Jack M. Guttentag

As the unemployment rate rises, more mortgage borrowers must choose between default and making the payment out of savings. That can be an agonizing decision. See the letter below:

“I was laid off recently but am reasonably hopeful of finding another position soon… We have stayed current by drawing down our IRAs, but there is only about $4,000 left, enough to cover us for one more month…Our family is counseling us to keep the $4K left in our IRAs and not make the next monthly mortgage payments. Do you agree?”

Not making the payment will hurt your credit, but if the choice is between missing the payment this month and missing it next month, I would miss it this month and keep the cash. I would only use the rest of your cash to make the payment if you manage to get a job before 30 days after the payment due date. In that event, you have a reasonable hope of being able to work your way out of the jam you are in, so using your remaining money to save your credit makes sense.

This question is heavily value-laden, which is why I answered it in terms of what I would do, which is not necessarily what someone else with different values might elect to do. Some, especially investors, could take the position that a borrower is morally obliged to make the payment if there is any possible way to do it. This is a defensible argument, but it assumes that the borrower’s only duty is to the investor. The borrower in question has a family to consider as well.

The issue of a borrower’s obligation to continue making payments out of savings after their income-generating capacity has been impaired arises in connection with the government’s Home Affordability Modification Program. See another letter from a reader:

“I have applied to have my loan modified, and am in process of filling out the financial questionnaire that my servicer sent me. It asks for the amounts in my bank accounts. Although my income has dropped, I have enough money in the bank to cover the mortgage payment for three years. Should I take it out, and where should I put it?”

To be eligible to have your payment reduced under this program, you must document not only that your income is insufficient to meet the payment but also that you do not have “sufficient liquid assets” to make the payment. I have scrutinized the specs for this program issued by Treasury, and could not find a definition of either “sufficient” or “liquid assets.” It is a thorny issue that Treasury elected not to deal with. In effect, this leaves it up to the servicers to decide, raising the prospect of widely divergent approaches.

Don’t expect me to advise you on how to avoid the intent of this regulation, but I am willing to advise Treasury on how it might have created greater certainty in the rule by defining terms. I would define “liquid assets” as deposits without a specific term plus money market funds, and “sufficient” as an amount exceeding six months of payments.

My guess is that few if any borrowers are going to get caught by the “sufficient liquid assets” rule, that Treasury knows this and put the rule in to cover its backside. It does not want to read press reports about a borrower with millions in the bank successfully obtaining a rate reduction. If it happens, it can be blamed on the servicer. From this standpoint, leaving the rule undefined makes perfect sense.

More:
How Deep Must You Dig to Pay the Mortgage?

When Edward Miller recently applied for a Charles Schwab Corp. credit card, a company representative asked him to fax in copies of his bank-account statements to verify his net worth.

It was “a bit of a hassle,” says the 64-year-old retired economics and finance professor from Bethesda, Md. He complied and was eventually approved for the card with a $5,000 limit.

After years of mailing cards out to just about anybody, banks are suddenly freezing out all but the most creditworthy customers. Those who do get cards have to jump through more hoops, such as sending in copies of their pay stubs. And they’re being hit with higher rates and fees.

Banks always tighten credit standards in an economic slowdown. But the recently passed Credit Card Act of 2009 is forcing the industry to rewrite the play book it has used for years. The new legislation aims to limit fluctuating interest rates, ban some controversial practices and arm consumers with more information on their debts.

Banks have until February 2010 to comply with the act’s key provisions, although some parts of the law have earlier deadlines. Beginning in August, for example, issuers have to mail bills at least 21 days before the due date and provide at least 45 days’ notice before changing any significant terms on a card.

The result: Many banks are tightening things up now before many of the restrictions go into effect.

For consumers, the tougher underwriting standards by banks may seem like a pendulum shift back to an earlier era when credit cards sported annual fees and double-digit interest rates.

In recent years, issuers cast as wide a net as possible by offering credit to millions of customers, knowing they could always raise rates on those who turned out to be bad bets. That pricing flexibility helped firms rapidly expand their operations, as those with less-than-stellar credit many of whom carried a balance or paid late fees and penalty rates generated millions of dollars in revenue.

Now, the industry is scrambling to figure out who its new profitable customer is. “Without the ability to reprice customers, raise fees or rates, the old profitability calculation won’t apply,” says Alan Mattei, managing director at Novantas LLC, a bank consulting firm.

In recent months, banks including Bank of America Corp., Citigroup Inc. and J.P. Morgan Chase & Co., have raised interest rates and fees, switched customers with fixed rates to variable ones, and dropped credit lines and closed accounts. Credit Suisse Group’s Moshe Orenbuch expects credit-card balances could shrink by 10% to 15% through 2012 as banks drop their teaser-rate offers and cut back on offering credit to riskier customers.

Charles Crawford of Grand Prairie, Texas, says that Bank of America raised the interest rate on his $19,000 balance to 23.2% from 12.2% starting with his June statement, citing his high balances. Mr. Crawford says the move nearly doubled his monthly finance charges to about $420 from about $220. “I feel so upset with them that I was thinking about not paying them,” says the 58-year-old engineer.

Excerpt from:
Banks Get Picky in Doling Out Credit Cards

Earn more and desire less. These are the words that have utmost importance when you want to achieve financial freedom. No matter how small your income is, if you desire less, definitely you will spend less and you can consider yourself to be “wealthy”.

I believe our lifestyle determines whether we will be wealthy and financially free. There are a lot of persons out there who earns a lot but still because of their high lifestyle, however how huge their income is, all are spent and nothing is put into savings.

I always say to some people whom I know that despite their huge earnings, they cannot save to remember the saying in Filipino: “Ubos ubos biyaya, bukas ay nakatunganga”. You might be lucky earning that huge income now but how sure you are that you will continuously receive it for the rest of your life? Life is full of uncertainties. Therefore, you must take advantage of that huge earnings. There are very few people who might be rich forever. There are few Paris Hilton, Tiger Woods, Ayala Zobel, Henry Sy, etc.

I remembered during the financial planning seminar I conducted in our office, there was one person who asked me: “How can I save if there are a lot of bills to pay and other expenses and my income is not enough to support these? I just answered the four words – EARN MORE and DESIRE LESS.

Earn more from its very essence means to have another source of income. You may take a second job, take a part-time job, or transfer to a job with a higher pay. But the great secret of the rich according to Robert Kiyosaki is not to earn more from active income but to earn more from passive income. For those of you who are new to these words, active income is you work for money and passive income is your money working for you. I wrote an article about active vs. passive income.

But shifting from active income to passive income requires hard work. There is no other way to go to passive income directly except if you are born rich or inherited wealth. So for most of us, we need to educate ourselves about financial intelligence especially the cash flow patterns of the poor, middle class and rich persons. Remember that for the poor and middle class, they always buy liabilities that they think are assets so all their income eventually goes to expenses while the rich only buy assets that will provide them enough passive income in the future.

It’s always us who are making our own destiny. So you choose. It’s your decision. Remember to always watch your thoughts, for they become words. Watch your words, for they become actions. Watch your actions, for they become habits. Watch your habits, for they become character. And watch your character, for it becomes your destiny.

On the other hand, desire less means “downsizing” your needs and wants and prioritizing your needs more than your wants. As you analyze your needs and wants, consider downsizing them. Do your own housework instead of employing a maid or a house helper. Keep food to the simplest and least costly but still nutritious. Lessen those eating out habits. By choosing a good but more reasonably priced school, you can cut on education costs.

Check all your assets. Chances are you can sell some of them and perhaps even reduce your maintenance expenses. Do with one TV set instead of two. Sell your car and take public transportation. Move to a smaller place to reduce you rent and the need for some of your stuff. Sell your jewelry. Downgrade your mobile phone. Unless you are a complete beggar in the street, you can do something about downsizing.

Lastly, why do we need financial freedom? If you are not yet convinced why you need financial freedom, then ponder and ask yourself the following questions:

“Will you be willing to work for the rest of your life?

“Who gets rich in the end if you keep on working: Is it you? Is it your boss? Or is it the shareholders of the company?”

“Did you ever notice that as your pay increases as you work your way to climb that corporate ladder, your income taxes increases too?”

“Did you hear stories of some top executives who committed suicide or risked their health because of too much stress they faced from their jobs?”

“Did you hear stories of children whose lives were misled because of the lack of guidance from their parents who didn’t have enough time for them because of work?”

So do you want to achieve financial freedom? Then just remember the four powerful words – EARN MORE and DESIRE LESS.

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Earn More Desire Less

~ Kim Kiyosaki

As my mind ran through all the mistakes I’ve made over the years, two thoughts came into my head.

First, I don’t consider a mistake something bad or something I wish I hadn’t done. A mistake, to me, is simply an action I took that did not have the outcome I intended. Every mistake I make teaches me something I didn’t know. Human beings are designed to learn from mistakes. The more mistakes I make, the smarter I become.

So even when I lose money on an investment, that loss tells me there’s something I need to learn. People who avoid making mistakes stay stuck, even trapped, by what they know. They rarely venture into untested waters and don’t learn anything new.

Second, I found that my mistakes–where the actual results didn’t match my intended results–fell into two main categories: 1. when I lost money or 2. when I lost a good deal.

These cases all had something in common. The mistake was not losing the money or losing the deal. That was the result. What was more important was what caused the result. That’s where the real mistake–plus the lesson–lies.

It turns out that every memorable and costly faux pas I made was the result of the same simple but powerful failing: My biggest investment mistakes occurred at times when . . . I did not trust my gut.

It was those times when I doubted myself: when something sounded so good it had to be true (that’s also known as greed) or when I allowed the so-called experts to talk me out of it.

Not trusting your gut, also known as not following your intuition, can last just a moment. It’s when you see or feel something, as subtle as it might be, and you ignore it.

“No, I must have heard him wrong.”

“I’m sure this case is the exception.”

“But all my friends have invested in this. They must know something.”

My “mistakes” occurred when I didn’t listen to the warning signals going off, and that’s when I got into trouble.

It may be as simple as a gut feeling that says, “Sell those ABC stock shares now.” Then the broker talks you out of it . . . and the shares go downhill. I’ve done that one.

Or when I knew, from one snapshot moment, that I should walk away from a deal because my gut was screaming “No, no, no!” I went through with it because the returns being reported were better than anything I had seen–and I wanted those returns. Here’s the story that goes along with that scenario:

My husband Robert and I met a man who owned a hedge fund while we were attending a stock-trading seminar. Several knowledgeable investors we knew were investing with him and telling us about the incredible returns they were getting. We were interested. So interested, in fact, that we made a special trip to his firm’s offices in Florida to conduct our due diligence on the company.

This man claimed to have designed a unique and confidential trading system that was the core of his success. He had just refurbished and moved into plush offices. I made a mental note of the high overhead he was paying monthly. What we heard and saw did not set off any alarms. That night he and some members of his executive team took us out to dinner at an upscale steakhouse.

This man had made a strong point of telling us what a good Christian man he was. Now I don’t care whether a person is Christian, Jewish, Buddhist, Muslim or Hindu. However, I’m a strong believer in practicing what you preach; if this man goes out of his way to share his religious principles with me, then I expect him to act in a way that is congruent with those principles. Not the case here.

During dinner, and after a bit of wine, this man and his cohorts turned into the most obnoxious, rude, womanizing and embarrassing people I had ever been around. Diners near our table were getting up and walking out. At that point I knew in my gut that, at least on the “Christian” level, this man did not practice what he preached. And my instincts raised the red flag: “Where else is he not practicing what he preaches?” That was the moment I should have walked away.

The next morning I had convinced myself that maybe this was just a fluke. Maybe this man was just letting off some steam. “Can I really judge a person’s character from one incident?” I asked myself.

Why didn’t I trust my gut? Greed. The returns on his investments were far beyond the average. People I spoke with who were investing with him sang his praises. I could certainly overlook this one flaw if it meant I’d make a lot of money, I rationalized.

So Robert and I invested money with this man. The statements we received showed beautiful returns–on paper. We were about to invest more money into the hedge fund when Robert brought home a copy of a well-known investment newspaper. On the front cover was our friend, Mr. Hedge Fund, sitting on the beach with the headline, “Would You Trust This Man With Your Money?”

At first I was shocked, and then I began defending the guy. “It’s probably a disgruntled employee wanting to get even,” I thought.

In fact, this man conned his investors out of millions of dollars that he spent on everything from a new house to a new boat. He’s in prison, and investors may get about 10 percent of their money back.

The lesson for me was this: Had I trusted my gut at that defining moment at dinner when I knew something was not as it should have been, I would have saved myself money, distress and frustration.

Mistakes are truly mistakes only when you cover them up and pretend they didn’t happen; if you do that, you learn nothing. And in that case, you’ve just wasted a perfectly good mistake.

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Trust Your Gut