The Subprime Lending Crisis In English

By now everyone who hasn't been living under a rock for the past 6 months has heard about the mortgage crisis. Basically what's going on is that during the housing boom, greedy mortgage lenders were financing huge mortgages to under qualified borrowers. Sub-prime borrowers include people with less than perfect credit and those with good credit but little or no documented proof of income. These borrowers have a higher default risk and therefore pay a higher interest rate in order to compensate for the risk they pose.

In addition to lending to sub-prime borrowers, there was a lot of adjustable rate mortgages being financed and people experience huge jumps in their monthly payments as interest rates rose so what may have originally been an manageable payment turned into something that people just could not afford to pay.

Worse yet was the creative financing. Loans that involved 0% down and interest only loans (where you pay only the interest and nothing towards the principal) made a huge contribution to the turmoil.

A lot of home buyers were expecting a huge appreciation in home values and thought that would cover them but the boom experienced for the past few years was nothing more than a bubble. Record low interest rates and the ease of getting a loan fueled this bubble. However, home values began to decline and a lot of people began to default and go into foreclosure because walking away from a loan they couldn't afford in the first place on a home declining in value was the easiest solution to the problem.

Well the greedy lenders were left holding the bag. It didn't just stop with the lenders though. Many mutual funds and securities purchased and invested in these sub-prime loans so they took huge hits as well.

The problem affects the entire market though for a variety of reasons. Whenever investors see any uncertainly and increased volatility in the market they tend to start selling off, driving down stock prices. They dump their holdings related to the issue and become more risk averse.

Unrelated stocks are affected because a lot of companies even large ones rely on debt to fund projects and operations. With the current mortgage crisis there are less funds available for borrowing and it is more expensive to borrow.

Most companies have some degree of debt. This is not necessarily bad debt because the companies finance projects and operations with the borrowed funds with the expectation that more money would be generated from the projects and operations than the debt costs them.

Anyone hoping buy a home with less than perfect credit and solid documentation can forget about it for now. However don't give up hope. Spend the next 6 months or so working on building up your credit score and fattening up your down payment. By the spring there should be some more balance and stability in both the stock and housing markets and you may be able to find some wonderful deals. Remember all these defaulted mortgages represent an available home that banks will be eager to get off their hands.

Yours Truly,
The Finance Girl

Protecting Your Portfolio With Defensive Stocks

If you still want to invest in the market during shaky times like now, defensive stocks are the way to go. Defensive stocks are those that are not dependent on the overall economic cycle. Though they are not the stocks of choice to have when the economy is booming, they do outperform cyclical stocks in hard times.

By now we're all well aware of the sub prime lending crisis that spread like a disease, attacking the stock market once and once the market began to recover, more bad news. Today it has gotten worse. Wal-Mart announced that their earnings will be less than expected due to consumers tightening up on their spending. Home Depot made a similar announcement but it is understandable if not expected due to the nature of their business and the current state of the housing market. However, like any consumer knows, you can only curb your spending to a certain degree, at the end of the day, we still need food, gas, electricity, clothing (especially when there are children in the household) and a roof over our head. This is where defensive stocks come into play.

Products such as tobacco, pharmaceuticals, alcohol and utilities are not dependent on the economic cycle. Additionally, food companies that make most of their income from grocery store sales, as well as alcohol and bottled beverages are additional safe options when trying to protect your portfolio from a beaten up market.

Why You Should Invest In Money Management Software

If you don't know where your money is going, its time to invest in a money management software program if you don't already have it on your computer. I've tried both Microsoft Money and Quicken and find both of them to be excellent for managing personal finance and taxes.

After about a month of tracking your finances you will have a rough idea of where you are spending and what areas you can make some budget cuts. However to get a really good assessment you will need about 3 months.

One great feature of money management software is that you get to see the big picture. The software generates reports and graphs that show where your money is going for both the month and the year to date. You can also see how much you spend in each category for these periods.

You can easily import credit card, bank and Sharebuilder statements to the program and manage them from there. The program will even download unbilled transactions.

In addition to being able to categorize your spending and track accounts, you can manage bills and due dates and the program offer due date reminders. Both Quicken and Money allow you to pay your bills online and schedule payments.

If you have investments, both software programs allow you to manage your portfolios. They also retrieve historical, value and fundamental data on your securities. Quicken also allows you to access accounts online and download recent activity at scheduled intervals. This is particularly useful in the Investing Center because it allows you to track your stocks daily performance, in percentages and dollar value gains and losses.

My favorite aspect of these programs are that they generate excellent charts and graphs that allow you to compare your spending, balances and investments both to each other and over time.

Money management software is essential to getting a hold on your finances and keeping track of your financial history.

Yours Truly,
The Finance Girl

NEGATIVE SAVINGS SHOCKER

I was recently appalled by a statistic I came across stating that in 2005 the American personal savings rate averaged -0.5%. We have gotten so used to living above our means that we have reached a savings low that hasn't been matched since the DEPRESSION!

Spending more than you bring in is nothing but a recipe for disaster. I know it's a challenge to live within your means but it's a bigger challenge to live under a growing pile of debt.

As Thomas Fuller said, ''Debt is the worst kind of poverty.'' If you're living in the red, you're in pretty bad shape and any money you make isn't really yours, it's your debtors! But there is hope if you can discipline yourself and figure out what method works best for you. Then you can not only be debt free but you can also begin to grow savings and do your part to increase this nation's embarrassing savings rate.

Investing In ETFs

ETFs or Exchange Traded Funds and similar to index fund and mutual funds in that they are invested in an index, commodity or basket of assets. The difference is that they trade like a stock on an exchange.

Investing in both individual stocks and mutual funds have their drawbacks. When you buy an individual stock, all of your investment dollars are riding on the company you invest in. One factor of successful portfolios is diversification and to obtain diversification investing in individual stocks is extremely expensive, it would cost tens of thousands of dollars to create a portfolio that held just one of each of the stocks in the S&P 500. Not to mention the amount of transaction fees you would rack up. The obvious alternative to this mutual funds and index funds.

Mutual funds on the other hand offer the diversity and balance needed for a successful portfolio and there are a wide range of funds that track the different indices, sectors and markets. Mutual funds do have their drawbacks though. Most mutual funds have a minimum investment, $2500 is not uncommon. Additionally, mutual funds carry expense ratios and fees that can take a huge chunk out of your earnings. Mutual funds are meant to be held long term and you don't have as many options as you would with individual stocks. On top of that the majority of actively manages mutual funds fail to beat their benchmark.

ETFs To The Rescue

ETFs offer the best of both worlds. You receive the automatic diversification that you would with a mutual fund but it behaves like a stock. This means that you can buy as little as one share. ETFs also have lower expense ratios than their mutual funds counterparts.Unlike mutual funds that are priced once daily, ETFs price fluctuates throughout the day just like a stock. Since ETFs behave like a stock, you have the option to short sell and buy on margin.

Additionally, there is an ETF for pretty much everything you can think of. The most common are Spiders (SPY) which tracks the S&P500, Diamonds (DIA) which tracks the Dow Jones Industrial Average and Cubes (QQQQ), which tracks Nasdaq 100. There a so many many more though for every index and every and sector. ETFs are also broken into categories such as large cap, small cap, growth, value, etc...There are also ETFs for bonds and fixed income and they too are categorized into everything from total bond market to short term bonds. There are even ETFs for commodities such as gold, oil and silver.

The only costs involved in purchasing ETFs are you're regular transaction fees. You can buy stocks free or at a low cost with either http://www.zecco.com/ or www.sharebuilder.com

Good luck and happy investing,
Finance Girl

Making A Deal With Your Creditors

Creditors lend money with one objective: to make money! They want their principal back and they want their interest revenue. From time to time they have defaulters who just won't pay up. This is when they are willing to recover any amount they can and cut their losses.

If you are severely behind in your bills and have over 90 days past due debt (tsk tsk) you can negotiate. Call your creditors and make them an offer to pay up 20% to 75% in a lump sum to settle the account. If they agree, and odds are in your favor that they will! This will automatically benefit your credit because the outstanding balance will be settled however previous late payments and delinquencies will remain.

Getting Your FICO Score

You are entitled to one free copy of your credit report from each of the three credit reporting agencies annually at www.annualcreditreport.com.

Unfortunately, there is no ''free'' way to obtain your FICO score. When you obtain your free credit report you are offered the opportunity to purchase your score (usually for under $10).

There are also several credit monitoring websites, such as http://www.truecredit.com/ and http://www.freecreditreport.com/

which allow regular access to your credit reports and FICO score on a monthly subscription basis.

If you really just want to get a free peek at your score, you can visit http://www.freecreditreport.com/. This site offers a 30 day free trial of their service. You can sign up for the service, view your report and score as often as you like and cancel before the trial is up.

However I recommend keeping the credit monitoring service because your score changes on a month to month basis and it is a good way to track your progress if you are working to boost your score. An additional benefit is that you can view your score on a month to month basis which allows you to catch any errors or suspicious and fraudulent activity in a timely fashion. This is important because many victims of credit fraud don't realize what has happened until they're knee deep in a mess.

Although your credit score is easy to obtain, it isn't free. Paying a small monthly fee is a good investment in monitoring and managing your credit as well as protecting yourself from fraud.

Yours Truly,
Finance Girl

Seven Ways to Spend Less and Save More

Everyone should be saving at LEAST 10% of their income, however many people spend every last dime and then some.

Having a cushion of savings equaling 3-6 months of living expenses is extremely important for everyone. Unforeseen events such as job loss, illness and injury can be disastrous and can leave you in financial ruin that can take years to climb out of...if you're unprepared. If you're thinking to yourself that you can't afford to save 10%, then you need to be saving it more than anyone! Saving money takes time, effort and discipline but you can do it and the following steps can help.

1. Make saving automatic. You can start an automatic savings plan with your bank where they transfer a specified amount from your checking to your savings on dates of your choosing. You can also make the same arrangement with an online bank which tends to offer higher interest rates than traditional banks. Some good options are http://www.emmigrantdirect.com/ and HSBC's online banking service.

2. Set yourself a limit for how many ATM withdrawals you will make and for how much, then stick to it!

If you know that the cash you have on you has to last till your next planned ATM visit you will find yourself spending your money smarter and making less frivolous purchases.

3. Subtract credit card purchases from checking account immediately so you're prepared for the bill.

Credit cards are a form of financing. Whenever you use a credit card and carry a balance, you are taking out a high interest loan. Why would you finance groceries and gasoline outside of times of desperate financial hardship. Charging day to day purchases is fast, convenient and allows you to go about your day without walking around with wads of cash but pay the balance in full at the end of the month and only resort to financing charges in emergencies and irregular large expenses such as car repairs and the like.

4. Avoid impulse buying! Give yourself a cooling off period before making purchases, the larger the purchase the longer the cooling off period should be!

If you give it some time and still can't live without it, then by all means treat yourself.

5. Spare change adds up! Put all your spare change in a jar at home or at work and then deposit it in your savings account when it gets full.

Loose change is something that many of us don't even make note of and you're not going to amass a fortune saving it. However it is painless and effortless to save and when your container is full, the cash will feel like found money.

6. If you're a nonstop shopper, it's time to stop! Reward yourself every time you pass up a purchase no matter how small the purchase is (hey, lattes add up!), put the money you would have spent in a clear jar somewhere where you can see it on a regular basis. You will impress yourself as you watch it grow.

7. Once you have finished paying off a credit card or loan keep making payments into your savings, investment or retirement account. People always claim to be low on funds available for saving and investing so take the opportunity to put some freshly freed up cash to work.

These steps are simple, practical, ans they work! Hopefully you will incorporate them into your daily life and it won't take long before you see the benefits of saving money and spending smart.

Yours Truly,
Finance Girl