Monthly Archives: October 2007

Credit card and the debt trick

The credit card is a wonderful piece of plastic to which even the Greenpeace would have no objections. The power of finance that the card gives the owner is lethal. But such lethal weapons are equally dangerous for the owner / operator.With all the glorious features that the credit card comes with, also comes some of the debt traps that might lead your finances to nowhere!Irregular payments, over purchases than the budgeted amounts, unnecessary indulgence, lavish lifestyle etc. are some of the causes that might force a person to fall into the credit card debt cycle. Once into debts it is highly probable that you will not come out of it until you put special and dedicated efforts into it.If you get into the credit card debt, try to hire debt consolidation experts to pull you out of the mess. Some of the self help techniques:-

Negotiate the debt

All finance companies negotiate. Yours is no exception. Sit across the table with your financers and get into debt negotiation. Chalk out a plan on your repayment schedule. Renegotiate the rates at which they are charging you the debt. Ask for waiver on charges.

Take a balance transfer

Inquire the credit transfer rates and transfer all your debts into one single card with the lowest interest rates.

Take a Personal Loan

Check if the unsecured personal loans are available at a cheaper rate than what you currently paying to the credit card company.

Try to pay lump sum with a single payment. It will help you to negotiate the final payment value in a better way. 

However the best way to come out of credit card debt is to avoid the debt itself. A peace of mind is worth the effort than a piece of debt advice.

Working capital concepts (finance)

There are two main types of working capital – net working capital and gross working capital. When the accountants use the word working capital they generally mean the net working capital, which is the dollar difference between the current assets and the current liabilities. It is a measure to the extent of which the firm is protected from liquidity issues. However from the management viewpoint it does not make much of a sense to talk about managing the net difference between current assets and current liabilities when that difference is continuously changing.

On the other hand, financial analysts mean current assets when they talk about working capital. As a result their focus is on gross working capital. It makes a lot of sense to the financial manager to constantly provide with the correct amount of current assets for the firm at all times.

What is your motive of holding cash ?

There are three suggested reasons for individuals and companies to hold cash – transaction, speculative and precautionary.

Transactions motive

To meet payments such as purchases, wages, taxes and dividends, arising in the ordinary course of business.

Speculative motive

To take advantage of temporary opportunities such as a sudden decline in the price of a raw material or sudden window of opportunity for buying an asset or making an investment.

Precautionary motive

To maintain a safety cushion or buffer to meet unexpected cash needs. The more predictable the inflows and outflows of cash for a person / company the less cash that needs to be held for precautionary needs.

Cash management involves the efficient collection disbursement and temporary investment of cash. The treasurer’s department of a company is responsible for the company’s cash management system. A cash budget tell us how much cash we are likely to have, when we are likely to have it and for how long. Thus it serves as the foundation for cash forecasting.

Are you part of the growth story – the logic behind investing in emerging economies

A lot has been said and written about the growth and development that is taking place in some of the Third world countries, notably, the developing nations like the BRIC – Brazil, Russia, India and China.

All of such investment reports leave the retail investors gasping and wondering as to how they could also own a part of such growth stories. Retail investors do not own million of $$$ to invest into some overseas companies nor do they have the requisite skill set to identify specific opportunities. They also fall short of federal laws that do not allow anyone and sundry to invest overseas. One way out is investing in mutual funds schemes the fundamental objective of whose is to invest in growing and emerging economies. Some MF schemes are region specific and have a clear mandate to invest in such economies.

Investing through such mutual fund schemes gives the investor access to overseas market without any regulatory hiccups and a kind of ready reckoner investing dictionary. Apart from this the investor is also assured of expert investment portfolio management. The risk to cost ratio in minimal under such circumstances and the risk to return ratio is optimally poised.

Now why to invest in emerging economies? Simple, because they are emerging economies. These are the countries / regions where the next phase of super development with respect to infrastructure, health, education, manufacturing, agriculture and services is happening. The world money is flowing into these nations to facilitate growth in expectation of good returns. The GDP of these nations are above the average GDP of the developed nations. The economies are self sustainable and to a certain extent self reliant. The internal consumption of such regions / economies is fuelling amazing growth stories.

And this exactly is the reason why a retail investor in a developed economy must own a part of emerging economy growth story. Be there or be left out….

The world of plastic money – your checklist before you enter

Very often than not you would come across an advertisement declaring a cash back scheme on some of the credit cards. In most cases the financers offering such schemes are reputed market players with a huge trail of expertise in the the upcoming months. Taking help from a personal finance blog can also be useful.

Ownership of credit card is definitely a good option at your disposal but always be very sure of what you are getting into. Apart from doing a pre investigation on the market rates of competitors you should always have a checklist of the following things:

  • Card acceptability / popularity

  • Balance transfer rates

  • Yearly subscription fees

  • Any one time charges

  • Regular charges associated with late payments

  • Interest rates / fixed charges for withdrawal of cash

  • Interest day calculation for late payments

  • Loss of card / Theft / Fraud insurance

  • Dispute / Grievances redressal processes

  • Foreclosure processes

  • Payment options / processes

  • Sharing of personal data clause

Why did the Federal Reserve cut the rates?

There are many arguments which support the Fed to cut the financial rates and on Sept 18 their arguments saw the end of the tunnel. The Fed had reduced the fin rates by 50 bps.

So here is how the argument goes for a Fed rate cut:

  • The world credit finance system is in need of support

An immediate rate cut would infuse cash into the credit finance system thereby allowing it to function smoothly. The global credit finance system virtually came to a halt when most of the financial lenders were wary of buying short term financial instruments like commercial paper because they were not pretty sure of what was being offered as collateral to their financial lending.

  • Problems in real estate might spread into the economy

A lower rate would enable investors to purchase houses at prices what the market forces expect. These in turn would induce buying of ancillary products related to the housing sector and create an atmosphere of increased money movement. The resultant cash flows will help the economy to grow.

  • A slow down in the economy

The broader economy is reeling under the pressure of the sub prime saga as well as that of the automobile sector. The local manufacturers are under a great pressure from the Japanese counterparts and the margins are constantly heading south. The gas prices on the other hand are increasing on a daily basis leaving the consumer with no space to breathe.

  • The financial houses need time to look in their back

Globally the financial lenders sold smartly packaged securities to investors and made trillions out of it. The problem is that these lenders themselves don’t know if the mortgages used to back up the securities are worth their salt or not. What if the loans go bad? Will the back up mortgaged stand good? An interest cut will give such lenders time to set their finances in order.

Home Equity Loans

An important decision while deciding upon your dream home is the fast home equity loan factor. Incidentally though, it also remains to be the most underrated decisive factor during such decision making processes.

Much of this under importance is due to the non availability of expert advice from the customer’s perspective. Before you sign up for an fast home equity loan always check up for the following 2 things:

The rate of interest

There are various kinds of interest rates that can be attached to your repayment schedules:

a) The fixed rate component has fixed interest rates and they do not change with the change in the benchmark rates

b) The floating interest rate is attached to the benchmark rates and they keep on moving up/down depending upon the Fed benchmark rates.

In times of reducing interest rates having a floating interest rate repayment schedule is the best thing to have.

In times of volatility the fixed rates should be the preferred rate for your home equity loan.

The readjustment option

Always ensure that your home equity loan has an adjustable repayment schedule i.e. the tenure of the loan can be increased / decreased depending upon your cash flows and your need of the hour.

A home equity loan on your dream house is a decision that has long term effects and you must be completely informed on the issue.

Education important for Long Term Care Insurance

Just a quick not for you today. I’ve been recently looking into almost all assets have been drawn down does the government step in. In fact, to qualify for aid from Medicaid, one must have only $2,000 to their name. Usually the house is exempt, but it will be used as collateral on any Medicaid expenses. Just want everyone to be sure they understand how LTC works. Women should especially take a look at their options since they tend to outlive their husbands.