Banks have always been viewed as the safest place to park your money but, in the wake of the financial crisis, this perception has changed. Not only have people’s confidence in the stability of banks been shattered by collapse of WaMu, etc., but ever increasing bank fees and executive payouts have engendered distrust. On a more practical level, there are just fewer banks to go around. Many banks have either folded or been swallowed up by larger financial institutions, forcing people to look around for more options.

Bank online

Online banking is a relatively recent phenomenon that has become increasingly popular as consumers become more comfortable with doing the majority of their activities — from shopping for books or music to booking their airline tickets — in the cloud. Most major banks offer online services today, which provide 24/7 access to your accounts and advanced services such as the ability to pay bills online. There are even Internet-only banks such as First Internet Bank of Indiana or Smartypig that, because they don’t have the overhead of physical infrastructure, can offer substantially higher interest rates on savings accounts. Smartypig pays an APY of 2.75%. Let’s take a look at the pros and cons of online banks.

Pros

1. They tend to offer higher interest rates than local banks due to lower overhead costs such as paper mail, lease and other real estate expenses.
2. Some banks offer customer service available 24/7 or till late evening hours.
3. You can quickly initiate transactions online such as a transfer, withdrawal request or a bill payment in a matter of minutes.
4. Most paperwork can be filled out on the computer and transmitted electronically.
5. You can set up alerts so the bank will let you know when your balance is low.
6. Less paper mail such as bank statements and utility bills will decrease the amount of paper trail left behind for identity thieves.
7. No Fees- The majority of online banks do not charge fees. HSBC for example has no monthly fees and no minimum balance requirement for their online savings account.

Cons

1. Limited Access – you can’t just drop off your deposit like you would at a local bank. It must be mailed or transferred from another account.
2. At some online banks, the customer doesn’t have the opportunity to get to know the staff. Calls are often handled through a random system where you will get to speak to different customer representatives every time you call for an issue.
3. Make sure you select a bank with many ATM’s available, otherwise you will end up paying fees for using machines not part of the bank.
4. It takes longer to clear a deposit.
5. Paperwork requiring signatures has to be done through mail, taking longer to process.
6. Your bank’s website can go down, limiting access to accounts temporarily

Just to give you an idea of the services online banks offer, HSBC has an online savings account with an interest rate of 1.85%. Wachovia has several online services available in addition to online banking such as bill pay, brokerage and retirement accounts. Bank of Internet has an online interest checking account that pays an APY of 1.30% and a high yield savings with an APY of 2%. At the time this article was written, national overnight averages for savings accounts were of .77% for interest checking accounts and 1.39% for a savings.

Although some consumers have remained skeptical about doing their banking online, the majority have been easily seduced by the ready access to balances and the ease with which these services categorize transactions. The advancements in technology and privacy protection have also pushed more people to take the leap.

Bank locally

On the other hand, with distrust in the banking industry at a fever pitch, some people are taking solace in the old-fashioned comfort that can be found in a local brick and mortar bank where you know the teller by name and she remembers yours. Let’s take a look at the pros and cons of local bank accounts.

Pros

1. Easy access – you can just drop off by your local branch to make deposits or get cash withdrawals.
2. Familiarity – by becoming a regular customer, you get familiar with staff, getting to know some on a first name basis.
3. Quick access to cashier’s and certified checks.

Cons

1. Limited hours of operation – At most banks, after 4 or 5 pm you can’t get a representative to help you – you’d have to wait till the next day.
2. Interest rates tend to be on the low end in comparison to online banking.
3. More opportunity to spend your money because it is so easy to access it.

With the banking industry in a state of reorganization, there’s never been a better time to be a customer. All banks, whether an established brick and mortar institution or a scrappy newcomer that only exists in cyberspace are scrambling to regain your trust. Of course you want the best interest rate you can get but you’ll also want to consider things like ease of access to your money, any fees that may be associated with your accounts, and the security and stability of the financial institution in question Decide what options you would like to have and what you can do without when considering the pros and cons of either method of banking. And it doesn’t have to be an either/or decision. The best approach if you decide to open an online account is preferably to keep your local bank account open, this will enable you to have the access you need to some of your cash if an emergency arises.

roland

Peter Griffin is the latest in a long line of stereotypical television dads: dense, crass, jealous, impulsive, eager to drink and constantly living in the past. It would be easy to ignore anything this man had to teach us about money, or anything else we value, for that matter. But perhaps to think this way would be oversimplifying. After all, it was the sophisticated, smooth-talking financial “experts” who kept us all in a lather while the economy was secretly imploding. In light of their failures, maybe the unpretentious straight-talk of an true American family man is just what our wallets need, once again, largely in the form of, “do the complete opposite of this guy:”

Value Based Shopping

Peter: I hope this isn’t a ripoff like that breakfast machine I bought.
(Cut to Peter in his kitchen activating his breakfast machine. A ball rolls activating a series of devices soon reaching a balloon attached to a string attached to a gun. This pulls the trigger and shoots Peter right in the arm.)
Peter: AAAAHH!! WHAT WAS THE POINT OF ALL THAT?! THIS JUST SHOOTS YOU IN THE ARM! IT DOESN’T MAKE BREAKFAST AT ALL!

Cash is scarce in a recession, and many of us exacerbate the problem by spending what we do have on inferior or unnecessary products. The road to recovery begins here. Whether you are being targeted by a fast-talking salesman or feeling the tug of your own whims, it’s time to institute a new policy: don’t buy something you do not need.  Simply purchasing something because you see it in a store and it “looks cool,” might sound hilarious at first but that can turn to mild depression upon receipt of your credit card statement. Discipline yourself and scrutinize every purchase beyond the bare necessities. Find customer reviews by people that have used products you’re interested, and you can learn from their disappointment rather than your own.

Peter: I’ll give you $40 for that coffin.
Store Owner: Sir, this casket is $1,000.
Peter: I’ll give you $2,000.
Store Owner: Sir, that’s double what it costs.
Peter: $60.
Brian (to the store owner): He doesn’t know how to haggle.

But what if there’s something you really do need – say, a new car? In situations such as this, negotiation is key. You wont get very far using a bone-headed haggling strategy like Peter’s. To shave every last dollar off your final purchase price, you will need to arm yourself with pertinent information prior to arriving at the dealership. The sticker price is not enough. To achieve real savings, you need to know the invoice price, which is what the dealer pays Ford or Chevy for the car. Between the sticker price and the invoice price is your room to negotiate. (It also helps to tell the salesman that you are fully aware of the invoice price and what it represents at the start of negotiations.)

Wise Credit Use

(At a lemonade stand)
Girl: I can’t take a credit card sir. I need real money.
Peter: Oh yeah? Whatcha sellin’? Meth, ex, crack, dust, coke, block, crystal? IN MY NEIGHBORHOOD? I DON’T THINK SO!

Most people would not seriously try to buy lemonade from a little girl with their credit cards, but it’s not too far off from reality (i.e., @ Starbucks, Jamba Juice, etc.). Today, credit cards are used for more purchases than ever, and a 2008 study revealed that we actually tend to spend more when paying with credit than cash. According to a recent report by LiveScience.com, researchers concluded that, “…less transparent payment forms such as credit cards tend to be treated like play money and are hence more easily spent or parted with.”

[Peter has bought a sexy version of a relationship tape]

Lois: $49.95? Are you sure we can afford this?
Peter: Lois, our relationship can not be measured in nipples and dimes … nickels and boobs … money.
[runs off]

In addition to making you likely to spend more, credit cards also make it easier to buy impulse items. While the wisdom of buying adult-related content is not for us to decide, this is something all budget-conscious consumers must be mindful of. Anyone serious about intelligent credit card use should take steps to restrain these tendencies, such as only carrying cards when needed or lowering the limits on cards you do carry. In short, only use cards in emergencies or when it really makes sense.

Competitiveness

Brian: Face it Peter, you get competitive about everything.
Peter: I am so not competitive. In fact, I am the least non-competitive. So I win.

Interestingly, this is one aspect of money management wherein Peter has it exactly right. Prosperous economies mask our shortcomings with the “flab” of easy profits and raises. Simply showing up is often enough to preserve your standing in the eyes of bosses or customers. But this is nothing more than a security blanket stripped away in recession. With businesses and consumers cutting costs and scrutinizing spending like never before, continued prosperity demands that you out-compete others. Whether it’s delivering a superior product or accomplishing more in each day’s work, the key is to be seen as doing better than everyone else around you.

Retirement Planning

“Peter: My dad worked at that factory for sixty years. That’s almost eighty years.”

Peter’s liberties with numbers notwithstanding, sixty years is roughly how long the average person works. Unfortunately, many of us do not make retirement the priority that it should be. Increasingly, people do not have enough put away to retire at 65, what was once-considered the normal age of retirement. This is due to either (or a combination of) poor planning, and bad management and working for the wrong employer. In any case, more than ever, individuals need to be more proactive in preparing for retirement, and make understand that poor financial decisions today can result in a lack of financial freedom in the future.

“Peter: I have a plan so good, it’s retarded!”

If you want to save for your retirement instead of just wishing you did, you need what Peter had – a plan. Start by playing by tracking your expenses, and setting goals. Take into consideration how old you are now, when you want to retire, your yearly income, how much you save, and put a realistic plan together that you are able to stick to. You might need to start small, and as you become more ambitious with saving, you’ll learn to change your consumption habits. The bottom line is any plan is better than none, put together a savings foundation, and feel free to monitor and chart your progress, because most people do not retire financially self-sufficient by accident.

Financial Savvy

Brian: Peter, did you read the fine print on this loan contract?
Peter: Um, if by “read” you mean imagined a naked lady, then, yes.

Every family should have someone they trust with important legal and financial documents. This is the go-to-person for buying a house, a car, investing or anything with a minimal level of risk. Clearly, Peter is not that person. But, his gullibility illuminates the importance of a healthy skepticism. Never assume that the other party to a transaction is looking out for your best interest, because they usually are not. Debt consolidation or restructuring are good examples. The allure of a lower monthly payment can be tough to resist, but ask yourself: does this sound too good to be true? If the answer is yes, then it probably is. “Quick fix” debt consolidation means you make payments for longer and therefore pay more over time than if you just made the current payments. Always do your research on the implications of committing to a deal that “sounds irresistible,” – and here is the important part – and is readily available to anyone in any financial circumstance.

Peter: I don’t take coupons from giant chickens, not after last time.

Everyone loves a discount, and bargain hunting is a cornerstone of financial savvy. That being said, discerning shoppers know that many alleged “discounts” and “sales” are no such thing. Grocery stores, for example, have long been criticized for advertising “3 for $20″ type deals where $20 is just the every day price of buying three of that item. Other stores will claim that they usually sell something for one price, but are now selling it for a lower (but still high) price for a limited time. Research often shows that the item was never actually sold for the “original” price and so the “sale” was illusory. Still other coupons require buying more than you intended thereby eliminating the savings. The only way to know a deal is worth taking is to shop around and ascertain the real “original” price of the item in question.

Curbing Unnecessary Costs

Peter: Come on you guys. I gonna buy us the most expensive meal we’ve ever had.
Peter (to drive-through speaker): Yeah, I’d like 6,000 chicken fajitas please.
Drive-through speaker: I beg your pardon?
Peter: 6,000 chicken fajitas.
Brian: And a sausage McBiscuit please.

Most families only include groceries when estimating food expenses. And this may leave out substantial money spent on vending machines, coffees, convenience snacks, and yes, fast food. It’s cliché advice to be mindful of these expenses, but sometimes clichés are correct. Giving yourself a pat on the back for “only” spending $150 a week at the grocery store to feed your family deceives you about your true spending in this area. And while we assume the typical reader isn’t ordering fajitas by the thousand, most of us could stand to scrutinize and restrain our out-of-home eating expenses more than we currently do.

Financial Independence

Peter: Hey, anybody got a quarter?
Bill Gates: What’s a quarter?

One of the most common rationalizations for not saving or investing is: “I don’t make enough money.” Surely, the reasoning goes, whatever pathetically small amount you put away in a week wont amount to anything. But this ignores the real issue involved, especially if you’re young. What matters is not so much that you start saving $500 a week (although it wouldn’t hurt) but that you start at all. Recession or no recession, most people see their income rise throughout their working lives until retirement. You will eventually be able to save more. But how likely is it that you will save more once you have it if you don’t get into the habit of saving now? Saving should be scaled up in-tandem with earnings, rather than put off until earnings are perceived to be high enough to have an amount taken out for savings.

Peter: Guys, our money problems are over; we’re officially on welfare! Come on, kids, help me scatter car parts on the front lawn.

Don’t take the Peter Griffin approach to solving your “money problems.” Instead, adopt the above mindset of starting to save and invest with whatever resources currently in your possession. The only exception is if you are in debt, in which case, pay that off first. A well thought-out and consistently implemented savings and investment program should minimize your need to rely on others (be it friends, family, or Uncle Sam) during financial hardships.

.michael.newman.

Envy those savvy grocery shoppers that come armed with coupons and always seem to know exactly what’s on sale and what to buy where? Here are 9 ways to help save money on your monthly grocery bill, most of them as easy on the environment as they are on your wallet.

1. Buy lettuce by the head, not by the bag or box. OK, so it may actually take you all of three minutes to cut, wash and dry a head of lettuce compared to buying the pre-washed bag or box, but on average you will save about $3.50-$4.50 for the exact same amount of lettuce. It’s also better for the environment (not as much plastic being used) and you probably want to wash the lettuce anyway, regardless of whether or not it’s in a bag or box. The lettuce will also be fluffier and fresher.

2. Buy your milk (& orange juice) from a convenience store rather than the grocery store. This may vary depending on where you live, but where I am a gallon of milk in the grocery store (store brand) is about $3.19-3.75 and in the convenience store it is only $2.49. That may not seem like much of a difference, but every little bit helps and in my house (with two kids, four people total) we go through about 4 gallons a week. That equates to a savings of $22.50 per month! Orange juice is also cheaper as a half gallon is typically $3.50-3.99 at the grocery store and only $2.50 at the convenience store.

3. Don’t buy perishables in bulk, unless you will use them. Every time I buy a five pound bag of potatoes I use about one and a half pounds and the rest grows arms before I get to eat it. I could have saved around $2.00-3.00 had I just bought the four potatoes I ate rather than the big bag that got tossed.

4. You can also buy celery, carrots, and other veggies in singles. Just as in point #3, if you don’t need an entire bag of celery sticks, don’t buy the whole bag. Most grocery stores have a separate section where you can buy carrots, celery and other vegetables in any quantity. If you only need one stick of carrot and one celery for a soup you are making, you can just buy one of each for a fraction of the cost of an entire bag.

5. Prepare your vegetables yourself. I know it is tempting to buy the pre-chopped onions, peppers, and zucchini, but it is a high price to pay to save five minutes of your time. You will save anywhere from $2.00-5.00 cutting your own vegetables. If time is a factor, my advice is to prepare all your vegetables ahead of time (I usually do it after I get home from grocery shopping). Place the vegetables in tupperware (not plastic bags) and add a crumbled up paper towel. The paper towel will absorb the moisture, thus leading to longer shelf life, and your vegetables will be ready to go when you need them.

6. Don’t buy watered-down juice. If you’re a savvy mom or dad (or at least a health-conscious one) and you have heard that your kids should reduce their juice intake, that’s great! Many companies are cashing in on this and are selling juices that are watered-down. So you are paying the same amount as the regular juice (whether in a bottle or in a juice-box), but you are getting half the juice and tap water that comes free right from your faucet. In other words, the companies are making twice as much money off of you! Buy 100% juice (in its entirety) and mix it with water at home. You will save around $2.75 to $4.99.

7. Don’t buy bottled water. In case you haven’t heard, most bottled water is tap water. The only difference is you pay $1.50 per 20 oz. if it comes in a plastic container. Drink more water from your faucet, it really is the same quality (it may even be better!). You will be doing your wallet and the environment a big favor! If your town water is questionable, you can always buy a water filter for your faucet. A much more economical answer to filtered water. If you only drank one 20 oz. bottle of water a day, this would save you $45 per month. And of course you need at least three times that.

8. Always look through the flyer and ask the deli clerk, butcher, etc, to see if anything is on sale. I know I have made the mistake of going to the deli counter, asking for the same meat I always get, just to find out a competing brand is on sale that week for $2.00-3.00 less per pound.

9. Try to shop at the same store. When you know a store’s layout, you spend less. You’re familiar with the products they carry and spend less time looking for things. In contrast, when you shop in places you aren’t familiar you tend to “look” more and thus buy more because you notice items you haven’t seen but want to try. On average, whenever I venture out to a “new” store, I spend $30 more than normal.

Now, if you make every change I just mentioned (on estimate) you would save about $170 per month!

Kimberly Bither, M.S., CPFT is a Nutritionist, Fitness Trainer, and
Writer at KimberlyFitness.com.

Living beyond your means is a sure way to guarantee financial ruin. Today, millions are dealing with the fallout from artificially-inflated real estate values and accessible, unsecured credit. For those recently (or still) in this situation, a number of temporary solutions were once readily available – refinancing, taking out home equity lines, taking on additional credit cards – but, these quick fixes all had one thing in common: they only delayed the inevitable. But it’s one thing for an individual to act irresponsibly, and quite another for an entire state.

The State of California resembles a classic spendthrift; the world’s 8^th largest economy, was long characterized by its numerous economic opportunities, inviting business climate, and bustling real estate industries. But, the state was also regularly in deficit for the last several decades. This did not seem to matter. The state continued to borrow against future revenue, in order to finance its budget requirements – much like an individual would borrow against the speculative increase in their home’s value to pay for existing bills. The way they were able to do this, was by the sale of short-term notes for cash (similar to bonds).

The logic behind these actions was that growth was always expected: businesses were going to continue to grow, unemployment would be always be low, and income tax revenues were going to continue to increase. Most importantly, existing and new debt would always be recouped by future profits. If this sounds familiar, it probably is. For Californians that witnessed their home values skyrocketing between 2002-2006, taking out new loans for motorcycles and boats, or for kitchen remodels or expensive vacations almost made since, even if what you earned did not justify these costs. Your house was a passive (almost magical) source of money from which everything would one day be paid off, and everything would once again be right with the universe

What Happened?

Starting with the real estate market slumping in 2007, the situation quickly become grim for the state with the credit and financial markets meltdown in 2008. Shortly thereafter, the State’s credit rating was reduced. Due to a lack of confidence in the short-term notes, their sales have slowed down considerably. And, in the face of a devaluing dollar and massive trade deficits, the Obama administration denied the state’s request to federally-back the state notes, citing that states are responsible for solving their own budgetary problems.

California’s general fund has also experienced sharp declines in tax revenue. Income tax revenues have dropped considerably since 2007; 2009 receipts alone, are expected to be over $1B less than the pre-year prediction – which was already lower than normal. The state is also experiencing (on average) $200 Million less per month from Sales and Use Tax revenues from pre-year forecasts. Also, the State has the nation’s highest level of unemployment at 11.5% (68,900 jobs were lost in May 2009 alone) – which is also a 30-yr high for CA. This has exacerbated existing budget issues, with a higher-than-normal amount of unemployment payments being dispersed to a larger non-working population.

The condition of the state is analogous to an individual simultaneously experiencing a reduced income, either because of mandatory vacations, or hour cuts (or even becoming occasionally-employed), and an increase in their expenses (an adjustable rate mortgage, increased credit card APRs, etc). Not surprisingly, this has increasingly become the norm for many California citizens. The situation is at the intersection of circumstance and lackluster planning. Looking back at the last decade of California’s dynamic economy, we can now all see that things really seemed too good to be true, because, in fact, they were.

What This Means

Currently the state is facing a shortfall of over $27 billion, and this deficit is estimated to increase to $40 billion by the end of 2010.To put this in perspective, $27 billion is more than ¼ of the state’s general fund. Or rather, the state only has ¾ of the funds necessary to run at full capacity.

When the state legislature met in May to discuss wide-reaching budgetary cuts, it created a division among party lines: Republicans agreed to lower the income of state employees; Democrats strove to increase fees for select goods and services (cigarettes, oil wells). Governor Schwarzenegger, however, moved to generate revenue by borrowing from local governments. Because the parties involved at the state legislature were unable to come to a resolution, Governor Schwarzenegger has declared a Fiscal State of Emergency. What this means is that if a deficit is not solved within 45 days, the state legislature cannot act on other bills until this is resolved – in short, the state must figure out a way to substantially reduce this deficit, and/or find new money.

Unlike people, states can’t simply file for some type of bankruptcy protection. If the state were to default on its creditors, it will be in an exponentially worse situation. The state will lose a sizable source of regular revenue, in that investors would no longer want to invest here. Courting investors may not be the solution for the immediate crises, it will inevitably be required, should the state get back on track.

To make matters worse California’s labor market, does not show signs of having hit rock bottom. Forecasts by Beacon Economics, the UCLA Anderson School and Chapman University estimate that unemployment may near 13% by year’s end; and according to Esmael Adibi (Chapman), the recession, “…at the state level should end by mid-2010, when job creation will start.”

How the State is Coping:

Because of the grim diagnosis, the state will be forced to enact a number of the cuts in an effort to shrink the deficit. There will also be a number of new and increased taxes that will be levied on citizens, to help bare the cost. Some of the more noted cuts and taxes include:

- Mandatory furloughs for many state employees Feb 2009 – June 2010. This is estimated to save $1.3 Billion. (The partial government shutdown also will lead to a third furlough day for 235,000 state employees, bringing their total pay cut this year to about 14%).

- Additionally, layoffs, reductions and other efficiencies will be instituted in an effort to cut payroll by 10%. This is estimated to amount to as many as 60,000 state jobs.

- As of April 1, 2009 Sales tax was increased by 1%.

- As of July 2, 2009 the State began issuing IOUs for state tax refund payments.

- The Vehicle License Fee (VLF) rate increased from 0.65 percent to 1.15 percent from May 19, 2009, to June 30, 2011.

- More than $3 B in cuts to public education.

- Nearly $1 B in cuts to public health care.

Prospective Cuts:

- As many as 200 of California’s 279 State Parks may be closed.

- A suspension of Cal Grants and Cal Works – state programs that provide health and education services to low-income families.

The Takeaway:

The type of problems facing California lawmakers are reminiscent of those presently faced by millions of Americans and their households. Similarly, the state’s response is largely a reaction to market conditions; the same can be said about so many Americans, in that we only fix what is broken. Expense management is perhaps the most important lesson learned on one’s way to financial maturity, and unfortunately for so many it usually only comes from past failures. There are a number of lessons to be learned at the administrative level, and I think I speak for most Californians when I say that I hope our leaders are wise enough to find a solution that enables our getting out of this situation, but also makes it more difficult for the state to get in this type of a mess in the foreseeable future.

Here are Mint’s guides on budgeting, investing and managing credit to help you manage your finances.

Sources:

http://www.latimes.com/features/health/medicine/la-ed-budget8-2009jun08,0,7552895.story

http://www.huffingtonpost.com/2009/07/02/ca-assembly-speaker-schwa_n_224673.html

http://www.latimes.com/business/la-fi-california-jobless20-2009jun20,0,3863292.story

http://www.bizjournals.com/sacramento/stories/2009/06/29/daily29.html

see part 1: The Descent into Credit Card Debt Hell

Here’s Mint’s advice on how you can lift yourself out of the abyss.

amycgx

Fresh off of the heels of Congress’s passing of the Credit Cardholders Bill of Rights, President Obama sent a proposed law to Congress, which if enacted, would create a shiny brand new Consumer Financial Protection Agency (CFPA). The agency would not only help enforce the Credit Cardholders Bill, it would expand into the broader scope of consumer protection. Treasury Secretary Geithner summarized the agency by saying, “This agency will have only one mission – to protect consumers”.

Knowing exactly what the proposed CFPA would mean for you is based largely on speculation at this point, and the full effects may not be seen for years (and the bill isn’t expected to go to vote until this fall or beyond). However, it’s fair to say that the primary reason behind the proposed creation of the new agency would be to police and put an end to the type of greedy and unfair predatory practices by financial institutions (mostly banks and credit providers) that has resulted in many borrowers suffering from undue financial hardship.

Citing the agency’s crackdown on predatory mortgage lending techniques, President Obama states, “You’ll be able to compare products and see what’s best for you. The most unfair practices will be banned. Those ridiculous contracts with pages of fine print that no one can figure out – those things will be a thing of the past.” Although, I find it hard to imagine that my next mortgage closure will result in anything less than a headache and a mild case of carpal tunnel, having an agency focused on enforcing simple, concise, and clear terms is certainly a step in the right direction.

According the White House’s official press release on financialstability.gov, the CFPA would

1. Provide protection against unfair credit card rate increases and late fee traps: The agency will enforce the credit card bill enacted by Congress and President Obama this spring, taking responsibility for enforcing the ban on unfair rate increases and for the implementation of new rules preventing late fee traps.

In other words, the Credit Cardholders Bill of Rights that was passed recently, but doesn’t go into effect until mid 2010 needs a governing body. The CFPA would be that governing body.

2. Set guidelines for simple “Plain Vanilla” products: The agency could create guidelines for standard mortgages without prepayment penalties; that are fully underwritten with documented income; that collect escrow for taxes and insurance; and have predictable payments.

Remember all of those funky ARM’s, jumbo loans, and other sleek mortgage names masking a product that is designed to rip you off? The CFPA would seek to put an end to these type of products.

3. Duties of care for mortgage brokers: The agency could require mortgage brokers to owe a duty of best execution among available mortgage loans to avoid conflicts of interest between themselves and the homeowners, and a duty to help ensure that only appropriate loans are offered.

A colleague who once worked for one of the nation’s largest mortgage lenders once told me that ‘in the good ole days’ mortgage underwriters would look for any possible reason to offer the largest loan possible and ignore little technicalities such as the borrower not providing proof of income. The goal of the CFPA would be to put an end to this type of practice and ensure that financial institutions are offering the right loan amounts to the right people in the right situations.

4. Ban unfair side payments: The agency could ban unfair practices such as “yield spread premiums” – side payments from lenders that encourage mortgage brokers to push consumers into higher priced loans.

Essentially, what the press release is trying to say here is that the CFPA would monitor and attempt to put an end to broker/institution side arrangements that are designed to steer you into a mortgage that may not be the best for you, but results in the mortgage broker getting a commission.

If you’d like to curl up and read the full version of the CFPA-Act bill, you can check it out here.

The Opposition

The financial industry will surely be up in arms over the bill, because it provides the type of oversight that they have been able to evade for so long. Opponents argue that the CFPA would limit product innovation and dictate what type of loans consumers should receive in certain situations.

Didn’t product innovation and offering ‘customized’ loans mostly get us into this mess?

For more of GE Miller’s writing, visit personal finance blog 20somethingfinance.com.

TV Guide

At first glance, South Park’s Randy Marsh does not seem to have the makings of someone with financial savvy. Neither his job as a geologist nor his irrational tendency to over-react suggest we should trust his judgment with money at stake. And yet, there is something this man can teach us about personal finance. For all of his sporadic obsessions and fad chasing, Randy Marsh exhibits a sincere desire to discover and (just as important) act on good ideas and principles. More of these are explained below.
Just do it

“There’s no time for your immaturity Stanley, do it!”

Many of the causes and crusades Randy commits himself to are foolish. But boy, does he commit to them, and fast! Once he gets it into his head that something (anything!) must be done to assure safety, prosperity, or prestige, Randy wastes no time getting started. In this last thought we find a bonafide gem of money management wisdom, which is simply this: all the personal finance knowledge in the world is worthless unless you act on it. In his excellent book I Will Teach You to be Rich, Ramit Sethi advocates “the 85% solution.” That is, taking the imperfect (but sufficient) steps you know rather than endlessly delaying action because you don’t know everything.

In other words, once you know that financial independence comes from sustained investment and savings, start investing and saving. You will prosper far more by simply investing $100 (or however much) per month in a plain old boring index fund than by perpetually trying to figure out what the “best” stocks are – and investing nothing in the meantime. Ditto for retirement savings. Open an IRA (preferably of the Roth variety, in which your money grows and can be withdrawn tax-free) and contribute to it every month. What matters is not whether that is the 100% best and most optimal strategy, but that you are doing it. You can always make adjustments later. And while your friends engage in fruitless debates about interest rates and ETFs, you will be the one actually making headway.

Manage your risks

Stan: “Dad, I don’t want to put my head in the sand.”

Randy: “It’s the best way Stanley, did you eat your Fruit-Roll Up?”

Stan: “Yeah…”

Randy: “Okay make sure your snorkle is working and get your head in the hole.”

Investing is full of risks. What often determines how prosperous and secure we are is how we manage these risks. Unfortunately for South Park fans, this comical exchange from the “Family Guy” episode illustrates exactly the wrong approach to risk management. Burying your head in the sand is just as ineffectual and wrong-headed in response to investing risks as it was in dealing with terrorists. The correct approach is to confront risks, understand their implications for your own wallet and insulate yourself as best you can.

For example: the Enron fiasco illustrated the risks of investing in only one or two things. In effect, Enron’s former employees “stuck their heads in sand” by putting their eggs in that one basket and hoping for the best. They had no hedge against the risk of the whole company failing – which it ultimately did. A far better approach is to diversify your investments across a broad swathe of index funds, mutual funds, foreign currencies, and other vehicles. This way, hiccups or slowdowns in one area wont decimate your entire portfolio.

Price Comparison

Stan: “How come Wal-Mart can afford to sell everything so cheap?”

Randy: “Well son, it’s simple economics…I don’t understand it all.”

People don’t always grasp the underlying reasons (volume purchasing, economies of scale, distribution efficiency) why certain stores always have lower prices. Fortunately, you don’t need to understand any of it to reap huge savings. All you need to do is comparison shop before making major purchases. It doesn’t have to be time-consuming or difficult; in many cases, simply Googling a few different retailers to check their prices will be net you significant savings the next time you buy furniture, appliances, cars, or any other major purchase. Not understanding simple economics didn’t stop Randy from saving at Wal-Mart, and it shouldn’t stop you from comparison shopping.

Develop Financial Priorities

“I was shopping at Wal-Mart all night. I was standing in the checkout line…they had these little stickers filled with glitter! They were only ninety-nine cents for fifteen of them, I couldn’t resist! Do you want one?!”

Randy’s giddiness at Wal-Mart exemplifies a trait many of us possess: mindless, impulsive spending. Don’t worry, we’re not telling you to never make spontaneous purchases (life would be awfully boring if we only saved and paid bills). The key is to establish priorities that you satisfy first. It is often the lack of such priorities – rather than the spending itself – that gets people into trouble.

In the end, your priorities will determine and depend on your financial goals. Most people would do well to put retirement, investing, and general savings on their list, and decide how much money they can contribute toward them each week or month. Most experts suggest having 3-6 months in living expenses at all times. Any planned major purchases (such as a new car or house) can be planned and saved for month to month as well. No matter the priorities you choose, the important thing is that you attend to them before letting your wallet run wild on impulse spending.

Educate Yourself

“Do you have any concept of money at all?!”

A common criticism of our schools and colleges is the lack of personal finance education offered to young students. This is blamed for the lack of financial savvy among adults young and old. But this doesn’t let you off the hook -  just because the ins and outs of money management weren’t spoon fed to you in class doesn’t mean you can’t learn them on your own.

Use Good Judgment

“These are not ’space cops’, there is no ’space jail’, and ’space cash’ is only worth what you as a planet decided it was worth.”

Randy again demonstrates the opposite of sound judgment in the episode titled “Pinewood Derby “. When visited by aliens, Randy and the other citizens of South Park were tricked into thinking that a massive hoard of “space cash” stored on board the alien’s ship was a real and valuable currency. Their naivety wound up costing Earth a membership in the ‘Federation of Planets’ and sealing them off from the entire universe. While your choices aren’t likely to determine Earth’s interstellar future, you can still take a big hit if you aren’t aware of scam artists and ripoffs. Countless Americans have poured untold millions of dollars into Ponzi schemes, pyramid schemes or dodgy multi-level marketing programs. These typically promise huge rewards for persuading others to sign up. They typically fail, little is done to stop people from promises of “getting rich quick”. In general, anything promising lots of money in a short time with little work is a scam.

Be Truthful About Taxes and Income

“Stan you have to learn to lie properly someday, it might as well be today.”

Despite Randy’s exhortations to lie, the one situation when this always comes back to haunt you is tax time. Many who neglect to file tax returns don’t hear anything from the IRS for months or even years after. They then erroneously conclude that they got away with shafting Uncle Sam and all is well. But this is rarely true. According to the book Standing Up to the IRS, this only happens because the IRS database is perpetually 12-24 months behind. Non-filers have not “gotten away with” anything, and an eventual phone call from the IRS is therefore inevitable. It’s best to simply pay all taxes owed and file all returns on time. It’s never fun, but the alternative is much worse: fines that sap your savings, time wasted with federal agents, or in the worst case, prison. Surely fulfilling your civic duty is not as terrible as this.

The Takeaway

The core of Randy Marsh’s approach to personal finance is to be active. You could also take away from this article that it is better to manage risks and educate yourself instead of sticking your head in the sand. Search for the lowest price instead of buying from the first store you visit. Let consciously chosen priorities, rather than whims, drive your spending. Don’t fall for hyped-up scams. Be honest in your dealings.

]]> http://www.mint.com/blog/finance-core/personal-finance-according-to-south-park/feed/ 9 http://www.mint.com/blog/finance-core/understanding-financial-statements/ http://www.mint.com/blog/finance-core/understanding-financial-statements/#comments Wed, 01 Jul 2009 00:59:31 +0000 Ana Gonzalez Ribeiro http://www.mint.com/blog/?p=2893 investments, do you ever wonder how the value of the companies you've put your money in is determined? What factors decide how well a company is really doing? What's the source of the company's financing? Will it meet or exceed this quarter's projections? While some consider the stock market to be little more than a house of cards, subject to the whims of individual investors, there are, in fact, some very real and measurable things that can help you to diagnose the financial health of a company. ]]>
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When looking over your investments, do you ever wonder how the value of the companies you’ve put your money in is determined? What factors decide how well a company is really doing? What’s the source of the company’s financing? Will it meet or exceed this quarter’s projections? While some consider the stock market to be little more than a house of cards, subject to the whims of individual investors, there are, in fact, some very real and measurable things that can help you to diagnose the financial health of a company.

Take a statement

It’s not an interrogation but you’ll want to ask the hard questions before you invest. Only by examining and drawing conclusions from a financial statement, will you truly know how well a company is doing. At first glance, you will see that a financial statement is made up of three main sections, the balance sheet, the income statement and the cash flow statement. Each statement depicts a different aspect of the overall financial picture of a business. The balance sheet details companies’ current assets such as cash and prepaid expenses. It shows the financial position at a particular date. This statement tells you what the current liabilities or existing debt the company has, that has to be paid within that year. Examples of debt include accounts payable, salaries payable or income taxes payable. The amount of current assets over current liabilities determines the amount of working capital or leftover cash the company has to cover other operating expenses. Whether or not there is enough money left over after the current debt is paid off, tells you whether the company is on solid financial ground or might be headed for destruction.

The income statement is a summary of the profits a business has earned for a specified period of time. This is where you would see the amount of revenue or profits obtained for a companies’ products or services and the expenses incurred for salaries, supplies or income taxes. The difference between the revenue and expenses gives you the net income, which when compared over a period of say two years shows you how the net income is rising or falling, a fairly good indicator of how profitable the business is. Basically, this statement tells you if the company has revenue coming in.

The cash flow statement is particularly important when considering new ventures such as an internet startup. The ability to balance cash flow now is a sign that the business has a long and profitable future ahead of it. This reports the cash going out and coming in from operating, investing and financing activities. In this statement, changes in the net cash flow indicate the company’s ability to meet its debt obligations and pay dividends, how much external financing the company is using and its ability to generate cash flow in the future. Operating cash flow can be described as the cash effects from revenue and expense transactions. Investing cash activities comes from the purchasing and selling of properties or assets and financing cash activities shows how owners of the company have used loans from creditors to finance their business.

Know the facts

Investing should never be based on emotion. While you might be tempted to invest in a company because you like its products or because you’ve just read a favorable article about it in a magazine or newspaper, you should make sure you’ve done your research before ponying up your hard earned cash. Think of the financial statement as a kind of scorecard that helps you determine which company is the one you should invest in. What you’ll find is a hard look at the financial structure of a business that shows you what it’s really made of. Ask yourself a few questions and see if the statements help answer them. Does the revenue exceed expenses in the income statement? Does the amount of assets exceed liabilities on the balance sheet?

Notes often accompany financial statements. Read these notes carefully as they disclose information that can help you interpret the financial information on the statements. The notes reveal any changes that could have an impact on the company’s finances. It can provide some startling insights such as what type of debt the company purchased, for how long and for what purpose. For example, the notes might state that company A entered into a two year term note of which the proceeds were used to purchase the company’s out of state manufacturing facility and headquarters. Essentially, the notes are a complement to the statement providing more details. If you’re a shareholder, it’s your company. So you’ll want to make sure you know as much as you can about it.