June 2006 - Posts
If the first step in getting out of financial trouble is knowing that you’re in financial trouble, then the next step is to take action to get out of that trouble.
First item on the menu is to budget your expenses. Create a spending plan that allows you to reduce your debts. Itemize your necessary expenses (such as housing and health care) and optional expenses (such as entertainment and vacation travel). Again, make sure you stick to the plan.
Then try and cut out any unnecessary spending such as dining out too much and haunting Circuit City, E-Bay or Home Depot. Don’t be above clipping coupons or purchasing generic products at the supermarket. If you feel you can’t resist using your credit card switch to a bank debit card where money is immediately draw from your checking account to pay for a purchase.
If you have revolving credit card debt
try using money from your savings account (normally they’re low-paying interest accounts) and use the cash to pay off your high-interest rate credit card bill.
Above all else, formulate a financial plan for the short and long term that includes a monthly budget and a savings account deposit goal of six months worth of your annual salary. Build a plan that will allow you to meet your basic life needs and one that will allow you to sleep at night. If you do create and maintain such a plan, you’ll be sleeping like a baby before you know it – with not a red flag in sight.
The reason people get into serious debt situations is a lack of a real-world financial education. How to budget. How to live on a limited income. How to avoid credit troubles
. Those kinds of things.
One solution to the problem is to tally up your income and your outflows and see where you are, debt-wise. Another is to recognize how much debt
is too much debt.
There are some other big, hard-to-miss red flags that tell you you’ve accumulated too much debt. Here are a few signs that you just might have too much debt:
If you’re in the habit of post-dating checks, you just might have too much debt.
If you habitually pay bills late, you just might have too much debt.
If you had to sell valuables, like a car, an old baseball card collection, or a family heirloom piece of jewelry, you just might have too much debt.
If you’ve ever taken a cash advance
on a credit card to pay off another bill, you just might have too much debt.
If you’re forever borrowing money off of family and friends, you just might have too much debt.
If it’s early in the calendar year and you already have a cash “crisis” you just might have too much debt.
If you’re surprised by the amount of money you owe on your credit card, or the low amount of money you have in your bank account, you just might have too much debt.
If you live from paycheck to paycheck, you just might have too much debt.
To figure out if you have too much debt, use one of the many online loan repayment and income estimation calculators available on the Internet. They’ll help you calculate how much debt you have, how much you can afford to pay, and help you develop a budget or action plan to get out of debt. Two of the best available at this time are:
First Consumer Credit
Whether you're paying off your loans or your credit card debt
, it's a great idea to know where you stand financially. Specifically, it's a great idea to recognize any warning signs that might foretell a personal economic plunge that may take years to recover from.
Here are some common financial “red flags” to look for in your busy life:
Your bank account is consistently overdrawn - If you keep getting those thin envelopes in the mail from your bank telling you that your checking account is overdrawn, it's time to regroup and find out why you're not keeping up. Tip: Ask your bank for overdraft protection against your checking account. For a few bucks each month, most banks will be happy to comply.
You are only able to make the minimum monthly payments on your credit cards -- A biggie. If you can't maintain a clean credit card bill each month then you're staring at big trouble down the road. At 15 percent or so interest, card companies clean up when you only pay the bare minimum of your monthly bill. At those rates, that new jacket you bought for $80 three months ago can cost you $350 in a few months if you don't pay your credit card bill in full. Tip: If you have multiple credit cards, cut all but one of them up. And only use that for emergencies.
You and your partner - if you have one -- are arguing about money. Money is an emotional issue; a power struggle sometimes between couples who usually have different ideas how cash should be handled. If you and your spouse or partner are haggling over bills more than usual, it's probably because your bills are higher than usual. Tip: Agree on a budget and a spending allowance, if necessary. Then stick to it.
Your savings account is busted - Money experts agree that a savings reserve of six-months worth of your annual salary is mandatory to ride out rough economic times, like the loss of a job or a serious illness. If you don't have any money at all in your savings account, it's time to re-examine your budget and see where your money is going every month. Tip: When you get paid pay yourself first - meaning take 10 percent of your check out and stash it in a savings or money market account.
You are juggling your monthly bill payments - If you're applying selective reasoning to your monthly bill payments (“Hmmm - we'll pay the phone bill this month, but not the dog walker”) then you're in over your head financially. Tip: Lose the dog walker and any other luxury item on your “to pay” list. In tough times stick to the staples: home, heat, groceries, and electricity. You might not think about it, but 20 years ago, nobody had an Internet bill or a cell phone bill. But you probably do now.
If any of these "red flags" are waving, it's time to take action . . . the subject of my next blog.
I wrote a book several years ago titled "Free Yourself From Student Loan Debt". In researching the book I had to do some real digging on the impact of debt . . . most of it negative.
Sure, some debt is good.
“Good” debt - things like college loans, business loans, or even a loan to buy a home to live in or a car to drive around in - if managed wisely - - can all be considered good debt.
On the other hand, paying more than you can afford for a home or a car; or racking up big-time credit card debt on things you could live without are all signs of bad debt. And make no mistake, eliminating bad debt is job one if you want to create wealth by investing in real estate, the stock market, or other wealth creating opportunities.
The bad news is that, if you are like many people in the Unites States, you may be up to your ears in debt.
In fact, US consumer debt has reached staggering levels after more than doubling over the past 10 years. According to recent figures from the Federal Reserve Board, consumer debt hit $1.98 trillion in 2003, up from $1.5 trillion in 2000. This figure, representing credit card and car loan debt, but excluding mortgages, translates into approximately $18,700 per US household.
Outstanding consumer credit, including mortgage and other debt, reached $9.3 trillion in 2003, representing an increase from $7 trillion in January 2000. The total credit card debt
alone stands at $735 billion, with the household card debt of those who carry balances estimated to average $12,000.
According to CNNMoney, consumer spending accounts for some 70 percent of the U.S. gross domestic product. “So the world economy is leveraged to the U.S. consumer. And the U.S. consumer is leveraged to the hilt,” states the CNN web site.
When you're talking about tackling and managing your money, the first thing you're really talking about is avoiding lifestyle-crippling debt.
A good analogy comes from the movie “Apollo 13” with Tom Hanks. Kevin Bacon, and Ed Harris. Fine actors, all. But it's Harris who has the best line in the film. Faced with a potential catastrophe up in space with a banged-up space capsule that might not survive re-entry into the earth's atmosphere. Harris - as the NASA commander - is the guy who has to solve the problem and bring the astronauts' home safely. Turning to his team, Harris gives them their marching orders and says point-blank “remember, failure is not an option”.
Failure is not an option when it comes to your financial future.
Let's look at reality. The more debt you accumulate (and don't pay off) the smaller the mortgage you're likely to get when you buy a home - even though you already own one. Or, the smaller the loan you'll get to buy a new car. Or how about your career? Many companies now rely on credit reports
to hone in on your character when you're applying for a job. If they see a heavy debt load, that's a big red flag. Hiring managers reason that if you're not reliable enough to pay your debts, you're not reliable enough to come work for them.
Face it. Bad debt can get very expensive after a failed loan payment effort and the ensuing nasty credit rating you'll get. That will impact everything that happens to you financially in life, from having to buy a smaller home - or heaven forbid, have to rent one because you don't qualify for a mortgage - to the amount of money you'll be able to put away for retirement. It won't be as much if you face a mountain of loan debt
, meaning you could be spending your golden years working under the Golden Arches to make ends meet.
Tomorrow, we'll begin tackling the strategies that can get you out of debt -- and keep you on the road to financial security.
So what strategies does Buffett deploy when picking stocks?
For starters, he looks for companies with solid financial performance managed by seasoned and savvy executives. Buffett also favors companies with histories of above-average earnings growth. His holdings in American Express and Coca-Cola are good examples of that.
Here’s a list of additional attributes Buffett looks for when buying stocks . . .
Simple Businesses -- Buffett likes to keep things simple – and he likes his companies to do the same. Again and again, Buffett has railed against the kinds of companies that seem too complicated or that are difficult to valuate. His avoidance of internet and technology companies during the dot.com bubble is the most famous manifestation of Buffett’s “keep it simple” dictum. Buffett jokingly calls himself a techno-phobe but, in reality, he shies away from technology and telecom stocks. He likes to base his stock picks on, among other things, what a company will look like 10 years down the road. Technology companies, he says, are much too volatile and risky for that kind of analysis. The 10-year rule also applies in a backward sense – Buffett will only consider companies with a good 10-year track record. Most technology companies haven’t been around that long and, for their lack of seasoning and earnings history, tend to fall of Buffett’s radar.
Return on Equity – Another key criteria for Buffett is a company’s return on equity (ROE). Again, he favors a 10-year plan where he can predict ROE ten years out. Companies that can’t be accurately gauged don’t make it into the Buffett portfolio. Buffett also favors companies that don’t need much capital. Such companies, he has said, generate significantly higher returns on equity.
Cash on the Barrel – The Buffet Way is long on companies that have deep pockets. Companies that have what Buffett refers to as ample cash flow are companies that have plenty of financial resources both to pay their bills and keep growing.
Low Debt – Companies that can limit and manage their debt are high on Warren Buffett’s priority list. Insurance companies (he owns both Geico and General Re) are particular favorites in this regard. With the Buffett Way, low debt equals significant room for growth. Buffett’s emphasis on low debt is grounded in reality. With limited debt, earnings growth is based on shareholders' equity as opposed to borrowed money.
Emphasis on Value – Historically, targets investments in undervalued companies with good long-term growth potential. Identifying such companies isn’t easy but Buffett has mastered the technique. In a nutshell, Buffett favors stocks that are unjustifiably low based on their intrinsic worth. He bases his calculations intrinsic worth by analyzing a company's fundamentals.
As with most bargain hunters, Buffett targets companies that are good revenue producers and are capably managed, though underpriced. Buffett is also famous for his aversion to reading stock market tea leaves. That’s not what he is about. Quite simply, he selects stocks solely on the basis of their overall potential as a company. Once added to his portfolio, Buffett will hang on to such stocks for years - - even decades. Buffett could care less if other investors ever get around to recognizing the stock market’s value. His only concern is that his companies earn money - - and lots of it.
The “Big Six”
There are other highly-visible cues to take from the Sage on his investing philosophy. In fact, Buffett's investing criteria are outlined in his yearly reports to shareholders. They are:
1. Large purchases (at least $50 million of before-tax earnings).
2. Demonstrated consistent earning power (future projections are of no interest to him, nor are "turnaround" situations).
3. Businesses earning good returns on equity while employing little or no debt
4. Management in place (he can't supply it).
5. Simple businesses (if there's lots of technology, he won't understand it).
6. An offering price (he doesn't want to waste time or the seller's by talking, even preliminarily, about a transaction when the price is unknown).
Source: Berkshire Hathaway annual report
Buffett has said candidly that, if a company falls within these criteria, don't call an investment banker, call him.
For Buffett, It’s All About Businesses . . . Not Stocks
Buffett can be a bit of a contrarian, sliding away from his own investment philosophy from time to time. Some Buffett watchers were surprised by his modest investments in struggling companies like Level 3 Communications, a fiber optics network operating in the red, and The Williams Cos., an energy group. Buffett is known for preferring old economy companies and firms that are already in the black. As I've said, he doesn't like technology companies because he says that he doesn't understand technology. Buffett invests in companies like Gillette because he loves the fact that millions of men grow whiskers every night. But the investments were not a complete surprise to true Buffett aficionados. Buffett said that if markets fell significantly he would use it as a buying opportunity – and he did.
In the end, Buffett’s investment philosophy is also attractively simple. He believes that investors should be buying a business, not simply a stock. Buffett's annual report is nothing if not readable--quite famously so—and is perhaps the best window into the way Buffett's mind works.
One of his annual reports contained what is probably as clear a one-paragraph summary of Buffett's investment philosophy as can ever be stated: "Whenever we buy common stocks...we approach the transaction as if we were buying into a private business. We look at the economic prospects of the business, the people in charge of running it, and the price we must pay. We do not have in mind any time or price for sale. Indeed, we are willing to hold a stock indefinitely so long as we expect the business to increase in intrinsic value at a satisfactory rate. When investing, we view ourselves as business analysts--not as market analysts, not as macroeconomic analysts and not even as security analysts."
Thus the Buffett paradox. On the one hand, this paragraph is so steeped in old-fashioned values--largely vanished from trading-obsessed Wall Street--that one can immediately understand why Buffett has followers. On the other hand, it’s clear that Buffett's investing style just isn't that difficult to understand. It’s nothing more than a balanced four-legged stool: Buffett cares about the future prospects of the business. He wants to know that management has both integrity and drive. He doesn't want to overpay for the stock. And whether the shares go up or down, he won't sell so long as the fundamentals remain the same.
Pretty simple, right?
Well, that's the point . . .
Warren Buffett's story is quintessentially American. He is by most counts the second richest man in America (the richest is Bill Gates) with a fortune estimated by Forbes Magazine
at more than $44 billion. He is the only US billionaire to have made his money entirely through investing, and today, along with current Federal Reserve Chief Ben Bernanke, he is arguably the most respected voice of financial America.
His natural habitat is not Wall Street or Washington, but the unpretentious Midwest heartlands. I've told you about the moniker “The Sage of Omaha” but it's not the only nickname. Buffett is also known as the Oracle of Omaha - the latter being the pleasant but largely unremarkable Nebraska city on the banks of the Missouri river where he was born and raised, where he made his fortune and where he lives to this day, in the same gray stucco house he bought for $31,500 back in 1956.
Buffett is today the best-known Nebraskan on earth, a gray-haired, no-nonsense Man of the Heartland who has been triumphantly vindicated by financial market events time and time again. He is not so much a financial institution as a national institution, the object of a cult that attracts 22,000 or so people to Omaha every May for Berkshire Hathaway's annual meeting. Buffett himself has called the occasion the "Woodstock of capitalism". Some people buy a Berkshire Hathaway share just to attend (not as small a matter as it sounds, for old-fashioned Warren has never been one for fancy devices such as stock splits, and a single share of Berkshire Hathaway stock can cost upwards of $80,000).
In this age when CEO stands in many minds for chief embezzlement officer, Buffett embodies those Midwest virtues of probity, modesty and common sense Americans like to think of as part of the national character. It should be noted that this same part of the world spawned Arthur Andersen, once held as another paragon of honesty and good housekeeping. But Buffett has kept his halo. He is a CEO for the nation, the self-made man who made his fortune honestly, the scourge of less principled peers.
Not So Fast, Mr. Greenspan
Affable and avuncular with the media and, especially, with Berkshire Hathaway shareholders, Buffet can be very combative when it comes to getting his point across - - even if his intended target is one of the most powerful men in the world.
A few years back, Buffett and former Federal Reserve Chairman Alan Greenspan agreed to disagree about the effect that so-called "derivative securities" would have on financial markets. Greenspan said they had reduced risk. Buffett saw things differently. In his letter to shareholders in 2003, Buffett called them "weapons of mass destruction."
A Student of Graham
The foundations of the Buffett legend were laid young.
The son of a stockbroker and Republican congressman, he made his first trade in 1941 when he was just 11, buying three shares in a company for $38 apiece. They dropped to $27 then rose to $40 at which point the cautious youth sold, earning a tiny profit but missing a later climb to $200. These events sowed the seeds of his lifelong investing philosophy, that sharebuying is for the long term.
As a child he was industrious in the extreme - running a double paper round, collecting lost golf balls and selling them, and putting the proceeds towards buying 40 acres of farmland, which he then rented out. College in Omaha was followed by a graduate degree at Columbia University in New York City, where he met and worked with, Benjamin Graham, the author of The Intelligent Investor and eventually to become Buffett's financial mentor.
Graham's strategy was to search for what he called "cigar butt" companies, no longer of interest to the market and thus undervalued, but which still had a few puffs of life in them. In 1962 Buffett found one - a rundown Massachusetts textile concern called Berkshire Hathaway. He poured what resources it had into other businesses, notably insurance.
It was a stroke of genius. Insurance companies may not intrinsically be hugely profitable, but they have a "float", up-front premium payments from policyholders from which claims are only settled later. The cash pile grew during the early 1970s bear market on Wall Street. Buffett used the money to buy stakes in companies at bargain prices, and the Berkshire Hathaway phenomenon was born.
Now, when Buffett speaks, ordinary Americans not only listen, they are enraptured. But the truly sacred texts of Warren Edward Buffett are Berkshire Hathaway's annual letters to shareholders, studied at business schools across the country, and collectively published in 1998 as The Essays of Warren Buffett. They are pithy and wise, sprinkled with the endearing admissions of human failure that a deity may occasionally permit himself.
The 2001 edition for instance contains a huge mea culpa for his failure to protect General Re, one of Berkshire Hathaway's re-insurance units, from the shockwaves of the 11 September terrorist attacks. Buffett well knew a mega-catastrophe (albeit more likely natural than man-made) was possible. "I violated the Noah rule," he groveled, "Predicting rain doesn't count; building arks does."
Few shareholder letters quote Horace. But BH's in 2001 noted that "Many shall be restored that now are fallen and many shall fall that are now in honor" - which pretty succinctly describes the reversals of reputation between 1999 and now of Buffett on the one hand and AOL-Time Warner on the other, not to mention disgraced erstwhile superstars like Ken Lay of Enron and WorldCom's Bernie Ebbers.
Buffett learned early on that predicting the future was futile -- that it was studying the past where fortunes are made. He once said, “In the business world, the rearview mirror is always clearer than the windshield”
On Wall Street, nobody has married the past with the present quite like Buffett -- he has $44 billion reasons to back that up.
Part III of The Buffett Way -- the Buffett investment strategy -- will appear on Monday.
Let's spend a blog or two talking about the ingredients for successful wealth creation. Specifically, what makes a good investor?
In my mind it's emulating a guy like heartland billionaire Warren Buffett, probably the most successful wealth creator of the last 50 years.
What’s the secret to Warren Buffett’s investment success?
The secret, according to The Sage of Omaha, is that there is no secret. “All there is to investing,” he says. “is picking good stocks at good times and staying with them as long as they remain good companies.”
Buffett has done that in spades over the past 40 years – at the helm of Berkshire Hathaway, one of the most successful investment companies in the history of Wall Street
. The $44 billion company is like a block of granite in an otherwise fragile investment environment. Astute investments in brand-name value plays like Coca-Cola, H&R Block
, American Express
and Comcast have fueled Berskshire Hathaway’s rise to the top of the global investment period. All solid, no-nonsense companies that offer investors the three things that Buffett prizes in his investment picks – steady growth, good management and no surprises.
Buffett’s results speak for themselves. A $10,000 investment in Berkshire Hathaway in 1965 would be worth nearly $30 million by 2005. In contrast $10,000 in the S&P 500 would have risen to roughly $500,000.
Consequently, Buffett is a Zen-like figure to both Wall Street and Main Street. Business writers and stock market analysts jot down his every utterance. Berkshire Hathaway annual meetings are almost mythical events, with a small army of Berkshire investors – and Buffett zealots – hanging on his every word. And he always delivers. Prior to Berkshire Hathaway's six-hour annual general meeting in May 2002, investors began lining up for seats at 4:00 a.m. Attendees were not disappointed. Among the treats? A film of Berkshire Hathaway chief Warren Buffett playing a ukulele and singing, "When the NASDAQ's down, you'll never frown, Berkshire's here to stay." In typical fashion, the folksy Buffett later led a visit to the local Dairy Queen down the street, which, by the way, he owned.
The Buffet Way
Call it the Buffett Way – as many people do.
In this day and age, when traditional investment like stocks and bonds ebb and flow along with the economic tides, seemingly tethered to nothing and batted about in global financial markets on an almost daily occurrence, there is comfort in the knowledge that a visionary like Warren Buffet exists. His company, Berkshire Hathaway is one of the most successful businesses in American history, if not the most successful. Buffet, himself, has personal net wealth of more than $40 billion, making him the second wealthiest individual in the US (behind Microsoft founder William Gates).
But it wasn’t so long ago that the so-called “experts” on Wall Street were laughing at Warren Buffet; mocking his cautious, carefully-measured methodology of investing in the financial markets.
To the self-proclaimed gurus, Buffett's take on things seemed out of tune. The rules of the game had changed, and he just didn't get it. "Warren Buffett should say, 'I'm sorry,'" fumed Harry Newton, publisher of Technology Investor Magazine
, in early 2000. "How did he miss the silicon, wireless, DSL, cable, and biotech revolutions?" That was a year when AOL stock rose six-fold and Amazon.com had rocketed by 1,000 per cent in a year, while shares in Berkshire Hathaway, the investment company Buffett had built from virtually scratch had climbed – cue ominous music - only 11 per cent.
But, as history has proved, the Buffet Way won out in the end, as the dot.com bubble exploded, leaving millions of Americans with huge holes in their investment portfolios, and left more than a few ‘experts” with egg on their faces. Experts, who right now would kill for 11 per cent investment returns. Yes, wise old Warren ("a life long technophobe" as he confesses on the Berkshire Hathaway web site) meanwhile stuck with boring bluechips like Gillette, Coca-Cola and American Express, saying he couldn't understand these newfangled companies.
What did Buffet know that the dot.com geniuses didn’t? Buffet and his partner, Charles Munger, began looking closely at dot.com company valuation sheets and came away convinced there was more folly than fortune in all those celebrated new economy companies. Instead, they returned to the grounds they had tilled before and knew so well – value stocks. They invested in companies like Proctor and Gamble that made products that people actually used. It is hardly necessary to point out that this was during the age of irrational exuberance, when the Nasdaq was flying and Berkshire's stock was flopping. While the experts considered Buffett's fixation on value (and values too) old hat, The Sage proved them all wrong.
In my next blog, I'll lay out Buffett's story, and explain how his background and frugal mindset made him the wealthiest man on Wall Street.
It's a story well worth telling -- and hearing.
We've been talking a great deal about credit and savings the last few days, but wealth creation is also about investing money, too.
To that end, I've been leafing through mutual fund manager Fred Kobrick's new book “The Big Money: Seven Steps to Picking Great Stocks and Finding Financial Security” and it's a good read.
Kobrick, whose Kobrick Capital Fund was designated as USA Today's “Fund of the Year” two-years in a row in 1998 and 1999, says that investors' Achilles heel is impatience.
“Patience is not only a virtue, it's a necessity,” says Kobrick. “All too often impatience costs investors dearly, because they might have only 'intellectual patience'-- they know what to do but just can't fight their emotions and the market swings. If investors do not have buy/sell disciplines or benchmarks or a compass, their emotions and intellectual patience will continually be tested by the volatility in the market,” says Kobrick.
In his book, Kobrick says there are five things every investor needs to know:
1) Know what a company plans to do to grow and how it plans to accomplish that so you can track it. This should be clearly stated in its business model, which for good companies, should be easy to find on their web sites, in their annual reports, and in other obvious places.
2) Know that when a company's stock is selling far above or below its trend line it is time to check on a possible buy or sell. Price-earnings ratios are only one way. Price to sales, and price to book value are nice additions.
3) Know if a company has a world-class opportunity in an industry that is going to be growing enormously. The early days of biotechnology, electronics retailing, personal computers, and athletic footwear are a few examples.
4) Know that world-class opportunity means things like differentiation, business model and management.
5) Know that analysis, knowledge and common sense have to replace emotion when you make decisions.
A sure-fire path to investment failure? Kobrick covers that, too:
� Feeling scared when a stock is going down, so you sell.
� Feeling that when a stock is going up rapidly in price, the press loves it, you must own it and hold it.
� Not knowing what opportunities a company wants to take advantage of over the next 3-5 years.
� Timing the market, and not having any sense of how long you should hold the stock.
All good points -- and all worth remembering when you invest your hard-earned money in the stock market.
Fabled scientist Wernher von Braun had it right when he said, “We can lick gravity, but the paperwork is overwhelming.”
When it comes to filling out your home mortgage loan application
, the process doesn't have to be overwhelming - if, that is, you know what goes into the kind of application that lenders usually approve.
Make no mistake, applying for a home mortgage can be a time-consuming and frustrating process if you are unprepared. So take these steps to ensure your home loan
paperwork is in order and easily approved:
Lay the Groundwork - A good home-buyer is a prepared home-buyer. So before you get ready to fill out your mortgage loan application, make sure your financial situation is in order. That means checking your credit report
to see there are no errors or other surprises (a topic we covered in our last three blogs). Just as importantly, get the necessary financial documents in order.
You'll need . . .
o A copy of any applicable purchase & sale agreement.
o Any current mortgage information, including monthly payments, taxes, and an estimation of housing expenses. If you have lived there for less than two years be prepared to include former home addresses dating back seven years.
o Two year history of employment and verification of all income sources. Usually your last several paycheck stubs and copies of the past two years Federal Income Tax Returns should do the trick (especially if you're self-employed).
o Information about your checking, savings and credit card
accounts. Two months worth of bank statements and investment account information should suffice. On the debt front, lenders typically don't like to see more than 20 percent of your estimated loan amount tied up in debt. Expect to include the outstanding balance of each of your debts.
o The Social Security number for you and your spouse, if applicable
o The number and ages of your dependents
o Information regarding divorce decrees. Not all lenders require that you list divorce information - just don't be surprised when they do.
Schedule a Loan Application
Interview -- By now you've selected a mortgage lender you're comfortable with and who offers terms and rates that meet your home buying needs. Help your lender help you by scheduling a sit-down, either face-to-face or over the phone. Such a meeting significantly streamlines and simplifies the loan application process. Your loan officer will use the meeting to explain the types of mortgages that the lender offers, information on interest rates, home buying fees, and criteria needed to qualify for your home loan. Not only is this critical information that you should know, it will give you a better framework for filling out your loan application. In fact, in many cases, the lending officer will walk you through the loan application itself during the meeting. You may have to ask, and it's encouraged that you do so, but professional help is right there when you need it.
Putting Pencil to Paper - Leave yourself plenty of time to complete your loan application. An hour or two is usually needed to completely fill out a home mortgage application (and the less prepared you are the longer that will take). Whether you are filling out a hard copy application or you're doing so online, place a premium on correct spelling and accurate data.
Key Tip - Thinking of buying a home but you're not ready to do so? Even if you plan on waiting six months or so before you buy, fill out a home mortgage application anyway - the exercise will leave you fully prepared for the application process and will also give you a good idea what you'll need to complete your loan application form when the real deal arrives.
The first thing you'll see on most home mortgage applications are requests for basic personal information. That means name, Social Security number, employment data - things like that. Then you'll be asked to explain what you want from the lender. Are you purchasing a first home? Refinancing
? After that you'll be asked to list your estimated down payment and add where it's coming from. If it's coming from your bank or brokerage account, that's viewed as a plus by the green eye-shade set. But a gift from a relative may be a red flag to some lenders, who may ask you why you don't have the money yourself. The bulk of the mortgage application is devoted to your income, your assets and your liabilities. In other words, the money you earn, the money you have, and the money you owe. Taken together it gives lenders a pretty good idea if you're a good credit risk or not.
Making Your Case with Additional Information - If you have had a checkered debt history you'll want to add a brief letter of explanation of what those debts were and what steps your took to alleviate that debt. Also attach any document that supports your case that the debt was addressed. Your loan officer may wind up requesting information that you haven't included. Don't worry - just get the information back to the lender as soon as possible.
Sign the Form - Go ahead and sign the form and ship the application off to the lender. Usually, you won't have to wait long for an answer. The loan officer does need time to review your credit report and check out your financial information. Expect an answer within a week or so. Some lenders may even give you a verbal “thumbs up” in lieu of a formal approval. When that happens, pop the champagne and get ready for another round of paperwork - the house closing forms that will make you the owner of your new dream home.
Find and review a sample home mortgage application at: Union plus Web Site
H. L. Mencken once said that for every problem, there is a solution that is simple, neat, and wrong.
Some might say that’s a good description of the credit reporting industry, where mistakes, unfortunately, are as common as flies at a July 4th picnic. When errors are made on your credit, you and you alone suffer the consequences.
That’s why knowing your credit score
and knowing what’s on your credit report
are two big first steps in smart debt management.
Why? Because by knowing your credit value and by knowing what information is included on your credit report eliminates any nasty surprises that might be in store for you. Example. You’re down at Gimbels or Marshal Fields and you can’t wait to open up your new charge card. But when the clerk comes back, with what you swear is a smirk on her face, you know right away that you’re application for credit has been rejected. Nine times out of ten that means you weren’t aware of your credit score or weren’t aware of what was on your credit report.
In other words, you didn’t have control over your debt management
situation (of course, opening a department store charge card is another example of that).
Okay, so what happens if that situation does come to pass and you get rejected for credit? And you swear that you’ve paid your bills and you swear that your credit is clean?
Could be that there is a mistake on your credit report – and you need to fix it. If you don’t the error stays on your credit report for seven years, for all to see. You don’t want that to happen.
Unfortunately, many Americans do. According to Consumer Reports magazine, 48% of Americans have mistakes on their credit reports, with 12% of those mistakes severe enough to restrict those consumers from getting credit.
Consequently, it’s always best to check your credit report before you apply for a big loan or buy something on credit. That way you can correct any mistakes you find on your report before a lender or creditor notices.
In most cases, credit errors are caused by that most banal of reasons – your name. The more common it is, the higher the chance you that you may share someone else’s financial faux pas – someone with the same name as you. Maybe that person dies, maybe that person stopped paying off their student loans, and maybe that person’s name wound up on your credit report through a transcription error. Most often, the name thing will come manifest itself on your credit report is an account that doesn’t belong to you.
To fix credit report errors
like that, make sure to check out all three credit report agencies. Do so at least once annually. One report agency may have different information than another so you have to cover all your bases.
When you identify an error, get cracking. By law, credit agencies are required to fix any errors. But don’t hold your breath – they don’t always move as fast as you’d like. Or as fast as you need if you have a big mortgage loan waiting.
To get things going, file a dispute with the agency. You can call or e-mail, or even place a phone call (if you go that route make sure you jot down the name and title of the person you speak to).
Any written correspondence should include the following pieces of information:
* Your name, address, date of birth and social security number.
* The name of the company you have a dispute with and any relevant account numbers
* The reason for your dispute, any corrections to your personal information and a request for correction.
Make sure that you collect all of the necessary paperwork you need to document your side of the story before you contact the credit agency. Assume nothing and be prepared for anything and any question. Make no mistake – the credit bureau will want solid proof that they have made a mistake.
One more item: If you can’t get a credit bureau to correct a mistake, you can get them to at least print your side of the story on a given dispute and include it on your credit report.
Sample Credit Score https://www.econsumer.equifax.com/consumer/forward.ehtml?forward=sp_summary_sample
Yesterday I wrote about credit scores, and how they can spell the difference between prosperity and poverty.
Let's use that as a springboard into how you can improve your credit score to ensure that you're headed toward financial security instead of the other way around.
To start, know that credit scores are dynamic, meaning they change all the time. A bank lender checking your credit rating may come up with a completely different score than an auto loan company who check your report 15 minutes later. That’s because bill payment information is coming into the credit rating agencies all the time, impacting your score one way or another.
What can lower your score include:
Repeated inquiries: Each time you apply for credit and a credit grantor requests your credit report, a few points may be deducted on the theory that you are adding to your potential monthly obligations
Pre-approved credit cards: If you have a history of accepting pre-approved credit cards, your credit score may lowered on the theory that too many cards equals too much debt. A person with one credit card is going to score much higher than a person with six credit cards because, in theory, the former has much less debt than the latter.
Late or No Payments: Any chagrined college graduate can tell you that being late just one payment on a college loan – or worse, not paying the bill at all – can cost you your first home. Lenders take bill payment seriously. If you’re habitually late paying one bill, they take the position that you’ll be late paying their loan, too.
How to Improve Your Score
In general, late payments will lower your score, but having a good record of making payments on time will raise your score. So the obvious place to start improving your credit score (after obtaining a copy of your credit report from an Equifax or a Trans Union) is to ensure that all your bills are paid on time.
Besides paying your bills on time, don't let your credit card and revolving balances get too high. Even if you pay the bare minimum on your Visa card a potential lender may see your high level of revolving card debt and assume you can’t keep up with your financial obligations.
Also check your credit reports for errors. The fact that you ultimately paid off your college loan may be lost in a sea of bureaucratic paperwork that the credit rating agency never sees. So check and see that all the data on your credit report is accurate.
One quick way to do that is to check the three major credit report companies; Equifax (www.equifax.com), Experian (www.experian.com), and Trans Union Credit Bureau (www.transunion.com). Each provides your credit rating report as well as handling stolen card and fraud complaints.
Once you get your credit report be sure all the accounts listed on the report are actually your own and dispute negative information if it is wrong. And if positive information is missing, insist that your creditors report it.
Above all, take nothing for granted. Your financial future may be riding on your credit score.
How to start your debt management strategy? By knowing where you stand, debt-wise.
That means knowing what credit report bureaus and lending and credit organizations think of you. Not as a person, per se, but as a credit risk.
One of the best ways to do that is to know your credit score. Credit scores are the answer to the question “How can debt problems can be cut off in advance?”
Credit scores are the marks that credit report agencies bestow upon you and share with the rest of the world – or at least with the part of the world that might want to extend a loan to you or green-light good credit for you.
You’d think people would want to know what credit score they’ve been given and what that score means to their lives. When you think about it, your credit score is a huge factor in your life. It can mean the difference between owning a house or renting one; going to an Ivy League school or a community college; or driving a new Lexus or an old LeBaron.
But people don’t seem to care what their credit score is. In fact, it’s downright funny how some people can rattle off trivial information at the drop of a hat but have no clue when it comes to knowing their financial status.
You want the lowdown on the latest Hollywood scandal? No problem – got it all for you right here. What’s that recipe for Bruschetta? Wait – I have it here in my back pocket.
What’s my credit score? Ummmhh . . . what’s a credit score?
So hear me out. Knowing your credit score and what it can mean to your financial future is a big deal. While knowing the latest Hollywood gossip or having the secret ingredient for that to-die-for party dish may pay off in your social circle, knowing your credit score – and knowing how to improve it – offers significantly greater rewards. Say, a better house or a good college education for your kids.
Why the onus on credit scores? And what are they?
A credit score, also known as FICO scores, are used by creditors to figure out if you’re a good credit risk or not. It tells them whether if it’s a good bet that you’ll pay off that student loan or make payment son that new big screen television in a timely fashion.
Creditors make those calculations based on the data included in your credit report. As a U.S. citizen, and presumably the owner of a Social Security number, you’re financial history is a public record. In virtually all cases, your financial background can be found, condensed and including payment history, at any one of three credit report agencies: Equifax, Experian and TransUnion. Each of these companies are veritable clearinghouses of personal financial information of anybody, citizen or not, with a U.S. Social Security number. The information each provides can make or break some of your biggest financial moves, from owning a home to opening your own business.
Credit scoring mechanisms are fairly easy to understand. A credit score in the low 600’s signals a problem for a lender. That doesn’t mean you can’t get a loan, but it likely means you’ll pay a higher interest rate to get it. On the other hand, a score in the upper 700’s is a joy to behold for a lender – and for you, too, as you’ll probably get the loan at a lower rate since you’re such a good credit risk.
Credit agencies look at people with similar financial backgrounds and habits to assign your score. That model includes past credit history, any big purchases made (and whether it/they were paid off or not), and job and income estimates. Based on the collective "credit history" of loads of people who are a mirror image of you financially, your credit score is meant to forecast you future abilities tom handle debt and make timely payments to lenders and creditors.
Your credit score is based on five key financial criteria (as follows):
Payment History: About 35% of your credit score is based on your bill payment history.
Amounts Owed: About 30% of your score is based on the amount of money you currently owe.
Length of Credit History: About 15% of your score is based on how long you’ve been taking on bills – and paying them.
How Much Credit? About 10% of your score is based on new credit activity.
Types of Credit: About 10% of your score is based on the kinds of credit you have, i.e., car payments, mortgage payments, credit card bills, school loans and the like.
Lenders and creditors also prefer to look at public record and collection items — things like bankruptcies, judgments, suits, liens, wage attachments and collection items. These are considered “red flags” by lenders, although older items will count less than recent ones.
They’ll also dig a bit deeper and check out details on late or missed payments and public record and collection items — specifically, how late they were, how much was owed, how recently they occurred and how many there are. A 30-day late payment is not as risky as a 90-day late payment, for example. But recent bill-payment activity and frequency count too. A 30-day late payment made just a month ago will count more than a 90-day late payment from five years ago. Note that that closing an account on which you had previously missed a payment does not make the late payment disappear from your credit report.
What’s not part of your credit score? Things like your income and bank balance, the interest rates you pay on other loans, your occupation, job title, employer, time with your company, and employment history do not count on your credit score.
In the next few days I'll be posting more about credit scores and how you can improve them. Knowing how to do that could mean the difference between financial stability and financial train wreck.
Looking for a good investment play down south of the border?
Why not punch up America Movil, the Mexican cellular telecommunications giant that provides fixed line and wireless phone services throughout the United States, Puerto Rico, and the U.S. Virgin Islands, and in Latin America?
The six-year-old company has approximately100 million customers across the US and Latin America. In 2005, AMX added 32.2 million wireless customers, perhaps the largest new customer run-up ever for a major wireless provider. Last month, AMX announced that it projects 2006 new customer numbers to rise above 24 million, pushing the stock upward on the news. Months earlier, AMX officials had projected 20 to 22 million new customers for 2006. Altogether AMX has 100 million customers across Latin America and the US.
Prospects for the company’s continued growth, particularly in the short term, are on the rise. Says the May 4, edition of Bloomberg, America Movil “is expected to significantly outperform the market over the next six months with less than average risk.”
With good reason. Owned by telecommunications magnate Carlos Slim, the world's third-richest individual, American Movil has taken off like a Roman Candle during the past year, with the company’s stock rising about 100% over the past 12 months.
Yet despite the stock’s top-notch performance, valuations are still fairly reasonable, with AMX currently trading at 20.4x 2006 earnings estimates of $1.74 per share. That is significantly below the long-term growth rate of 35.68%, tagging AMX with a PEG ratio of 0.57.
Many analysts figured that American Movil would suffer when Telefonica TEF entered the Mexican wireless market in recent years. That didn’t happen, as America Movil saw its operating margin increase by 2.3% in 2005. American Movil has proven equally adept at grabbing market share in new markets, like Brazil, Peru, Paraguay, and Chile.
Operating margins should also improve, with Morningstar forecasting that AMX profits to rise by 20.6% in 2006 from 18.5% in 2005. Morningstar also forecasts 24% revenue growth in 2006, with average annual growth of 13% for the three years following. Return on capital invested should rise from approximately 17% to 24%, significantly over AMX’s cost of capital.
The cash flow picture is just as bright, with AMX deep on the positive side and well positioned to internally fund its growth. Company officials say they intend to use much of that cash to increase AMX’s stock dividend and to buy back shares of company stock.
Recent earnings growth has been solid, coming in much higher than analysts had expected. On May 2, 2006, AMX said it earned 9.946 billion pesos, or $912 million, in the quarter ended in March, up 114 percent and far exceeding market expectations. Analysts had anticipated quarterly earnings of 7.273 billion pesos.
While quarterly revenue rose 26.4 percent to 50.724 billion pesos, it was below the 52.509 billion pesos that analysts polled by Reuters were expecting, on average.
AMX By the Numbers
2006 2005 PERCENTAGE
JAN-MARCH JAN-MARCH CHANGE
Revenues 52.509 bln 40.292 bln + 30.32 pct
EBITDA 17.611 bln 13.089 bln + 34.55 pct
EBITDA margin 33.54 pct 32.49 pct + 105 bps*
Operating profit 11.705 bln 8.243 bln + 42.00 pct
Operating margin 22.30 pct 20.46 pct + 184 bps
Net profit 7.273 bln 4.667 bln + 55.84 pct
Majority owner Slim has positioned AMX for further growth, particularly with a $3.7 billion deal with Verizon to buy its Latin American and Caribbean operations. The deal gives AMX a bigger global footprint in the wireless marketplace, adding 15 million new customers to the fold with one stroke of his pen. Slim, who owns 80% of AMX and Telmex (another Mexican phone services provider) also spent $350 million to purchase Columbia’s largest phone company and spent $472 million to buy Chilean mobile phone company Smartcom.
It’s a risky bet that seems like it’s already paying off for Slim and for AMX. With 75% of his personal fortune tied up in Mexican wireless companies, Slim can’t afford to come up empty in the global telecom marketplace.
Looks like he doesn’t have to worry about that.