail with a request to send you a receipt. This is the most effective way.
2) When disputing something, include as much evidence to support your claim as possible.
3) If you want to get around the Experian credit report fee, you can always dispute the same item with another credit reporting agency. Most of the time, an item will be reported on at least two of the three credit reporting agencies. If you dispute the item with one agency and they rule in your favor, they then communicate with the other agencies and have them correct or remove the information.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Monday, February 18, 2008
Don’t Confuse a Marketing Solicitation with an Actual Offer
The mortgage marketing machine is running in overdrive and aimed at getting your mortgage. For the most part, the teaser rates promising ridiculously low rates are gone. Mortgage companies now have moved on to other ways to get your business. Now the method of choice is the personalized offer.
Mortgage companies armed with information on your mortgage are sending out personalized offers to refinance your mortgage. The solicitation is designed to look like a done deal. It is an offer much better than the current mortgage. The marketing message leaves the impression that only a signature is required and the low rates are a given.
One listener wrote me about an opportunity to get her rate lowered from 9% to 5%. She was hopeful that this was a good deal for her.
Well, yes it is a good deal……if she qualifies. Yes, it is a good deal if she qualifies and the deal is not back-loaded with excessive penalties. If you are paying high interest rates on your mortgage and are facing the prospects of an adjustable rate mortgages, you still have to qualify for a new lower interest rate mortgage.
What if you don’t qualify? Could there still be an opportunity for a new mortgage? I am currently working on a story for the Under the Radar Newsletter that uncovers one bank’s offer to refinance a mortgage at a higher interest rate. Why would anyone be interested in a higher interest rate?
Well, this bank is doing it under the pretense of a debt consolidation/mortgage plan. Not only were they going to charge almost 1.5% more in interest on the total loan, they were also going to charge 4% in fees to close the note. What’s worse, this bank called the listener on his cell phone and pitched the deal.
His credit score is 596 (considered a poor credit score) and they want to offer this deal because he is a “preferred customer.” Be watching for that story in the Under the Radar. This is clearly predatory lending.
Rules of thumb:
- If you need to refinance, do so only if the overall interest costs are reduced.
- Those with a good credit score and substantial equity in their home have more options available to them.
Friday, February 15, 2008
Congress Doing Its Part To Make America Great
I don’t know about you but when I go to sleep at night I want to know that our Congress (who we pay with tax payer money) is working hard to do several things: Help protect America, the economy, the markets, and our rights.
So, it just gives me the greatest feeling in the world to know that Congress is taking the time to look into this whole Roger Clemons steroid scandal. This is a great use of tax payer money. They really need to get to the bottom of this situation and find out the truth. Who is telling the truth? Who is lying? This is hugely important in a time when we are at war, a time when our economy is sinking into a dark hole, and people by the thousands are losing their homes.
You solve that steroid problem, and then you have the answer to America’s housing situation. An added bonus to some of the members of Congress was a pre-hearing autograph session with Mr. Clemons (true story – he was signing autographs for random members of Congress).
Let me set the stage – You have all of these politicians sitting forum style facing a row of people set to grill their “guests” with questions. Next to each member of Congress was a name tag. What struck me as a little “elitist” was that you didn’t see the first and last name of the member. You just saw either “Mr.” or “Mrs.” and then their last name. It reminded me of fraternity pledgeship. “Always refer to me by my last name and never my first. Look me in the eye when spoken to. Never speak unless I acknowledge you.”
Is it the business of our Congress to stick their nose into everything that has nothing to do with their chief role in this country? To me, that is a complete waste of time and resources to figure out who is lying and who is not lying about steroid use. Besides being lightly entertaining on ESPN reruns, it has nothing to do with the important issues that we face as a country. Quite frankly, if polled, I would think that the greatest portion of America really cares less.
As I do more research on the activities of Congress, one question really continues to come up. What do they really do? For instance, most of the solutions recently proposed by Congress as an answer to America’s housing crisis have been just a little more than political sound bites and not real answers. They sound great. Beneath the surface, there really isn’t anything to them.
Credit laws are in place to protect the credit industry more than the consumer. They sat back and watched the mortgage problem boom as if there was no way there could be a problem. Surely those advertisements to buy a home for nothing down, 1.2% interest for the life of the home, and no closing cost loans were not a scam. How could any member of Congress truly concerned about the American people ignore what was blatantly obvious. The truth is there is no policing of the mortgage industry.
To the members of Congress – With all due respect, please spend your time revamping mortgage laws in order to protect the citizens of this country. Please restructure all of the credit laws so that they are fair and balanced. Get some real solutions together to help the homeowners who your system failed. This is not a bail-out plan that we need. We need a plan to help those who have faced or are facing foreclosure to get back on their feet.
Finally, create laws as if you couldn’t get elected again because of a term limit.
The biggest mistake that we ever made in this country was not limiting an individual’s ability to retain power. Career politicians are the problem. If we thought it was a good idea to limit the number of times a President could get re-elected, why wouldn’t it be a good idea for the Congress?
So, it just gives me the greatest feeling in the world to know that Congress is taking the time to look into this whole Roger Clemons steroid scandal. This is a great use of tax payer money. They really need to get to the bottom of this situation and find out the truth. Who is telling the truth? Who is lying? This is hugely important in a time when we are at war, a time when our economy is sinking into a dark hole, and people by the thousands are losing their homes.
You solve that steroid problem, and then you have the answer to America’s housing situation. An added bonus to some of the members of Congress was a pre-hearing autograph session with Mr. Clemons (true story – he was signing autographs for random members of Congress).
Let me set the stage – You have all of these politicians sitting forum style facing a row of people set to grill their “guests” with questions. Next to each member of Congress was a name tag. What struck me as a little “elitist” was that you didn’t see the first and last name of the member. You just saw either “Mr.” or “Mrs.” and then their last name. It reminded me of fraternity pledgeship. “Always refer to me by my last name and never my first. Look me in the eye when spoken to. Never speak unless I acknowledge you.”
Is it the business of our Congress to stick their nose into everything that has nothing to do with their chief role in this country? To me, that is a complete waste of time and resources to figure out who is lying and who is not lying about steroid use. Besides being lightly entertaining on ESPN reruns, it has nothing to do with the important issues that we face as a country. Quite frankly, if polled, I would think that the greatest portion of America really cares less.
As I do more research on the activities of Congress, one question really continues to come up. What do they really do? For instance, most of the solutions recently proposed by Congress as an answer to America’s housing crisis have been just a little more than political sound bites and not real answers. They sound great. Beneath the surface, there really isn’t anything to them.
Credit laws are in place to protect the credit industry more than the consumer. They sat back and watched the mortgage problem boom as if there was no way there could be a problem. Surely those advertisements to buy a home for nothing down, 1.2% interest for the life of the home, and no closing cost loans were not a scam. How could any member of Congress truly concerned about the American people ignore what was blatantly obvious. The truth is there is no policing of the mortgage industry.
To the members of Congress – With all due respect, please spend your time revamping mortgage laws in order to protect the citizens of this country. Please restructure all of the credit laws so that they are fair and balanced. Get some real solutions together to help the homeowners who your system failed. This is not a bail-out plan that we need. We need a plan to help those who have faced or are facing foreclosure to get back on their feet.
Finally, create laws as if you couldn’t get elected again because of a term limit.
The biggest mistake that we ever made in this country was not limiting an individual’s ability to retain power. Career politicians are the problem. If we thought it was a good idea to limit the number of times a President could get re-elected, why wouldn’t it be a good idea for the Congress?
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Thursday, February 14, 2008
Is Debt A Sin?
Debt is a tough subject for most to discuss. I would suggest that it is the biggest financial challenge facing Americans today. So, where does the Bible stand on debt?
Since we talk a lot about debt here, I wanted to give you some Biblical views to consider today. We will talk about various ways to reduce the impact of debt or to negotiate debt that is in collections. We will often even discuss what happens if you walk away from debt. It is my role to answer your questions and give you the facts of the situation.
I have always felt that when people call in with these tough questions, they want straight facts and not an answer designed to make them feel guilty for their situation. If you are like me, it is easy to feel guilty without the help of someone else. I also don’t always give unsolicited opinions on their situation. It is not my role to pass judgment. Prudent Money should be a safe place for you to come and get information.
Having said all of that, I do want to take the time to share with you my views on debt from a spiritual perspective. In taking about twelve key Scriptural references in the Bible, these are my conclusions. It comes down to moral obligation, dependence, and freedom.
1) I believe that you should always pay back what you owe. Debt is a contractual and moral obligation that we make with someone. Whether or not we like the terms and conditions, at some point we did agree to them.
2) Paying back your debt takes your relationship with Christ to whole different level. Paying back debt brings us back to a level of dependence of Christ. It is the strength of that level of dependence that forms the foundation for a strong relationship. I have often said that it is debt that brings Christians to their knees and back to God.
3) If we are in debt, we are not free as we can be to serve. We want to be 100% free to serve in our relationship with Christ. If we are not in a place to where we can commit 100% of our time and attention to Christ, then we are a slave to man as it says in 1 Corinthians 7:23. We also want to be free to serve others as well.
4) Christ doesn’t want obligations above the relationship with Him. If you are in debt, you are completely obligated. Until you get out of debt, it is hard to be in a place where you can give 100% of yourself. Debt can become something that develops a life of its own.
5) Most debt problems are created due to not living a Matthew 6:24 life. There comes a time when we have allowed money to be a god. It is so easy to enjoy all of the immediate short-term gratification that debt can give. It can be powerful feeling from a powerful stimulant. The key is getting back into God’s financial will for your life. It is only there that you can start your road back to freedom.
So is debt a sin?
Money was written about more than anything else in the Bible. God knew that we needed instruction on dealing with money. He knew that it would get in the way. Debt is a powerful tool of commerce. If used correctly, it can be a good prudent strategy in how we handle His money.
The key is using debt the right way. If you are going to borrow money, know how you are going to pay it back. Know without a doubt you are not making a commitment that will not in any way get in the way of your relationship with Christ. If you have debt, commit to a game plan to where you can get out of it. Make the two objectives freedom from everything and dependence on Him.
The Bible does not specifically say that debt is a sin. There are many things in the bible that are not specifically mentioned as a sin. It is letting those things get out of control and get in the way of your relationship with Christ that becomes the problem.
That is the problem with debt. It can happen in an instant if we are not guarding our wallets and our hearts.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Since we talk a lot about debt here, I wanted to give you some Biblical views to consider today. We will talk about various ways to reduce the impact of debt or to negotiate debt that is in collections. We will often even discuss what happens if you walk away from debt. It is my role to answer your questions and give you the facts of the situation.
I have always felt that when people call in with these tough questions, they want straight facts and not an answer designed to make them feel guilty for their situation. If you are like me, it is easy to feel guilty without the help of someone else. I also don’t always give unsolicited opinions on their situation. It is not my role to pass judgment. Prudent Money should be a safe place for you to come and get information.
Having said all of that, I do want to take the time to share with you my views on debt from a spiritual perspective. In taking about twelve key Scriptural references in the Bible, these are my conclusions. It comes down to moral obligation, dependence, and freedom.
1) I believe that you should always pay back what you owe. Debt is a contractual and moral obligation that we make with someone. Whether or not we like the terms and conditions, at some point we did agree to them.
2) Paying back your debt takes your relationship with Christ to whole different level. Paying back debt brings us back to a level of dependence of Christ. It is the strength of that level of dependence that forms the foundation for a strong relationship. I have often said that it is debt that brings Christians to their knees and back to God.
3) If we are in debt, we are not free as we can be to serve. We want to be 100% free to serve in our relationship with Christ. If we are not in a place to where we can commit 100% of our time and attention to Christ, then we are a slave to man as it says in 1 Corinthians 7:23. We also want to be free to serve others as well.
4) Christ doesn’t want obligations above the relationship with Him. If you are in debt, you are completely obligated. Until you get out of debt, it is hard to be in a place where you can give 100% of yourself. Debt can become something that develops a life of its own.
5) Most debt problems are created due to not living a Matthew 6:24 life. There comes a time when we have allowed money to be a god. It is so easy to enjoy all of the immediate short-term gratification that debt can give. It can be powerful feeling from a powerful stimulant. The key is getting back into God’s financial will for your life. It is only there that you can start your road back to freedom.
So is debt a sin?
Money was written about more than anything else in the Bible. God knew that we needed instruction on dealing with money. He knew that it would get in the way. Debt is a powerful tool of commerce. If used correctly, it can be a good prudent strategy in how we handle His money.
The key is using debt the right way. If you are going to borrow money, know how you are going to pay it back. Know without a doubt you are not making a commitment that will not in any way get in the way of your relationship with Christ. If you have debt, commit to a game plan to where you can get out of it. Make the two objectives freedom from everything and dependence on Him.
The Bible does not specifically say that debt is a sin. There are many things in the bible that are not specifically mentioned as a sin. It is letting those things get out of control and get in the way of your relationship with Christ that becomes the problem.
That is the problem with debt. It can happen in an instant if we are not guarding our wallets and our hearts.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Wednesday, February 13, 2008
Uncertain Times is the Theme of 2008
You can go back and say that things in the stock markets are always uncertain. There are always the unexpected problems that appear that create the greatest risks. The stock market hates uncertainty. Unfortunately, we could be in a historic time of uncertainty that lasts a very long time.
I interviewed Mike Larson yesterday on my program. He is the Senior Real Estate Analyst on Money and Markets. For more information, his website is www.moneyandmarkets.com.
Many of the tougher questions about where the real estate and credit crisis leads were met with the response that it is so hard to tell because no one really knows the extent of the risk. Thus, we can paint all types of scenarios going forward. The bottom line is that debt is the problem and we are a country that is in trouble with debt. It has a reckoning day and doesn’t just go “poof” in the night.
I would encourage you to listen to the podcast interview with Mike. This really gives you an idea of what we are up against as a body of investors.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Tuesday, February 12, 2008
Another Week, Another Government Bail-Out Plan
It seems like very two weeks the Government is coming out with some type of bail-out plan for the American consumer. Last week, it was the stimulus plan announced by the Government. Weeks before, it was Project Hope. Today, it is Project Lifeline.
Here is what all of these plans have in common:
1) They are nothing more than sketchy announcements where the details are to be worked out into the future. Unfortunately, that never seems to happen.
2) They are never as advertised. For instance, the Government announced that they will make it easier for people with Jumbo Loans to get refinanced. Unfortunately, if you look at the fine print, very few will benefit.
3) They are nothing more than political sound bites. Hillary Clinton announced today that President Bush is finally doing what she said to do all along. With all due respect, Senator Clinton, I wouldn’t put my name behind the so-called solution that President Bush is suggesting.
4) They are all band-aid approaches that only time will fix. These plans just prolong the pain.
So what is the solution? I think that the Government needs to get out of the way and let this credit crunch fix itself. That could have some consequences. However, those consequences will not go away. We either face them today or face them tomorrow.
Congress needs to write strong mortgage rules and regulations that will prevent fraud from occurring again. Unfortunately, the way they would like to enforce the mortgage industry is a real soft approach. They need to get tough with that industry.
The train has left the station and the problems are very real. Unfortunately, all of the political sound bites in the world are not going to correct this problem (that the Government allowed to happen in the first place).
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Here is what all of these plans have in common:
1) They are nothing more than sketchy announcements where the details are to be worked out into the future. Unfortunately, that never seems to happen.
2) They are never as advertised. For instance, the Government announced that they will make it easier for people with Jumbo Loans to get refinanced. Unfortunately, if you look at the fine print, very few will benefit.
3) They are nothing more than political sound bites. Hillary Clinton announced today that President Bush is finally doing what she said to do all along. With all due respect, Senator Clinton, I wouldn’t put my name behind the so-called solution that President Bush is suggesting.
4) They are all band-aid approaches that only time will fix. These plans just prolong the pain.
So what is the solution? I think that the Government needs to get out of the way and let this credit crunch fix itself. That could have some consequences. However, those consequences will not go away. We either face them today or face them tomorrow.
Congress needs to write strong mortgage rules and regulations that will prevent fraud from occurring again. Unfortunately, the way they would like to enforce the mortgage industry is a real soft approach. They need to get tough with that industry.
The train has left the station and the problems are very real. Unfortunately, all of the political sound bites in the world are not going to correct this problem (that the Government allowed to happen in the first place).
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Friday, February 08, 2008
Marketing that is an Insult to your Intelligence
“This just in – The government has been saddled with 1000’s of foreclosed homes and they want to get rid of them. They do not want to be in the business of owning real estate. Now, in this special offer, you can get a list of the homes in your area. We will send you these special lists so that you can buy your home at an incredible value. Now listen to this special instruction. If your name starts with the letters A through N, please call today. If your name starts with the letters M through Z, do not call today. We will not take your call. You can call tomorrow.” – Advertisement heard on the radio
So, I called. Unfortunately, I was calling on the wrong day. I asked the lady why she was taking my information when I wasn’t suppose to be calling. She said that they just say that to control phone call activity. You have to be kidding me.
In the script that she read, she stated that this list contains homes that will be sold for less than $ 1,000. They will even pay your first month’s mortgage payment if you buy from their list. In addition, they will send you all of these special offers. Of course, there is a free trial offer.
If someone could buy a house for under $ 1,000, do you think that they would tell anyone their secret?
Why do I point out something as ridiculous as this marketing message?
I point it out because this company would not be marketing this scam if they weren’t making plenty money. People are falling for this marketing message.
Please don’t keep these businesses in business by falling for their scam. If it sounds too good to be true or even to the extent of being ridiculous, then it probably is too good to be true and it is very ridiculous.
Even if they had a legit service, would you want to do business with anyone who uses sleight of hand marketing?
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
So, I called. Unfortunately, I was calling on the wrong day. I asked the lady why she was taking my information when I wasn’t suppose to be calling. She said that they just say that to control phone call activity. You have to be kidding me.
In the script that she read, she stated that this list contains homes that will be sold for less than $ 1,000. They will even pay your first month’s mortgage payment if you buy from their list. In addition, they will send you all of these special offers. Of course, there is a free trial offer.
If someone could buy a house for under $ 1,000, do you think that they would tell anyone their secret?
Why do I point out something as ridiculous as this marketing message?
I point it out because this company would not be marketing this scam if they weren’t making plenty money. People are falling for this marketing message.
Please don’t keep these businesses in business by falling for their scam. If it sounds too good to be true or even to the extent of being ridiculous, then it probably is too good to be true and it is very ridiculous.
Even if they had a legit service, would you want to do business with anyone who uses sleight of hand marketing?
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Thursday, February 07, 2008
Getting out of High Interest Debt the Right Way
I received an email from a listener asking whether or not I thought that it was a good idea to seek consumer credit counseling and get all of this debt consolidated? As always, my typical answer is that it is not a good idea. Those services are usually not as advertised and can make a situation much worse.
I asked the listener to just send me a synopsis of his debt situation. After looking at it, going to one of these services would have been a tragic mistake for the following reasons. First, it was not an enormous amount of debt. Second, he was able to make the monthly payments. Third, his credit scores were such that he had other options. Finally, he could actually pay the debt off in a reasonable timeframe.
So if you are facing this situation, here are some questions that you need to ask.
Are you able to make the payments? The answer has to be yes. As long as everything is current, you do whatever you have to do to keep it that way. So figure out a way to stay in the good graces of the creditors.
Do you know how long it would take to get out of debt? This is crucial. Regardless of your interest rates, you need to know how long it would take, at your current pace, to get out of debt. Simply use a debt calculator and calculate how long it will take to pay that amount of money off. Then use the debt funneling method of getting out of debt.
Debt funneling is a process that can help you get out of debt faster. When you look at your debts, they come in all shapes and sizes. The smaller ones will pay off first. Once you pay off a debt, you take that monthly premium payment and then apply it to the highest interest rate card. You keep repeating that process until the majority of the money is going to the highest interest rate card until everything is paid off.
Do you know your credit scores? Many times, a person’s credit score is good enough to transfer and combine all of that debt into a low interest rate card. Without knowing your credit score, it is impossible to know if that is an option.
The ideal credit score is above 700. Between 650 and 700, you still have options. However, they start factoring many more things into the equation. If you can get that low interest rate card, then you really have gone a long way to solve your problem.
What if your credit scores aren’t any good? Then you start the process of rebuilding your credit scores. You pay everything on time and talk to your card companies about what it will take to get those interest rates lowered. Some credit card companies have programs for this type of thing.
The keys to getting out of high interest rate debt are:
1) Stay current with your payments – at all costs
2) Work on your credit scores so that you can decrease your interest rates
3) Determine what options are available to you to lower interest rates
4) Commit to the process and accept the fact that it will take a period of years to complete
5) Understand that debt consolidation is a convenience and not a prudent strategy unless your overall interest rate is lowered
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
I asked the listener to just send me a synopsis of his debt situation. After looking at it, going to one of these services would have been a tragic mistake for the following reasons. First, it was not an enormous amount of debt. Second, he was able to make the monthly payments. Third, his credit scores were such that he had other options. Finally, he could actually pay the debt off in a reasonable timeframe.
So if you are facing this situation, here are some questions that you need to ask.
Are you able to make the payments? The answer has to be yes. As long as everything is current, you do whatever you have to do to keep it that way. So figure out a way to stay in the good graces of the creditors.
Do you know how long it would take to get out of debt? This is crucial. Regardless of your interest rates, you need to know how long it would take, at your current pace, to get out of debt. Simply use a debt calculator and calculate how long it will take to pay that amount of money off. Then use the debt funneling method of getting out of debt.
Debt funneling is a process that can help you get out of debt faster. When you look at your debts, they come in all shapes and sizes. The smaller ones will pay off first. Once you pay off a debt, you take that monthly premium payment and then apply it to the highest interest rate card. You keep repeating that process until the majority of the money is going to the highest interest rate card until everything is paid off.
Do you know your credit scores? Many times, a person’s credit score is good enough to transfer and combine all of that debt into a low interest rate card. Without knowing your credit score, it is impossible to know if that is an option.
The ideal credit score is above 700. Between 650 and 700, you still have options. However, they start factoring many more things into the equation. If you can get that low interest rate card, then you really have gone a long way to solve your problem.
What if your credit scores aren’t any good? Then you start the process of rebuilding your credit scores. You pay everything on time and talk to your card companies about what it will take to get those interest rates lowered. Some credit card companies have programs for this type of thing.
The keys to getting out of high interest rate debt are:
1) Stay current with your payments – at all costs
2) Work on your credit scores so that you can decrease your interest rates
3) Determine what options are available to you to lower interest rates
4) Commit to the process and accept the fact that it will take a period of years to complete
5) Understand that debt consolidation is a convenience and not a prudent strategy unless your overall interest rate is lowered
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Wednesday, February 06, 2008
What Wall Street Doesn’t Want You To Know About Market Timing
We have been talking about whether or not it is a good idea for you to move a portion or all of your money to a safe place because of what is happening in the stock market. Basically, that is referred to as market timing. You are attempting to pick the best time to take your money out and then the best time to put it back in.
Wall Street says it is a horrible strategy and one at which investors never can succeed.
A Barron’s article in the fall of 2001 published an article that showed what an investor would have made if invested in the S&P 500 index from February 1966 through October 2001. During that 36-year period, an initial investment of $1,000 would be worth
$11,710.
A study done by Birinyi Associates performed a compliment study to the one in Barron’s. They stated that if an investor missed the five best days every calendar year, that the
$1,000 would have shrunk to $150.
Now, the second part of their research went the opposite way. What if the investor had been invested in all but the very worst days in those years? The $1,000 would have grown to $987,120.
Merriman Capital Management cites another research study. “If you invested $100 in the stock market in 1926 and simply kept your money there through 1993, your investment would be worth $80,000. If you tried to time the market and “missed” the 30 best months, your $100 would have grown to only about $1,200.”
In the same study, they ran a study where you were invested in the same time period and missed the 30 worst months. That initial $100 would have grown to $8.6 million.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Wall Street says it is a horrible strategy and one at which investors never can succeed.
A Barron’s article in the fall of 2001 published an article that showed what an investor would have made if invested in the S&P 500 index from February 1966 through October 2001. During that 36-year period, an initial investment of $1,000 would be worth
$11,710.
A study done by Birinyi Associates performed a compliment study to the one in Barron’s. They stated that if an investor missed the five best days every calendar year, that the
$1,000 would have shrunk to $150.
Now, the second part of their research went the opposite way. What if the investor had been invested in all but the very worst days in those years? The $1,000 would have grown to $987,120.
Merriman Capital Management cites another research study. “If you invested $100 in the stock market in 1926 and simply kept your money there through 1993, your investment would be worth $80,000. If you tried to time the market and “missed” the 30 best months, your $100 would have grown to only about $1,200.”
In the same study, they ran a study where you were invested in the same time period and missed the 30 worst months. That initial $100 would have grown to $8.6 million.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Tuesday, February 05, 2008
Should I Stay or Should I Go?
With January investment statements coming out this week, most investors will face the reality of pretty steep investment loss. January’s returns, combined with the preceding two months, have been tough on investment accounts.
This is going to lead many of you to consider pulling out of the market. Should you stay invested or should you preserve capital?
Since no one has a crystal ball, it is impossible to determine what makes the most sense. So for most people, trying to figure out the direction of the stock market is going to be tough at best. Thus that might not be the best strategy unless you are willing to get an education in technical analysis of the stock market.
So the question is not about the direction of the market. The real question is what is most important to you? How much of your investments are you willing to risk in the stock market? You also have to consider your time horizon. How long will it be before you need that money?
Now don’t mistake time as an excuse for taking risk that is not prudent. I have always felt that the idea promoted by the 7 trillion dollar financial services industry that if you are young, you can be aggressive because time is on your side.
Whether you have one year or thirty years, it only makes sense to invest in investments that have a high probability of either rewarding you for the risk that you are taking or preserving your capital.
So if you are wondering what steps to take with your investments, then consider this question: How much risk do you really want to take today?
This is a tough question to answer. Let’s say you are 50/50 on taking risk in the stock market. If that is the case, maybe you stay 50% invested and keep the other 50% safe.
If you want to cut way back on risk, then maybe you are 80% in safe investments and 20% in the stock market.
Before you start that process, it is always good to look back over the past five years and see what type of growth you have had in your accounts. If you have had great growth and you are only down a little bit this year, you might find that it makes sense to just protect everything. This information might help make this decision a little easier.
Most importantly, determine when you are going to need this money. If you are nearing retirement in any type of market, whether good or bad, it is important to be thinking about capital preservation and protecting your future nest egg. If you have a long time ahead of you, then your decision is more of a strategic one that balances risk and reward.
So if you move to safety, when do you know that it is safe to move back into the investments? Join me tomorrow for part II of this series and we will discuss some strategies for getting back into those investments again.
Finally, on Thursday, we will discuss what type of investments that you should consider if you are staying invested.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
This is going to lead many of you to consider pulling out of the market. Should you stay invested or should you preserve capital?
Since no one has a crystal ball, it is impossible to determine what makes the most sense. So for most people, trying to figure out the direction of the stock market is going to be tough at best. Thus that might not be the best strategy unless you are willing to get an education in technical analysis of the stock market.
So the question is not about the direction of the market. The real question is what is most important to you? How much of your investments are you willing to risk in the stock market? You also have to consider your time horizon. How long will it be before you need that money?
Now don’t mistake time as an excuse for taking risk that is not prudent. I have always felt that the idea promoted by the 7 trillion dollar financial services industry that if you are young, you can be aggressive because time is on your side.
Whether you have one year or thirty years, it only makes sense to invest in investments that have a high probability of either rewarding you for the risk that you are taking or preserving your capital.
So if you are wondering what steps to take with your investments, then consider this question: How much risk do you really want to take today?
This is a tough question to answer. Let’s say you are 50/50 on taking risk in the stock market. If that is the case, maybe you stay 50% invested and keep the other 50% safe.
If you want to cut way back on risk, then maybe you are 80% in safe investments and 20% in the stock market.
Before you start that process, it is always good to look back over the past five years and see what type of growth you have had in your accounts. If you have had great growth and you are only down a little bit this year, you might find that it makes sense to just protect everything. This information might help make this decision a little easier.
Most importantly, determine when you are going to need this money. If you are nearing retirement in any type of market, whether good or bad, it is important to be thinking about capital preservation and protecting your future nest egg. If you have a long time ahead of you, then your decision is more of a strategic one that balances risk and reward.
So if you move to safety, when do you know that it is safe to move back into the investments? Join me tomorrow for part II of this series and we will discuss some strategies for getting back into those investments again.
Finally, on Thursday, we will discuss what type of investments that you should consider if you are staying invested.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Monday, February 04, 2008
What You Need To Know If You Are Refinancing A Mortgage
Due to the decrease in mortgage rates, consumers are starting to look at refinancing again. If you are in the market, here are a few things you need to know:
1) Mortgage companies are just as aggressive today as they were years ago
Some of these aggressive mortgage companies are saying anything to get you into the door. Unfortunately, the real details are not as advertized and most of the time consumers don’t catch it. Be careful doing business with the aggressive mortgage lenders.
2) It might not make sense for you to refinance
On the surface, it might look like it makes sense to refinance. If you dig deep, add in all the fees, and run the numbers, refinancing might not be prudent. Unfortunately, if you are with an aggressive salesperson, you will never be told that it is not a good idea.
3) Understand the fees that you are paying
I am seeing cases where mortgage companies are loading up these loans with fees. Be careful and understand the fees that you are paying.
4) There are no good deals
This is a big one. You can shop rates all day long and probably not come up with much of a difference. ALL mortgage companies are working with the same markets. If a mortgage company is giving you a special deal, you are paying for it or will pay for it in the end.
5) The ability to refinance is based on good credit scores and at least 5 to 10% equity
A good credit score and equity in your home is extremely important today. The lending standards have become very restrictive.
6) Companies are still aggressively marketing the low payment through the use of adjustable rate interest only mortgages
Only in certain situations, do these make sense. In most cases, they do not. Don’t let an aggressive mortgage salesperson sell you on the low payment.
Bottom-line – The mortgage industry is hurting. This type of environment is ripe for the unscrupulous, desperate salespeople to do whatever it takes to close a deal. It is more important than ever before to know all of the details and information before signing on the dotted line. Don’t get me wrong. There are some excellent mortgage people that are ethical and take care of their clients. Unfortunately, they represent a small percentage. This is why you have to be careful.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
1) Mortgage companies are just as aggressive today as they were years ago
Some of these aggressive mortgage companies are saying anything to get you into the door. Unfortunately, the real details are not as advertized and most of the time consumers don’t catch it. Be careful doing business with the aggressive mortgage lenders.
2) It might not make sense for you to refinance
On the surface, it might look like it makes sense to refinance. If you dig deep, add in all the fees, and run the numbers, refinancing might not be prudent. Unfortunately, if you are with an aggressive salesperson, you will never be told that it is not a good idea.
3) Understand the fees that you are paying
I am seeing cases where mortgage companies are loading up these loans with fees. Be careful and understand the fees that you are paying.
4) There are no good deals
This is a big one. You can shop rates all day long and probably not come up with much of a difference. ALL mortgage companies are working with the same markets. If a mortgage company is giving you a special deal, you are paying for it or will pay for it in the end.
5) The ability to refinance is based on good credit scores and at least 5 to 10% equity
A good credit score and equity in your home is extremely important today. The lending standards have become very restrictive.
6) Companies are still aggressively marketing the low payment through the use of adjustable rate interest only mortgages
Only in certain situations, do these make sense. In most cases, they do not. Don’t let an aggressive mortgage salesperson sell you on the low payment.
Bottom-line – The mortgage industry is hurting. This type of environment is ripe for the unscrupulous, desperate salespeople to do whatever it takes to close a deal. It is more important than ever before to know all of the details and information before signing on the dotted line. Don’t get me wrong. There are some excellent mortgage people that are ethical and take care of their clients. Unfortunately, they represent a small percentage. This is why you have to be careful.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Friday, February 01, 2008
Tell the Senate that the Economic Stimulus Package Must Contain Relief for Homeowners
I wanted to share this information from our mortgage consultant Alice White. We have been very blessed to have her as a resource for Prudent Money. She sent this and we need to take some action. This would be a good thing for the mortgage markets.
The much needed and welcome economic stimulus package is now in the hands of the U.S. Senate. But the Senate must include new loan limits on FHA and Fannie Mae and Freddie Mac loans. America's housing market needs this help.
NAR wants a stimulus package that will be good for America’s home-owners now and for future homeowners to come.
Take action and make your position known. Tell Senators Cornyn and Hutchison that these new loan limits must be included in the economic package.
Take Action!
Send this sample letter to Senators Cornyn and Hutchison:
Subject: Support Inclusion of Housing in the Economic Stimulus Package
Dear [decision maker name inserted here],
As a constituent and a REALTOR®, I want to stress how important it is for the Senate to include increases for the FHA and GSE loan limits in the Senate’s economic stimulus package. These provisions will create safe and affordable mortgage options for our state’s homeowners and provide much needed stability for our local economies.
The critical role that Fannie Mae and Freddie Mac (GSEs) play in providing liquidity to the mortgage market has never been more evident than it is today. The national subprime meltdown has had a dramatic impact on both the cost and availability of mortgages in my market. Since August 2007, the interest rates for jumbo borrowers have been more than 1 percentage point higher than conforming loans, which can cost homeowners up to $400 month in higher interest payments.
Raising the GSEs’ conforming loan limit will provide immediate relief to borrowers and alleviate downward pressure on our already fragile housing markets. According to the National Association of REALTORS®, increasing the GSE loan limit will result in more than 300,000 additional home sales and strengthen current home prices by 2 to 3 percent.
I also believe that increasing the FHA loan limits is critical to helping bolster our fragile housing market. Current law restricts FHA loans to levels well below the median home price in many areas of the country and caps loans in high costs states at $363,790. These limits are preventing many homebuyers from using FHA to purchase or refinance their loan. The proposed provision will increase FHA loan limits nationwide by raising the floor to $271,050 and the limit to 125% of local median home prices. These increases will help an additional 138,000 Americans purchase and 200,000 families refinance their homes safely and affordably.
I hope I can count on you to support including increases for the FHA and GSE loan limits in the Senate’s economic stimulus package. Our national housing and mortgage finance markets need stability and an immediate infusion of liquidity. Both of these provisions are necessary if our nation’s families, housing markets and economy are to move beyond the crisis they now face.
Sincerely,
Alice Hinckley
Take Action!
The much needed and welcome economic stimulus package is now in the hands of the U.S. Senate. But the Senate must include new loan limits on FHA and Fannie Mae and Freddie Mac loans. America's housing market needs this help.
NAR wants a stimulus package that will be good for America’s home-owners now and for future homeowners to come.
Take action and make your position known. Tell Senators Cornyn and Hutchison that these new loan limits must be included in the economic package.
Take Action!
Send this sample letter to Senators Cornyn and Hutchison:
Subject: Support Inclusion of Housing in the Economic Stimulus Package
Dear [decision maker name inserted here],
As a constituent and a REALTOR®, I want to stress how important it is for the Senate to include increases for the FHA and GSE loan limits in the Senate’s economic stimulus package. These provisions will create safe and affordable mortgage options for our state’s homeowners and provide much needed stability for our local economies.
The critical role that Fannie Mae and Freddie Mac (GSEs) play in providing liquidity to the mortgage market has never been more evident than it is today. The national subprime meltdown has had a dramatic impact on both the cost and availability of mortgages in my market. Since August 2007, the interest rates for jumbo borrowers have been more than 1 percentage point higher than conforming loans, which can cost homeowners up to $400 month in higher interest payments.
Raising the GSEs’ conforming loan limit will provide immediate relief to borrowers and alleviate downward pressure on our already fragile housing markets. According to the National Association of REALTORS®, increasing the GSE loan limit will result in more than 300,000 additional home sales and strengthen current home prices by 2 to 3 percent.
I also believe that increasing the FHA loan limits is critical to helping bolster our fragile housing market. Current law restricts FHA loans to levels well below the median home price in many areas of the country and caps loans in high costs states at $363,790. These limits are preventing many homebuyers from using FHA to purchase or refinance their loan. The proposed provision will increase FHA loan limits nationwide by raising the floor to $271,050 and the limit to 125% of local median home prices. These increases will help an additional 138,000 Americans purchase and 200,000 families refinance their homes safely and affordably.
I hope I can count on you to support including increases for the FHA and GSE loan limits in the Senate’s economic stimulus package. Our national housing and mortgage finance markets need stability and an immediate infusion of liquidity. Both of these provisions are necessary if our nation’s families, housing markets and economy are to move beyond the crisis they now face.
Sincerely,
Alice Hinckley
Take Action!
Thursday, January 31, 2008
Hillary Clinton’s Solution to the Credit Problems in America
First, let me state that the problem with the credit industry in America is politicians. Politicians in the name of campaign support have protected this industry and allowed a huge problem to occur. There is very little Federal regulation of credit card companies.
So now that Hillary is running for President, she is concerned about fixing this problem. She never seemed to be concerned while she was serving as a Senator.
Now some of her colleagues have some great legislation on the table that should be passed. This Fair Credit for Families Agenda is a joke. This is what concerns me about the Clintons. They are blatantly political and offer nothing but political sound bites that don’t solve anything.
Here is her latest solution for credit industry reform:
· Cap penalty interest rates at 30% - Well Senator Clinton, that is just about where most penalty rates are right now. Capping them at 30% does nothing for the American consumer and still protects the credit industry.
· Prevent card companies from unfairly increasing interest rates – In order to do this, politicians would be forced to write legislation that at the end of the day, they just will not write. The only way to solve that problem is to forbid a company to raise rates unless the card holder was late two times or more. Even then, there should be some restrictions. If you take away the universal default clause, they find other creative ways to raise rates.
· Credit card companies cannot raise your interest rate without your affirmative written consent – I really cannot make this stuff up.
“Hillary will require lenders to obtain written consent from a borrower before any rate increases or change in terms become effective.” So, if I don’t want a credit card company to raise my rates, I will just write them and tell them “don’t do that!” or just refuse to agree to it. What did she say?
We need a real leader to stand up and stop the abuse. I only write these blogs about her press releases so that you get the real information. These sound bites are nothing more than political banter. Please don’t elect four years of this sort of thing.
Please give us a real leader to vote for!
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
So now that Hillary is running for President, she is concerned about fixing this problem. She never seemed to be concerned while she was serving as a Senator.
Now some of her colleagues have some great legislation on the table that should be passed. This Fair Credit for Families Agenda is a joke. This is what concerns me about the Clintons. They are blatantly political and offer nothing but political sound bites that don’t solve anything.
Here is her latest solution for credit industry reform:
· Cap penalty interest rates at 30% - Well Senator Clinton, that is just about where most penalty rates are right now. Capping them at 30% does nothing for the American consumer and still protects the credit industry.
· Prevent card companies from unfairly increasing interest rates – In order to do this, politicians would be forced to write legislation that at the end of the day, they just will not write. The only way to solve that problem is to forbid a company to raise rates unless the card holder was late two times or more. Even then, there should be some restrictions. If you take away the universal default clause, they find other creative ways to raise rates.
· Credit card companies cannot raise your interest rate without your affirmative written consent – I really cannot make this stuff up.
“Hillary will require lenders to obtain written consent from a borrower before any rate increases or change in terms become effective.” So, if I don’t want a credit card company to raise my rates, I will just write them and tell them “don’t do that!” or just refuse to agree to it. What did she say?
We need a real leader to stand up and stop the abuse. I only write these blogs about her press releases so that you get the real information. These sound bites are nothing more than political banter. Please don’t elect four years of this sort of thing.
Please give us a real leader to vote for!
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
Tuesday, January 29, 2008
It is a Good Thing that Senator Clinton has this Housing Mess Figured Out!
NEWS FLASH!!!!!! Senator Clinton revealed her plan yesterday to “bring our nation’s financial house in order.” This was from her press release.
“Simply put, in order to bring our nation's financial house in order, we need to begin with housing itself. That is why my economic stimulus plan calls for $30 billion in assistance to states and communities to help them fight foreclosures. I have also called for a 90-day moratorium on sub-prime foreclosures and a five-year freeze in rates on sub-prime adjustable mortgages.”
There are two things that frighten me about politicians. First, they could potentially know very little about the economy and the housing markets. During the political season, politicians tend to turn into economists. Second, politicians actually think that the American people are that stupid. If it were as easy as 1-2-3, the current administration would have already fixed it.
First, there is an estimated 1 trillion dollars of adjustable rate mortgages still to reset over the next few years. Throwing $ 30 billion in aid to the housing problem is like giving an antibiotic to someone who has a fatal disease. In addition, bailing out homeowners by providing assistance creates moral hazard. This is not a good precedence.
Second, by freezing sub-prime rates, you throw out the basis of contract law. President Bush already tried to offer this as a solution. However, he soon found out the disaster he would have created by doing so. This type of thing creates huge problems in our credit and investment markets. The lawsuits could potentially get completely out of control.
Third, please stop calling it a sub-prime problem. It goes way beyond sub-prime mortgages.
When evaluating the candidates, remember political sound bites offering “the” solutions is the method of getting elected. Don’t be fooled that these politicians actually have an answer. If there were a solution, the current administration would have already figured it out.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
“Simply put, in order to bring our nation's financial house in order, we need to begin with housing itself. That is why my economic stimulus plan calls for $30 billion in assistance to states and communities to help them fight foreclosures. I have also called for a 90-day moratorium on sub-prime foreclosures and a five-year freeze in rates on sub-prime adjustable mortgages.”
There are two things that frighten me about politicians. First, they could potentially know very little about the economy and the housing markets. During the political season, politicians tend to turn into economists. Second, politicians actually think that the American people are that stupid. If it were as easy as 1-2-3, the current administration would have already fixed it.
First, there is an estimated 1 trillion dollars of adjustable rate mortgages still to reset over the next few years. Throwing $ 30 billion in aid to the housing problem is like giving an antibiotic to someone who has a fatal disease. In addition, bailing out homeowners by providing assistance creates moral hazard. This is not a good precedence.
Second, by freezing sub-prime rates, you throw out the basis of contract law. President Bush already tried to offer this as a solution. However, he soon found out the disaster he would have created by doing so. This type of thing creates huge problems in our credit and investment markets. The lawsuits could potentially get completely out of control.
Third, please stop calling it a sub-prime problem. It goes way beyond sub-prime mortgages.
When evaluating the candidates, remember political sound bites offering “the” solutions is the method of getting elected. Don’t be fooled that these politicians actually have an answer. If there were a solution, the current administration would have already figured it out.
Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.
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