Equity Finance » Common Sense

Saving For Hard Times

admin — Wed, 11 Nov 2009 13:01:36 +0000

Saving for rough times is a crucial part of your financial planning as having some spare cash stashed in an easily accessible place to cover disasters is a good idea. At a certain point common sense dictates that you’re going to run into an unforeseen expense and not having funds to pay for it you’re going to have to use poor borrowing practices. The average surprise cost when such events do occur is thought to run a few thousand dollars however whether it’s a gigantic amount or a very minor amount a disaster fund is needed to cover it.

You don’t need to hide this money under the mattress for it to be available. The best way to conserve this fund is by using a quick access savings account that pays a good rate of interest and hopefully is tax exempt. You could set up a simple bank transfer and allot a small amount into your bank account each pay check. You should also be sure that your savings account is low risk as you wouldn’t want to lose the money by trying for high interest payments. For example: don’t invest the money in the stock market, as stocks and shares can change in value, depriving you of much needed money at a critical moment.

Treat any interest your disaster account earns as a perk and not the main reason for having the account. In a pinch you’ll need quick easy access to your money and this is more useful than a little more money in interest can ever bet. Do not allow your disaster fund to grow into a fortune as the extra money would be more wisely invested, growing more in a better investment vehicle. Keep just enough to cover a rainy day so a few thousand should be more than enough.

Don’t be tempted to use your existing account to create up your rainy day fund. Your existing account makes it easy to “borrow” from the savings without knowing it and this usually means you won’t have enough money when you really need it. Also most checking accounts don’t pay high interest rates. To avoid the accidental spending of your disaster fund keep your checking account for normal bills and expenses.

By: Joe Duggins

Negative Equity – A National Disease

admin — Sun, 30 Aug 2009 01:23:19 +0000

Capitalism has many benefits in a free society. It has inherent benefits to those who are creative and willing to work hard. Nowhere else can such a variety of people from many diverse backgrounds and countries succeed by their own efforts.

However, sometimes our creative efforts cause serious problems. As a people, we have become enamored of things, possessions, and goods. We want to own the biggest house, the biggest automobile and other possessions without number. And for all the things we say we want, there are manufacturers ready and willing to provide them. In order to be competitive these same manufacturers are always seeking better ways to convince us that it is possible to own that Cadillac El Mundo Gordo Magnifico SUV when realistically we can only afford the Ford Sub-Midsized ordinary Sedan. Desire for things, plus superb salesmanship overcomes common sense and basic math. The result can be what the subject of this article is all about.

Let’s clear up a couple definitions.

Equity: The market value of a property (house or car or whatever) minus any mortgage or money owing on the property.

Example # 1 Positive Equity: You have owned a house for thirteen years. Its market value is $400,000. You owe the bank $225,000 over the next seventeen years. Your equity in the house is $175,000. This is positive equity.

Example # 2 Negative Equity: You buy a house for $300,000. The housing market changes and the market value drops to $200,000. You owe the bank $225,000. Your equity in the house is $25,000. This is negative equity and sometimes referred to as being “upside down”. This is a very bad thing.

Negative Equity occurs frequently with automobile purchases. What do you do if you’ve had the car two years and want to trade it in? The “upside down” buyer frequently adds the amount on the trade-in onto the loan for the new car. They also stretch out the loan to keep the payments low. This is a losing proposition as the longer the loan, the longer it takes to reach a point where they owe less than the vehicle’s depreciating value. It is a financial Catch-22.

How does this happen?

It is a combination of things. In order to sell more cars, manufacturers offer deep discounts on new cars. This has the effect of depressing the value of cars, which coupled with five and six-year loans means it’s going to take much longer for car owners to achieve a position of positive equity. (two to three years is not unusual)

It is a fact that the moment you drive your car away from the lot it is a used car. If you are paying $45,000, the Kelly Blue Book value may be $40,000. If you still owe $43,000, there’s a $3000 difference. How do you protect yourself if you have an accident? Now the vehicle owner has more problems.

Gap Insurance

Why is an auto gap insurance policy so important? Because standard comprehensive and collision auto policies only cover your new car’s “fair market value”. And that can be as little as 80% of what you paid for your car, starting the minute you drive it off the lot. This condition of negative equity may exist for the first two or three years of ownership.

This means that if you’re involved in an auto accident that leaves your new car “totaled”, you could end up paying off a loan on a car that you can’t drive. This is where gap insurance comes in. A gap car insurance policy insures you for the difference between what you owe on your car and what your insurance company says it’s worth. In some cases this insurance will be required as part of purchase or lease.

Gap insurance coverage would also become critical if your car is stolen. Thieves prefer new cars and they seek out specific models, which usually happen to be the most popular models of cars sold. (Honda Accord, Ford Taurus – etc. etc.)

If your car is stolen, the insurance situation is the same as in the case of an at-fault accident on your part: comprehensive insurance will cover the value of the vehicle, but not necessarily the value of the loan that you owe to the bank. You could be stuck paying thousands for a car that’s long gone. Add that to the truly disheartening feeling of having your car stolen, and that makes for a really rough time.

As a Lemon Law firm, we see many situations of negative equity when a case is being settled with an auto manufacturer. Often it is the first time the owner discovers the reality of being upside down on their loan or lease. It is always painful. We certainly could offer scads of advice about this situation. The first piece of advice would be, never buy something that is beyond your means. This advice will surely be ignored over and over. The other thought, which isn’t really advice is, if you get caught in a situation where your negative equity is going to be expensive, bite your lip and promise yourself you will never get in that sort of situation again. It’s bad for you and accepting these kinds of deals only encourages manufacturers and their financial organizations to offer these “good deals”.

By: Donald Ladew

Show Me The Money! – The Financial Truth of New Business

admin — Fri, 17 Jul 2009 06:30:54 +0000

“I want to start my own business and be my own boss!” Sound familiar? It may, because nearly 95 percent of people have this pass through their thoughts at some point in their working lifetime.

“Get rich quick” schemes never work. Yet we are repeatedly bombarded with TV and other advertizing promising us riches and status if we join their programs to gain “financial success.” But regardless of if the program they offer is a valid means of making an income or being successful, the truth is, new businesses rarely show any amount of profit in their first two years.

It has been estimated that as many as 90 percent of new businesses fail in their first year. Lack of planning is the number one cause of new business failure; “financial planning” tops that list. Being financial smart is perhaps your best chance at success. Follow the basic guidelines listed here:

Avoid business loans requiring the collateral of your home. Never mortgage (or sell) your home to finance your business. Never use a credit card to start or operate a new business. Keep your business idea in proportion with the amount of money you have available.

Use common sense; if your means of financing your new business might potentially put a strain on your personal finances, look for other means to support the new venture. One should NEVER try starting a business to “save” a poor personal financial situation, unless the new business requires no monetary investment and can eventually supplement the personal income. Consider a business which utilizes your skills or services and requires little or no financial investment to start.

Be financially prepared to survive your first two years in a new business. Allow for personal income needs as well as the businesses financial requirements. You may need to “keep your day job” until the business gets established.

Better to be one of the 10 percent of new businesses who succeed, rather than facing financial and emotional devastation due to poor financial planning.

Carol Denbow is the author of Are You Ready to Be Your Own Boss? For more on new business start-up or to read about the author, visit www.BooksByDenbow.Weebly.com

By: Carol Denbow