“Anytime you invest, you have expectation.” – TD Jakes

 

 

Since I started this blog, my senses have been heightened to find any information to help the normal guy on main street succeed by teaching financial principles. It is very gratifying to be in such a receptive head space that I find inspiration from the unlikeliest of sources. Last night, I found inspiration on CNBC’s American Greed, a show that I have been watching faithfully for years. It is like soft porn to a seasoned CPA like me. Each episode tells the story of unwitting investors losing their hard-earned money to scoundrels and crooks. Last night was no exception. I watched in angst as several elderly people gave away their life savings to invest in a pipe dream. This lesson is to teach you how to spot an unscrupulous investment opportunity based on advice from the most famous investor of all time, Mr. Warren Buffett.

Education:

The Buffett Philosophy

I love Warren Buffett! There, I said it! No really…I love this down-to-earth, investing genius who teaches by living. In Lesson #26, I assigned a video of him speaking about his investment philosophy and how he makes money. Since American Greed shows no signs of airing its last episode, you would be wise to listen to sound advice for the legend himself.

 

 

1. “Rule No. 1: Never Lose Money. Rule No. 2: Never Forget Rule No. 1.”
2. “Never invest in a business you cannot understand.”
3. “Always invest for the long term.”
4. “Buy a business, don’t rent stocks.”
5. “If you don’t feel comfortable owning something for 10 years, then don’t own it for 10 minutes.”
6. “Price is what you pay. Value is what you get.”
7. “By periodically investing in an index fund, the know-nothing investors can actually outperform most investment professionals.”
8. “Investing is laying out money now to get more money back in the future.”
9. “I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.”
10. “For some reason, people take their cues from price action rather than from values. What doesn’t work is when you start doing things that you don’t understand or because they worked last week for somebody else. The dumbest reason in the world to buy a stock is because it’s going up.”
11. “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
12. “Why not invest your assets in the companies you really like? As Mae West said, ‘Too much of a good thing can be wonderful.”
13. “The most important thing to do if you find yourself in a hole is to stop digging.”
14. “Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.”
15. “I never buy anything unless I can fill out on a piece of paper my reasons. I may be wrong, but I would know the answer to that …I’m paying $32 billion today for the Coca Cola Company because… If you can’t answer that question, you shouldn’t buy it. If you can answer that question, and you do it a few times, you’ll make a lot of money.“

Stay within your circle of confidence. “ – Warren Buffett

Resources:

• http://www.businesspundit.com/10-investing-books-recommended-by-warren-buffett/ – 10 Investing Books Recommended by Warren Buffett

Important term!s from this lesson:

Term	Definition
Investment Philosopy	A set of guiding principles that inform and shape an individual’s investment decision-making process.

 Action Step:       Watch and Learn – Billionaire Investing Secrets

http://www.youtube.com/watch?v=NizR0KXjhhM

Do you know how to squeeze dollars out of your home?

In the last lesson, we discussed interest rate arbitrage as a means to save money. Other than credit cards, mortgage refinancing may be the ultimate way to use interest rates to save money. In today’s lesson, we will discuss how refinancing your home loan may result in huge savings.

Education:

In general, mortgage refinancing is a good move when you can save money by locking in a lower interest rate or payment, shorten your loan term, or restructure debt optimally.

Refinancing is the practice of paying off an existing loan with the proceeds from a new loan, usually of the same size size, and using the same property as collateral. In order to decide whether this is worthwhile, the savings in interest must be weighed against the fees associated with refinancing. The difficult part of this calculation is predicting how much the up-front money would be worth when the savings are received.

Other reasons to refinance include:

• Reducing the term of a longer mortgage
• Switching between a fixed-rate and an adjustable-rate mortgage

Benefits of Mortgage Refinancing

By refinancing, you can improve your financial situation. In particular, you can:

• Lower monthly payment
• Lower lifetime interest costs
• Reduce risk
• Get cash out for other purposes
• Consolidate debt and possibly get tax benefits
• Opportunity to use savings for investment alternatives

Disadvantages of Mortgage Refinancing

 

• Prepayment fees – If there are prepayment fees attached to the existing mortgage, refinancing becomes less favorable because of the increased cost to the borrower at the time of the refinancing.
• Closing costs
• Loan term
• Equity reduction

Examples – What a 3% difference really means.

200k loan @ 6.25%	200k loan @ 3.25%	Savings
$1231 per month	$870 per month	$361 per month
$443,316 total cost	$313,348 total cost	$129,967 total cost

 That’s real $$$. Do not ignore this important opportunity to save money.

Resources:

• Quicken Loans (www.quickenloans.com) – Providing valuable information resources and lending options for homeowners.

Important term!s from this lesson:

Term	Definition
Mortgage Refinancing	A mortgage refinancing transaction happens when you swap out an old loan for a new (ideally better) one. You pay off the old loan with the proceeds of a new one.

 

Action Step:       Watch and learn to find out if you should refinance your mortgage.

Are interest rates draining your wallet?

Managing interest rates can mean HUGE savings in your pocketbook. Today’s lesson will focus on interest rate arbitrage. I will teach you how to understand and manage interest rates to hold on to your hard-earned money.  Believe it not, credit card companies and banks make billions (with a capital B) on the interest that they charge to customers like you.  It is time to take a bite out of their profits!

Education:

Arbitrage is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices. That clinical definition typically describes a complicated investment strategy, but if we strip away the investment focus, the applicability of this term has valuable meaning and practical application for basic personal finance. Here are a few examples to illustrate interest rate arbitrage for practical purposes.

Basic Example: Interest Rate Arbitrage

You have a credit card with an interest rate of 15%. You receive an offer in the mail to transfer your balance to a card with a 0% APR. Arbitrage would be the difference between the 15% and the 0%.

 Arbitrage = MONEY SAVED or MONEY EARNED

In the example above, instead of paying the 15% to a lender, you would keep that 15% in your pocket. This is an area where people lose money because they don’t know their interest rate. If you have a loan (car, house, etc.), credit card, or outstanding tax balance, you should always know what rate of interest you are paying. The higher the federal funds rate, the more expensive it is to borrow money.

Practical Example: XYZ Bank

Banks lend money to other banks at the Federal Funds Rate or the interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution overnight. Currently, the Federal Funds Rate is .25%. If XYZ Bank borrow funds at .25% and then lend it to you for 5%, they just made a profit of 4.75%. This is how banks make money.

Practical Example: Credit Card Co.

 

You are a customer of Credit Card Co. and the interest rate on your cash purchases is 20%. If you pay off your balance each month, then you will never have to worry about paying interest. However, if you are like most Americans, you will maintain a monthly balance. In that case, Credit Card Co. would receive a stipend (inject sarcasm here) from you of 20% interest on top of the balance that you owe them. What if you could have kept that 20% in your pocket?

Most people don’t think about interest rates when they slam the credit card on the counter to make an impulse purchase.  But interest rate ignorance is taking more money out of your pocket.  To be prudent and to ensure that you are keeping every penny that you can in your pocket, please take this concept to heart and apply it in your everyday life.

 Resources:

• Federal Reserve (www.federalreserve.gov) – The Federal Reserve System is the central bank of the United States. It was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system

Important term!s from this lesson:

Term	Definition
Arbitrage	The practice of taking advantage of a price difference between two or more items, the profit being the difference between the two prices.
Federal Funds Rate	The interest rate at which banks and other depository institutions lend money to each other.

 

Action Step:       Find out the interest rates on your borrowings.

1. Review your Liabilities Inventory Worksheet (see Lesson #3).
2. Find the interest rates on all borrowings listed on your Liabilities Inventory Worksheet.
3. Credit a plan to pay off the balance or shift