What would a world with no money be like?

 

Image attribution: Frank Kovalchek; CC BY-S.A. 2.0 

By Paula Whately

“Money, so they say, is the root of all evil today,” sang Pink Floyd’s Dave Gilmour back in 1973. Little did the Ancient Mesopotamians know when they introduced the idea of currency to the world around 5,000 years ago that their revolutionary idea would go on to transform the planet in such a profound way. What’s more, given what humankind has achieved by moving massive amounts of money around – the scientific discoveries, the medical advances, the mind-blowing technological developments – it kind of seems a bit ungrateful to those Assyrian and Babylonian pioneers of old to suggest that maybe we’d be better off without money, and that it’s time to start imagining a future where goods and services are exchanged in a different way.

In a world dominated by competition for resources and defined by massive economic inequality, it’s certainly appealing to think there might be a better way of doing things and that hunger and poverty might one day become things of the past. But thinking about how an alternative economic system would work in practice isn’t that simple.

A New World economy

Maybe they got it right in Star Trek, where the good old United Federation of Planets began shifting to a ‘New World Economy’ in the 22nd century, money becomes an outmoded concept and Fort Knox is turned into a museum of the primitive capitalist ways of the society of old. But this New World Economy was only possible in Star Trek because they had, in their Replicators, a technology for synthesising whatever material goods they need. Whether you’re a lowly warp drive engineer or a high-ranking Starfleet diplomat, you have equal access to food, clothes and novelty key rings. Additionally, automation has become so widespread that there is no longer any need to pay for labour. That leaves citizens free to focus on bettering themselves and improving the lot of their fellow humans, instead of worrying about the relentless accumulation of wealth.

With the advent of 3D printing, replicator-style technology might not be as far away as we thought, but for now it’s fair to say we can’t really compare our current society to the inter-planetary civilisation imagined in Star Trek. But that certainly hasn’t stopped figures at the very highest level from thinking about and discussing what the world might be like without money as we know it today.

A barter economy

Sir Mervyn King (Governor of the Bank of England and possible Trekkie) has said that there is “no reason” that producers and consumers couldn’t exchange products and services directly through “essentially a massive barter economy.” According to King, “all it requires is some commonly used unit of account and adequate computing power to make sure all transactions could be settled immediately. People would pay each other electronically, without the payment being routed through anything that we would currently recognize as a bank. Central banks in their present form would no longer exist – nor would money.”

So we just need to come up with a unit of value and then figure out exchange rates for every single one of the trillions of different products and services that people might want to exchange? Cool. I’m sure someone could make an app for that. But is it simply the question of computing power that stands in the way of a transition to a barter economy?

Not according to ex-Microsoft engineer Balaji Viswanathan, who points out what he describes as the ‘indivisibility problem’; imagine you sold all your mushrooms for a pair of socks, and then decided you wanted to buy some bread. Would you be able to split the pair of socks in order to get the bread? No, you wouldn’t, you hippy fool! What were you thinking swapping all those lovely mushrooms for a rubbish pair of socks? Other criticisms include the problem with individuals storing wealth for use in future transactions (as many of the products being exchanged will be perishable, meaning they don’t necessarily retain their value over time), and the fact that there’s no easy way of arranging unsecured or secured loans of other forms of credit.

Collaborative consumption

As things stand, it’s hard to see how the world would function without conventional currency, but that doesn’t mean you can’t start doing some small scale bartering in your own day to day life. Are you awesome at baking? Then why not offer to bake a delicious cake for the landlord at your local pub in exchange for a few pints of the good stuff? Do you have a skill that people value? Then see what they can offer you in return for your time and expertise. Just ‘cause you have a job and occasionally shop at Tesco doesn’t mean you have to be a total slave to money; people are definitely embracing the idea of bartering, skill-swapping, and what Rachel Botsman calls ‘collaborative consumption’, so now’s the time to get in on the action.

About the author: Paula Whately is a freelance writer who has been writing about financial issues such as secured loans and credit ever since the recession began.

Finance Events, Doubt and Facts

• Interest finance charges were first incurred around 5,000 years ago. 

• The 1933 Double Gold Eagle Coin sold for $7,590,020 .

• The Federal Government spent $400,000 per wolf to reintroduce them.

• Academic research finds rich people aren't as happy. 

• The dream of economic growth may be unsustainable. 

How Net Present Value is calculated

The Net Present Value (NPV) calculation makes use of an important time variable to tell you 1) the value of an investment at present time given future cash flows and 2) if the investment is worthwhile. Net Present Value is important in valuation of projects and investments because the combination of estimated value based on cost, yields and cash flow can sometimes paint an inaccurate financial mirage without quantification of the variables.

Another reason why Net Present Value calculations are useful is because they can help determine if an investment or project is more profitable than it actually is in less uncertain terms. With numerical figures entered into a proven formula, the only factors that may be questionable are the future cash flows and cost of capital. Moreover, if these can be reliably estimated, the resulting NPV stands a greater chance of accurately predicting present value. 

When NPV calculations are used 

If you buy a bond and know the periodic interest rate, and will receive the face value of the bond at a specific point in time like 10 years, then fair valuation would price the bond at the present value of all future payments. Present value adds up all the interest payments, and the difference between the initial purchase price of the bond and the future reimbursement to arrive at a present value. In another circumstance maybe a bond is bought from someone else several years after it was originally issued and you want to know the price. Net Present Value would factor in additional costs if the bond investment were considered as a project.

Perhaps you are a project manager and are attempting to illustrate the value of a project to another executive. The Net Present Value calculation will mathematically give you the total value of an investment's returns that are in the future and are based on key variables including 1) the cost of capital, 2) time, and 3) negative and positive cash flow. Two more examples of circumstances in which NPV calculations may be used are below:

• Example 1: Your business purchases tax free bonds with some of its earnings. The bonds pay 5% every 6 months for 10 years at which time the face amount of the bond is either redeemable without penalty or rolled over. You are trying to calculate how much you should pay for the bond not to be overcharged and use a NPV calculation to do so.

• Example 2: Your company is thinking about investing in a project and wants to know if the opportunity cost is lower than the rate of return for the project. You know how much the initial investment is and have a good idea of what your annual returns will be and how much, if any, the financing of the project will cost. The NPV calculation can help you with the decision.

NPV calculations and methods of calculation

Net Present Value can be calculated in a number of ways and a number of different NPV calculations exist for varying circumstances. In other words, due to differences in variables used, Net Present Value calculations can differ. For example, a bonds can provide either fixed or variable rates of return. Both cases require different calculations. Additionally, cash flows can vary from year to year due to changes in project success and/or cost. NPV can be calculated manually, with regular or financial calculators or with financial software. Examples of NPV calculations are below:

• Calculating Net Present Value against costs of capital and opportunity cost for a fixed rate bond 

Variables: Term of the bond 10 years
Fixed rate of return 5% annual
Future Face Value: $ 5000.00
Interest payments: Bi-annual

Step 1: Calculate present value:
$5000.00 x 5%= $250.00 x 10/20=$125.00
$125.00 x 20=$2,500 + $5000.00 =$7,500.00
The bond is worth $7,500 at present with all cash flow included

Step 2: Reduce value by cost of capital
Cost of capital, inflation + opportunity cost
3.35% (est .avrg)+2% (est. return after risk reduction)
=5.35% = $3210.00+$5000.00=$8,210.00

Step 3: Subtract present values for net present value
$8,210-$7,500= -$720.00
NPV= - $720.00

Conclusion: The bond is a bad investment based on cost of capital and opportunity cost discounting.

• Calculating Net Present Value with inconsistent cash flow

Variables: Project down payment $5000.00
Cost of financed capital (Annual project yield -Annual project cost): 12% per year
Time period: 10 years
Cash flows: Between 12-18% ascending return per year

Step 1: Calculate present value of each individual estimated cash flow
Y1: $600.00 Y2: $625.00 Y3: $650.00 Y4: $675.00 Y5: $700.00 Y6: $825.00 Y7: $850.00 Y8: $875.00 Y9: $900.00 Y10: $900

Step 2: Present value for each future year's payment equals percentage yield plus value to which that yield can be added to amount to the future yield. EX: $600 =$535.71 x 12%., $625.00 =$498.246 x 12% for 2 years.

Step 3: For each year add the present value to arrive at Net Present Value. Ex. $535.71 + 498.25= $1033.96 for 2 year Net Present Value.

Source:

Brigham and Houston. 'Fundamentals of Financial Management 9th ed.' Mason, Ohio. South-Western, 2001, Chapters 8 + 11.

Understanding the accounting concept of cash flow

The accounting concept of cash flow provides insight into businesses operations and cash positioning at the time the cash flow is recorded. Cash flow in its simplest form is the sum of cash that moves in and out of a business, specifically in terms of business operations, financing i.e. borrowing activities and investing activities. These three elements of cash flow are frequently recorded on the cash flow statement. (investopedia.com)

Cash flow statements, which became mandatory financial reporting statements in 1987 (ibid) illustrate cash details not included in other financial documentation. Since net income includes revenue owed but not received, this net income calculation can fall short in accurately reporting a companies complete financial position. (Brigham and Houston p.48) For example, net cashflow subtracts depreciation, amortization and cash receivables that haven't been received from net income (Ibid)

Why cash flow is important

Cashflow is important because it provides financial analysts, managers, shareholders and regulatory institutions such as the Securities and Exchange Commission (SEC) or the Federal Deposit Insurance Corporation (FDIC) with more detailed information regarding a businesses cash inflow and outflows. This information is useful in determining several factors regarding a business or company's use of cash. A few of the insights and facts revealed by a cash flow statement include the following:

• Demonstrates efficiency of cash utilization

• Allows for more comprehensive financial reporting and identification of cash usage

• Cash flow returns over time i.e. with several cash flow statements

• Operating, financing and investing activities

• Information used in calculating cash flow ratios and equations ex-net cash flow

• Assists in determining business valuation *Allows for more comprehensive financial reporting

How cash flow is measured 

Cashflow and information within cashflow statements is used in measuring several useful accounting and financial functions. Three such metrics include 1) net cash flow calculation 2) cash flow ratios and 3) cash flow based calculations such as present value of cash flows and internal rate of return. (wikipedia) Since the cashflow statement is divided into three sections included cash flow from operations, investing and financial activity, different ratios can be formed using each area of the cash flow statement. For example, the operating cash flow ratio is determined by dividing operating cash flow by current liabilities. (Brigham and Houston p.56) A few of the different cash flow ratio metrics are listed below.

• Operating cash flow ratio

• Price to cash flow ratio

• Free cash flow ratio

• Cash flow to debt ratio

• Working cash flow ratio

Additional cash flow measurements such as present value of future cash flow and internal rate of return use cash flow values to determine how much a series of cash flows are worth in terms of achievable interest rates as applied to each cash flow over time in the case of present value of cash flow (Brigham and Houston p.294) and matching costs to present value through adjustment of interest rate in the case of internal rate of return or IRR. (Ibid. p.509). These latter two calculations are quite important in bond and project valuation because they allow investors and managers to determine reasonable assessment of valuation and worth.

Both present value of future cash flows and internal rate of return can be calculated by using the functions of a financial calculator. For example, if a business has a 12 annual cash flows of $100, that are able to earn an interest rate of 10% upon receipt and where the first payment is received at the beginning of the first year the following function buttons can be used. N (Number of payments), I (Interest rate), PMT (Payments/Future cash flow), and FV (Future value). (Brigham and Houston p.295). 

To calculate the present value of future cash flows first determine the future value for poseterity by entering the values using these function buttons. For example, N=12, I=10, PMT=-100, PV=0 then CPT (compute) FV=$2138.428. Since payments are reversed the value is recorded as negative. Then, to compute the present value of the future cash flows, enter the same values except enter $0 FV and compute PV for a value of $681.369. (Ibid.p305) This is also called an annuity cash flow present value.

Summary 

Cash flow is a vital part of business operations and is often reported on the 'cash flow statement'. Cash flow is the movement of cash in and out of a company for various purposes over a given time and as recorded in the cash flow statement. Cash flow records can be used for a variety of financial and accounting purposes including valuation, assessing business management decisions, determining cash solvency via cash flow ratios, and illustrating how and where cash is used in a company. The cash flow within a company is a dynamic and important aspect of business operations, financing and investment for which the ideal balance of cash usage varies depending on type of business, economic conditions, business management and accounting reporting requirements.

Sources:

1. Eugene F. Brigham and Joel F. Houston. '0Fundamentals of Financial Management 9th edition'. Mason, Ohio. Southwestern, 2001. P.48-52.

2.http://www.answers.com/topic/cash-flow-statement 

3. http://www.investopedia.com/articles/04/033104.asp 

4. http://en.wikipedia.org/wiki/Cash_flow 

5.http://www.exinfm.com/board/cash_flow_ratios.htm 

6. http://www.candlestickforum.com/PPF/Parameters/11_1262_/candlestick.asp

Financing a New Business With Personal Savings

Depending on the business, utilization of personal savings as a source of financing can be achieved in a number of ways. Before going into more specifics however, it is important to note that capital invested in a business is locked in that investment until it is either withdrawn and/or yields a profit. For this reason it is advantageous to utilize one's capital in supplementation of one's business instead of sole capitalization.

The following illustrates a three-step process by which personal savings can first be maximized for optimal leveraging and application through employment of financial instruments and institutions. Second, the financing obtained in step one can be further optimized by properly applying the funds as necessitated by considering the type of business. Then, in the final step, the business itself can be operated using overhead expense management techniques that minimize start up operating costs.

Step 1- Financial leveraging

The goal here is to take a sum of money and turn it into a larger sum of money through financial instruments and business tactics. As soon as money has been invested in a business it can't be used for anything else until it yields a profit. For this reason it may be a good idea to leverage the capital before investing it in anything. A few such leveraging methods are as follows:

Business Plan Collateralized Loans: Non-secured loans don't require collateral, but rather a good business plan. The fact a business owner is willing to put his or her personal savings on the line is the first step in this business finance plan as it demonstrates the willingness to invest personally. If the lender finds the business plan achievable they may loan money without collateral thereby once again allowing the business owner to not use up the personal capital.

Small Business Seed Grants and Capital: Seed grants and/or capital may be available to entrepreneurs with demonstrated capacity to attain probable cash flow in a new business. Furthermore, depending on how strong the business model, idea and plan are, the seed capital may not require repayment in the case of a grant or have low interest rates in the case of seed capital.

Loans on Investment: If savings are invested, those funds can earn a percentage in interest and/or capital gains, and also be used as collateral for additional financing. This way a business owner isn't actually using his/her money. What's more, the returns from the investment may pay off all or part of the interest on the loan. One may also be able to obtain partial collateralization in which the savings allow one to borrow double, triple or even more than the original capital at hand.

Step 2-Maximizing capital through business type

Online lending business:

Companies such as www.prosper.com allow lenders and borrowers meet outside the confines of traditional loan application procedures and interest rates. If one wants to start a lending business, this may be a good place to start as individuals and investment groups come together and arrange loan deals for interest rates in excess of 8%.

Multiple owner business:

Many investments in businesses are made by groups of owners and/or investors. This enables the owners to pool their money and achieve more. By starting a business with multiple owners one is in effect leveraging one's own capital with the capital of others. In this case personal savings are the entry fee to a potentially profitable business.

Community based business:

If a business is to be operated with the goal of assisting certain social, community or religious needs the financing for such operation may be provided for by a parent organization. Examples of this include churches, state and federally sponsored privatization programs and fundraising organizations for social causes. While the business may not earn huge profits, it may return a stable living and with little or no start up cost.

Step 3- Overhead expense management

To reduce investments costs and operating expenses one may also utilize overhead expense management techniques. These techniques allow one to

Consignment Inventory: If the business involves inventory of any kind, it may be possible to negotiate a consignment or partial consignment with the wholesaler. Not only does this allow the business owner the opportunity to return some or all of the goods if they aren't sold, but it also doesn't require outright purchase of the inventory. This method of inventory saves the wholesaler inventory storage overhead costs and frees up savings/capital for other uses.

Space Utilization: Rent and/or building costs can be a very large expense for a business. For this reason it is advantageous to avoid this expense altogether by either working from home, finding an operating location outside the city and/or sharing space with a other businesses or soliciting space at discounted prices. Space utilization may require relocating but the pay off could mean a great reduction in monthly expenses.

There are many other expenses and methods that can be implemented to supplement and/or make the most of one's personal savings when starting a new business, The above steps are just a few of the possible approaches to starting a small business with use of one's personal savings.

When is Refinancing a Car Loan a Good Option

Refinancing a car loan is a good option if it serves as a functional finance instrument,  and in addition, when the refinancing doesn't have any fees associated with it. Sometimes refinancing a car loan might seem like a good option, but may cause more financial harm than good in terms of total cost, credit rating and budgeting. This could happen if the extra cash flow from the car loan refinancing is mishandled, or the loan adjustment rate and term isn't financially advantageous. However there are several circumstances in which  refinancing a car loan may be a good option.

• Lower payments

Lower car loan payments can arise out of a refinanced car loan if either the interest rate is adjusted or the term of the loan lengthened.  If interest rate stays the same, but the term of the car loan is extended from 36 to 60 months, it can lower monthly payments but may simultaneously increase the cost of servicing the loan. However, if the refinanced car loan has a lower interest rate with a longer term the cost may stay the same while lowering monthly bills which could be helpful.

• Build credit

If the refinanced car loan is able to assist in making payments on other debts previously unpaid, this is a positive and can help improve credit score associated with the late or non-payment of debt. However, if the refinance increases discretionary income and that income is used as down payment for additional debt, then the affect on credit score may be negative. Also, with an extended payment schedule it can take longer to reduce debt to credit ratio, however having a debt to credit ratio of less than 40 percent on multiple types of credit can be better than having the same for just one type of credit.

• Save money

Ideally refinancing of car loans is a good option when it also saves money. This is accomplished most effectively with an interest rate, compounding terms and servicing costs that lower the cost of the loan and monthly payments. For example, suppose the original car loan was for $8,500 at a fixed rate of 6.4 percent interest compounded monthly with a term of 36 months; this would cost $260.13 per month. If the car loan were extended to 60 months at 5 percent would that be good?  It would cost $160.41 per month at a lower rate but the total cost would be $259.92 extra interest.

• Improve budget

Another benefit of refinancing a car loan can be with a budget. If too much of one's monthly budget goes toward car payments it can have a negative affect on other costs, savings, and retirement planning where the net affect can be a magnified loss of money due to misallocation of funds. In the above example, the refinanced car loan is more expensive but requires almost $100 per month less. Should that extra $99.51 be reallocated to a financial instrument yielding three percent, after five years of monthly payments with an initial deposit of just one dollar, the final amount would be $6,440.89.

Keep in mind, the original amount of $260.13 saved or invested after the 36th month would yield $6429.59 after 24 months. Thus, using these numbers it would be more cost effective to use the 5 year auto loan at five percent with monthly savings of $99.51 than the three year plan with deposits of $260.13. If an extra. .51 cents were added to the $99.51 monthly savings over five years a yield of $6,472 would be earned. The financial outcomes between the three year and five year plan are rather minimal in terms of total savings, however at a larger scale, for example with a $40,000 auto loan, the car refinancing provides larger scale affects on cash flow, savings, credit and financial planning.

Sources:

1. http://bit.ly/5RQYy (Bankrate Auto loan)
2. http://bit.ly/aQNJul (Bankrate Savings)

How to Benefit from Helium's Personal Finance Channel

Helium's personal finance channel is a resource for those seeking to learn about a variety of financial topics relating to your money. As a resource, the information in the personal finance channel can be used to build an awareness of spending and saving, managing debt, building investments, planning for retirement or understanding insurance among a variety of other pertinent topics.

The personal finance channel provides its visitors and contributors with several useful financial tools including knowledgeable and well written articles, finance topics that are important to you, your money and your life and a place to discuss ideas with other finance minded people.

The value of personal finance articles

Helium's Personal finance articles are written from a variety of financial, professional, and experiential backgrounds. What this allows is the content of the articles to be more in touch with the human experience and free from the hand of editorial censorship that might accompany a different type of information source. Since the articles are both peer and community rated, the value of that information is assessed with a rank and thus provides readers with a gauge of how useful the information may be.

Writing personal finance articles can also be useful in developing and building writing skills, help one earn ad revenue from Helium's revenue ad share program. By completing one's about me page and adding articles to one's profile a writing portfolio can also serve as a marketing tool or link source to a personal blog, or business website. Also, the more quality articles are contributed to Helium, the better the site becomes in terms of potential web traffic, rapport within the writing community, and as an information source.

Personal finance topics of interest

In addition to individual writers, the personal finance steward team and staff select article topics to write to within the range of personal finance sub-channels. The sub-channels include topic areas such as financial planning, loans, spending and saving, taxes, investing, real estate and debt management.

Articles are subsequently reviewed and rated through Helium's peer rating and steward review process. This process allows for a diversity of information and infusion of financial knowledge that is truly unique and of value because of its distinctiveness. The personal finance topics and content can be of value to readers, writers, and advertisers for a more complete and holistic financial experience.

Marketplace titles

Occasionally Helium's Marketplace features personal finance titles from various publishers. Writing to these titles offers an opportunity to expand writing styles, achievements and earn extra money if articles are selected for publication. The Marketplace venue often has different writing guidelines than Helium's main articles allowing writers to gain a greater awareness of publisher goals and needs. Topics featured in Helium's marketplace have included investing, insurance, mortgages, saving and more. The Helium Marketplace is a great way to learn new writing skills and techniques.

Personal finance forum

To discuss ideas, ask questions or simply take a break from reading articles, the Helium Personal Finance Channel Forum is the place to be. Whether it be talking about earnings, getting to know other Helium readers and writers, or sharing ideas on how to make the personal finance channel even better, the personal finance forum is worth a visit. The personal finance channel forum is located in the community area of the helium website and is also a good starting point to becoming acquainted with some of the ins and outs of writing and membership at Helium

The Helium Personal Finance channel can offer a wide variety of people a refreshing new source of personal finance information that is step beyond the rest. Cookie cutter doesn't quite cut it when it comes to Helium's way of delivering information and that is to your advantage because it's about you and your money.

Summary

Writing at Helium's personal finance channel can be a rewarding and enriching experience. The channel offers distinguished information on personal finance topics in addition to an opportunity to develop writing skills, share in a distinctive writing community and participate in Helium's ad revenue share program.

Finding questions to answers is also facilitated through Helium's community forum, workshops and staff and steward contacts. Participating in Helium's personal finance channel can be a worthwhile experience for writers, educators, professionals or individuals seeking to learn and grow.

How to qualify for stimulus refinance loans

Qualifying for stimulus refinance loans involves identifying which governement stimulus program one is eligable to apply for refinancing through. Two such programs are The Homeowners Affordability and Stability Plan which is part of U.S. Government's Housing and Economic Recovery Act, and the Hope for Home Owners (H4H) program.

The U.S. Government has estimated millions of American residents will be able to qualify for these loans in order to assist in building household financial stability. Stimulus loan finance is not available to everyone as this article will illustrate. However, for those that do qualify, the problem of low to negative home equity value is addressed by the loan refinancing section of the plan.

What a stimulus refinance loans is

A stimulus refinance loan specifically addresses the problem of refinance disqualification from lowered home value or financial distress. Moreover, in the Homeowners Affordability and Stability Plan, the goal is to help responsible mortgage owners refinance their existing mortages even if they have less than 20% equity value in their homes. The refinancing options available to qualifying individuals include both fixed rate and adjustable rate mortgages and the benefits of these loans are as follows:

• Rewards homeowners who have consistently paid their mortgage
• Helps lowers mortgagees mortgage interest rate
• Assists in generating more equity value in property over less time
• Ameliorates some of the refinancing complications exacerbated by refinancing policies
• Potential to reduce mortgage amount by $1000 for 5 years (savingtoinvest.com)

Hope for Homeowners loans are different from Homeowners Affodability and Stability plan loans in the sense that the homeowners may be struggling to keep up with mortgage payments. This program refinances loans at 96.5% of current appraised value thereby taking the burden of equity loss off the qualifying loan applicants financial profile. These loans must also be qualified and applied for through existing home mortgage lenders and may also involve a restructuring of the existing loan using the pre-existing mortage amount.

Qualification criteria

The qualification criteria for Homeowners Affordability and Stability plan require what is called conformity' which means the existing mortgage must be sponsored or guaranteed by either Freddie Mac or Fannie Mae, two of the largest U.S. mortgage buyers with accountability to the Government. Additionally, the mortgages must be under a predetermined financial value, be for a residence, and cannot have a market value of less than 5% of the pre-refinanced mortgage amount. Other criteria include the time in which the refinancing takes place and when the original mortgage was obtained.

After qualification has been determined, especially mortgage ownership or guarantee from Freddie Mac or Fannie Mae, the refinance loan can be applied for through a loan officer at the existing financial institution that maintains the mortgage In such case, several documents are required as in the case of most mortgages. Typically these include income information, identification, tax documents, existing debt, assets etc.

Accodring to the Department of Housing and Urban Development, Federal Housing Administration, qualifying for the H4H program involves meeting the pre-determined criteria. These criteria include loan origination prior to January 1, 2008, non-intentional default, mortgage payment in excess of 31% of the mortgagee's gross monthly income and truthful application for original mortgage i.e. non-falsified income and/or other information. These and any other qualifying factors can be viewed at the FHA website or discussed with mortgage servicers.

Summary

Stimulus refinance loans are aimed at existing homeowners with either low equity value or troubled financial situations. Since the Homeowners Affordability and Stability Plan loans only address existing homeowners with good credit histories and specific borrowing criteria, they only apply to certain homeowners.

Similar qualifying criteria are applied to the H4H program, specifically financial difficulties during home ownership. These criteria are illustrated in this article and in the case of the Housing affordability loans, include mortgage support by one of two named U.S. large mortgage buyers. This may automatically exclude certain mortgagees in similar situations who did not take out conforming' mortgages.

For those who do qualify for stimulus refinance loans, the benefits can include lower mortgage interest premiums, reduce mortgage, refinancing qualification, and low equity relief. To apply for and/or learn more about the stimulus refinance loan options, it may be helpful to contact a loan officer, Housing and Urban Development department (HUD) representative or the U.S. Department of the Treasury.

Sources:

1. http://www.savingtoinvest.com/2009/03/will-my-mortgage-now-qualify-for.html
2. http://www.debtconsolidationpost.com/?p=702
3. http://www.treas.gov/press/releases/tg33.htm
4. http://findarticles.com/p/articles/mi_m0EIN/is_2009_Feb_24/ai_n31375948/
5. http://portal.hud.gov/portal/page?_pageid=73,7601299&_dad=portal&_schema=PORTAL

Why Idioms are Used in Personal Finance

Idioms are used in personal finance for the same reason they are used in life, to accentuate meaning and draw attention to the nature of things, often within figurative phrases. There are several idioms in personal finance, many of which highlight some of the key principles of managing money effectively as well as hinting at the nature of some financial transactions. Financial idioms also express the creative side of a topic that is very often thought of as dry and bottom line in outlook.

• Why the "dead cat bounced"

In the investing world, there are a lot of idioms that summarize investment scenarios into quick and fast meaning. These phrases serve the useful function of getting to the point both when time is a critical factor, and when there's work to be done managing money. Dead cat bounce is one such phrase that captures the meaning of a financial event that would otherwise take longer to express. A dead cat bounce is when the price of a financial security, or group of securities collapses, and then rises briefly before declining again.



• Which animal is better, the bear or the bull?

Bear and bull markets are part of the business cycle, or so it is believed in convention. The animal that precedes it represents each type of market. In the case of a bear market the business cycle has contracted and liquid assets dry up. This could also be a bad time to "catch a falling knife", as some business may be on their way to insolvency in a bear market. Bull markets are the opposite of bear markets, and demonstrate 'bullish' behavior. Bulls are somewhat aggressive, charge forward and do so in volatile movements. The stock market and other financial markets are thought to behave similarly when an economy is improving.

• Chickens lay eggs, but they don't always hatch

If you've never wondered why money put away is referred to as a "nest egg" it is a figurative way of referring to growing money based on a practice that is believed to encourage hens to lay eggs. Nest egg can also be thought of in another way, specifically the care with which the hen protects the egg; keeping it warm, making sure it develops into something more, watching out for predators as best she can and so on. Thus the process of growing and protecting one's money is a somewhat close to the heart matter in so far as the metaphor works.

Another egg idiom having to do with chickens is "don't count your chickens before they hatch". With variable interest rates, unstable economics, inflation, and investments that don't live up to their expectations, there's not always a guarantee that money planned on will be there despite relative financial security. For example, an insurance company might go bankrupt, an investment might turn sour because of an unforeseen event or a job loss might cause one to use up savings. Keeping in mind the chickens haven't hatched yet might add a healthy does of perspective to a financial plan.

• Greed is good

The phrase is trite, and the implication somewhat lacking in benevolence, but when it comes to managing your money "Greed is good", as Gordon Gecko stated in the 1987 Oliver Stone movie 'Wall Street'. The reason why the phrase is even worth consideration is because commerce is such an integral part of the creation, distribution, and retention of wealth. Greed is both an aspect of human nature and economical thought, after all who is 100% not greedy?

• How there is both "Honor and No honor among thieves"

The phrase "No honor among thieves" is sometimes confused with "honor among thieves". Both these idioms speak volumes or at least pamphlets to the nature of finance. Regardless of which is the original phrase, the two have emerged, both with unique meaning. The phrase no honor among thieves, is a reference to the nature of those who seek "ill gotten gains", or in a wider interpretation, other people's money. In doing so, honor may be lost or replaced with the interest in gain.

Honor among thieves refers to those who seek gain in conjunction with one another. In such case the honor among thieves is there, but lost with everyone else in which case there is both honor among thieves and no honor among thieves depending on who the reference of honor regards. So next time you're wondering where the money you thought was safe went, it might be a good idea to recall these two phrases.

Source: http://www.investopedia.com

What does it take to refinance a mortgage?

Refinancing a mortgage for a lower interest rate can be a great way to reduce monthly expenses and lower the overall cost of a home. There are a number of refinancing options available to consumers, but the mortgage refinancing benefits and process can vary between financial institutions. Generally, what it takes to refinance a mortgage is influenced by a few essential variables.

• Credit rating
• Debt to income ratio
• Equity in home
• Valuation of the home
• Individual cash flow

Online financial institutions may be able to offer better quotes with a digital network, however local banks may have better service. Also, as financially beneficial a mortgage finance process can be, it is important to keep in mind how the costs breakdown over time.

Assessment of the refinance terms

Before signing the contract for a mortgage refinance it is important to determine whether or not the refinance will be worthwhile and how much you will save, have to pay etc. To do this, calculate the amount of a refinanced mortgage and compare that to your current mortgage payment.

For example, if a current home valued at $225,000 has a monthly payment of $1363.49 and the refinance is for 5.4% the new monthly payment is $1263.44, however this does not include costs that may be built into the previous monthly payment such as annual property tax, hazard insurance, and mortgage insurance.

If these additional costs add up to 30 basis points or .3%, then the monthly payment becomes $1305.90. Add to this refinance costs and principal lost to the resetting of the amortization schedule. Moreover, if the refinance costs are $2000.00 and included in the mortgage, the cost becomes $1317.51 per month.

In addition to the above, if the original mortgage is 5 years old and is reset to 30 years at the new rate, 360 new interest payments will become due on top of the 5 years of interest already paid. If the new amortized interest plus the previous 5 years of interest adds up to more than the previous mortgage at the 6,1% rate, then the refinance is not worthwhile. For these reasons, be sure to include enough percentage difference between the refinance and the existing mortgage to make it worthwhile.

Pre-qualification

Pre-qualification at a couple of well selected mortgage refinance facilitators can come with as little as a good credit score. The pre-qualification may also provide a prospective mortgagee with several competing quotes. However, pre-approval for a mortgage requires more documentation than pre-qualification. Typically a mortgage refinance requires the applicant to demonstrate debt to income ratio, net asset value, gross annual income, tax compliance, and property details such as assessed value, title deed, and insurance.

Choosing a bank

Choosing between a local bank and online banks for mortgage refinancing is an important decision in the home refinancing process. If your local bank provides good service, knows you and has interest rates as low as online financial institutions or refinance quotes, this bank may be a better choice. This is because for something as expensive and involved as a mortgage, it can be helpful to have the face to face and telephone contact in addition to proximity in the case of sorting out details related to personal finance.

Refinance planning

In a New York Times interview by Bob Tdeschi with mortgage industry experts Regina Garlin and Nicholas Bratsafolis, Bob Tedeschi highlights the relevance of timing when applying for home refinancing. Moreover, Tedeschi's interview brings up the concern that mortgage refinances could fail or not be worthwhile because mortgage rates will not stay at historical lows forever, and home equity values may drop below a point required for the refinance to be approved. In other words, mortgage processing times themselves can take up to 3 months, in which time the value of a home's mortgage may drop below the traditional allowable refinance.

To illustrate the above point, if your home currently has an assessed value of $275, 000.00, and your current mortgage is for $260,000.00, the real estate's value may be getting too low for the bank to approve a traditional refinance. You may also want to keep in mind the affect of refinancing cost on the mortgage application if that cost is included in the refinance value. The reason for this consideration is that the mortgage value may rise above assessed value after these refinance costs are included.

How the U.S. National Debt Affects Average Citizen's Personal Finances

How the U.S. National Debt affects average citizen's personal finances depends on the correlation of that debt with economic conditions and variables such as inflation, dollar valuation, cost of capital etc.

Since Government is the regulator of a country, a national marketing agent, and administrator of Federal services, a high debt can affect all these things and all those businesses, institutions, employees, and programs related to them.

The economy is affected by more than just national debt however; the affects of the debt on individuals may be subdued. Nevertheless, when high national debt is a significant problem it may lead to individual finance related concerns in the following ways:



• Income limitations, furlough, or reduction
• Higher cost of living
• Increased taxes
• Decreased spending power
• Lower performance on investments
• Decline in availability of capital

This article will discuss the above listed potential negative affects of high national debt in terms of 1) debt, currency valuation and capital, 2) money supply and 3) cost of living. Moreover, as alluded to in paragraph 1 of this article, exactly how much national debt is too high varies on a number of economic, administrative and political factors.

Even so, high debt means the same thing for Government as it does for a business, family or individual. Consequently, the U.S. National Debt may in some cases negatively affect the average citizen's opportunities, spending power, federal assistance, and costs. It does this through the economic, budgetary, and financial repercussions of the debt as illustrated henceforth.

National debt, the dollar and cost of capital

When the national debt is too high, it can undermine the credibility of a Government that in turn affects the public. This is why not having too much debt is critical for a national Government. When debt becomes too high, confidence, investment and liquidity in a country, its money, economy and people can wane thereby affecting the following factors that in turn affect the average citizen's personal finances.

i) Valuation of the dollar:

High debt can mean a low valued dollar due to lack of confidence in the economy as related to debt. When the value of the dollar declines, it takes more money to buy the same tings be they household products, business investments, imported goods etc.

ii) Lower foreign investment:

Foreign national investment may decline when other countries find reason to believe the high national debt may negatively affect the country's economic performance. In other words, it foreign investors feel their investment opportunities in a country are jeopardized, they may invest less.

iii) Higher cost of capital:

When debt rises, the cost of capital for consumers can rise thereafter due to either decreased value of currency and/or limited government funding through monetary policy. When monetary policy limits money supply the cost of capital rises for consumers through higher interest rates as is the case with lower currency values.

Less money for everyone

A higher national debt also means less money for government programs, industry, businesses and individuals. Moreover, when the Government has less money, it follows the same applies for the economy, the businesses and people within that economy. These decrease in the availability of money may be evident in the following ways:

i) Limitations on business subsidies:

Business subsidies come from earmarks and legislated government programs. When the government has less money, so to does the availability of money for such federal assistance. This in turn can impact business success which affects the wealth of business owners, and valuations thereby potentially lowering the value of retirement accounts, investment accounts, managed finances etc.

ii) Decline in Business investment:

If businesses notice the debt is impacting both subsidies and the ability of the economy to perform be it through higher taxes, lower liquidity or decreased consumer confidence, a decline in business investment may occur. This affects the average American by reducing the availability of goods and services through operational cutbacks within a cautious commercial enterprise. This can also negatively affect performance of public investment in both private and public firms.

iii) Reduced incomes and fewer jobs:

Government and business cut backs can also mean increased unemployment, income furloughs, reduced pay raises etc. When income and jobs decline, financial pressure becomes a problem for a larger amount of people.

Increased cost of living

Since economic conditions are at least partially linked and correlated to the national debt, a negative national debt can affect the consumer price index, taxes, and government services that are then privately attained by individuals.

In other words, the cost of goods and services can go up because of a potential decline in the value of the dollar and in order to pay for the debt, the government may increase various taxes such as sales tax, excise tax, sin taxes etc. and/or cut back in government programs that can lubricate the economy and cost individuals in compensation for such services.

i) Inflation:

Cost of goods and services may rise for a number of reasons related to debt. For example, the combined affects of lowered business, international and consumer confidence in the economy may lead to a decline in wealth overall. This can lead to inflation through an increase in costs passed onto the consumer.

ii) Higher tax-payer burden:

Excise, sales, business or income taxes may rise as a government measure to pay off the national debt. When taxes rise, less consumer income is retained making the same amount of income buy less in after tax dollars, thereby limiting the standard of living.

iii) Decreased services:

Lower services cost consumers time and money because they may require private alternatives to those services. For example, limitations in educational programs may spur the need for private education just as cut backs in government agencies such as tax services may necessitate an increased reliance on private tax services that cost consumers directly. When coupled with higher taxes, this can double the cost to the consumer.

Guide to personal finance: Money mangement tips

Personal finance is the managing of individual and/or household monetary circumstances and goals through use of financial instruments, methods and rules. Personal finance can be divided into a number of categories that form a comprehensive financial model that utilizes income, debt management, investment, and financial planning to achieve a more efficient, cost effective and optimal use of personal finances.

Since everybody's financial situation and aims tend to be different, personal finance applies conventional and unconventional money management methods with lifestyle objectives, short-term and long-term plans. Some of the areas of personal finance include the following:

• Budgeting
• Tax planning
• Investing
• Retirement planning
• Financial recordkeeping
• Cost management
• Estate planning

Budgeting

Budgeting is an important part of personal finance because it allocates income and "liquid" financial assets into allocations that allow an individual or family to meet multiple financial needs. For example, a typical household will have expenses, limited income, savings, insurance needs and retirement plans. To properly accomplish and attend to these financial tasks, a budget can be made use of.

A budget is a time-coordinated application of money to various uses with limitations. In other words, through a budget, money is pre-allocated to various monetary ends for the purpose of better applying that money. Preparing a budget can help reduce debt, build savings, maintain credit ratings and financial order to one's life. Budgets can be weekly, bi-weekly, monthly, annual or a combination of times where finances are accounted for and utilized in different ways.

Tax planning

Tax planning is an important part of personal finance because when properly done, tax savings and retained income can be maximized. For example, contributing to an IRA lowers total taxable income and defers taxes until retirement when total income may be lower for a net gain in tax savings. There are many tax savings techniques and methods that can be applied through deductions, tax filing status, exemptions and knowledge of tax rules, mechanisms and code.

Tax preparers and/or accountants can be helpful in proper tax planning and may be worth consulting before major financial decisions are made that are likely to impact one's income, inheritance, property, capital gains or other tax. Adequate application of tax methods may be useful in growing tax free income, and wealth building whether it be individual or family wealth.

Investing

Another key area of personal finance is investing. When done correctly, investing can not only be done tax free, but grow one's wealth through allocation of money into financial instruments. There are many ways to invest and these methods depend on personal financial goals, risk tolerance, age, available investment products, investment plans and services. Investing takes capital, research, time and patience and possibly the advice of a financial planner and services of a broker.

Depending on the investment goals, investment know how, and types of financial instruments invested in, financial services may or may not be necessary. Investment income is ideally not needed until a future point in time so that it may fluctuate in value without obstruction to the long term financial goals. In the case of low-risk and/or short term investing, money should also be allocated for these purposes and not needed.

Retirement planning

Eventually most people need to retire, and this can be facilitated by a retirement plan. Most financial advisors will say the earlier one develops and implements a financial plan, the better. The reason this is so is because more time allows an individual to save less each month to attain a long term retirement goal assuming the same yield on savings for two separate time horizons.

Examples of retirement planning include, 401(K), 403(B), IRA, Pension plans, property investments, trust savings, life insurance policies with cash value etc. Government social security may be part of a retirement plan but due to uncertainty regarding availability of social security due to an aging population, the security of these finances may be somewhat questionable in some countries. For this reason, having a self-guided, employer or other type supplemental retirement plan may improve one's financial retirement prospects.

Financial record-keeping

When budgeting, tax-planning, investing etc. good record keeping can not only help one know how and where money is going, but assists in facilitating these objectives more expediently, and can help with making adjustments to one's financial planning and personal finances when necessary.

Good financial record keeping can also help when applying for loans, filing for taxes, and accounting for cash flow or disputing charges. Strong financial recordkeeping is a tool of financial planning that spans across several areas of personal finance and organizes monetary management potentially saving time and lowering money related complications. Financial recordkeeping can be accomplished through financial software, or an individually customized financial records system.

Cost management

Cost management includes loans, credit cards, living expenses, bills, and any debt an individual and/or household incurs during a given time. Effectively managing costs of living includes debt management and is essential to keeping control of spending and staying within a budget. Costs are the single biggest way to render a complete financial plan ineffective as they can eat up and eliminate income and savings and potentially hamper or greatly reduce non-cost elements of a financial plan.

Cost management can be developed through mindful spending, adherence to a budget, lowering of expenses and reducing of debt and debt interest levels. Keeping debt under control, eliminating debt and/or reducing debt/income ratio are ways to manage costs. A quality cost management strategy can greatly improve a financial plan and one's personal finances in the short-run and long-run scenarios of managing money. Many tips, services and techniques exist to assist in cost management and becoming familiar with these methods may involve research and/or the use of financial services.

Estate planning

For the wealthiest of individuals with net worth in the millions of dollars, estate planning can be quite useful. Successful estate planning can lower taxes, grow income and assets, and legally protect money from lawsuits, estate taxation and inheritance tax through the use of financial instruments such as trusts, insurance policies, and retirement vehicles in addition to legal tools such as wills, family corporations and living trusts. Enlisting the assistance of accountants, attorneys and/or financial planners may be worthwhile especially when large amounts of money are involved as in the case of some estates.

Effective estate planning can help maintain fiscal privacy, protect finances, and legally avoid taxation. Estate planning may also incorporate retirement funds, health management savings, investments and insurance policies and may consist of a combination of financial strategies, financial instruments, tax techniques and legal mechanisms. For these reasons, estate planning has the potential to be complex and/or elaborate but may also end up improving one's personal finances significantly

To summarize, personal finance is the conjunction of personal goals, financial regulations, legal and tax environment with financial instruments, mechanisms and techniques. The objective of personal finance is to manage money effectively and this may include growing money, preparing for retirement, saving, managing costs, achieving lifestyle objectives, and protecting one's money and self through financial means.

Personal finance is a cornerstone of life management and quality of life because it helps facilitate life objectives and quality of life through the effective management of money and aspects of life affected by money. There are many sources of information, services and tools available to persons seeking to improve their personal finances, and these tools include online literature, financial services, financial plans, software and equipment.

The practice of personal finance may change over time as one's financial aims and/or the nature of the economic, financial and legal environment changes. Consequently, personal finance is not always a static practice and involves continual awareness and diligence to financial means and goals.

A Financial Conscience

Reader J. Christian dropped me an email pointing me towards a piece to today's WSJ about the importance of good and honest financial information -- as underlined by our current crisis. From it comes this description of John Moody, the originator of Moody's Investor Services:

When Moody published a statistical manual in 1900, followed by a system of rating securities with categories Aaa, Baa etc, and a series of investor-advice books, he provided reams of information to everyone, for just the price of a few books. These beginnings led to the development of Moody's Investor Services and other rating agencies. The securities rating system has now spread from the United States to the whole world, and helped make possible the capitalist explosion of growth and prosperity.

Moody left behind an autobiography, "The Long Road Home," 1933, and so we can glean some of his motivations.

Though Moody was a democratizer, he was not acting out of populist philanthropic motives when he launched Moody's. As he makes very clear in his autobiography, he did it to make money. But there were other things he cared about besides making money. People asked him around 1900, why give away all this information so cheaply? They told him he might expect to make a lot more money as an underwriter, middleman or bond salesman. But he recognized that was not his personality, and that "there was that 'literary' or writing bent of mine. To bring out a book -- even a mere compilation -- fired my imagination far more than could any dreams of becoming a successful banker."

He called it a "writing bent" but as is plain from his autobiography, it might be considered an impulse to speak perspicaciously and openly to the people. A "writing bent," connotes an impulse to consider the interests of a broad reading public, and publishing tables of statistics and ratings, as well as the various investing advice books Moody wrote for retail investors, is just that.

Moody was not selfless but he cared about people, and he cared about ethics. His autobiography was filled with admonitions about speculative bubbles that draw in unsuspecting investors (as he himself had personally experienced). He wanted to provide the careful information that would prevent financial misfortune for the average family. He was obsessed with ethical behavior and musings about his traditional Roman Catholic religion. He wrote about moral dilemmas, and his refusal to accept money under terms that would bias his ratings.

I know little else of Moody other than that, but what the article says I found charming, and a little inspiring. We could use more like him.