A friend of mine who is not a banker, yet has been involved in the financial world and is an educator made this comment to me. I think it’s great and worth sharing.

The quote has to do with predatory practices, and with the financial reform taking place, predatory lending is a focal point.

‘I hate the word “predatory” with anything related to economics, as it sort of absolves the “victimized individual” of responsibility for being stupid…’ MW

Predatory lending has a hype factor built into it as well. Lack of knowledge though is the real culprit; that’s why I’ve written “Barking With The Big Dogs”.

Quotes To Share: Predatory Practices is a post from: TOPIX To Share

While driving home, I heard a typical hyped up debt free commercial.  The ad said mortgages should be illegal.

If mortgages were illegal, what would housing sales be without loans?

Now considering most people need a place to live, there are a few choices.  First, live with relatives, who bought a home.  However, did they have to get a loan to buy the house?  Second, rent.  Renting is not always a bad idea, just as homeownership is not always a good idea.  Both scenarios have pros and cons.  Third, buy a house.  Based upon Census information, about 48.7 million people have regular and/or home equity mortgages.

With a population of 307 million, approximate 1 out of 6 have a mortgage.  Estimates show 24.3% are under the age of 18, so homeownership in this age group can be kicked out leaving  232.4 available to own a house.

Households in 2000 were105,480,101 and persons per household were 2.59 in 2000 as well.  If you take 307 million people and divide by 3 people per household today, that leaves about 102+ million households which is a close estimate to Census’ past data.

With almost 50 million people having some type of mortgage out of 100 million households, it’s easy to see homeownership would be difficult without a loan.  Therefore, if mortgages were illegal, housing sales would be much lower; and a 27% decline would be the good news.

Just as homeownership or renting has pros and cons, so do mortgages.  Mortgages have pitfalls as we all know, but provide benefits.  The benefits are not just the ability to purchase property, but can increase wealth as well.  Therefore, and having said all of this, don’t buy the hype blasted all over the airwaves.

If you want to turn the tides against the economic superpowers and mega-machines, read Barking With The Big Dogs; if not follow the crowd.

Housing Sales Down 27% Is The Good News is a post from: TOPIX To Share

GM, known as government motors since the take over last year by the US government, Canadian government and United Auto Workers union is looking to issue an IPO (initial public offering) to generate money to pay its debt.

What’s wrong with this picture?

First, refer to the ownership as listed above. Instead of solar cars of the future, they can build socialist cars.

Second, GM got billions of dollars, yet is looking to raise cash to pay debt.

Third, a company that his been around for a hundred years and was publicly traded is looking to issue NEW shares because all of the existing shareholders got wiped out in a bankruptcy that lasted one month.

Fourth, the president of a corporation in the private sector got ousted by the President of the country.

Fifth, refer back to ownership. Will I as a taxpayer get shares of the company? Doubtful.

Sixth, dealer contracts were canceled, thus hurting small business.

When the union goes on strike someday as they did in  2007, they will be striking against their own people as the UAW has ownership.  But that will be okay, the customers have been on strike against GM anyway!

I was considering buying a Chevy Traverse or Buick Acadia, but decided to get a Ford Explorer instead as I stated in my auto review. I’m glad I did, because I like the Ford better; it seems to be built better as the Traverse’s door handles seemed very flimsy.

One other thing, I’m not planning on doing business with Ally Bank, or should I say the former GMAC; a majority owner is…you guessed it…the government.  However, Ally has some of the best deposit rates, so maybe I should put my some money there and get paid while getting my loans elsewhere.

When the day comes and the IPO happens with shares traded, I may purchase some stock for a short time, but I won’t be buying a car or truck.

GM: Buy the IPO, not the car is a post from: TOPIX To Share

About a week and a half ago, Friday the 25th I believe or Saturday, I was listening to Barney Frank give some quick responses to a Q&A session on the steps in Washington regarding recent financial legislation.

A couple comments Mr. Frank made referenced banks which would require them to hold more loans versus selling them on the secondary market. Another topic referred to YSP and mortgage brokers.

I’ll leave the second topic to be discussed in the chapter “The Banker’s Secret” in my book, “Barking With The Big Dogs”, but for now, let’s see if the new legislation is really good for you and me and America as a whole.

When I heard his comments, I immediately thought the comments are good talking points, but more to the story exists which probably won’t be heard on CNN or Fox.

So, here is my take on just parts of the recent financial overhaul.

The new recent proposed legislation requires banks to hold more cash on hand, and is not a bad idea. However, new changes may require banks to hold more mortgages too thus affecting the transfer of loans to the secondary market. (The secondary market is where mortgages are in investments such as mutual funds for example which the Average Joe may own.)

The secondary market helps the big banks and small banks and individuals too regarding the flow of money and money earned. However, small and regional banks may not have the ability to sell as many loans or do as much business, thus potentially hurting the local banking community.

If banking laws require lenders to hold loans and keep larger deposits, the changes could be a huge benefit to the largest banks since smaller institutions may not have the balance sheet requirements to compete. Holding loans also reduces liquidity, the free flow of markets and the ability to loan money to more people can diminish.

How Will Bank Finance Reform Impact America? is a post from: TOPIX To Share

I was going over the financial feasibility study with a client today. When the conversation turned toward financial ratios, I brought up return on equity as I usually do.

However, something eye opening hit me during the conversation.

Before I talk about my discovery, let me mention topics we hit on first. You’ll want to pay attention this today if you are interested at all in making money on your investments, etc. If not, both  you and future generations to come will miss out too.

When determining if the business was worth doing, we looked at cash flow. Cash flow statements are very easy to understand and it’s this simple…money coming in versus money going out. You can look at a personal checking account just as a business looks at their statements.

Next we discussed income statements. Income statements show business the items such as depreciation of assets on and other tax write-offs which reduce the taxable amount of income. The income statement, however, does not affect cash flow – money spent does. The income statement gives an idea about the net profits which are taxable.

From there, we reviewed return on equity. A difference between return on equity and return on investment is different, but in short, the return shows how hard the money is working. In just a minute, I’ll demonstrate some simple math; but first, let’s look at the Rule of 72 as it relates to how hard your money is working.

The Rule of 72 will tell you how fast the money will double in value.

To figure the time, you will only need the calculator between your ears. If you know the rate of return, which is mentioned on the feasibility study ratios page – or a CD at the bank, simply divide 72 by that number. The answer will be the number of years for your money to double.

For example, if you earn 6%, take 72 and divide it by 6. The answer is 12. Your money will double every 12 years.

Now comes the eye opening part.

I was looking at a money market account paying .01%. That’s right, 1/100th of a percent. At this rate, money will double every 7,200 years!

Without reinvesting the interest earned and simply setting it aside, in order to double the money, 11,920 years will pass.

Looking at interest rates on CD’s at .25%, which are not uncommon rates, money will double in 288 years. Can you and your family wait this long? Mine can’t.

Don’t blame banks for offering low rates, there is more to the story and you can read about it in “Barking With The Big Dogs” which is soon to be released.

How well will you do? OMG, you might want to consider this! is a post from: TOPIX To Share

I tell clients all the time when starting a business, find the money first before signing any contracts. As much of a “no-brainer” as the previous statement seems, it happens.

I know people who paid rent for six months before getting the funding for their business. Fortunately, the time was only six months.  Could you imagine being in a contract for three years at $1,500 per month without a business? You would be out $54,000!

Before getting the keys to the property, first do a business plan so see the feasibility of the project. Next, find the money.

When finding the money, where do you look?

As I’ve stated before in my article, “Why Small Businesses Can’t Get Loans“, only about 4% of money for start up business comes from banks. Some of the big banks (such as Bank of America as I am told) have blanket policies not to lend to start up business. Wells Fargo had an advertisement talking about new business owners having friends around in the beginning, but now the people are gone and Wells Fargo is there to help. Is this a way of Wells Fargo saying they don’t lend to start up businesses?

Some banks won’t make a commercial loan for under $200,000 as well.

When a bank doesn’t lend to start up businesses, this practice may be their policy; however, if the project is good enough, the bank can seek the backing of the SBA and still do the loan.

The SBA (partially) guarantees loans to bank. The idea is when a loan falls outside the banks normal lending practices and/or the client cannot get money elsewhere, the SBA comes in to help businesses get the funding. The SBA has been called “the lender of last resort”.  Businesses do not deal directly with the SBA.  However, the ultimate decision still rests upon the bank.

So where does the money come from?

55% – your savings

10% – relatives

7% – partners

6% – charge cards

4% – venture capitalist

3% – friends

3% – Angel investors

3% – mortgage property

5% – other

Now consider grant money.

Grant is money that does not have to be repaid.

Most grants however require matching funds meaning the recipient also has to come up with funds in addition to the grant money they are receiving.

Grants are usually available through public or private community foundations primarily granting monies to not-for-profit agencies and rarely, if ever, grant money to for-profit businesses.  The grant money for small business may come in the form of assisting you with help and education, not direct funds.

WATCH OUT FOR GRANTS – some grant wording changes throughout the conditions to terms such as – grant – to loan – to equity position.  In addition, to satisfy the conditions of a grant, you may have to spend the money received to do so, thus netting you no additional funds to operate.

When getting help from the government, there’s one thing you need to know right up front about getting money from the government…

They don’t have a single dime to directly lend to you for the start-up of a small business.

You may believe this statement to be untrue because of the way the term “government loan” is thrown around, and we hear about government loans all the time.  (Refer back the the SBA.  The bank is the SBA’s client, not the business.)

The bottom line is there is no direct money.  But that’s okay…

If the government had to give money to any American who wanted to start a business, just imagine how much money they would have to collect in taxes to fund such a program.

Besides, a capitalist system works best when the government uses a hands-off approach with regards to the competitive market system.  Having the government choose who gets funded and who doesn’t is socialism not capitalism.

Finally, getting a funding may not be as difficult as it sounds because money is out there.  If you have a good plan, collateral, credit scores, etc., you can find money.  However, be prepared to face rejection and get creative if you decide to follow your dream.

How to get money for your business is a post from: TOPIX To Share

Many people believe banks are out to get borrowers and cheat them. I would have to agree to a certain extent, because I have met some lenders I would never use. At the same time, I’ve met just as many, if not more, realtors causing me to run in the opposite direction as well.

I once had a realtor, who was also a and mortgage loan officer, say I was cheating myself by figuring qualifying payments based upon net income vs. gross income.

Okay, so I could purchase a more expensive house and qualify for a more expensive mortgage using gross income. Is this qualifying amount to my benefit, or the realtor and mortgage company? (Obviously having a nicer house has many benefits.)

If I knew for certain my income was going to increase, I would have to agree to a certain extent that I am cheating myself.

However, with insurance, taxes, utilities, maintenance, etc., these factors make a big difference in the amount of money left over each month.

The debt ratios for qualifying for a mortgage are 28/36, or 28% and 36% respectively, meaning 28% of income goes for housing and 36% is for total debt. (Some programs allow for higher ratios.)

For simplicity purposes, I’ll use 25% instead of 28%, or 1/4, since it is easy to figure in my head.

With an income of $100,000 per year, the paycheck’s gross amount is approximately $2,000 per week. (50 weeks x $2K. I’ll leave the other two weeks for vacation.)

$2,000 per week is approximately 1/4 of the monthly income. Four weeks per month, even though technically there are 4.33 weeks per month on a yearly average.

If you use 25% of the gross amount, then your principal and interest payment would be equal to one’s weeks pay, or $2,000. But this amount is gross income.

Take 7.65% for Social Security and Medicare plus income taxes. For simple math, let’s say the combined total taxes are approximately 25% of income.

Now the net income is $1,500 per week which accounts for taking out the 25% for taxes vs. $2,000 gross weekly amount.

$500 per month is a big difference in payments.

To give you an idea how $500 per month equates, a thirty year fixed rate mortgage at 6% is equal to $600 per $100,000 loan.

$100,000 loan = $600 / month.

$200,000 loan = $1,200 / month and so on.

If you have a $500 difference per month in payments, the difference is nearly $100,000 difference in a house. ($83K actually.)

Now you see why some realtors and loan officers say you are cheating yourself? You could buy a nicer house for an extra $100,000.

Moving up to a nicer house, the extra $100,000 is a big difference in commissions too. By using the smaller qualifying figures, I’m really cheating the reator and loan officer, not just myself.

Therefore, I think I’ll stay conservative and use the “net” income for many reasons. And, I’ll probably be glad I cheated myself for doing so.

How Bankers and Loan Officers Cheat People is a post from: TOPIX To Share

Getting money for a small business is not easy for many reasons.

First of all, owners and prospective owners need to cut through the sales hype.

Advertising my say the President has ordered banks to loan money to those who qualify, but in reality, the President can’t simply do such actions.

Banks have internal business practices and structures just as any other business operates. Did you know some banks won’t loan on start up businesses or until a business has operated for two years? Some banks won’t make commercial loans under $200,000. Not all banks or credit unions do commercial lending.

Not lending is not always a bad thing.  When we put money in a savings account, for example, we want our money protected.  In order for our money to be protected and safe, we should want to bank to make prudent lending decisions, not risky loans.  Risk is more for investors and with the added risk, investors should reap the rewards knowing the potential losses could be great.

In addition, a bank or credit union has regulations to meet before a loan can be approved on top of their standard operating procedures. If a loan falls outside the lender’s normal business practices, or parameters, but wants to do the loan, the bank can seek the assistance of the SBA. The SBA has guidelines determining lending activities too.

Next, take secondary market issues. Many loans are sold on the secondary market. What may make lending difficult in the future, as we have seen in the past couple of years , is obviously related to people making money on investments. The market has been in the tank starting in 2007; therefore, no one wants to investing losing propositions.

Moving right along, consider taxes. In 2011, tax laws revert back to pre-2003 levels. Dividend rates will go back up to 39%! Higher taxes and less profits on investments may lead to lower values on investments due to lack of demand, thus people once again losing money.

Investments and dividends are not just for the wealthy or Wall Street execs, but also the average Joe’s IRA and 401k accounts, mutual funds, exchange traded funds, etc. (Check out my article, “Kissing retirement money goodbye“.)

So when looking for money, according information derived from the Small Business Development Center, only about 4% of the money for start up business comes from the bank – approximately 55%-65% comes from personal finances or relatives.

Other forms of money comes from selling assets, home equity loans, partners, investors, etc.

Grant money is for another topic, but basically there is not any grant money “for profit” businesses and the government isn’t a direct source of funding (or cash) for business,  which is not a bad thing either; but I’ll go into this at a later time.  In the meantime, consider what our taxes would be if the government provided loans to everyone.

In summary, the business idea and creating a business plan may take the least amount of time, but finding money could take months so be prepared and possibly be creative.

Why Small Business Can’t Get Loans. is a post from: TOPIX To Share

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Small Business Tools & Help To Banking & Taxes is a post from: TOPIX To Share

Okay, Radio Gaga has nothing to do with Lady Gaga. Actually, Radio GaGa Radio Goo Goo are lyrics from an old Queen song.  However, the title of this article has to do with the gaga and goo goo of advertising.

While driving, I was listening to a commercial about mortgages. The ad started out saying something like this. “Mortgages should be illegal.”

Then the ad went on to mention that on an average of loan of $200,000 over thirty years, the borrower would send in over $400,000 to the bank including interest. That’s almost half a million dollars!

Obviously sensationalizing half a million dollars going to the bank makes a borrower want to pursue the product the commercial is pitching – a get out of debt and build wealth scheme.

Without debating whether or not wealth can be built using debt is another topic for discussion, the focus here is to cut through the hype of the commercial.

To begin, on a $200,000 mortgage for thirty years at 6% interest, the payment is $1,199 – call it $1,200 for simplicity purposes. Over thirty years, or 360 payments at $1,200 per month, the total outlay by the borrower is $432,000. And yes, this money goes to the bank. However…

$200,000 of the $432,000 goes to principal reduction; or to put the example in another context, the borrower is reimbursing the bank for paying for the property in the first place as opposed to the individual paying the seller.

If cash had been paid for the house, the amount $200,000 is paid by the homeowner anyway. Therefore, $200,000 is a wash for buying the house. This money is spent regardless of getting a loan or paying cash. Therefore, the remainder $232,000 is interest.

Now is paying $232,000 a lot of interest? Sure it is.

Is it wise to pay such an enormous amount of interest to the bank? Maybe.

What will determine if paying interest is wise depends on a couple of questions.

First, is saving money important or making money important?

If saving money is important, paying off a mortgage quickly reduces the amount of interest owed.

Second, if making money is important, then consider “what are you doing with your money?”

If you are making money and creating more income and wealth, sending money in those asset and income directions may be more important than saving the interest. After all, businesses borrow money to make money and without OPM (other people’s money), generating income may not be possible.

If the gains are greater than the amount of money paid, paying large amounts of interest is a wise choice.

Just as paying interest is a choice, individuals have the choice whether or not to believe the hype pitched in advertising, but a little financial education require one to think just a little…and that leads us to my next topic…

Save more, think less.

Radio GaGa, Radio Goo Goo is a post from: TOPIX To Share