More Credit Fact or Fiction

(1) If a spouse is responsible for a debt due to a divorce decree, the other spouse is completely released of all liability - True or False.

False – If at the time of divorce both spouses are signed on the credit account, they are both liable for the debt after the divorce regardless of the divorce decree. The credit card companies only release liability when the debt is refinanced into the responsible spouse’s name.

(2) If you co-sign for another individual, your credit could be affected – True or False.

True – If you co-sign on a credit application, you are as responsible for the loan as the individual you co-signed for. If that individual misses a payment, that negative mark goes on your credit report. If that individual defaults on the debt, the co-signer is now responsible.

(3) If a creditor settles a debt, the consumer has no other further obligations - True or False.

False – If the creditor forgives debt, the creditor reports that to the IRS and the consumer has to pay taxes on the amount that has been forgiven.

(4) If a debt collector harasses a consumer, the consumer has no means of protecting their rights - True or False.

False – Consumers are protected under the Fair Debt Practices Act. If a consumer’s rights have been violated, a consumer can hire an attorney and file suit against the debt collector for the means of protecting their rights. The law also allows for attorneys that practice this special type of law to take cases for free. The attorney can force the debt collector to pay fees in the event the case wins.

(5) If your debt has been charged off and is with a debt collector, the consumer can always go back to the original creditor and negotiate the terms of the debt - True of False.

False – Once the debt has been charged off and is in the hands of the debt collector, the original creditor has no interest in talking to you about the debt. You talk with the creditor as long as they are holding the debt and collecting the debt through their in-house debt collection department.

(6) It is a good idea to try and negotiate a current debt - True or False

False – If you are on time with your payments and everything is current, you never want to call a creditor and ask for the balance to be reduced. It is like asking your credit card company to close your account and place you in collections. They will automatically deem you as a risk and probabilities are high that they will close your account and raise your interest rates to penalty rates. It happens all the time. You can attempt to get your interest rate lowered. However, it stops there.

(7) There is a way to legally remove bankruptcies before the credit reporting period has ended - True or False

False – Every negative item on your credit report has to serve its allotted reporting time on your credit report. For most, that is 7 ½ years past the first missed payment.

(8) A credit reporting agency has to inform me of the results of my dispute - True or False.

True – They do have to inform you by letter of their findings.

(9) After 7 ½ years and the debt has been removed from your credit report you no longer owe it - True or False.

False – You always owe the debt.

(10) Debt Collectors can always take legal action against you to collect a debt - True of False.

True and False – They can only successfully file suit against you during the statute of limitations period which is determined individually by each state. In Texas, it is 4 (some attorneys argue 4 ½) years past the first missed payment. They can still file suit after that period. However, it is up to the consumer to use the statute of limitation defense and get the lawsuit thrown out. If the consumer does not take action, the debt collector will probably successfully win that suit.

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

Credit: Fact or Fiction?

There is a lot of information floating around out there about debt. Today, we are going to take a look at some of this information and determine if it is fact or fiction.

(1) If I close my credit cards, I will remove all of my credit history - True or False.

False – your credit history stays on your credit report if you close a credit card.

(2) Your credit score is your FICO score - True or False.

True and False – Fair Issac Corporation developed the original credit scoring formula. However, each credit reporting agency has its own version of the scoring model. Trans Union’s score is called the Empirica score. Equifax calls their score the Beacon score. Experian does call its credit score the FICO score.

(3) Every time you check your credit report, you get an inquiry posted and could lose points on your credit score - True or False.

False – When an individual checks their credit score, it is called a soft inquiry and there are no deductions or records of the inquiry. When a company checks a consumer’s credit score for the purpose of credit information, this is a hard inquiry and there is a deduction of points.

(4) Every time you close a credit account your score lowers - True of False.

More True than False – Approximately 30% of your credit score is determined by how much overall credit that you have available to you versus how much of that credit you are using. This creates your utilization ratio. It is the ratio of total available credit to debt. If you have a lot of available credit and low amount of debt your ratio is low. That is a good thing. If it is the other way around, your utilization ratio is high. If you close accounts that have free credit limit, you remove the available credit limit from your ratio, which in turn could increase your utilization ratio and lower your score.

(5) If someone illegally uses your credit card without your authorization, you are on the hook for the full amount charged on the credit card – True or False

False – The law states that you are only on the hook for no more than $50. The credit card company is on the hook for the unauthorized charge. Credit card companies market that you have zero liability for unauthorized charges. They are just marketing something that you have anyway due to the law. In fact, most companies waive the $50.

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

Mutual Fund Red Flags

With the stock market losing ground, it is important to evaluate your investments and make sure that you are in good solid investments. What if you find a fund with big losses? When do you dump that loser mutual fund? There are some red flags that you need to monitor that will help you know if your fund is in trouble or if the losses are just market related.

Mutual Fund Red Flags

(1) Did the fund change money managers? I think that this is one aspect of your mutual funds that needs to be monitored very closely. Chances are that if you do get a new money manager, the fund might be managed differently. If the management of your fund changes, keep a close eye on the performance.
(2) Did the fund close to new money? Mutual funds that get too large and potentially unmanageable will close their doors to new investors. This can end up being problem for investment performance going forward. Morningstar performed a study back in 2003 where they looked at mutual funds that had closed and prior to closing were in the top 20% of their category. Over the next three years, 75% of those closed funds went from tier performance to average performance. Why does that happen? There could be a number of reasons. The bottom line is that it is a red flag that you want to watch.
(3) The fund manager is in a slump – Bill Miller, the acclaimed mutual fund manager who outperformed the S&P 500 for 15 straight years, can tell you about how a slump feels. Well his streak ended in 2005 and the last positive year he had was 2006 with an underperformance of 5.9%. In 2007, he lost -6.7% and through the first quarter of this year, he was down a horrible -19.7%. Money managers do go through slumps. When in a slump, people take big risks. If you think that your money manager is in a slump, keep up on the performance.
(4) The fund changed their investment style – There are two main types of investment styles. For the most part you are either a growth or value manager. There is even an investment style that is a blend both of both growth and value. In some cases, you will see the fund manager change their style from one growth to value or vice versa. This can end up hurting performance.
(5) The fund is performing in the lower percentile of the peer group - You always want to know how your mutual fund is performing in comparison to other mutual funds that invest the same way. This is measured on a daily, weekly, monthly, quarterly, annual, etc. basis. Ideally, you want your money manager in the top 50% of their peer group. However, when you start to see the performance slip to the 75%, 80%, or 90% and greater of their peer group, there are problems. This is the biggest red flag of them all.

The best way to monitor any of these red flags is through http://www.morningstar.com/. You can look up everything from category rankings to investment style change. You can also sign up for alerts to notify you if news comes out on the mutual fund.

You don’t want to just hold and hope that the investment comes back. Have good reasons for holding onto an investment and remember, hoping and crossing your fingers that all be well is not an investment strategy.

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

Is it Always a Good Time to Invest? Yes, No, It Depends on the Strategy

Is it always a good time to invest? Well if you ask most investment advisors and professionals on Wall Street, the answer is “Yes, it is always a good time to invest in the stock market.” What do you think? With the U.S. economy unarguably in a recession, the real estate markets in a mess, and the credit crisis, are we now facing a time where the worst is behind us?

“It is always a good time to invest in the stock market” is your only option when investing in the stock market. This is the challenge with those on Wall Street. The majority of professionals who either manage money or are financial advisors only have one strategy. Their strategy just consists of growing money.

They show you performance numbers and how great their investment strategy has performed…during the good times. What about during the bad times? They will just show you how it paid to stay invested because the stock market ALWAYS comes back.

So since the market always comes back, these times in the stock market when stocks have lost money provide great opportunities to buy stocks ON SALE. Thus, it is always a good time to invest in the market. The best part of this strategy is that it is easy to explain, easy to understand, and even easier to sell.

Well, unfortunately, investing just doesn’t work that easily. Yes, it is always a good time to invest. It just depends on your strategy. If you operate under the buy-and-hold, always stay invested for the long-term, it isn’t always a good time to be invested. If you have a strategy that invests for both good and bad times in the market, then yes there is always opportunity.

This is the challenge with most investment strategies as practiced by the financial advisor community. It is tough to have long-term success with only a strategy for growing money. Investment success is about a strategy for growth AND a strategy for investing during bad markets. Yes, we can and will go through long periods of time where it doesn’t make sense to fully invest in the stock market.

For instance, the S&P 500 composite return over the past 10 years has an average return of 2.4% per year. You would have made more being invested in a money market account.

The Dow Jones Industrial Average returned 1.61% a year between 1966 and 1982. The bottom line is that during those long time periods it didn’t pay to just invest for investment growth. However, if you had an investment strategy that invested for both good and bad markets, then there were a ton of opportunities.

The proof is in the returns. A growth strategy doesn’t always work because we aren’t always in that type of stock market environment.

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

More Irresponsible Marketing

Hi, I am the Video Professor and I am known for giving away my training software (read: Yes, I am just giving this stuff away and paying all of these advertizing costs because I like charity work).

I want to give you the opportunity to try my new software that teaches you how to make money buying and selling on eBay. Now this DVD will not teach you how to make millions (read: however, if millions of you will just answer this “free” offer I will make millions of dollars).

Just call this number and I will send you for free this title and any of the 48 titles that I have produced, once again for free. You just pay a small shipping and handling cost (read: of $9.95, where I have a profit margin of around $ 6 per product).

It is amazing that these guys get on cable TV and make it seem like they are doing consumers a favor. They are doing nothing more than selling product. It is about selling hundreds of thousands of units for a nice little profit margin.

They use the word free and small shipping and handling cost to disguise the fact that you are actually buying a product that has been produced for a low cost.

I would really have much more respect for these companies if they wouldn’t resort to smoke and mirror marketing.

There are tons of these ads. Some of my favorites – The Real Estate Selling System, the Ross Gardine Stock System, the Make Millions From Home System, etc.

Do yourself a favor. These systems could actually provide great information. There is no question. However, buy the same information from authors who market and sell their information the correct way.

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

The Secrets to a Great Financial Marriage

Like it or not, money is cited as the number one reason for divorce in this country. The good news is that this does not have to be the case. The real problem with money amd marriage is that couples do an ineffective job of communicating when it comes to finances. Let’s face it – money is a tough and sometimes emotional subject to discuss when you are married. It also doesn’t help that a husband and a wife bring in their own set of baggage about money that was learned prior to marriage.

The key is taking two sets of financial value systems and making them work. Here are a few tips to financial success in your marriage.

1) Release the need to be right – Arguing is nothing more than an attempt to declare someone right and someone wrong. Couples spend a lot of time unnecessarily fighting over who is right and wrong when it comes to money. The truth of the matter is that arguing makes both the husband and the wife wrong. Release the need to be right and focus on working through the issues until you figure out what works for both of you.
2) Give respect by seeking to understand – We all have our own views when it comes to money. Many times we work so hard at having our views understood that we don’t stop and take the time to show respect to our spouse and understand their views. The key to being heard is listening and understanding the other person’s viewpoint. We cannot begin to help our spouse understand our views until we first understand how they feel. As Stephen Covey writes, “Seek first to understand, then be understood.” You can never go wrong giving your spouse the respect of their views.
3) Leave your ego at the door and let God in - This is the key element to making all of this work. This isn’t about you and your needs. This is about your family as a whole. Make that your objective. Before discussing finances with your spouse, pray about it together first. It is tough to argue when God has been invited to the meeting.
4) Respect your parents’ advice and remember that you have your own family – I do believe that parents have good intentions when they give advice. Oftentimes parents will get a little to involved in the affairs of their grown children. You always want to listen and respect your parents. That is biblical. You also have to remember that your responsibility is to your family. You no longer live under your parents’ roof. Pray about the advice you are being given and let God be the deciding factor as to the decisions that you make.
5) In marriage it is not yours or mine, it is ours - In order to have a good financial system in a marriage, it comes down to teamwork and communication. Someone needs to be in charge of the bills and keeping the bank accounts. Both spouses need to manage the outcome of that process together. Many times it is one spouse that is in charge and the other spouse is in the dark. Communication and being on the same page is key.
6) Two separate sets of values mold new family values – Two sets of values concerning money have a hard time coexisting in a relationship. Each of us has our own set of financial values. That is what makes us unique. Work to find out how two sets of values can compliment each other and form a new set of family values. It isn’t about what is important for you individually. It is about what is important for the family. Compromising for a bigger objective is the key.

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

Deducting Taxes is not a Good Reason to Invest in an IRA

There is a process that is important to go through when considering an IRA. First, let’s just look at a regular IRA. With a regular IRA, anyone that has income can invest into an IRA. However, there is a key question that you have to ask. Can I invest this money in an IRA and get a tax deduction?

For most people, it is the tax deduction of the contribution that is appealing about putting money into an IRA. The ability to deduct an IRA contribution comes down to two factors. First, are you an active participant in a 401(k) plan? If the answer is no, then you would get a tax deduction on the contribution. Second, what is your adjusted gross income?

If you are an active participant in a 401(k) plan, then the ability to deduct an IRA contribution comes down to the amount of money that you make. If you are married and filing jointly, you can deduct 100% of your IRA contribution as long as your adjusted gross income is below $83,000. Between $83,000 and $103,000, your ability to deduct is phased out. Over $103,000 AGI, you cannot deduct anything.

If you are single, the AGI limits are $52,000 to $62,000.

For the Roth IRA, it isn’t about the ability to deduct the contribution. It is about the ability to just contribute. If you are married and filing jointly, the income limits are $150,000 to $160,000. If you make less than $150,000, you can contribute the full amount. However, between $150,000 and $160,000, your ability to contribute starts to phase out. Over $160,000, you cannot contribute at all.

For the single filer, the income limits are $95,000 to $110,000.

Let’s say that you find yourself in that “unfortunate” position where you make too much money to contribute to a Roth. If that is the case, invest an after-tax contribution into your IRA. In 2010, they are lifting the income restrictions and allowing everyone, no matter your income, to convert traditional IRA’s into Roth IRA’s.

So for the next three years, you can put the maximum after-tax nondeductible contribution into the IRA and then convert it to a Roth in 2010.

So which makes the most sense? I believe that the Roth makes the most sense and it comes down to which gives you the biggest tax benefit. With a regular IRA you get the small tax deduction up-front. Then you pay taxes on the money once you take it out at retirement. With the Roth, you don’t get that tax deduction. However, when you take money out of the Roth it is all tax-free. You could have a tax-free income off of decades of investment growth. There is a huge difference in tax benefits.

The Roth also has one other big benefit. All contribution that you make to a Roth can be taken out of the account without penalty. If you get into a bind, you can take out your contributions.

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

Banks Scaring People into Refinancing

It is vitally important today that you as a consumer check your facts and verify information that is being told to you. Unfortunately, the reason is not because mistakes can be made. I am seeing more and more examples of companies in the financial arena that are deliberately misleading consumers into thinking one thing when another actually exists.

Consumers have been running into trouble with these adjustable rate mortgages. Adjustable rate mortgages start out with low “teaser” rates for a period of time. Then the time comes when the payment and the interest rate changes or “resets.”

When these mortgages reset, the payment usually takes off. As a result, many consumers can’t make the payment and many have or are facing foreclosure.

We only hear about the mortgages that change for the worse. What about the ones were the payment changes for the better or the payment changes but is still bearable? If that happens, then the consumer could be set for at least another year.

In an article written by “Mike Mish” Shedlock, he writes that Citigroup is scaring people into refinancing their mortgages without giving them all of the information.

He sites an example where a recent letter sent out by Citigroup is encouraging this one consumer to refinance his mortgage because the mortgage is resetting. Of course, the letter is written as if the payment will go up.

The letter gives an example and shows the ARM adjusting on the date, the new interest rate, the new higher payment, and then compares that to a refinance. If you look at the data, of course it makes sense to just go ahead and refinance.

The problem is that the data was based on old rates. Given the old data, the mortgage payment would reset higher. Given current data, there would be no need to refinance because rates have fallen making refinance a bad idea. It wouldn’t make sense.

Nowhere in that letter is pointed out that his adjustable rate mortgage could be lower. There is obscure language that hints at it.

So, this individual calls Citigroup and asks the question:

Consumer: What happens to our loan on the anniversary? Will it go down?

Citigroup Rep: It is very unlikely that it will go down. Would you like to refinance?

Although no one is outright lying in this situation, there is a question of ethics. Remember, that you have to verify information and not just trust what you are being told.

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

Fees, Simplicity, or Strategy?

So what is going to make or break you when it comes to your investments? Is it going to fees, simplicity, or strategy?

Well, Columnist Scott Burns builds his whole philosophy on simplicity and low fees. These are the two keys to his approach. His stance is that a low cost, passive approach is the only way to go when it comes to investing. The big point that he attempts to make is that professional money management is an expensive way to lose money. You should just do it yourself.

In a recent article, he is basically defending his investment portfolios that he has touted over the years. His low cost approach is apparently not immune to losses. The following were some of his remarks:

Since his approach is based on low cost index funds, “each fund has a high probability of doing better than 70 to 80% of its more expensive professionally managed competitors.”

Well, a big loss is a big loss. If a professionally managed fund goes down 30% and the low cost index fund goes down 24%, it really doesn’t matter. Investment strategies should be designed to avoid the big hits. In addition, it has been proven that index funds beat out the majority of managed mutual funds a portion of the time and not all of the time as this writer would have you believe.

“The greater the number of asset classes in your portfolio, the better the odds that one asset class will perform well enough to compensate for the asset class that is performing poorly.”

Well I do agree with that statement. However, I disagree with calling a REIT, a large company stock, and a small company stock three different investment classes. Depending on the market, they could all be considered one investment class because they are all three stocks. We are in that type of market.

The biggest concern that I have about this type of advice being given is that he is answering back to a retiree question about his portfolio method for investing.

Low fees are the way to go.

There is nothing wrong with fees. It comes down to what you get for those fees. If you are paying someone to manage your money and that investment manager is making you money this year, there is nothing wrong with fees. The question is not the amount of the fee. The question is if the fee is producing value? Sometimes you do get what you pay for!

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

Time, Not Interference, Corrects the Problems

For the third or fourth time (I’ve lost count), the Bush Administration is announcing another “solution” to the current credit crisis. This is another prime example of why politicians remain virtually useless. They are reactionary versus proactive. This morning, Treasury Secretary Hank Paulson is set to announce the biggest set of reforms and regulation since the Great Depression.

Paulson stated in his remarks, “"I do not believe it is fair or accurate to blame our regulatory structure for the current turmoil.”

What a priceless statement. A regulatory structure is put in place for the sole purpose of preventing abuse in the system. If the politicians were paying attention instead of conveniently ignoring advertized teaser rates, no documentation loans, adjustable rate mortgages, and the mortgage industry giving consumers loans without money down, we wouldn’t have this problem.

However, this is the problem. The politicians don’t make the tough decisions when we need them. They make the popular decisions that serve the masses (and their own political agendas) on a short-term basis.

In 2001, in order to prop up the economy following 9/11, Bush aggressively cut taxes during a time we couldn’t afford to do so. The Federal Reserve Board aggressively reduced interest rates that fueled a housing bubble. As a result, we had six years of debt-induced economic growth.

Instead in 2001, the Bush administration should have allowed the excesses from the 90’s to work themselves out through the system. Yes, it would have been tough. However, not as tough as a situation we are about to face.

Now, once again, you have the Bush Administration stepping in and trying to bail out every individual who has made an irresponsible decision. People should pay their dues, markets should be allowed to function on their own, and time should be the solution to the problem.

The time to act was years ago. Politicians should have put a stop to predatory lending and stopped the abuse in the mortgage industry. The politicians should have worked to put laws together that would protect consumers from themselves. Unfortunately for all of us, that solution wasn’t politically convenient. For the politicians, it is much more convenient for consumers to spend at all costs. If that means getting into debt over their heads, then that is what needs to happen.

Have you ever really heard a politician encourage people to save? Of course not! That would be the best thing for the average American.

I doubt that anything the politicians put on the table is going to matter anyway. First, it will go through endless months of political debate. Second, there is really very little that they can do. Bailing out America (even though they would like you to think differently) is not viable option. Finally, this is a deflationary debt contraction we are experiencing. Time is our only option.

If the politicians figure out some type of bail-out and successfully interfere, the problem will just be pushed out further into the future. I don’t think anyone wants to make this problem any bigger.

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

Paying your Taxes with your Credit Card for Membership Rewards – A $ 1,045 IPOD

American Express wants you to use your American Express credit card to pay any remaining tax balance owed to the IRS. Why does AMEX say it is beneficial? Use your card and you get membership rewards. You have to pay those taxes anyway. You might as well get a side benefit in the way of membership rewards.

For every dollar you charge in taxes, you will receive 1 membership reward point. With membership rewards points, you can travel, eat out, go to shows, buy that gadget you always wanted, etc…..

That is a pretty tempting offer. I don’t know anyone who doesn’t like membership rewards. I use them all the time as a means of buying airline tickets. It makes a lot of sense.

Oops, I forgot to tell you about the little catch. There is this small 2.49% convenience charge (a convenient way for them to make excessive money) that goes along with the credit card transaction. For example, for every $10,000 you place on the AMEX card, you will pay $249.

So, let’s say you wanted to buy a brand new classic 80 GB IPOD. In the AMEX membership rewards program, you would need 42,000 points. So, in order to get that IPOD, I just pay my $ 42,000 tax bill using my AMEX card. By doing so, that would give me the 42,000 points that I need. This way I can pay my taxes and get my IPOD at the same time.

The convenience fee is 2.49% or $ 1,045.80. Basically, you paid $1,045.80 for an IPOD that you can get at Circuit City on sale for $237.49. It must be great to be in the credit card business. Doesn’t it bother you that a credit card company would market an idea as a benefit when in reality it is a huge waste of money?

Further, I can understand that some people might have to pay their taxes on a credit card because they don’t have the money at the time. In a tight situation, you can justify the fee. However, AMEX is suggesting that you use a card that you are forced to pay off at the end of the month just for the convenience of paying your taxes online and a bunch of membership reward points!

If you need to put taxes on a credit card, then that is one thing. If you want the convenience of using a credit card, you can use your debit card to pay your taxes. You go to www.officialpayment.com and pay $2.95.

Irresponsible marketing at its best – In the past, AMEX was above that type of marketing. I guess things change.

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

A 42 Million Dollar Announcement - Your Tax Dollars Hard at Work

So what is a few million between friends? Well a few million must not mean much to the Federal Government because our politicians instructed the IRS to send out notices to tell you, the taxpayer, that you are about to receive a rebate check. Yes, the check from the Federal Government is nearly in the mail. I would suspect that most people know about the rebate check that the Federal Government is sending out.

So why is necessary to send out notices to everyone in the free world and spend 42 million dollars? Yes, we have over 9.4 trillion dollars of debt in this country and the government wants to spend 42 million to just let you know the check is going to be in the mail. I guess we don’t have to wonder how the country got into this mess in the first place.

Well the story even gets better. This is going to cost the government $117 billion to fund these rebate checks. Where do you think that the government gets that money? They do it the good old American way. They borrow the amount and add to our national debt.

Now think about this for a minute. First, the Bush Administration wants to make sure that you know they are thinking of you by making sure that you know you are getting a check. Second, the Bush Administration is so desperate to pump up the economy that they would borrow and spend over 117 billion to do it. Finally, the Bush administration is in hopes that you take that rebate check and spend it. The better option is that you will buy something that costs much more than the rebate check and put the balance of the purchase on plastic. You have to know the retail marketing machine will be in overdrive trying to get you to spend that money and more.

Well this is no surprise that Washington is financially irresponsible with our tax payer dollars. Incidentally, it will be your kids and my kids that end up getting stuck with this tab. It is the next generation that will be picking up the bill.

You do have a chance here to do something prudent with that rebate check. So, what are some of your options?

1) Tithe on that money – that is a given
2) Pay off debt – that should definitely be on the agenda
3) Fund your emergency account – this is so important.
4) If you are out of debt and have an emergency account, why not give it away to a ministry that really needs it?

This is your chance to be prudent over an IOU from the Government. Just because they want you to be irresponsible with the money doesn’t mean that you should be irresponsible. Make your decision count with this rebate check.

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

Are Leasing and Smart Buy Programs a Good Deal?

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.

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.

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.

Happy Easter

Due to the holiday, the next blog will be posted on Monday, March 24th. Have a great Easter weekend!

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®

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.

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.

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.

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.

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.

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.

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.

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

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

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

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

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

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

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

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

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

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

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.

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.

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.

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.

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.

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.

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.

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.

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.