Money Decision Problem 2: Solving the Wrong Problem

You can have the greatest system in the world for analyzing and solving your personal or business money problems, but you would be wasting your time if you were solving the wrong problem. This usually happens if you do not think through a problem before you start to solve it. To understand how to approach a particular problem you should understand at least these things about the problem:

1. What are the limits to problem at hand?
2. How do you define a good or a bad outcome to the decision?
3. How should you measure the outcomes?
4. What do you bring mentally and psychologically to the decision table?
5. What are other ways to look at the problem?

A Mutual Fund Example
One example of solving the wrong problem is to pursue a high rate of return from a mutual fund investments without first deciding what kind of comparison or benchmark you should use to determine if the return is high enough. For example, index mutual funds that are designed to mirror the results of the Standard and Poor’s 500 index consistently outperform rough 80% of all mutual funds. The original problem may have been how to choose mutual funds with high returns. A better problem to solve would be how choose mutual funds which consistently perform better than the S&P 500.

Final Thoughts
Remember that most problems involving money usually involve something else besides money or mathematics. If you focus on the parts of the problem that are objective and that can be measured or solved with common with equations and spreadsheets, you may miss the most important part of the problem.

Next Lesson: Not Looking at All Sides of a Problem

Money Decision Problem 1: Not Taking the Time to Think About the Problem

Money Decision Problem 1: Not Taking the Time to Think About the Problem and the Decisions that Must Be Made

Before you make a financial decision, you have to know something about your needs, the effect your decision may have, and how you go about making a decision. Some common money decisions that often happens too quickly is what credit card you should have, whether to buy or sell a stock, or whether to go into debt to replace your boring old (and paid off) car for a shiny new one. Taking the time to make a proper decision can save you a lot of frustration and regret, especially if you do it consistently.

A Credit Card Example
Let’s look at the credit card situation more closely. There could be dozens of reasons why you suddenly decide that you need a new credit card. You might not have one at all, but one day you decide to rent a car and find out that you need a credit card. You might have a card already, but you find a way to transfer balances and reduce your interest rate for the first six months. Even if you think you need to take action right now, it always makes sense to think it through to see if it is the right decision for you. The following are just some of the questions you should ask yourself before you sign on the dotted line:

1. What do you want to accomplish when making the decision? - At the very least, figure out if it is a short term or long term goal.
2. Who will be making the decision? - Typically anyone who will be responsible for paying the bill and whoever will be allowed to make charges on the card.
3. How should the decision be made? - Figure out things like whether you need to decide after comparing other options, or if any one person will have veto power.
4. Does the decision significantly affect other decisions?
5. Does the decision have to be made at all? - Think about what would happen if you took no action.
6. Does the decision have to be made by some kind of deadline?
7. What’s the worst that will happen if you don’t make a decision?
8. How much time do you need to make a decision?
9. What kind of options do you have?
10. Do you have any experience making this kind of decision, and if so what did you learn?

Once the background questions are settled and you have a good understanding of your overall situation, you have to start dealing with the decision making process. You should finish gathering any information that you need to make a decision. For credit cards, this would be things like late fees or other penalties, how much interest you will be charged, and what kind of no-interest grace period you have. These kinds of details should be spelled out in the agreement. If you don’t understand it, don’t sign it. If you don’t see it in the agreement, then it’s not part of the deal.

The next big steps are making the decision and carrying it out. If you decide to do something, then follow through. If you decide to do nothing, then take no action, no matter how tempting it may be. If you decide to change your mind, go through the same decision process. Don’t make the mistake of being logical and systematic the first time through and then being very informal the second time you wrestle with the same decision. Every decision is a combination of your analysis and your judgment. If you have a consistent process, you’ll likely improve the quality of both your analysis and your judgment.

Final Thoughts
Keep in mind that a credit card can turn out to be a long-term relationship. If you pay your bills in full every month, it can be a very happy and harmonious relationship. If you fall behind, it can turn real ugly real quick.

Next Lesson: Solving the Wrong Problem

30 Year Fixed Hovers around 5%

If you don’t currently own your the place you live in you may be missing out on one of the greatest opportunities in your life. Most of us are well aware that it is a buyers market and that homes are being sold dirt cheap. The other opportunity is the incredibly low prices on 30 year fixed mortgages. The last time they were even close was March of 2004 at 5.45%. If you look at the charts since 1971 this has rarely happenned and could truly be a once in a lifetime opportunity to have a low monthly payment on a loan. Even if you already have a home loan your payback period to refinance could be less than 2 years. The reason for that is you typically have to pay some fees to refinance your home. Let’s say you save $100 a month in mortgage payments by refinancing, but the fee is $2,400. Even with the lower payment it will take you 2 years to make up for the difference. If you plan on staying in your current home for more than 2 years it should certainly be considered. Over the next 30 years you would save $36,000.

Loan Fraud - What to Look for

I’ll never forget the first spam I received involving an African prince who would send me oodles of money. Unfortunately, these types of loans continue to proliferate the Internet and take advantage of people. The trend has only gotten worse as people are more desperate in these hard economic times. They prey on people desperate to get student loans and other types of financing. The most common type of fraud is called an advance fee loan scams. In this situation the person is told that they have been guaranteed a unsecured loan for a large sum of money. They simply need to pay the processing fee.

Here are a few of the signs that the company may not be legitimate.

• A lender who isn’t interested in your credit history
• Fees that are not disclosed clearly or prominently
• A loan that is offered by phone
• A lender who is not registered in your state

Do business with licensed companies. Ask your state banking or finance department about the licensing requirements for lenders and loan brokers, and find out if the company has complied.

If you are the victim of a fraudulant crime you can visit https://www.ftccomplaintassistant.gov/. This site helps people who have been victimized by credit card theft. It helps the government to aggregate data and ultimately apprehend those responsible for the fraudulant crimes.

Debt Consolidation - How it Works

Debt Consolidation

Every day I hear ads for debt consolidation. I was always curious how these loans are able to take existing interest debt and turn it into a lower payment. The primary way debt consolidation programs work is by transferring unsecured debt into secured debt. Which brings up the next question, what are the difference between the two? An unsecured debt does not have an underlying asset associated with it. A good example is a credit card. Usually, there isn’t a specific asset that you own tied to the credit card. An example of a secured debt is a home mortgage. If you don’t pay back the mortgage the bank can take possession of the home (secured asset).

Lenders are usually able to offer a lower rates since the debt is now secured with an asset. There is less risk to the lender.

Additionally, programs can do things like extend the term of your loans to increase the payback period and decrease the monthly payment. This makes it easier to meet your monthly payment. Many debt consolidation experts have the ability to work with multiple lenders. This can save a great deal of time and frustration as these agents are experts and can navigate the maze of creditors while minimizing payment.

Compare Rates in Australia

One of my favorite financial sites is bankrate.com. When I was looking for a mortgage I scoured that site on a daily basis watching rates change and thinking about who I would place my mortgage with. Interestingly for me it wasn’t all about the best rate. I also wanted someone who wouldn’t sell my mortgage and who had an office close by. I was able to find it and get a decent rate easily. I am amazed at the difference between the advertised rate and the rate you end up with though.

Even though bankrate is the 800 lb gorilla in the market there are a growing list of sites specializing in financial niches as well.

Anyway, there is a new site that seeks to help Australians with their rates as well. The site is called GoodWithMoney. They compare traditional items like credit cards
and cheap loans, but what I also found interesting is that you can compare rates on items like insurance and broadband services. They have most of the major items that you need for your financial being on their site specifically geared to those living in Australia. They also have a section dedicated to financial Australian news.

If you have any other interesting sites that help to compare rates for a given niche let us know in a comment.

Money Market Accounts - Safety and Liquidity

Pay Day Loans - Legislating Rates

The payday loan industry is enormous at over 85 billion dollars. In 2008 the state of Ohio passed legislation limiting the interest rate to 28% for businesses offering payday advance loans. This puts the interest rate at close to the same rate as a credit card. The state supported this bill by 64%. Proponents of the bill noted that payday loans cause the poor to get caught in a vicious cycle of debt that they cannot escape.

The interest rates on these types of loans ranges from 300% -600%. It is also important to understand the amount of risk involved with this type of transaction for the person lending the money. Given the size of the industry it would seem that there is plenty of profit motive to enter the market and that someone would lend at a lower percentage to pick up more business. However, the only thing to factor in must be the size of risk involved. More innovative online pay day lenders such as those that offer no fax payday loan have actually decided to stop lending in Ohio due to the new legislation.

This limits choice for Ohioans and others in States that limit pay day interest rates. Some have suggested that state level assistance programs may be necessary in the absence of this form of credit.

I’m interested to hear your thoughts on the subject. Leave a comment and let me know what you think. Does the new legislation protect those who would otherwise be taken advantage of or is this a necessary service that people depend on that will no longer be an option?

How old are you in credit years?

I came across this fun credit quiz that will tell you your credit age. It takes about 2 minutes to take the quiz. At the end you will get your credit age and a description of your credit self.

Oh, and by the way my credit age was also 47. In this case I am assuming that older is better, but I’m not really sure. I had my cousin take the quiz and she failed miserably. I think that explains a lot. This is the same woman who collects tons of longaberger baskets and complains about not having any money. Hmm, I don’t know what could be the problem.

Anyway, here is the link to the quiz Credit Quiz. Don’t forget to tell everyone how you did.

Tools to Increase Your Sense of Financial Security: Financial Products Review Sites

In my previous post I talked about improving your sense of security by exposing yourself more toward facts and less toward assumptions.

This article is about a tool that can help you gain more facts: financial products review site.

The pros and cons of financial products review sites

Review sites are those websites that offer you comparisons among a selection in a certain category. In financial products, for instance, there are review sites that compare credit cards - their plans, benefits for cardholders, and such.

With plenty of sites doing reviews on various financial products, you are faced with a multitude of things to ponder before deciding one financial product to take.

Like everything in life, there are pros and cons of financial review sites.

Pros:

• Reviews help you decide which financial products are the most beneficial for your need.
• You can access plenty of key information on products highlighted - all in one place.
• You can learn as much as you can about a financial product, without the fear of being chased around by financial product salesperson.

Cons:

• Reviews could be non-genuine ones, or even fake, to drive you to a limited choice that bring the review sites the most revenue for recommending you.
• The review sites themselves could be scammers - Their aim is to lure you to provide private information for them to take advantage of.
• Non user-generated review sites can be subjective in their recommendations.

The key is to find reputable financial products review sites that offer you legitimate reviews and unbiased recommendations on multiple financial products, such as the Australia-based Good With Money.

How to make the most of financial product review sites for your benefit

First of all, you should seek a reputable review sites that can offer you more details in user’s review, not only a star rating system. This is important, because it is imperative that taking loans will need more effort from you to minimise risks.

Secondly, you should visit the recommended third party sites to learn whether the financial products reviewed are claiming the same features and benefits. This is also useful to see whether the information found in the review sites still relevant with the information found in the provider or issuer sites.

Good luck on your endeavour in increasing your sense of financial security.

Faxless Payday Loan: Helping Hand or Quick Sand?

When we talk about loans in any forms, they are always related to debts.

Taking loans can offer you two things: good debts and bad debts - good debts put money in your pocket, bad debts lose money from your pocket.

Your financial needs, situation and knowledge play important roles in making the loan bad debt or good debt.

Loans come in many flavours - One of the most talk about, in my opinion, is payday loans. Why is that?

Faxless payday loan - offering you financial solution, fast - a bit too fast to handle

Payday loan is a small amount, short-term loan that is intended to cover borrower’s financial need until his/her next paycheck received.

With the advent of the Internet, payday loans are becoming more and more accessible. The term “faxless payday loan” refers to payday loan which application is processed online, thanks to the Internet.

While in essence payday loan aims to help people regardless of their credit score, many accuse payday loan as the culprit that drown many people deeper in debt.

Not quite.

In my opinion, people inherit a common weakness. They want more for less, and they want it fast.

People are always looking for fast and instant remedies for their problems, including financial problems. Just like everything in life, such as fast food, instant means immediate gratification first and quality second.

Payday loan offers fast solution. Faxless payday loan even does things faster, due to online application processing and instant approval. The drawback, as always, is the sky-high interest rate.

Those bring interesting relationship: No matter how negative the reputation of payday loan is, it seems that more and more people need payday loan these days, and payday loan providers are thriving these days. Some sort of love-hate relationship between lenders and borrowers.

Reality check: Stop blaming payday loans - have you ever look things from the eye of payday loan providers?

I am appalled to know people are blaming payday loan. Although I’m not offering any payday loans or similar things and not involving in one either, I think there are too much bad apples thrown at lenders, accusing them as scammers.

Have you ever thought that it is borrower’s responsibility to keep him/her-self well-informed regarding what type of loans he/she is about to take? It is borrower’s responsibility to know what question to ask and when to take payday loans.

Many payday loan providers I know are trying hard to offer a solution. They bear huge risks - they lend to borrowers with no regard of their credit scores. That is why payday loans charge huge interest rate: to supplement the high risks of lending to borrowers with bad credit ratings.

The right borrowers do regard payday loans as the life-savers. do help people - the right one and the well-informed one, that is - getting out of debt.

Image by toolfan.hess.

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