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Archive for the ‘Cash flow’ Category

From a utilitarian perspective, giving gifts makes no sense. Generally speaking, you buy gifts for people who are likely to buy you gifts – hence the term “exchanging”. Receive a gift from someone you had no intention of buying anything for, and you’re selfish and inconsiderate. Do the opposite and you’re a sucker or a suck-up. And if you do buy something for someone who buys something for you, custom dictates that the gifts can’t be of disparate value: hence the ludicrous practice of removing price labels. After all, nothing ruins the joy of receiving a thoughtful and apposite gift than finding out the donor spent too little on it.

Think about it: you spend money to get people things that you hope they’ll like. If they don’t, you’ve wasted your time and resources. Thus the most useful possible gift is the one perfectly adaptable one: cash. But again, the suitability of cash runs into the brick wall of decorum. ‘Tis the season to be gauche. And again, if the recipient adopts the same logic about gift-giving, you end up exchanging cash for cash. Reduced to its fundamentals, the transaction is easy if quotidian: instead of you buying me a $150 gift and me buying you a $160 one, I should just give you $10. Then we can spend the next year discussing how I’m tacky and you’re cheap.

If you’re the parent of a young adult, or otherwise have someone in your life whose net worth isn’t yet where yours is, here’s a mutually beneficial idea for a decidedly American gift that isn’t cash: the next best thing, credit.

The average college graduate receives that bachelor’s degree with a five-digit Sallie Mae obligation. As for the prudent and responsible students who manage to graduate with no or minimal student loans, doing so usually means there’s hardly enough money remaining to create any kind of nest egg. The wealth-building years have begun in earnest, but there’s almost nothing to lay a foundation with. Renting an apartment for the next few years (an investment with a guaranteed rate of return of -100%) wipes away much of the equity a young person could be building.

If you can afford it, lend your upwardly mobile kid enough to cover the down payment on a modest little domicile. Even buying the tiniest of townhomes gives him or her the opportunity to build equity, and to exercise the care and consideration for one’s things that renters have no incentive to.

Say you find an $80,000 condo that requires a 20% down payment to avoid private mortgage insurance costs. Financing the remaining $64,000 at today’s 4.24% 15-year rates means your kid would write monthly checks for $481.13, which makes far more sense than spending $800 on a larger rental house in a fancier part of town.

Remember, this isn’t a gift in the traditional sense. As the giver, you’re expecting something in return – regular payments, with interest. If you can give your kid a 100-basis point break on market rates, she could pay back that $16,000 loan back to you in $112.35 monthly installments. Which should be pretty easy to do, especially if she’s collecting rent from a roommate. Of course, we’re assuming she’ll be making gradually more money throughout the life of her concurrent loans.

The real “gift” in this situation is something intangible but vital: an introduction to real-world finance, and a chance to exercise responsibility. It’s the ideal meeting of a recipient whose ambitions outweigh her wherewithal, and a donor with the ability to make the recipient’s transition into the world of commerce run a little more smoothly.

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The first number you need to know is your net worth. Calculate it by adding up all of your assets and subtracting your liabilities. You increase your net worth by taking your cash flow and buying assets. You decrease it when you take equity and buy consumables (e.g. cars, clothes, vacations.)

Track your net worth each quarter. Make it your goal to increase 3% per quarter, which translates to 13% per year. Do that and you’ll double your net worth in 6 years.

Which leads to the next number you need to know. Cash flow is the difference between your periodic income and expenses. This number must be positive. If it isn’t, increase your income and/or lower your expenses. You should probably focus on the latter. Positive cash flow can be invested in assets that will increase your net worth. Living beyond your means leads to consumer debt and decreasing net worth.

Finally, you need to know your FICO score. FICO stands for Fair Isaac Corporation, the organization that conducts statistical research on the probability that a loan will be repaid. Factors that affect your score include available credit, payment history and credit inquiries. Your FICO score determines what it’ll cost you to borrow money. The higher the score, the lower the rates you pay.

Net worth measures your investment strategy.
Cash flow measures your budget skills.
FICO score measures your ability to manage cash.

These numbers paint a picture of your financial health. Track them consistently and work to increase all 3.

Take control of your future by taking control of your cash.

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comfessions_of_shopaholic

“They used to call me valued customer, now they are sending me hate mail.”

Becky Bloomwood Confessions of a Shopaholic

Every year, 1½ million Americans file for bankruptcy.

Imagine a widow with infant triplets who renews her health insurance policy the minute her old policy expires. She can’t get an internet connection, and she doesn’t want to risk being uninsured, so she gets up from the chair, only to trip over the power cord and fall headfirst onto a hardwood floor. She breaks 8 teeth and dislodges her lower vertebrae, requiring tens of thousands of dollars of dental work, surgery and rehab. She works as a model, so now she can’t draw a paycheck for the year. Two years ago, her husband died when he happened to be driving along a faultline as an 8.0 earthquake hit, so his life insurance didn’t pay out because it was an Act of God. The triplets’ grandparents all live in the Czech Republic, and the woman lives on a ranch in southern Oregon, miles from any neighbor who could help her get back on her feet. So she declares bankruptcy.

How many of last year’s bankruptcy claimants have similar stories, and how many bought too much junk on credit and never bothered to budget?

This might not sound kind, but most people in bad financial straits are there because they chose to be. Not in the sense that they said “I can’t wait to be broke,” but in that when they were buying cars with 8.9% financing and spending $100 a week on cigarettes, they didn’t think about where it would inevitably lead.

No one wants to die in a car accident, but if you drive through enough stop signs while talking on the phone, you can’t be surprised if it happens. (Of course you can’t be surprised, the part of your brain that senses surprise[1] is now on the asphalt next to your cerebrum and your hippocampus.)

Personal responsibility is neither quaint nor outmoded. When enough people fail to exercise it, it leads to macroeconomic calamity. Of all the financial disasters of the last few years – the subprime mortgage crisis, the monster budget deficit, the stock market losing half its value, centuries-old investment banks going out of business – every last one happened because people who could have taken responsibility for their money chose to do something else instead.

“People tell you life is short. Life is long. Especially if you make the wrong decisions.”

-Chris Rock

Come check out Control Your Cash for one reason: your relationship with money is almost certainly dysfunctional. You don’t know what you don’t know, probably because nobody ever taught you.

Join, read, comment, share ideas. You can stop letting money act on you – and actually take charge of it.


[1] The amygdala, if you care.

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3351670683_7aa80b2415**This post has been featured on the Calvacade of Risk carnival**

Have you ever missed out on a great investment because you didn’t know how to quantify its risk and return? Or even worse, because you didn’t even know what to ask to make an informed decision?

If you fancy yourself an investor, you need written investment criteria you can refer to when someone offers you an opportunity.  Here’s a sample.  Once you fill it out, answer these questions:

What type of investment is it?
Real estate

If I buy it, how will it affect my allocation distribution?
Negligibly.

But what if it didn’t? Will you sell an asset? Buy other assets?

Estimated Return on Investment:
4½%-8%, plus appreciation (estimated to be 0 for the next 3-5 years.)

Description:
A 2nd floor, 1-bedroom/1-bath 770 ft2 condo in southwest Las Vegas.  It’s listed at $50,000 and approved for a short sale.  Monthly rents in the area are $650-$750.  Annual expenses are per the attached Annual Property Operating Data worksheet.

The APOD lists multiple scenarios that affect the ROI, including varying rents and whether you (or your business partner) plans to live in the condo. If you do, you can include the federal $8,000 first-time homeowner credit if you buy before December 1.

Here are 2 ways you can construct a joint venture between you and whomever’s bringing you the proposal:

#1: Bought by owner-occupant. This is perfect for a parent who wants to help her kid buy a home, yet still reap an ROI.

You lend the entire price of the condo, without interest.
Say the monthly market rent is $700. You’d charge 80% of that to your daughter, which is $560.

-$490 goes to you
-$70 goes to a reserve account for property maintenance.

Your daughter saves 20% off fair market rent. In return, you get to write the property expenses off on your tax return instead of she.

#2: Bought by LLC. Investment partners would use this proposal when one partner (the Finder) has the time & expertise to find the property and the other (you) has the money to finance it.

Again, you lend the entire price of the condo, without interest. However, you’ll rent it out to some stranger at the full market price of $700.

-$490 goes to you
-$70 goes to a reserve account for property maintenance.
-$140 goes to the Finder.

Describe the worst-case scenario:

-Property values may continue to fall. You might have to hold the condo for 5 years to break even.
-If the condo doesn’t rent immediately, the return will decline.
-The condo could get damaged. (So you need a security deposit.)
-You and your partner might disagree on management or sale of the property. (So you need a properly worded operating agreement.)

Since you’re creating a partnership, I recommend an operating agreement clarifying these issues:
•    Whose name will the condo be in? (You can own it outright, your partner can own it outright, you can own 63% and your partner 37%, etc.)
•    When you sell, how will you split the profits?
•    Who will manage the condo and rent it out?

The answers depend on whether your partner will be your kid or someone else.
If you’re setting this up as a business arrangement, create an LLC to hold title to the property.  In the LLC’s operating agreement, you can set out details such as who gets to write the property expenses off and what each partner’s duties are.  The LLC also protects against liability if your tenant or a visitor gets litigious.

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We’re suffering an epidemic of foreclosure, or so the media and certain members of Congress would like us to believe. The overwhelming majority of Americans AREN’T losing our properties; we’re making our payments.

But apparently this is a situation beyond everyone’s control. The economy made me lose my house. Rather than be accountable, why not blame the economy (or the President, or lenders) for your own ignorance, immaturity and bad money management? After all, when it’s not your fault there’s no reason to feel shame.

To those people who “walked away” from their homes:

1) What did you do with the money you saved by not making a mortgage payment for 6 months to 1 year? You knew you’d need a new place to live when the inevitable happened, right?
2) Who’ll pay for the loss on your property? Do you care? Dutiful taxpayers end up bailing out our neighbors. This is the reward for being responsible.

If the taxpayers are forced to bail out the homeowners who walked away, they should at least face some consequences. Liks being denied government-backed financing for a few years.

How do you prevent foreclosure?

-Buy a house you can afford* . Put at least 20% down and stick to a conventional (in the generic sense) loan. (e.g. 30-year fixed, 15-year fixed, 5/1 ARM)
-If you’re honest enough to admit you don’t manage your money well, have your taxes and insurance payments impounded by the mortgage company.
-Eliminate consumer debt. Ideally, you did this before you bought the house. Okay, you can have a car payment as long as it’s no more than ½ your mortgage payment.

-Have a reserve savings account with at least 6 months of expenses in a safe, liquid investment. (CD, money market, etc)
-If you’re old or have a dangerous job, get disability insurance.
-Pay on time and in full. Duh.

If you’re already behind, do this NOW:

-Contact your lender and work out a payment plan.
-Sell everything that isn’t nailed down and put the money toward your past due balance.
-Cut everything out of your budget except food, mortgage & utilities. (Notice there’s no car in there. If you have a car payment and can’t pay your mortgage, one of them has to go. And it’s not the house.)
1) Get a second job. Again, the money goes to your past due balance.
2) Talk to a property manager about renting the property**
3) If you have credit card debt (which, of course, you do), ask the card issuer to cancel your account and work out a payment plan that begins once you’re current on your mortgage.

It’s almost universal – people who struggle to pay their obligations spend frivolously. Vacations, dinners out and fancy cars are common among people who are days away from losing their homes.

It’s time to take responsibility instead of looking to the taxpayers to save you from yourself.

*I’m assuming you worked with a REALTOR to buy a home for the best available price.

**If you’re in default/foreclosure and plan to rent your house, you must disclose the potential foreclosure to the tenant. Use a property manager and have the rent payments handled by an escrow company that will pay them directly to the lender.

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