Adam Sanders, Registered CPA®

Hey Veterans: Are You Interested In Tax Lien Certificate Investing?

Imagine the following scenario on your favorite tv drama cop show: A guy in a dark coat with an evil glint in his eye walks up to the star of the show and tests their financial intelligence:

“Hey…Psst…You kid…c’mere… You interested in getting 20% interest GUARANTEED and easy as pie? Well, check this out.  looks around suspiciously  Right here in my trench coat, you see, I got this gold-plated guide.

It shows how normal Joe Schmoes are makin’ out like bandits. It’s all right here in this book called “Guide to Get-Rich-Quick Buying Tax Liens”.  Shhhh… SHHHH!!! Normally, people pay $497 for this inside info, but (and I’ll probably regret it later) ima let it go for only $97.  Whaddayathink??”

Luckily for you, just the other day you happened to see this exact blog post.  It was like having a vaccine against tax-lien hucksterism!

Oh, you say that you can’t remember all the finer points of the article?

Well, the TL: DR version is “I personally wouldn’t waste my time on this”.  There are easier ways to make money.

But, for those who wish to get a little bit more in-depth knowledge, read on!

Below, I break down the reasons why most people probably should steer clear of tax-liens or tax lien certificate investing.

Note: This article does not get into the ethical question of whether one should get into this racket (the “you’re-making-widows-and-orphans-homeless” argument). It is not my place to judge how you legally invest your money.

The fact is, local governments are desperate for the cash that comes from this activity.

So, what’s a tax lien?

In simple terms, it is the process that occurs when a person does not pay their property taxes.

The county or other jurisdiction needs to collect a tax payment from the homeowner.  Instead of hiring a collections firm or bugging the homeowner, the ask investors to pay the person’s bill.  What the investor gets in return is called a tax lien certificate from the city or county government that states that they’re not only going to get their original investment back, but that they will be able to collect a sizeable amount of interest too.

The typical cost of property taxes for a year can be a thousand, three thousand, five thousand, or even eight thousand dollars per year depending on the area. Not only does an investor get the original investment back but you will also get an unusually high-interest rate or rate of return. All because they paid that homeowners bill. All because most American counties are in dire economic straits and typically have significant money needs.

Incredibly Specific Local Rules

The first thing any potential investor needs to be aware regarding tax lien investing is that the rules are very area specific.

The rules vary from County to County and from state to state. Each state has global rules but then at a county-specific level there are even more details, rules, and regulations.  The basic risk is that every area is different. You need to be fully aware of all rules if you are going to operate in a specific area.

Some locales are going to offer a higher rate of return than others. In other areas, it can be easier to actually become the owner of the property if the person never pays back their taxes. That’s where things become really interesting.

Disclaimer: I personally do not buy tax liens.

I have purchased real estate in the past and have studied the process of tax lien property investing and decided it was not worth the headaches. We’ll discuss pros and cons I think potential investors ought to be aware of.

Tax liens or tax lien certificates on homes can cost from two to eight thousand dollars. Of course, it’s going to cost much more if the lien is on a big commercial property.  That might cost you a hundred thousand or more, but in most cases, the average investor won’t be buying this type of lien.

Let’s talk about the process.

It starts with a property owner who will not pay their property tax.

Who is most likely not to pay their property taxes and have the property end up on a tax lien list?

People that don’t want their property and also do not have a loan against their property.

This means that there may be some properties on a tax lien list that potentially have equity. Most of the time, these properties don’t have a loan on them.

Why?

Because most loans on a home are made through a mortgage company.  The mortgage company usually will pay the taxes and insurance each year, on time.

Even if the homeowner doesn’t pay their mortgage, the bank will still pay the property taxes and the insurance because they want to protect their position. If there’s a loan against a property, the taxes are almost certainly being paid and most of the time you won’t see these properties on tax lien lists. If the property is owned free and clear you might definitely expect some people to stop paying.

What kind of properties are own free and clear? Those that have been owned a long time by an owner.  They probably paid off the loan a long time ago.

Sometimes an heir might inherit the property. Those are the most likely people not to pay their taxes.  Imagine if you just inherited this wonderful property but now owe an extra $6000 a year to pay the taxes to keep it.

If it is in a depressed area of the country you may have trouble selling it.  If you don’t have the $6K lying around, this could make you throw your hands up and say “No Thanks!”.

Beware The “Too Good To Be True”

There are other people who don’t want the properties they have, though.

Examine closely: If someone owns a property free and clear and doesn’t want it, you must carefully ask “Why?”.

Maybe it’s some weird piece of land that’s completely landlocked containing only a whole bunch of trees. In this case, you couldn’t even sell the trees to a logging company because they couldn’t get in to harvest the trees.

Many properties you will see on the list have strange unmarketable features weird like that.  Perhaps it’s raw or vacant land that the owners themselves don’t want.  They say “Forget this crap! I’m not going to pay four K a year for this poopy property. I’m out! Peace!”

In these cases, the city will eventually become the rightful owner because the land has no value. Unless some sucker bids on a tax-lien.

But I Want It, Mom!!!

If you win an auction for tax lien certificates, in many cases you have the option of potentially becoming the owner. This can happen if you pay the taxes over a number of years. This process depends completely on the state, though. In Florida, for example, if the person doesn’t pay their taxes for three years, the property is sold at a tax deed foreclosure auction.

So, the only way to own the property if you hold the tax lien is that no one else bids at the final auction.

Yet, if I am the lien holder, this would really scare me because this means that no one else wanted it. NO ONE??

If no one else wants the property, why should I?

I’d probably now be stuck with a property I now really do not want that I now must continuously pay taxes on.

If you’re interested in investing in tax liens, you’re obviously going to have to evaluate each property individually to see which one you want to potentially buy the tax lien certificate for.

Do Your Homework!

In Chicago, where I am from, they issue a list once a year. There are over 50,000 tax lien certificates that are sold in a year and they do it once a year.

That means you have potentially to crawl through all 50,000 just to make sure you are not going to end up screwing yourself.

If you have a budget of twenty grand in a year and you want to invest in these tax liens you could just go shopping properties down the list until you estimate that you’ve eaten up your budget, but remember you may lose on this or that auction so you will have to have some backups.

Please, please, please evaluate each property in person before you make the decision to put the money into a tax lien certificate. You absolutely need to know what you’re putting your money into.

If you’re blindly putting that money on some weird slab of land, you just may end up with it. After that, it’s pretty much guaranteed that you will suffer a loss of your investment.

No Mom! I Still Want It!!!

In certain cases, you may actually want the property. This is where it gets interesting. You are probably going to have lots of competition if the property is desirable.

You will now be going up against the big boys.  Your competition will likely be local banks, hedge funds and other major players.

Here’s what they typically do: They will cherry-pick the single-family homes or properties that have a big mortgage on them. This happens because if the tax lien isn’t paid after two or three years, depending on the area, that mortgage could get wiped out.

Most mortgage companies will come in and pay the tax lien right before the tax deed sale. Either that or somebody is getting fired.

Banks and hedge funds absolutely love this game because they may get 2, 4, 6, and 8% on their money. Currently, deposits in a bank might make .5%. You do the math.

But I Heard About Making 20% Interest on Tax Liens?

You may have heard that there are places in this country that give up to 20% guaranteed rates of return on tax liens, but it doesn’t quite work like that. Why? Because it’s an auction process.

The person who bids the lowest interest rate will probably win. 20% is where the bidding usually starts. Competition then bids the price down.  You’re bidding against other people on the interest rate so the final percentage may end up on 6% or 8% or maybe 10% which is still hefty compared to, say, a savings account.

Once again, it depends on the area.

All in all, you’ll probably have serious competition which will be a challenge because you’re going head to head with people that have been doing this a very long time, know a lot more about this than you do, and have deeper resources than you.

A single-family home with a high dollar first mortgage on it is probably going to get redeemed. If not by the homeowner, at least by the banks. They will definitely go pay the back taxes before the property goes to foreclosure and they lose their mortgage investment. If that’s your goal, great!

But if your goal is to pick up a couple of these properties, then you’re going to need to take the approach of finding the deals that are least likely to get redeemed.

Just how do you get the property?

Start by going to tax auctions with the intent to learn the ropes for a few rounds before you first do any investing.  Study the process.  Study the players.

Figure out who the competitors are and what they’re doing.  Study what happens to each of the listed properties.  It will take time but you’ll start to notice some holes in the system.

I’m telling you to go study your local area (or area of choice) because that’s where the key pieces of information are. No tax lien course will be so thorough that it will allow you to skip this step.

It’s simply not possible given the competition, the amount of money at stake, and the possibility of rule changes.

It’s also a really good idea to go talk to an attorney that handles tax foreclosures.  For example, if you are a tax lien owner and you need to get your money back and the property owners didn’t pay you, sometimes you can file for a quiet title or for a tax foreclosure.

If this is possible in your area, this can make you much more competitive picking up properties.

Find out who’s handling tax foreclosures and learn from them.  There may be some local providers that handle this for investors.  In fact, I would bet that if you went to an auction and asked around you would quickly get to know what attorney to use and which title company to use because everyone wants a clear title.

Getting clear title can be a challenge in certain states.  For example, in Tennessee, it used to be a very big problem.  In Florida, there are closing companies that focus specifically on clear title for tax foreclosures.

You’ll have to definitely get a better understanding and that’s where these local service providers can give you some great wisdom on this subject.

Again you must really dig in and learn what’s going on in the game.  Remember, it’s much better if you know the property you’re dealing with.

Be Careful, You’re Playing With Real Money Now!

In every investment, you have got to verify whether it’s a good idea. The problem is that you have to go through so many to find a few that are going to be winners, that the time investment may not be worth it. It is difficult to know what’s going to be a good use of time.

You definitely need to have money ready to play in this arena.  This is not the no money, no cash down, creative financing stuff.

You have to have the money now. I would not personally put my own money into it because I could use that money to make a lot more deals out of it.

For example, if I was going to take $20,000 and throw it into a tax lien, I could also take that same $20,000 and give it to a homeowner or someone who needs to get out of their property ASAP.

I could then turn around and, most likely, flip that property for a lot more than I put in.

Getting more done in less time would mean that I can get a much better rate of return over the course of a year.

However, there are some people out there who are cash rich and don’t want the hands-on work that’s required with what I am suggesting.  They would much prefer to just go buy a bunch of tax liens and expect to get six to eight percent on their money.

They might focus on single-family homes that they know will get redeemed.  They won’t have to worry about owning the property and that’s exactly how they want it.

So are there any good things about tax lien investing?

In many instances, it’s a hands-off real estate investment style. Sure, it’s not hands-off in the beginning when you have to examine and choose which property you’re buying but it becomes hands off once you buy it.

You buy it, set it, then forget it. Then you move on. That that’s definitely a benefit.

You are also getting a guaranteed interest rate. Of course, it is very likely that you’re going to wait a couple of years before you can get it back. As a financial planner I prefer to think this is positive or negative related to your personal need for liquidity.

This type of investment is not very liquid because once you buy it, you have to sit on it. And wait.

You can end up sitting on it for three years before you get your money back.  But it’s a good rate of return, much better than any bank cd’s on the market today.

My Personal Preference Is Not To Invest in Tax Liens

Once again, I don’t do it because I prefer to have a better place to put my money.  However, I do love to check out tax deed auctions in Illinois, just out of curiosity.

Where I prefer to be in the real estate game is more on the active side because I’m happier with the hands-on, person to person deals. I don’t prefer to invest in a hands-off fashion because I’m happier actively making deals.

If possible I don’t want to get a specific return on my money over three years but would prefer active buying and selling which increase monetary turnover.

So That’s It! Location, Location, Location!

I hope you enjoyed this article and hopefully, you have gained some insights that you won’t see in other places whether paid or free.  This data comes from the good ol’ school of taking my lumps on the street.

I have certainly suffered enough headaches and stress to know what my personal preferences are.

So if you want to go the tax lien certificate investing route, just remember to know where your profitable paths lie.  It really is all about being a local expert, knowing other local experts, and knowing your local laws thoroughly.

If you study long enough in your local area and talk to enough professionals who are doing it, you’ll eventually begin to see where the opportunities are and that’s a HUGE key to success.

It’s simply about knowing what’s going on locally, asking a lot of professionals for information in that area and finally digging into knowing who the players are.

Maybe the guys at the auction that are bidding may not want to help you but if you knock on enough doors and buy enough people a latte, you can start to get to the juicy money-making information that others won’t know.

If you have any question, or if you have any comments you know please ask them on our Facebook page.

Veterans: Who Taught You Financial Literacy as a Student?

Hey Veterans: Do you think your financial life would be different today if had been taught the benefits of financial literacy as a kid? Have you become frustrated with the fact that schools teach us to be great worker bees, but teach almost nothing about financial freedom?

With home ownership, retirement, savings, and cash deposit accounts listed as things an adult needs to really understand, many people, including myself were left wildly unprepared for the real world once they left high school.

The United States is one of the countries with the highest number of citizens with checking accounts, yet many young people could not balance a checking account if their life depended on it.

With such a severe lack of financial education, one wonders how young people ever attain financial freedom in their lifetimes.

What is financial literacy and why is it important?

In a country that is supposed to be among the wealthiest in the world, most people are struggling because they don’t understand the most basic financial concepts on a personal level.

Financial literacy training for young people is severely lacking and as such is the future financial security of the nation itself is at risk.

Even when I came out of college with a degree in Finance, it was amazing to me that it took another full year of struggling with my personal financial life for the light bulb to come on regarding financial management.

The definition of financial literacy is having a deep and unshakable understanding of the various topics topics related to managing money, personal finance (i.e. credit), how and why we save money, and what to invest that money into once it has grown to a decent size.

It involves understanding concepts such as compound interest, the rule of 72, and the time value of money.  These items are tools that in the hand of the skilled build great wealth, but in the hands of the uninitiated quickly bring about bankruptcy.

So how can we start to gain the benefits of financial literacy?

A good place to start is by reading the following list!  If you are interested in giving a young person you know a great financial headstart, then read on to find out what I wish I had learned as a high school student or even earlier.

1- Watch Out For Predatory Lenders and Credit Cards

I remember walking down the street my first few weeks on campus and seeing a kiosk with a person giving away 2 liters of Coca-Cola just for signing up for a Discover Card.

I thought wow! Free money and free Coke…What a sweet deal.  Little did I know that I should have made them give me so…much…more! I was woefully unprepared for that first card but it taught me a ton of life lessons.

Lenders love to hound young adults who are just beginning to live on their own and manage their financial lives. With credit cards from well known financial institutions starting at 23% for first-time applicants and ever increasing credit limits, it is no wonder that the average amount of credit card debt is $15 thousand dollars.

Furthermore, predatory lenders enjoy playing the no interest game to trap young people. Be smart with credit cards if you must have them.

Don’t use them for anything except what you can fully manage to pay back at the end of the month. Really, though, it is simply best not to use them at all except for strategic reasons.

2- Compound Interest – Learn The Rule of 72

Interest is the amount of money that is earned on an amount of money each period.  This is usually listed as a percentage.  For example, a person holding a $100 investment that earns 10% per month will have 110.00 dollars at the end of the month.

Compound interest is what occurs the next month.  First, the same $10.00 is earned next month, but something magical also happens.  The previous month’s earned $10 also earns 10% or 1 dollar bringing the total earnings to 100 + 10 +10 +1 = $121.

Now, this example may not seem like a big deal but if you could find a deal like this you would be advised to take it and run for the hills before they change their minds.

Why?

Because at the end of 10 years at this rate of return your $100 would have turned into $9,024,920.  That is the power of compound interest.  It is also the power that credit card companies use against the unsuspecting.

If you invest your money in the stock market, you may be able to obtain a rate of return that might be in the range of 10% per year, not per month.  However, this is still enough to double your money every 7 years.  How do I know this?  Through the rule of 72!

The rule of 72 states that if you take any interest rate as a whole number then divide 72 by that number, you get the number of years it will take for the investment (or debt in the case of credit cards) to double, without any other money being added to the pile.

This is the real reason why the “rich get richer and the poor get poorer”.  One is using compound interest in their favor.  The other is having it used against them through high-interest credit cards or predatory lending practices.

3- Start Investing in an IRA As Soon As Possible

The problem with earning money even in a passive way like investing is that the government is always taking part of the earnings, putting a drag on your money’s compounding rate.

However, tools such as IRA’s are government sponsored plans for that allow money to grow tax-free. These can be started at any age under 70 and a half years old.

You should start an IRA as soon as possible because guarding your investments against taxation is one of the best ways to ensure that the money will grow as quickly as possible.

Parents should seriously consider setting up IRA’s for their children once they begin earning money because the earlier you can get money compounding, the wealthier you will be at retirement.

For example, if a person has $10,000 in an IRA, at the age of 35, then decide to invest no more, their expected value at age 65 compounded at 8% per year would be $147,853.44.

However, if they had done this at the age of 25, with no additional savings, the expected value would be $319,204.49.  More than double with just an additional 10-year head start. Play with the numbers yourself at this calculator.

4- Balancing the cost of college against expected job opportunity pay (or ROI)

Of course, you go to college expecting to get a high paying job, but you should carefully examine the future prospects for the job market before you embark on your degree.

If the money you are expecting to earn after school is going to be significantly less than what you spent on the schooling, then you may want to re-think the chosen career path.

However, a key variable is how happy you will expect to be in your chosen field.  If you know without a doubt what makes you happiest, then money earned will be irrelevant. The key is to live way below your earnings, whatever they may be.

Also, don’t be afraid to work and learn at the same time.  There are plenty of IT professionals that are now foregoing 4 year colleges and are turning to micro-learning vehicles such as Certification Training. This allows them to advance at their own pace with no risk to their future earning potential.

5- Reducing college cost by taking as many AP courses as possible

Let’s face it.  A college education is becoming ridiculously expensive.  But smart high schoolers know that Advanced Placement courses can cut down on time spent in college and save you money as you wouldn’t have to pay for taking those courses in college.

Taking as many AP courses as possible in high school and passing the AP exam allows you to very cheaply offset the costs of a normal college education.

6- Reducing college cost by taking prerequisites at junior colleges in summer

Junior colleges are significantly cheaper than the conventional universities and as such, taking some of your pre-requisite courses will help save money and also cut down on your college hours.

It is also a wise choice financially as it will show you whether college is for you or not.  Be sure to check with the top three universities you would like to attend to ensure that the courses you want to take would qualify as transferable.

7- Saving the MAX in a 401(k) as soon as I got my first job

In youth, you have very few obligations. But the moment you have the opportunity, you must get into a 401k and immediately save the maximum amount possible in your 401k.  One big caveat: The 401 k must not be solely invested in the stock of the company that you are working for.

If you can’t diversify your portfolio then that is a huge risk.  In that case, you should probably only save enough to get any matching amount that the company would give you.  That’s free money!

If you can’t diversify your portfolio then that is a huge risk.  In that case, you should probably only save enough to get any matching amount that the company would give you.  That’s free money!

8- Learn to save a little bit of any money received

When you are young and you get some money, there is usually no real need for discipline. Most kids have no concept of budgeting or needing their money last because bills are coming due.

We get it, we were young once too but it is important to learn good spending habits early. Some parents like to teach their kids to use the 25% formula.

Save 25% of whatever money you get and go wild with the rest.  Goals are important in teaching teens about money as they respond better to ideas when they can see how it will be to their benefit.

9-Understand financial jargon

Financial education for kids is profoundly important. If they do not know what financial jargon means then they could be left vulnerable when it comes to predatory lenders.

Why not have your teen spend a little time on Investopedia or even make learning the terms a game with a small prize.

If a teen goes into the adult world with blinders on, they may end up making some poor choices regarding credit or investments that are not really investments but gambling.

10- Play the game Cash Flow 101 from Rich Dad (and other money games for kids)

You are never too young to learn to be a great money manager.  Robert Kiyosaki has a great game called Cash Flow For Kids that can really help parents teach financial discipline.

There is absolutely nothing wrong with teaching 4-year-old’s practical money skills. The internet is full of money games or you could even use your child as a banker in the next monopoly game. Why not check out www.winthemoneygame.com for some educational fun.

11- Good money books for kids

The children’s book market is a billion dollar industry with books on potty training to the welcoming of a new sibling there is a book on everything.

Picture books on money are also in abundance and are a very good tool to help young ones understand the concepts of saving, spending and the notion that money doesn’t grow on trees.

“Bunny Money” by Rosemary Wells is a good book to start with as it teaches basic money math and other little tricks to help your child understand the concept of money.

12- Learning ways to earn money as a kid (particularly sales and self-promotion)

Let’s face it, the majority of wealth is generated by people who are employers, not employees.  This is where learning an entrepreneurial spirit early in life comes in handy.

There are many ways for your child to earn money, such as by recycling cans, door-to-door candy sales, starting a lawn mowing business, opening a lemonade stand or even negotiating a garage sale with their stuff-hoarding parents.

Making sales and getting customers to buy is not only a great social exercise, but it also teaches grit in the face of rejection. This is a great way to boost their confidence and to help out with the added items your child may want to purchase.

Learning the value of a hard day’s work will help them to appreciate their hard-earned nickels.  Just don’t forget to save a portion!

13- Read www.themint.org

Launched in 1997, themint.org provides tools to help parents, as well as educators, to teach personal finance lessons for high schoolers on how to manage money wisely and develop good financial habits.  In today’s hyper-consumerism environment, these are lessons that desperately need to be learned.

Furthermore, the website offers financial literacy activities for high school students and teaches everything from best saving practices to how to protect themselves from predatory lenders.

14- Use Mint once on your own

New college grads should consider using Mint on their own as soon as possible and explore the wealth of financial knowledge they put at our fingertips. The website is broken up into sections for all ages and even has a section for recent graduates in order to guide them through their post-college years.

It has helpful tips on how best to manage any new debt they have and learn how to manage their money.  Of course, it also offers budgeting tips and saving ideas. Check out the option tailor-made for new grads at http://www.themintgrad.org/

15- How to make money with money

There is an old saying that goes “you have to spend money to make money”. Now if you want to learn ways to increase your wealth, then you need to put it to work.

You can do this through putting your money in investments such as stocks or bonds, mutual funds, starting your own business or perhaps real estate.

If you have a pretty large nest egg already, you might consider buying a franchise as these tend to have systems in place that help ensure that you’ll make money. With your growing wealth, you can provide jobs, boost the economy, and give back to those in need.

16- Learn about stock index funds and why it beats most money managers yearly

A stock index fund is a low cost, mostly unmanaged investment fund. “Indexing” is a passive form of fund management that generally outperforms most actively managed mutual funds over long periods of time.

Money managed funds are beaten by index funds due to the fact that managed mutual funds are typically more aggressive in their attempts to beat the market.

Index funds, on the other hand, mimic the market.

Managed funds pose a greater risk while giving the investor no greater expected return on the investment. Basically, if you are using an index fund, you will very likely beat most money managers over the long term.

17- What frugality really means

To be frugal is to be thrifty or a wise shopper. Frugal people are not cheap or tight-fisted, they are simply economical in everything they do. A great example of this is couponers or bulk shoppers.

There are coupon shoppers who have whole files of supermarket layouts and arrange their coupons so that they have a cheap and effective shop.

There are even ways to get money back from the store and walk out with free groceries.

Frugality is something to be encouraged, especially when it comes to young adults just starting out.

More important than finding great deals, is embracing a Minimalist way of living.  Only buying what you absolutely need and letting go of the idea of “keeping up with the Joneses”, is a sure-fire path to peace and wealth.

18- How to balance a checkbook

Now as previously mentioned, there are some people who cannot balance a checkbook to save themselves, but the process is really very simple and only requires basic math skills, or even better, Quicken.

Balancing a checkbook means you’ve recorded all additions (deposits) made to your account and subtractions (withdrawals).

Most checkbooks will have pages for you to record the transactions made. You simply make sure you do not write checks for more than the amount of money that is in your checking account.

It is important to remember that a person who you pay with a check may not cash it for several weeks.  So you must keep a record of uncashed checks as well as leave sufficient funds in the account to cover the unpaid portion.

What’s even better is that in today’s environment you really don’t need to bother with checks these days. However, even if you do not use checks, you should check your bank balance daily to make sure you know what your money is doing.

Another good idea is to always pay everything you can from your bank account online.

Chase Bank is great because they immediately withdraw and hold any amounts you pay online, even if the business you are paying hasn’t received the funds yet. This is awesome because you have much less of a chance of overdrawing your account with this feature.

19- Why budgets matter

Budgets are important educational tools for those new to the wonderful world of financial independence. Many Americans do not stick to or even have budgets.

Budgeting is important because it helps expose what your silent but deadly spending habits are and helps you overcome them with simple math.  It can often be really illuminating to see your true spending habits versus what you planned to do.

Many people have commented that they do not know where their money goes and still do not keep track of their spending.  This is like trying to drive to New York from L.A. with no map.

Budgets are important tools to help you with your financial goals. If you stick to a budget then you are more likely to have a healthier financial life.

20- What good debt is

Now, this is a concept that may confuse you. For years we have been told that debt is a bad thing, but that is not strictly true.

Good debt is simply debt that allows you to purchase something that pays the debt back for you. Examples of good debt are real estate

Examples of good debt are real estate loans, or loans for businesses that need to grow in order to meet heavy demand for their products. You can have debt and still be smart about it. Just make sure it is a debt that will pay itself back in the long run.

21- Why A Big House Is a Bad Investment

Have you ever heard someone use the phrase “We just need a bigger house”? Well, there are some interesting home usage statistics that show that what this person is really saying is that “I need more space for my junk”.

From a purely cash-flow based analysis buying bigger houses are a bad investment.  Why?  They do not pay the owner cash on a monthly basis to help pay the debt.

This fact came home to roost in the 2008 real estate crash. This is not to say that one should not buy a home.  However, we should rather buy the least amount of home possible so that we retain our financial freedom.

Summarizing:

Clearly, financial education is a vastly under-appreciated field for teaching children how to become responsible adults with money. Many, including myself, wish they had learned about some of these concepts at an early age.

If we want the youth as well as those grown-ups who continue to struggle to have the drive to plan for the future then it is important to focus on financial literacy. This ensures that they will be independent and make great decisions because they will have the practical money skills necessary for a sound financial future.

Hey Veterans: Are You Looking To Invest In Mutual Funds? See This Checklist First!

The following information comes from the SEC and should be helpful for anyone looking for a long-term investing solution.

This information is straight from the horse’s mouth, so to speak, so it should be studied closely if you want to have a grip on the very basic rules of financial competence you need to play the game.

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I. A MUTUAL FUND CHECKLIST

* Mutual funds are NOT guaranteed or insured by any bank or government agency. Even if you buy through a bank and the fund carries the bank’s name, there is no guarantee. You can lose money. (see Part IV “Kinds of Mutual Funds”)

* Mutual funds ALWAYS carry investment risks. Some types carry more risk than others. (see Part IV “Kinds of Mutual Funds”)

* Understand that a higher rate of return typically involves a higher risk of loss. (see Part IV “Kinds of Mutual Funds”)

* Past performance is not a reliable indicator of future performance. Beware of dazzling performance claims. (see Part V “Comparing Different Funds”)

* ALL mutual funds have costs that lower your investment returns. (see Part V “Comparing Different Funds”)

* You can buy some mutual funds by contacting them directly. Others are sold mainly through brokers, banks, financial planners, or insurance agents. If you buy through these financial professionals, you generally will pay an extra sales charge for the benefit of their advice.

* Shop around. Compare a mutual fund with others of the same type before you buy.

II. WHY MUTUAL FUNDS?

Mutual funds can be a good way for people to invest in stocks, bonds, and other securities. Why?

* Mutual funds are managed by professional money managers.

* By owning shares in a mutual fund instead of buying individual stocks or bonds directly, your investment risk is spread out.

* Because your mutual fund buys and sells large amounts of securities at a time, its costs are often lower than what you would pay on your own.

This document explains the basics of mutual fund investing — how a mutual fund works, what factors to consider before investing, and how to avoid common pitfalls.

There are sources of information that you should consult before you invest in mutual funds. The most important of these is the prospectus of any fund you are considering. The prospectus is the fund’s selling document and contains information about costs, risks, past performance, and the fund’s investment goals. Request a prospectus from a fund, or from a financial professional if you are using one. Read the prospectus before you invest.

Before you buy a mutual fund, make sure it is right for you.

III. HOW MUTUAL FUNDS WORK

A mutual fund is a company that brings together money from many people and invests it in stocks, bonds, or other securities. (The combined holdings of stocks, bonds, or other securities and assets the fund owns are known as its portfolio.) Each investor owns shares, which represent a part of these holdings.

HOW TO BUY AND SELL SHARES

You can buy some mutual funds by contacting them directly. Others are sold mainly through brokers, banks, financial planners, or insurance agents. All mutual funds will redeem (buy back) your shares on any business day and must send you the payment within seven days.

You can find out the value of your shares in the financial pages of major newspapers; after the fund’s name, look for the column marked “NAV.”

TERMS TO KNOW

Net Asset Value per share (NAV): NAV is the value of one share in a fund.

When you buy shares, you pay the current NAV per share, plus any sales charge (also called a sales load). When you sell your shares, the fund will pay you NAV less any other sales load (See Part V “Comparing Different Funds”). A fund’s NAV goes up or down daily as its holdings change in value.

Example: You invest $1,000 in a mutual fund with an NAV of $10.00. You will therefore own 100 shares of the fund. If the NAV drops to $9.00 (because the value of the fund’s portfolio has dropped), you will still own 100 shares, but your investment is now worth $900. If the NAV goes up to $11.00, your investment is worth $1,100. (This example assumes no sales charge.)

HOW FUNDS CAN EARN YOU MONEY

You can earn money from your investment in three ways.

First, a fund may receive income in the form of dividends and interest on the securities it owns. A fund will pay its shareholders nearly all of the income it has earned in the form of dividends.

Second, the price of the securities a fund owns may increase. When a fund sells a security that has increased in price, the fund has a capital gain. At the end of the year, most funds distribute these capital gains (minus any capital losses) to investors.

Third, if a fund does not sell but holds on to securities that have increased in price, the value of its shares (NAV) increases. The higher NAV reflects the higher value of your investment. If you sell your shares, you make a profit (this also is a capital gain).

Usually funds will give you a choice: the fund can send you payment for distributions and dividends, or you can have them reinvested in the fund to buy more shares, often without paying an additional sales load.

TAXES

You will owe taxes on any distributions and dividends in the year you receive them (or reinvest them). You will also owe taxes on any capital gains you receive when you sell your shares. Keep your account statements in order to figure out your taxes at the end of the year.

If you invest in a tax-exempt fund (such as a municipal bond fund), some or all of your dividends will be exempt from federal (and sometimes state and local) income tax. You will, however, owe taxes on any capital gains.

IV. KINDS OF MUTUAL FUNDS

You take risks when you invest in any mutual fund. You may lose some or all of the money you invest (your principal), because the securities held by a fund go up and down in value. What you earn on your investment also may go up or down.

Each kind of mutual fund has different risks and rewards. Generally, the higher the potential return, the higher the risk of loss.

Before you invest, decide whether the goals and risks of any fund you are considering are a good fit for you. To make this decision, you may need the help of a financial adviser. There are also investment books and services to guide you.

The three main categories of mutual funds are money market funds, bond funds, and stock funds. There are a variety of types within each category.

1. MONEY MARKET FUNDS have relatively low risks, compared to other mutual funds. They are limited by law to certain high- quality, short-term investments. Money market funds try to keep their value (NAV) at a stable $1.00 per share, but NAV may fall below $1.00 if their investments perform poorly. Investor losses have been rare, but they are possible.

A WORD ABOUT BANKS AND MUTUAL FUNDS

Banks now sell mutual funds, some of which carry the bank’s name. But mutual funds sold in banks, including money market funds, are not bank deposits. Don’t confuse a “money market fund” with a “money market deposit account.” The names are similar, but they are completely different:

* A money market fund is a type of mutual fund. It is not guaranteed, and comes with a prospectus.

* A money market deposit account is a bank deposit. It is guaranteed, and comes with a Truth in Savings form.

2. BOND FUNDS (also called FIXED INCOME FUNDS) have higher risks than money market funds, but seek to pay higher yields. Unlike money market funds, bond funds are not restricted to high-quality or short-term investments. Because there are many different types of bonds, bond funds can vary dramatically in their risks and rewards.

Most bond funds have credit risk, which is the risk that companies or other issuers whose bonds are owned by the fund may fail to pay their debts (including the debt owed to holders of their bonds). Some funds have little credit risk, such as those that invest in insured bonds or U.S. Treasury bonds. But be careful: nearly all bond funds have interest rate risk, which means that the market value of the bonds they hold will go down when interest rates go up. Because of this, you can lose money in any bond fund, including those that invest only in insured bonds or Treasury bonds.

Long-term bond funds invest in bonds with longer maturities (length of time until the final payout). The values (NAVs) of long-term bond funds can go up or down more rapidly than those of shorter-term bond funds.

3. STOCK FUNDS (also called EQUITY FUNDS) generally involve more risk than money market or bond funds, but they also can offer the highest returns. A stock fund’s value (NAV) can rise and fall quickly over the short term, but historically stocks have performed better over the long term than other types of investments.

Not all stock funds are the same. For example, growth funds focus on stocks that may not pay a regular dividend but have the potential for large capital gains. Others specialize in a particular industry segment such as technology stocks.

A WORD ABOUT DERIVATIVES

Some funds may face special risks if they invest in derivatives. Derivatives are financial instruments whose performance is derived, at least in part, from the performance of an underlying asset, security or index. Their value can be affected dramatically by even small market movements, sometimes in unpredictable ways.

There are many types of derivatives with many different uses. They do not necessarily increase risk, and may in fact reduce risk. A fund’s prospectus will disclose how it may use derivatives. You may also want to call a fund and ask how it uses these instruments.

V. COMPARING DIFFERENT FUNDS

Once you identify the types of funds that interest you, it is time to look at particular funds in those categories.

VIEWING PAST PERFORMANCE

A fund’s past performance is not as important as you might think. Advertisements, rankings, and ratings tell you how well a fund has performed in the past. But studies show that the future is often different. This year’s “number one” fund can easily become next year’s below average fund. (NOTE: Although past performance is not a reliable indicator of future performance, volatility of past returns is a good indicator of a fund’s future volatility.)

TIPS FOR COMPARING PERFORMANCE

* Check the fund’s total return. You will find it in the Financial Highlights, near the front of the prospectus. Total return measures increases and decreases in the value of your investment over time, after subtracting costs.

* See how total return has varied over the years. The Financial Highlights in the prospectus show yearly total return for the most recent 10-year period. An impressive 10-year total return may be based on one spectacular year followed by many average years. Looking at year-to-year changes in total return is a good way to see how stable the fund’s returns have been.

COMPARING COSTS

Costs are important because they lower your returns. A fund that has a sales load and high expenses will have to perform better than a low-cost fund, just to stay even with the low-cost fund.

Find the fee table near the front of the fund’s prospectus, where the fund’s costs are laid out. You can use the fee table to compare the costs of different funds.

The fee table breaks costs into two main categories:

1. sales loads and transaction fees (paid when you buy, sell, or exchange your shares), and

2. ongoing expenses (paid while you remain invested in the fund).

Sales Loads

The first part of the fee table will tell you if the fund charges any sales loads.

No-load funds do not charge sales loads. When you buy no-load funds, you make your own choices, without the assistance of a financial professional. There are no-load funds in every major fund category. Even no-load funds have ongoing expenses, however, such as management fees.

When a mutual fund charges a sales load, it usually pays for commissions to people who sell the fund’s shares to you, as well as other marketing costs. Sales loads buy you a broker’s services and advice; they do not assure superior performance. In fact, funds that charge sales loads have not performed better on average (ignoring the loads) than those that do not charge sales loads.

TERMS TO KNOW

Front-end load: A front-end load is a sales charge you pay when you buy shares. This type of load, which by law cannot be higher than 8.5% of your investment, reduces the amount of your investment in the fund.

Example: If you have $1,000 to invest in a mutual fund with a 5% front-end load, $50 will go to pay the sales charge, and $950 will be invested in the fund.

Back-end load: A back-end load (also called a deferred load) is a sales charge you pay when you sell your shares. It usually starts out at 5% or 6% for the first year and gets smaller each year after that until it reaches zero (say, in year six or seven of your investment).

Example: You invest $1,000 in a mutual fund with a 6% back-end load that decreases to zero in the seventh year. Let’s assume for the purpose of this example that the value of your investment remains at $1,000 for seven years. If you sell your shares during the first year, you only will get back $940 (ignoring any gains or losses). $60 will go to pay the sales charge. If you sell your shares during the seventh year, you will get back $1,000.

Ongoing Expenses

The second part of the fee table tells you the kinds of ongoing expenses you will pay while you remain invested in the fund. The table shows expenses as a percentage of the fund’s assets, generally for the most recent fiscal year. Here, the table will tell you the management fee (which pays for managing the fund’s portfolio), along with any other fees and expenses.

High expenses do not assure superior performance. Higher expense funds do not, on average, perform better than lower expense funds. But there may be circumstances in which you decide it is appropriate for you to pay higher expenses. For example, you can expect to pay higher expenses for certain types of funds that require extra work by its managers, such as international stock funds, which require sophisticated research. You may also pay higher expenses for funds that provide special services, like toll-free telephone numbers, check-writing and automatic investment programs.

A difference in expenses that may look small to you can make a big difference in the value of your investment over time.

Example: Say you invest $1,000 in a fund. Let’s assume for the purpose of this example that you receive a flat rate of return of 5% before expenses. If the fund has expenses of 1.5%, after 20 years you would end up with roughly $1,990. If the fund has expenses of 0.5%, you would end up with more than $2,410. This is a 22% difference.

TERMS TO KNOW

Rule 12b-1 fee: One type of ongoing fee that is taken out of fund assets has come to be known as a rule 12b-1 fee. It most often is used to pay commissions to brokers and other salespersons, and occasionally to pay for advertising and other costs of promoting the fund to investors. It usually is between 0.25% and 1.00% of assets annually.

Funds with back-end loads usually have higher rule 12b-1 fees. If you are considering whether to pay a front-end load or a back- end load, think about how long you plan to stay in a fund. If you plan to stay in for six years or more, a front-end load may cost less than a back-end load. Even if your back-end load has fallen to zero, over time you could pay more in rule 12b-1 fees than if you paid a front-end load.

TIPS FOR COMPARING COSTS

* Beware of a salesperson who tells you, “This is just like a no-load fund.” Even if there is no front-end load, check the fee table in the prospectus to see what other loads or fees you may have to pay.

* Check the fee table to see if any part of a fund’s fees or expenses has been waived. If so, the fees and expenses may increase suddenly when the waiver ends (the part of the prospectus after the fee table will tell you by how much).

* Many funds allow you to exchange your shares for shares of another fund managed by the same adviser. The first part of the fee table will tell you if there is any exchange fee.

Shop wisely. Compare fees and expenses before you invest.

V. OTHER SOURCES OF INFORMATION

Read the sections of the prospectus that discuss the risks, investment goals, and investment policies of any fund that you are considering. Funds of the same type can have significantly different risks, objectives and policies.

All mutual funds must prepare a Statement of Additional Information (SAI, also called Part B of the prospectus). It explains a fund’s operations in greater detail than the prospectus. If you ask, the fund must send you an SAI.

You can get a clearer picture of a fund’s investment goals and policies by reading its annual and semi-annual reports to shareholders. If you ask, the fund will send you these reports.

You can also research funds at most libraries. Helpful resources include fund investment books, investor magazines and newspapers. The fund companies themselves can also provide information.

VI. IF YOU HAVE PROBLEMS OR QUESTIONS

If you encounter a problem or have a question concerning a mutual fund that you believe can be addressed by the SEC, contact an SEC consumer specialist at one of the offices listed on the next page.

Remember: There are no guarantees in mutual fund investing. Inform yourself and exercise your judgment carefully before you invest.

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