With all the financial turmoil that has been caused by the recent economic recession, it isn’t surprising that consumers are struggling with their debt in unprecedented numbers. The free-spending, easy-credit environment of the years preceding the recession has given way to high unemployment and underemployment, a floundering housing market, restrictive lending guidelines and millions looking to pay down their debt rather than spend. The loss of income and inability to qualify for new loans have left consumers buried with high interest credit card debt that in far too many cases will require decades to pay off, given their current repayment capacity and the seemingly dismal prospects looking forward.

The situation as it presents itself defies a tolerable solution, and droves of borrowers are now turning to the debt relief industry for answers. One of the debt solutions that seems to hold the most promise is commonly known as credit counseling. Aside from the actual financial counseling they provide, the credit counseling agencies also offer a debt management plan (DMP) that offers a potent mix of benefits that successfully deal with many of the most troublesome aspects of the unsecured debt problems so many are now facing. Here are some of the most frequently asked questions about credit counseling and DMP’s, and their answers:

1. Am I a good candidate for credit counseling?

Consumers can get a good idea whether or not they could benefit from consulting with a credit counseling agency by watching their finances for certain warning signs. Here are some of the most common:

• You are current with your payments now, but you are getting closer to being late as time passes
• You already had some late payments and things don’t seem to be changing for the better
• You need to take out cash advances at high interest rates to make ends meet
• You transfer balances from one credit card to another just to avoid having to make a scheduled payment
• Your finances have taken a downturn and you see the potential for future problems

2. What should I expect to happen in credit counseling?

The first thing that will happen is that you will be assigned to a credit counselor, who will collect all your relevant financial information. From doing this they can get a good idea of the state of your financial situation and can then suggest some possible remedies. Here is some of the information you will need to bring:

• The sources and amounts of all your monthly income
• Your detailed monthly expenses
• The balances you owe on all your accounts
• The interest rates you are being charged on your accounts
• The minimum payments and due dates on your accounts

3. How does credit counseling help with my debt problem?

Your credit counselor will be able to suggest some possible answers to your particular situation. If your counselor determines that your financial hardship requires it, he may recommend that you enroll in a debt management plan (DMP). Credit counseling agencies maintain close relationships with creditors and are able to get relief for their clients in a number of ways with a DMP:

• Your interest rates on your unsecured debt can be reduced
• Your accounts can be paid off in just 5 years or less
• You will no longer be charged over-limit and late fees
• You will get the benefits of a consolidated monthly payment
• You will get relief from collection phone calls
• You can avoid bankruptcy

4. How will a DMP affect my credit?

Most consumers are very concerned about the impact that a DMP will have on their credit. According to the Fair Isaac Corporation (FICO), the fact that a consumer is paying their accounts through a DMP will not have any effect on their credit score at all. The fact that some of the accounts are being paid through a DMP will be noted on the credt report, however, and this information can be viewed by any of your prospective creditors. Some of them may interpret it positively, as a sign that you don’t just walk away from your debts even when you are experiencing a financial hardship. Others may choose to interpret it less favorably as a sign that you may not be a good risk for acquiring more debt.

About the Author: Alan Winkler is a writer for RightStartllc.com. Right Start helps indebted consumers improve their financial situation through debt relief solutions, such as credit counseling and debt management. Their blog also serves as a resource for helpful debt advice and tips, offering educational articles on the debt relief industry and other financial topics.

photo credit: jacksteruk309

Filing for bankruptcy used to be a pretty clever and painless way to stick it to your credit card company.  Back then, if you were really up a creek you could file for Chapter 7 and get a “fresh start.”  Effectively, all your assets would be liquidated and given to creditors, and all your remaining debts would be nullified, so your credit card, mortgage, and student loan debt would basically just disappear and you would start over with a clean slate.  Those days ended in 2005 with the Bankruptcy Abuse Prevention and Consumer Protection Act.

This law, quite simply, tries to make filing for bankruptcy a royal pain in the backside, in order to prevent abuse from those who would repeatedly run up debts and then file. New requirements for a bankruptcy filing include mandatory credit counseling classes, a “means test” to make sure you really need to file, audits, an eight year moratorium on future filings, and significantly higher filing fees.  If you fail to meet any of these qualifications, you have to file for Chapter 13 instead, which means establishing a payment plan with your creditors of up to five years, so your debts still stand and you’re still left holding the bag. (Editors Note:  See our post on the different types of bankruptcy)

How do I rebuild credit after bankruptcy?

Secured credit cards are often the best choice for people who are looking to rebuild their credit history after you file for Chapter 7 (total wipeout) or Chapter 13 (payment plan). The way these generally work is that you post collateral upfront equal to the amount of the credit line you want, normally in the ballpark of $500-$3,000.  The card issuer then holds this as collateral in case something happens and you can’t pay your bill.  It’s not used to cover your balance each month, however, so if you fail to pay back what you spend each month, you still incur interest on any remaining balance, despite the collateral.

We recommend you stick with a secured credit card from your local bank or credit union, instead of going with one you find on the internet. Your local bank may offer you much lower fees, and usually offers the ability to parlay the card into an unsecured credit card after a year of good behavior.  However, we recognize that this isn’t an option for everyone.  There are both secured credit cards and prepaid debit cards to help you get started on the path to rebuilding your credit.

This a guest post by Melissa Mansur who is a member of the NerdWallet team, helping to dig up the dirt on the credit card industry, and is also an MBA candidate at Stanford University’s Graduate School of Business. Prior to graduate school, Melissa was a venture capital investment associate at DCM and an investment banking analyst with Credit Suisse’s technology group. She is a graduate of Stanford University, where she has degrees in Electrical Engineering and Economics. Nerdwallet is not affiliated with or endorsed with LPL Financial.

There are many reasons people consider buying a bigger home (our building our dream home as we did). Often, newlyweds might purchase a “starter home” which is intentionally smaller than their ideal home, in order to save money. They figure they can buy a larger house later, when they start adding children to their family or start earning more money. Maybe you’ve decided to run a daycare or other business from your home and require more space to do it well. Whatever your reasons for wanting a larger home, here are some things to consider before purchasing a big home that will prevent you from going broke.

Your Income

A larger home means more expenses! Keep in mind you’ll have more expenses than just a bigger mortgage payment. Bigger homes also mean higher property and school taxes, higher utility bills, and larger maintenance and repair expenses. Other things to consider are more furniture and other home furnishings that were needed for the old house (this one got us).

It doesn’t stop on the inside of the home, either. What about the outside? Do you have a bigger lawn to maintain. More landscaping? I think you see where this can go. You might also have Homeowner’s dues that you weren’t used to before.

Mortgage Interest Rates

Interest rates for mortgages fluctuate from week to week. The cost of buying a home varies greatly between a 4.5% fixed interest rate and a 14% interest rate. Your ability to obtain the lowest interest rate should play a roll in whether or not you look to buy a bigger home. If your credit score is not up to par, you can expect to pay a higher interest rate, and higher monthly payments than if your credit history and score are in good shape. You might want to consider renting if your credit score is low, take the time to improve your credit, and consider buying later when your credit score has improved to take advantage of the best interest rates.

If you didn’t know, mortgage rates have been low for quite some time. We initially locked in a 30 year fixed rate at 5% in January 2010, which was a 1% lower than we locked in our first home in 2005. Just the other day, we had the chance to refinance to a 20 year rate at 4.375% in just under 6 months. If you’re income supports it, locking in now might make sense for you.

Equity in Current Home

photo credit: woodleywonderworks

If you’re looking to buy a bigger home than one you already have, you should first consider how much equity you have in the existing home. You can avoid a bigger mortgage payment if built up equity in your current home. When you sell the home, you can apply the profits to your down payment and lower your mortgage payments on the larger home. Remember, if you meet certain ownership tests (if you’ve owned your home 2 out of the last 5 years) a couple could exclude up to $500,000 of a capital gain on the sale of their primary residence ($250,000 if individual owner).

Location For New Home

When you start thinking about buying a larger home, you’re probably thinking about a home you intend to stay in for the long haul. Make sure to consider carefully the neighborhood you want to live in. What town would be best for you and your family? Do you need to think about school districts or how close to your work the home is?

Where we actually built our new home was only two miles from our old home. You’re probably wondering, “what’s the point”? For us, we knew we needed to expand because we had another boy on the way and we know we wanted a third. Plus, the subdivision that we had bought the lot in was new and growing and was one of the only that was still “in town” and close to the new school. We felt that if we didn’t act now, we were going to miss out. We’re thankful we acted when we did.

What’s the Condition of the Market?

At any given time, it is either a “buyers market” or a “sellers market”. This simply means whether the market is favoring the buyers of new homes, or the sellers. Who is benefiting the most from the current marketing conditions? You want to time your purchase of a larger home when the market is in the buyers favor – as this means lowest interest rates and lowest prices on homes.

This is a lot harder than it sounds. You can read the first part of our selling process in my building dream home post. Needless to say, we thought we picked a good time to sell, but it took us a few months longer than we really expected.

This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

This year we took the plunge and built our dream home. Along the way, we learned a lot in the building process, especially when it comes to the mortgage loan process. Our first home was bought while I was in Iraq, so I cashed in on my veteran status used the VA home loan. With our dream home, we were short the 20% down payment that we needed to avoid PMI (Private Mortgage Insurance). While we could have used the VA loan again (for refinancing not for first time home purchases), it was actually cheaper to do the traditional loan process and take out a second mortgage.

A second mortgage is basically a loan using your home equity as collateral. If you own your home, whether you have a mortgage attached to the property or not, you may be able to secure a second loan by liberating your equity that has built-up over the years.

Generally speaking, real estate increases in value, so while a typical mortgage can stretch out for up to 30 years, the principal owed on the house steadily falls while the value of the house appreciates. To find out how much you can possibly qualify to borrow on your home you need to find out how much equity is in your home. This is calculated by estimating the market value of the property and subtracting the payments made towards your first loan so far.

For example, if your home is currently worth $250,000 but you have a first mortgage of $160,000 outstanding on the property, you have managed to amass $90,000 in equity. Lenders may be willing to allow you to borrow anywhere from 60% to 80% of your equity, which works out to roughly $54,000 to $72,000.

What are Second Mortgages Used For?

As you can see a second mortgage can really represent a sizable chunk of cash, but what are they used for? Well, you can use a second mortgage for anything from funding a child’s education to making repairs on your home. I’ve had a client take out a second mortgage to put in a new pool.

If you are going to take on additional debt,it should be for something worthwhile. A vacation, however deserved might be better to save for slowly, that to take on the cost of a home equity loan.

Another option can be to avoid Private Mortgage Insurance. As I mentioned above, we chose to do a second mortgage to avoid PMI. We had the option to use the VA Loan again, but we would have had to pay a 0.5% funding fee, so the second mortgage made more sense for us. Although we financed the second mortgage over a 30 year period, we had set a goal to have it paid off in 2 years (after just recently refinancing we’ll now have our second mortgage paid off in under a year).

Pros of a Second Mortgage

The good news about a second mortgage is that mortgage interest of up to $100,000 of the principal for married couples and $50,000 for singles is deductible on your tax return as well. Although this is meant to be a combined mortgage interest on both your mortgage loans it is still a great deduction, especially if your first mortgage is closer to the end of its life and so has a relatively small portion of interest payments left.

Another (possible) pro of taking out a second mortgage is the ability to liquidate the equity in your home. If you are on the verge of bankruptcy and you need to get access to cash to pay off high interest loans and back taxes, taking a home equity loan might not be a bad trade. The interest payable on a home equity loan is usually lower that other types of debt because it offers the lender the security of your house.

While this might seem like a smart strategy, one thing you never do is borrow against your home to pay off credit cards. I cringe every time I hear of someone pondering that.

Cons of a Second Mortgage

photo credit: kevindooley

Taking out a second mortgage is not without its drawbacks. For instance, you need to remember that even though the loan does provide you with the cash you want it comes at the cost of putting your house up for grabs in the event you cannot make good on the loan.

A second mortgage is also not without its costs. You have to pay for an appraisal on your house, loan origination and other legal fees associated with an ordinary loan, so although there is a lower rate of interest there are other costs to consider.

If you’re one that has a rough relationship managing debt, I would strongly have you reconsider taking out a second mortgage to pay off debt. You first have to fix the root of the problem which is most likely – you. A second mortgage is not the answer for everyone so think about all the factors before making your final decision.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

photo credit: nikcname

Market participants’ constant preoccupation with spotting the next bubble in financial markets has spread to the bond market. Citing low yields, high bond prices, and strong mutual fund flows (according to Investment Company Institute (ICI) data), talk of a bond bubble has recently become more frequent in the financial media. The term bubble, which was used to describe tech and telecom stocks in the late 1990s, and of course, more famously used for the housing market in recent years, is associated with sky-high prices that selloff abruptly and violently and hand investors significant losses in the process. We strongly disagree with the notion that the bond market as a whole is a bubble waiting to burst. While Treasury prices are expensive, we believe current pricing is a reflection of underlying fundamentals rather than a speculative boom.

Proponents of the bond bubble argument will often cite low yields and then apply a price-to-earnings (PE) ratio to bonds. For example, dividing the par price of the 10-year Treasury note (100) by the 2.6% yield of the note (as of August 23, 2010) results in a “bond PE” of 38 (100 divided by 2.6), similar to what the stock market witnessed in the late 1990s. Applying a stock metric such as PE to bonds is flawed in our view. Assuming no default, bonds repay principal at maturity unlike stocks where there is no set redemption value. Using such a rationale for short-term securities, in particular, does not take
into account the fact investors will get their money back sooner and the lower yields reflect the reduced interest rate risk relative to longer-term bonds.

High Quality Bonds

We agree that high-quality bonds are expensive relative to stocks but relative value is different than bubble talk. The bond PE measure is often then compared to stocks to show how expensive bonds are relative to stocks. With second quarter earnings season all but finished, 12-month trailing S&P 500 earnings are on track to reach roughly $75 per share according to Bloomberg data. Dividing the $75 earnings-per-share level with price level of the S&P 500 Index of 1067 (as of August 23, 2010) produces an earnings yield of 7.02% (75 divided by 1067). This yield is significantly higher than that of the 10-year Treasury and implies greater value. We believe this speaks to the greater return potential of stocks relative to bonds over the long-term and the prospect of low high-quality bond returns over that time but not a bubble.

Treasury yields reflect fundamental economic and financial market conditions. As we discussed in last week’s Bond Market Perspectives, inflation and the Federal Reserve (Fed) are the two main drivers of interest rates. Core inflation, as measured by the Consumer Price Index (CPI) less volatile food and energy prices, is running at less than a 1% annualized rate,a multi-decade low, and is expected to remain low over the remainder of the 2010. Inflation-adjusted yields (also known as real yields) indicate the Treasury market is expensive on a valuation basis but not at an extreme. The higher the real yield the more attractive bonds are and vice versa. Real yields indicate Treasury valuations are on the expensive side of the past 10 years but not at the extreme witnessed during the fall of 2008 or even during the first quarter of 2008 when Bear Stearns failed.

Short Term Yields

Short-term Treasury yields are highly correlated to the level of the Federal Funds target rate set by the Federal Reserve. Record-low short-term Treasury yields are largely a reflection of the similarly record-low overnight lending rates. Furthermore, by committing to Treasury purchases, the Fed has reiterated its “lower for longer” message and reinforced the low level of short-term Treasury yields. The worst yearly performance of the bond market, as measured by the Barclays Aggregate Bond Index, was 2.9% and occurred in 1994. What was the catalyst? The Fed hiked interest rates by three percentage points over a 13-month span. The Fed’s impact should not be underestimated.

Bond bubble proponents have cited inflows into bond mutual funds as cause for alarm. To be sure, inflows into bond funds have been robust since the end of 2008, totaling $529 billion according to ICI data from January 2009 through June 2010, and have come at the expense of stocks. Comparing bond fund flows to the bond market total returns, as measured by the Barclays Aggregate Index reveals that inflows do have an impact on bond returns over longer time periods such as 3 months. However, the correlation is modest at best and in our view does not fully explain bond performance. Note during late 1999 through 2000 bond fund inflows were negative yet bonds experienced strong performance. Similarly, there are discrepancies in the middle part of the last decade as well and current fund inflows would have suggested even stronger performance than what investors have experienced in the past two years.

A sharp reversal of bond fund inflows would certainly be a headwind for bond performance but it does not capture all the drivers of bond performance. In addition to the fundamental drivers of inflation and the Fed,fund inflows also do not reflect changing risk tolerances among investors, some of which were permanently changed following the financial crisis.Some investors feature bonds more prominently in their portfolios as a result and the demographics of an aging population also explain a greater reliance on bonds. Lastly, and on a related note, bond fund inflows do not capture institutional investors, including managers of pensions and endowments, which represent a significant presence in the bond market.

What’s Going On Abroad

photo credit: Sprengben [why not get a friend]

Foreign buying has also been cited as a crutch the Treasury market cannot do without. Recently released Treasury International Capital (TIC) data revealed that foreigners actually increased their purchases of Treasuries over the first six months of 2010, purchasing a total of $344 billion compared to $331 billion during the second half of 2009 and $208 billion over the first half of 2009. The European debt problem likely contributed to foreign Treasury purchases. The impact of foreign debt purchases is also questionable as foreigners have been net sellers of corporate bonds over the past 18months
yet it is the strongest performing sector in the bond market over that time. Still, we do not dismiss the impact of foreign buying of Treasuries and will monitor closely. Central banks tend to move at glacial speeds and any change to Treasury buying habits are likely to come over many years. This could potentially be a drag on future bond performance, but it will be very gradual and hardly equivalent to bursting of a bubble.

In sum, current bond prices and yields are largely a reflection of current fundamental drivers and not the speculative forces that create asset “bubbles”. High valuations and low yields do imply low rates of returns for bond investors over coming years and may even result in an occasional negative return as low yields provide less of a cushion against rising rates.

However, this is an important distinction to make relative to a bubble talk that is typically associated with an asset price decline of 10-20% or more over short one to two-year time frames, something we think is highly unlikely for high-quality bonds.

IMPORTANT DISCLOSURES

• The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
• The Barclays Aggregate Bond Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment-grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.
• High-Yield/Junk Bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors.
• The market value of Corporate Bonds will fluctuate, and if the bond is sold prior to maturity, the investor’s yield may differ from the advertised yield.
• Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of funds shares is not guaranteed and will fluctuate.
• Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise, are subject to availability, and change in price.
• Past performance is no guarantee of future results.
• Investors should consider the investment objectives, risks, charges and expenses of the investment company carefully before investing. The prospectus contains this and other information about the investment company. They can obtain a prospectus from you. Read carefully before investing.
• Consumer Price index (CPI) is a measure estimating the average price of consumer goods and services purchased by households.
• The P/E ratio (price-to-earnings ratio) is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It is a financial ratio used for valuation: a higher P/E ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower P/E ratio.
• The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
• Correlation is a statistical measure of how two securities move in relation to each other. Correlations are used in advanced portfolio management.
• The Investment Company Institute (ICI) is the national association of U.S. investment companies, including mutual funds, closed-end funds, exchange-traded funds (ETFs), and unit investment trusts (UITs). Members of ICI manage total assets of $11.18 trillion and serve nearly 90 million shareholders.
• Treasury International Capital (TIC) is select groups of capital which are monitored with regards to their international movement. Treasury international capital is used as an economic indicator that tracks the flow of Treasury and agency securities, as well as corporate bonds and equities, into and out of the United States.
• TIC data is important to investors, especially with the increasing amount of foreign participation in the U.S.financial markets

This is a guest post from MD of Studenomics. A personal finance blog aimed at helping young people become financial studs.

You worked really hard to get to the point where you’re now able to earn a solid income. You graduated from college, networked your way to your current job, and now you’re looking for a few places to safely store your money. Let’s explore a few of the options for where 20-somethings can store their money:

Online bank accounts

Its no secret that online banking is taking over for the 20-something crowd. The debate to find the best online banking account may still be on, but your goal should be to find the online savings account that’s right for YOU. We all have different needs with different levels of risk. Some of us only care about an easy-to-use interface, while others are heavily focused on chasing high interest rates. An online bank account is the most conservative option for storing your money. While some of the more advanced readers of this blog will mock such an option, the less financially-savvy folks could really stand to benefit from setting up an online savings account as they enter the always interesting world of personal finance.

Investment accounts

Any investment account, from a discount brokerage where you trade securities to safe low-return bonds, is an option worth exploring. The major issue here is that investment accounts can feel like an overwhelming topic for most college graduates without a finance background. Instead of delaying any action in this area, start off by deciding whether you will take care of your own investments or if you’ll hire a financial planner to work on your behalf. Either way, if you want to consider this alternative I recommend you take action now.  Stop delaying.

Physical Assets

An asset like a home or a car is a common place to store your money. A car is a depreciating asset, while a home is arguably considered an appreciating asset. Either way both of these assets can take up a large chunk of your savings. You need to be sure that buying a home is the right option for you before you invest a heavy portion of your hard earned savings. A brand new car on the other hand is a highly debatable purchase. The young dude inside of me says that you should get a brand new car for reliability and security purposes. The grumpy old man inside of me says to drive a used car into the ground.

Experiences

Some people simply don’t care about possessions. Instead of chasing passive income opportunities and planning for retirement, some young folks have chosen to spend their money on life experiences. These experiences vary anywhere from climbing Mount Everest to going away for a few weeks, all the way up to long term traveling (over a year). I personally envy these people because I travel a few times a year and spend the rest of my time working my but off to finish school build my business. It’s also easy to judge these types of folks, but frankly Tim Ferriss summarizes experiences perfectly with this quote:

People want to experience what they think only millions can buy.

These are the 4 most common options that come to mind when 20-somethings try to decide where they will store their money. Please feel free to list any options that I may have missed.

This is a guest post from MD of Studenomics. A personal finance blog aimed at helping young people become financial studs. MD is not endorsed or affiliated with LPL Financial.

photo credit: Jeff Keen

When it comes to finances, nearly everything you do offers teaching opportunities for your children. And, there are few teaching moments as obvious as back to school shopping. Money (sometimes large amounts of it) is involved, and this is the perfect opportunity to teach your children some basic financial principles — while getting them the school supplies and clothes that they need.

1. Plan Ahead

Financial planning requires, well, planning. Back to school shopping can teach your children the importance of planning ahead. Show them how to go through their things and figure out what they already have. Then, help them make a list of their intended purchases. Next, if they are old enough, go through sales fliers and look for coupons that match the items on the list. You want to teach them that, by planning ahead, they can help their money go a little further. You can also teach your children to comparison shop by checking prices around town, and even by shopping online.

2. Budgeting

Rather than just buy everything on the list, discuss budgeting with your children. Explain that your household runs on a budget, and that Mom and Dad have to stay within a budget as well. Then explain that back to school shopping comes with its own budget, and that getting everything on the list may not be possible. Let your children know what their back to school budget will be, and then help them go through the list and estimate whether or not everything will fit within that budget, and where they might need to cut back in order to save more money.

3. Financial Priorities

We don’t always get everything we want in life. A very important money lesson is that children can learn through back to school shopping is that there are needs and there are wants, and these need to be properly prioritized. Your child may need a new binder for school, but a $75 pair of jeans is a want (especially when there are perfectly good jeans available for $19.99). Help your child go through his or her list and determine which items are most important. Re-shuffle the list so that the most important items are at the top, with the less important items dropping off the bottom. If you explain to your child that the expensive top may mean that he or she can’t get the proper shoes for participation particular school sport, a less expensive shirt suddenly becomes acceptable, since the extracurricular activity may have higher priority.

4. Managing Your Own Money

Many parents like to provide some of the money for their children’s back to school purchases, and then expect their kids to take care of the rest. If your child has an allowance or a part time job, it might be a good idea to put some of the back to school shopping burden on their finances. Be clear in your expectations, and let them know what you are willing to pay for. Perhaps you tell them that you will pay for necessary extracurricular equipment, but your child must buy his or her own new clothes. Other parents say that they will provide a certain amount of money toward back to school shopping, but anything over that amount has to come from the child. Many kids (but not all) suddenly become much more financially responsible when they are spending money they have earned, as opposed to money you are giving them.

This is a guest post Miranda Marquit is a journalistically trained freelance writer and professional blogger working from home. She is a contributor for Mainstreet.com, Personal Dividends and several other sites. Miranda is not affiliated or endorsed by LPL Financial. The opinions voiced in this material are for general information and are not intended to provide specific advice and/or recommendations for any individual.

photo credit: Bloomington Salvation Army

The day has finally come.  After 18 years of laughter, tears, and arguments,  you finally get the house to yourself- your kids are heading off to college!  (Feel free to do a little dance and jig right here if it’s in you)   Starting college is a huge step in your kids’ life, so you want to make sure that they start off on the right financial track for two reasons:

1. The can begin their life without falling into the many financial traps that most young adults do.
2. You prevent them from falling into those financial traps which ultimately leads them to moving back home. (No more dancing and jigging).

Nonetheless, this is advice that I wish my parents would have given me.  There are things in life that are worth learning the hard way.  Climbing out of a pile of debt is not one of them.   Here are 7 financial tips to help your kids get on the right financial track as they head off for school.

1.  Run Their Credit Report

It might seem premature to run the credit of an 18 year old, but it’s a good life lesson.  There might not be a whole lot of activity on the report (and hopefully no deficiencies!), but at least your child will learn a few things.

1. They’ll now how to access their credit report for free.
2. They’ll learn that they can request their credit report once per year without hurting their credit.
3. They’ll have a good introduction into the credit system of how it works and why it’s important to have good credit.

I didn’t access my first credit report until my later 20’s and was floored to see how many credit cards I had applied for over the years.  I also found an old gym membership that was showing as delinquent and I didn’t even know!  Thankfully, I found it and made a few phone calls and got it fixed.   Don’t let your kids find out the way I did.

2. Give Them The Talk- Credit Cards That Is

We all know how easy it is to fall into the credit card trap.   Sallie Mae reports that of all college students 84% have at least one credit card and 34% have a balance of at least $3,174.   When I was in college, I had gotten myself even worse than that.   A few things that your kids needs to realize is that just because they have a $1,000 credit card limit, doesn’t mean that have to charge $1,000. Credit cards are for emergencies and not for convenience.

A simple exercise of running some numbers to demonstrate how long it would take to payoff a purchase if only the making the minimum payment will be a major eye opener for many kids.  Using the credit card calculator, I simulated an iPad purchase for $800.  Making a minimum payment of $15 a month would take your child 60 months (Five Years) to pay it off. That means that if your kids bought the iPad when they were a freshman in college, they would still be paying for it a year after they graduated!

3. Be Careful of Student Loans

photo credit: Riggzy

Student loans, like credit cards, have become too common place in our kids financial lives.  Student loans should be used to pay for school and school related expenses, period.  Many students apply for the loans to use as extra “spending cash” with the mentality that they can just “pay it off later”.  BIG MISTAKE!

I’ve heard this similar line from several college students, “I should only have around $30,000 in student loans when I graduate”.  Only!?

Listen, if you have to have student loans, then I completely understand.   But don’t treat the $20,000, $30,000, or $40,000 or whatever your amount is as “only that amount”.   When you graduate and start your career, the less debt you have the better.   If it takes working part time (See Point 6), applying for scholarships or grants, then do it.

4. Budgeting 101

The best prerequisite class that you can make your child take is budgeting.   Since this doesn’t classify as a general study, you better teach it at home before they leave.  Your child needs to understand the basics of monthly inflows and outflows.   They need to understand the ramifications of eating 4-5 days per week and how that affect their other spendings.  You want your child to go out and have a good time, not just too good of time that it sets them back financially.

5. Bank Check

A major step in your kids financial development is how they manage their checking and savings accounts.  Your child needs to be aware of all the little hidden fees that bank charges as well as the ramifications if they bounce a check or miss a payment.

This will also be a good time for them to start being conscious of interest rates and how much they are getting paid on their money.  If your child already has the knack for shopping, have them apply that in shopping for the best interest rates that the local banks have to offer.

6. Part Time Job

photo credit: TheTruthAbout…

With their new found independence, your child will mature rapidly through their college life.  One way to add another layer of responsibility is to encourage them to find a part time job.  Many universities offer positions on campus that are flexible for your kids tuition work load.   They can also venture out to the local malls or restaurants and look for a good paying position.   Having a job will teach them the importance of managing a schedule and their paycheck.  The extra income could also help alleviate many of the tuition and fee costs of college.  Working a little harder today to have an easier and brighter future down the road is a mantra that I’ll always buy into.

7. Time to Invest

It’s never too early to teach them the fundamentals of investing.   If they do get a part-time job, make sure the understand the wonderful potential benefits that a Roth IRA offers them; especially starting at a younger age.   I’m envious of any 18 year old that has the foresight to start a Roth at such a young age.

Have you recently sent your child to college?  What lessons did you teach them or wish you would have taught them?

photo credit: jeremy.wilburn

Dear Clients and Friends:

After starting the third quarter with near double-digit gains, the market, as measured by the S&P 500 Index, has given up almost half its returns as optimism around strong earnings has faded into concerns that recent data points are pointing towards an economic slowdown. While it is normal at this stage of the recovery for the rate of improvement in economic conditions to decelerate, the market has become increasingly worried that the global growth story is losing traction and may push the U.S. economy into double-dip recession territory. The consequence has been increased volatility and a virtual investment-return whiplash as investors seek to determine the market’s direction in an economy that appears increasingly directionless.

The catalyst for the recent pullback was the developing weak employment picture, which subsequently prompted the Federal Reserve Bank (the Fed) to outline a no-win scenario in the Federal Open Market Committee (FOMC) statement on August 10. The interesting part of this unfolding economic puzzle is that it is largely a “chicken or the egg” scenario where the potential for a self-fulfilling prophecy is materializing. After all, if we all fear the economy may get worse, our behavior is affected and we may stop spending or sell stocks, which actually increases the odds that it will happen.

Take a Picture

Take the employment picture, initial jobless claims (unemployment insurance) increased for the week ending August 7 to 484,000, the highest level of new unemployment claims for any week since February 2010. While that is still a huge improvement from the worst levels seen during the depths of the recession, the concern is that the improvement in the level of unemployed is stalling and may even begin getting worse. A simple explanation for this level is that companies, which do the hiring, have become more hesitant to add to payrolls because they are now questioning the strength, and maybe even the validity, of this recovery.

But the real paradox comes when we try to figure out why companies feel this way. The likely answer is that because consumer spending has decelerated somewhat, businesses fear the recovery is at risk and thus are not hiring new employees. However, the reason consumer spending is decelerating is because hiring has stalled. Thus, we have a chicken or the egg standoff where businesses want to see spending accelerate before hiring, but consumers do not have the disposable income to spend because of the weak employment situation. The result is an economic stalemate. Investors are rooting for either side—the consumer or business—to gain an edge and be declared the victor as the market needs a winner to fuel the continuation of this economic recovery and avoid a double-dip recession.

Fed’s Latest Announcement

Largely as a result of the decelerating rate of economic improvement, the Fed announced in its latest FOMC statement on August 10 that it was downgrading its view of the economy and announced that for the first time in over a year it would put its foot back on the economic accelerator in an attempt to spur economic growth. The plan of action is to buy Treasury Bonds which will serve as an easing monetary policy move that will place additional dollars into the economy, keep mortgage rates low, and drive the yields of conservative Treasury investments to lower levels in an attempt to persuade risk taking by income-seeking investors. Sounds good, right? Well, the market promptly dropped almost 5% in the days following the news.

Not unlike a chicken or the egg dilemma, the Fed was caught in a catch-22. If the Fed elected to do nothing, the market would take the lack of proactive action as a negative. But if the Fed actually did re-engage to offer monetary stimulus, which it did, then the market had to face the reality that this economy still needs the Fed to continue to prop up growth. Ultimately, the market viewed either scenario as a negative which prompted the downside selling pressure we have experienced over the last couple of weeks.

The bottom line is that the market is at a crucial crossroads.

Despite the recent move by the Fed, the economy is attempting to transition from one of stimulus-led growth to one of sustainable growth. But to make this transition a success, the next catalyst for growth needs to materialize. If the consumer and business continue to play the chicken or the egg game, the likely scenario is decreased growth and an increased chance for a double-dip recession. However, I expect businesses to end the game and to reaccelerate spending in the weeks and months ahead to be the catalyst this market has been waiting for. Evidence is growing that businesses are starting to increase spending on key initiatives like capital expenditures and advertising—and modest gains in employment will likely be the next area of spending to reemerge.

There is no doubt that economic growth is decelerating, but that is common at this stage of the recovery. After such a remarkable climb from the depths of the worst recession since the Great Depression to a robust recovery in just one year’s time, the pace of improvement had to slow down. But I believe that this is merely a soft spot in the midst of what will continue to be a slow, but nonetheless advancing economic recovery. While volatile economic data will bring volatile market returns, there are several factors I believe will convert today’s market pessimism into tomorrow’s potential investment opportunities, such as the Fed’s foot firmly on the economic accelerator, record corporate profits, and a consumer that has proven resilient even in the face of adversity. As always, please contact me with any questions.

Best Regards,

Jeff

IMPORTANT DISCLOSURES

• This research material has been prepared by LPL Financial.
• The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
• Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of a fund shares is not guaranteed and will fluctuate.
• Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price.
• The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual. To determine which investments may be appropriate for you, consult me prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
• The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

photo credit: rex dart: eskimo spy

Friend and freelance writer Les O’Dell shares this diary entry from the 13th and final session of Financial Peace University discussing what types of life insurance you may need. FPU is 13-week course from national talk-show host Dave Ramsey.

Next to the lesson on dumping debt, week 13’s teaching was my favorite.  Despite an absolutely horrible night weather-wise (severe thunderstorms), my wife and I were looking forward to the evening. We were excited about finishing up Financial Peace University and wanted to hear what Dave Ramsey had to say about giving. We were not disappointed.

Tonight’s lesson was, in many ways, the goal for us. Based upon Baby Step Seven: Build Wealth and Give, the title of the lesson was “The Great Misunderstanding”. Ramsey said in the teaching for the evening that the reason for the title is that there is a great paradox when it comes to giving. He said that contrary to popular belief, the way to have more is not by holding on tightly, but rather having an open hand and giving.

A Change in Attitude

In giving, Ramsey taught, people tend to become less selfish. The result, he said, was that less selfish people tend to prosper more in relationships and in wealth. He said that understanding tonight’s lesson was very important: while a student can prosper by following all of the other lessons, it is only by giving that a person can truly have financial peace.

Lessons from the Bible

Tonight’s lesson spoke most clearly to those of us who are Christians. Ramsey taught the Biblical principles of tithing and stewardship. He said that in our giving we are more Christ-like and because we are designed in God’s image, we are happiest and most fulfilled when we are serving and giving.

He taught that giving is a reminder of who actually owns everything, it is a form of praise and worship and he likened giving tithes and offerings to spiritual warfare. He concluded the lesson and the course by saying that financial peace is more than just God’s system for understanding money, becoming debt free and building wealth. Financial Peace, he said is when The Great Misunderstanding is truly understood.

At that point in the evening’s lesson, my wife nudged me with her elbow and pointed outside. The storm clouds had lifted, the sun was shining and there was a beautiful full rainbow in the eastern sky. I got the point. I understood.

Course Wrap-Up

We had completely finished Financial Peace University. Through the 13 weeks we had learned a lot and reconsidered many of the decisions we had made with money. We came away from the class inspired and ready to tackle our finances and to begin making better decisions.

Financial Peace wasn’t everything I had hoped for; it was much more. The course was entertaining, educational and motivational. It was a great experience and an investment I’m very glad we made.

Les O’Dell is a freelance writer living in Carbondale, Ill. His work can be seen in a number of newspapers, magazines, publications and websites. He is co-author of the popular “He Said, She Said” newspaper column. He can be found on the web at www.lesodell.net. Les is not affiliated or endorsed by LPL Financial.