Kudos the S&P for being the first major debt rating firm to downgrade US debt to AA+.  Essentially they warned Congress that $4 trillions in cuts was required in a debt ceiling deal, Congress only ponied up about $2 trillion.  Bill Gross of PIMCO saw this coming as did many, many others including this finance blog.

The importance of the credit downgrade is the message it sends to voters and to Washington:  The US Treasury  is not immune the market realities of global economics.  The giant US credit card has terms and conditions ultimately dictated by global bond markets.  As debt-to-GDP ratios increase so will borrowing costs.  The long-term trajectory of US debt growth, under current law, is staggering.  Further the cocktail of massive debt, out-of-control debt growth, and a weak US economy do not bode well for future US debt ratings.

Unfortunately I don’t think this message is being heard or understood by a sufficient number of Americans.  Gross and El-Erian get it.  The US House of Representatives is starting to understand. The Senate and the White House do not.  Neithe does the US Treasury saying “There is no justifiable rationale for the downgrade?”  Seriously, what meds do they have to be on to say that with a straight face?  The American public has a degree of understanding, but not sufficient concern or attention.

The fallout of the downgrade will be modest but wide-ranging.  It will be good news for AAA rated companies and countries like Exxon Mobile, Britain and German.  The debt rating will be bad news for adjustable-rate mortgage holders, US bond holders, and entities that are required to hold US Treasuries.

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There are many ways to diversify beyond Wall Street’s offerings:

  • CDs (Certificates of Deposit)
  • Bank at a Credit Union
  • iBonds and/or Savings Bonds
  • Residential Real Estate
  • Commercial Real Estate
  • Starting a Small Business
  • Collectibles (gold, silver, platinum, art, vintage cars)
  • DIY home improvement

Paying down debt is also an investment:

  • Paying off (or paying down) credit cards
  • Paying off auto loans
  • Paying off student loans
  • Paying down mortgage(s)

These debt-lowering options have the side benefit of improving your credit score and lead to a healthier credit report.

Additionally, there are “investments” that benefit your finances and offer other non-financial advantages.

  • Education and training.  Either self-taught or formal. (including reading this blog!)  Increase your earning potential.
  • Exercise, and healthy diet.  The longer and healthier you live, the greater your potential to earn and prosper.
  • Strengthen your social network.  You will feel happier, more motivated, have more job networking opportunities.

Finally, there are methods to reduce and diversify your cost of living expenses:

  • Learn to cook, grill, or otherwise eat at home more often.  If you are persistent you may find you are eating better, healthier, and more economically.
  • If you like coffee… brew your own.  It may take time to learn what you like, but when you do you’ll love it.  Whether it is is store-ground hazelnut drip, Vietnamese coffee with Chicory and sweetened, condensed milk, French Roast, or a plethora of other choices you will benefit.
  • If you love high-quality craft beer, consider brewing your own.  After the initial investment (~$200) you can brew your own for less than $4 per six-pack.  Share it with friends, and grow your social network.
  • Use those DIY skills to make your house more energy-efficient by installing low-E windows, LED light bulbs, and even update weather stripping and doors.
  • Grow a garden.

I have employed all of these financial ideas except commercial real estate (not counting REITs), certificates of deposit, and gardening.  My point is that it is possible to invest beyond Wall Street’s offerings.  Wall Street now offers some great investments including ETFs, and excellent brokerage companies like Vanguard, Fidelity, and Interactive Brokers (for sophisticated investors).  Finance and investing extends beyond stocks, bonds, ETFs, and Wall Street.

Improving your Credit Score

On June 12, 2011, in finance blog, Investing, money, by Dave

Credit scores are important because they effect the interest rates you pay on everything:credit cards, car loans, mortgages, lines of credit, etc.  Credit scores and credit reports can also effect your success or failure in landing jobs or obtaining leases on an house, townhouse, or apartment.

If you know your credit score (FICO score), and it’s 770 or higher, you have an excellent score and are in great financial shape.  If your credit score is 720 to 769, you are in good shape, but could benefit from an upgraded score.  Finally if your credit score is below 720, you should strongly consider fixing your credit score.

I have some personal experience with credit score improvement and repair.  When I met my girlfriend and eventually found out her personal finance situation I had to take a deep breath.  She had $13,000 in credit card debt and credit score of 630.  One year later she had a credit score of 750 and almost zero debt. I provided no money to her… just advice and emotional support.  Today she is kicking butt and her credit score is well north of 770.

How’d we do it?  Pretty simple.  By making minimum payments to the low-interest accounts and throwing any left over money towards the highest interest account.  After a couple months, and an improved credit score, she took out a line of credit that was lower than her other rates.  She used it to pay off her highest rate card which was charging an outlandish rate of near 27%.  She kept making timely minimum payments to her lower-rate balances, while throwing almost all leftover money at the cards with the current highest rate.  As her credit score improved she was even able to call up and negotiate lower rates with some of her credit card companies.

I am Mr. Finance.  When I initially learned of her credit and debt situation I was taken for a loop.  I called my dad, Mr. Finance Senior, and confessed my discomfort.  Wise man that he is, he counseled me on observing how she adapts to my financial advise.   Since all else with her was wonderful, I held my breath and watched and waited.  Long story short, she did great.  I am so proud of her.

Not only is she now past her debts; she is thriving.  And because she did it herself, she has learned to “grok” a healthy financial lifestyle.  We are still happily (even blissfully) together.

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Buying US Debt?

On April 24, 2010, in bond funds, bonds, decisions, finance blog, financial, by Dave

Why not evaluate US government bonds like corporate bonds?  Take a look at the balance sheet, cash flow, and anticipated future cash flow.  Look at current management… where are the they taking the organization?

The data:

So the trend is not so good. Ever increasing debt implies more debt supply. Can the demand keep up. Not at current yields, no. Yields up, prices down.

Management? Fiscal discipline? Not anytime soon. Cash flow? The situation is not positive.

So I’m not very inspired to buy US Debt today. Maybe, maybe TIPS. But traditional US Bonds? Not with a credit report like this.

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Creative Finance

On January 30, 2010, in Investing, Real Estate, by Dave

The last few weeks have been busy for Balhiser LLC. First the small biz was denied a $50,000 line of credit from a bank despite an excellent credit credit score, collateral and cash flow. That’s where creative financing come into play. It occurred to me, as president of Balhiser LLC, that the real estate venture was a good investment, and the the bank had made an error by rejecting the application on the basis of “industry: real estate”. I came up with the idea of a risk-sharing loan that would pay the lender a percentage of gross revenue from the income property in proportion to the loan-to-value of the property. The “angel” lender turned out to be a non-bank individual. The terms of the gross revenue agreement include a minimum 6-month term at which point the loan becomes callable and repayable in full or in part.

The lender gets a good deal because they realize proportional gross revenue. Balhiser LLC gets a good deal because it receives financing to close the capitalization gap with a non-bank lender sharing the revenue risk. The classic win-win business deal. So long as the property goes unrented no “interest” is due.

As it turns out, a 12-month lease on the property was signed on January 27th. If all goes according to plan both my small biz and the private lender will do reasonably well. The lender stands to receive just over 8% return.