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The Best Way to Understand Personal Finance

January 20th, 2016 3:12 am

When we are trying to understand Personal Finance, the best thing to do is to understand what Personal Finance is NOT.

Many people think that accounting and personal finance are the same, but Personal Finance is NOT Accounting.

On the surface they may seem the same; they both have something to do with money. However, the definitions will help us better understand the differences.

Merriam-Webster’s definition of accounting is “the system of recording and summarizing business and financial transactions and analyzing, verifying, and reporting the results.”

Based on this definition, we see that accounting is the process of analysing and recording what you have already done with your money.

This is why having an accountant is usually not enough when it comes to your personal finances.

Accountants generally don’t concern themselves with personal finance (there are some exceptions to this rule). Unless your accountant is also a financial advisor or coach, he or she will likely just look at what you have done with your money at the end of the year and provide you with a report of their analysis.

This report is usually your tax return; what you owe the government or what the government owes you.

Very rarely does the accountant provide an individual with a Balance Sheet or Income Statement or a Net worth statement; all very helpful tools that are necessary to effectively manage your personal finances.

Personal Finance is looking at your finances from a more pro-active and goal oriented perspective. This is what provides the accountants with something to record, verify and analyze.

The Merriam-Webster’s (Concise Encyclopedia) definition of “Finance” is the “process of raising funds or capital for any kind of expenditure. Consumers, business firms, and governments often do not have the funds they need to make purchases or conduct their operations, while savers and investors have funds that could earn interest or dividends if put to productive use. Finance is the process of channeling funds from savers to users in the form of credit, loans, or invested capital through agencies including COMMERCIAL BANKS, SAVINGS AND LOAN ASSOCIATIONS, and such nonbank organizations as CREDIT UNIONS and investment companies. Finance can be divided into three broad areas: BUSINESS FINANCE, PERSONAL FINANCE, and public finance. All three involve generating budgets and managing funds for the optimum results”.

Personal Finance Simplified

By understanding the definition of “finance” we can break our “personal finance” down into 3 simple activities:-

1. The process of raising funds or capital for any kind of expenditure = Generating an Income.
A Business gets money through the sale of their products and services. This is labeled “revenue” or “income”. Some businesses will also invest a portion of their revenue to generate more income (interest income).

A Person gets money through a job, or a small business (self employment, sole proprietorship, network marketing or other small business venture). The money coming in can be a salary, hourly wage, or commission, and is also referred to as income.

A Government gets money through taxes that we pay. This is one of the main ways that the government generates an income that is then used to build infrastructure like roads, bridges, schools, hospitals etc for our cities.

2. Using our money to make purchases = Spending Money.
How much we spend relative to how much we make is what makes the difference between having optimum results in our personal finances. Making good spending decisions is critical to achieving financial wealth – regardless of how much you make.

3. Getting optimum results = Keeping as much of our money as possible
It’s not how much you MAKE that matters – its how much you KEEP that really matters when it comes to your personal finances.

This is the part of personal finance that virtually everyone finds the most challenging.

Often people who make large incomes (six figures or more) also tend to spend just as much (or more) which means they put themselves in debt and that debt starts to accrue interest. Before long that debt can start to grow exponentially and can destroy any hope they would have had to achieving wealth.

Personal Finance made simple

Personal Finance doesn’t need to be complicated if you keep this simple formula in mind:

INCOME – SPENDING = WHAT YOU KEEP

For Optimal Results you simply have to make more than what you spend and spend less than what you make so you can keep more for you and your family!

If you are not actively working towards an optimal result you will by default get less than optimal results

It really is that simple!

Now that you understand personal finance and WHAT you need to do, the next step is learning HOW to do this!

The best way to start is by following these 3 simple steps:-

1. Know what you want to achieve – “if you don’t know where you are going, any road will take you there” has become a very popular quote, probably because it is so true. One of the habits that Stephen Covey highlights in his book “7 Habits of Highly Successful People”, is to always start with the end in mind. Knowing where you want to go will be a big help in ensuring you get there.

2. Have a plan – that you can follow that will get you to your goals. Knowing how you will achieve your goals in a step by step plan is invaluable. Sometimes this is easier with the help of an advisor or a financial coach.

3. Use tools and resources – that will help you to stick to your plan and not become distracted by the things in life that could limit our incomes and make us spend more than we should. Don’t try and work it all out in your head! You will end up with a massive headache and your finances will become one gigantic dark fog!

How You Can Learn to Predict Mortgage Rates, Too

January 20th, 2016 3:11 am

Many people, particularly, first-home buyers, tend to shop around for the cheapest mortgage rate that they see not knowing, or understanding, that these rates dip and fall. If you get an understanding of how mortgage rates work, you will be in a far better position to land one that really works for you and may even be cheaper than the one you’re ready to commit to, say, today.

Here’s how mortgage rates work.

The firs thing you should know about these rates is that they are unpredictable. They change. A high rate today may be low tomorrow. At one time, these rates were more stable. They were set by the bank. But since the 1950s, Wall Street took over and adjusted them according to supply and demand. Or more accurately, Wall Street linked them to bonds. So that when bonds – that are bought and sold on Wall Street – drop, mortgage rates do, too.

How can I know today’s bonds rates?

It sounds simple: let’s keep up with the prices of bonds and we’ll know when to shop for our mortgage. Unfortunately, only Wall Street has access to this knowledge (called “mortgage-backed securities” (MBS) data). And they pay tens of thousands of dollars for access to it in real-time.

Here’s how you can make an educated guess:

Calculate according to, what’s called, the Thirty-year mortgage rates.

These are the events that lower rates in any given 30 years:

  • Falling inflation rates, because low inflation increases demand for mortgage bonds
  • Weaker-than-expected economic data, because a weak economy increases demand for mortgage bonds
  • War, disaster and calamity, because “uncertainty” increases demand for mortgage bonds

Conversely, rising inflation rates; stronger-than-expected economic data; and the “calming down” of a geopolitical situation tend to elevate rates.

The most common mortgages and mortgage rates

You’ll also find that mortgages vary according to the level of your credit rating. The higher your credit score, the more likely you are to win a lower mortgage rate.

Mortgage rates also vary by loan type.

There are four main loan types each of which has a different level of interest. In each case, this level of interest hinges on mortgage-secured bonds. The four loan types together make up 90 percent of mortgage loans doled out to US consumers.

Which mortgage loan do you want?

Here is the list:

1. Conventional Mortgages – These loans are backed by Fannie Mae or Freddie Mac who have set regulations and requirements for their procedures. The Fannie Mae mortgage-backed bond is linked to mortgage interest rates via Fannie Mae. The Freddie Mac mortgage-backed bond is linked to mortgage-backed bonds via Freddie Mac.

Mortgage programs that use conventional mortgage interest rates include the “standard” 30-year fixed-rate mortgage rate for borrowers who make a 20% downpayment or more; the HARP loan for underwater borrowers; the Fannie Mae HomePath mortgage for buyers of foreclosed properties; and, the equity-replacing Delayed Financing loan for buyers who pay cash for a home.

2. FHA mortgage – These are mortgage rates given by the Federal Housing Administration (FHA). The upside of these loans is that you have the possibility of a very low downpayment – just 3.5%. They are, therefore, popular and used in all 50 states. The downside is that the premium is split in two parts.

FHA mortgage interest rates are based on mortgage bonds issued by the Government National Mortgage Association (GNMA). Investors, by the way, tend to call GNMA, “Ginnie Mae”. As Ginnie Mae bond prices rise, the interest rates for FHA mortgage plans drop. These plans include the standard FHA loan, as well as FHA specialty products which include the 203k construction bond; the $100-down Good Neighbor Next Door program; and the FHA Back to Work loan for homeowners who recently lost their home in a short sale or foreclosure.

3. VA mortgage interest rates – VA mortgage interest rates are also controlled by GMA bonds which is why FHA and VA mortgage bonds often move in tandem with both controlled by fluctuations from the same source. It is also why both move differently than conventional rates. So, some days will see high rates for conventional plans and low rates for VA/ FHA; as well as the reverse.

VA mortgage interest rates are used for loans guaranteed by the Department of Veterans Affairs such as the standard VA loan for military borrowers; the VA Energy Efficiency Loan; and the VA Streamline Refinance. VA mortgages also offer 100% financing to U.S. veterans and active service members, with no requirement for mortgage insurance.

USDA mortgage interest rates – USDA mortgage interest rates are also linked to Ginnie Mae secured-bonds (just as FHA and VA mortgage rates are). Of the three, however, USDA rates are often lowest because they are guaranteed by the government and backed by a small mortgage insurance requirement. USDA loans are available in rural and suburban neighborhoods nationwide. The program provides no-money-down financing to U.S. buyers at very low mortgage rates.

Mortgage rates predictions for 2016

Wondering what your chances are for getting a mortgage for a good rate the coming year? Wonder no further.

Here are the predictions for the 30-year trajectory:

  • Fannie Mae mortgage rate forecast: 4.4% in 2016)
  • Freddie Mac forecast: 4.7% Q1 2016, 4.9% Q2 in 2016
  • Mortgage Bankers Association (MBA) forecast: 5.2% in 2016
  • National Association of Realtors (NAR) forecast: 6% in 2016.

In other words, mortgage rates are projected to rise slightly in 2016.