Personal Finance Advice

We learn a lot from our parents: what type of food to eat, how to behave in social settings, and what values are important are just a few. Sometimes parents don’t even realize what an impact they have on kids, but nonetheless, kids are always watching and always learning.

You probably learned a lot from your parents about personal finances. If you take a look at the way your parents handled their finances you may come to realize that it has great bearing on how you handle your personal finances as an adult. You might discover that your parents intentionally taught you very valuable lessons about handling money, or you might realize that the way your parents handled money really set you up to fail.

Here are some things to consider about how your parents handled their finances:

Did they use credit wisely, or did they use it with reckless abandon?

Were finances never really a problem, or were your parents constantly scrambling for money to pay the bills?

Did your parents intentionally teach you about personal finance, or did you enter adulthood with no idea about how to navigate personal finances?

If your parents prepared you for adulthood by giving you a comprehensive education in personal financial matters - while also leading by example and handling their own finances efficiently - then be sure to give mom an extra Mother’s Day hug.

If your parents didn’t handle finances well, or didn’t bother to teach you about the proper ways to manage your finances, then it’s time to realize that you don’t need to follow their example. It may not be easy to take on the task of getting your finances in order despite the ideas you have in your mind about how money should be handled. After all, coming to the realization that your parents may not have taught you something properly can sometimes be a rude awakening.

If you are in this position, realize that you’re a grown-up now. Break the cycle of living paycheck-to-paycheck and hiding from creditors. Now is the time to get your personal finances in order despite the bad example your parents may have exhibited.

Far too often consumers are so concerned with what their interest rates are that they never take a step back and look at the bigger picture.  While low interest rates for debt are great and high interest rates for savings are fantastic, the interest rate should not become the be-all, end-all reason driving people to put their money in certain places. 
 

The interest rate you earn on an interest-bearing account should not be the only reason your money is parked there.  In other words, look beyond the interest rate.
 

What about fees? It doesn’t matter if your credit card has a 0% APR if you are paying a fee every month just for the privilege of carrying the card around in your wallet.  Your mortgage loan’s interest rate might be lower than everyone else on your block, but your neighbors may not have a costly prepayment penalty or Private Mortgage Insurance with every payment.  Some fees are inevitable when dealing with debt, but some lenders will offer low interest rates to get your attention and then hit you with a barrage of fees.
 

Fees apply to savings too.  Why in the world should you pay a fee every statement cycle for your savings account? Your money should be earning interest without having the balance slowly whittled away by fees.  There are simply too many financial institutions offering feeless interest-bearing accounts with impressive interest rates for you to keep your money in an account that is getting constantly bombarded by fees, regardless of the interest rate they give you.
 

What about your needs? You might have a credit card with a low interest rate, but would you be better served by a rewards card with a slightly higher interest rate that allows you to accumulate cash, travel benefits, or more? If you are the type of person who regularly utilizes a credit card, yet always pays the balance off each month, then a rewards card can result in some really attractive bonuses.  You can apply this same logic to an equity loan.  Yes, you will probably pay a higher interest rate for a fixed equity loan, but isn’t that better than having an initially lower adjustable interest rate that has the potential to shoot sky-high when interest rates rise?
 

Savings accounts should be about more than interest rates.  Examine the reason why your money is in savings.  For example, if you’re building up an emergency fund you won’t want this money to sit in an account with a high interest rate which also happens to be quite risky.  Losing your entire emergency fund due to a downward swing of the market is bad news.   
 

A low interest rate for credit and a high interest rate for savings can be a great starting point to grab your attention, but a savvy consumer will know that there are other aspects to take into consideration. 

Financial institutions are in a mad dash to raise capital in an effort to avoid the fate that befell Bear Stearns when it ran out of cash and nearly collapsed.  Many of them have had to issue new stock at bargain basement prices which has angered existing stockholders because it will dilute their earnings per share for years. 

While some of this capital is being hoarded in anticipation for more write downs from additional sub prime defaults. another area that has many of them concerned is their exposure to credit default swaps(CDS).  One of the many financial innovations that came about in the last decade, the notational value of the fast growing market is estimated at over $62 trillion.

CDS are basically insurance polices sold by financial institutions to protect purchasers of bonds against the risk of default.  Many parties use them as hedges against their positions but because the only money that changes hands initially are the premium payments, it’s also a very popular tool for speculation.  Reconciliation payments take place only when a certain credit event is triggered like a ratings downgrade or default.

CDS were very popular during a booming economy when the default risk was low because it was basically free money for  the sellers of these instruments.  Now with credit markets in shambles, CDS have become an albatross around the neck of many financial institutions.

Warren Buffet spoke out against CDS as early as 2002 saying that they were a disaster waiting to happen.  Since it was pretty much an unregulated market, much of the risk exposure to sellers of CDS was unfunded.  Some analysts believe that it would only take one large financial institution to default on a CDS to cause a catastrophic chain reaction in the entire credit market.

CDS spreads ballooned during the height of the sub prime write downs and although they have recently tightened somewhat, they are still nowhere near their normal levels.  Some believe this may be an indication that credit markets are starting to improve or that at least financial institutions are now less pessimistic than they were a couple of months ago.

Nonetheless any money that’s being hoarded isn’t being loaned out, which serves to exacerbate an already tight credit market.