Moneywise24 Personal Finance

Most people have a tremendous fear to be broke, or to become broke at some point in their lives. But what does it actually mean, to be “broke”? And how can we prevent from getting to that point, where we have to call ourselves “broke”? When it comes to the understanding of many people, being broke means simply not having any money to spend.

This week, however, the Greek government agreed on radical savings measurements, which resulted in European Banks and the IMF to be willing to lend Greece an additional 3.2 billion Euros. Greece does not have any money to spend, else it wouldn’t need any additional loans, so in a sense Greece is as broke as one can get. Yet, the additional 3.2 billion Euros did something interesting: it saved Greece from bankruptcy.

Similarly, Donald Trump wrote in one of his books, that at some point in his life, he found himself being in dept so much, that he envied the homeless people on the street, who theoretically had more assets than himself, even if it were a few Dollars. Still, The Don is one of the richest men, and he didn’t end up on the streets.

So, there must be something else going on. Something beneath the surface, something secret.

Assets and liabilities Read the rest of this entry →

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• Flirting With Debt

When I read through many personal finance and money management blogs, I feel that a great importance is being put on reducing debt and leading a debt free life. I do agree with many standpoints about leading a debt free life. But still, I also believe debt can provide a true benefit, depending on the kind of debt, its use, how it is being paid back, and what it is used for. I call it flirting with debt, because debt can contribute to a particular life quality, but it can just as easily ruin families.

Remaining liquid

In the world of accounting and finance, there are this magical word liquidity. Liquidity simply refers to one’s ability to pay debt when required, and in terms of accounting this is usually measured by using the quick ratio. The quick ratio expresses the amount of units available in relation to one unit of debt. The formula is the following:

Quick Ratio = Total Assets / Total Liabilities

I tend to see liquidity as a form of insurance: I have the ability to repay my debt instantly whenever required. How one calculates his total assets might be different for each person. Myself, for example, I include cash, cash equivalents, stocks, and stock options. However, I do not include my mutual funds, which are meant for retirement purposes, as part of calculating the quick ratio.

Also, I tend not to put too much value on my current salary, simply because I know that salaries can change, or in bad economies companies might cut back on jobs. If I can pay for my debt now, there is no guarantee that I will be able to do so in one year from now.

The intention to grow

I intend to grow, and to further develop, at a financial level, but also regarding my health, or at a spiritual level. For this reason, I closely watch what the debt is intended for.

If a loan is simply used for an expense, which is likely to decrease in value over time, or of which the costs will be greater than the increase in value over time, it is quite destructive. I feel buying such items with a loan is merely an expression of my impatience of not being willing to wait to buy the item when the funds are available. Even worse, I would be willing to pay an extra fee, in order to pay the loan amount of a greater period of time, leaving me with a lesser amount from my income each month, and thus decelerating my growth and financial development.

What I would be really looking for is acceleration of my financial development. This means, that if I take a loan, it should provide a real financial benefit. Not only should there be a benefit over the long run (e.g. increase in real estate price, or the increase of value of a rare wine), but it should also cover for my monthly expenses, leaving a little bit extra.

Payments due vs. return

So, when thinking about taking a loan, I ask myself one important question:

Is the monthly return I get from the item going to fully cover my monthly payments?

The item I buy using the loan needs to have a true benefit, that can cover for my payments. For example, I have quite a huge loan which I took in order to study for my Bachelor’s degree. Had I not taken the loan, I would not have studied, and I would have earned at least 30% less with a job I probably would not like. Therefore, the loan has paid out, and it is directly visible on my monthly paycheck.

Alternatively, this question could be asked for virtually each and every item. And even if there is no return at first sight, could there be a possibility to create a return from it? Take real estate for example: I could buy a home in order to live in it, and it would provide me with no income; or I could find someone to rent it, and have an income from that.

The use of credit cards

Generally, I consider credit cards also as being a loan. Why? Because I can buy an item now, and pay for it next month. I do track all my finances, and I know exactly how much I spent using my credit card, so I always know that I can pay for my bills at the beginning of next month. However, many people don’t. In fact, many people need to pay for their outstanding credit card payments in installments, which can be extremely expensive.

I use my credit card as a sort of an emergency account. If I quickly need something, urgently, and I don’t have the money for it now, then I’ll buy it (for example I need a white shirt for tomorrow’s job interview). But as soon as I can postpone the purchase for a month or two, I will postpone it.

I find debt a useful instrument in order to grow financially, and I tend to look at it as another tool for accelerating growth. Still, debt is to be handled very carefully. If it is constructive, and it can contribute to my income, I would consider taking it. Still I would carefully consider my liquidity as well as some worst-case scenarios. What would happen if I’d lose my job? What happens if I get sick and I can’t work for 2 months. What happens if my stocks drop by 50% in value during another recession? Similarly, I tend to stay away from destructive debt, unless it cannot be avoided.

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• When Are You ‘Broke’, And What To Do About It?

Without doubt, since the world’s first credit card, issued by Diners Club, credit cards have become an integral part of our lives. Some people swear to have only one credit card, whereas others are committed to having different credit cards for different purposes and needs. Nevertheless, using credit cards unwisely can potentially lead to great money losses, increasing debt, reduced credit rating, up to complete insolvency.

Credit cards exist with many different features and terms and conditions, but they have one thing in common: they will usually cost money in one way or the other. Either credit cards come at an annual fee, or you will pay charges or interest on monthly installments, ATM withdrawal fees, or foreign exchange fees when abroad. For this reason, credit cards should be handled with great care, always aiming at holding a grip on one’s own personal finance.

The best way to manage credit cards is to simply have only one credit card. Credit cards are a necessary feature in many situations, such as when renting a car or conducting online purchases. However, when you have only one credit card at your disposal, it is much easier to overlook the associated expenses. Firstly, many banking institutions issue credit cards free of charge, usually provided specific conditions are met. You will need to do some research, but on the long run this might save you some cash annually; why pay for an annual fee for a credit card if you might not even use it during a given year? Additionally, the terms and conditions may vary greatly for each issuer. This includes ATM withdrawal fees, foreign exchange fees, or fees when you lost your credit card or when it becomes stolen.

One of the biggest dangers of credit cards is the temptation to spend more on items, and to pay back the money using installments. Banks will usually always ask some form of late payment fees, for which yearly interest rates are far from moderate. On average, people will spend 25% more money on items bought with a credit card than they would have otherwise when using regular cash. Additionally, since the money is not immediately debited from the bank account, individuals tend to lose their reality for the spent money. At the latest next month, when the bill arrives, people see the real consequence of their spending. This causes a new problem: due to the mindless spending, people may need to pay items with a credit card again, since otherwise they would not have the required money on their bank accounts.

This spending pattern may result in a mean and vicious circle, causing people to slide into debt even deeper. In such an event, it is not uncommon, that people start applying for additional credit cards in order to create an imaginary spending freedom; the realization that unpaid debt is accumulated is suppressed, and people start living off debt in stead of equity.

Credit cards can offer some necessary freedom, but they can also be quite dangerous for those with poor personal finance capabilities. Therefore:

• Commit yourself to owning only one personal credit card, and stick to it. Do you research as to the pricing and terms and conditions, in order to pay the least possible fees.
• Track all your credit card expenses. Credit cards tempt to mindless spending, but the money will be debited in one way or the other.
• Always pay your bills online. Paying late or using installments creates additional, unnecessary interest, making it harder to pay off debt. In the end, you purchased an item or service, so you will need to pay for it.
• When you are about to purchase an item with a credit card, think about your motivations. If using the credit card is the only possible way to pay for the service (think about car rental services or online shopping), then go ahead. But if your sole motivation is because you do not have the necessary cash to purchase the item otherwise, what makes you think that you will have the financial means next month? Or the month after that?
• Think about your motivation about shopping general. Do you shop because you truly need specific items, or do you shop because it makes you happy and feel good? In the latter, it may be well possible that you are simply burning your cash on items you do not really need. In this case, you may think about thinking over your motivations to go shopping, or in extreme cases think about counseling.

This article is also available on The Man Experience.

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I stumbled upon an article the other day, unfortunately I only quickly browsed the site and completely failed to write down the URL. Nevertheless, the article was an interesting one; it described how a woman from Latin America paid back her 25,000 USD loan within a couple of years, by taking on two jobs, letting her children live with her parents, and moving into a 100 USD per month apartment.

Although when I read the article, I felt great empathy and respect for the woman paying off a huge debt within such a short time, I felt somewhat confused when I started thinking it over. The article implied, that the woman had achieved something amazing, which she did in a sense. But:

• I live in Western Europe, it is impossible for me to find a place which would cost me only 100 USD per month.
• If I had children, would I really give them to live with my parents for as long as a couple of years?
• Would my parents approve of me giving them my kids to take care of?
• What is the use of paying off a debt, if it means living in absolute poverty for a few years?

Especially the last bullet point, whether I would sacrifice my life in order to pay off debt quickly, set me to think. Yes, living on the verge of poverty would let me pay off my debts much sooner. However, at the same time my life would come at a full stop; I would not be able to develop myself in any sense, since I would not have the financial means.

Usually, it is recommended (and many banks and land lords apply this rule also) to spend about one-third of one’s net income on rent or mortgage; in the more expensive metropoles, it could also be as much as half of one’s net income. This does not mean, that exepenses can not be reduced. Many people spend only 25% of 20% of their net salary on rent, meaning they are theoretically spending less than average on rent. The money that is saved could be spent on paying off the debt in addition to what is spent on paying off debt already. This way, debt can be repaid more quickly while a certain living standard is maintained.

I am big fan of finding the right balance between living standards, personal development, income and expenses. Sure, some people simply do not have this choice. But sometimes, people do have a choice and still they opt for the hard way. In many cases, this applies to income the same way; people choose a job or a profession which will reduce their social lives to virtually zero, yet offering them a great salary with a company car and bonuses. Five years later, some get a burn out… was it really worth it?

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At present, countless individuals are feeling the stress of handling their overwhelming debt burden. Consequently, they are resorting to debt consolidation companies to help them deal with their debts and regain financial control. Unluckily, many of them ask for exorbitant fees and give assurances that they are not able to fulfill. Prior to making a commitment to a debt consolidation company, you have to do some homework and think about your options. It can ultimately help you save a considerable amount of money.

 Warning Signals Regarding Debt Consolidation Services

 There are particular red flags by which you can realize that a debt consolidation company you’re thinking about is too good to be true.

 Assurance that you would get a debt consolidation loan: Majority of genuine debt consolidation companies would not assure that you would receive a debt consolidation loan before checking your credit history and completing an application. You should be leery about these types of assurances.

 Asking for personal details over the telephone: Look out for companies that request for personal details like social security numbers, credit card numbers or bank account numbers – particularly if you have not been accepted for a debt consolidation program or loan.

 How the ad has been put forward: On many occasions, scam companies claiming to provide consolidation services are noticed in classifieds instead of as common display advertisements. In addition, be cautious about inexpensively generated advertisements on local ratio and cable stations. On certain occasions, you need to call costly numbers to obtain a consultation.

 Documents supplied through a special courier or an overnight service: On many occasions, con artists use these forms of deliveries instead of the postal service. This is due to the reason it is a federal crime to perform fraud with the mailing system of the United States. If an agency delivers the documents in this fashion – not utilizing the postal services, then it is a warning signal.

 Company is requesting for an advance payment prior to issuing the loan: This is a significant warning signal. Though various lenders ask for a nominal application fee (normally between $35 and $50) to compensate for administrative costs and the expenses of a credit check, advance payment can never be a part of their programs. If you are told to make a huge upfront payment, you must be wary and stay away from such a company.

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