admin on July 21st, 2010

Of what use is money in the hand of a fool, since he has no desire to get wisdom?   – Proverbs 17:16

You will consistently hear financial advisors and investment professionals discuss the importance of diversifying your investment portfolio – an investment strategy that follows the simply adage “Don’t put all of your eggs in one basket”.  

In my experience, I have seen many of my friends invest in various bonds, stocks, and mutual funds.  And yes, some of them do make an effort to diversify the markets/sectors represented in their portfolio – a few S&P 500’s here, a couple mid-cap companies there, a sprinkling of international funds, and a dash of precious metals and speculative start ups. 

That said, very few of the people I know (or the investment professionals I’ve read or listened to) consider real estate to be an essential part of diversifying their investment/retirement portfolio.  Sure, we are constantly reminded of the tax benefits and financial soundness of home ownership but for some reason the average American has been convinced that real estate investing is in some way ‘beyond’ our investment capabilities.  But is it?

While I will occasionally post articles addressing various real estate investment topics, in this posting I want to focus in on a couple of ideas that I feel strongly about, ideas I want to share with you, and most importantly, ideas I want you to get excited about! 

Residential investment property is what I consider to be the most accessible (risk, return, upfront cost) real estate investment tool available to the average American.  For this discussion, a residential investment property is classified as a building that contains four (4) or less units and includes – single family homes, duplexes, triplexes, and quads. 

Top Reasons Why I am a Proponent of Adding an Investment Property to your Financial Portfolio

1)      Leverage – real estate is like very few other investment opportunities in that it presents you with great leverage.  What does this mean?  (see below for an explanation)

2)    Real Estate Investment is accessible to you – and no, I’m not talking about the get rich quick schemes you see on late night tv or the profiteering personalities out there encouraging risky real investment strategies.  But for most of you, a few trips to your local library, some diligent research, and some expendable income is all you’ll need to get started.  Real Estate Investing is NOT beyond your ability!

3)    Taxes – there are tremendous tax advantages to owning real estate (and many of you who are homeowners already know this).  But the truth is, these advantages are even greater when it comes to investment properties (depreciation, management deduction, repair/improvements,  and tax free growth on your investment if you live in an owner occupied residence for at least two years)

4)    Returns – the return on your investment in real estate can be much more substantial than in nearly any other type of investment and in my opinion is considerably less risky (not true for more speculative real investment strategies) and a much safer/less volatile long term investment.  

Let’s look at an example of these four ideas in action (this is an example and basic overview from my own most recent investment in a “quad” in my area)

Read the rest of this entry »

admin on July 20th, 2010

I recently had a conversation with an old friend of mine, named Jim, who lives in Boston.  Jim and I have actually known each other since college and have managed to stay close friends for over 30 years now!   

Among the many items we discussed – our families, the baseball season, mutual friends, etc – Jim and I somehow stumbled upon the topic of ‘giving’; specifically giving within the context of the Church.  Both of us share a similar background – altar boys, Catholic grade school, married in the Church, currently active in our respective parishes – and are familiar with the idea and practice of tithing (giving a percentage of one’s earnings to the Church).  

I was surprised to learn that Jim, like many Americans over the past few years, had fallen on some challenging financial times.  It wasn’t something he had shared with me previously out of embarrassment, but Jim had dipped into his retirement account to cover a substantial financial misstep made by his son-in-law.   He was now worried about the ability of he and his wife to cover their current living expenses and re-establish a retirement account that would provide for their long term living/medical needs (his wife has suffered from a number of expensive medical issues for a number of years).  

In addition to the financial strain Jim was feeling, he explained that he was really struggling spiritually as a result of his current inability to give to the Church at the level he was used.  He explained that he was confused by what his priorities ought to be – how to balance his responsibility to his wife/family with his responsibility to the church.  Jim explained that he and his wife had regularly prayed about what was right in light of their current financial decision and had spoken with their priest and fellow parishioners to see what they could learn from others.  Interestingly enough, and what I’m going to share with you here, is that Jim also reached out to the Boston Archdiocese to ask about the Church’s position on giving in the midst of a personal/family financial struggle.      

Jim was kind enough to share an email exchange he had with Father Peter at the Archdiocese Read the rest of this entry »

admin on July 20th, 2010

On the first day of every week each one of you is to put aside and save, as he may prosper, so that no collections be made when I come.

1 Corinthians 16:2

If nothing else, I think the Great Recession may have served as a much needed wake up call to many American households.  In saying that, I certainly do not mean to diminish the financial and personal struggles of those individuals and families affected by lost jobs, lost homes, lost retirements, and other difficulties prompted by the economic downturn of the past few years. 

But I can’t help but wonder if sometimes life challenges us and exposes our weaknesses in order to bring us a little wisdom and help us make much needed changes in our life.  The priest at my Catholic grade school (gosh that was a long time ago) was fond of saying – “God never gives you more than He knows you can handle”.  

Prior to the economic downturn of the past few years how many of you thought about visiting a personal finance website?  How many of us deliberately chose to forego a meal out for a dinner at home?  Do you find yourself a little less inclined to take that credit card out for that new sweater, those baseball seats or that new CD on Amazon?  Plainly … have you found yourself spending a little more time thinking about saving money and a little less time thinking about spending it?  I know I have.  And in large part, I think it was prompted by the Great Recession – an event that has (or should have) forced many of us to question our financial security and that of our families. 

While there are many lessons to be learned regarding the recession – and I’ll try to focus on the lessons and leave the seemingly non-constructive finger pointing to the experts – I think one of the biggest areas Read the rest of this entry »

admin on July 20th, 2010

“The rich rule over the poor, and the borrower is servant to the lender.” ~Proverbs 22: 7

Are you a servant to your lenders? What is your relationship with your creditors and lenders? When it comes to borrowing, how do banks, mortgage lenders, automobile dealerships, and other creditors view you?

In large part this question can be answered by looking into and understanding your credit score – a three digit number that indicates your credit aptitude and reflects lenders attitudes regarding your credit worthiness.

A few basics before we get into the composition of your credit score:

  • You have three (3) credit scores. These three scores represent each of the three credit bureaus: TranUnion, Equifax and Experian
  • Each of these three bureaus most often uses methodology/software developed by Fair Isaac and Company (www.fico.com) and your three credit bureau scores are often called “FICO” scores*
  • FICO scores range from 300 – 850 and you can have a different credit score at each of the three credit bureaus (different bureaus may have different information in your report)
  • Lenders do NOT use just your FICO score when determining your credit worthiness and terms. Oftentimes they will use these scores in conjunction with other information they may have about you.
  • While FICO scores are the most common credit scores, there are other credit bureau scores and methodologies that are used (ie., VantageScore)

Now that we have covered a few basics about credit bureau scores, let’s take a look at the five components that make up your FICO scores and the relative importance of each.

And for the sake of clarity – here is a breakdown of these 5 components:

  • Payment history (35%) – Aside from extreme events, like bankruptcy or tax liens, late payments have the greatest negative impact on your score. Recency and frequency of late payments count too. In other words, even though a 60-day late payment is not as risky as a 90-day late payment in and of itself, a 60-day late payment made just a month ago will count more than a 90-day late payment from five years ago.
  • Outstanding balances (30%) – Evaluation of your total balances in relation to your total available credit on revolving accounts is one of the most important factors in the FICO score. Owing a great deal of money on many accounts or “maxing out” on various credit cards can indicate that a person is overextended, and is more likely to make some payments late or not at all.

Read the rest of this entry »

admin on July 15th, 2010

Have you ever wondered how your spending compares to that of other families in the U.S.?  The graph below (courtesy of a great website – www.visualeconomics.com) outlines the average annual expenditures of a typical U.S. ‘consumer unit’ as reported by a 2009 survey from The Department of Labor.  

* “Where Does the Money Go“ graphic courtesy of Visual Economics (www.visualeconomics.com)

admin on July 15th, 2010

Do not be a man who strikes hands in pledge or puts up security for debts; if you lack the means to pay, your very bed will be snatched from under you

Proverbs 22:26-27

Does your current credit card debt cause you stress?  Do you feel overwhelmed when reviewing your monthly bills?  Have you thought about trying to dig yourself and your family out of debt but just don’t know where to begin? 

If you answered “YES!” to any or all of these questions, I am going to advocate that you use a debt repayment plan popularized by Dave Ramsey (a financial ‘guru’ that grounds his common sense advice in sound financial principles and his faith).   Dave supports a Debt Elimination approach called the “Debt Snowball“ and in my opinion it is an appropriate combination of practical debt repayment and debt psychology. 

The Debt Snowball plan begins by creating a list of all your current debts: credit cards, car loans, outstanding health bills, student loans, and any other consumer debt (we won’t worry about mortgage debt at this time).  In addition to listing each of your current debts you will want to include 1) the minimum monthly payment, 2) the interest rate for each card, and 3) the total balance. 

There are a number of websites offering free Debt Tracking spreadsheets (as I’ve stated elsewhere, I prefer Excel based options) and here is a look at a sample “Debt Snowball” worksheet: 

DebtSnowball

The Debt Snowball method calls for listing your debts in order from the lowest balance to the highest balance – in our example, a $307 balance on a Midwest Credit Card to a $14,000 balance on a Student Loan.  This is the order in which you will begin paying off your current outstanding debts. 

But isn’t this a financially backwards approach?!  ***********************

Strictly speaking, yes it is.  As you’ll note, the order in which we decide to pay off outstanding debts with the Debt Snowball approach is based strictly on the current outstanding balance – lowest to highest – as opposed to paying off the balance with the highest interest rate and working your way down.   If we were looking at this from a purely numbers based approach it would be most appropriate to focus on paying off highest interest loans first (and many financial ‘gurus’ will recommend this method).  I would simply state (as Dave argues) that our relationship with money isn’t strictly about dollars and scents, but also a function of our attitude toward money and the psychology of money.  That said, for a person in debt there is significant value in seeing immediate and short-term results when it comes to tackling debt.   Regardless of the arguments to be made against this method, I have yet to read/listen to something that convinces me that the psychology behind this method isn’t sound.  As somehow that used this method years ago,  the short term wins of paying off even small debts and moving on to bigger debts was a powerful motivator.  I look at it like weight loss – seeing small results on a weekly basis reinforces the decisions you’ve made to eat healthier and exercise regularly.

***********************************************************************

After listing your outstanding debts in order from lowest balances to highest balance the method is fairly simple – you begin by paying off the first debt as aggressively as possible (that means looking for opportunities in your budget and elsewhere to pay more than the minimum monthly payment) while continuing to make the minimum monthly payments on your other accounts.   

Let’s say it takes you two months to pay off the first debt on your list

Read the rest of this entry »

admin on July 15th, 2010

I am convinced that the number one problem with most people when it comes to managing their money boils down to one simple truth: most of us have NO idea where our money is going each week, each month, and each year. 

How many of you know what percentage of your net income you are spending on  housing?  What percentage of your pay goes towards dining out and entertainment?   When was the last time you calculated the amount of annual interest you pay on your annual debt? 

I’ve never been one for spreadsheets, but then again, there was a time in my life when I wasn’t one for monthly budgeting or financial responsibility.  For many years, I was quite an adept guess-timator of what was coming in and what was going out.  And perhaps like some of you, I didn’t rely on the tedious chore of checkbook balancing.  No no, previously my system consisted of an ill conceived ménage of ATM receipts, occasional visits to my bank website to see what was left, and my all to often fallible memory. 

Typically, this “system” resulted in more money going out every month then I had coming in.  Obviously, this pattern of spending is a disaster waiting to happen. 

But lets face it, many of us convince ourselves that running in the red by $50, $100, or $200 dollars every month is not that big of a deal.  After all, we can always play catch up later (though this seldom happens).  And the scary part – many of us have found an excuse for overspending and actually get really good at convincing ourselves it isn’t a problem.  “Don’t worry, I had a rough month and deserved those dinners out, that new toy, that weekend away.  I’ll get ahead next month.  Next month for sure is when we buckle down financially.  In fact I’m going to start praying about getting ahead right now!” 

But inevitably next month comes and goes, next year goes, and there you are with nothing to show for your hard-work except a pile of debt, a meager savings account, financial insecurity, and the daily stress of wondering how you’re going to get out of this mess.  And I hear you saying – “But I’ve looked so good getting myself nowhere!  Best of all, I haven’t had to tell myself or my family “No” for the last decade and it has felt soooo good!!” 

Perhaps you’re waiting for a visit from the ghost of your Financial Future to ask the question – “So how’s that working for you?” 

But there is hope. 

Read the rest of this entry »