Some of the best advice is timeless. Here’re some nuggets of wisdom from the late Harry Browne.
These topics are covered in the timeless classic – Fail-safe Investing , probably the best $10 you’ll spend on personal finance and investing!
Regular readers know I’m currently pursuing an MBA. What they don’t know is that I’m currently taking 6 classes plus an Applied Management Research project which is almost twice the usual workload. I’m a third of the way through the quarter and I’m already feeling burnt out.
To help take my mind off things, I decided to look at vacation packages. Once my quarter gets over, I might travel for a week. I’ve been dying to visit South America or the West Indies for quite a while. Several packages look pretty good. And by good, I mean from the aspect of being good value for money. Yes, I like to travel cheap, or as I like to emphasize, I’m a price-conscious consumer. Some of the places that had good deals were Costa Rica, Puerto Rico, and Mazatlan. Argentina also looked enticing, but the flights were slightly more expensive. One of the things I noticed was that my Discover Card was offering 5% cashback on travel booking until the end March 2010.
I don’t usually use my Discover credit card very much. It has a strange (but useful) rotational rewards program. Usually, you get 1% cashback, but every month (or sometimes for a whole quarter) you’ll get 5% cashback on a specific category of purchases. Each month its a different category. For example, it might be on travel (plane, hotel, car rentals or cruises), only restaurants, gas or maybe just groceries. This quarter, it just happens to be travel. Pretty useful if I actually end up traveling somewhere.
I typically use my American Express True Earnings Card instead of Discover. The rewards are more predictable. You get the typical 1% cashback on regular purchases, but you always get 2% cashback at restaurants and 3% cashback on travel. I paid my MBA tuition fees with it and got over $500 on it! While I don’t condone spending $50,000 just to get $500 back, it still makes for a nice Christmas present! (I would’ve actually preferred the American Express Starwoods Card since the rewards are great for taking vacations and the points are redeemable for stuff on Amazon, but I was coldly rejected).
So before making any major purchases, you should definitely go through your credit card rewards and see which one gives you more bang for your buck. If you don’t have a Discover card, make sure you sign up for it – the additional 5% might be worth it if you’re planning a big ticket purchase.
If you’re a student with limited credit history, you can sign up for the Discover Student credit card. It is a bit easier to get approved for it and it comes with the same set of rewards.
And if any of you have any vacation suggestions for the end of March, please let me know.
You must have read the recent post about the New York Times economics reporter who is facing foreclosure himself. Edmund Andrews covered the US economy and Alan Greenspan for over six years, but despite his financial accumen still got suckered into a loan he couldn’t really afford. He hasn’t made a mortgage payment in 8 months and is wondering when the bank is going to throw him out of his house. Instead of making his payments, he has been busy spending money on a beach rental, clothes, gifts and other necessary expenses. At some point, I think foreclosure is inevitable.
But could he have avoided foreclosure?
I think so. Let’s review some of the financial mistakes he made. The real ones, not the excessive spending that set in once he stopped making house payments!
This is always grounds for economic disaster. No matter who you are, the longer you stay married, the more it’s going to hurt you financially. If you are going to divorce, do it like Tom Cruise and get out before the magic 10 year mark or before you have kids.
Ouch! Paying $4,000 in alimony and child support when your net income is $6,777 is a lot. Effectively, his take home income is $33,000 per year or about $16/hour. I think most people on that wage move back home to their parents basements.
If there’s one major recipe for disaster, it’s buying a $500,000 house when you’re only taking home $16/hour. He really should have known better. But then again, he outsourced the analysis of his finances to his mortgage broker instead of doing it himself. He was set up to fail from the beginning. I’m sure his broker knew in the back of his mind there was a chance Ed would face foreclosure at some point. But Ed really should have bought a cheap house instead.
A home mortgage is the most complex financial transaction you’ll probably ever undertake. So it’s easy to blow it off or let some one else do the heavy lifting for you. However, the mortgage broker doesn’t necessarily have your best interest at heart. They get paid on commission for every loan they close and are directly incentivized to get you into the largest, most outrageously expensive home loan possible. There is a tremendous conflict of interest and you should not let them dictate what you should do. Many people claim that a home loan is just too difficult too understand. True, but only if you don’t take the time to understand it.
I strongly recommend Randy Johnson’s stellar book How to Save Thousands of Dollars on Your Home Mortgage . If you don’t know what Yield Spread Premium (YSP) or Paid Out of Closing (POC) means on a HUD-1 you definitely should read this book. If you own a home and don’t know a HUD-1 is then get your spouse to smack you and then go buy the book! I promise you’ll save thousands of dollars on your mortgage.
Just in case, you missed that last paragraph, BUY THAT $12 BOOK ABOUT SAVING THOUSANDS OF DOLLARS ON YOUR HOME MORTGAGE. You should buy it before you buy a house, before you even think of buying house, maybe before you even graduate from college. If you’ve already read it, you should buy a dozen copies of the book and gift it all your friends, co-workers, in-laws, cousins, nieces and nephews for Christmas. Unless you hate them.
The best way to prevent foreclosure from happening to you is to buy a house you can afford with a mortgage that is the cheapest over the life of the loan. That may mean paying extra points to buy down your interest rate, which means the cheapest loan is not necessarily the loan with the lowest closing costs. Learning about your finances, and how mortgages actually work is probably the best way to save money in the long run.
I guess Amex decided they weren’t making any money on my account so they basically told me my credit limit was now $2,500. Since my revolving balance is close to that amount every month, my ratio of available credit to debt ratio will look like its over 80% which will hurt my credit score.
Apparently this isn’t an isolated incident. Smart money just had an article about credit card companies reducing credit limits on numerous borrowers, sometimes with the current balance exceeding the new limit.
While the fees, frozen accounts and default interest rates resulting from credit-line cuts can sting your finances, they can do some serious long-term damage to your credit score. Your credit utilization ratio — the total amount of debt you owe in relation to the amount of credit available to you — accounts for roughly 30% of your score. A credit line cut has the potential to decrease your score by 50 points or more if you don’t have much other available credit, says Craig Watts, spokesman for FICO, the company that calculates and issues the credit score that most lenders use.
One of my friends just graduated from USC’s Marshall School of Business. Last year he told me that a visiting professor announced in class that consumer lending was going to dry up and people would no longer be able to get credit. His advice was to get it while they still could!
Seems like that day has now arrived. Regardless of your credit, skittish credit card companies are reducing credit limits. How do they expect to make any money if they’re not lending money?
But more importantly, what good is your credit if you can’t borrow any money? Do you think this might drive people to max out their credit cards while they still have available balances and then default on them?
Time To Buy Online Retailers?
Online retailers have been fairing better than their brick-and-mortar counterparts. One school of thought is that affluent buyers make up a bigger portion of online buyers and they fare better during recessions, which means online retailers are likely to do better.
Another line of reasoning suggests that there is a perception among buyers that there are better deals online than in stores. So its the bargain hunting, not the higher incomes that is driving people to shop online. I think there’s some truth to this.
Last week, I needed to replace the battery on my motorola KRZR cellphone. The battery was no longer holding charge and had developed a slight bulge in the middle as well. I went to the Verizon store and they told me I was out of luck, and would have to buy a new battery for $40 plus tax.
Instead, I bought a cellphone battery online for only $6.41 delivered! I had to wait 2 days, but I got a whopping 85% discount!!!
For some reasons, retailers think that replacement batteries should cost 40-50% of the cost of a new electronic item. If you’re willing to spend a few minutes doing the research and wait 2-3 days, then you can usually save at least 60% of the cost. Now whether your time is worth that 60% in savings is another question.
Incidentally, that battery link goes to a niche store I built initially to buy cheap iPod batteries, which cost a ridiculous $79 plus tax at the local Apple store. I bought my battery replacement kit for $20 online instead!
But getting back to my main point, I think that with inflation eroding the purchasing power of the average American, more people will turn to online shopping. And with gas prices being so high, people are more likely to limit they’re driving to the mall.
So there are two lessons to learn here.
1. If you own stocks of retail stores, ditch them and buy online retailers instead.
2. Look online for bargains.
Maybe it’s time to look at Amazon’s stock (AMZN)?
I’d like to announce that I’m part of the new of The Wealth, Money & Life Network (WML-Net), a new personal finance network.
The WML-Net is made up of a diverse group of individuals. The ages span across the 20s, 30s and into the 40s. They’re located in geographically diverse parts of America; ranging from the east coast to the west coast, from the midwest to the southwest to the deep-south. Their backgrounds are as varied as their careers, education, income streams and lifestyles. Some have debt, while others do not. There are those who are married, with and without children, while others are single. Some have a college degree and there are those who do not.
Considering that that no one situation is alike, the group’s diversity should provide different insights based on everyone’s own personal financial experiences.
Periodically a topic will be presented and we’ll approach it based on our own unique experiences. This month, we are going to discuss Emergency Funds. I certainly look forward to hearing about each member’s approach to the topic of having an emergency fund. If you would like to share your posts about having an emergency fund, feel free to contact any of us to add it to the network post at The Wealth, Money & Life Network site.
Be sure to pay a visit the other The Wealth, Money & Life Network member sites and subscribe to their feed, and my feed, if you haven’t done so already. The links below will get you there quickly!
Also, be sure to visit The Wealth, Money & Life Network site.