Monday, Nov 30

Borrowing Wisely– From Where?

Almost everyone needs to borrow money at some point. Maybe it's for a new home. Maybe it's for college tuition. Maybe it's to start a business.

Nowadays, professional financing options are many and varied. Thus, it is important to choose the right lending source, by reviewing the pros and cons associated with each.


Banks offer a variety of mortgage products, personal loans, construction loans, and other loan products depending upon their customers' needs. By definition, they take in money (deposits) and then distribute that money in the form of mortgages and consumer loans at a higher rate. They make their profit by capturing this spread.

Banks are a traditional source of funds for those purchasing a house or car or those that are looking to refinance an existing loan at a more favorable rate.

Many find that doing business with their own bank is easy. After all, they already have a relationship and an account there. In addition, personnel are usually on hand at the local branch to answer questions and help with paperwork. A notary public may also be available to help the customer document certain business or personal transactions. Also, copies of checks the customer has written are made available electronically.

The downside to getting financing from a bank is that bank fees can be hefty. In fact, some banks are notorious for the high cost of their loan application or servicing fees. In addition, banks are usually privately owned or owned by shareholders. As such, they are beholden to those individuals and not necessarily to the individual customer.

Finally, banks may resell your loan to another bank or financing company and this may mean that fees and procedures may change—often with little notice.

Credit Unions

A credit union is a cooperative institution controlled by its members— the people that use its services. Credit unions usually tend to include members of a particular group, organization or community to which one must belong in order to borrow.

Credit unions offer many of the same services as banks. But they are typically nonprofit enterprises, which helps enable them to lend money at more favorable rates or on more generous terms than commercial financial institutions. In addition, certain fees (such as transaction or lending application fees) may be cheaper.

On the downside, some credit unions only offer plain vanilla loans or do not provide the variety of loan products that some of the bigger banks do.

Peer-to-Peer Lending (P2P)

Peer-to-peer (P2P) lending, also known as social lending or crowd lending, is a method of financing that enables individuals to borrow and lend money without the use of an official financial institution as an intermediary. While it removes the middleman from the process, it also involves more time, effort, and risk than using a brick-and-mortar lender.

With peer-to-peer lending, borrowers receive financing from individual investors who are willing to lend their own money for an agreed interest rate. The two link up via a peer-to-peer online platform. Borrowers display their profiles on these sites, where investors can assess them to determine whether they would want to risk extending a loan to that person.

A borrower might receive the full amount he's asking for or only a portion of it. In the case of the latter, the remaining portion of the loan may be funded by one or more investors in the peer lending marketplace. It's quite typical for a loan to have multiple sources, with monthly repayments being made to each of the individual sources.

For lenders, the loans generate income in the form of interest, which can often exceed the rates that can be earned through other vehicles, such as savings accounts and CDs. In addition, the monthly interest payments a lender receives may even earn a higher return than a stock market investment. For borrowers, P2P loans represent an alternative source of financing— especially useful if they are unable to get approval from standard financial intermediaries. They often receive a more favorable interest rate or terms on the loan than from conventional sources too.

Still, any consumer considering using a peer-to-peer lending site should check the fees on transactions. Like banks, the sites may charge loan origination fees, late fees, and bounced-payment fees.

401(k) (Retirement) Plans

401(k) plans allow employees to invest money on a tax-deferred basis. Their primary purpose is to provide for an individual's retirement. But they can be a last resort for financing.

The money that you've contributed to the plan is technically yours, so there are no underwriting or application fees if you want to withdraw it. Or rather, borrow it—since a permanent withdrawal incurs taxes and a 10% penalty if you're under 59.5 years old.

Most 401(k)s allow you to borrow up to 50% of the funds vested in the account, to a limited amount and for up to a number of years. Because the funds are not withdrawn, only borrowed, the loan is tax-free. You then repay the loan gradually, including both the principal and interest.

The interest rate on 401(k) loans tends to be relatively low, perhaps one or two points above the prime rate, which is less than many consumers would pay for a personal loan. Also, unlike a traditional loan, the interest doesn't go to the bank or another commercial lender— it goes to you. Since the interest is returned to your account, some argue, the cost of borrowing from your 401(k) fund is essentially a payment back to yourself for the use of the money.

Bear in mind, though, that if you remove money from your retirement plan, you lose out on the funds compounding with tax-free interest. Also, most plans have a provision that prohibits you from making additional contributions to the plan until the loan balance is repaid. All of these things can have an adverse effect on your nest egg's growth.

Credit Cards

If used responsibly, credit cards are a great source of loans but can cause undue hardship to those who are not aware of the costs. They are not considered to be sources of longer-term financing. However, they can be a good source of funds for those who need money quickly and intend to repay the borrowed amount in short order.

If an individual need to borrow a small amount of money for a short period, a credit card (or a cash advance on a credit card) may not be a bad idea. After all, there are no application fees (assuming you already have a card). For those who pay off their entire balance at the end of every month, credit cards can be a source of loans at a 0% interest rate.

On the flip side, if a balance is carried over, credit cards can carry exorbitant interest rate charges (often in excess of 20% annually). Also, credit card companies will usually only lend or extend a relatively small amount of money or credit to the individual. That can be a disadvantage for those that need longer-term financing or for those that wish to make an exceptionally large purchase (such as a new car).

Finally, borrowing too much money through credit cards could reduce your chances of getting loans or additional credit from other lending institutions.

Margin Accounts

Margin accounts allow a brokerage customer to borrow money to invest in securities. The funds or equity in the brokerage account is often used as collateral for this loan.

The interest rates charged by margin accounts are usually better than or consistent with other sources of funding. In addition, if a margin account is already maintained and the customer has an ample amount of equity in the account, a loan is somewhat easy to come by.

Margin accounts are primarily used to make investments and are not a source of funding for longer-term financing. That said, an individual with enough equity can use margin loans to purchase everything from a car to a home. However, should the value of the securities in the account decline, the brokerage firm may require the individual to put up additional collateral on short notice or risk the investments being sold out from under them.

Finally, in a market downturn, those that have extended themselves on margin tend to experience more severe losses because of the interest charges that accrue as well as the possibility that they may have to meet a margin call.

Financing Companies

Financing companies routinely make loans to those looking to purchase any number of items. While some lenders make longer-term loans, most finance companies specialize in providing funds for smaller purchases such as a car or major appliance.

Finance companies usually offer competitive rates, and the overall fees can be low when compared to banks and other lending institutions. In addition, the approval process is usually completed fairly quickly.

However, financing companies may not provide the same level of customer service or offer additional services, such as ATMs. They also tend to have a limited array of loans.

In conclusion, whether you are looking to finance your children's education, a new home, or an engagement ring, it pays to analyze the pros and cons of each potential sources of capital available to you.

Got a ‘F**K YOU’ Money in Place?

Got a ‘F**K YOU’ Money in Place?

Sometimes we let emotions get in the way of making sound financial decisions which leads most people to make mistakes when making financial decisions. These emotions are even more pronounced in most employer-employee dealings. Most employment related financial decisions are made on impulse with little or no thoughts about the implications of such decisions. ‘F**k You’ money is one of the areas where this bias is most prevalent.

Just for better understanding– ‘F**k You’ Money is an amount of money an employee has that can allow him/her to tell the boss to take a hike when they feel the employer is becoming a pain in the back side. It is sort of an insurance policy that you have in your pocket which gives you the power to walk away if you feel like doing so. I have posed this question to a few people and most of them responded by plucking a very huge figure from the air and the response I get is one completely devoid of the thinking process that will go into such a decision. Most individuals just mention some millions of dollars or cedis as the amount they will need to walk away from their bosses. Others indicated that they will be willing to walk away even if they didn’t have money stashed anywhere. The emotional side of this decision is very strong and sometimes overshadows the very objective of making such a decision.

Most bosses or business owners normally push the employees so they can get more work from them than they are paying for and therefore most employees naturally hold a very bad view of their bosses. I read somewhere that employment is increasingly seen as a temporary economic arrangement for the mutual benefit of the company and the worker and it last only as long as both parties find it advantageous.

 I have come across employees who will walk away from a terrible employer even if they do not have the finances to support such a decision. I have also heard of people who will stay employed even under the most terrible of conditions. For these people the concept of ‘F**k You’ money is not very relevant to them. In any case anybody who is employed should have some sort of reserved funds that will come in handy in case of the unexpected happens.

The ‘F**k You’ money can also be stretched to moneys that an individual will need to have in order not to work again. Others may look at it as contingency fund to cater for the period between losing a job and finding a new one.

In any case the most important decision in dealing with ‘F**k You’ money is the amount one will need and where one has to keep that money. The most objective way of deciding how much money will be needed is to start looking at your living expenses. An individual’s living expenses is key in calculating the amount of money needed to be kept as an emergency fund. If the level of expenses cannot be ascertained, then it will be very difficult to arrive at an accurate value. If you do not have a budget or are not tracking your spending, then you need to start doing so now because without it, your chances of having financial and investment success will be very low and you wouldn’t have any business talking about ‘F**k You’ money. Let’s assume that you are either tracking your spending or have a fair idea of how much goes out of your pocket each month.

Those of us who spend more than we earn should not have any business talking about ‘F**k You’ money because it will not work. My advice to these people is to just overlook whatever treatment the employer is taking you through now until you are able to live within your means and can save. With a knowledge of your monthly expenses in hand, the next step is to decide on how far you want that ‘F**k You’ money to go. It will not make a lot of sense to leave work and run out of money in the next month.

The original idea of ‘F**k You’ money is so you do not have to work for anyone again. Another approach is to have enough to take care of you until you find another job and hopefully a more pleasant boss to go with. In the first scenario, you guess or if possible, predict how long you will live and then work backwards to calculate the total money you will spend from now to that period. If the total expenditure from now till your death looks very huge, don’t panic because we will adjust that amount by returns expected on such funds. If your plan is to have your ‘F**k You’ money last until your next job, then your problem is not complicated. You will need to estimate how long it will take you to get your next job and use this to calculate your total expenditure from the time you leave your job till you find a new one. I am making a conscious effort to keep any complicated calculation out of the discussion. The reason is we can look to the internet to learn how these calculations are done.

The next important question to ask is where to keep this ‘F**k You’ money?

My advice is to keep it with a financial institution in a low risk low return product. Treasury bills and related product comes to mind. When safety comes into any discussion then we have to look at low risk investments. There is always the temptation of being very aggressive and taking on more risk but I think the risk is not warranted in this case if the money is meant to be a ‘F**k You’ money.

The question about ‘F**k You’ money almost always generates an emotional response but what actually goes into answering it requires an individual to have an idea about personal expenses and then armed with this information, calculate how much money will be needed in this case.

A similar concept to ‘F**k You’ money is contingency fund.

This is money that an individual set aside to take care of emergencies when they appear. How much contingency a person needs to hold depends on the safety of a person’s employment. If your job is secured with no threats of layoff or sudden dismissals, then a contingency fund which holds three months of person’s expenditure is advised. If the stability of a person’s job is questionable then six months to a year’s expenditure should be held in a contingency fund.

Most individuals do not take the concept of contingency serious but it is one of the pillars of proper financial and investment discipline.

Any individual whether young or old, rich or poor must have some money set aside for emergencies. This is what will make the difference between being able to deal with a financial emergency and watching helplessly as an emergency drowns you financially.

In all, by revisiting the ‘F**k You’ money concept and rehash the point that most decisions taken in this area is loaded with emotions and devoid of very serious financial consideration, if you do not have that ‘F**k You’ money and your boss is getting on your nerves, my advice is bury your pride and keep working until you can raise that money.


Winslow Sackeyfio

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Knowing your money personality helps to shape financial and life goals

Knowing your money personality helps to shape financial and life goals

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