Saturday, November 14, 2009

Robert Kioysaki TIME Magazine Interview

Robert Kiyosaki's Key Financial Philosophies

Friday, August 28, 2009

Thursday, August 27, 2009

Health Care Reform: Let's Keep it Real

This post was provided by Ruth Vincent, Clarkston Georgia.

Those appearing to favor big business in the Health Care Reform discussion appear to have lost sight of the moral dilemma faced in this country with approximately 47,000 million individuals uninsured (see study, Who are the Uninsured? An Analysis of America’s Uninsured Population, Their Characteristics and Their Health dated June 2009 by the Employment Policies Institute (EPI). This study is based on 2006 Current Policy Survey data obtained by the US Census Bureau. Using more recent polling data also in June 2009, the Gallup-Healthways Well-Being Index data revealed that one in six US adults are without health insurance.

It appears that misinformation and fear of change dominate the day. A recent example of misinformation by a national conservative daily newspaper in an article supposedly discussing ‘the truth about health insurance’ stated, “nine out of 10 people under 65 are covered by their employers”. This statement in my opinion is not only dishonest, but deceitful. reports for 2006-2007 that 53.4% of US employees were covered by employer plans.

In addition to the moral dilemma of the uninsured, we must face the fact that Medicare is going broke in the near future, the employer and employee shares of health care costs are rising at such a rate that employers can barely afford the premiums and the employee’s share has escalated to the point that the average worker sees take home pay reduced while co-pays and caps on hospital costs, professional services and drugs continue to increase.

Using CPS Microfile data from March 2007, the EPI study of the uninsured indicates in ages 18-64, 57% (21,541 million) are involuntarily uninsured because their incomes are less than 2.5 times the poverty level. This means that 43% (16,251 million) of the uninsured had some means of contributing to the cost of their insurance. Eliminating all non-US born uninsured, leaves 26,454 million US born citizens between the ages of 18-64 without health care insurance or about 9% of the total US population uninsured!
The uninsured receive some level of medical care, either through self-pay, non-profit agencies, free services, emergency rooms, and etc. Free-to-patient-services are not without costs and we as taxpayers pay for them one way of the other. A reasonable person would agree that it will be more cost effective and humane to keep people healthy by providing them with a basic level of health care.

For those of us who can afford care that is superior, say to Medicare which I consider basic care, there will be private providers who will sell supplemental policies that will upgrade any basic ‘Chevrolet’ health coverage to a ‘Cadillac’ or somewhere between. Not many with insurance now have ‘Cadillac’ coverage.

Having worked with college students, it did not take long to figure out that ‘tax credits’ are not cash on the day that tuition is due to be paid. I don’t pretend to know what health care reform must look like, but if we don’t make meaningful reform, I do know a few things:

• What we have today will cost more next year;
• If you are employed today, you may not be employed tomorrow;
• Even subsidized COBRA coverage may be unaffordable; and
• If you think leaving it up to the private sector is the answer, just look at the melt down in the financial sector: stocks, banks, capital markets, housing, student loans and insurance!

Finally, I believe in capitalism, but it seems that ethics, integrity and reasonable profit expectations are being replaced by simple greed.

Saturday, July 18, 2009

Colorado Attorney General Bans 7 Loan Modification Companies

Guest Post Authored by Jonney Pean.

Loan modification has helped many homeowners from losing their homes. In loan modification, the existing terms of your loan get modified making the monthly mortgage payments more affordable. Whether your mortgage loan is eligible for modification is decided solely by your lender. The incidence of loan modification scams has increased noticeably.

The state attorney general of Colorado reached agreements with 7 loan modification companies in recent months that failed to deliver what they promised to the borrowers. Moreover these companies were also deceiving consumers by making false promises through their advertisements. The 7 loan modification companies that were banned include the following –

1. Summit Resolutions
2. Eugene Alkana Law Firm
3. Rescue Home USA
4. Legal Home Solutions
5. Traut Law Group
6. Nationwide Modification Center Inc
7. Infinity Group Funding

The 7 loan modification companies mentioned above will not be able to carry on with their operations unless they comply with the provisions of Colorado Foreclosure Protection Act. As per the Colorado Foreclosure Protection Act the consultant will not be allowed to take upfront fees and must enter into agreements with borrowers that have specific provisions.

The banning of 7 loan modification companies was a part of the “Operation Loan Lies”, a combined effort of many states to eradicate loan modification scams. This was announced by the Federal Trade Commission and the operation will be taking place in nearly 20 states as well as in the District of Columbia.

Loan modification will enable you to make payments for your mortgage regularly. This is because the lender will increase the duration of the loan, allow you to make payments as per fixed interest rate. The principal balance of your loan may also be reduced under certain circumstances.

In case you have doubts that your lender has manipulated the terms of your mortgage, you can opt for a forensic loan audit to find out the same.

Friday, July 17, 2009

This American Life Rocks on the Economy

Giant Pool of Money, Another Frightening Show About the Economy and Bad Bank. Are 3 awesome shows about the economy. The best Blog and podcast ever??? Planet Money.

Tuesday, July 7, 2009

New Blog Destination

Over the next few weeks, I will be moving content to my new blog at and over to Hubpages at Hubpages at

Thursday, July 2, 2009

Mortage Reduction Secret Weapon

The personal finance literature is replete with tips to assist you with paying off your mortgage sooner than the standard 30-year amortization period. Most of these tips rely on bank-sponsored bi-saver programs or snowflake and snow ball debt reduction plans geared to help a home owner own his or her home years sooner and save thousands of dollars in interest payments. Each of the mortgage reduction strategies pales in comparison to the method available to every homeowner with a down payment. What is this method? Strategic use of the down payment.

Before I outline this strategy, it is important to review some key principles as regards home ownership, wealth creation and money management.

Principle 1

As iconoclastic as it may seem, a home is not an investment. According to Wikipedia, investing is the active redirection of resources from being consumed today to creating benefits in the future; the use of assets to earn income or profit. At present millions of homeowners have learned that they will earn neither income nor profit upon the sale of their home. However, what has happening today as regards home prices is not far out of the ordinary, what happened over the past decade in terms of housing appreciation is. Robert Schiller, professor of economics at Yale, has charted housing prices since 1890.

This graph clearly shows that home prices up until the year 2000 were essentially flat.

Indeed, the average annual investment return from 1950-2000 was less than one half of 1% per year after adjusting for inflation. This means that $100 dollars invested in a home in 1950 was worth $104 in inflation-adjusted dollars in 1997. Housing prices have yet to fall further to reach historic norms. At best, a home is a form of forced savings plan in which the home interest deduction and the intangible benefit of home ownership accrue to the homeowner. How much of an economic benefit is that? A quick trip over to Hugh’s Calculators provides the following illustration on a $125,000 mortgage with no down payment.

Over the life of the loan, the homeowner will pay $166869.14 in interest payments. At best he will enjoy a reduced tax burden equal to $55623 over the life of the loan due to the mortgage interest deduction. Leaving roughly $111000 that will go to the banks as profit for them. This homeowner will have paid roughly $236000 for a $125000 home that appreciates at maybe 1% per year in inflation-adjusted dollars. The $236000 figure does not include 30 years worth of property taxes, insurance, maintenance and repairs.

A home is not an asset, it is a roof over ones head.

Get Rich Slowly provides an excellent comparison between the costs to rent versus the costs to own a home in the Seattle area.

Principle 2

To create wealth, each unit of money must do more than one job.
On the surface a home would appear to do that. A home provides a roof over the head and equity that can be tapped for future use. But does it really? Who determines whether and when a homeowner can tap equity? The bank does. When is a person most likely to need the equity? When the bank doesn’t want him to have it: during tough economic times, during periods of job loss or downsizing, when incomes have been cut. Even during boom times a home owner’s income-to-debt ratio will determine whether or not he can tap the equity in his home, how much he can tap and at what rate of interest. The recent meltdown in NJNA (no job, no asset), Alt-A and no doc loans will insure that home equity will be difficult to tap for everyone. A home, then, does one thing: it provides a roof over one’s head.

Principle 3

To minimize opportunity costs people who seek to create wealth, must maintain a level of liquidity. This means access to ready cash for emergencies or to take advantage of long and short-term investment opportunities. Home ownership inherently presents an opportunity cost in that equity that accrues through principle and interest payments is trapped and not readily available and the costs of taxes, insurance, maintenance and repairs are true costs and are monies not available for investment. For a simple $145000 dollar home in my area, taxes, insurance maintenance and repairs are approximately $3500 dollars per year. That is money that is not saved, not invested to provide future benefit to the homeowner. Does insurance protect the home? Yes it does. Do repairs and maintenance protect the home? Yes they do, but these are sunk costs and are costs that will not, in all likelihood, be realized when the home is sold. These costs are expenses aimed at preserving something that is appreciating at a glacially slow rate.

Principle 4

Wealth is not automatic. Despite the numbers of books sold with the words “automatic” and “wealth” and “automatic” and “millionaire” in their titles, wealth does not come automatically.
Now savings plans can and should be automated but individual decisions that create wealth by their very nature cannot be. You can automate your stock market investing, but you cannot automate the stock market so that you become wealthy. You can automate your savings, so that you have something to invest, but you cannot automate the economy so that yields remain fixed and your savings earn a meaningful rate of interest. You can automate debt payments, but those payments will come at a hefty cost to the debtor in the form of service fees and those debts will be collected in terms that benefit the lien holder. Therefore allowing a financial institution, especially a bank, access to your accounts for the purposes of debt reduction is a dicey proposition at best and will most likely benefit the bank by allowing them to collect fees that a person truly seeking to create wealth for themselves would do better to avoid. Finally wealth creation requires more than preparing bulk casseroles, reusing tin foil, denying yourself Starbucks or a coke. Wealth creation requires contemplation of what it truly means to have wealth in all its many incarnations. It requires vision, choices and active participation. While Ron Popiel may encourage you to set it and forget it, doing so with your personal finances will cause you to stagnate in your quest for wealth.

, a premier consulting firm specializing in the economics of prosperity provides a full list of principles:

Principle 5

Understand what a mortgage is and what it does. According to Wikipedia: “
“A mortgage comes from the old French “dead pledge” apparently meaning that the pledge ends (dies) either when the obligation is fulfilled or the property is taken through foreclosure. In many countries it is normal for home purchases to be funded by a mortgage. Few individuals have enough savings or liquid funds to enable them to purchase a property outright.”

A mortgage, then, is an instrument of debt, serious debt.

There are four principles to understand about a mortgage:
1) Mortgages are front-loaded. That means that most of the payments made during the first half of the loan term are used to satisfy interest while most of the payments made later in the loan term are used to satisfy principal. Put another way, the first payments in the loan term primarily go to benefit the bank and its investors, the latter payments in the loan term primarily go to benefit the homeowner and build equity.

2) With a fixed-rate loan, the principle and interest payments are fixed. The proportion of each payment that goes to interest depends on the unpaid principle balance at the end of each month. This last statement is true whether the interest rate is fixed or adjustable.
3) Extra principle payments have the greatest power the earlier they are made in the loan term.
4) Mortgages payments are made one month in arrears. If you close on a loan in January, your first payment will not be due until March 1st. In the first year of your loan you will make 11 payments. Even though you will make 12 payments in the second year, you will always be one payment in arrears.

One of the best detailed explanations with illustrations I have found about how mortgages work and the advantages and disadvantages of the different payment options can be found in Harj Gill’s book: How to Own Your Home Years Sooner - without making extra interest payments
Understanding mortgage principles number 2 and 4 is critical to understanding why mortgage reduction plans work, so let’s synthesize them again:
Key principle: The proportion of each payment that goes to interest depends on the unpaid principal balance at the end of each month.
Key principle: Mortgage payments are made one month in arrears.

Mortgage Prepayment plans

In general mortgage prepayment plans fall under two types; automated (the bank has control) and manual (the home-owner has control). If you choose to prepay your mortgage, and there are sound financial principles for not doing so, please do it on your own terms! Pay Plan 26 offered by Countrywide Financial now Band of America is a simple plan. In a nutshell, a homeowner makes a principal and interest payment every two weeks. The homeowner will make a half payment every 2 weeks or 26 times per year. That means that a homeowner who signs up for this program will make 13 principal and interest payments per year, but the 13th payment will go to principal. These payments are automated payments that the bank withdraws from a homeowner’s account every two weeks. Depending on the bank, the payments will be applied in one of two ways, either in one extra principal and interest payment per year or one and a half payments twice a year. There is a small difference in interest savings depending on the way the payments are applied.

Let’s look at what a bi-saver program like Pay Plan 26 really does:
1) A bi-saver program started immediately will turn a 30-year mortgage into a 24-25 year mortgage saving the homeowner thousands of dollars in interest payments.
2) A bi-saver program allows the bank to collect fees for a service the homeowner can provide for himself at no charge. Simply dividing the monthly payment by 12 and applying that amount monthly to each principal and interest payment will save a homeowner additional interest payments in addition to the fees assessed by the bank for its program.

Two Illustrations follow. In both the loan amount is $125,000 at 6.75% interest. The first total interest figure indicates what you would pay in interest if you did not pre-pay the loan. The second total interest figure indicates what you would pay in interest with a pre-payment plan.

Bank-sponsored pre-payment plan:

Home-owner do-it-yourself payment plan. $67.56 ($810.75/12) is added to each principal and interest payment. The monthly payment is $810.75. The final summary takes into account the additional $67.56 paid each month.

3) A bi-saver program allows the bank ready access to a homeowner’s bank account
4) A bi-saver program saves the homeowner very little in the first five years of the loan. As an illustration a homeowner who purchases a $125000 home at 6.75% interest will pay $40989.50 in interest. Enrolled in Pay Plan 26 that homeowner will make $4053.75 in extra payments to the bank will pay $40384.30 in interest and another $240 in fees. His total interest savings then will be $365.20. That is $4053.75 in additional payments to save $365.20. The interest savings become much more pronounced the longer you stay in your home with the savings totaling $3373.09 by year 10.

It is very important when you buy a home to determine how long you truly plan to be in the home. There is so little equity build up in the first 5 years of home ownership that it makes very little sense to buy a home if you know that you won’t be in the home longer than 5 years. Data from the Census Bureau and the National Association of Realtors indicates that the average length of home ownership is 6-8 years. Banks understand this. When the average homeowner enrolls in a bi-saver program, he guarantees the bank cash flow, while carving out little benefit for himself.

Be very cautious if you choose to participate in a bi-weekly program in which the bank uses a third party to collect and deliver payments. The third party processor may charge fees for set up and monthly transaction fees. Additionally the homeowner can end up in a bind if the loan is sold to another bank and the third party processor fails to deliver the payment to the new lender.

The Down-payment Secret Weapon

What is a down payment?

A down payment is typically a lump sum of money that a homeowner applies against the purchase price of a property. The loan amount is typically equal to the purchase price less the down payment. Homeowners make down payments because they feel they ought to and to lessen the “payment shock” of the mortgage. Banks want homeowners to have a down payment because it lessens their overall risk. If you could maintain foreclosure rights on a property by loaning a fraction of its appraised value, wouldn’t you want to do that? That is what a bank wants to do.

Home owners ought to have a down payment because a home purchase is an expensive transaction and once the excitement of the home purchase has passed, homeowners typically find that they are very cash poor forced to put unforeseen expenses on credit cards.

The amount available for down payment should be at least 20%. Given the expenses of owning a home, having a down payment of 10% means just barely getting into a home. Scraping together a down payment, barely qualifying for the monthly payment, then living in the home can create a level of stress that will make a homeowner regret ever purchasing the home. Although principal and interest payments may remain fixed home ownership costs are guaranteed to go up due to rising tax, maintenance and insurance costs.

Now even though I believe you should have at least 20% down, I don’t believe you should apply the down payment the way the bank wants you to.

For homeowners seeking to prepay their home loan and save massive amounts of money in interest payments. Their down payment is their secret weapon. Simply making the down payment the first payment on the loan will turn a 30 year mortgage into a 22 year mortgage saving thousands more than the bi-saver programs banks offer. The down payment, then will serve at least two purposes: 1) save massive money in interest payments 2) build equity in the home. Strategically using your down payment employs the wealth principles outlined previously by reducing the opportunity cost incurred when using a down payment as traditionally dictated by the banks.

Why does this work?

Strategically applying your down payment works because of mortgage principles number 1 and 2. Mortgages are front loaded meaning that the bank collects half of the total interest due in the first 10 years of the loan. With a fixed-rate loan, the principle and interest payments are fixed. The proportion of each payment that goes to interest depends on the unpaid principle balance at the end of each month. Applying the down payment to the first mortgage payment literally disrupts the mortgage shaving time and interest payments off of the front end of the loan. The best way to illustrate this is to use the mortgage calculator at
On a loan balance of $197000 a first principal payment of $19700 will drop the principal balance to $177300. The interest that would have been paid is $94000. By strategically applying your down payment, that is $94000 that you don’t have to pay.

As the illustrations below prove, strategically applying your down payment is a far superior equity and savings strategy than putting 10% down and taking out a loan for $177000. It is also a far superior strategy than putting 10% down and enrolling in a bi-saver program. In fact there is no need to ever enroll in a bi-saver program when you strategically apply your down payment. Applying 20% with the first payment does not deliver the “bank for the buck” that 10% does. Applying 20% however will deliver another $57000 dollars in savings and shave an additional 5 years off the loan converting a 30-year loan into a 17-18 year loan. Strategic application of 10% down provides the biggest return per dollar applied. It makes sense to hang onto the other 10% as a cushion or for future investment. Although this strategy will work for any loan amount and any interest rate, a home price of $197,000 is used for illustrative purposes.

Loan amount $197,000. No down payment, no prepayment plan:

Loan amount $177,000. Home valued at $197,000 less 10% down payment:

Loan amount $157,000. Home valued at $197,000 less 20% down payment:

Loan amount $177,000. Home valued at $197,000 less 10% down payment and bi-saver program:

Loan amount $197,000 with 10% applied to the first payment:

Loan amount $197,000 with 20% applied to the first payment:

One of the main reasons that people make a down payment is to lower the monthly payment. $127.78 is the difference in mortgage payments between a $197000 loan at 6.75 percent and $197000 less 10 percent down ($197000-$19700=$177300). There are an incredible number of things that can happen when you own your own home, which is why you should hold on to your capital. If $127.78 will make a payment unaffordable, then it is probably best to pass on the house until your financial situation improves.

We used this strategy in 2006 when we purchased the home we intend to retire in. The loan was an 80/20 loan with a blended rate of 6.77%. The 80/20 loan avoided PMI. By strategically applying the down payment, the 80% portion will be paid in 19 years and the 20% portion in 16 years.

About Private Mortgage Insurance;

The loan is collateralized by the underlying real estate. Private Mortgage Insurance (PMI) is a premium you pay to make sure the bank is reimbursed in the event of a default. The banks are double dipping here and it is unfair. The premium is typically $55 per month per $100,000 financed. There is specific law about private mortgage insurance and how you can petition to remove it. Through 2010 PMI is tax deductible. I had PMI for the first 3 years I was in my home it was relatively easy to get rid of.

Will the bank let you do it?

The short answer is that we did it and made our intentions clear when shopping for a loan. While we got our loan through the private sector, this strategy is very easy to employ using VA or FHA loans. We looked at all three types of loans before going with the private sector loan. This strategy does not work nearly as well if you have only 10% to put down and have to put at least 5% down to get a loan. In fact, under those circumstances, you are better off putting 10% down and enrolling in a bi-saver program. Remember that because of the expense of homeownership you should delay a home purchase until you have 20% down. If you have 20% down and the bank “forces” you to put 5% down you still win. By then applying 10% of the unpaid principal to the first payment you will put a total of 14.5% down, preserving part of your down payment and will save slightly more in interest costs over the life of the loan than if you had played the bank’s game and put 20% down and enrolled in a bi-saver program.

Here are the illustrations:

Home price is $197,000 – 20% ($39,400) = $210388.62 total interest payments at 6.75%

Home price is $197,000 – 20% = $157,600 loan amount. Bi-saver program = $160,673.16 total interest payments + fee expense for program

Home price is $197,000 – 5%(9850) = $187,150 loan amount. Apply $18,715 to the first payment = $160, 226.52 + 0 additional expenses. Using this method a homeowner would still have $10,835 dollars of their down payment to have as cash reserves.

The more philosophical answer is this: You shouldn’t have to ask permission for how you spend your money.

A roof over ones head is a necessity; home ownership is merely one option that meets that need. As an investment or a forced savings plan, home ownership is a poor choice. Wait to purchase a home until you have sufficient capital reserves and can apply strategies to decrease your overall costs on the back end of the loan and preserve your wealth on the front end.

Tuesday, June 16, 2009

Win Win Win Cash or a Book You Choose

You can win "Why Smart People Make Dumb Money Mistakes" OR Cash $100
check it out here

Monday, June 8, 2009

Why Home Prices May Never Recover

Here is the data from the USA today article that I posted earlier on my blog.
The graphs show long term housing appreciation data going back to 1950. Looking at the data, a house just isn't an investment. It is a roof over your head that is it. It is not even a source of ready cash if you need it because the markets determine whether or not a homeowner can access the equity in his home. To look at the actual data click here.

Saturday, May 23, 2009

Home Ownership Revisited

On March 17th 2008 I wrote: Home Ownership, The Biggest Financial Scam of the 20th Century. I said that home ownership is a terrible way to build wealth and that in fact it won't build wealth for the majority of people who own a home. I said home ownership as a way to build wealth is a scam because all of the participants in the housing bubble knew that long term home owners would in fact lose money on their homes. My article was controversial. I quoted financial planners, the comments that I received from the many sites the article was published were largely skeptical. In December, Dennis Cauchon of USA Today wrote: Why Home Values May take Decades to Recover. Yale Economist, Robert Schiller wrote about the long-term appreciation of home values. It is about as dismal as the long term appreciation of stocks that I outlined in The Great 401K Experiment.

Why Home Values May Take Decades to Recover:

Dennis Couchon, USA Today
Rick Wallick moved into a new, three-bedroom $200,000 home in Maricopa, Ariz., in October 2005. Today, the home is worth $80,000.

The disabled software engineer stopped making mortgage payments this month. His $70,000 down payment is now worthless. His dream house will be foreclosed on next year.

"We're so far underwater it's not funny," says Wallick, 57, who had to return to his original home in Oregon to care for a sick family member and tend to his own medical problems. Wallick, one of the hardest-hit victims in one of the states hit hardest by the housing crisis, lost 60% of his home's value in three years.

His story is an extreme example, but home values have fallen so sharply since hitting a historic peak in the spring of 2006 that many Americans are wondering how much more prices can for the rest of the article.

Thursday, May 21, 2009

Credit Card Bill of Rights Part 2

I just received this update from The Simple Dollar on the "CC Bill of Rights"

The Credit Cardholders’ Bill of Rights Act of 2009 Is Here: What Does It Mean For You - And What Might It Mean for the Future?
Posted: 20 May 2009 07:00 AM PDT
On Tuesday, the Senate passed the Credit Cardholders’ Bill of Rights Act of 2009, an act that will quickly be passed into law with the signature of President Obama, likely within the week. This bill has a huge number of ramifications for credit cards - for users who are late on their payments, for those who pay their bills on time, and perhaps even for the ability to use credit cards in stores.

Washington Wire summarizes the bill very succinctly:

Existing balances: Issuers cannot retroactively change the rate on an existing balance unless the account is 60 days delinquent.
Payments: A consumer payment above the minimum applies first to the balance with the highest rate.
Teaser rates: Issuers cannot raise rates for the first year after an account opened. Promotional rates must last at least six months.
Bills: Issuers must send a bill 21 days before the due date.
Over limit: Issuers cannot charge over-limit fees on credit cards unless the consumer has signed up to allow such transactions.
Minors: For consumers under 21 years old, a company must get the signature of a parent or another to take responsibility for the debt, or it must obtain proof that the under-21 consumer can repay credit.
Disclosure: Cardholders must get 45 days notice of change in terms.
Fees: Issuers cannot charge fees to pay by mail, phone, and electronic transfer or online, except for expedited service.
Gift cards: All gift cards must have at least a five-year life.

Meanwhile, The Wallet offers a few predictions for what this means:

“We’re in uncharted territory here,” says Curtis Arnold, head of, a credit-card comparison site. Mr. Arnold says consumers can expect issuers to work overtime to lure high-end, high-volume clientele while adding fees and rate hikes for customers with less-than-stellar credit profiles.

The rationale is that credit-card issuers make money off interchange fees (fees merchants pay to card issuers). So customers who charge everything and pay off their balances are seen as less risky and still profitable by card issuers.

The future of rewards programs is also up in the air. Mr. Arnold advises cashing in reward and airline mile points, as their purchasing power has been on the decline in the last year or so. However, he points to new cards from brokerages like Charles Schwab and Fidelity, which offer higher cash-back rewards that lure customers to their brokerage products.

Mr. Arnold also advises those customers with existing balances to pay them off as soon as possible and consider transferring them to smaller banks and credit unions, which may be able to offer more generous rates and repayment terms. He, and others in the industry, expect interest rates on existing balances to keep climbing before the proposed legislation kicks in. (An optimistic guess would be that card issuers would have to comply nine months or a year from now.)

Something else to keep an eye on: Annual fees. The era of reward cards, or even non-reward cards, with no annual fees may be at an end. Stay tuned to notices from your card issuers and the changing fine print of your statement

So what does this mean for you?

First of all, these rules do help people avoid getting into trouble with credit cards. I applaud the change that requires minors to get parental approval or to prove they have the ability to repay before getting a card. I also like that all extra payments always go to the portion of the balance with the highest interest rate - no more shenanigans with companies applying overpayments to 0% balance transfers. Eliminating fees for different types of payment is also a plus.

But what else will change? It’s important to remember that the full ramifications of this bill won’t be seen immediately. Obviously, the credit card companies will try to keep their level of profits the same, which means that, inevitably, they’ll have to change their business in some ways. However, as Arnold noted above, they don’t want to kill the golden goose - the interchange fees that they rake in as a result of wide credit card use.

So, beyond the immediate impact for credit card users noted above, I’m going to make a few predictions about how this bill will affect things over the long term.

Interest rates will keep climbing. The days of easy low-interest credit are ending. That means the role of the credit card will begin to change as smart consumers begin to use credit cards more like charge cards - they pay off the balance in full at the end of each month.

What this might mean for you: Paying down your credit card balances as soon as possible is more important than ever! If you’re carrying a credit card balance, now is the time to start buckling down and wiping out that debt. If you aren’t carrying a debt on your cards, don’t start one - stick to spending less than you earn and keep using the credit card as an intelligent tool.

The credit card syndicates (Visa, Mastercard, etc.) will seek to raise interchange fees as a first line of attack. Credit cards work most effectively when lots of consumers have them and then expect this service from merchants. Think about it from Target’s perspective, for example - if half of their customers use credit cards to pay, they’re somewhat tied to offering that service to customers. Thus, I predict credit card companies will use that to their advantage and raise interchange fees, particularly on large retailers.

What this might mean for you: Many merchants will attempt to recoup this increase in interchange fees by passing the cost along to the consumer, so I would expect a slight bump in prices - 1% or so, spread out over many purchases and items. For most people, this will largely go unnoticed and will be seen as normal inflation.

Credit card issuers will get clever with fees, but annual fees won’t return. Most consumers have come to expect that their credit card will have no annual fees, so I don’t believe these will return in wide use. Instead, the companies will see other avenues for fees - cards that require a minimum number of uses per month, cards that have fees to enroll in particular rewards programs, and so on.

What this might mean for you: You’ll have to be more careful with credit card offers in the future. Also, when there are updates to your terms, you’ll need to read them carefully. Again, if you keep your balance paid, your credit will be good, so you can walk away from any cards that try to slip sneaky fees in on you.

I don’t believe rewards programs will go away. I would expect, though, that rewards programs will become more tied to specific “partner” retailers, like Target and Amazon, and away from more general programs like Drivers’ Edge. Why? Merchant-specific cards encourage loyalty to those merchants, and that has quite a bit of value to the merchants - those aren’t programs they will want to see go away.

What this might mean for you: Don’t be surprised if you find some of your rewards programs changing, particularly when your current card expires. For now, though, stick with what works for you.

Any thoughts or predictions on this new world of credit card rules?

Credit Card Bill of Rights

I just spoke with a friend angry at the "Bill of Rights" to be signed into law over the next week. We are concerned and just a bit angry because reward cards may become a thing of the past as a result of this "Bill of Rights". As always the full implications of this new law won't be known for years. Our credit card debt is in the trillions! See the YouTube video.

Wednesday, May 20, 2009

Developing Your Personal Financial Philolophy

Philosophy is defined as the most general beliefs, concepts and attitudes of an individual or group. A financial philosophy, therefore, is the development of general beliefs and attitudes as they relate to money and business transactions.

I began to think about this article months ago when it dawned upon me that I simply wasn’t getting the level of enjoyment out of my money that I ought to be. Each new purchase has become a cause of fear and anxiety rather than a cause of joy at having the resources to make the purchase. I poured over consumer reports for months looking for the perfect purchase until I realized that I hadn’t had a salad in weeks, produce freezing without end in my old refrigerator. I picked up a copy of Rich Brother, Rich Sister by Robert and Barbara Kiyosaki thinking that the Buddhist teachings of Barbara Kiyosaki would inform my spiritual thoughts about money. It didn’t. I have watched affluent friends research purchases until the joy of the purchase has long passed and finally, today, I read an article on a widely-read financial blog, The Simple Dollar, about haggling. The article was a about a reader who had proudly written in that they had haggled successfully at a dollar store!

I am reminded of Dr. Depek Chopra’s audio, Creating Affluence. To paraphrase: If you are constantly thinking about money, spending it, how to get more of it, then regardless of the dollar amount in your bank account, you are really poor. The antidotes to psychological poverty? Carefreeness and charity.

I was not brought up in poverty, the popular claim of so many financial authors, my upbringing was solidly middle class. My father always had a wad of cash on his person or nearby. When he passed on, I came to believe that his wad of cash was the only tangible asset that my father had. My grand parents were business people who thrived even in the segregated South. When my grandfather died, my grandmother managed the assets that he left her for almost 40 years. I always heard that my grandmother was cheap. I preferred to think of her as frugal. She had the funds to do what she needed to do and, in many cases, what she wanted to do. When she became ill in her later years, it was her resources, not the resources of her children, that paid her medical bills and assisted living expenses. My mother, like my father, is highly educated. She always earned a good living. “He is going to die and go to hell” was the mantra that I often heard in childhood when an unexpectedly high utility bill came due and my mother was afraid to show it to my father.

In the 1970’s, when I grew up, the dollar was worth something. Food and energy were expensive, iceberg lettuce was in, salmon came in a can, steak was a treat, and I thought the best cakes were made by Duncan Hines.

I was the kid who had a wad of cash hidden away in a coffee can.
I was afraid to spend it and afraid someone would ask me for it. Wanting only to accumulate, and afraid to spend, I was afraid to make decisions about money.

My mother and I had a fight about money when I was in college. She wanted me to move some money to a different account and needed me to get some paperwork notarized. I resented the request and didn’t do what she asked. I didn’t feel trustworthy in the area of money and was angry that my mother had told me to do something I wasn’t comfortable doing.

My solution trustworthiness around money was to depersonalize money and to think of it as a tool, something to help me move from point A to point B. Since money was just a tool, it did not matter to me who owned the tool as long as I got to use it. I was therefore content to rent the tool. My mother tried to teach me financial lessons by sharing a credit card with me while I was in college. She had to take the card back because tool ownership was not a concept that I had learned to embrace. When I went to graduate school, I got a credit card of my own. Seemed a great deal that I could charge a lot and pay a little. Citibank and I became business partners, a relationship that would last almost 16 years. By the time I left graduate school I owed a manageable amount to Citibank. By the time I left professional training, I owed double the amount. By my second year in practice, I owed 12 times the amount plus a car, plus student loans, plus a mortgage and open lines of credit at other retail outlets. Yes, my philosophy was that money was a tool, but because I was only renting and didn’t own the tool, I found myself in bondage to Citibank, forever focused on the next pay raise as the solution to my problems.

My financial philosophy of buying what I want, using someone else’s money at a high rate of interest was not working. My nights were sleepless. I felt enslaved as much to my own habits as I was to Citibank. I read the Millionaire Next Door and my philosophies began to change. Robert Kiyosaki came into my life and I learned that income is not wealth and that my home is not an asset. Kim D. H. Butler, of Partners 4 Prosperity, came into my life and I realized that I have to have each dollar do as many jobs for me as it can, that one of my major responsibilities is to generate as much income as I can and that to the extent possible I have to retain control of my money, remain as liquid as possible and shun situations in which access to my money is restricted by law or the economic climate.

My key money philosophy shifted from one of renting the tool to owning or having clear control of the tool.

My clearest thought and philosophy about money is that it is to bring joy. Not that money buys happiness. It does not, but it does facilitate ease. It is the unexpected, but necessary, trip home to see family, the trip overseas, the gifts to charity, the new kitchen, the new car, the flower garden, the work of art. I developed some clear money rules about how and under what circumstances money could leave my account. But on the road to money acquisition new philosophies can clash with old money rules and the old dissonances can occur anew. That is certainly what has happened at times for me.

Save for a major purchase and forestall buying even if it means missing a major sale and saving money. Does that make sense?

Understand the time value of money, but does that mean that every minute not spent in revenue generation is a minute wasted?

Understand what it costs in work, sweat, and time to earn the money to buy a car and we understand the true cost of the car.

Developing a financial philosophy that serves and empowers rather than imprisons us is a personal development activity that never ends. Our relationship to money is defined anew as the complexity of each transaction increases and our thoughts about ourselves in the market place evolve.

Without evolving philosophies we risk slavery to poverty and sacrifice carefreeness and charity even as we gain material wealth. This is one of the greatest ironies of our time that differentiates the cheapskate, from the person driven by value and the haggler from the person living in abundance.
About 3 weeks ago I wrote in "The Great 401K experiment and 16 Ways to Create Wealth, that gaining new skills was essential. Today, The Simple Dollar posted this article about gaining transferrable skills.

The Power of Transferrable Skills - And Six Areas to Work On
Posted: 19 May 2009 01:00 PM PDT
When I was in college, the vast majority of my classes were effectively training for a career in research and scientific data management. Seven years after graduation, though, I find myself drawing instead on the transferrable skills I picked up in other classes: public speaking, writing, leadership, information management, and so on. To put it simply, transferrable skills are those things that you can utilize no matter what specific career path you find yourself on.

Transferrable skills are often left by the wayside in competitive college majors. In order for a computer science major to get a leg up in the post-graduation workplace, for example, it’s often preferable to jam in another programming or algorithms class than it is to insert another public speaking class. Even if the program does require classes on transferrable skills, those classes are often looked down upon as “blow off” classes - ones that have to be finished in order to get down to the real classes within the major.

I believe this is a mistake. As change in this world accelerates, people are spending less and less of their life strapped to one particular career. They have the freedom to choose other avenues - starting a new career, starting their own businesses, and so on. In that environment, transferrable skills become more and more valuable. In fact, a well-polished transferrable skill makes for brilliant resume fodder no matter what your job - communication skills and leadership experience are a plus for almost any post-college job you might apply for.

Obviously, course loads often aren’t very flexible in a college environment, so my recommendation would be for college students to seek out other sources for picking up and mastering transferrable skills - extracurricular activities, internships, and other sources. Beyond college, transferrable skills are useful for everyone to work on at any stage in one’s career

Here are six significant areas of transferrable skill well worth working on, both to improve yourself and to prepare for your future.

Leadership Can you actually lead a team? Can you herd a group of people towards a greater purpose? Are you self-motivated enough to do this? Can you set goals and actually achieve them? Can you plan large projects and push them forward?

How can I get it? Join a community or student organization and take charge of a large project. Later, run for a leadership position within that group. The best way to learn leadership skills is to learn them in the laboratory of life, and organizations provide the perfect opportunity.

Administrative skills Are you able to prioritize the tasks in front of you? Can you analyze information and then describe it in layman’s terms for others to understand? Can you interpret rules and use them effectively?

How can I get it? Get involved in the planning of as many large projects as you can. Project planning teaches you many of the administrative skills you’ll need in life. If there is a large project, volunteer to help with the planning - if there’s already a planner in place, learn everything you can from that planner.

Information management Can you actually research a topic? Can you take a pile of research and use it to answer worthwhile questions? Can you communicate those facts to others? Can you manage a budget and handle financial records? Can you use a wide variety of computer programs?

How can I get it? If there are opportunities to present anywhere around you, take them, even if you aren’t familiar with the topic. Of particular use are topic areas where you’ll have to do some research in order to get the presentation right. Another great avenue is to volunteer to be the secretary or (particularly) the treasurer for a group. Such activities will require you to carefully manage a large amount of information on behalf of a large group.

Creativity Can you come up with interesting ideas of all kinds? Are you good at coming up with marketing ideas? Are you good at formulating the next step in a process? Are you good at creating visually appealing layouts?

How can I get it? Create some websites for groups - and learn how to do it along the way. Whenever there’s an opportunity for brainstorming, get involved and throw out ideas. Creativity is something that is best learned by practice - so practice it.

Interpersonal communications Are you willing to speak in public? Can you communicate your ideas well in writing? Can you lead a conversation? When you communicate with others, do they understand your ideas?

How can I get it? Participate in conversations and meetings instead of just sitting there. Volunteer for any and all public speaking opportunities that come your way. Volunteer for difficult and arduous tasks of documentation - that’s the best way possible to practice writing to communicate information.

Personal development Can you use the experiences in your life as a source for growth and personal change? Do you have a personal moral code that you actually follow? Can you effectively and honestly evaluate the strengths and weaknesses of others (both people and things)? Can you deal with stress?

How can I get it? Don’t shy away from challenges - step up to big projects. Keep a journal and use it to explore what you really think about things, particularly the people around you.

Every moment you spend learning the above skills is a valuable moment. You’ll find yourself returning to these skills time and time again throughout your life - and they’ll provide a surprisingly strong backbone for your career and personal success.

Friday, May 8, 2009

Setting Goals and Failing

Goal Setting may be oversimplified, overrated and downright dangerous. Business school professors from the University of Arizona, Northwestern, Harvard and the Wharton School examine the downside to goal setting. This article has unleashed a storm of controversy.
Read it at

Sunday, April 26, 2009

Looking for Literary Agent

Our Book Proposal for Straight Talk: Making an Informed Choice About Network Marketing is ready and the query letters are starting to go out. Mike Ray and I are looking for a literary agent with an interest in Business and Personal Development to represent us in the market place.

Query Letter and Book Proposal are available on request.

Saturday, April 25, 2009

Bea Arthur dies at 86

This is a sharp departure from my usual posts. Beatrice Arthur has passed away.
This is a great little article in the LA Times. Here is the link:

The Great 401K Experiment and 16 Strategies for Creating Wealth

You have been diligently saving into your 401K looking forward to funding your retirement. You are 57 years old and you open your statement. You’ve lost half of your retirement investment. Suddenly retirement has been pushed back beyond age 65 and you are facing the prospect of having a part-time job when you retire. You have been diligently saving into your 529 college plan. Junior is about to turn 18 and instead of the one hundred thousand dollars you expected based on what you were told were the historic returns of the market, you have less than half of that. Now you have to have the conversation with Junior, valedictorian of his class, about going to the Junior College.

What if the first thing that your financial planner told you after the usual obligatory greeting was that you were about to embark on a great experiment? That experiment would require you to set a consistent amount of money aside for 30 years in a lock box controlled by investment banks and the United States Federal Government, limit your investment options to mutual funds and bonds, and hope that certain beliefs about long term historical returns hold true until you need your money at the end of your working life.

That is exactly the first conversation that I had with my financial planner 7 years ago. She said to me, “Ouida, these mutual funds, 401Ks and 529 college plans…this is all a great experiment Large groups of people have never retired or planned for college in this way before and we won’t know how this experiment is going to turn out for another 10 years or so.”

When I heard that, I thought how silly the television pundits and financial authors are who teach and preach that investors should invest for the long haul and dollar cost average. They simply articulated unproven strategies in an overall experiment that began in the late 1970’s when corporations began to shift the responsibility for retirement planning and pension funding onto employees. I thought about the meaningless conversations that I had with my erstwhile plumber about the latest hot mutual fund and whether or not he should buy Google. The Great 401K Experiment has turned the majority of employees into investors and turned the man on the street or the salesman behind the desk into a financial guru.

Wikipedia defines an experiment in the following manner:
In scientific inquiry, an experiment (Latin: ex- periri, "to try out") is a method of investigating causal relationships among variables. An experiment is a cornerstone of the empirical approach to acquiring data about the world and is used in both natural sciences and social sciences. An experiment can be used to help solve practical problems and to support or negate theoretical assumptions.

I wonder who ever thought that by diligently placing money in their 401K that they were “trying out” their retirement plan?

In scientific inquiry we use an experiment to determine an outcome. As a physician, I rely on the outcomes of well-designed experiments to determine the best therapeutic strategy for my patients. In health care, by the time an experiment involving a therapeutic intervention is carried out on human test subjects, basic assumptions about the therapeutic intervention have already been formulated and tested in the laboratory. In medicine, we know what the variables are and we control for them, we have specific outcome measures and, most importantly, we can stop the experiment if the outcome is out of line with expectations and proves to be harmful to patients.

Despite involving human test subjects, the goings on in the world of finance and retirement planning have nothing to do with a safe controlled experiment. No, in the world of personal finance and retirement planning, we have what is known as an observational study. In an observational study, people participate in a series of activities and we follow them long term to the, uh, end. Whatever that end is. We are simply along for the ride waiting to see what happens. In terms of retirement planning, that could mean a retirement lived in poverty or a retirement in which all of the financial needs are met. But this experiment does not guaranty the latter outcome.

Let’s look at the assumptions that financial planners and employees alike have made:
1) In retirement, expenses will go down. Therefore retirees will need only 75% of their pre-retirement income. This assumption basically means that a person with an annual income of $100,000 during their working years, should set enough aside to generate an annual income of $75, 000 in retirement. This assumption has one basic flaw: it ignores inflation. Current estimates are that retirees will need $250,000 to $300,000 dollars to handle health care expenditures alone. This basic tenet of retirement planning ignores the realities of many retirees, personal illness, the need to care for a sick spouse or adult children.
2) Stock market returns average 8% per year over the long haul. This is simply untrue. A quick trip to shows that the S&P has returned 8.76% since 1871. However that percentage drops to 6.56% when adjusted for inflation. If you could have been invested in the markets for the past 137 years you could have done okay. But 137 years really does challenge the idea of just what the long haul is. The long haul is certainly more than 10 years. From January 1, 1998 to December 31, 2008 market returns were 0.96%. Inflation-adjusted returns were -1.44%. As I discuss in my article, The Stock Market: The Second Greatest Financial Scam of the 20th Century, the long haul for stocks is more like 30 years. It becomes obvious, then, what you should do if you are 50, intend to retire at 65 and are contemplating putting money in the markets as an investment.
3) Home prices will always go up. This assumption made home ownership tantamount to putting money away monthly into a super-charged savings account. I’ve never seen a savings account lose value the way the housing market did during the Savings and Loan crash and this most recent financial downturn.
4) Capital gains are better than cashflow. The current economic environment is a prime example of what happens when people invest for capital gains alone. When the capital gains party stops wealth is devastated. With cashflow, however, businesses can operate as usual. It is estimated that 20 percent of real estate loans made during the housing boom went to investors. What if all of those investors had invested for cashflow? Price appreciation made cashflow impossible for most of the investor purchases that were made in the last 4 years of the most recent real-estate boom. Absent cash flow, investor money would have remained on the sidelines, fewer loans would have been made, property valuations would have remained in check and part of the speculation that drove the recent housing market would have been absent.

What happens when the basic assumptions of an experiment prove false? The experiment fails. In medicine, a failed experiment sends everyone back to the drawing board looking for answers. Not so in the world of personal finance. Personal Finance is called personal finance for a reason. You are the person and it is your finance. You are the only one who goes back to the drawing board usually with less money than you started with. The broker who sold you the stocks made his money. The fee-only planner that you were told to use by Smart Money Magazine made her money. The fund manager made his money.

What is the solution? Education. Education of the financial type. Every waking minute of every waking day. Yes this is work, but it is the only way. Those who don’t want to do this type of work should remain participants in the observational experiment to whatever end. My financial planner made sure that I stayed out of 529 plans, and that I did not invest in IRAs outside of my 401K plan. The way to wealth is simple and it is the following:
1) Live below your means
2) If housing prices in your area are too high, rent, but aim to keep total housing costs at less than 20% of income
3) Buy a quality car no more often than every 10 years and maintain that car. Car leases and frequent new car purchases are among the greatest drainers of household wealth
4) Eliminate consumer debt.
5) Obtain skills in writing, sales and marketing
6) Save
7) Invest savings into income-producing assets:
a) businesses such as network marketing
b) real-estate
8) Work with those assets once you do invest to make sure they produce income.
9) Protect all assets via entities
10) Find advisors and partners that you can trust who have your interests in mind. They are not hard to find
11) Understand yourself and your tolerance for risk. For many putting money into bonds and not giving financial education another thought is the best strategy.
12) Read a financial book per month and attend one business development seminar per year that teaches a specific skill
13) Stay away from mainstream financial magazines. They only offer the same pabulum that has left many high and dry, stripped of their wealth.
14) Subscribe to Investors Business Daily, The Financial Times or The Wall Street Journal
15) Stay away from personal development seminars but read personal development books
16) Implement the strategies and skills from the seminars and books

Your time investment will be at least 10 hours per week.

Are you ready to invest the time and get going?

As Featured On EzineArticles

Saturday, April 11, 2009

Zack, Miri, the P-Word and the Laws of Success

The “p-word” is Porno and Zack and Miri, life long friends decided to make one. Busted and broke, Zack thinks it would be an easy to make a porno and make money. Miri thinks that if it were easy, everyone would do it. Zack raises the money, finds a studio, writes the script and together they select the cast. They are on a roll and ending their financial problems does seem easy, but before they shoot a scene, they lose their studio, props and investment. Miri was right…not so easy. This movie was not a tale of persistence or success, they never do make their porno and the best we can figure out is that they never do change their financial situation. Friends, Zack and Miri, do fall in love, but nothing else changes.

Their experience is true for so many who seek positive financial change in their lives, assume the change will be easy and rush, headlong, into disappointment.

Not everyone that I talk to about getting started in a home-based business gets started. In fact most don’t. I have learned over the years, that when a prospective business partner says no to me, what they are really saying is that there must be an easier way to make money. There must be an easier way to make money than sales, there must be an easier way to make money than marketing, there must be an easier way to make money than saving and investing, there must be an easier way to make money than taking classes at night to improve skills. There must be an easier way. Period.

As Zack and Miri found and most wealth seekers find: There isn’t. Faced with the harsh reality that there isn’t an easier way, wealth seekers either quit seeking wealth or they vow to acquire the necessary skill sets to gain and retain wealth. Few people choose the latter. The majority, never quite letting go of the misplaced belief that there must be an easier way, drift aimlessly from project to project, opportunity to opportunity becoming increasingly disillusioned with each failure.

Unfortunately few people ever make and complete the journey of wealth creation. According to the Tax Foundation’s July report of individual income tax data, ten percent of American households make over $100,000 per year. In their book, The Millionaire Next Door, Stanley and Danko indicate that the average household income of millionaires is $247,000.

When Stanley and Danko wrote their book, they focused on millionaires because they thought that many American households could attain that level of wealth within a single lifetime. “About 95 percent of millionaires in America have a net worth of between $1million and $10 million. Much of the discussion in this book centers on this segment of the population. Why focus on this group? Because this level of wealth can be attained in one generation. It can be attained by many Americans.”

Why do some succeed while others ultimately fail?

People who seek and ultimately gain wealth gain different skill sets from those who don’t. Napoleon Hill places Specialized Knowledge among the 15 required assets to create wealth in his book, Think and Grow Rich. How long does it take to acquire Specialized Knowledge or a new, useable, skill set? 1000 hours, according to Michael Masterson in his book, Automatic Wealth. That is roughly 2 years at 10 hours a week for the person who has a full-time job and is seeking to change his or her financial picture. So one must either gain Specialized Knowledge or align himself with one who has it. Every other success strategy or characteristic outlined in Napoleon Hill’s Books requires work to attain or practice. Desire, Self-Control, Autosuggestion, Faith and a Definite Aim, require daily practice. Forming a Mastermind group does not require daily practice, but it does require a commitment to that group, and it often does require rearrangements within social networks. That is changing the people you hang out with.

The Success Strategies are also known as Laws of Success. They are so called because they cannot be negotiated with, they simply are.

The irony is that without any knowledge of the Laws of Success, Zack and Miri employed them. They had a Definite Aim: to change their financial picture. Their living situation reinforced that aim daily. Their group of actors and camera-men became their Mastermind Group and their group became self-reinforcing facilitating Faith, Autosuggestion and Specialized Knowledge. Zack initially had Persistence and Imagination to overcome the setback of losing their equipment, set and props. But lost Self-Control and Persistence when he realized he loved Miri. Without knowing the Laws of Success, he used the Laws of Success. Without knowing the Laws of Success, he broke them. Breaking the Laws of Success will undo the plans of success as Zack discovered, because he never did achieve his Definite Aim: to change his financial picture.

The truth is that whether we acknowledge them or not, we live in a world governed by Laws, Rules and Regulations. Many of which we use without acknowledgement and many of which we break in ignorance. We take for granted that we can leave our home without floating away because gravity allows us to walk down the street. We understand that what goes up, must come down and that our best hope is to control the nature of the landing.

Such are the Laws of Success. They exist and they work no matter our state of awareness.

Wednesday, February 18, 2009

Bulldoze That House!

It is time for a new Television show, Bulldoze That House! The theme for the show could be done to the tune of Elvis Pressley’s Viva Las Vegas; that gambling town. For gambling is what many home owners have done over the last four years; supplementing their income or the lack there of through no-doc-cash-out-refis on their homes, assuming the free money ride would never end.

Home ownership has always been about more than making the minimum payment, but with teaser rates and “pick-a-pay” loans doing the minimum was all this so-called housing boom was about.

The housing boom was about easy credit rather than economic expansion. While the average American family actually lost purchasing power over the last eight years, easy credit allowed us to maintain the illusion of prosperity while masking the truth: that the American economy has transitioned from higher-wage manufacturing jobs to lower-wage service jobs. That the American economy is based on consumption rather than production.

Since 2004, the basic rules of the housing game were thrown out of the window in an effort to put more and more people into homes. Home ownership was no longer something to aspire to through hard work and sound money management. With the barriers, income, assets, savings, a decent credit score, to home ownership removed anyone and everyone could own a home.

According to the Hoover Institution, home ownership was 66% in the year 2000 and peaked at 69.2% in 2004. The rate of homeownership fell to 67.8% in 2008 and reflects the rising tide of foreclosures in America. According to RealtyTrac, foreclosures have exceeded 250,000 units per month for the last 10 months. If current trends continue, 3 million people will lose their homes to foreclosure over the next year. According to the National Association of Realtors (NAR), there was an inventory of 3.8 million existing homes at the end of December 2008. The NAR estimated that it would take 9 months to work off the existing backlog. The median home price has fallen to $181,000 dollars in part because the numbers of homes bought under distressed conditions such as foreclosure are driving the price of homes down. With an estimated 3 million homes coming on the market due to foreclosure, housing prices have nowhere to go but down.

For ill or for good, home ownership has been considered one of the greatest vehicles for creating wealth in America. The decline in home prices means the loss of wealth that may take a generation to recover.

Already the mythology of the housing downturn is shifting to the economy. Previously, foreclosures were blamed on bad loans not bad borrowers. Now the economy is to blame. The reality is that just over one-third of delinquencies were due to job loss in 2006 and 46% of delinquencies were due to job loss in June of 2008. What this means is that if only the economy were to blame fewer than 1.5 million new homes would be on the market due to foreclosure rather than the projected 3 plus million homes.

Now the banks and borrowers are waiting to see what the Obama administration will do. Borrowers don’t want to lose their homes and banks don’t want to face the truth, that many of their assets are worthless. Municipal and state governments don’t want to lose the tax revenue so everyone is waiting to exhale.

But let’s look at the rules of the housing game: the rules as they were 10 years ago. Ten years ago, a borrower had to show income. Not only did that borrower have to show income, they had to show their qualifying income for at least five years. Ten years ago a first time borrower had to have a down payment of at least 5 percent, earnest money and closing costs. Ten years ago principal and interest payments could be no more than 28% of gross income with total debt payments being no more than 33%. Ten years ago, these were the minimum standards for owning a home.

The reality of home ownership is that it takes more than meeting minimum standards to truly own a home. Homes must be maintained and the cost of maintaining a modestly-priced, three-bed room, two bathroom, home is approximately $3000 per year. Property taxes and insurance payments are guaranteed to increase 3% to 20% per year depending on the market. In other words, a home-owner must have sufficient cushion of three to five thousand dollars per year to truly own their home. If not, a water heater, furnace, landscaping or paint job will become an economic catastrophe.

The reality is that many borrowers do not meet the minimum income requirement or debt to income ratios to remain in their homes. Some borrowers purchased $10 dollars worth of house for every $1 dollar in income. The only way to keep that borrower in their home is to re-price that home to 30% of its original value. Housing prices have not fallen 70% from their peak, therefore how does the government setting a new price bottom so that that borrower can remain in their house help the overall market? It doesn’t. What about the borrower who has significant credit card debt and was slightly over leveraged, borrowing 3.2 dollars for every dollar of income in order to purchase a home? That borrower would be helped by stretching the mortgage term to 40 years. What about the borrower who lost his job after qualifying for a mortgage and found a new job at 80% of qualifying salary? That borrower might be helped by stretching out the term of the loan to 40 years and setting the loan at today’s fixed rate of 5.26%

A borrower purchasing a house today at the median home price of 181, 000 and an interest rate of 5.26% will have a payment of $1000.61 (assuming nothing down). The income to afford that house is $61,000 per year. According to the Census Bureau 25% of US households meet or exceed that income.

The reality is that the government has few tools at its disposal to help borrowers without hurting broader society. Those tools are extending the loan term, re-setting the interest rate, re-pricing the homes, direct subsidies to borrowers. Both re-setting the interest rate and extending the loan term are two solutions that are both sustainable and limit the collateral damage. The contract began with borrowers and the banks and it stays there. Re-pricing the homes extends the damage to neighborhoods and potentially creates a windfall for the delinquent borrower. As an example, look at a borrower with and income of $40,000. That borrower leveraged into a $200,000 dollar home during the housing boom.
In order to afford the home, the borrower took out an interest only loan at the teaser rate of 4.85 percent. The interest-only payment was $808 dollars. The loan resets 5 years later to the prevailing interest rate of 5.26% and the principal and interest are amortized over 25 years. The new principal and interest payment for this borrower is $1199.68 more than 1/3 of monthly gross income. The market has already re-priced homes in the neighborhood to $180,000. Re-pricing the outstanding principal to $180,000, the amount set by market conditions, setting the interest rate at 5.26 percent and extending it over 40 years will make the principle and interest payment $899.00. This borrower might just make it. But the presence of other debts, rising insurance and property tax payments will ensure that this borrower’s economic situation remains tenuous at best. The government then re-prices the home to $150,000 dollars in an effort to keep this borrower in his home. Now the cost to the neighborhood exceeds the penalty imposed by market conditions forcing housing losses in that neighborhood of 25% rather than the market losses of 10%. If this borrower cannot maintain his home, the neighborhood still loses. Direct subsidies to borrowers is a solution without end. At a time when this nation is without a plan to deal with the entitlement obligations of Social Security and Medicare direct subsidies to borrowers is both untenable and unsustainable.

There is a reality that too few people seem to want to face: there are too many homes. In an effort to increase the percentage of home ownership from 66% in 2000 to 69% in 2004, credit flowed too freely and too many homes were built. Cities are populated with unfinished neighborhoods, incomplete apartment complexes, vacant-homes falling into disrepair, and boarded up apartment buildings. Neighborhoods suffer as abandoned buildings house squatters and crime instead of working families. Preferring to board up foreclosed buildings, banks have been loathe to maintain them. Because of the now complex relationships among borrowers, banks and investors, local governments are often unable to locate the parties responsible for a given, abandoned property. It is time for state and local governments, through the power of eminent domain, to take possession of abandoned properties and Bulldoze That House! Local governments could turn the new land into green spaces and community gardens or sell the land for commercial purposes such as bookstores, coffee houses, laundromats. Bulldozing that house is another way to preserve neighborhoods and support housing prices by removing excess inventory. Bulldozing that house also has the added advantage of forcing banks and investors to face their losses and re-price their assets, something they have not done despite receiving billions in taxpayer funds.

Friday, January 23, 2009

Why Won't Someone Just Tell Me What To Do With My Money?

I am sitting here in my office looking over the book titles I have purchased and read over the years. Wealth Cycle Investing, Cash Machine and The Truth About Money are titles that jump out at me. There are many, many others.

Why did I buy those books? Because I, like so many people looking for a way out of financial quick sand, have often just thrown up my hands and wished someone with more brains than me would give me a plan and tell me what to do.

Stephen Greenspan wrote in a recent Wall Street Journal article about financial gullibility. He was swindled by Bernard Madoff. He chalked his gullibility up to financial ignorance and his failure to remedy the situation through financial education. He also outlined social factors that cause us to act contrary to our own financial self-interest. Who is Stephen Greenspan anyway? He is emeritus professor of educational psychology at the University of Connecticut. Oops and oh dear. If he gets swindled with all the tools he has to understand human behavior what about the rest of us? Are we sunk?

I don’t think so. The truth is that no one and I mean no one will care as much about our own personal financial situation than we will. A dear friend of mine used to be an investment banker on Wall Street. She asked me how I was investing my 401K. I said that I was invested in bonds and index funds. She said that that was a good thing because her co-workers who were money managers spent more time managing their own accounts than the accounts of their clients. Humm what a shocker. But isn’t this what the current financial crisis is all about? That money managers, brokers, CEOs, creators of financial instruments were far more worried about their personal bottom lines than the long term implications of their actions in the market place?

What is a person to do? The first thing is to realize that while you may have a trusted financial advisor, that advisor also has mouths to feed and we as a society seem to be a bit beyond the philosophy that payment and compensation should be based on the value one creates in the market place. There has been a giant decoupling of the concept of commissions based on the returns for the investor. Mortgage brokers and realtors were paid based on sales and loans generated for over-priced properties. Now as real estate prices plummet across the country they get to keep their money. Fund managers get to keep their one, two, three, four, five or six percent of assets under management even in a declining market. As a friend of mine recently said, it is a “Yo-Yo”: yo on yo own. One would be well served to realize that it’s a “Yo-Yo” and act accordingly.

Financial planners tell individual investors to consolidate debt by refinancing their homes, to buy and hold, diversify and invest for the long haul. What they neglect to tell individuals is that the long haul is actually a generation. Charles Farrell, an adviser with Denver’s Northstar Investment Advisors, used data from Morningstar’s Ibbotson and Associates to analyze 52 rolling 30-year periods, starting with 1926 to 1955 and ending with 1977 to 2006 “But here’s what’s interesting: The Majority of your wealth would almost always have come in the last 10 years. Mr. Farrell calculates that, on average, you would have notched 8% of your final wealth after the first decade and 32% after the second. In other words, 68% of the total sum accumulated was amassed in the last 10 years.” (Wall Street Journal, Jonathan Clements November 21, 2007); For the investor who invested in mutual funds in 2000 and is asking himself when is he finally going to make money, the answer is probably 2030. Too bad if that investor needed that money in 2010, 2015 or 2020. What about using a home to consolidate debt? Most financial advisors neglect to tell their clients that there is benefit in gaining the skills necessary to eradicate short-term debt. Exchanging short-term debt for long-term debt merely forestalls the problem without addressing the underlying problem for the short-term debt. Lack of skills in debt management simply means that the short-term debt will recur if the reasons for the accumulation of that debt remain unaddressed. From the financial planners’ point of view, consolidation solves their client’s debt problem that is until the debt occurs again. To me the only reason to refinance a house is to free up capital to use for other purposes including gaining the skills to retire short-term debt. Once the debt is retired, the capital can go to other worthwhile financial projects.

Why won’t someone just tell me what to do?

One of the biggest criticisms of financial author Robert Kiyosaki is that he doesn’t give individuals a specific plan to attain financial freedom. He writes, outlining broad concepts, without providing specifics. Robert Kiyosaki does not know each individual’s circumstance, level of financial education or tolerance for risk. How can he simply tell any individual what to do?

Acting the part of the bon vivant, I got a very late start on my financial path and had to make up for lost time. My solution has been to realize first that it is a “Yo-Yo” and to read widely, very widely. Understanding that there is no one size that fits all when it comes to financial matters, I am careful about where I get my financial advice. I was listening to a recent Business Week podcast. The discussion was about credit, the credit markets and ways to protect yourself financially during the current downturn. The correspondent did not even know her credit score when asked. I listened to the podcast, but I certainly wasn’t going to take that correspondent’s advice. I have carved out a plan that works for me. My plan isn’t sexy, it is slow and steady. It isn’t all one strategy, but a combination of strategies gleaned from a few sources. I use free online calculators at and hugh’s calculators to make savings and investment projections. I diligently work my plan. I make mistakes and I blow opportunities but my plan works nonetheless. Yes, I have financial advisors, but the advisors I started out with are not the ones I have today. The advisors I have today have proven over time that they have my interests as well as theirs at heart. I never expect an advisor to throw themselves under the train for my sake but I do expect that if they spy the promised land that they will take my hand and that we will journey there together.

What are the lessons? First, realize that it is a “yo-yo” act accordingly and read widely. Second, financial intelligence is the only remedy for financial ignorance. Third, wealth creation takes time and is not without risk. Fourth develop a plan and work that plan. Fifth, evaluate that plan. Sixth, wealth creation is a team sport so develop your advisors and evaluate those advisors based on the results they get for you. Seventh, as Jesus once said, the poor will always be with you, so understand that whatever is going on in your life that is preventing you from accomplishing steps one through six will always be with you, so the time to start truly is now.

Saturday, January 3, 2009

It is a business decision not a bail out

The past few weeks have been breathtaking to watch. Turmoil in the financial markets have roiled, boiled and spilled over into the broader economy.

It would seem that until recently not even our politicians have understood how vital the credit markets and trust in the integrity of the US financial sector are to ours and the global economy.

When the Chinese government announced on the 24th of September that it instructed its banks not to make interbank loans to US banks I felt sure that this was only the first step in the world’s attempt to confine America’s economic woes to American Shores.

Our government and its citizens have become increasingly dependent on the availability and use of both short and long term credit to maintain the illusion of prosperity. The expansion of credit and the increasing indebtedness of US households began during the boom years of the Clinton Administration and accelerated during the comparatively weak Bush expansion.

Since the 1990’s Americans have moved from one bubble to the next, increasing their debt burdens and in so doing becoming the largest consumer market in the world. Manufacturing has left American shores leaving us with a service economy based on consumption and indebtedness to maintain levels of consumption. This necessarily means that the terms of our quality of life will be determined by those who manufacture and sell to us as we become increasingly dependent on imports while simultaneously exporting our money overseas into the coffers of our trading partners.

Now we face a crisis of confidence in our markets and our government must act. On the table was the proposal to inject liquidity into the financial services sector by buying assets.
The US government has the balance sheet and the time to hold these assets to determine which will perform. In all liklihood the American taxpayer will make money. This proposal is, therefore, a business decision rather than a bailout. The Paulson plan was a clean one entailing only the purchase of assets, we are now awaiting the compromise plan put together by congress.

I am a real estate investor and I know that I am far less likely to make another purchase, or otherwise allow a major capital outflow from my accounts, if for some reason one of my assets does not perform as planned.

This psychology is exactly what is going on on a massive scale on Wall Street. Because assets are not or may not perform as planned, financial institutions are hoarding the only asset they can be sure of, capital.

I have also had partners tell me recently that they reason that they continue to do business with me is because I am true to my word.
Sound business dealings are often based on integrity.

Integrity is lacking in the markets right now.

To the person on Main Street who doesn’t have a credit card the Paulson plan or any financial plan will look like a bailout of a “fat cat” at their expense. That is until that Main Street worker misses a paycheck because their employer cannot secure a bridge loan to make payroll.

Our financial system is simply too interconnected for our government not to act. And I am sure that if our government does not act, other nations will. I am a firm believer that it is better for us to implement our own solutions than have terms dictated to us by other nations.

I grow tired of pundits, economists, even Nobel Prize winning ones, whose knowledge is theoretical rather than practical and who have never run a business.

I believe that my greatest disappointment is the fact that our representatives in Washington have done a poor job connecting the dots for themselves and their constituents.