How To Buy A House When You Are Young

I just graduated from highschool. I have had a credit card for 4 months. I am going to buy a house. My parents are not cosigning. How?

1. Get some of your parent's credit. Ask them to add you to, at the most, three credit cards as an authorized user. You don't actually have to have one of their credit cards to use but all that payment history will go on your credit record and give you a better score.

2. Take care of your credit. Don't miss payments, max out your card (30% is optimal), or open up to many accounts.

3. Go to your favorite bank and get a CD for any amount of spare cash you have. Then get a personal loan for the same amount and secure it with the CD. This gives you a line of credit with the credit bureau (important) and the CD helps pay off the interest.

Since three lines of credit are optimal for getting a good score you can duplicate this process. Get a CD, borrow, go to another bank, get a CD, borrow against it, go to another bank, get a CD, and borrow against it. That will give you three lines of credit. The bureaus like seeing that.

Note: This method must be done in advance of the house and must be fully paid off. Don't pay off this loan in less then a year, otherwise the credit bureau won't recognize it.

4. Get a secured credit card. It's basically a debit card but the credit bureaus see it as a line of credit.

5. Check with a local real estate agent and see if there are any government grants for first time home buyers. Here in Idaho I can get up to $20,000 for my downpayment. Free. Of course there are some stipulations. You can't rent the house out and for every year that you occupy the house your obligation to pay the grant back is reduced 20%. So it's really more like an interest free loan that turns into free money if you live in the house long enough.

You will also get a better interest rate with the government program.

6. If you are in debt or need to go into debt then try to keep your down payment greater than half the loan value. If you already have the debt work hard to get on the "greater then half" portion of the loan.

Remember. Credit card companies don't want to see use of credit as much as they want to see good management of credit (i.e. don't max out your credit cards).

The best way to qualify for government aid when getting a house is to have an income less then $48,000 and have a very low (read non-existent) debt to income ratio.

How To Begin Investing To Build Wealth

Building wealth can be a daunting task for someone young or unfamiliar with the financial industry. To get involved without a good idea what you want can be dangerous for your financial future. However, to not get involved can be far more dangerous for that same future. So here is what you do.

1. Educate yourself

Find out what kind of investing would be the most profitable for you. The most profitable form of investing is always the same for everyone. It's whatever interests you the most. Don't try building wealth based on subjects you find boring. If you seem to find all subjects boring then find a good investment adviser and let him manage your money.

Here are some ideas for investing:
real estate
stock market
bonds
business

When you decide on a subject or multiple subjects then begin educating yourself. Go to the library, rent books, download podcasts, buy books, read everything you can, prepare yourself for any possible situation so you can take advantage of any situation, even situations that seem like problems.

2. Find a good investment adviser

In my opinion this is the most important part of investing. An educated, clever, and honest adviser will prevent you from making even the small mistakes that can cost you hundreds to millions of dollars.

You should make a list of local advisers in your area of interest and set up dates to interview them to advise you and help you manage your assets.

To know you have a good adviser you need to at least know the basics of investing. Don't expect the advisers you meet with to have your best interest in mind. Non-fiduciary advisers don't have the clients best interest at heart. They have a legal contract to put their broker service's interest first, then they will humanly put their interests second, and finally you come in a sad third. A fiduciary is a special, higher, certification that the adviser has the client's best interest at heart. These fiduciaries are the people you want helping you manage your money.

Get ALL of the fees and expenses associated with the adviser. Make sure you understand everything the adviser suggests.

3. Implement The Plan

Set goals that you want. The type of goals you have will dictate what you should invest in and how it should be managed.

Here are some ideas for goals:
growth
income
stability
safety
time span

4. Stick with the plan

Rarely will investing yield you astronomical gains. However, over time it can create HUGE wealth using compounding interest. Compounding interest is nothing to be ignored. To exemplify this I will show you some simple numbers.

$1,000 invested at a very reasonable rate of 8% over 50 years, yields $46,901.61

But.

$1,000 invested at 8% over 100 years, yields $2,199,761.26

You need to put the money in a tax shielded vehicle to capture the full effect of compounding interest. If the money is not in a tax shield vehicle then the interest gains will be reduced by taxes and the gains will take much longer to realize.

The fact is this. If you see these numbers and they don't impress you then move along. But if you do, then you have realized a huge asset. You are the type that can take information and run with it.

Here is a compounding interest calculator so you can do some of your own calculations.

What Should You invest in?

Deciding among the plethora of investments is a heady and hazardous task. Small mistakes made early can affect your results significantly. A mistake in what you invest in and when can cost you your comfortable retirement.

If you are young you are incredibly wise to apply this knowledge now to take advantage of the time you have. Starting now gives you time to use compounding interest and allows for mistakes to be corrected with less impact on your final sum for retirement. If you really do well and apply yourself you can easily retire early. Then you can do whatever you want!

In this article I will discuss some of the most popular investments and what you should avoid when putting your money in them.

CDs
CDs are the easiest form of investing. They are the easiest because you can get them at almost any bank and your money is already there. All you have to do is say you want to buy a CD, sign some paperwork, and off you go. Banks make it this easy for a reason. They make a killing off of you that you could be making somewhere else. Most CDs return a yield of 3% to 5% in our current, healthy market. That will fluctuate along with interest rates. T

The unfortunate part about CDs is the horrendous rate of return. No joke. If you get a average 3% out of your bank then after taxes and inflation you are actually losing ground. That is to say, don't invest in CDs. Yes they are easy but they are not liquid and get low, taxable yields.

One reason most people invest in CDs is for the liquidity. One way to get complete liquidity (checkbook access) from your invested money is a Money Market.

Money Markets
Do your research in this sector. For keeping money liquid and constantly returning a 5% yield you can't beat a money market. If you need to keep large amounts of money liquid then a money market is the way to go. I like the Genworth Interest Plus money market a lot because it has no fees or expenses, has checkbook access, and gives a great rate of return. For keeping money liquid in an IRA your just can't beat a money market.

Mutual Funds
Mutual funds are great for returning a predictable yield, are rated by the Nationaly renown mutual fund company, Morningstar, and can have proven track records from their fund managers.

One word of caution though. Mutual funds can have some hefty fees tied to them that your broker or advisor will NOT tell you about, no matter how cuddly you are with them. Make sure you ask to see a complete Morningstar report on the selected fund. When you get this report look for expenses.

There are management expenses. These are called expense ratios. These can run all the way up to 2%. An acceptable expense ratio would be close to 0.4%. Don't accept anything over 1.5% because there are plenty of funds that return excellent yields for low expense ratios.

The next trap is the 12-b fee. These are fees imposed by your manager on a yearly basis for "managing" your money. Since most mutual funds are held for the long term this is ridiculous. A good investment manager will not charge you 12-b1 fees. An average 12-b1 fee will run around 0.25%.

Then there are loads. If you are young an uncouth investment manager will suggest funds that are heavily front loaded. This means there is an up front fee for buying that fund. It also means you start out at a loss. A typical front load is 5.75%! That means your fund needs to grow 5.75% before you make a dime. It's a ripoff. Don't buy funds that have a loading, either front or rear. There are a great many good funds that don't charge loads. You should not stay with an investment manager if he recommends heavily loaded funds. The reason he will recommend these expensive funds is because he gets paid from the sale.

Understand that your investment advisor needs to be well compensated IF they bring you a good yield on your money. However, most advisors will not bring you a consistent, safe, and high yield. What they will do is charge these fees:

1. 12-b1 fees (0.25% on average)
2. Expense ratios (mutual funds)
3. Loads (mutual funds)
4. Account Fees (these may be simple account maintenance fees and range up to very specific trade fees)

Stocks
This one can get you in a lot of trouble if you don't take the time to educate yourself. However, with some time well spent learning about value investing from a business perspective you can turn a handsome profit. A great example is Warren Buffet who made 33 billion dollars from $100,000.

The essentials of buying stocks can be summarized into these few points.

1. Buy a company that has constantly made significant amounts of money on the profits.

2. Buy a company that has a consumer monopoly that couldn't be taken away with a zillion dollers. A few examples come to mind like, Hersheys, Coca Cola, Google, Wriggly, and any others who have a firm position in their market.

3. Buy a company with a low price to earnings ratio. The way to determine this is to divide the price of the stock by the earnings per share. All of that information is readily available on the net.

4. Don't buy a company just because the price has been going up or you think it will go up. Invest only in good solid companies and you will reduce your risk to a minimum.

5. If the stock takes a dive don't be the first one to jump ship. If you don't manage to sell your stake in the company before a correction occurs then sit it out. Most corrections are nothing more then stockholders letting their emotions run their money.

6. Be alert and be detached. Don't follow the crowd.

7. Don't take stick "tips" from websites or people unless the company meets the prerequisites laid out above. If you do take tips you are putting yourself at their mercy. It is most likely you will be extremely disappointed and that relationship will be damaged.

Be greedy when others are fearful and fearful when others are greedy.

What goes up must come down.

Buy LOW sell HIGH.

Sell before the market corrects and buy after it corrects.

Don't get caught by a plunging market with your hand in the money bag.

Investment Advisor
Do your research and get a good advisor. Try to get an advisor with a fiduciary agreement. This is a special kind of advisor that is required by law to give you information that helps you first. Most investment advisors like Schwab, Edward Jones, Davidson, UBS, and more have obligations to their broker first, themselves second, and you third. Having a fiduciary manage your money can mean the difference between keeping your money and watching it grow or giving your yields to the brokerage and your advisor.

Don't rely on an emotional tie with your advisor to keep him honest with you. The majority of happy investors are being lied to and robbed blind by their nice investment advisor. And I do mean that all those investment firms I listed above engage in those practices. LOOK AT THE NUMBERS! with investing, the numbers are all that matter. If you are getting a satisfactory rate of return, not paying much in fees (less then 2%), and can easily understand the investment choices your advisor has made then you should stay. Otherwise, find another advisor.

The Power Of Compounding Interest

Did you know that if you inherited a $100,000 IRA when you were one year old that IRA would pay out more than $8,000,000 over your lifetime?

Compounding interest is an amazingly powerful tool for building wealth. Almost all wealthy people have used compounding interest to work for them in one way or another. Whether it be stocks, bonds, CDs, or mutual funds, you should get your money working for you as early as possible.

Often when I mention the folly of not investing extra money into some sort of compounding investment early in life I get mixed responses. Some don't comprehend the magnitude of an opportunity like that. Some think numbers that enormous can only be a scam. Some are apathetic and just don't care. But then there are some that see the opportunity and take advantage of it. I hope you are one of those people.

Compounding interest is the best way to build wealth because it is easy. There is no effort involved in making the principal accrue interest and build itself. Granted, you have to work hard to earn that principal but look at it this way. Say you are 21 and you have $40,000 in savings. You want to buy a new lifted truck because you hear paying cash is a great way to save money not paying interest. This scenario is to illustrate the power and importance of compounding interest. Here are two options and the results they will give:

Option 1: Buy the truck outright with the cash. Let's imagine you would have had to pay 9% on that loan. Over a period of 5 years you would have paid $9820.05 in interest.

Woohoo! That's great. Let's see what you would have made if you would have invested the $40,000 in a retirement account and taken out a car loan.

Option 2: Invest the $40,000 at 9% in a ROTH IRA and take out a car loan at 9%. You might think they would just cancel out, but you would be wrong. Here are the numbers:
You spend 5 years paying off your new truck and pay out $9820.05 in interest. While you paid off your loan your IRA was busy making money babies. Over 5 years that invested $40,000 has made you a fat $61,544.96 . That is a profit of $11,724.91 (with the interest subtracted). But since that money is staying with you it continues on making money far past the loan maturity date.

To summarize that scenario, over 20 years, when you are 41, you would have a comforting $224,176.43.

I do not suggest trying to retire on only $224,176. I do suggest using this principal of compounding interest while you are young so that you don't have to work so hard as you get older.

Here is your very own calculator so you can figure out what your savings could do for you.

Financial Calculator

What have your experiences been with saving and investing? Sound off!

Prosper Peer To Peer Lending System

I have been searching for a way to make money, or more exactly, make my money make more money. Prosper.com seems to be a cool way to do that. Prosper is a peer to peer lending system. Unlike peer to peer file sharing systems that this one is legal, safe, and productive.

People with money they want to invest create an account for free on Prosper. The financial and ID information is verified through your bank and by faxing photo ID and tax information. Once everything is confirmed you can transfer money into your Prosper account. The loans people have applied for and were accepted are posted on the lending page.

Information on the borrowers is available to members (free), that includes credit score, delinquencies, credit card usages, lines of credit open, debt to income ratio, and how many times their credit score has been requested.

The borrower also posts what the loan is for and how they intend to repay it. Most borrowers post their income and how the loan will benefit that.

Prosper has all the performance data (important to me) regarding the number of defaults in each credit catagory. The numbers are suprisingly low. Click here for perforance data on all the loans.

In total, Prosper.com has a total of 460,000 members and has loaned out 92,000,000 million dollars. That seems to lend some amount of credibility to this institution.

Zorpa is a UK based p2p lending system that pioneered the concept. They are currently building a site for the US market. Zorpa has some interesting investing ideas that I am going to write about later on.

My Personal Finance Blog has some great analysis on Prosper.

Practice Getting Rich For Free

Online stock trading is a questionably profitable enterprise (for the end user) when compared to trading with a broker. Trading commissions can destroy profits in small trades and often online brokers have a limit on trade amounts which forces large volume traders to make multiple trades one the same stock.

I have a solution for people who want to use the internet to spend money on stocks without calling their broker. There is a catch though. It's free and you won't make a dime. Welcome the virtual stock market.

I have found the Market Watch site is easy to use and has great resources for those looking to learn how the stock market works.