The American Dream: A Fictional Story

Thanks to Danny Kofke, author of the book Live Wealthy With Little Money, for this portrayal of a family in debt.

Jim and Laura are a typical American couple. They just got married last year after dating for four years. Jim is a manager of a local department store and Laura is a school- teacher. They make a combined salary of $100,000 a year, and look forward to raises and increased incomes in their future. They have around $3,000 in their savings account— which seems ample since they are certain they’ll continue to make more money each year—and both drive new cars.

Spending Spree

Jim and Laura go shopping whenever they want and pretty much buy anything they like without thinking twice. In addition, they eat out most nights of the week but try to keep it cheap; they usually don’t spend more than $30 for these dinners.  

After renting an apartment for six months, they decide it’s time to buy a house.  Even though it’s just the two of them right now, they want at least a 2,000-square-foot house because children are on the horizon. Jim and Laura find the “perfect” house but it’s a little above the amount they wanted to spend.

Their Realtor® tells them that it’s not a problem. They can sign up for a five-year adjustable rate mortgage (ARM) and by the time it adjusts, they’ll have so much equity in their house they can just refinance. The housing market is strong and they’re confident their home will go up in value considering the prime neighborhood it’s in.

Both Jim’s and Laura’s parents live in much smaller homes but, after some talk, the couple feels they deserve this larger house because they work so hard and all their married friends are getting big houses too. Jim and Laura sign on the dotted line and their American Dream begins.

Never Enough Money

Fast-forward five years. Jim and Laura are now the proud parents of a little boy, James, and a girl, Sarah. After having James, Laura took eight weeks off from teaching to stay home and loved every minute of it. She wanted to stay home longer but they went through their savings on that 10-day Caribbean cruise before she got pregnant.

Laura began to feel very upset at having to send James to daycare but there was no way around it—they needed her check to pay the bills. Jim saw how unhappy she was and one night decided to have a talk.  It was very encouraging and they both agreed to make a change and start saving so Laura could eventually stay home.

This change lasted a few months before they started spending their entire paychecks again on things such as new clothes and dinners out.  Last year Laura had Sarah and was only able to stay home with her for four weeks before having to return to work. She now spends over half of her take-home pay on daycare expenses. Laura dreads going to work and hits the snooze button at least five times every morning because she hates getting up to face another day.

Jim is not doing much better. He’s had to lay off most of his salespeople. The raise he was promised every year did not happen. There are even rumors that his job might be the next to go. He’s started to look for other jobs but nobody seems to be hiring in his area of expertise.

Bad to Worse

To make a bad situation even worse, Jim and Laura’s five-year ARM is scheduled to adjust this year and their monthly mortgage payment will increase by $500.  The house has dropped greatly in value and Jim and Laura are underwater on their loan so they cannot refinance.

In addition, after James was born, Jim and Laura began to use their credit cards again with the promise of paying them off in full each month. That plan didn’t pan out and they now have $10,000 in credit card debt.

They both have a lot of trouble falling asleep at night and don’t feel optimistic about either their marriage or their future.  They have started arguing more and more—something they never did in the good old days—and these arguments usually concern their finances. What was supposed to have been their American Dream has turned into a scary nightmare!

Your Money

Not a pretty picture, is it? I hope your story is not like Jim and Laura’s but, unfortunately, I know a lot of people can relate to this couple in one way or another. The great news for Jim and Laura (and maybe you too) is that life allows us to learn and adapt and change.

Jim and Laura are obviously an example not to follow—but we can learn so much from them.  Many people don’t see the need to learn about money and how to manage it correctly. They bury their heads in the sand and don’t want to be worried about the true state of their finances because, if they did, they might have to change their spending habits.

The thing is, if you continue to make poor financial decisions, these actions will eventually come back to haunt you.  Even if you make $5 million a year but spend $6 million, you’ll wake up one day and find that you are broke. The great news is that it doesn’t have to be this way. We can educate ourselves, find examples to emulate, create goals and take action.

 

Editor’s Note: When Danny first contacted me I noticed he had already written one book “How to Survive on a Teacher’s Salary”.  So he’s definitely writing about an area where he has personal experience, trying to make ends meet on a small salary. 

My wife used to be an elementary teacher and it was interesting to see how teachers, making similar amounts of money, used that salary in different ways.  Some managed it well and never complained and some didn’t know how to handle their money and always seemed to be scraping the bottom of the barrel at the end of the month. 

So if you’re running dry at the end of the month and want a way to stretch your dollars farther, check out Danny’s book, Teach Yourself (and Your Kids) How to Live Wealthy with Little Money .

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Interview Series – Bible Money Matters

Today’s interview about money bullies is with Peter Anderson, the guy behind the site Bible Money Matters.  Peter started the site several years ago to talk not only about personal finances but also, as you might have guessed from the name, how his faith impacts his money decisions. 

Peter has actually grown Bible Money Matters into a part-time business and wrote an ebook to shares the steps he took to grow a following of readers and earn some side money from the site.  He’s also quite a social guy online, you see him a lot on Twitter (@moneymatters), which is the topic of his roundtable at the upcoming Financial Blogger Conference.

Today, Peter shares with us some pretty sizeable lessons.  Cars and homes are some of the most expensive things you’ll likely buy in your lifetime.  Spending decisions like those aren’t something you want to be bullied into so read on to hear how he handled his money bullies.

1) Describe a time that a person or company tried to take advantage of you financially and what you did to stop them.

My wife and I were recently looking to replace our small 4 door Honda Civic with a larger vehicle because we had our first child just over a year ago. We’ve been managing with the smaller vehicle for a year now, but as our son gets older we’ve needed to cart around more things for him wherever we go.  We just didn’t have enough room in the little Civic anymore.

We knew what we wanted for our new vehicle, a Honda CRV, but the problem was that they weren’t in as plentiful supply as we had thought. Due to the Tsunami in Japan used Hondas are in shorter supply, and the prices weren’t that flexible.  Because of that our vehicle search ended up taking a lot longer than we had thought. We did end up finding several vehicles that fit our criteria, but when we test drove them something just didn’t feel right, or it would smell funny, or the price would just be too high.

After searching for 3 weeks we finally found the vehicle we had been hoping for after an hour drive from where we live.  But that’s when the fun started, and we started to feel taken advantage of.  I think the salesperson (who also happened to be part owner of the dealership) could sense that we really liked the vehicle – even before the test drive. 

Before he would allow us to test drive the vehicle he said he wouldn’t allow us to test drive it unless we agreed to the price.  We laughed it off, but he was insistent – and we finally said we wouldn’t have driven that far if we didn’t think the price was OK.  After a test drive all we had to do to finalize a deal was to get the vehicle inspected.  The dealer wouldn’t allow us to do that and started to verbally abuse us and minimize us, implying we were stupid for wanting to get an inspection done.

I think the dealer knew we had driven quite a ways to see the vehicle, and thought he could take advantage of us and keep us from taking the extra time to inspect the vehicle – and still get his full price for the SUV.  I’m sure his tactics had worked plenty of times before and others had given in and bought -  but we wouldn’t back down.  We were not feeling good about the transaction after his bullying tactics.  We walked off the lot right there.  If you don’t feel good about a deal, listen to that voice inside of you, and walk.

2) Describe a time you were bullied into a financial decision (by a person or a company).  How did it end up impacting you and if you could go back in time how would you handle it differently?

One time I think I felt a little bit bullied into a financial decision was when buying our first home 9 years ago.   The people doing the deal weren’t very detail oriented and had made some mistakes on the Good Faith Estimate that they sent over. 

When I pointed out that the GFE and the final documents had different figures on them they tried to brush over it and try to tell us how they were essentially the same.  By this point we were already at the closing and I was feeling a lot of pressure to just sign the documents and figure out the details later.    In the end I did end up just signing the closing documents, and finalizing the deal.

By just giving in and finalizing the deal it probably ended up costing us a few hundred dollars in closing costs.  Thankfully the error didn’t include the principal and interest on the home which could have had a much bigger financial effect.   If I were to go back and do it over I would have insisted that the closing documents be corrected, and that they remove the extra fees – and I would have examined them a lot closer the first time around.

My advice, if you don’t understand something completely, don’t sign it.

 

Thanks to Peter for sharing!  I’ve been in somewhat similar situations when buying a car and a house.  Since they’re such big ticket items, the people making the sale and lending the money have a lot at stake and probably won’t be afraid to try and pressure or intimidate you into making decisions that aren’t in your best interest. 

Not that all car salesman, realtors, and loan officers are that way.  I’ve had the good fortune of working with ones that were honest and fair.  A big part of it is doing your research before you decide who to work with.

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The Pill to Cure Debt

Would you agree that taking a pill to cure us has become ingrained into our trips to the doctor?  When we’re in pain or sick we hope there’s a pill we can to make our troubles disappear.

Sometimes it’s possible and the little purple, yellow, or pink pill our doctor prescribes us does make us feel better… at least for a while.  But many times the pills we find only treat the symptoms of our underlying illness or pain. 

The pills are great for short term relief or for getting our symptoms under control but when we stop taking them the same nasty pain creeps back into our nerve endings.

Disease of Debt

Obviously debt is a “man-made disease”.  There’s no virus or gene that determines whether you’ll go into debt.  Some people end up in debt as a result of their own decisions, others find themselves broke due to an illness or accident.

However we get into debt, there are tools that can temporarily help us shuffle our cash and pay our bills to stay afloat another month.  These tools are our “debt pills” but unfortunately, they only treat our symptoms.  Cash advances, pay day loans, credit cards, home equity loans, or money borrowed from friends and family help us get by but they don’t address the root cause of our debt.

In fact, some times these “debt pills” come with such high interest rates that we’re actually worse off after we absorb the pills than we were before.

Temporary Relief

Fortunately, I can say we haven’t been in that position when it comes to debt but I have faced my share of medical “magical pills”.  Usually the way it plays out is that I’ll have some problem that’s being caused by behavior (posture, eating habits, repetitive stress, etc). I’ll spend money to go see the doctor and have tests done and buy medicine.  The medicine will help but when it’s gone, if I haven’t changed my behavior, the pain will still be sticking around.

In reality, it takes a while to “fix” whatever I’m doing that is causing me the pain.  Debt’s the same way, it’s not something that you can cure overnight.  Even if someone gave you enough money to pay off your debt it wouldn’t necessarily be “cured”.  You’d be free of it for a while but if the source of the debt wasn’t taken care of then eventually it could surface again.

A Family in Debt

I know a family who learned this lesson the hard way several years ago, the Baker family.  They found themselves pretty deep in consumer debt and finally realized that popping debt pills wasn’t helping, they needed to attack the source of the debt.  So they sold almost everything they owned, went through a major mental transformation, and focused most of their energy on paying down their debt.

A few years back the dad (Adam) actually started up a blog to write about their battle with debt and called it Man vs Debt.  Now that the Baker’s have paid off all their consumer debt and pay cash for everything, Adam is on a quest to help others win their struggle with debt.

You vs Debt

Adam just released a course called You vs Debt that walks you through the steps of beating your debt, the same steps that he and his wife went through to pay off the money they owed.  Since they were figuring it out as they went along, it took them over a year to pay it down.  Now since they’ve “been there, done that” now they share everything they learned so that others in debt can squash the “debt pill” mentality and get thiers paid off much faster.

It’s a pretty cool story, here’s a video where he talks about the debt they were in and how they were borrowing from one credit card to make payments on a different card (you have to scroll down a bit to get to the video).  I think it’s pretty brave of him and Courtney to be so open about their mistakes and that they invested so much of themselves in creating a course to help others beat their debt.

So if you’re struggling with debt, definitely check out You vs Debt to hear their story and see how they beat their debt.

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MarketRiders Review – Custom ETF Portfolios

In recent years, exchange-traded funds have grown a great deal in popularity. They trade like stocks on the market, but they are funds. ETFs generally come with low fees, which means that you keep more of your money, rather than watching your returns eroded by fees. If you are interested in how an ETF portfolio might be able to help you reach your investment goals, you can use MarketRiders to help you put together a portfolio.

What is MarketRiders?

MarketRiders is a subscription service that offers you the ability to create ETF portfolios based on asset allocation. With the right asset allocation, the theory goes, you should be able to meet your investing goals, whether you are looking for growth, income, or have some other end game in mind.

This service allows you to put together portfolios using information about your goals. There are more than 1,000 ETFs that MarketRiders helps you choose from. After creating your portfolio, MarketRiders will send you periodic alerts about further steps you should take, as well as offer helpful hints on rebalancing.

MarketRiders comes with a 30-day free trial, after which you must pay $9.95 a month to continue the service. Signing up also allows you the option to receive a weekly newsletter about investing.

How to Build a MarketRiders ETF Portfolio

After you set up an account and log in, you can begin to build your portfolio. This is quite easy to do. You start out with two options:

1. Have MarketRiders build a portfolio for you
2. Create your own portfolio

 

MarketRiders portfolio: If you decide to have MarketRiders build a portfolio for you, you start out by answering some basic questions. MarketRiders has an algorithm that takes into account your age, when you expect to need the money, your level of investment experience and your risk tolerance. You also enter how much you have to invest right now, and MarketRiders goes to work.

I like how MarketRiders provides you with the reasoning behind the portfolio, explaining why the selected ETFs complement your investing style, and how they can be useful as you work toward your goals.

Additionally, MarketRiders lets you know how much the fees will cost you each year — and compares them to what you are likely to pay if you go the managed fund route. The difference is astounding. If there are dividends being generated, MarketRiders tells you that information, based on the last 12 months.

Create your own portfolio: If you are satisfied to have MarketRiders generate a portfolio for you, no worries. The recommendations made appear to be solid. However, more advanced investors might want to tweak a portfolio to more closely mirror their requirements. When you choose the “let me build it” option, you have three choices as you begin:

1. Start with a template
2. Start from scratch
3. Start with ETFs you already have in your portfolio

The templates start you out with the ability to narrow your types to growth, balanced or income. You can also choose “specialty.” The specialty portfolios are rather interesting, allowing you to choose from different specialty funds, such as a rising inflation fund, an energy hedge fund, or a reweighted S&P sector portfolio. You also have the option to specify what ETF provider you are most interested in (Vanguard, iShares, etc.).

Once you choose what type of portfolio you are interested in, you are taken to a page that breaks down the initial asset allocation. You can then tweak the allocation to fit what you are looking for. If the suggested portfolio doesn’t have just the allocation you want, or if you want to add something to the mix, you can adjust the numbers to fit your goals.

The other options, starting from scratch and starting with what you already have, can also help you build a portfolio. You start out with your asset allocation, and then tweak your portfolio to the allocation you want.

Generating Your Portfolio

Whether you have MarketRiders build a portfolio for you, or whether you build your own using the asset allocation technique, MarketRiders will then generate a portfolio for you. If you have indicated a preferred brand of ETF, all of your recommendations will come from that.

If you are building your own portfolio, you will have the option to add or remove different ETFs before the final portfolio assembly. Then, all you have to do is tap the “continue” key, and your portfolio will appear.

You will get a list of ETF symbols, and the number of shares you should buy, based on how much you have to invest. You are even provided a printable version, if that makes things easier for you. Then, all you have to do is head to your broker and enter the trades.

Tracking Your Portfolio

You can continue to update your portfolio by entering in changes you make as you buy and sell. Right now, MarketRiders does not have broker integration, so everything has to be done manually. This is something you’ll have to remember to do, kind of inconvenient for those who are used to complete financial integration. However, MarketRiders hopes to include broker integration in its next release, making it possible for trades to be automatically confirmed.

MarketRiders also sends you a monthly email update that summarizes the performance of your portfolio.  Here’s an example of the monthly email that you’d receive for the ETF’s you’re tracking:

Another nice feature of MarketRiders is that they’ll let you know how your portfolio is doing in terms of the target asset allocation that you setup.  The example above represents ETFs for Bonds, Commodities, Currencies, TIPS, Real Estate, US Stocks, and World Market Stocks.  When those holdings are no longer in balance with the asset allocation you specificed you’ll get an email from MarketRiders.  The example below is a MarketRiders email showing how the ETFs in your portfolio fall into your asset allocation targets and where you might need some rebalancing.

 

 

Bottom Line

If you are interested in using ETFs to build an investment portfolio that will help you meet your needs, MarketRiders can be a great choice. You have the ability to build multiple portfolios, so you can create different profiles for immediate income, retirement and other goals.

MarketRiders is good for DIY investors who want to invest their money themselves but would like some recommendations in terms of quality ETFs and asset allocation – for a 30 day trial Click Here .

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Interview Series – Laura Adams

Laura Adams has definitely earned her nickname of the “Money Girl”.  Not only is she an author (Money Girl’s Smart Moves to Grow Rich) she’s also a financial coach -a Certified Personal Finance Counselor® – and she produces one of the top financial podcasts, the MoneyGirl podcast.

Laura’s podcast is a weekly five minute discussion of personal finance topics; her current episode (#234) goes over how to invest your business or self-employment income into a Simple IRA.  If you do the math (234 x 5) you’ll see that so far she’s produced almost 20 hours of bite-sized personal finance tips, perfect for easy consumption on your commute or daily workout routine.

However, even someone as knowledgeable about money as Laura has been known to make a money mistake or two.  In today’s interview series of speakers at the upcoming FINCON, Laura talks about one financial decision that she wishes she could do over. 

1) Describe a time that a person or company tried to take advantage of you financially and what you did to stop them.

I can’t think of a particular incident–but I’m on guard all the time to stay safe from people and companies who try to take financial advantage of me!

For instance, I get phishing emails and scammy investment offers in the mail pretty frequently. Consumers need to be pretty sophisticated these days in order to distinguish what’s legitimate from what’s bogus.

2) Describe a time you were bullied into a financial decision (by a person or a company).  How did it end up impacting you and if you could go back in time how would you handle it differently?

I’ve never been bullied into a financial decision–I take full responsibility for every stupid money mistake I’ve ever made!

My worst decision, by far, was a hedge fund that I invested in many years ago that turned out to be a ponzi scheme. It wasn’t Madoff, but the guy did end up in jail.

A dear friend recommended the “investment company” to me and I trusted him so much that I didn’t check it out for myself. We both lost lots of money. So, if I had one financial do-over in my life, that would definitely be it!

 

Thanks to Laura for sharing!  One of the things she mentions, phishing, can have nasty effects but is actually pretty simple to avoid.  If you’re not familiar with phishing, it’s basically when criminal sends you an email that makes you think it’s from a trusted source and includes a link to a nefarious website that’s setup to steal your information.

How I Avoid Phishing Scams

To avoid phishing scams, I’m very careful about what links I click on in an email.  Even if I know the person I always hover over the link to see where it will take me.  Usually I’ll just open a new tab on my browser and type the website into the address bar of the browser.  If it’s an extremely long web address that I don’t want type out sometimes I’ll click on it, but only if I know the person sending the email and recognize the site that the link leads me to.

Doing Your Homework

The experience Laura shared about a Ponzi scheme she got involved in through a friend is a tough because often the best people to work with come through referrals.  So if a family member or friend you trust recommends a product or service you’re a lot more likely to give it a try.  Referrals are great but as Laura mentioned above you should do your own research before handing over any money.

One way to try out referrals is to start off small.  So if a friend recommends an auto mechanic, don’t go there and have your timing belt replaced the first time you use them.  Instead, start off with having them change your oil and rotate your tires.  If you like how they do business and feel they’re competent then you can trust them with bigger jobs.

Another thing to do is to just ask a lot of questions.  Many legitimate service providers may gloss over details to begin with but will go into more depth if you ask them.  However, someone who’s up to no good or has something to hide may avoid your questions or try and confuse you with jargon.  Don’t feel embarrased to keep asking questions until you understand what you’re getting for your money and feel comfortable with the arrangement.

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Betterment Review

The new online brokerage Betterment has been getting positive feedback for the simple approach they offer investors so we decided to take a look at what exactly the firm offers.

What is Betterment?

Betterment is an online investment option that offers an alternative to companies like E*Trade, Charles Schwab, TradeKing, and Scottrade. As you’ve seen in the broker reviews the discount brokerage market is full of options each with their own positives and negatives.  What makes Betterment different than these other brokers is that they focus on keeping costs low and making investing simple.

Betterment Investment Options

Betterment aims to reduce your barriers to investing. Many people are intimidated when it comes to investing and putting their hard-earned money at risk. They see a bunch of acronyms (401k, 403b, Roth IRA, Traditional IRA) and too many options.

In some ways, the hardest part of saving for retirement is deciding where to invest your money and just getting started.  Being confused by the process or your options increases the odds that you will put it off. Betterment is trying to tackle this issue by making saving and investing incredibly simple. The company offers only two investment options in what they call baskets:

• Treasury Bond Basket
• Stock ETF Basket

Each basket is made up of a mix of ETFs chosen by the Betterment investment commitee.  The Betterment website explains how they choose which ETF’s to include in the bond basket.  Here’s a snapshot of the current allocation:

The Stock ETF basket holds a grouping of exchange traded funds to that’s designed to give you a growth option to your portfolio while not taking on excessive risks.  The Betterment site also explains how they select the ETFs with a key goal ofdiversification .

You are given the ability to change your overall asset allocation between the Stock and Bond baskets. You could do 10% in Treasuries and 90% in stocks today, change your mind, and switch to 50% Treasuries and 50% stocks.

That’s as complicated as it gets. Decide what percentages you want in risky investments versus conservative investments. Your focus becomes regularly investing funds rather than deciding what mutual funds, ETFs, or individual stocks to choose.

Hiding Complexity

If you haven’t noticed yet, simplicity is one of the key factors of the investing options that Betterment offers.  They do a good job of hiding some of the complexities from you, for example:

• Re-balancing every quarter, or, when an allocation is more than 5% from the target 
• Creating a diversified portfolio comprised of over 3,000 different companies inside cost efficient ETFs

• Dollar based, fractional share investing into ETFs

Things like these combined with automatic deposit and regular contributions over time help investors avoid the roadbumps that keep people from investing in the first place or prevent them from following some of the investing best practices such as diversification and proper asset allocation.

Betterment Investing Fees

Unlike other discount brokerages that charge a per trade cost (ranging from $5 to $20), Betterment has a different take. Instead of charging per trade, they add an expense ratio to your account. The level of the percentage is based on the amount of money you have invested with the firm.

The lowest level accounts (under $25,000) are charged 0.9% of the total invested. If you invested $10,000, you would pay $90 per year. The expense ratio gradually decreases as your balance increases. At the top end of the range — anything over $500,000 — you pay 0.3% per year.

Room for Improvement 

One of the ways I see Betterment being useful is for people who want to save for retirement but haven’t started because they’re uneasy with the whole investment process.  Unfortunately, Betterment doesn’t have the option of opening a retirement account.  Of course you can save for retirement outside of an IRA but then you give up the tax advantages of a retirement account.  I spoke with someone at Betterment regarding retirement accounts and was told they’re a high priority and will be coming soon.

Another pretty standard feature for mutual fund companies and brokerages is the ability to open a joint account.  Betterment doesn’t offer joint accounts right now; it sounds like they will be available at some point but there’s no timeline for when that will be. 

Another nice to have would be the ability to create multiple investment accounts with a different asset allocations for each.  So if you wanted to have two investment funds, each with a different time frame, you could set the investment allocation separately for each of them – Update: I’ve heard from Betterment and a feature that supports this is being released later this month.  You’ll be able to create sub accounts and each will have it’s own allocation.

New Account Bonus

Betterment is offering new customers a $25 bonus for trying it out.  Betterment doesn’t require any account minimums, however, if you sign up for Betterment and deposit at least $250 into your account to try it out, they’ll give you $25 – Click here for the bonus.

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FHA Loans 101

An FHA loan is one of the tools available if you want to buy a home but don’t have much money for a down payment. I actually bought my home with the help of a FHA loan. However, it is important to consider the pros and cons of a FHA loan before jumping in.

What is an FHA Loan?
The FHA loan is backed by the Federal Housing Administration. With a FHA loan, the government guarantees the loan, so that a lender is at a lower risk should you default. FHA loans were not terribly popular before the financial crisis of 2008, since it was possible to get 0% down home loans fairly easily.

Now, though, with many mortgage lenders tightening requirements, the 3.5% down payment requirement for a FHA loan seems attractive to many. It is important to note that the 3.5% down payment option is only available to those who have a credit score of at least 580. If your credit score is between 500 and 579, you will need a 10% down payment. FHA loans are not available to those with credit scores are less than 500.

You do need to show sufficient income to be approved for a FHA loan, and some of the guidelines are stricter than what was available prior to the financial crisis.

Private Mortgage Insurance
When you borrow for a mortgage that’s not an FHA loan, banks and other lenders ask for at least 20% down on the home to protect themselves against a default.  If you don’t have enough money to make a 20% down payment, they may still lend you the money but you’re required to buy private mortgage insurance.

Private mortgage insurance (PMI) usually amounts to between 0.5% and 1% of the entire loan amount each year. If you have a $200,000 loan, and the PMI is 0.75%, you will pay $125 a month each year until your loan to value ratio drops to 80%.  Although the existence of PMI does extend home ownership as an option to many that might not be able to afford it, that monthly fee can add up to a big expense for the homeowner.

PMI vs FHA Insurance Premiums
If you borrow money with an FHA loan, you don’t pay PMI but you do have to pay into a fund that guarantees FHA loans.  This fund is an escrow account setup by the U.S. Treasury Department.  Lenders are still exposed to the risk of default (even more so since the down payment is so small) but the Federal Housing Administration is agreeing to back the loan with the escrowed funds paid into by FHA borrowers.

When you have a FHA loan, you will need to pay 1% of the loan amount up front (Upfront Mortgage Insurance Premium), and then an annual premium depending on the term of the loan and how much you put down. (You can add the 1% up front premium to the loan amount.) You have to pay the premium for at least five years, and you stop paying the premium once your loan to value ratio reaches 78%.

The table below is based on the rates on the FHA website for new loans after April of 2011.  The table shows the annual premium for an FHA loan according to the length of the loan and the size of your down payment.

		Loan Term
		<= 15 Years	> 15 Years
	< 5%	0.50%	1.15%
Down Payment	>= 5%	0.50%	1.10%
	< 10%	0.50%	1.10%
	>= 10%	0.25%	1.10%

 

So, to figure out how much mortgage insurance you’d pay with a conventional loan vs FHA loan you’d first figure out your monthly premium based on your loan term and the size of your down payment.  Multiply that times the number of months it would take you to pay down the loan to less than 78% loan to value ratio.  Then add that number to the amount of your Upfront Mortgage Insurance Premium and you’ll have the total cost of insurance for your FHA loan.

There are many variables involved in this decision.  In addition to the term of your loan and the amount you have to put down, you also have to factor in what the appraised value of the property will be.  In terms of determining if you can afford the monthly payments, you’ll also need to know what interest rate you’ll pay.  The combination of the interest rate and the term of the loan will determine what your monthly payments will be – which you need to know in order to figure out how long it will take you to pay down your loan to the point where you have at least 20% equity in your home. I haven’t seen a good calculator that compares a conventional loan vs an FHA loan but if I find one I’ll be sure to write about it.

Saving Up for a Down Payment

Right now, with tighter lending standards, a FHA loan can be quite tempting. You have a lower down payment requirement — and a lower credit score requirement. However, you might end up paying more. A bigger down payment can save you money in the long run, since you will be financing less, and paying mortgage insurance premiums for a shorter period of time.

What you decide depends on your priorities: Do you want to buy now and long in a lower home price and lower interest rate? Or do you want to save up for a down payment and borrow less? In the end, it depends on whether you want the home now, without saving up, or whether you want to wait until you have a bigger down payment.

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Interview Series – Kylie Ofiu

Who could say no to a big list of ways you can make extra money?  That must be why Kylie Ofiu’s original list of money making ideas on her blog was turned into a recently released book, 365 Ways to Make Money. 

Like many parents of little kids Kylie was looking for ways to earn some extra money.  She made a list of ideas and published them on her website.  One thing led to another and now she’s an author and speaking at the Financial Blogger’s Conference next month.  In case you missed the first few interviews, I’m asking conference speakers the same two questions, about how they handle being pushed around financially.

I can relate a little to Kylie’s first story below, I remember when my wife and I sat through a similar presentation right before we were married.  We probably said no thanks about 50 times before they finally realized we weren’t going to buy and then they finally left us alone.

1) Describe a time that a person or company tried to take advantage of you financially and what you did to stop them.

When my husband and I first bought our house in 2006 we were setting it up with all the furniture and things when we got invited to a dinner party. The party was actually a hard sell for some pots and pans, which we were offered interest free terms for 5 years. They were fantastic pots so we signed up.

About 6 months later, I wanted to check our balance and see if we could get a discount for paying the whole lot out now. When they told me how much we owed it was $2,000 more than we had signed up to pay. When I queried it, they said well the weekly payments you signed up for over 5 years work out to be this amount, and we charge xx interest which is why you owe this much.

I pointed out on my paper work there is no mention of any interest, at all, or extra fees and charges. It would be assumed the weekly rate would mean the pots were paid off quicker.

They continued to push the point with me and I simply replied, “You have a choice. Remove the interest from my account or I take it up with Fair Trading Australia who will force you to remove the interest as there is no mention of it on my paperwork, so you have no right to charge it.” They said they would call me back. Within 5 minutes I got a call, they were going to drop the interest. On another call a few weeks later I also managed to negotiate a $600 discount by paying it in full.

2) Describe a time you were bullied into a financial decision (by a person or a company). How did it end up impacting you and if you could go back in time how would you handle it differently?

When my husband and I were looking for a house I wanted to buy in the state I grew up in, but he wanted to buy where he grew up, close to his family. After much ‘discussion’ we ended up buying a property near his family. I felt very much like I did not want to live here and I was being pressured by him. I really wanted to own a house, he didn’t care, so the compromise was we bought a house, but in an area he wanted.

I really wish I had pushed harder to buy where I wanted. My area was cleaner, lower crime rate, better reputation and has gone up in value $100,000 more than the area we bought in. 18 months after buying we ended up moving to where I wanted to live (due to issues with his family) and it cost us a lot. Had we bought there originally we would have been much better off both financially and emotionally.

At the time we also could not sell our house (due to the mortgage terms) so had to rent it out, which ended it in getting trashed and costing us more money. I really wish I had stood my ground and not bought where he wanted. Even he wishes that he hadn’t made me buy where we did.

Thanks to Kylie for sharing her experiences!  You can keep track of what she’s up to at @kylieofiu and her site is up for an award if you want to vote for her.

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9 Ways to “Beat” the Stock Market

One of the truths about the stock market is that it’s extremely difficult to beat consistently. What makes it even harder is that often we let the stock market beat us mentally and make us act in irrational ways. Rather than thinking about beating the return on the stock market, you need to learn how to make the most of your investing plan. Here are 9 ways to help you stay on top of the stock market:

1. Reduce the Emotion Involved in Investing

One of the worst things you can do is let emotion rule your investing too much. While you can’t get rid of emotion entirely, you can control it so that you don’t make as many mistakes. Don’t get caught up in euphoria and buy when the price is high, and certainly don’t let blind panic induce you to sell just because the price is lower – read the book “Why Smart People Make Big Money Mistakes”.

2. Consider the Fundamentals

Part of reducing the emotion involved with investing is considering the fundamentals. Before you buy, consider the strength of the company, and find out more about the “big picture” items that can influence long term strength for the investment, such as management, profit margins and industry growth. If nothing has changed in your fundamental analysis, and a price drop is due to a general market decline, selling based on panic could cost you in the long run.

3. Appropriate Diversification

In order to help protect your investment portfolio from drops in one sector, some diversification is important. Figure out a good asset allocation, and figure out how you can limit your exposure to one sector. Make sure all of your eggs aren’t in one basket.

4. Watch Out for High Fees

Investment fees can erode your returns over time. When you pay fees, it cuts into what’s available to invest, as well as how much you end up with. Look for brokers with low fees so that you keep more of your money.

5. Don’t Confuse a Broker with a Financial Advisor

You need to be aware when getting investment advice from a broker that they don’t have a fiduciary duty to you as an investor. This means that he or she does not have to look out for your best interest first. A financial advisor, on the other hand, is required by law to look out for your best financial interest.

6. Avoid Over-Reacting to Big Market Movements

Sometimes, in the short term, we see big drops or big gains. In the short term, the stock market is volatile, but over the long term a lot of the volatility has historically evened out to an overall upward trend. Before you buy or sell based on a big market movement, take a step back and think about your reasoning. A measured response to short term volatility is important. – Again, read the book “Why Smart People Make Big Money Mistakes”.

7. Understand What You’re Buying

Before you buy a stock, you should undertand it. What does the company do? How does it make money? Why do you want to purchase the stock? Find out about what you are buying, and make sure you understand the industry so that you can evaluate the stock on its merits.

8. Avoid Buying Based on Hype or “Hot Tips”

Watch out for investments that have a lot of hype. Also beware of “insider” tips from friends and family. Realize that often hype is used to generate interest in an investment. You don’t want to buy in during the “dump” phase of a pump and dump. Do your own research and don’t rely only on what others are saying.

9. Don’t Be Too Risk Averse

While you do want to protect against excessive risk, you do have to realize that some risk is necessary if you want to make money. Only by taking on some risk will you be able to realize adequate gains for your investing goals over the long term.

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Replacing Leaky Windows – Roundup

Leaky windows are just another in the list of homeowner expenses we’ve run into this summer.  We’ve been in our house a little over a year now and have had all kinds of expenses pop up here and there.  The latest surfaced during a recent storm when we found a leak in one of our windows. 

I know water can do nasty things to your house so we wanted to get it taken care of right away.  As usual I looked up the three best contractors on Angies List and scheduled them to come out as soon as possible (here’s the contractor checklist I use).

Two of the companies were available Saturday, I scheduled one for 10 AM and the other for noon.  We spent two hours out front of the house with a hose, spraying potential leaky hot spots and watching for the leak to develop.  Finally we found the trouble spot, at the peak of the highest window, and he gave me estimates to replace it. 

The second window company showed up while the first guy was still there and in the middle of his closing sales pitch. I felt kind of bad making the second company wait, I had no idea the first one would take so long.  Turns out it might have been a good thing because each window guy threw in an extra discount.  They didn’t specially reference their competitor but I imagine seeing each other bidding on the same job probably had something to do with it.

Seeing the two estimates reminded me of why I always like to get at least three bids on house projects.  The estimates were almost $1000 apart.  According to the company with the higher bid, they have higher quality windows (triple pane glass, very energy efficient) and better installion crews (full time employees vs contract labor).  Now we’ll get a third estimate to see how they all compare.

No matter who we go with replacing the windows won’t be cheap.  It looked from leak test that the source of the leak may be the top of the window or even above it.  Unfortunately, the top of the window was higher than our neighbors 28 foot extension ladder would reach so I’m still not sure.  Once I can get up high enough, I may find that the window is okay and that a few tubes of caulk above the window may get rid of our leak.  That would certainly be a cheaper option, so I’m keeping my fingers crossed.

Speaking of cheaper options, here are some personal finance tips and articles from around the web this week you can use to save some money.

Personal Finance

• 10 Ways to Simplify Your Finances @ Generation X Finance
• 6 Surprising Benefits of the One Car Household @ My Dollar Plan
• How to Create a Sinking Fund @ Frugal Dad
• 45 Ways to Save Money @ Financial Highway
• Is Your Money Working for You? @ Peak Personal Finance
• 10 Ways to Stop Wasting Money @ My Two Dollars

College

• Best Value For Your College Dollar? @ Lazy Man & Money
• Options For Your 529 Accounts If The Kids Don’t Go To College @ Suns Financial Diary
• Businesses to Start in College @ Studenomics
• Save Money with Off Campus Housing @ Budgeting in the Fun Stuff

Investing

• Ways To Shrug Off A Stock Market Slide & Reduce Market Anxiety @ The Digerati Life
• A Primer on Futures Contracts  @ Million Dollar Journey
• Dollar Cost Averaging: An Overview @ Good Financial Cents
• Dealing with Stock Market Volatility @ The Oblivious Investor

Career

• Is it a good idea to be a consultant? @ Brip Blap
• The Corporate Stability Myth @ The Wealth Artisan
• What Would You Do If You Lost Your Job? @ Free Money Finance
• What Do You Value in a Job? @ Cash Money Life
• 6 Weird But Successful Small Business Ideas @ The Money Crashers

Thanks to the following sites for including our articles in recent money carnivals:

• The Best Rental Car Deals for Road Trips @ Narrow Bridge
• Top 10 Ways to Beat Your Bills Big Time @ Financial Uproar
• 10 Ways to Get Ahead at Work @ Stumble Forward
• 10 Ways to Get Out of Debt  @ Invest It Wisely

 

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