Archive for Debt Management

Loan from a Stranger

You might consider peer to peer lending as a way to get rid of those huge credit card debts.

Two companies that could be of assistance are “Prosper” and “Lending Club.” The borrower gets a lower interest rate to pay off those high rate credit cards. Rates are set based on your credit scores, but, in general are below 12% for card consolidation loans.

For loans of $1,000 to $35,000 you will need a credit score of 640 (Prosper) to 660 (Lending Club) or higher to qualify. There are origination fees based on your credit score. Excellent credit could get you at 7% rate with a 1% fee. Good credit is a 15% rate with a 3-4% fee.

This may or may not be for you. Check it out.

Reveals on Debt Consolidation

A Publication of NEFE Digest
Nov./Dec. 2012 Issue

RESEARCH REVEALS REAL THREAT OF DEBT CONSOLIDATION ADS

Debt consolidation loan (DCL) providers often market their products as no-hassle solutions that can lower consumers’ monthly payment and overall debt. But NEFE-funded research found that DCL ads also can lead consumers to take on riskier money behaviors rather than find solutions to their debt problems. Specifically, the ads make consumers feel that once they enroll in a DCL program; they have a “get-out-of-jail-free” card and can start spending again, without regard to their debt levels. To combat this “boomerang effect,” researchers at Pennsylvania State university, Duke university, and the University of Florida crafted a financial literacy intervention that gave consumers full disclosure about DCLs. Armed with this knowledge, consumers made different decisions about the loans and about managing debt compared to when they encountered the DCL provider ads alone. To read more about the research, visit: www.nefe.org

Improve Your Financial Future

Here are a few simple strategies to build your wealth:

• SPEND LESS THAN YOU EARN. You can’t make your money grow if you spend it all.
• LIST YOUR FINANCIAL PRIORITIES. Put your retirement at the top of the list.
• ESTABLISH AN EMERGENCY FUND. Low-risk, accessible cash will lessen the temptation to dip into retirement savings in an emergency.
• MAKE SAVINGS A HABIT. Even a little can add up, thanks to the power of compounding.
• PAY YOURSELF FIRST. Stock away at least 20% of your pay. Have the money automatically deposited so you’ll never miss it.
• CUT EXPENSES. It’s one of the fastest and best ways to make money. Clip coupons, buy second-hand on eBay, eat out less often. Funnel this “found money” into your investments.
• CREATE INCOME. Take a second job, rent out a room or downsize and invest the profits.
• INVEST REGULARLY. Use time and timing to get into the marketplace. If you don’t know how to invest, find out how! Go through training, read books, ask an expert and then apply your knowledge. Remember: Don’t work for money. Let money work for you.
• CREATE LONG-TERM WEALTH. Money in a savings account is safe, but inflation will erode its value. Stocks provide long-term growth.
• DIVERSIFY. The best way to balance your risk is with a portfolio that spreads your money out over a variety of financial instruments.
• REVIEW. Revisit your spending plan, savings and goals monthly to be sure you are on track.
• AVOID BAD DEBT. Don’t borrow for things such as vacations, clothing or furniture. Borrowing to remodel a home, on the other hand, may be good debt that can provide long-term financial benefits.
• BEWARE OF HIGH-INTEREST LOANS. Look at the total cost of repaying the principal and interest, not just the low monthly payment.
• GET OUF OF BAD DEBT. Otherwise, finance fees eat up principal that could be earning interest.
• HANDLE CREDIT CARDS WISELY. Keep only one or two cards. Transfer high-interest balances to zero-interest cards.
• PLAN TO RETIRE LATER. If you’re doing what you love, work is fun! You can work longer, work part-time or become a consultant.
• DELAY TAKING SOCIAL SECURITY. Benefits will be higher when you start.

Boomer Retirement

Research by Somnath Basu, professor of finance at California Lutheran University and director of California Institute of Finance, has collected some revealing results.

Those over age 60 employed for 30 or more years had about $200,000 in their 401K plans. While those in their 50’s are set for retirement with about the same amount. Leaving out cost of living adjustments both groups have inadequate resources for retirement for a two income family.

Looking at history, in the 1990’s young boomers were earning $31,000, consuming 80%, saving 10% (including retirement contributions) and paying 10% in taxes. By 2010, for this group savings went up to 15%, taxes down to 5% and consumption at 80%.

Similarly in 1990 the old boomers were consuming 77%, saving 11.5%, and paying taxes of 11.5%. By 2010, consumption increased to 80%, savings at 15.5%, and taxes dropped to 4.5%. The older ones are spending more and are clueless about what lies ahead for retirement [keep in mind, across the nation, taxes fell from an average of 9.4% to just 4% between 1990 and 2010. So the “rich” paying 15% capital gains tax rate is way above what the masses are paying].

Using a boomer’s income level of $50,000 per year, and using ONLY an 80% retirement replacement rate (low) that equates to $39,000 per year gross (minus taxes). Using a 30 year Treasury rate risk free return of 3% (gross) on $400,000 of retirement funds generates only $12,000 per year. Thus 12,000 ÷ $39,000 means they will have 30% of their needs. Will the boomers cut back their expenses by 70%?

There seems to be no way out except everyone will have to change their current lifestyles significantly. Basically, everyone must begin saving every penny they can find. Next, they need to invest in a prudent way looking for principal conservation.

Keep in mind health care costs continue to soar as demand for these services rises. Those over 65 are now spending 13% of total income on healthcare. So health expense in retirement is 13%, housing 35%, transportation 14% and food 12%. That’s 74%. Add in taxes and other living expenses… that leaves very little for “fun”.

The pending boomer financial crisis is real, immediate and will place further strain on social security.

Ah, discipline or regret.

Social Security – The Good and The Bad

THE GOOD

You can find out what you may receive in Social Security benefits by using their benefit calculator. It is very easy to use and takes less than a minute. This may help you determine if you want to take early or delayed retirement. Keep in mind this estimator is using “blue sky-rose colored glasses” in the calculations. It assumes that there is no problem with the funding of Social Security (sure!!) and you will get all of your promised benefits.

THE BAD

Most people are aware that Social Security has unfunded liabilities near $50 trillion, but they do not think it will affect them. For many years, when you received your annual Social Security statement, the report stated that revenue will not meet outlays starting in 2019. Every year it has come closer to present day. Last year’s statement said by 2016 outgo will exceed income. This year’s statement does not even mention when outgo will exceed income. It does state that you may get only 77 cents for every dollar promised in 2037; down from 2041 a few years ago. Good news – it looks like a one-penny increase from last year’s report.

The bad news — these calculations do not take into account the STUPID program that has let you have a 2% reduction in Social Security taxes being taken from your paycheck for the past year. Thus, you are personally spending and enjoying 2% more in take-home pay now so you can lose 25% in benefits later on. Ah yes, government thinking at its best. Rob from Peter (you) now to take away from Peter (you) later on. Expect to see a massive increase in this tax soon to make up for the 2% you have had recently.

I hope you are saving every dollar of your new found wealth in that 2% Social Security tax cut.

By the way, did you watch the riots in Greece recently when they proposed a 5-10% cut in pension plans? The masses started fires at the Parthenon. Imagine when everyone wakes up here and sees a 25% cut in their Social Security payments for as far as the eye can see. (Let’s see…will they burn buildings in Washington, New York, or in your city?) I would dump stocks in any property and casualty insurance companies and buy stocks in water companies…to put out the fires!

Throughout history socialism has never worked. Well, it does work fine until they run out of ways to find people to tax.

No discipline leads to all regrets!