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9/9/2014

6 Hidden Values in Your Credit Report

A provision in the Fair Credit Reporting Act gives everyone access to a free report once per year -- be sure to get yours and discover 6 potentially valuable chunks of information:

#1 - a snapshot of your credit profile

While this one may be the most obvious value proposition in your credit report, it also perhaps the most practical.  Businesses and agencies access our credit reports all the time to gather insights into our financial conditions; I once worked a job that ran a credit check on me at least once a year to make sure I wasn't under significant financial pressures.  When viewing your own report, take a minute to consider the information from the perspective of a potential employer or loan underwriter -- does anything stand out as particularly troubling?

#2 - a quick test for identity theft

The three different reporting agencies that participate in this program all represent the data in their own way, but each report will summarize open lines of credit as well as offer details specific to each line.  If you are concerned with the possibility of being a victim of identity theft, these reports should be a shortcut to finding evidence of such theft.  Accounts that are listed as "delinquent" or as having "issues" may represent lines of credit opened in your name by someone else.  Just skimming through the report may also reveal loans that you do not recognize -- a sign that something is likely amiss.

#3 - a jog for the memory

This one surprised me: your credit report includes data about your current and previous addresses, phone numbers, and employers.  For some of us who have moved around a bit, this reference may be a useful reminder of the particulars of those pieces of history (seriously, can you remember all of the phone numbers used in your adult life?)

#4 - loan specific info

Similar to number 3 above, your credit report can also be useful in remembering specifics of important loans that may be a little old now.  For instance, did you open that car loan in 2002 or 2003?  What did you pay for it back then?

On my own report, I was excited to find the actual Fannie Mae account number for my mortgage -- perhaps a random bit of trivia for most people, but if you get really interested in the life of your particular loan, this info is crucial.

#5 - drags on your credit

People with a long history of credit may find accounts on their report that have been long unused, maybe a department store card or a credit line opened to buy furniture that no longer carry a balance but represent a claim on their overall credit capacity.  In these cases, people may wish to formally close those unused accounts to "free up" credit for other uses, and to prevent future fraud on those unnecessary credit lines.

#6 - insights on your rights

The fine print following my data on one report included this information on our rights as consumers:

"You may limit "prescreened" offers of credit and insurance you get based on information in your credit report.  Unsolicited "prescreened" offers for credit and insurance must include a toll-free phone number you can call if you choose to remove your name and address from the lists these offers are based on. You may opt-out with the nationwide credit bureaus at 1-888-567-8688 (888-5OPTOUT)."

9/4/2014

Sneaky Budget Tip #7

Don't Go Shopping

Before you say "Well, duh...", bear with me.  My daily routine on the web includes checking some sale sites like Woot.com.  Occasionally, I will see things that match up with my household wishlist; sometimes I see things that I know a friend has been looking for a deal on for a while.  And in those cases, maybe, just maybe, it was worth me taking a look.  But more often, what I find is that whatever is on sale suddenly looks appealing to me.

Sure my drawer is full of socks, but that 12 pair pack seems so cheap!!

The sneak budgeteer knows that the best way to avoid a severe case of the Wants is to simple skip the step where you see the deals.  A more responsible approach to spending may be to collect, over time, a list of things that your family really needs and then do a bit of targeted shopping for a deal.

9/2/2014

The Question of Cash

Economic decisions revolve around cash: companies concern themselves with consistently producing cash in excess of their operating costs; non-profits need regular infusions of cash to provide the service or content they organized to provide; households have to keep an eye on cash reserves to manage the flow of bill payments and to maintain a comfortable level of "cushion" against unexpected demands on the checking account.

The investing world is similarly concerned with cash in a few specific ways:
  • For investors in the "sustaining" or "distribution" phases of their lives, cash flows out of their portfolios may be a crucial part of their investment objectives.  In the "old school" conception of fixed income investors (typically represented as retired, older folks on a pension), the cash coming out of their bond portfolios represents a significant portion of their monthly spending money.
  • In formal terms, all investments are predicated on a simple cash in --> cash out formula: the rational investor chooses among investments based on the relative likelihood of improving their eventual cash position.
  • In terms of asset allocation, cash represents an asset class with a mix of serious pros and cons.  On the positive side: cash is a great parking place for funds to escape volatility; historically cash earned some nominal interest rate (in savings accounts, money market accounts, etc); cash on hand provides flexibility to take advantage of non-cash investment "deals" that come along.  However, the con list of holding cash is long too.  Among the disadvantages, the prime concern is related to return: based on historical numbers, the expected "real" return on cash is 0% ("real" return is adjusted for inflation), and in the current interest rate market the expected real return is actually negative.  Choosing to allocate significant funds to cash in the present market is equivalent to accepting an expected negative return (albeit a small one) on that portion of the investor's overall assets.

As an investment adviser, I am constantly confronted with the decision to hold or invest cash on behalf of my clients.  Today, as of this writing, approximately 3% of the funds under my management are held in interest bearing money markets, but as mentioned above the current interest rates are very low vs historical averages.

Is 3% too much or too little to hold in cash?  Is there an "ideal" level for all investors?

The decision making process from my perspective is complicated by the fact that individual investors exhibit considerable variability in their particular situations.  For some clients, the assets invested with my firm represent a small portion of their overall wealth, and those clients may very well be holding considerable cash in their personal bank accounts (or even in cash management accounts with another adviser or broker).  In other cases, a client household may work with me very carefully to dial in to a targeted amount of money to hold on hand in the bank (typically a cash "operating" balance plus an emergency fund) and direct me to keep the rest invested in (potentially) productive assets for them.  Still other clients fall along the spectrum, and may be using brokerage assets as a piece of their emergency fund, or have a stated objective of maintaining a target liquidity.

My approach is to consider each client (or client household) individually and try to balance their desire for return (in line with their risk and objective profile) with practical requirements related to liquidity, expense management, opportunity costs, and on and on.

    Author

    David R Wattenbarger, president of DRW Financial

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