Paul Ferraresi

If you have a desire to help motivate entrepreneurs in developing nations, you may want to consider Microfinance. No, this is not lending to your brother-in-law, by the way, who will never pay you back. These are responsible (gee, that is a new word for a lot of Americans) individuals that want a way out of poverty. In many countries and cultures, people are more entrepreneurial than
in the U.S.

I remember, many years ago, when Ross Perot was running for President of the United States. He uttered one line that stuck with me …”Give me an immigrant (legal); I’ll back him financially, and, we will both become millionaires.” In my own lifetime personal studies, I have found the further away (number of generations) Americans are from their immigrant ancestors….the fatter and happier they are (I do not mean waist measurement). So, take a look at being a banker via Microfinance.

There are about 4,000 registered microfinance banks that make small loans to entrepreneurs in developing nations (many times, comprised of women in small villages who cannot get money from traditional banks). The purpose of the loan is so they can start up a new business or expand an existing one. The business may be as simple as sewing clothes, raising chickens or selling food in a local market.

The interest rates charged by microbanks may be in the range of 30% to 40% because of the high costs to service the small loans. Although these rates seem high by our standards…they are much less than black market “loan shark” rates.

As the loans are repaid …and… they are…the microbanks put the money back to work and pay out a reasonable return to you, the investor. There is about a 5% default rate, so, 95% of the loans are repaid. The interest paid out to investors is in the mid to high single digits.

Here are some examples:

• A 5-year note by MicroVest paying 6%.
• A senior tranche by FINCA was paying 7.5%.
• Those with, say, only $1,000, can take advantage of Community Investment notes offered by the Calvert Foundation.
• You may want to look at the Global Impact Investing Network (GINN).

Do your research online. There are a host of avenues in which your money can help another person, in a remote place in the world, and have a chance to improve their lives.

With the stock market in disarray, you might consider becoming your own banker. (See Barron’s in January 2008, “At Last a Bank of Your Own” at http://online.barrons.com/article/SB119949061512768841.html.)

Instead of you being a borrower, think of investing and being a lender. (Remember, when you put your money in a bank you are actually lending money to the bank.)

Look at Prosper (www.prosper.com) which is a loan auction site, or Lending Club (www.lendingclub.com.) There you will find daily new borrower requests. There is a 1% loan servicing fee that is charged and an average 1% lost to defaults (people who do not pay.)

There are good credit risk borrowers that are in need of money since the spigots have dried up with the banks.

Here are some other sites to investigate….Loanio (www.loanio.com,) Pertuity Direct (www.pertuitydirect.com,) Virgin Money USA (www.virginmoneyus.com.)

Overall loans can be as small as $50 with the average about $5000.

Some helpful hints from people who “play” the loan market:

• Do not lend to borrowers that have a primary desire to just pay off a single high interest rate card
• Look at those that want to clear all debt
• Do not lend for new cars….maybe a used one
• (See Barron’s August 17, 2009, “A Booming Loan Market”)

Some have done well by financing students….see Fynanz (www.fynanz.com) and Greenmute (www.greenmute.com.) Also check out Prosper’s site to figure out the risk involved.

If your flavor is in international micro-business lending….check out kiva.org or MicroPlace (www.microplace.com.)

Figure you must spend at least 1 hour per week managing the portfolio….but you may be able to “bank” on some global returns.

The cost of higher education has increased dramatically, particularly at private colleges and universities. It may cost $15,000 to $40,000 per year in tuition, books, fees and room and board for a student to attend some private colleges. This does not include transportation, clothing, laundry and incidental expenses that frequently equal or exceed the basic tuition. This can result in a tremendous financial drain for a family with college age children.

HOW MUCH SHOULD I SAVE?

The size of the fund depends upon the number of children, their ages, educational plans, school selection, scholarships and student loans that may be available to them, student earnings and the amount of family income.

It also depends upon the attitudes of the family toward education. Some people feel they should provide their children with all the education they can profit from and want. Others, however, feel that children should earn at least part of their educational expenses themselves. If costs are substantial, it may even be necessary for a major portion to be financed by student loans.

HOW TO FINANCE A COLLEGE EDUCATION

Since loans must be repaid, many parents would like to avoid having their children start out heavily in debt. The payment burden can be substantial for a young couple, especially if both have education loans. There is also the idea that older children should help send their younger brothers and sisters through school after their parents have helped them. However, this is not a reliable source of funds because the siblings may not have the ability or willingness to provide this support.

The types of schools and graduate schools the children plan to attend also have a considerable bearing on the costs involved. An investment fund for educational needs is a relatively long-term objective, and it should be set up so the fund, hopefully, will not be needed in the meantime. Therefore, a less conservative investment vehicle seems justified in order to secure a more attractive investment yield. However, it would be unwise to speculate too aggressively with more than a small percentage of the fund.

The September 2009 issue of Investment Advisor portrayed how much it costs to raise a child. The report from the Department of Agriculture child-rearing study will take your breath away.

A two-parent, middle income family (with income from $56,870 to $98,470) can expect to spend $221,190 ($291,570 inflated) to raise a child born in 2008 for the next 17 years. This amounts to $11,610 to $13,380 per year based on the child’s age.

The USDA states that a family with income over $98,470 can expect to spend $366,660 raising a child for 17 years. This does not include any private school or college costs.

You can see the full report and online calculator at www.cnpp.usda.gov.

And don’t you love it when your children say to you … “what have you done for me?”

What if you could retire early and still get full retirement benefits??

It is not a new concept but many people do not know about it. The current Social Security system allows individuals to claim reduced, early retirement benefits beginning at age 62. Individuals who wait until their full retirement age to collect and receive about 30% more in monthly benefits. If they wait until age 70 to collect, their benefits will be about 60% larger than at age 62. So what should you suggest your clients do?

Assuming a normal life expectancy and using the interest rate on government bonds, the actuarial present value of lifetime benefits are the same for those taking early retirement as for those waiting to take benefits at a later age. Of course, if one’s life expectancy is not normal (due to illness or bad luck or particularly good genes or good luck) one retirement age will look more attractive than another.

Look at going for the best of both worlds: retire at age 62, then pay back and reapply for Social Security benefits at age 70 if you come to regret your early decision.

A couple claimed their Social Security benefits at age 62 and now they each receive reduced benefit of $13,250 annually (in 2008 dollars). If they had waited until their normal retirement age (65) to collect benefits, the couple would each receive $18,928 a year. If they waited until 70 (this year) to apply, their benefit in 2008 would have been $20,693, thanks to the delayed benefit credit. If they choose to pay back the Social Security benefits they have received over the past eight years, they will each receive the much higher benefit for the rest of their lives. If they take this option, each would repay $94,556 to Social Security. They would then each begin receiving $20,693 a year (the same as if they had waited until age 70 to begin receiving benefits); and as a result, they would have approximately 56% more in real Social Security benefits every year for the rest of their lives. “Essentially, the government has given them an interest-free loan.”