~ Annette Sampson ~
The strategy To stash some cash for emergencies.
Do I need to do that? Are you kidding? Hasn’t all the mayhem on world debt and sharemarkets this year brought home the fact that spare cash is a good thing to have? Whether you believe the latest rally is the turnaround point or not, the fact remains that the easy money of recent years has dried up and the resulting credit squeeze has put meaning back into the old adage that cash is king.
There’s not a lot the experts agree on but on one point they are unanimous: the uncertain times aren’t disappearing any time soon. We’re still seeing the unwinding of dodgy lending practices, a recession in the US looks increasingly likely and Australia can’t seem to work out whether the porridge is too hot, with inflation the main problem, or about to become too cold as all those interest rate hikes start to bite.
A cash buffer gives you the security of having money on hand if your personal circumstances take a turn for the worse and the ability to take advantage of opportunities when other people are strapped for funds. In falling markets, investors with liquidity can snap up bargains as cash-strapped investors are forced to sell.
How much of a buffer should I have? Denis Orrock, the general manager of InfoChoice, says his Depression-era dad always advocated having three months’ income set aside to help you get back on your feet if something went wrong. He says that’s still a reasonable ballpark figure, though how much you need will depend on things such as how much debt and other commitments you have.
“[Having a buffer] also frees you up and gives you more choice in life,” he says. “You often see people who don’t like their jobs but can’t afford to leave. But people make decisions if they have money set aside and want to make changes. They reap the benefits of their savings.”
Financial planner Laura Menschik of WLM Financial Group says in uncertain times you need to look at what you can do to make yourself as comfortable as possible. This could mean having cash set aside but it could also involve paying down your debts so that you have money to draw on if you need it.
“If you pay off all your credit cards, you know that you can use them in an emergency,” she says. “Reducing your debt over time gives you access to finances when you need them.”
If you have a home loan with a redraw facility, Menschik says pumping extra money into your mortgage is a very effective buffer as you reduce the size of your loan now (and the interest charged) but can still redraw the excess payments if you need the cash.
“It’s hard to say how much you should set aside as everyone’s different and it’s all about your comfort zones,” she says. “But you need liquidity available to cover extraordinary expenses such as a medical emergency.”
Menschik says the last thing investors want is to have to sell their investments to raise money during a down market. As we’ve seen recently, having spare cash is even more important if you have a loan that could be subject to margin calls.
So where should I stash this cash? If you have a mortgage with a redraw facility, putting the extra cash into your mortgage effectively allows you to “earn” the mortgage interest rate tax-free – as your savings reduce the interest payable on your loan. But if you want to build up cash savings, Orrock says the simplest option is to look at a high-yield savings account or term deposit.
“If you trust yourself, an online high-yield account can give you good interest with your money at-call,” he says. “But if you don’t trust yourself to leave it there, term deposits are offering attractive interest rates and you don’t have to lock your money away for long periods.”
Orrock says term deposit rates have risen as the banks have looked to increase their funding from deposits. Investors can now earn about 8 per cent on 180-day term deposits and even more if they lock their money away for a year.
He says innovations such as Suncorp’s term deposit product linked to its online savings account have made term deposits simpler and more flexible. With the Suncorp product, he says, you can nominate your term and get attractive interest rates.
Orrock says at-call online accounts are paying 7 to 8 per cent interest, typically with no minimum deposit. If you need to save to create your cash buffer, you can commit to regular savings through an automatic savings plan.
This story was found at: http://www.smh.com.au/articles/2008/03/17/1205602290166.html
Read the original:
In case of emergencies, break into stash of cash
US-based psychologist Kathleen Gurney, a leader in the field of money personalities says everyone fits into one of these nine money personalities.
ENTREPRENEURS: This is a very male dominated group that favours investing in the stock market.
HIGH ROLLERS: They are thrill seekers who enjoy the ride of financial risk.
HUNTERS: These are often women. Usually highly educated, with a live-for-today financial style.
ACHIEVERS: These are often conservative and not interested in risking assets they have worked hard to accumulate. They’re big on insurance and like to take charge of their money.
MONEY MASTERS: They get contentment and security from money and are the top wealth accumulators. They tend to act on sound advice and don’t rely on luck.
PERFECTIONISTS: They hate making mistakes and as a result they often don’t make decisions about their money. They find it difficult to find suitable investments thanks to having tunnel vision.
PRODUCERS: They have a lack of self confidence in money management and do not profit from risks because they can’t evaluate them carefully.
OPTIMISTS: They can cope with risk, but are more interested in enjoying their money than taking risks. They have few anxieties and tend to outsource the management of their money.
SAFETY PLAYERS: They are the really risk averse investors who put their money into really safe and secure investments such as the bank. They don’t take enough risk to make their money grow.
Here is the original post:
What?s your money personality?
SEARCH ENGINE KEYWORD RESULTS :
By Barbara Hagenbaugh, USA TODAY
WASHINGTON — U.S. teenagers are making little headway when it comes to financial literacy, a survey out Wednesday shows.
High school seniors on average answered 52.4% of a 30-question financial survey correctly. That was up from 52.3% when the survey was last conducted two years ago but down from 57% in 1997, the first year for the survey, according to the Jump$tart Coalition for Personal Financial Literacy.”Financial literacy is still a very significant problem. It doesn’t seem to be getting any better,” says Lewis Mandell, a professor at SUNY Buffalo School of Management who oversaw the survey, which was conducted in December and January. It includes topics such as investing and managing personal finances.
He said the lack of knowledge was troubling given that today’s high school seniors likely will be more responsible for their own financial well-being when they retire given trends away from company pension plans and an uncertain future for Social Security benefits.
But the study suggests students are unprepared for such a task, Mandell says.
In one question, only 14.2% of the students correctly answered that stocks would have the best growth potential for money over an 18-year period. That was the lowest percentage in the survey’s history.
“In the 21st century, the only person you can really count on is yourself,” he says.
The results of the survey taken by 5,775 high school seniors in 37 states were unveiled at a news conference in the boardroom at the Federal Reserve. Fed Chairman Ben Bernanke called improving financial education “vital to the future of our economy.”
Survey details:
• White students answered an average 55% of the questions correctly vs. 44.7% for blacks and 46.8% for Hispanics. The gap between whites and blacks was the widest in the survey’s history.
• Students from families with incomes of $80,000 or greater answered 55.6% of the questions correctly on average vs. 48.5% for those with incomes less than $20,000. The gap between the two income groups was also the largest in the history of the survey.
• Nearly 17% of the seniors had taken a money management or personal finance class, down from 20% in 2004. Surprisingly, students who had taken a class actually fared worse than those who did not. Students, however, who had played a stock market game, in which they used play money to pick stocks, fared better than students who had not participated.
• There was little difference in financial literacy based on gender. Boys on average answered 52.6% of the questions correctly vs. 52.3% for girls.
Students aren’t the only whose financial literacy is lacking. In a survey of 1,000 adults conducted last month for the Financial Services Forum, only 57% said they knew “quite a bit” or “a great deal” about managing their personal finances and retirement savings.
Excerpt from:
U.S. teenagers lack financial literacy
If you think playing the Cashflow game is just like playing another silly round of Monoploy, then you need to seriously think again. Cashflow boardgame is not just like a game, it is a educational tool for you to sharpen your finanical acumen and you get to learn different lessons each time you play the game. Â
The author of Rat Race Escapes (ratraceescapes.com) shares his learnings from his recently cashflow game:
Sue, Bob, Terry and I played Cashflow 101.
I played the teacher. Because the monthly cash flow is lower than occupations I normally play, it was much longer before I started taking big deals. Things moved pretty slowly for me for quite some time, buying 400 shares of MYT4U at a reasonable price of $10, even though I immediately landed on charity and in my next 3 roles I had for paychecks. Shortly thereafter, I partnered with Bob and Sue on a limited partnership with a doctor’s office and then immediately I was downsized.
Things were looking great when I bought a “great deal” for $35,000, a government owned home with a tenant, for $2000 down and $220 per month cash flow. Just before my next turn, a buyer appeared and I sold the house for $135,000, putting $102,000 in my pocket. I paid my bank loan plus my credit card and retail debt and still had $90,000 in cash!
On my next turn I drew a Big Deal and it was the 60 unit apartment building. Perhaps I should have passed on it. It was initially a net neutral deal for my monthly cash flow: with a down payment of $200,000, I borrowed $110,000 to make up the difference in the cash I had on hand but the $11,000 in monthly cash flow covered the loan. I still had a decent monthly cash flow of about $1600. Had I passed and taken a different big deal on a subsequent turn, I’d have retained cash, increased my cash flow and I may or may not have exited the Rat Race sooner.
After a couple more turns, and starting a software company in my basement, received a paycheck and borrowing more money from the bank, I got laid off again. My cash flow shrank to less than $100 and on a subsequent turn to about -$300. I survived and then sold the limited partnership, double the money for myself and partners and then sold the MYT4U stock for $40 after a split. After paying debt down, I was back to good cash flow and still had cash. In the mean time, Bob exited the Rat Race getting $600,000 as his initial Cash Flow Day.
Bingo, now there was a private lender offering better rates than the bank. I had a Big Deal Opportunity for a 8-Plex but didn’t have the cash for the down payment and there were no partners in sight. But with the private money rates from Bob, borrowing the amount I didn’t have the cash flow made the property cash flow. Bingo!
Now I refinanced my remaining bank debt with Bob increasing my loan from him to $127,000 but my monthly payment was only $6350! Adding the cash flow from the 8-Plex and refinancing the remaining $104,000 bank loan dropped that payment from $10,400 to $5200 and Bob had $6350 cash flow from me in the Fast Track. Great investment for him and such better financing for me that I was immediately out of the Rat Race with passive income of $12,700!
Ultimately I won because of a little luck. I loaned money to Sue in the Rat Race so she could buy a property that now made sense where it wouldn’t have before because the cost of the money would have been too high and I bought several businesses. But I won because the Russian Oil Deal paid off with $75,000 in cash flow.
So I learned two good lessons:
(1) I jumped on a huge deal that immediately netted me no extra income, took all of my cash and gave me a lot of debt. Had I waited for a less expensive big deal, I would have had more flexibility and cash. I don’t know if I would have exited the Rat Race sooner but I do know it wouldn’t have felt like a struggle. Ultimately, despite some financial pain, it still paid off handsomely, primarily when I got to the Fast Track with monthly cash flow of $1.3 Million. Maybe sometimes being circumspect pays off. Or not. It’s a matter of risk tolerance and while I still did the deal, I had less stomach for it than usual.
(2) Debt strategy and exit is a major component of success. Sometimes, paying a seemingly high rate for debt is okay (think hard money, borrowing downpayments, or even using credit cards on a daily basis while running a balance), IF you have exit strategies for this debt. For example, paying down to reduce what you pay monthly is a valid strategy and the only one that “stock” rules allow for. But life isn’t like that. Refinancing and restructuring of debt are real world examples of debt strategies that allow you to get cash or reduce the cost of debt.
Strategies change over time and debt should be no different. Say you bought a property with hard money for the purchase and rehab. You bought well and now the property is occupied and you have an appraisal that shows your debt is 65% of it value. Maybe you paid 5 points are paying 15% on the hard money. You’d want to refinance, right, especially if you could at Fanny Mae rates. You’d cut you debt payments in 1/2!
My strategy changed for debt when Bob got out of the Rat Race since I now could get a money backer that would help me along beautifully while giving him returns he was happy with. I call that WIN-WIN! He got a 60% yield and there’s only one business with that kind of yield in the Fast Track. Does he have risk? Sure, if I were to go bankrupt in the game on unsecured debt, he’d have a problem and lose his money. Would it kill him? Hardly but no one would like it. The bank takes the same risk on bank loans.
I went from struggling to being free because my strategy evolved and I had a new exit. So look for your options and act when conditions change.
Read the rest here:
Cashflow game – lessons learnt
