Help your Teens Become Millionaires
Parents always want their kids to grow up and be successful. It's even better if that success includes a seven-figure savings account.
It isn't too late to turn your surly teen into a millionaire. Yes, your teen-the same kid who periodically loses an iPod in an unorganized backpack-can be taught the tenets of saving. You've taught him about integrity, courtesy, and personal responsibility; now it's time to teach him about compound interest.
The American dream is about working hard to accumulate wealth. Fortunately, in this land of free enterprise, wealth is an attainable dream. Since your kids have a lot of time, they can get rich without ever breaking a sweat. If you start teaching them about investing now, you can watch them build wealth thanks to compound interest.
A little now versus a lot later
The concept of compound interest is the process of making money on money made. As confusing as this might sound to a teenager, it's really pretty simple. Here's an example to get the message across:
Let's say you deposit $2,000 into an interest-bearing account with a 3.5 percent annual yield. After one year, the account will have earned $70, and the balance will be $2,070. If the interest rate never changes, and the earnings are taken out every year to buy, say, 70 iPod downloads, the account will indefinitely produce that $70.
But what happens if you skip the 70 downloads, and you leave the money in the account? In the second year, you'll earn interest on the $2,000 plus the $70 previous interest, for total earnings of $72.45. Let that money sit there longer, and the earning power continues to grow. By the tenth year, the account will earn more than $95 per year, and the balance will be in excess of $2,800. That's $800 earned just by waiting around.
Making a millionaire
Your teen will probably argue that $2,800 is nowhere near $1 million. He might also imply that forgoing ten years of downloads is a high price to pay. You'll then have to move to the more interesting lesson-what it takes to save up seven figures. The most important considerations in the calculation are yield, and the amount and timing of additional investments. If you can stash away $500 a month at an 8 percent average annual yield, the investment will crack the million-dollar mark after 35 years.
Your teen may then argue that 35 years is practically an eternity, and too long to wait for the million-dollar jackpot. Yes, it's a long time-but there's another factor to the equation. The $500 per month for 35 years only adds up to $210,000. That means that your teen will only contribute a couple of hundred thousand, but will end up with $1 million. That's the kind of return even a surly teenager should appreciate. What's more, by the time he becomes a millionaire and he's just turning 50, he'll have his own surly teenager to explain the miracle of compound interest to.
Wednesday, January 30, 2008
Tuesday, January 29, 2008
Refinancing Woes - Meet the Parents
Refinancing Woes? Meet the Parents!
When you're facing foreclosure and you don't qualify for a refinance, consider asking mom and dad to help you out of the jam.
Kids in TV families are always asking their parents for help. Remember when Arnold and Willis Jackson were accused of robbing their neighbor's apartment on Different Strokes? Mr. Drummond helped his kids prove their innocence, despite the presence of some damaging circumstantial evidence. If you're struggling to meet your adjustable-rate mortgage (ARM) payments, it could be time to follow Arnold Jackson's lead, and ask for a little parental redemption.
Avoiding foreclosure
Being stuck in the web of an inappropriate mortgage forces you to consider the possibility of foreclosure, particularly if you can't sell your home and your mortgage refinance applications continue to be declined. It's a high-stress situation that offers no easy answers.
If you're not ready to play victim to foreclosure just yet, your parents might be able to help you out. A parental bailout may not be the preferred course of action, but it could be the best way to survive this temporary crisis. Parents can help you in one of three ways: by giving you money, co-signing on your refinance, or buying your property.
Gifting cash
You might be able to negotiate a refinance if you had some cash available to reduce the debt balance. Your parents can give you up to $12,000 per year without tax consequences; if you're married, they can give that amount to both you and your spouse. Split up the gift in two separate tax years, and your parents can donate up to $48,000 to your cause. Lenders may want to see a signed statement from your parents stating that the funds do not need to be repaid.
The gift of a signature
Your parents can also co-sign for you on a mortgage refinance. As a co-signer, they're agreeing to pay the debt if you default. The lender may approve your refinance with this additional backing; but having a co-signer won't help you make the payments. Before asking for those parental signatures, make sure that you understand why you didn't qualify for the refinance. Then, ask yourself honestly if this mortgage is realistic for you and your household. If it isn't, find another solution. You don't need to get your parents involved if foreclosure is inevitable.
An investment gift
You could also sell your property to your parents, and use the cash to pay off the loan. Once the transaction is complete, your parents can rent the property back to you. Or you can move to a smaller rental, and your parents can rent it out to a third party.
While your parents may not be as financially well off as Diff'rent Strokes' Mr. Drummond, it's likely that they're more stable than you are. Try opening the conversation-you just might end up with a solution to your mortgage dilemma.
When you're facing foreclosure and you don't qualify for a refinance, consider asking mom and dad to help you out of the jam.
Kids in TV families are always asking their parents for help. Remember when Arnold and Willis Jackson were accused of robbing their neighbor's apartment on Different Strokes? Mr. Drummond helped his kids prove their innocence, despite the presence of some damaging circumstantial evidence. If you're struggling to meet your adjustable-rate mortgage (ARM) payments, it could be time to follow Arnold Jackson's lead, and ask for a little parental redemption.
Avoiding foreclosure
Being stuck in the web of an inappropriate mortgage forces you to consider the possibility of foreclosure, particularly if you can't sell your home and your mortgage refinance applications continue to be declined. It's a high-stress situation that offers no easy answers.
If you're not ready to play victim to foreclosure just yet, your parents might be able to help you out. A parental bailout may not be the preferred course of action, but it could be the best way to survive this temporary crisis. Parents can help you in one of three ways: by giving you money, co-signing on your refinance, or buying your property.
Gifting cash
You might be able to negotiate a refinance if you had some cash available to reduce the debt balance. Your parents can give you up to $12,000 per year without tax consequences; if you're married, they can give that amount to both you and your spouse. Split up the gift in two separate tax years, and your parents can donate up to $48,000 to your cause. Lenders may want to see a signed statement from your parents stating that the funds do not need to be repaid.
The gift of a signature
Your parents can also co-sign for you on a mortgage refinance. As a co-signer, they're agreeing to pay the debt if you default. The lender may approve your refinance with this additional backing; but having a co-signer won't help you make the payments. Before asking for those parental signatures, make sure that you understand why you didn't qualify for the refinance. Then, ask yourself honestly if this mortgage is realistic for you and your household. If it isn't, find another solution. You don't need to get your parents involved if foreclosure is inevitable.
An investment gift
You could also sell your property to your parents, and use the cash to pay off the loan. Once the transaction is complete, your parents can rent the property back to you. Or you can move to a smaller rental, and your parents can rent it out to a third party.
While your parents may not be as financially well off as Diff'rent Strokes' Mr. Drummond, it's likely that they're more stable than you are. Try opening the conversation-you just might end up with a solution to your mortgage dilemma.
Monday, January 28, 2008
Avoid Penalty Points for Missed Payments
Avoid Penalty Points for Missed Payments
The fallout from delinquent subprime mortgages continues to illustrate how inter-connected our financial system truly is. Because of a penalty known as "universal default," a late payment on a mortgage can cause the interest rate on your credit card to rise.
In the wake of the surbprime mortgage crisis, credit card companies have moved to their battle stations, carefully keeping watch over potential credit problems. After observing countless financial institutions lose millions on defaulted mortgages, they're pricing their products to reflect potential risks. People with bad credit are now paying more than ever before, and their interest rates are also being adjusted upward based on a provision called universal default.
Domino effect
Credit card companies base their interest rates on a person's credit score. The higher the score, the lower the rate. When a financial institution issues a piece of plastic, their contracts generally allow them to change the interest rate. This is the case with the universal default provision.
These companies monitor the scores of their cardholders, and they react if they observe risky financial behavior. If, for example, a cardholder makes a late payment on his mortgage, the credit bureau will report a lower score. The credit card company sees the reduced score, and assumes that the customer is stumbling financially and could be a potential risk. Despite the fact that the cardholder's late payment was on his mortgage and not the credit card, the financial institution may raise interest rates to compensate for the potential risk.
Preventive maintenance
Unless you've got a card that excludes the universal default provision, there's not much you can do to stop the credit card company from raising your rate. Ideally, you should check your contract carefully, ensuring that it doesn't contain such provision. However, if you find that your current card has it, there are two ways to avoid the penalty.
The first is to get another piece of plastic without the default charge. The other is to make sure that your credit score never dips by making timely payments on all your accounts. Set up automatic withdrawals from your bank account on big ticket items like your home or car payment, and keep up on all your other bills. Consider using online payment systems so that you don't have to worry about a check getting lost in the mail. Also, make sure that you don't take on more debt than you can handle, as that can also lower your score.
The universal default provision is yet another example of how skittish financial institutions have become in the wake of the subprime mortgage crisis. By penalizing cardholders if they make a delinquent payment on other accounts, they're pricing for a potential credit risk. It's an example of how people with bad credit are being held to a higher standard-one that can, unfortunately, involve much higher interest rates.
The fallout from delinquent subprime mortgages continues to illustrate how inter-connected our financial system truly is. Because of a penalty known as "universal default," a late payment on a mortgage can cause the interest rate on your credit card to rise.
In the wake of the surbprime mortgage crisis, credit card companies have moved to their battle stations, carefully keeping watch over potential credit problems. After observing countless financial institutions lose millions on defaulted mortgages, they're pricing their products to reflect potential risks. People with bad credit are now paying more than ever before, and their interest rates are also being adjusted upward based on a provision called universal default.
Domino effect
Credit card companies base their interest rates on a person's credit score. The higher the score, the lower the rate. When a financial institution issues a piece of plastic, their contracts generally allow them to change the interest rate. This is the case with the universal default provision.
These companies monitor the scores of their cardholders, and they react if they observe risky financial behavior. If, for example, a cardholder makes a late payment on his mortgage, the credit bureau will report a lower score. The credit card company sees the reduced score, and assumes that the customer is stumbling financially and could be a potential risk. Despite the fact that the cardholder's late payment was on his mortgage and not the credit card, the financial institution may raise interest rates to compensate for the potential risk.
Preventive maintenance
Unless you've got a card that excludes the universal default provision, there's not much you can do to stop the credit card company from raising your rate. Ideally, you should check your contract carefully, ensuring that it doesn't contain such provision. However, if you find that your current card has it, there are two ways to avoid the penalty.
The first is to get another piece of plastic without the default charge. The other is to make sure that your credit score never dips by making timely payments on all your accounts. Set up automatic withdrawals from your bank account on big ticket items like your home or car payment, and keep up on all your other bills. Consider using online payment systems so that you don't have to worry about a check getting lost in the mail. Also, make sure that you don't take on more debt than you can handle, as that can also lower your score.
The universal default provision is yet another example of how skittish financial institutions have become in the wake of the subprime mortgage crisis. By penalizing cardholders if they make a delinquent payment on other accounts, they're pricing for a potential credit risk. It's an example of how people with bad credit are being held to a higher standard-one that can, unfortunately, involve much higher interest rates.
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