What Does Freedom Mean for You?

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Two hundred and forty-three years ago, our Founding Fathers signed the Declaration of Independence, freeing our great nation from the rule of the British Empire.

On July 4th, we acknowledge their courage with celebrations all across the country. 

While you probably associate the fourth now with fireworks, cookouts, and summer mattress sales, I’m willing to bet you still hold freedom as one of your highest values.

But if you’re deeply in debt — or on shaky financial ground — fiscal freedom might seem like another 243 years away.

First, what does monetary independence mean to you?

For some people it’s a retirement number. Maybe $1 million in a 401(k), with your house paid off and expenses less than $1,000 a month. That person is probably more financially free than someone with $3 million in the bank and over $10,000 in monthly expenses. It all depends on your specific circumstances.

To me, monetary freedom is simply not having to base my decisions on financial constraints. You can achieve freedom with more money or less spending. It doesn’t really matter how you get there.

In the spirit of the holiday, I want to share with you four fiscal freedom principles. These should guide you throughout the rest of the year toward your own monetary independence.

Principle #1: Confront Your Spending

American households owe more than $1 trillion in credit card debt, according to the Federal Reserve.

Chalk it up to a lack of discipline to save or a meager salary that’s not enough, so you turn to borrowing to make ends meet.

No matter how you got there, it’s time to add up your debt and confront it — you’re not going to get ahead if you stay in denial.

And just like our forefathers had the courage to imagine a nation of liberty long before it materialized, you need to believe you can get yourself out of debt and stay out.

Starting this July 4th, commit to paying down your debt with a portion of every dollar that comes into your bank account.

Principle #2: Understand Your Investments

Just over half of Americans — 54% — invest in stocks, according to Gallup. While that number may sound decent, it still means there are millions of Americans missing out on their best chance at building real wealth.

Historically, the stock market has been the best place to build wealth over time. But you need to have some basic understanding of how investing works before you start.

As it stands, a lot of investors barely know what they’re invested in. For instance, among investors who own target date funds, the SEC found that only 48% knew that target date funds don’t provide guaranteed income after retirement.

Make sure you know what you’re getting into before you do it. But the bottom line is invest.

Principle #3: Improve Your Credit Score

Your credit score affects so many different areas in your life that you need to figure out how to improve your score.

If you have lousy credit, it impacts the rate you get on car loans, property, and all sorts of large purchases you make. The better your score, the lower your payments will be, and in turn the more money you can save.

Another reason you desperately want to start improving your credit score is because every inflated payment you make means those dollars can’t be invested elsewhere. Payments on large purchases typically last for many years. So, a bad credit score today will impact your lifetime savings dramatically.

Improving your credit score should be at the top of your list after this weekend.

Principle #4: Don’t Give Up

One of our Founding Fathers, Benjamin Franklin, famously said: “A penny saved is a penny earned.” America had to struggle hard for its own independence, but the payoff has been more than 200 years of freedom and prosperity.

If you truly want to achieve fiscal independence one day, it’s going to take some grit and self-discipline. You’re going to have to sacrifice short term pleasure for long term gain. But once you eliminate your debt, and continue saving and investing, you’ll eventually reach your monetary freedom day.

There are no magic shortcuts to wealth accumulation. If you apply the basics found in these four principles, you’ll be celebrating the rest of your life.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

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The Importance of Understanding Mortgage Insurance

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Mortgage rates have been dropping for the past few months, with a 30-year fixed falling to 4% recently according to FreddieMac. And now there’s the possibility that the Fed will lower interest rates this summer. So this could be the ideal time to buy that home you’ve been eyeing.

But suppose you have credit problems or haven’t saved enough for a hefty down payment (20% for most conventional loans)?

Data from U.S. Mortgage Insurers (USMI) revealed that it could take 20 years for a household earning the national median income of $61,372 to save 20%, plus closing costs, for a $262,250 home, the median sales price for a single-family home in 2018.

And by the time you do, housing prices may have substantially increased to the point of becoming out of reach. In other words… it’s like trying to hit a moving target.

The reality is that banks are reluctant to trust potential borrowers who have poor credit or can’t invest much of their own money in a home. They want assurance that you’re a good risk and can be trusted. And in their eyes, the lower the down payment the riskier the loan.

Moreover, coming up with a 20% down payment can be a humongous hurdle for first-time buyers who don’t have much in savings or any equity in a current home.

But lack of cash doesn’t mean you can’t achieve the American Dream…

How Private Mortgage Insurance (PMI) Bridges the Gap

PMI protects the lender in case the borrower defaults on the mortgage.

The premium is based on your credit score, the loan-to-value ratio (LTV) of the home, and whether the mortgage will be fixed or variable rate.

The better your credit, the lower the premium. Another good reason to build good credit.

The LTV ratio is the amount you want to borrow compared to the value of the home securing the loan.

For example, if you hope to borrow $180,000 for a $200,000 home, the ratio would be: $180,000 ÷ $200,000 = 90%.

But if you can come up with more cash and only need to borrow $170,000, the ratio becomes: $170,000 ÷ $200,000 = 85%.

So as far as the lender is concerned, the lower the ratio… the less risk in making the loan.

The Important 78% Mark

PMI isn’t cheap. Typically, it costs 0.3% to 1.5% of the original mortgage amount each year. That means PMI at 1% for a $180,000 loan could cost you $1,800 per year, or $150 per month. The lender tacks this premium to your monthly payment.

So you want to get rid of it as soon as possible.

As you make mortgage payments the amount you owe slowly declines and your equity rises.

When the LTV falls to 80%, you can ask your lender to drop PMI. However, they are not required to do so.

But once it hits 78% (you have 22% equity in the home) they must eliminate the insurance.

So in the above example, when the mortgage drops to $156,000, the LTV falls to 78% and would be canceled. 

There are several ways to reach this mark sooner:

  • Get a new appraisal. It’ll cost you a few hundred dollars, but if your home has surged in value, the additional equity could push the LTV down to the 78% mark. For instance in our example, if the home’s value shot up to $240,000 and you owed $175,000, the LTV would be 73%… low enough to request that the PMI be dropped.
  • The same could apply if you remodel. A new screen room or upgraded kitchen, for instance, could make your home more valuable.
  • Pay a little extra each month and tell your lender to put that money towards the principal… not interest. $50, $75, $100 or so on top of your regular mortgage payment will get your loan balance down faster.

Lenders must tell you at closing how many years it will take until your mortgage is paid down enough to cancel PMI. So be sure you understand where this information is located in the loan documents.

The Downsides…

Before you sign up for PMI realize that there are some important details that the lender might overlook explaining to you in full.

For instance,

  • PMI does nothing to protect you if you can’t make the payments
  • Premiums are not tax-deductible
  • You might have to pay the first year’s premium at closing
  • The lender is the beneficiary. Your loved ones get nothing if you die
  • Reaching the 78% mark could take many years

On top of all that, it could take months to cancel the coverage once you do hit the 78% mark…

Your request must be in writing. The lender may want a certified appraisal, which you might

have to pay for, to assure the home’s value hasn’t fallen below the original estimate. They’ll also request proof that there aren’t any other debts on the property, like a home equity loan or second mortgage.    

How to Avoid PMI

There’s really no way to shop around for PMI. You have to accept what the lender offers. But you aren’t without options…

You could take out a piggyback mortgage to get you enough money for a 20% down payment.

Suppose you want to buy a home for $200,000 but only have $20,000 for a down payment.

You’d take out two separate loans for the same home. The first would be for $160,000 representing 80% of the home’s value. The second loan would be for 10%, which is $20,000.

This is also known as an 80/10/10 loan. The first mortgage is for 80% of the home’s value. You’re putting down 10%. And the second mortgage covers the remaining 10%.

Even though you won’t have PMI premiums to pay, there could be other costs that might make this strategy more expensive.

  • There will be closing costs on two mortgages, rather than one
  • The second loan will probably have a higher interest rate than the first
  • The second loan will typically be variable, which could mean an even higher interest rate in the future
  • The second loan might have a balloon provision that makes it payable in full in 15 or 20 years
  • The second loan doesn’t go away until you pay it off, whereas PMI gets canceled at some point
  • Some lenders will not permit you to borrow down payments.

There are other alternatives to conventional PMI.

For instance:

  • The FHA has loans with a 3.5% down payment and provides its own mortgage insurance
  • Your local or state government might have down payment programs
  • The VA has special low-down payment loans that don’t require mortgage insurance

In 2018, PMI helped more than 1 million borrowers purchase or refinance a home with an average down payment of 7% and as small as 3%.

Without this insurance they would have been kept from living the American Dream.

And as long as you understand the ins and outs and are willing to pay a little extra money each month, PMI could make it possible for you to buy your dream home too.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

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Before You Pay Your Hospital Bill, Read This

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Have you run up a huge hospital bill that you’re having difficulty paying?

The stress can be overwhelming, especially while you’re recovering from a complicated procedure and feeling like you’ve been hit by a truck. 

But you’re not alone…

The Consumer Financial Protection Bureau (CFPB) found that 43 million Americans have overdue medical debt on their credit reports.

You may have already pleaded with your insurance company and battled with debt collectors. But you still can’t get a break.

One resource you might consider is…

Hospital Financial Assistance

As part of the Affordable Care Act (Obamacare), all nonprofit hospitals must offer hospital financial assistance, also known as charity care. It’s optional at for-profit facilities.

The programs offer free or reduced-rates for certain patients. Yet the federal government doesn’t have any clear rules on how much assistance should be provided and who qualifies.

So that gives hospitals a lot of flexibility on what they offer and to whom.

Many base assistance on federal poverty guidelines (FPG). This is a measure of income and family size used by Washington to determine who is eligible for some federal programs. 

Others might have a sliding scale, which eliminates hospital debt for lower-income folks. Or there could simply be a standard amount of forgiveness.

Many hospitals post specifics about their financial assistance program on their website.

For instance, Jupiter Medical Center in Florida gives patients a 100% discount if their income is less than or equal to 200% of the FPG. If income is over 200% but not more than 400% of FPG, they’ll get an 80% discount.

The University of Pittsburgh Medical Center has a sliding scale. If patients have income below 251% of FPG, they’re eligible for 100% assistance. An income between 251% and 400% will get them partial debt forgiveness.

Here in California, USC hospitals grant a 100% discount for patients whose income is less than 200% of FPG. Those with family income between 201% and 350% will be eligible for a sliding scale discount.

Loyola University Medical Center is one of the more generous. The Chicago hospital has discounts for patients with family income as high as 600% of the FPG.

Other Criteria

Besides financial need, eligibility can depend on why you were in the hospital since some procedures, such as cosmetic and dental, might not be covered in your hospital’s program.

Also before requesting hospital financial assistance, you must have used all of any insurance benefits you were entitled to. That includes: insurance from your employer, auto insurance, and workers comp.

Patients with sufficient assets to pay for care are ineligible for financial assistance.

How to Apply

Hospitals have application forms online that you can download, print, and submit. You’ll likely have to include proof of income with pay stubs and tax returns as well as a list of assets, liabilities, and family members.

You have up to 240 days after the initial billing to file your application for assistance.

Call the facility’s billing office if you have questions on the application process.

And if You Don’t Qualify…

There are still steps you can take to get this monkey off your back.

The most important: don’t ignore it.

Because once a debt like that goes to collections, it can hurt your FICO credit report for up to seven years. And even land you in court.

So before your bill is sold to a collection agency, request an itemized statement from the hospital and ask that they put a hold on your account for 30 days. That gives you time to look for errors, such as double-billing and unexpected fees.

If you have medical insurance, they should have sent you or posted online an explanation of benefits (EOB) form. Compare it to the hospital’s itemized bill.

Is there something that you think the company should have paid but didn’t?

There could be a coding error, which may be why it was not paid…

For example, removing stitches from a gash on your arm, applying antiseptic cream, and covering it with a bandage at a walk-in clinic could have been coded as a much-more expensive emergency room visit.

Or tests done by technicians could’ve been coded as being done by doctors.

Or is there a large unpaid amount on the EOB form that you have no idea where it came from?

Get on the phone with your insurer and request to speak with a representative.

You can also delve deeper by comparing your bill to your medical records to see if the services invoiced were actually performed.

Extreme? Perhaps. But doing this legwork could save you thousands.

One study found errors in 99% of bills analyzed for 2017. Double-billing for services and procedures were among the most common.

Finally, if you’re uninsured or haven’t hit your deductible yet, remember that almost everything is negotiable, even hospital bills.

Not sure how much to offer? The Healthcare Bluebook lists the fair price for procedures in your area.

You might also see if the hospital will let you repay the bill on a low-or no-interest installment plan.

And in case you end up in the hospital again, you may want to reapply for financial assistance. Your family circumstances might change, and the FPG adjusts annually.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

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3 Ways to Grow Your Savings by Thousands of Dollars

This post 3 Ways to Grow Your Savings by Thousands of Dollars appeared first on Daily Reckoning.

Do you ever wonder why lottery winners sometimes go bankrupt, even after winning big? Why some people keep balances on their credit cards and pay high interest rates when they have savings available to pay the bill?

And why it seems so hard for Americans to set aside regular savings for retirement, even though they know they should?

These paradoxes can all be traced back to one concept you may have noticed is gaining attention as of late: behavioral economics.

The idea of psychology as a driver of economic action dates back at least to Adam Smith’s The Theory of Moral Sentiments (1759). Behavioural economics has, however, only in recent years been getting more popular.

In 2017, the Nobel Prize in Economics was awarded to Richard Thaler, professor of behavioral science and economics at the University of Chicago Booth School of Business. Dr. Thaler’s research looked at why people often make irrational decisions with their money.

Instead of acting rationally and having self-control, we tend to get easily distracted from long-term goals by short-term rewards, we often make poor financial decisions when we know better, and we give in to impulses way more than we should.

The bad news is marketers have figured this out and they’re constantly sending you small “nudges” telling you about special offers, limited-time sales, and never-before-seen deals encouraging you to spend your money now instead of saving it for tomorrow.

The good news is you can apply these same psychological strategies to boost your retirement savings.

Using Small Nudges to Improve Your Savings

In 2008, Dr. Thaler and Cass Sunstein, a legal scholar, wrote a book called Nudge: Improving Decisions about Health, Wealth, and Happiness. Dr. Thaler defined nudges as something that “alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives. To count as a mere nudge, the intervention must be easy and cheap to avoid.”

“Nudges are not mandates,” the authors write: “Putting fruit at eye level counts as a nudge. Banning junk food does not.”

This idea of nudging extends beyond health and personal finance. Several countries around the world, including Britain, Germany and Japan have started implementing “nudge units” within their governments to change citizen behavior.

But for today’s discussion we’ll focus on how you can use little nudges to save more, invest more, and meet your retirement savings goals faster.

Nudge 1: Commitment Devices

Commitment devices are voluntary, binding arrangements that people make to reach goals that may otherwise be hard to achieve. Commitment devices are not a new concept.

From “Christmas club accounts” designed to help you save for holiday expenses, to CDs, financial providers have offered commitment savings products for decades now.

Why do commitment devices work?

  • People are present-biased – People prioritize today’s desires and needs over tomorrow’s and, as a result, fail to make choices that will only benefit them in the future.
  • People lack self-control – People often intend to save money for a bigger expense, but find themselves spending it on more tempting and gratifying things, instead.
  • People are inattentive to the future – It can be difficult to remember the future. People often under-save because they don’t think about how much money they’ll need in the next month, year, or decade.
  • Social pressure – Many people face pressure from their family and friends to share their earnings and savings.

Commitment savings devices have helped a lot of people save more than they would have otherwise. Studies suggest that people would rather be nudged than shoved into commitment savings though.

Here’s an example:

In Kenya, researchers found that simply providing people in pre-existing savings groups with a safe box (a metal box with a key they controlled), increased preventive health product investments by 75 percent in the following year.

However, a hard commitment device – where people put money for preventive health in a locked

box, and could not withdraw it for emergencies – had a much smaller impact over the same one-year period.

Nudge 2: Defaults

Automatic (“opt-out”) enrollment is when you are automatically enrolled in a product or service unless you choose to opt out. Setting the default to “opt-out” instead of “opt-in” has been shown to significantly increase uptake of certain savings vehicles, especially in retirement planning.

Why do defaults work?

  • People prioritize today over tomorrow – People tend to get caught up in their busy lives and systematically fail to make decisions today that will only affect them in the future.
  • People put off taking action on complex tasks – People often avoid taking action on tasks that seem daunting or complex, and financial transactions like choosing a 401(k) plan are no exception.
  • People suffer from inertia – People have a strong preference for the status quo, regardless of whether it is better or worse for them than available alternatives.

Research around the world suggests that defaults affect savings at every step of the way, from the rate at which people participate in savings programs, to the amount people contribute, to the likelihood that people will increase their contributions over time.

Especially in the U.S., we’ve seen the dramatic effect defaults have on retirement savings plans. One study found that when companies began automatically enrolling new hires in a 401(k) plan, participation rates went from 59 to 95 percent.

When the employer changed the default contribution rate from 3 percent to 6 percent, it increased retirement savings amounts without reducing participation rates. The 6 percent default doubled the amount of people who contributed 6 percent of their pay, from 24 to 49 percent.

Nudge 3: Reminders

A lot of people struggle to build good savings habits because there are so many seemingly urgent needs today that it’s hard to save for tomorrow, or they simply forget. Setting reminders is an easy, low-cost way to bring savings goals to the top of your mind.

Why do reminders work?

  • People tend to be inattentive to their future needs – People often fail to think about or budget for large future expenses – think weddings or a new roof, or emergencies, which are hard to budget for.
  • People prioritize today over tomorrow – People tend to put their current desires ahead of their future needs, even when they are tempted to buy something they know they shouldn’t. Temptation today makes saving for tomorrow hard.
  • People procrastinate – People often get caught up in their busy lives and delay taking action. They may intend to deposit money in a savings account, but never seem to find the time.

Research from different countries around the world show that reminders are a useful tool in fighting procrastination and helping people follow-through on their goals.

For example, Canadian online robo-advisor firm Wealthsimple started using a system that provides personalized, frequent alerts (displayed when clients sign in to their accounts) to inform them about possible investment options, like unused RRSP or TFSA contribution room.

“The idea is to proactively educate clients about the opportunities available to them – such as contributing to a retirement account. As this is personalized and immediately useful information, our hope is that it will nudge them to make decisions that are aligned with their longer-term interests,” says Dave Nugent, Wealthsimple’s chief investment officer.

As you can see, gradual changes or “nudges” can make significant shifts in financial behavior. If you’re ever feeling stuck, don’t look to make big moves right away. Instead look for small nudges that can change your course.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

The post 3 Ways to Grow Your Savings by Thousands of Dollars appeared first on Daily Reckoning.

6 Must-Have Apps for Managing Debt

This post 6 Must-Have Apps for Managing Debt appeared first on Daily Reckoning.

Remember the old days? 

When you’d sit down at your kitchen table with a stack of bills on one side and a checkbook on the other. Paper envelopes were opened and receipts saved as you desperately tried to organize your finances.

Managing your money was a full-day affair and even after you’d finish, it was hard to tell exactly where you stand. 

Times have changed. 

Tracking your money and staying on budget is easier than ever now with the abundance of financial applications. You can automate bill payments, track financial goals, and know your actual net worth by the month, week, day, or even second. 

However, there are a lot of choices when it comes to selecting which finance apps you should consider. Today I’ll share my top six must-have apps for managing credit and debt. 

Here are my top picks:

1. Credit Karma

Cost: free

Platform: Android, iOS, Online

Yes, this app really is free. The Credit Karma app has three tools I like to help manage your credit: 1) 

You can access your credit score at no cost, 2) you get a credit report, and 3) you receive credit monitoring if anything important changes on your TransUnion credit report. That can help you spot identity theft.

How Credit Karma makes its money is by analyzing your credit score and suggesting ways you could improve your credit through recommended products. If you buy one of the recommended products, Credit Karma receives compensation from the bank or lender backing the product. Also, it’s important to note that the credit information provided by Credit Karma is based on reports from TransUnion and Equifax, so your credit score is not a FICO score.

2. Credit Sesame

Cost: Free
Platform: Android, iOS, Online

Another free credit score app I like is Credit Sesame. You get a monthly Experian credit score and credit monitoring, plus Sesame summarizes your monthly debt payments and shows a list of your total debt and balances. 

Credit Sesame is not as robust as Credit Karma, but it’s still worth trying so you get a free credit score from a different credit bureau. Also, Credit Sesame can provide you with an estimated value of your home and real-time tips on how to save money on home loans. 

3. Mint

Cost: Free

Platform: Android, iOS, Online

This is one of my favorite all-around personal finance apps. Mint is great for tracking your spending and managing your budget. The app pulls your banking and credit card transactions and categorizes them so you can see where your money is going each month, week, and day. 

You can also set up bill reminders and balance alerts, and be notified when you’re charged a bank fee. 

On top of these functions, you can set financial goals and set up a budget to keep you on track to meet your goals. Mint only reads your account information so you can’t move money or make payments through the app — which is good news or bad depending on your comfort level with third-party financial apps. 

4. Unbury.me

Cost: Free

Platform: Online

I really like this simple and straightforward calculator tool to help you get out of debt. Unbury.me approaches debt repayment in two different ways:

  • The ‘debt snowball’ method
  • The high interest rate method (or ‘avalanche’)

You enter all your debt information into the calculator and it will quickly compare which debt reduction method will work best for your situation and finances. 

You can play around with the monthly payment amount, and the chart will update to show your remaining principal balance, how much interest you’ll pay, and a debt freedom date.

5.  Debt-Free

Cost: Free

Platform: Online

When will I be debt free? CNN Money created a handy-little free calculator to help answer this question for you. List out your credit cards and other loans, and based on your debt repayment choice, the outcome of your plan will be calculated based on three variables: 

  • Minimum payments
  • Fixed monthly payments
  • The debt-free deadline

If you choose to be debt-free by a certain deadline, your monthly payments will be calculated based on that date. And if you choose a fixed monthly payment option, your debt payoff date will depend on the monthly payment you choose.

6. AwardWallet

Cost: Free

Platform: Android, iOS, Online

If you have multiple credit cards, you will have reward points and frequent flyer miles in multiple programs. AwardWallet helps keep all your reward information in one place. 

AwardWallet tell you when your points are about to expire. I can’t tell you how nice it is to only have to log into one platform to track all my points and miles. 

The basic version of AwardWallet is free. Premium starts at $5 for six months. 

There are no shortage of quality apps to help you manage your credit and debt. In later issues I’ll dive into some solutions to help you better manage your savings and investments.

To a richer life,

Nilus Mattive
Editor, The Rich Life Roadmap

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The 7 Stages of a Financial Bubble

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“Is there a real estate bubble?” That’s the question I’m asked repeatedly. When I reply honestly, “I hope so,” the person asking me will sometimes get angry.

“You want the market to crash?” asked one young man incredulously, at an event where I was a featured speaker.

“Yes,” I replied. “I love market crashes.”

Apparently not wanting to hear the rest of my explanation, he stomped off muttering something like “moron.”

I’ve covered this subject of booms, busts, and bubbles before in my columns and books, but since the world seems to be on the brink of so many different booms and busts, I think it’s a good time to revisit it.

Over the years, I have read several books on the subject of booms and busts. Almost all of them cover the Tulip Mania in Holland, the South Seas Bubble, and, of course, the Great Depression. One of the better books, Can It Happen Again?, was written in 1982 by Nobel Laureate Hyman Minsky. In this book, he described the seven stages of a financial bubble. They are:

Stage 1: A Financial Shock Wave

A crisis begins when a financial disturbance alters the current economic status quo. It could be a war, low interest rates, or new technology, as was the case in the dot-com boom.

Stage 2: Acceleration

Not all financial shocks turn into booms. What’s required is fuel to get the fire going.

After 9/11, I believe the fuel in the real estate market was a panic as the stock market crashed and interest rates fell. Billions of dollars flooded into the system from banks and the stock market, and the biggest real estate boom in history took place.

Stage 3: Euphoria

We have all missed booms. A wise investor knows to wait for the next boom, rather than jump in if they’ve missed the current one. But when acceleration turns to euphoria, the greater fools rush in.

By 2003, every fool was getting into real estate. The housing market became the hot topic for discussion at parties. “Flipping” became the buzzword at PTA meetings. Homes became ATM machines as credit-card debtors took long-term loans to pay off short-term debt.

Mortgage companies advertised repeatedly, wooing people to borrow more money. Financial planners, tired of explaining to their clients why their retirement plans had lost money, jumped ship to become mortgage brokers. During this euphoric period, amateurs believed they were real estate geniuses. They would tell anyone who would listen about how much money they had made and how smart they were.

Stage 4: Financial Distress

Insiders sell to outsiders. The greater fools are now streaming into the trap. The last fools are the ones who stood on the sidelines for years, watching the prices go up, terrified of jumping in. Finally, the euphoria and stories of friends and neighbors making a killing in the market gets to them. The latecomers, skeptics, amateurs, and the timid are finally overcome by greed and rush into the trap, cash in hand.

It’s not long before reality and distress sets in. The greater fools realize that they’re in trouble. Terror sets in, and they begin to sell. They begin to hate the asset they once loved, regardless of whether it’s a stock, bond, mutual fund, real estate, or precious metals.

Stage 5: The Market Reverses, and the Boom Turns into a Bust

The amateurs begin to realize that prices don’t always go up. They may notice that the professionals have sold and are no longer buying. Buyers turn into sellers, and prices begin to drop, causing banks to tighten up.

Minsky refers to this period as “discredit.” My rich dad said, “This is when God reminds you that you’re not as smart as you thought you were.” The easy money is gone, and losses start to accelerate. In real estate, the greater fool realizes he owes more on his property than it’s worth. He’s upside down financially.

Stage 6: The Panic Begins

Amateurs now hate their asset. They start to dump it as prices fall and banks stop lending. The panic accelerates. The boom is now officially a bust. At this time, controls might be installed to slow the fall, as is often the case with the stock market. If the tumble continues, people begin looking for a lender of last resort to save us all. Often, this is the central bank.

The good news is that at this stage, the professional investors wake up from their slumber and get excited again. They’re like a hibernating bear waking after a long sleep and finding a row of garbage cans, filled with expensive food and champagne from the party the night before, positioned right outside their den.

Stage 7: The White Knight Rides in

Occasionally, the bust really explodes, and the government must step in—as it did in the 1990s after the real estate bust when it set up an agency known as the Resolution Trust Corporation, often referred to as the RTC.

As it often seems, when the government does anything, incompetence is at its peak. The RTC began selling billions of dollars of unbelievable real estate for pennies on the dollar. These government bureaucrats had no idea what real estate is worth.

In 1991, my wife Kim and I moved to Phoenix, AZ, and began buying all the properties we could. Not only did the government not want anything to do with real estate, amateur investors and the greater fools hated real estate and wanted out.

People were actually calling us and offering to pay us money to take their property off their hands. Kim and I made so much money during this period of time we were able to retire by 1994.

The Best Time to Buy

Take market crashes. I love them because that’s the best time to buy—finding true value is a lot easier during such periods. And since so many people are selling, they’re more willing to negotiate and make you a better deal. Although a crash is the best time to buy, the market’s high pessimism also makes it a tough time to do so.

I remember buying gold at $275 an ounce in the late 1990s. Although I knew it was a great value at that price, the so-called experts were calling gold a “dog” and advised that everyone should be in high-tech and dot-com stocks.

Today, with gold above $1200 an ounce, those same experts are now recommending gold as a percentage of a well-diversified portfolio. Talk about expensive advice.

My point is that this current period is a tough time to buy or sell. Real estate is high, interest rates are high—and climbing, the stock market is a roller coaster, the U.S. dollar is low, gold is high, and there’s a lot of money looking for a home.

So, the lesson is: Now, more than ever, it’s important to focus on value, not price. When prices are low, finding value is easy.

When prices are high, value is a lot harder to find—which means you need to be smarter, more cautious, and resist your knee-jerk reactions. A final word from Warren Buffett: “It’s only when the tide goes out that you learn who’s been swimming naked.”

Now you know why I say, “I love market crashes.”

Although my wife and I continue to invest, we’re more like hibernating bears waiting for the party to end. As Warren Buffett says, “We simply attempt to be fearful when others are greedy, and to be greedy only when others are fearful.”

So instead of asking, “Is it a bubble?” it’s more financially intelligent to ask, “What stage of the bubble are we in?” Then, decide if you should be fearful, greedy, or hibernating.


Robert Kiyosaki

Robert Kiyosaki
Editor, Rich Dad Poor Dad Daily

The post The 7 Stages of a Financial Bubble appeared first on Daily Reckoning.

Credit Card “DECLINED” Notice — And 3 Stocks So It Never Happens Again

This post Credit Card “DECLINED” Notice — And 3 Stocks So It Never Happens Again appeared first on Daily Reckoning.

“Sorry, your card was declined.”

What the….!?!?

I was at the hospital cafeteria picking up some food for my little man who broke his arm this weekend. And for some reason my card wouldn’t go through. Was I really out of money?

The holidays can be stressful trying to make sure you cross everyone off on your shopping list. And then if you throw in some unexpected expenses like a trip to the emergency room, the stress can affect your finances!

Thankfully in my case, I just used the wrong pin for my debit card. But the experience made me think about how many families are spending money on holiday shopping this season.

More importantly, I started thinking about how you as an investor can protect your wealth and start cashing in on this year’s holiday spending.

Today, I want to show you three reasons why holiday shopping should be stronger than ever this year. And then we’ll take a look at three different ways to play this profitable trend.

So let’s get started!

Consumers Have More Reasons to Spend

Over the past year, we’ve talked a lot about the American “wealth effect.” Thanks to a strong job market, people have more money to spend, driving retail sales higher.

But in addition to that ongoing force, there are three additional reasons why shopping should be especially strong this year.

The first is tied to another trend we’ve been watching: the decline in oil prices.

Extra supplies of oil have been hitting the market driving oil prices lower. This means gasoline prices have also been dropping. And with less money being spent at the pump, consumers have more money left from every single paycheck. That money will come in handy when it’s time to buy those last minute holiday gifts!

A second reason shopping should pick up is low credit card debt.

Heading into the holiday season, consumers have been carrying lower credit card balances. That’s a smart financial move to keep from paying those awful credit card interest rates.

But knowing human nature, many shoppers will opt to spend more during this season, even if it means taking advantage of those credit limits. With more room to spend money on credit, we can expect to see higher holiday sales this year.

One final reason shopping should pick up this year is thanks to less inflation.

Inflation levels have been low over the past several years. And for us as shoppers, that means our money will go farther. I don’t know about you, but if I can still buy great gifts without paying unreasonable prices, I’ll definitely be in more of a buying mood.

Add these three drivers together, and it’s clear that this is going to be a season with plenty of spending here in the U.S.

But how do we take advantage of all of this spending?

I’m glad you asked!

Three Areas for Investors to Cash in on Spending

An obvious answer to how we profit from higher spending is by owning retail stocks.

But in today’s volatile market, you have to be very discerning with what you buy. After all, while retailers have reported strong revenues, some retail stocks have been moving lower alongside the broad market.

That gives us a chance to buy at a discount. But you’ll want to make sure you’re buying shares of companies poised to do very well this year.

Here are some great areas to start shopping for investment opportunities.

Maybe I’m biased because I have three teenage daughters. But I’ve been watching athletic apparel companies very closely this year. Stocks like Under Armour (UAA), Lululemon Athletica (LULU) and Columbia Sportswear (COLM) should be in great shape to move higher as sales beat expectations and investors jump in.

In some cases (like with LULU), the market pullback has given you a great opportunity to buy stocks that are growing, while paying a discount price. (Who doesn’t like a discount during the holidays!)

A second retail area to keep tabs on is the restaurant industry. Some of my favorite memories with my family have taken place going out to eat together. And with the culture in America getting busier — coupled with extra money to spend — it’s natural for more families to go out to eat.

A few attractive stocks in this area include Chipotle Mexican Grill (CMG), Cracker Barrel (CBRL) and Brinker International (EAT). When you hear Chipotle, you might think about the E. coli issues that they’ve had in the past. But the company has made headway in preventing issues like this from coming up again. And Chipotle’s commitment to fresh organic food should attract more socially conscious diners over time.

A final retail area to keep tabs on is the discount retail category. I’m talking about big stores that offer great deals like Walmart Stores (WMT), BJ’s Wholesale Club (BJ) and Costco (COST).

Even though consumers have more money to spend, there are still many shoppers (myself included) who want to make every dollar stretch. Stores that are famous for offering good products at discount prices will continue to grow revenue this holiday season.

And heck, you can probably make a profit from Costco based solely on the fact that I shop for our family of 9 there every week!

So there you have it… Three ways to profit from higher holiday spending in 2018.

I hope you’re enjoying this holiday season and remembering that while building our wealth is important, cash is only a tool to help us have more of an ability to focus on the things that really matter — like friends, family, and helping those that are less fortunate than ourselves.

Happy Holidays!

Here’s to growing and protecting your wealth!

Zach Scheidt

Zach Scheidt
Editor, The Daily Edge
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The post Credit Card “DECLINED” Notice — And 3 Stocks So It Never Happens Again appeared first on Daily Reckoning.