Wise Bead (Silicon Valley Blogger)

Life After Bankruptcy: What's Next?

Silicon Valley Blogger — Tue, 23 Feb 2010 14:00:39 +0000

Having to file for bankruptcy is something we all hope we never have to do in our lifetimes. Whether you file for Chapter 13 or Chapter 7, there are repercussions to going through this process. However, like with other setbacks in life, you can recover. There may be different paths to recovery for each form of bankruptcy, but there is always hope!

You may have done everything you can to avoid bankruptcy but those sweet 0% interest credit cards may have gotten the better of you. Or your health or unemployment issues may have taken center stage in recent years, and you were left with no recourse but to declare bankruptcy. When considering your financial future following such an event, you can expect that trying to secure credit for the next 3 to 5 years is going to be tough. Also, you can expect this negative mark to appear on your credit report for the official length of time of 10 years; although sometimes you may get lucky and the time can be reduced to 7-8 years. For those who need to weigh their options further, check out How You Know When It's Time For Bankruptcy.

Bankruptcy And Your Credit History

It’s legal for creditors to keep financial events on your report for 10 years, but that’s not a hard and fast rule. So how does bankruptcy actually affect your credit? It does so by lowering your credit score by 200 +/- points — usually because of late payments on accounts and not just because you filed for bankruptcy. If you find yourself becoming overwhelmed by payments, then this is an ominous sign. This is one symptom that can eventually lead to serious financial consequences for you if you fail to make any changes about your situation.

Now the good news: if during the bankruptcy proceedings, you decide to reaffirm or keep some of your debt and you continue to take responsibility for these loans (e.g. your car loans or house mortgage), then you may have a shot here (to some degree) to preserve your credit score and future credit worth in the eyes of lenders.

Additionally, there will be credit card companies (yes, they are out there) that will solicit you after the bankruptcy. You'll be debt free after all, right? You should certainly be cautious and wary, although you may think of this as a second opportunity to do things the right way. While taking on new credit and applying for a secured credit card can be a way to rebuild your credit history, you'll have to evaluate just how responsible you can be with handling debt all over again. You'll need to tread down this road very carefully because if caution is not heeded, your actions could lead you back down the same path towards bankruptcy. Here's more on how to build good credit (and clean up your bad history).

Bankruptcy And Your Living Situation

For those who have gone through bankruptcy, you may wonder just how your living situation may become affected. If you're a prospective tenant, you may be surprised to know that in many cases, landlords who own individual homes will be open to considering your application: after all, you've got no debt after you've filed for bankruptcy, and you're eager to build up your finances. Your living expenses and rent are surely a high priority for you. On the other hand, you may find it more difficult to deal with some large apartment complexes and management companies that frown upon those with a record. At any rate, you're likely to still find housing, and things may not be as bad as you thought it would be.

Now if you’re a homeowner, reaffirming your mortgage is the sole way to keep your home. Let’s consider the advantages of this move. The most obvious benefit is that you get to keep your home! This helps your credit and puts a roof over your head while keeping your bank or lender happy. But if you do decide to include your mortgage in the bankruptcy, you’ll be handing your home back to the bank and walking away. If you aren’t a homeowner yet, keep in mind that you can get approved for an FHA (HUD insured government loan) mortgage after two years from the date you are discharged from bankruptcy.

Bankruptcy And Your Financial Future

Do keep in mind that you'll need to continue making payments if you have other credit lines, and that you'll need to keep an eagle eye on your credit score. What most people may not realize is that this is precisely what credit monitoring services are intended for. You can best keep track of your FICO credit score by using myFICO products, which offer visibility to the most widely used score that lenders use.

It may take 3 years before you can qualify for a conventional loan once more, and when you do, the credit score requirements will no doubt be pretty stringent. or such loans, you'll typically need a credit score of at least 620 or higher, while you'll need a score of at least 680 to snag the best mortgage rates. For the lowest unsecured personal loan interest rates, you'll need your score to be in this general vicinity. Approval for these various loan scenarios will be up to the underwriter’s discretion. If you’re considering a mortgage after bankruptcy, I would consider talking with a financial advisor or mortgage banker about specific bank guidelines and your specific scenario so you can get a better understanding of your situation.

Given everything that we've discussed, anyone facing bankruptcy can hopefully see that there's light at the end of the tunnel. Recovery from bankruptcy can happen, and will happen if you're diligent, committed, and positive.

Permalink | 10 comments | Silicon Valley Blogger's blog | Channel: Personal Finance

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Comparing Savings Rates: U.S. vs Japan

Silicon Valley Blogger — Wed, 03 Feb 2010 14:00:02 +0000

By Silicon Valley ...

Over the past 3 years, we Americans have seen an interesting shift in our economic and social patterns. First, we’ve seen credit card use decline, not by any conscious choice made by spenders, in a lot of cases. Credit card companies have rejected a good number of applications, and have even decided to cancel the accounts of existing cardholders due to single late payments, credit risks not associated with their products, and higher-than-ever credit qualifications.

For instance, while balance transfer credit cards do exist, they are no longer the fad they once were, and have lost some favor with credit hungry consumers, given the stricter requirements and stipulations they now have that govern their 0% APR offers. Combine all this with higher than ever interest rates on many popular credit cards, and guess what? We get people who want to start saving money again. While this may be simplifying things, it seems that as credit card companies began to shift their policies in response to a tighter credit environment, Americans have reacted by tightening their belts and adjusting their spending. The economic recession and subsequent changes in the credit industry have resulted in a silver lining; these changes have had an effect on consumers, even encouraging many of them to shun credit card debt and to avoid using credit cards as a lifestyle choice.

The American Way

In real numbers, there is proof that our attitude towards money has changed. In particular, we have begun to save money to the tune of 5%-7% of our disposable income. Check out this graph, which illustrates the increase from 2007 to now, according to research done by the Bureau of Economic Analysis.

If you’ll notice, the 2nd quarter of 2009 shows the American savings rate lingering at 5%, which is higher than the rate registered at any other time in the last 5 years. That’s a pretty noticeable shift in savings (and consequently, spending) when you consider the fact that many Americans had little to no savings 5 years ago, and relied heavily on credit cards. This is happening despite the current dismal returns of many so-called high interest savings accounts these days — especially when you're lucky to get 2.00% to 3.00% on certificates of deposit.

How Is Japan Doing?

Meanwhile, there is a different and opposite trend going on across the ocean that is completely contrary to our current patterns, yet similar to our economic trends that occurred 4-5 years ago (but for different economic reasons). In Japan, savings rates have declined sharply. They have fallen drastically from “11.4% of aggregate disposable income to just 2.2% in the decade ending December 2007”. Since 2007, disposable income in Japan has remained pretty stagnant, resulting in the decreased savings trend.

What is causing the downward savings trend in Japan? There are many factors, not the least of which can be attributed to income stagnation and an aging population, not unlike our “Baby Boomer” generation, a group that tends to do less saving and more spending, especially of their retirement funds. In addition, there are economic reasons that have accounted for the stagnant income, including an expensive housing market. The housing bubble phenomenon is something that isn't uncommon to many industrialized countries.

In comparing our two economic macro situations on a broad level, it’s easy to see some comparisons and trends that relate to each other. We see similarities in housing climates, spending trends by an aging population, and distribution of money, or lack thereof among generations.

It will be interesting to see how the trends will play out in both Japan and the United States. Here are a few questions that can add some food for thought:

What do you think of these new savings and spending trends?
Do you think credit card spending will continue to increase just as it has in the past?
Do you think Japan will follow suit and see a massive consumer credit bubble?
Any predictions on the economic outlook for the U.S. and Japan?

Permalink | 3 comments | Silicon Valley Blogger's blog | Channel: Personal Finance

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Simple Tax Strategies to Maximize Your Tax Refund

Silicon Valley Blogger — Thu, 21 Jan 2010 14:00:03 +0000

By Silicon Valley ...

We’re nearing the thick of tax time, and I’m sure the first thing on your mind (I know it’s on mine) is “how much money am I getting back?” and “what am I going to use the money for?” If you’re part of the W-2 crowd and have your taxes withheld throughout the year, you could be getting some money back. If you’re self employed on the side, then you could be in even better shape if you've got expenses and tax deductions that you can take advantage of.

So how can we maximize the tax refund we receive? Can we leverage some of our skills and our assets in order to bring down our tax obligations? Here are a few ideas.

1. Look into self employment options.

If you're self-employed, you can utilize the many itemizations that exist for those in your situation. For instance, even by just taking on one or two freelancing projects during the year, you can already qualify as self-employed, which will allow you to take certain deductions, such as expensing the mileage on the car that you use to do your freelance work. You can also expense meals that you share with clients. Save those receipts and take them to your CPA or tax representative when you are ready to file. You’d be surprised at the expenses that you can write off once you declare self-employed income.

2. Check out real estate tax strategies.

If you own real estate, you can qualify for many tax deductions, including those that you can claim due to paying property taxes throughout the year. If you own a home, you also claim a deduction on your mortgage interest. If you have rental properties, you have to report your rental income, but if you've incurred expenses from repairs and troublesome tenants, those can be itemized and deducted as well. Alternatively, if you rent your apartment or house, your rental payments can be used to offset your taxes as long as you file as Head of Household.

3. Don't forget charitable activities.

You may be eligible for many personal tax write offs, especially if you’re prone to philanthropy. In particular, donating goods to organizations like the Salvation Army, Goodwill and even your local church can yield decent deductions. Make sure you keep your receipts and any forms relating to your donations: if they amount to $250 or more, these will require documentation by the IRS. Keep accurate records of the checks that you write. If you donate cash, something in writing from the charitable beneficiary will be required and you can only claim up to 50% of your adjusted gross income. Be aware that you may not be able to deduct your charitable gift to certain organizations (e.g. political parties and random individuals).

Who Does Your Taxes?

So once we wade through all of this information, we come to how we file our taxes. Do we do it ourselves or do we hire a professional? This of course is a very subjective matter and can really depend on a few things. Some factors that can affect your decision on how you should file include your familiarity with the tax code, how complicated it is to file your taxes, and whether you've got the motivation to do this yourself.

There's a lot of software and online options out there that steer you through the tax filing procedures, but do what’s comfortable for you. For those wanting to try filing themselves, this TurboTax review or this coverage of H&R Block tax services may be helpful.

If you'd rather go with a professional, then ask around for well qualified CPAs or enrolled agents who may quote you a good rate. There are many tax professionals out there and finding a reputable one shouldn't be too challenging. But before you commit to a new service, check them out through the Better Business Bureau to make sure that the service is indeed reputable.

Permalink | 2 comments | Silicon Valley Blogger's blog | Channel: Taxes

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Are You Saving For Your Child's College Education?

Silicon Valley Blogger — Mon, 04 Jan 2010 17:00:09 +0000

By Silicon Valley ...

Are you worried about savings account rates and whether your investments are keeping up with your financial expectations? That perhaps your money isn't stretching far enough to fund some of your future financial goals? Well you're not alone. There is one financial goal in particular, that looms heavily upon those of us with children: increasing costs tied to the call of higher education and college.

Lately, the issue of higher tuition rates has occupied the news; we heard of the disruption that took place at U.C. Berkeley when regents announced rising fees in the horizon. It can't be helped really -- it's one of those things that will hold true just like death and taxes do: rising college costs have always been a rite of passage for all of us -- parents and kids alike! (Check out our College Financial Aid How-to Guide for ideas on how to deal with the rising cost of higher education.)

But I'd like to bring up the notion that perhaps not all parents are intending to save for their children's education. No, they've decided not to set up that Coverdell ESA with an online stock broker or mutual fund company. There may be various reasons why this is the case and it's something I'd like to explore a little; I'd also like to determine how some well-meaning families are coping with the pressures of paying for college.

7 Reasons Why Parents May Decide Not To Save For College

I am making these points mainly to elicit discussion. But do you know anyone who has decided not to save for college? And if so, why don't they? I thought about it a bit and came up with a few possible reasons (or "excuses"):

1. You feel that you don't have enough resources.

A common reason for not saving for college is that you just don't have enough money to fund competing financial goals. The rule of thumb here is that you should first fund your retirement accounts before you contribute to your child's 529 college savings plan. The reason? It's more important to ensure that you take care of your own future to avoid having others worry about you in your old age. Your kids can qualify for financial aid, but it will be tough for you to handle any shortfalls in your retirement years if you don't have the means or the savings to live on. Now if financial resources are the issue for you, you may be assured by the knowledge that there are easier ways to get others involved with your savings goals: perhaps an avenue like a 529 account or a free savings account like SmartyPig that allows others to help contribute to your goals may be helpful. It's something worth checking out.

2. Some kids are independent and make their own decisions.

I believe that not everyone is necessarily cut out to go to college. It's also often the case that people in the cusp of adulthood will feel that they aren't ready to enter college at a certain point in their lives. Of course, they may always change their minds later, and that's something that they can decide for themselves. Now there are kids that only need a little motivation to be able to make it through school. If you're a parent, you'll know whether your child is the type whom you should trust with this important decision; and based on how you gauge your child, some of you may realize that your child may not require you to cover 100% of their educational needs.

3. Some parents expect their kids to pay their way.

Maybe it's a lesson in life that they'd like to impart to their kids, but many parents make the conscious decision to have their kids pay their way through school. In the past, by cobbling together various financing resources such as college scholarships, financial aid, work and student loans, a student can make their way through college on their own. But in recent years, with college costs much more expensive, leaving the financial burden for college solely on your child may no longer be a reasonable option. Perhaps your children's efforts would probably be better spent attaining a full-time college education and then paying you back once they get a secure full-time job in their chosen career.

4. Kids of veterans may receive reimbursements of educational costs.

Children of veterans are entitled to have 70 percent of their college education reimbursed. However, parents must still pay for the first semester of college in full. Once the child attains a grade of C or better in all subjects, a designated percentage of the tuition is reimbursed. Parents can roll these reimbursements into paying for the next semester but still need to come up with the remaining money for their kids' education. Again, 529 programs such as the one offered by the College Advantage Ohio 529 Savings Plan may help you build up some of the savings needed to support your child. Veteran parents can save more on their children's schooling by remaining apprised of the latest programs available to them.

5. Certain families don't see the value of higher education.

Unfortunately, not all people find value in going to college. Those folks who are particularly entrepreneurial by nature may think that their kids may be better off getting the experience from the school of hard knocks, say by working in the family business. They may value life experiences above those that can be obtained from a structured, academic environment. In this case, it's all about the family's values.

6. Some parents have lowered expectations.

If a child is not doing that well in primary school, his or her parents may end up having lower expectations of the child. Without noticing the potential, some parents may become discouraged about helping their kids pursue a higher education. It's sad, but could they be unwilling to take the risk of investing in their child's education? I believe that no matter what, we shouldn't give up on our kids as surprising transformations can happen in people.

7. There's the belief that what's good for the parent is also good for the chld.

There are some parents who didn't finish college or never attended college, and because of their own experiences, they may not feel compelled to have their kids acquire an education on their dime. But fortunately, there are many parents who don't think this way, despite the fact that they've never made it into the hallowed halls of academia. There are many parents who value college highly and look upon it as the holy grail for the next generation; therefore, they do what they can to encourage their children to get a degree. These are the stories that should inspire us to think about how we can push forward to better ourselves and the plight of the youths in our lives.

Having the opportunity to attend college is priceless and even when resources are low, there may be ways to save up for this important phase in your child's life. If there's a will, there's a way.

Permalink | 30 comments | Silicon Valley Blogger's blog | Channel: Investment

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This article is from Wise Bread.

How to Make the Most of Your 401K

Silicon Valley Blogger — Tue, 15 Dec 2009 15:08:36 +0000

By Silicon Valley ...

Most of us have a 401k account with our employer. But there are people who've decided not to participate in their employer's retirement program for a variety of reasons. Some employees feel that they simply don't have the funds to sock away, and make this an excuse to skip out on the free money that comes along with company matched 401k or 403b contributions. Others would prefer to defer saving for the long term until they're "older." Others are still at the point of worrying about which high interest savings account to house their emergency funds in.

But imagine the money you're missing out on when you decide not to invest in an employee retirement program! The irony here is that the younger you do save for the long term, the better your investment returns will be over time. I started investing at the age of 23 and that was exactly two decades ago. I've been pretty happy about having made my retirement a financial priority, along with the commitment I took to building my retirement fund at a young age. Even with the volatility in the stock market, the returns have been good.

I've also heard another excuse that employees use to avoid putting money in an employer sponsored account. It's that they don't trust their employer with their money. With the nation just getting out off a painful recession, a lot of people have been concerned about the financial health of their employers — what with layoffs and all. After all, bankruptcy did Enron in, costing a lot of people their retirement years. But these fears are unfounded if people familiarize themselves with their employee sponsored plans. Here are a few tips to to help you get the most out of your 401k account.

1. Understand the rules that affect your 401k.

Don't forget that your 401k is your responsibility and nobody else's to manage. There is an administrator that handles the paperwork and provides you with a menu of investment products to choose from, but ultimately, you are responsible for the money you decide to invest. If you make the wrong choices for your investments, you can end up with a poorly performing portfolio. Realize, too, that your 401k has tax benefits and it's good to know how to leverage those benefits when you invest: for instance, avoid sheltering tax-friendly investments in your retirement plan as the tax benefits are redundant. Instead, buy tax-friendly investments in your regular accounts (such as tax exempt bonds) while you keep other assets in your 401k plan. Strategies like this can give you an edge with your portfolio.

2. Diversify your investments, even those in retirement accounts.

So your retirement accounts contain long term investments, but this doesn't mean that you should take unnecessary risks and that you should be overly aggressive with your investment selections. Use the investment tools offered by online brokers and investing sites to check on your portfolio's composition and how to best diversify your contributions.

3. Know the best investments for retirement accounts.

There are certain investments that may be more suitable for long term accounts and which work best with a 401k. Stock mutual funds and index funds are great choices — they are the perfect balance of risk and reward, in my opinion. It's also interesting to note that many employers will offer their own stock as part of their company retirement program. Should you invest in your employer's stock? It's up to you to make the decision, but I wouldn't go overboard with a high concentration in just one stock, no matter how confident I am about the company. Again, diversification is key. Also, putting your money in a pure cash account in your 401k may set it up for underperformance. Since your account is for a long term goal, you should pick investments that have good growth prospects.

4. Move to a rollover IRA once you leave the company.

For many of us, leaving an employer also means leaving our 401k behind and forgetting about it. As in my own experience, performing a rollover is a task that often falls by the wayside. But this is something that shouldn't wait: you should work on moving your money over to a high yield savings account using a rollover IRA registration. Be careful that you go through this process carefully so as not to incur penalties.

5. Contribute up to the match, at the very least.

The conventional wisdom here is that unless you have a lot of debt and need to reduce your debt load as a first priority, then you should open a 401k account. Most 401k programs have index funds you can invest in, by default, and also have an employer matching component. If you can afford it, contribute up to the maximum amount that is matched by your employer: a typical scenario has your company matching 50% of your first 6% of pretax dollars that you contribute to your 401k (or 403b) account. I've actually done a step further and have contributed the maximum allowable in all my retirement accounts, which has been up to 15% or more of my salary.

6. Be careful when you borrow from your 401k.

For those looking for affordable loans, one option has been to target their retirement funds as a source. Borrowing from your retirement plan is a pretty good deal since you're required to pay back the money plus interest over a certain length of time, and you're actually paying yourself that interest. But be careful: if you end up having trouble repaying this loan, you'll owe income taxes and a 10% early withdrawal penalty. I wouldn't go down this path unless I'm absolutely certain I can pay back what I borrow...only because I'm allergic to penalties and additional payments. So tread carefully!

In general, the investments that are housed in your retirement plans are typically protected by either FDIC or SIPC insurance, depending on what type of assets you hold. In my mind, there's no real good excuse not to own a 401k account, especially when you've got an employer match; it's a valuable benefit you shouldn't miss out on when you're working for someone.

Permalink | 7 comments | Silicon Valley Blogger's blog | Channel: Investment

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Can Your Spending Patterns Affect Your Credit?

Silicon Valley Blogger — Tue, 01 Dec 2009 17:07:07 +0000

By Silicon Valley ...

I am one who prefers to use credit cards over cash for the convenience and ease of use of dealing with the plastic. Since I always pay my monthly bills in full, using credit cards has never been an issue for me. In fact, I'm always on the lookout for good credit card rewards programs and I readily take advantage of those 0% interest credit cards that allow me to take out free loans for a limited period of time. No worries since I always pay off my balances in full before the intro periods are up.

But regardless of how fiscally cautious and responsible you are as a credit card holder, you may still be curious to know just how much credit card companies know about you through your card use. The truth is, our card spending patterns provide information that is monitored by issuers; and this data has been used to affect our credit ratings.

This article from CreditCards.com is quite telling: credit card companies are interested in where we shop, how much we earn (which they may try to verify based on activity in our accounts), where we live, how much we normally spend per year and even what nationality we are. So it's not just how you pay your bills that goes on record, but also how and where you use your money. These companies keep their eye on how you shop, and use this data to determine your financial health. Certainly, they are mining a lot of our personal information for a variety of purposes. Here are a few of those reasons.

To know which products to market to you

I've been receiving a lot more telemarketing calls from my credit issuers lately and it's no doubt linked to what they know about me as a customer. This is nothing new though, as many retailers use the information they get about you to pitch more products your way. If you use sales and store catalogs, then you know what I mean!

To monitor your account for possible fraud

I've been contacted more than once for possible suspicious activity in my credit card accounts. This kind of free monitoring is something I appreciate from the credit card companies. At least they're putting their information gathering to good use this way.

To manage risk

Here's where a lot of consumers may feel a bit uncomfortable about the extent of tracking that their credit card companies are doing. The truth is, these companies watch your FICO score and credit report like a hawk to gauge your credit-worthiness. Even financial accounts you have at different institutions may be subject to scrutiny by credit companies and agencies such that any financial transactions you make may influence your credit rating. You may be paying your card bills on time but if you're late on your mortgage payment, watch out! That just may be grounds for your card rates to go up or for your credit limit to get cut. It's therefore important to check your credit score on a regular basis to keep abreast of what it is that is visible to lenders and credit watchers. You'll want to ensure that these reports are accurate.

To monitor information that may be used for law enforcement.

If need be, financial data may be used for legal situations and cases. Our financial records may be utilized and entered as potential evidence in disputes, reviews or investigations of any sort.

That said, I'm not at all surprised that our financial behaviors are easily monitored by those we go into business with. When you enter into a relationship with a financial institution such as a credit card company, bank or mortgage lender, you should assume that your data is being tracked to form your profile as a debtor or consumer. It's the tradeoff we make to become borrowers or customers of companies that offer us the privilege of being part of a financial system that helps us thrive and prosper in the material sense.

Can You Avoid Being Monitored?

While it may be concerning that banks and credit card companies are aware of just how and where you spend your bucks, the good thing is that there have been steps taken by the government to pursue reform and regulate the card industry further. The Credit CARD Act has been put together to address the "abuses" that have been rampant in the industry for some time now. By early next year, the full effect of this legislation will be in place and may hopefully make a dent on some of the undesirable practices that card companies have been imposing upon their customers, including unpredictable rate increases, unfair changes in credit limits, and unfavorable adjustments to terms and conditions.

While the government is pushing for change in this area, there are things that consumers can do to protect themselves from this kind of scrutiny, if they so choose. It's always our prerogative to limit the use of credit cards when participating in financial transactions. It's simple: if you use cash, there won't be any data to track. As it stands, this could be one more reason for why using cash-only rocks.

So are you at all surprised by how much your spending behavior can affect how your lenders and card companies are viewing you? The bottom line is that there are both good and bad implications for having "big brother" watch how you shop. Well nothing's for free. In this case, we give away some of our privacy for the convenience of using the plastic.

Permalink | 10 comments | Silicon Valley Blogger's blog | Channel: Consumer Affairs, Credit Cards

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The Debt Trap: Factors That Have Led Us To Our Debt

Silicon Valley Blogger — Thu, 12 Nov 2009 15:00:03 +0000

By Silicon Valley ...

We're a nation of borrowers. This reality is quite well illustrated by the personal stories and profiles covered by various media publications on the subject of consumer debt. Recently, The New York Times published a series on debt, which I found to be both highly intriguing and sobering, as it shed light on the plight of debtors and took a peek at our saving and borrowing habits. When I hear and read about these debt stories, I sense a common thread in the discussion, as people ponder what got them into this kind of trouble in the first place. In many cases, we point fingers at lenders, banks and credit card companies for creating financial products and developing an environment that is conducive to lending and borrowing (and that which allows us to shoot ourselves in the foot).

Let's review how we've found ourselves so heavily in debt as a nation of consumers.

Easy credit

In the past, it was simply too easy for consumers to obtain access to credit. Not long ago, I remember the slew of 0% interest credit card offers that would invade my mailbox. Because credit was so easy to get, consumers figured out how to leverage their credit card rewards as well as balance transfer cards in order to make money. Many tried to perform credit card arbitrage by taking out cash advances and balance transfers from these cards, then investing the amounts into a rising stock market. This was just one of those things you'd consider to be a "sign of the times." Of course, things are different today, but the 2000s was a decade during which our debt ballooned due to these types of products. Subprime loans, jumbo mortgages and other forms of costly debt are inventions of our capitalistic society; these are high-risk financial tools which countless consumers have used and gambled with, often with dire results.

Need for instant gratification

As a society, we're quite an impatient lot. It's ingrained in us to be able to get immediate access to the things we covet, even if we can't really afford these things at the moment. We live in a highly consumerist society that encourages materialism and is not ashamed of excess. Have you seen just how huge the portions are served in most American restaurants? It's all about more, more, more right now! So it's often the case that funds that should wisely be funneled into high interest savings accounts or into high yield savings are instead being used to keep up with the Joneses, a syndrome that many of us harbor, and which has caused many a household to fall into debt.

Lack of financial education

I don't believe that we're giving our finances enough priority; after all, personal finance isn't given importance in schools. A lot of us don't learn about finance while in school and instead are picking it up through experience and trial and error. Unfortunately, this lack of understanding and awareness about money management can make us vulnerable to making many financial mistakes, particularly those that land us squarely into the depths of debt. We should take it upon ourselves to learn the ropes: you can become informed and educated for free, if you check out libraries and the Internet for financial material and resources such as money management tools, budgeting tools and investment software that are available at no cost.

Lack of accountability

I don't think we're accountable enough for ourselves either. It's too easy to procrastinate about our finances, go in denial or sweep things under the rug when we get into trouble. But also detrimental is when we can't take responsibility for our own actions and mistakes. We readily blame the government or the financial industry for causing the rifts in our economy, but we're just as guilty about causing the crisis as they are. Both lenders and borrowers contributed to the subprime lending boom, subsequent bust and credit crisis, but guess who's getting the lion's share of the blame?

Debt as a cultural phenomenon

You've heard the saying "it's the American Way," a statement most applicable when referencing our relationship with consumer debt. In other cultures, debt is heavily frowned upon and is only gingerly used by households. But in America, debt is socially acceptable and ingrained in our culture; it carries no stigma. If bankruptcy, foreclosure, debt and being broke are things we easily accept in our culture and way of life, then these aren't things we'd readily condemn (or worry about) until too late or until we're forced to face the painful consequences.

When the economy blew up last year, it prompted the government to start making some changes; they've since introduced policies that help regulate the financial industry to some degree (e.g. credit card rules) but in many respects, it's still pretty much "business as usual." Instead of worrying about what the Fed or Obama is going to do next, we should focus on the things we have control over, and take responsibility for our own financial predicaments.

Permalink | 15 comments | Silicon Valley Blogger's blog | Channel: Credit Cards

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This article is from Wise Bread.

How to Deal with Recession Anxiety

Silicon Valley Blogger — Thu, 29 Oct 2009 13:00:05 +0000

By Silicon Valley ...

The nation’s economic recovery is anemic, with unemployment rates continuing to climb, but this doesn’t mean that your household economy is in trouble. In all the news that I've read about the economy, the media fails to report that around 90% of the country that wants a job has one; small businesses are hiring; and that if you buy stock now, when the market goes back up, you’ll be in an enviable position. Recession, even economic depression, is also a mindset. And there are millions of people in the US and around the world who are simply choosing not to participate in this downtrend.

Why do recessions cause anxiety? Because of our fear of uncertainty and the unknown. And then there is the media, which can provoke that anxiety. Local news reports have started running stories about people who have a complete year’s supply of food on hand at all times for the coming depression. Employment security (or the lack thereof), investment certainty (or the lack thereof), inflation, and other factors all combine to create a sense of dread that the media elevates to panic. But you don’t have to participate in the fear, the hype, the sleepless nights, or the hoarding. Here are a few simple (or not so simple, but effective) ways to prepare for any economic slowdown. These methods will help you to avoid participating in the recession and the fear mongering that prevail during such periods.

Emergency Funds Are a MUST.

The best way to combat uncertainty is to have a back-up plan. Back-up plans remove fear. If you had money to cover six months worth of household expenses (food, bills, house and car payments, etc.) in a high interest savings account — or even under your mattress — “just in case”, would that ease your mind about getting a pink slip? Would you work differently knowing that you had a Plan B? Increasing your savings — your “rainy day fund” — will ease your mind and give your family a strong financial footing. You may even be able to tell your boss “thank you” when the pink slip comes because then you'd be free to start your own small business or spend time at home with the kids or plant that garden you were meaning to, or do whatever it is you would like to do while you look for another job.

Pay off Debt.

What would you do with an extra $1,000 dollars a month? Would you revisit your stock broker for advice on how to build your retirement? Or perhaps you'd like to rethink the early mortgage payoff and pay off your house. Or what about building up your emergency fund or taking a vacation? Would you stimulate the local economy by being a consumer? There's a lot that you can certainly do when you have an extra $1000 or more a month in income. Most American households pay anywhere from $800 to $2,000 a month toward debt (including car loans) and compound interest. But imagine having no debt to worry about — then even if you lose your job because of a layoff or pay cut, things wouldn't be so dire given that you don't have to make debt payments. If you're having trouble paying off debt, you may want to consider credit counseling or debt settlement as a last resort.

Keep Cash on Hand.

If you are worried about a run on the banks, or your bank in particular, then keep a supply of cash on hand: just enough to buy food, water, and gas for a couple of weeks, no more. Should your bank fail, your deposits and surely, your high yield savings are insured though the FDIC for up to $250,000 and you will get your money back, eventually. Should the FDIC fail…well, getting money out of your bank will be the least of your problems if the Federal Reserve fails.

Don't Stop Investing.

Warren Buffett (a close, personal friend of President Obama, if one believes campaign rhetoric), once said about investing: “Be fearful when others are greedy and greedy when others are fearful.” Well, right now should be the perfect time to invest because everyone and their brother is taking money out of the market and hiding it in a paper grocery bag in the back corner of the hall closet.

Sure, you may lose a little of what you put into the market today, but when you continue to invest when the market is down, you can buy more stock than you could a year ago with the same amount of money. When the market goes back up — which it will — those who continued to invest with their discount broker during this time, when stocks are “on sale”, will be that much closer to reaching their financial goals.

Don't forget, also, that investing should be for the LONG TERM…not for just a couple of years. Remember that 80% of ANY rolling five-year period in the last 110 years has averaged up, and over 90% of any rolling 10-year period and each rolling 20-year period have shown overall gains. Thus, market hiccups don’t look nearly as bad.

When you make the conscious choice not to participate in the recession, suddenly the dire economic news does not seem so apocalyptic. If you do just a few things to protect your family — most important is paying off debt (and not accruing more) and putting aside an emergency fund equivalent to at least six months of expenses — then the numbers given in the evening news, even if you are included in the latest round of layoffs, won’t keep you awake at night.

Permalink | 7 comments | Silicon Valley Blogger's blog | Channel: Personal Finance

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This article is from Wise Bread.

Worried About Debt? Tips On Managing Your Loans

Silicon Valley Blogger — Wed, 14 Oct 2009 13:00:03 +0000

By Silicon Valley ...

I am extremely debt averse. In fact, the only debt I have is my mortgage. However, I do have family members who have been struggling with debt for a long time, whom I try to help out with some friendly advice. Someone in my family, for example, is a head of household who's had a hard time holding on to a job in recent years, especially in the state where he lives, where unemployment has been sky high. So he's taken on personal loans, credit card debt, auto loans and even student loans galore! With so many loans to manage, he's often asked me and other people for tips and advice.

Here's what I tell him: If you've got a lot of loans under your belt, you'll want to make sure to manage them well, or risk wrecking your credit by making a late payment somewhere. Dealing with debt involves both defense and offense: when your goal is to cut down on the debt you carry, the key is to stop borrowing any more money, to make sure you can afford paying down your loans (spend less and earn more to pay off debt!), and to try to lower your interest rates as much as you can.

Here are a few tip to keep your debt under control and ways to speed up the process of reducing your debt load.

1. Keep tabs on your credit.

Anyone who borrows money should keep an eye on their credit. But interestingly, there are quite a good number of people who aren't even aware of their credit score. Do you know what your credit report says about your debt habits? If you've got loans and many accounts you're dealing with, you'll need to know how your debt load affects your credit rating. The way you manage your debt influences your credit rating: this is important because by taking care of your credit, you can be eligible for cheaper loans or have the leeway to reduce your loan interest rates. If you want to retire your loans as quickly as possible, having a healthy credit history may help you negotiate your way to lower rates.

2. Consolidate your loans.

You may want to consider consolidating your loans on your own as a way of reducing your debt. For example, I like the idea of using balance transfer credit cards if you can commit to paying down your debt before the teaser rates bump up. Despite the credit crunch, there are still 0% APR credit card offers that abound, to which you may think about transferring your debt balances over if you can be aggressive about paying off your debt at the 0% rate within a short period of time.

3. Do your own debt management.

Before you seek credit counseling or turn to debt settlement companies, do all that you can to handle your debt issues on your own. Handling things on your own is cheaper. A lot of it is simply applying fiscal discipline: start off by avoiding new debt. Don't take on additional debt unless you are comfortable with what you're already dealing with. Cut back on spending or try to earn more in order to cover your bills. There's really no magic bullet here: there's nothing that others can help you with that you can't already do on your own. If you really are experiencing hardship, turn to local and government financial programs that are geared to assist low income families or those having a hard time paying their bills.

4. Lower your interest rates.

Find out if you can somehow reduce your loan rates. Can you qualify for low interest credit cards? Or you may think about taking out a cheaper personal loan to pay off a more expensive loan. Also, you may be surprised to know that financial institutions may have hardship programs available and that bankers may be willing to negotiate with borrowers who approach them for guidance. It never hurts to try!

5. Pay on time!

You know you're in trouble if you're unable to make your loan payments on time: this indicates that you've taken too heavy a load and that you should make it a priority to address this debt. Do your best to cut down on expenses, while paying on time. Pay your bills late and you'll see your rates go up. Whatever happens, do your best to make those payments because late or missing payments can do a number on your credit.

6. Pay more than what's required each month.

If you ever get a hold of a windfall or find yourself with extra income, you should think about applying it towards your debt. Some people suggest keeping debt around while banking the extra money in an emergency fund, but I think it would depend on just how big a debt obligation you actually face. If debt is a thorn on your side, get rid of it asap. In my case, I've added extra payments to my mortgage whenever I could afford it!

7. Be picky about the help you choose to get.

Turning to credit counseling, debt settlement and loan modification outfits should be the last thing you try to do. You can actually do your own debt negotiations yourself by approaching your lenders directly for assistance. Some people decide they need the extra help by reaching out to debt management companies when they feel there's nowhere else to turn. These companies can help alleviate the pressure but you'll be paying for offloading the work onto someone else. The good news is that there are other free and non-profit programs that may be able to assist you — so go to these first: visit Debtor's Anonymous or the National Foundation for Credit Counseling for support and information on how to live with and manage your debt and credit.

Permalink | 6 comments | Silicon Valley Blogger's blog | Channel: Credit Cards

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5 Creative Ways to Invest During a Weak Market

Silicon Valley Blogger — Wed, 23 Sep 2009 16:00:05 +0000

By Silicon Valley ...

With the stock market finally recovering this past month, even closing at highs for the year, a lot of investors may be breathing a sigh of relief about their stock investments. You may have checked your online broker recently and discovered your balance looking a bit healthier than it did several months ago. But given the volatility we've seen over the past year or so, can we really trust that the markets are reflecting a true recovery in our economy, or is this just a technical bounce?

A lot of armchair market pundits I've been reading are keen on predicting that we're going to see a double dip recession. And interestingly, market insiders are also making defensive moves right now, apparently bailing out of their equity positions while the market registers this year's highs. This caught my attention, given that these very same insiders were known to be buying heavily when the market was carving out a bottom (at DJIA mid 6000).

So if you're worrying about what you should be doing with your investments right now, you're certainly not alone. But instead of wondering whether you should hang on tight or abandon everything for cash, I'd like to suggest that we think outside of the box a little and investigate some alternative approaches to investing. Here are 5 creative ways to invest right now.

1. Invest in lending notes.

While I've known of peer to peer lending for a while now, it's only recently that I've looked into it earnestly as an investor. I was particularly intrigued by the potential returns you can make by investing in notes (between 7% to 9.6% as an annual average). For more details, you can check out my Lending Club review and evaluate this particular lender's personal loan rates to gauge what you can earn as an investor.

2. Explore foreign currency investments.

Are you interested in adding some foreign exposure to your portfolio beyond owning traditional international equities? Then you may be interested in foreign currency CDs which are certificates of deposit that are invested in various world currencies. There are variants of this product that may give you downside protection (most currency CDs do expose you to currency risk): for more information, check out my EverBank review, which discusses such products in more detail.

3. Ladder your cash instruments.

Short term cash reserves aren't the most exciting things these days, given the low yields they've got right now. So for the short term reserves I have, I've opted to use a CD ladder, which requires staggering the purchase of certificates of deposit of various terms so that they reach maturity at various times. Laddering allows you to diversify across CDs of differing rates thereby giving you a chance to enjoy a higher average rate of return. They also grant you some level of liquidity because of the different maturity dates represented in your CD portfolio. Here's are some of the best CD rates I've found, which you can explore for this strategy.

4. Diversify into precious metals.

For further diversification, consider delving into other asset classes such as precious metals, and in particular, gold. Investing in gold has paid off for long term investors over the last decade, but like any other investment, can be subject to volatility during certain periods. A good rule of thumb is to put only a small portion of your funds (say 5% to 10%) into this category for diversification purposes. Investors normally flock to precious metals when there's fear in the markets and the streets.

5. Diversify into commodities.

Aside from putting a small portion of your funds in precious metals, you may also want to investigate the possibility of buying a commodities fund, index or ETF. Relatively speaking, commodities are not a very popular asset category and are not widely found in the average investment portfolio. The truth is, they are meant to represent only a very small part of your holdings due to their volatile nature. However, if you are looking for one way to hedge your core equity portfolio (e.g. against inflation), then you may want to put a little bit of money in a commodity index fund like the PIMCO Commodity Real Return Strategy Fund (PCRDX). This particular type of investment has both its champions and critics, so do your best to learn about it before investing.

So what about investing in the obvious? Now that stocks and real estate are down from their price peaks, you may start feeling tempted to move the lion's share of your portfolio into these weakened areas. I would caution you from making such radical moves though, since outright market timing can be a dicey game (you can be wrong, after all!). Instead, look into rebalancing your investment portfolio if you haven't done so already, in order to keep to your original asset allocation (by shifting your funds accordingly, you're actually buying low). Or if you really want to invest in real estate, make sure you study the local markets. Alternatively, you can simply go for REITs, which are so much easier to manage. But if you're thinking about buying a house to live in, I believe that now is a good time to buy!

Permalink | 7 comments | Silicon Valley Blogger's blog | Channel: Investment

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