My Personal Finance Journey

Category Archives for Invest & Retire

How Much of Your Net Worth Should be Sitting in Cash or Low-Interest Savings Accounts?

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Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!
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Click here to enter my free $79.07 giveaway for a chance to win 5% of My Personal Finance Journey blog income and give another 5% to a charity of your choosing! Deadline to enter is September 30th, 2012.

The following is a post by MPFJ staff writer, SK. SK writes about the reasons we get into debt, changing the patterns that get us into debt, and examines small business ownership and real estate investing at her blog, American Debt Project. Please welcome her to the MPFJ family! 

How Much of Your Net Worth Should be Sitting in Cash or Low-Interest Savings Accounts?

Even though your net worth is a pretty simple equation (Assets minus liabilities = net worth), exactly what is the breakdown of those assets? And, is there a magic ratio you need to follow? Like everything else in personal finance, the answer really depends on your situation. To hear rappers tell it, your assets should be spread out as follows:

Assume: $1 million net worth

  • $250,000 in diamonds and platinum from Jacob the Jeweler
  • $100,000 in equity in overpriced Los Angeles/Atlanta/New York McMansion
  • $400,000 in Lamborghinis, Maseratis and vehicles for entourage
  • $50,000 in investments in other rappers and own record label
  • $200,000 cash on hand because it ain’t flauntin’ if you got it

Another extreme example of poor asset selection could be a Dave Ramsey devotee:

Assume: $100,000 net worth

  • $60,000 equity in house that is almost paid in full due to Dave Ramsey’s advice
  • $5,000 in Roth IRA invested in mutual funds as recommended by Dave Ramsey’s endorsed local providers
  • $40,000 earning 0.65% interest in an online savings account for an emergency fund which covers 12 months of living expenses

Call me crazy, but even though the rapper has made some pretty ridiculous investments that make up his total net worth, he still gets points ahead of the Dave Ramsey guy for only having 20% of his net worth in cash versus 40%. It sounds appealing to have 3 (or 6 or 12) months’ worth of living expenses in reserve, but that money should be working for you. Sitting in cash or a less than 1% interest-earning bank account means your money is not even keeping pace with inflation. Consider adding to your cash savings slowly as you invest in other options first. Cover a month of living expenses and then contribute to retirement accounts like a SARSEP or 401(k) to reduce your tax liability. Or pay down any debt that you have, especially anything with more than a 6% interest rate.

At the moment, I’m focused on just paying off my high-interest debt. I save money with every paycheck or side job, and then use large chunks of that to pay down debt. When I am out of debt, I don’t plan to hold more than 10% of my net worth in cash/easily accessible savings. As my net worth increases, that percentage will go down, since I don’t have an extremely risky career (like a rapper) and haven’t built a criminal empire that might require me to flee at any minute and be able to secure hoards of cash in a moment’s notice (like Chapo Guzman). So, if you’ve been diligent about saving and find yourself holding onto a lot of your net worth in the form of cold, hard cash, start considering investments that can give you a better return on a good portion of that cash.

How about you all? What percentage of your net worth do you feel should be held in very liquid accounts (savings, money market, etc)? 

 Share your experiences by commenting below!

When Is Business Debt A Good Thing?

The following is a guest post. Enjoy! 

Given the business climate over the past few years, debt has become something of a dirty word. And, on the whole, this is a healthy attitude. As a general rule, debt is a necessary evil for all businesses – large or small – rather than something to be taken for granted as the natural order of things. In fact, many soundly-managed businesses get themselves completely free of debt. Nevertheless, debt can sometimes be a good thing if used correctly – as well as simply being necessary to maintain cash-flow etc.

 

Business Mortgage Debt

For example, business mortgage debt is a generally smart move, financially, given sufficient time. In other words, commercial property values generally rise more quickly than the interest rate over long periods of time. This is also a good way of building steady value in a business in the equity in the property and by avoidance of expensive leases – unless you can strike a great deal, of course, or are given some form of financial incentives.

 

General Business Loans

But mainly, a business loan can be “good” debt for companies which have a proven business model and are on a steady road to expansion – with a future in which they may be reasonably confident of adding value. If your ability to create good profits that far outstrip the payments on your loans, then debt can be a wise way of fueling your expansion.

But, always take professional advice in this area from older and wiser heads. We all tend to be a little too optimistic about our business prospects, particularly when things are going well. Independent advisors will be a little more balanced in their view, and on the potential pitfalls – and will be able to advise on the best debt solution if you get yourself in too deep, too quickly.

How about you all? In what circumstances in business or your personal life do you think debt can be a good (or at least acceptable) thing?

 Share your experiences by commenting below!

***Photo courtesy of http://www.flickr.com/photos/betsyweber/5053385796/sizes/l/in/photostream/

11 Personal Finance and Life Lessons I Learned from Bicycle Racing

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Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!
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Have you ever wondered to yourself, “What do athletes think about while they are exercising?”

For me personally and several other people I have talked to, the answer to this question is surprisingly, “Not much at all.” Generally, what I think about when I am running or cycling is either 1) my breathing, 2) my stride or pedaling, or primarily, 3) what comes next in the trail or road ahead. However, now that I think about it, this of course may be the whole reason for the attraction of exercising – to turn our brains off for a few minutes and/or hours each day!

Regardless, while on a trail run several weeks ago, my thoughts actually began to focus on a rather profound and potentially cheesy (but, since I am kind of cheesy, I figure why not, right!?) topic to write about on my blog – the life and personal finance lessons that can be gleamed from my time doing a lot of category 2/3 road bicycle racing several years ago (see picture of me in action to the right!). 

 Let’s get started with the list of 11 total things that I brainstormed! This should be fun!  

1. The Importance of a Good Team Around You

One of the most important things that newcomers to the sport of cycle racing don’t understand is how much of a team sport it really is. A good team can really make or break your chances of winning a race, regardless of how fit you are. In cycling, teams provide financial support, coaching, race strategy tips, massages to keep the riders’ muscles flushed of lactic acid, equipment, mechanical support, team workers to transport and distribute food and liquid to the riders (both in cars and within the peleton of riders), and much needed drafting to shield their leading riders from expending too much energy in the wind.

In a person’s finances, I’ve learned that recruiting and maintaining a high quality financial team around you is equally important. For me personally, I employ the help of a CPA for assistance with my taxes and blogging business structure planning, and a real estate agent, lawyer, and insurance agent to advise me on issues related to home ownership. Another good addition to your ‘financial team’ would be a a Certified Financial Planner (CFP). However, I opt to manage my finances myself (since I am interested in that sort of thing), so don’t have a CFP.

2. Working Harder Does Not Guarantee Success

In cycling, one of the things that took me the longest to learn was that knowing how to ride very easy on certain set days is almost as important as doing very hard, long workouts. The reasoning behind this is that you need the easy days in order to recover and be able to have better performance out of your body in the harder workouts. In other words, working harder does not always guarantee that you’re working the smartest you can. By being strategic with your cycling training (especially with the help of a coach), you can maximize the benefit you get out of your training hours/minutes.

Similarly, in your personal finances and career, working harder does not always guarantee success. The common theme here in both financial and career matters is that we must focus our efforts on what ADDS THE MOST VALUE. For example, I once read a story about a family who spent MANY hours a week balancing their checkbook to know where their money was going. However, since they spent so much time doing this one step, they did not have any time left to do important financial planning sessions to try to achieve their goals. In addition, they didn’t have time to analyze their spending to see where they could save money. Similarly, at the workplace, we are often asked to do tasks for others in order to merely be helpful or support the workplace community. However, these tasks, while also important to a certain degree, are often not the ones that actually add value to the company/organization. Hence, we must always focus on committing a good amount of time to what is the most value adding.

3. Staying with the Pack is a Wise Choice to Avoid Big Losses

In cycling, if you are drafting/riding behind a group of other riders, you are expending about 30-40% less energy than the person at the front battling the wind resistance. By conserving your energy and staying in the ‘pack,’ you greatly increase your chances of making it to the finish and avoiding being pulled from the race. In fact, simply finishing with a group of very good riders is often enough to get you points to advance to higher categories of racing!

In personal finance, when I first started investing, it was very tempting for me to try my hand at investing in individual stocks for the chance at getting that one BIG winner that stands apart from all the others and beats out the market (the ‘pack’). However, by investing in individual stocks, while I had a couple good performing ones, I definitely lost a lot of money overall.

Now, I simply invest WITH the market using passively managed index mutual funds. By doing this, I am able to preserve more of my capital for long term growth.

4. The Importance of Short and Long Term Goal Setting and Periodic Review/Progress Assessment

During my cycling days, my coach and I would meet once per year to set specific goals for races/events that I wanted to target for doing especially well, both that specific year and in the long term. In other words, these events were the ones in which I wanted to have my peak performance. After setting these goals, we would then meet once or twice during the year as a follow up to check in on our progress.

I have found that organizing my personal finances with this same structure increases my chances for success. Once a year (usually around Christmas), I sit down and define my short, mid, and long term goals for the coming year. Then, once per month, I check in on my financial/net worth progress and also how I’m doing to meet the specific goals I set for myself.

5. You Don’t Have to Be Good at Everything

On a cycling team, it is common for the various team members to have specific specialties. For example, there is generally a team leader, several smaller riders that specialize in climbing mountains, several riders that are very strong on flat roads and time trials, and then several weaker riders whose job is to help the team carry water bottles and food to the other riders. In other words, no one person is expected or should be good at doing everything.

This same line of reasoning applies to personal finance (and business) and also relates to the importance of building a good team around you. For example, if your strength as a blogger is being able to write really high quality articles, then you can hire other team members to help you with promotions, commenting, bookkeeping, etc. In personal finance, if you are really good at implementing an investing strategy, but aren’t as good at knowing all of the tax codes, then you’d want to hire the help of a good accountant to handle that facet for you.

6. Learning from Your Losses/Mistakes and Improving for the Future

Back in 2005 when I was just starting to race as a Category 2 cyclist, one of the races that I was targeting for a good performance was the Joe Martin Stage Race in May of that year. I had trained pretty well in preparation for the event, had eaten and properly hydrated the day before, but when it came race time, my stomach got tied in a knot because I was a little nervous about performing well in the race. Ultimately, I got dropped off the back of the pack after about 60 of the 100 miles in the race the first day and had to hop a ride with a race vehicle to get back to town.

It was rather disappointing to train for something and then have it not work out, but such is life. Even though I was a little down about the experience, I got back on my bike the next day and went out for a training ride to get ready for a big race I was targeting for the next weekend. In that event, I did very well and was able to ride to the peak of my ability.

In personal finances, it is also very important to not let losses, failures, and poor performance stop you from sticking to the goals and strategy you have set for yourself. In the 2008-2009 recession, I did not actually sell one bit of my equity index mutual fund holdings out of fear that the market would NEVER return. Instead, I held firm to my asset allocation, rebalanced accordingly, kept buying shares using dollar cost averaging each month, and have experienced a significant increase in net worth in the years that have followed as a result.

7. A Little Caffeine Can be Helpful, but Too Much Can Damage Performance

Ok, so this lesson doesn’t really relate to personal finances, but since I am a big fan of coffee, I wanted to include it in this post!

Back when I used to race bikes, I would take a Red Bull caffeine/energy drink about 30-45 minutes before the start of very intense, short races. The reason for this was that while the caffeine would dehydrate you for longer races, it actually increases your muscles’ efficiency over the short term.

Similarly, in life, I’ve found that drinking a little bit of coffee each day is fine, but that if you drink too much of it or drink it too late in the day, it can keep you up at night or make it so that you don’t have as much natural energy.

8. A Consistent Moderate Pace Outperforms Short Term Sprints

One very beneficial way to train with cycling is to do interval training. What this involves is short, very intense efforts (30 seconds to 20 minutes) mixed in to a longer endurance pace ride. One day, I was out on my bike doing a series of these short, 5 minute, hard intervals. At one point, I passed a middle-aged rider during one of the interval sets. After completing the interval, I slowed down to rest for several minutes, and the middle-aged rider caught up with me. I then accelerated for another interval, passed the rider, and then proceeded to slow down again. Guess what happened next after I stopped? He caught up with me and kept pedaling on his merry way.

The personal finance lesson here is that while some very risky investments and ventures can be appealing because they can offer short-term growth, one must always remember that unless that growth is sustained, another investment (such as the S&P 500 index) growing at a more moderate pace will eventually catch up.

9. The Latest Technology/Fad is Not Always Required for Success

The equipment side of cycling is quite interesting. In general, cycling is considered a “working man’s” sport. After all, you don’t often hear about rich people hopping on their bikes and heading the country club to meet up for a group ride. Instead, you might hear about them playing golf, etc. However, the fact of the matter is that competitive cycling equipment, in my opinion, is far more expensive than golf. You have to purchase a good bike ($1000-$8000), helmet ($150), shoes ($200-$300), clothing ($200), and the list goes on.

Cyclists are especially concerned with having ‘the latest and greatest’ technology when it comes to the bike itself. However, one consistent truth about cycling is that if you put a REALLY in shape rider on a bad bike, that bike will still go fast. In other words, you don’t absolutely need the latest and most trendy technology or equipment to do well.

The personal finance world is ABSOLUTELY INUNDATED with new fads, investing instruments, high-tech analysis tools, and investing strategies. Examples of this would include the advent of all sorts of fancy, very specific ETFs, spread-betting, online investing widgets, and my favorite – some hedge funds using fractal algorithms to predict each little stock market move. Truthfully, it’s enough to make your head spin.

However, the use of all of these tools is absolutely not required in order to achieve success in your personal finances/investing. Simply buy a good mix of index mutual funds, and you’ll likely beat all of those new fads 9 out of 10 times.

10. The Importance of Pacing Yourself and Knowing Your Own Limits

In cycling, I used to wear a heart rate monitor and power meter in order to monitor the effort level I was putting out. The purpose for this was 1) to facilitate good training in order to tune my efforts during hard interval and easy rest days and 2) to make sure that I wasn’t going too hard so that my body would go in to oxygen and glycogen (energy storage) debt later on in the ride or race.

Similarly, in personal finance, knowing your own limits and pacing yourself is very important when it comes to spending. For example, if your budget system only calls for you to spend a limit of $200 per month on groceries, you must learn to stay within those limits. Otherwise, you might get in to debt levels that you cannot easily pay off each month.

11. The Importance of Good Community, Friends, Helping One Another, and Being a Good Citizen Steward

No matter where I have lived in the US, one thing remains constant: the cycling community in a given area is a very close-knit family. As such, whenever I was out on the road either riding by myself or in groups, I would always try to be courteous to other riders, help them as much as possible, talk to them, and interact favorably with people I would meet (in gas stations, for example, when I was refueling with water and food).

In my career and personal finances, I have learned that if I focus on building good relationships and helping others, favorable things seem to happen to me as well.

For example, let’s say that you’re in graduate school, and you have to depend on other people to let you use their equipment in order to analyze your samples. On one hand, you could simply go to the the lab of that other person and start using the equipment with little dialog. Or, on the other hand, you could take a few minutes out of your day and develop a relationship with them. In my experience, the person that I build a relationship with will be much more likely to help me going forward when I need it. And, you just might also find that you make some good friends along the way!

How about you all? What personal finance or career lessons have you learned indirectly by participating in other activities?

 Share your experiences by commenting below!

Who Manages Your Investments?

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Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!
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Click here to enter my free $119.13 giveaway for a chance to win 5% of My Personal Finance Journey blog income and give another 5% to a charity of your choosing! Deadline to enter is August 31st, 2012.

For the past several months, I’ve featured a reader poll on the upper left sidebar on this site seeking feedback on the question below, with the possible answers listed underneath:

Who Manages/Directs Your Investments?

  • Self-Directed Using Individual Stocks
  • Self-Directed Using Mutual Funds
  • Friend or Family Member Manages Everything
  • Stockbroker Directs Investments
  • Fee-Only Financial Planner
  • Using Investing Newsletter / Column / Blog Recommendations

After the poll closed this past week, I went in and tallied the results. They can be seen on the pie chart below:

Self-Directed Investing in Mutual Funds Takes the Top Spot! 

As you can see, the most popular method (almost 60% of readers) of directing investments among blog readers by far is making your own choices through a mix of mutual funds (red on pie chart). Of course, since I’m a big fan of passive investing as a long term saving strategy, I hope that a lot of you all are using passively managed index mutual funds (such as the low cost options at Vanguard and Fidelity).

Self-Directed Investing in Common Stocks

Self-directed investing using individual stocks came in at the second most common spot (dark blue portion). Given the historically bad track record that professional money managers and stock picking newsletters have in failing to beat the overall market, it’s great to see that everyone is avoiding the management fees and directing their own investments!

Differences in Pay Structure and Objectivity Between Stockbrokers and Fee-Only Financial Planners

A somewhat fascinating result of the poll results above is that the % of people that use a stockbroker and fee-only financial planner to direct their investments was equivalent. I would have expected many more people to be using a fee-only financial planner than a stockbroker because a stockbroker is paid by a commission on how much TRADING he or she executes, not how much money they make you. And, often times, stockbrokers are more of a salesperson than a knowledgeable investing professional.

On the other hand, a fee-only financial planner will provide a much more impartial perspective on your finances since they are only paid on their time they take to help you, not by what products they get you investing in.

Comparison of Blog Reader Results with the Rest of the United States?

When I started writing this post, my original ideal intention was to compare the site reader poll results above with a more complete study published online about how people manage their money. Unfortunately, I was unable to find a robust enough study in searching online that I could publish here.

As a far-from-perfect proxy, I figured that instead, I would take a poll of how my family, friends, and co-workers manage their investments. The results are shown in the pie chart below:

Again, we see that self-directed investing using mutual funds carries the largest % occurrence by far. In second place this time is employing a stockbrokers to direct one’s investments.

A big thanks to everyone for participating in my reader poll. I should have another one up very soon. Also, if you have any specific requests for poll results, please feel free to email me!

How about you all? How do you manage your investments? Do you use individual stocks or mutual funds? Do you make the decisions yourself or enlist the help of a stockbroker/financial planner/newsletter?

 Why did you choose one specific method over another?

 Share your experiences by commenting below!

    ***Photo courtesy of http://www.flickr.com/photos/12738795@N00/3474012583/sizes/l/in/photostream/

    Should I Add Long Term Bonds to My Investing Portfolio and Asset Allocation?

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    Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!
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    Click here to enter my free $119.13 giveaway for a chance to win 5% of My Personal Finance Journey blog income and give another 5% to a charity of your choosing! Deadline to enter is August 31st, 2012.

    Previously on My Personal Finance Journey, I have mentioned several times that I prefer to invest in short-term and TIPS (inflation protected) bond funds for the fixed income portion of my investing strategy and asset allocation and tend to steer clear of long-term bond funds.

    As I mentioned in Part 3 of Creating and Implementing Your Investment Strategy, the reason why I avoid long term bond funds is because it was recommended to do so in the investment books I used to develop my investing strategy (Stocks for the Long Run, A Random Walk Down Wall Street, and What Wall Street Doesn’t Want You to Know). The case that these books present against long term bonds is that:

    • Academic research has shown that short-term fixed income investment instruments have:
      • 1) Less interest rate risk, and 
      • 2) Equal, if not higher returns than long term bonds.
    • Because of these two factors, short-term (1-3 maturities) fixed income investments are considered superior to long-term ones.

    However, as I was conducting some research recently for a guest post on the topic of dollar cost averaging, I noticed that during the years of 1992-2012, long-term bonds actually OUTPERFORMED the S&P500 index by almost 30%.

    This finding got me thinking – does it still make sense for me to exclude long-term bond index funds from my investing strategy?

     As such, in today’s post, I wanted to take a look at each of the reasons given above for why short-term bonds might be potentially superior to long-term bonds and see if they are in fact valid. So, let’s get started!

    Do Short Term Bonds Have Less Interest Rate Risk Than Long Term Bonds?

    Interest rate risk (in the case of bonds) deals with the possibility that the price of your bonds will change (go down) if interest rates change. If current interest rates go up, the price for your currently lower-interest rate bond will go down.
    So, in plain English, increased interest rate risk with bonds can be translated as increased price volatility, or in mathematical terms, standard deviation of bond prices.

     In order to compare the standard deviations, or price volatility, of short-term and long-term bonds, I performed a 20 year (1992-2012) back-test performance analysis of a $10,000 initial investment in 3 separate portfolios:

    1. Investing $10,000 in the Vanguard Short-Term Federal Bond Fund (ticker symbol: VSGBX).
    2. Investing $10,000 in the Vanguard Long-Term Treasury Bond Fund (ticker symbol: VUSTX).
    3. Investing $10,000 in the Vanguard S&P 500 Index Fund (ticker symbol: VFINX).

    The resulting standard deviations/volatility of the different account values is shown in the table below. All pricing data was sourced from Yahoo Finance.

    fixed income investments, Treasury Bonds, short-term bonds, long-term bonds, investing strategy, asset allocation

    As can be seen in the table in red, the long-term bond fund had >2 times the price volatility than the short-term bond fund, a level almost equivalent to the 100% equity S&P500 index fund.

    This increased price volatility can be seen very clearly on the graph below, which charts the price change of both funds over the 20 year period. As you can see, while the blue curve (short-term bonds) increases smoothly over time, the red curve (long-term bonds) experiences a much greater degree of price swings.


     Conclusion: Short-term bonds do indeed have MUCH less interest-rate risk/price volatility than long-term bonds. 

    Do Short Term Bonds Have Higher Returns Than Long Term Bonds?

    Next, I analyzed the overall performance (% increase in portfolio value) that each portfolio realized over the 20 year period from 1992-2012. The results are shown in the table below.


    As was mentioned previously, long-term bonds realized higher returns than equities during the 20 year period and MUCH HIGHER returns than short-term bonds (almost 2.5 times more in fact!).

     Conclusion: Short-term bonds DO NOT have higher returns than long-term bonds. 

    Does Inclusion of Long Term Bonds Provide A Diversification Benefit?

    An important question to answer regarding whether or not to include any asset class in a portfolio is if that asset class will provide a diversification benefit.

    According to Modern Portfolio Theory (MPT), a diversification benefit is realized when any two assets have a correlation coefficient of their returns/price movements that is not equal to 1. This is due to the fact that assets whose prices move different helps preserve capital and provide a favorable shift on the Efficient Frontier.

    As such, I ran a correlation coefficient analysis on the 20 year performance data for the 3 portfolios mentioned above. The results are shown in the table below.

    As expected, both short-term and long-term bonds are weakly correlated with equity returns (0.75 and 0.79 correlation coefficients). However, short-term and long-term bond prices move together in the same direction 97% of the time (correlation coefficient of 0.97), meaning that they are very strongly correlated with each other. This implies that long-term bonds provide some, but not much, added diversification benefit if you already have short-term bonds in your portfolio.

    Conclusion: Inclusion of long-term bonds along with short-term bonds provides minimal, if any, diversification benefit. 

    Overall Verdict on Long-Term Bond Funds

    While it is clear that long-term bonds have tended to produce higher long-term returns over the past 20 years, they do not provide much of a diversification benefit and also would expose my portfolio to a much higher level of risk and volatility than with the short-term bond funds I am currently using.
    So, since the main purpose of having fixed income assets in my portfolio is to provide safety (the purpose of equities is to give me appreciation), I feel that long-term bonds still do not have a place in my portfolio and will instead continue to invest in short-term bonds.


     How about you all? What type of fixed income securities do you invest in with your retirement/investing funds? Short-term bonds, long-term bonds, TIPs, municipals, or something else altogether?

     Share your experiences by commenting below!

     You can view the complete numerical analysis used in this post by clicking the following Google Docs spreadsheet link.

    The Essential Mortgage Loan Refinance Checklist

     

    The following is a guest post. Enjoy!

    The Essential Mortgage Loan Refinance Checklist

    Looking for a way to put more cash in your pocket? Refinancing your home is a great way to modify your home loan payment and make it better fit your budget. Whether you’re looking to take advantage of low mortgage refinance rates or to change the terms of your loan, it can be a smart move. Of course, refinancing requires some upfront fees, so you’ll want to do the math to be sure they’re covered by the eventual savings.

    Before you sit down to tackle your refinance application, be sure you’ve gathered all of the necessary documents and important information you’ll need to complete it. The mortgage refinance process will go more smoothly if you’re prepared upfront.

    Ready to refinance your mortgage? Use this helpful checklist.

     

    Information on your home and mortgage:

    ·         All properties you own, including addresses, estimated value, annual taxes and insurance.

    ·         The year you purchased the property you’re seeking to refinance.

    ·         The original cost of that property.

    ·         The amount you owe on any loans tied to this property. This includes all mortgages and home equity loans and lines of credit.

    ·         Any additional liens against the property, such as judgments.

    ·         Your most recent mortgage statement.

     

    Personal information:

    ·         Residential addresses for the last three years.

    ·         Social Security Number.

    ·         Driver’s license or state ID card.

    ·         Tax returns, W-2s, and pay stubs for the last two years.

    ·         Employer information, including name, address, and phone.

    ·         Financial assets, including checking and savings account balances, investments, life insurance, vehicles, jewelry, antiques, etc.

    ·         Documentation proving other income sources, like Social Security checks, retirement accounts, child support, alimony, rental income, dividends, etc.

    ·         Information on any bankruptcy proceedings or discharges.

     

    Of course, the documents required by your bank to refinance mortgage terms could vary somewhat from this list. But, this is still a good place to start when you’re preparing to refinance. Once you’ve completed the refinance process, you’ll have peace of mind knowing that your mortgage is best suited to your finances.

    How about you all? Have you ever refinanced your home loan? If so, do you still think it was the best decision financially?

    Share your experiences by commenting below!

    ***Photo courtesy of http://www.flickr.com/photos/alancleaver/4439276478/sizes/o/in/photostream/

    Improving Your Small Business Cash Flow

     

    The following is a guest post. Enjoy! 

    Improving Your Small Business Cash Flow
    Every small business owner is looking to improve their cash flow. This can be tough, especially if your business relies on invoicing customers, and then following up on the accounts receivable each month to make sure that payment has been made.  And, as your business and the amount of invoices grow, it will become harder to maintain, and sometimes, harder to collect.  That is where invoice factoring can come into play.

    What is Invoice Factoring?

    Invoice factoring is where a business sells its accounts receivable (i.e. invoices) to a third-party company at a discount to what is owed.  That company, however, provides the discounted amount of money up front, similar to a cash advance, with the collateral being the outstanding invoices.  There is also maturity factoring, where the cash isn’t provided up front, but instead, payment is paid on the average maturity date of the invoices on the purchased receivables.

    How Does Invoice Factoring Work?

    Invoice factoring is very different than getting a traditional bank loan because a bank looks at the value of the entire company before making a lending decision.  This can sometimes be hard for a small business or start-up, because there is not always a lot of data to make the banks happy.  However, with factoring, the amount paid is based on the value of the receivables, and it is not a loan.  The factoring company will actually purchase the financial assets that are the outstanding invoices in the accounts receivable.  The factoring company will then make money by the difference between the value of the receivables versus what it paid the business, as well as any commissions or fees charged.

    Is It Right For You?

    Invoice factoring can be a good solution to many businesses who have a lot of outstanding invoices and need cash flow now.  By selling the receivables, you can get that cash now to continue building your business, and basically let someone else deal with the invoices.

    How about you all? Has your business ever used invoice factoring? If so, did it work pretty smoothly?


    Share your experiences by commenting below!

    ***Photo courtesy of http://www.flickr.com/photos/23024164@N06/7222346312/sizes/l/in/photostream/

    What is Private Mortgage Insurance?

     

    The following is a guest post. Enjoy!

    What is Private Mortgage Insurance?
    Private mortgage insurance is an insurance product that is taken out by a borrower, but is payable to the lender.  It is insurance designed to offset losses in the case where a borrower isn’t able to repay the loan and the lender worries that it may not be able to recover its costs after foreclosure and sale of the property.
    Private mortgage insurance is typically used in situations where the borrower isn’t able to put enough down to satisfy the lender’s risk requirements.

    When You Need Private Mortgage Insurance

    Private mortgage insurance is used when the lender believes there will be risk in recouping the cost of the loan.  This typically applies when the down payment is less than 20% of the appraised value.  However, it can also change based on the loan term, loan type, total amount financed, and more variables.  It also is not needed for many government-backed loans, like FHA, since the loan is insured against loss by the government rather than the homeowner.

    How Private Mortgage Insurance Works

    Private mortgage insurance is typically required by lenders when there is not an 80% loan-to-value ratio on the property.  If you don’t meet this criteria, you will need to purchase private mortgage insurance.
    Private mortgage insurance typically costs around $55 per month for each $100,000 financed.  Usually, your loan servicer will provide a list of qualified mortgage insurance providers, and you will need to select one and have the policy in place upon close of escrow.
    You can cancel your private mortgage insurance when your loan has an 78% loan-to-value ratio.  This can occur either by principal repayment, or by the house appreciating in value (or both).  Only the servicer can decide if the 78% ratio has been reached, but you can ask them for an appraisal if you think it has been made.
    A great thing is that, since 2007, private mortgage insurance premiums are tax deductible, just like mortgage interest.  This made it cheaper for borrowers to get private mortgage insurance, instead of having to rely on complex financing.

    How about you all? Do you currently have insurance on your home mortgage loan? If so, does it provide you with any additional benefits aside from the implied financial protection?

    Share your experiences by commenting below!

    ***Photo courtesy of http://www.flickr.com/photos/68751915@N05/6869769579/sizes/l/in/photostream/

    5 Financial Planning Tips for Families

     

    The following is a guest post by Philip Reed. Enjoy!

    5 Financial Planning Tips for Families
    When economic growth is not quite as strong as it could be, sound financial planning takes on added importance for families. Although things have certainly improved over the past four years, it is important to remain vigilant in these uncertain times.Fortunately, there are a few simple tips that you can follow to ensure the financial well-being of your family.

    Save for College

    If you have children, they are probably growing up much faster than you would like. Before you know it, they will be heading off to college to get an accounting degree or to become a doctor. Unfortunately, tuition costs continue to skyrocket, and total student loan debt has already ballooned to more than $1 trillion. However, you can help your children – not to mention yourself – by taking advantage of 529 college savings plans, which can give you a way to save for future college expenses with a tax advantage.

     

    Establish an Emergency Fund

    Life is full of unexpected surprises. Whether your car breaks down or your kid needs braces, there are times when you will need quick access to cash and won’t necessarily want to utilize your credit card. And, quick access to cash is exactly what an emergency fund is designed to provide.

    However, nearly 30 percent of Americans do not have an emergency fund at all, and many other people have insufficient funds to protect themselves when unexpected problems arise. If you haven’t already started, set aside a small amount of money every month into a separate savings account; one day soon, you will be glad that you did.

     

    Cut Your Expenses

    Although making more money would be the ideal solution, that can be very difficult to do in an economy that is suffering from eight percent unemployment. Fortunately, there is another way to take control of your budget: reducing your spending. If you are not sure where you can save money, consider some of the following possibilities:

    • Make more meals at home
    • Borrow books and movies at the library
    • Buy gently-used items on sites such as Craigslist.org
    • Cancel subscriptions

    Review Your Asset Allocation

    There is no denying the fact that the past decade has been terrible for stock portfolios. Thankfully, it is hard to imagine another decade of such poor returns. However, you still need to ask yourself if you are comfortable with the amount of risk that you are taking in your portfolio. If not, consider increasing your allocation to bonds and other low-risk investments.

     

    Increase Your Savings Rate

    Thanks to a $20 trillion funding gap, future retirees will need to supplement Social Security with more of their own savings. Unfortunately, only 15 percent of people are saving enough in their 401(k) plans to retire comfortably. If you want to relax during your golden years, use some of the money that you save from cutting expenses to boost your retirement savings.

     

    Conclusion

    By following the tips listed above, you can avoid the major mistakes made by many families and put yourself on a path toward financial security. It will certainly take discipline and commitment on your part, but the rewards are worth it.

    How about you all? What financial planning initiatives are taking priority in your lives these days?


    Share your experiences by commenting below!

    ***Photo courtesy of http://www.flickr.com/photos/serpicolugnut/172616929/sizes/o/in/photostream/

    Banking Sector Blight

     

    The following is a guest post. Enjoy! 
    Banking Sector Blight
    Every time you turn on the television, it seems that there is another scandal or lawsuit plaguing the banking sector.  From the Libor banking scandal, to the ‘London Whale’, to various Ponzi-schemes that haven’t seemed to get any less common since the Bernie Madoff scandal.
    In this article, we look at three recent cases that exemplify the seemingly rotten state of our financial services industry.

    The Libor Scandal

    The biggest item in the news the past few weeks is the LIBOR banking scandal, where it is believed that Barclays sent in false data to alter the LIBOR interest rate calculation, thereby possibly altering the interest rates charged on trillions of dollars in loans.  This scandal has already cost the bank $450 million in fines, and it may cost billions more as different instruments linked to the LIBOR start suing because of the belief the rates could be wrong.  This scandal continues to add to the distrust of banks.

    The London Whale

    Another story making news has been the London Whale, where a London-based trader for JP Morgan lost over $4 billion in bad trades.  This story keeps getting worse for JP Morgan, who initially downplayed the loss significantly.  Lately, the bank has been talking about how it is reforming and clawing back pay from this trader, but it once again goes on to show that banks are running wild when it comes to trading.

    More Fraud and Scams

    Finally, there are still all types of fraud and scams taking place in the banking sector.  For example, there has been an uproar lately about missold PPI, or Payment Protection Insurance.  This is where credit card companies or other lenders sold additional insurance.  The problem isn’t with the Payment Protection Insurance itself, but in the way in which it was sold. In many cases, it was incorrectly presented as a mandatory product, or it was sold to people who would never have qualified to make a claim anyway.
    There seems to be an almost endless series of scandals plaguing the banking sector at the moment, and financial institutions around the world have a great deal of work to do to repair their battered reputations and restore consumer trust.  Hopefully, we will start to see some regulatory reforms, and as a result, banks will start behaving more responsibly.
    How about you all? Do you know of any other scams/scandals that have affected the banking sector recently?

    Have you felt any effects from these scandals to your personal finances?

    Share your experiences by commenting below! 

    ***Photo courtesy of http://www.flickr.com/photos/jepoirrier/2046188221/

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