Fortune Watch

President Obama signed a legislation last year that brought around many changes to the Credit Card companies and users. Starting early this year, the credit card companies need to comply with a new set of rules. From now on, credit card companies cannot raise interest rates on purchases you already made on your existing balance. The bank won’t be able to charge you for spending more than your credit limit any more. The credit card bills will be more user-friendly, with the payments due on the same day each month and the consequences of paying just the minimum monthly payment clearly printed on it.

From now on, banks will need to send you a minimum 45 days prior notice before raising cash advance and late fees. Mandatory fees (like the annual or application fees) should be less than 25 percent of the credit limit, a rule that puts an end to the credit card company’s pursuit of people with poor credit histories.

The new rules are going to make it increasingly difficult for students to get credit card. For a start, no one under the age of 21 can get a credit card unless they have a co-signer or offer substantial proof of their ability to repay the debt. This move assures that no irresponsible student ends up having a large loan on his credit card without any means of repaying it. However, there’s one fee that has not been curbed, in spite of drawing serious flak from numerous customers for over a decade. Of course, we are speaking about the foreign transaction or currency conversion fee, a fee that earns several million dollars annually for the credit card companies.

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A disappointed salesman of Coca Cola returns from his Middle East Assignment.

A friend asked. “why weren’t you successful with the Arabs?”

The salesman explained.

When I got posted in Middle East, I was very confident that I would make a good sale pitch as Coca Cola is virtually unknown there. But, I had a problem I didn’t know to speak Arabic.

So, I planned to convey the message through three posters.

First poster: A man lying in the hot desert sand….totally exhausted and fainted.

Second poster: The man is drinking our Cola….

Third poster: Our man is now totally refreshed…..

And then these posters were executed all over the places…”Then that should have worked!” Said the friend.

“The hell it should have!?” Said the salesman. “Didn’t realize that Arabs read from right to left”.

What is the first thing that almost any personal finance blogger that tends to align themselves in “Camp Frugal” will tell you when it comes to saving money? Most likely it is a variation of the mantra, “Spend less! Save, save, save! Quit spending money!” Is this really the best way? It seems that many people, myself included, can leave an important variable out of the cost saving and wealth maximizing formula. This “missing variable” is opportunity cost.

Opportunity Cost Explained

What exactly is opportunity cost? Let’s say that you have two different things that you could do with an hour of your time: Activity A or Activity B. You can only choose one of them but not both. If you choose to do Activity A then you cannot do Activity B and vice versa. If Activity A is your #1 choice for what you would choose to do for that particular hour and Activity B is your #2 choice then when you choose to do Activity A, and are therefore excluded from doing Activity B as well because remember you can only choose one or the other, your opportunity cost is the cost to you in not being able to partake in Activity B.

The technical definition of opportunity cost is therefore the cost of the next best alternative (the thing that you have given up) whenever you are making a decision between two or more mutually exclusive choices.

It’s important to remember that opportunity cost is not necessarily always measured in financial terms (although it is a smart thing to do to ultimately convert all opportunity costs into a financial measurement so that you can better compare options).

Let’s take a look at some different scenarios to see if strictly adhering to the “Spend Less” rule in all circumstances is the best way to go or if there are times when taking a closer look at the opportunity costs involved might help us to improve upon our cost savings and wealth maximizing “formula” and ultimately create wealth and skyrocket our net worth even faster.
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Weekend Humor

During every correction, I encourage investors to avoid the destructive inertia that results from trying to determine: how low can we go; how long will this last? Investors who add to their portfolios during downturns invariably experience higher market values during the next advance— particularly if they focus on Investment Grade Value Stocks (IGVS).

IGVS valuations have been trending upward for nearly a year; Market Cycle Investment Management portfolios are eclipsing the all time highs achieved in 2007, and income Closed End Fund values have risen with surprisingly high yields still intact. The investment gods are smiling once again— but not on everyone.

Corrections are as much a part of the normal market cycle as rallies, and they can be brought about by either bad news or good news. (Yes, that’s what I meant.) Investors always over-analyze when prices become weak and over-indulge when prices are high, thus perpetuating the “buy high, sell low” Wall Street lunacy.
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Asset Allocation is an investment-planning tool, not an investment strategy — few investment professionals understand the distinction. Fewer still have discovered the power of The Working Capital Model. The problem that most investors have is that they use the wrong number to determine their Asset Allocation in the first place. Neither market value nor the calendar year should be relevant issues.

The only reason for a person to assume the risks associated with investing is the possibility of achieving a higher rate of return than is attainable in risk free savings depositories for their capital (money). Investing is a get rich slowly process, conducted in an uncertain environment — one that must be understood and managed in a way that minimizes the risks involved.

The Working Capital Model accomplishes this by eliminating the need for impersonal comparisons with arbitrary and unrelated numbers and time periods. It works best with portfolios that are diversified among individual securities that are at the same time of high quality and income producing.

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Weekend Humor!

The current mortgage rates are as good as they are going to be for a couple of years now. The current mortgage rate is 5 percent- a rate so good that it has forced people to rethink over paying off extra payments to pay off their debts well before their loan period is over. The Federal Reserve announced its decision not to buy mortgage-backed securities from now on last week. The rates are expected to go up once the Federal Reserve stops buying.

Your browser may not support display of this image. When rates used to be much higher at about 7 to 8 percent, it made sense to pay off extra payment to guarantee a return on your money. However, with the mortgage rate dipping low, it would be wise to invest your mortgage payments in someplace else where you can earn a greater return on your investment, especially when getting rid of your debt costs you much less.

Would you prefer to keep your money in a more liquid option than a mortgage? Having hit the lowest possible mortgage rates in years, would you be willing to invest your extra money in savings rather than clearing off your debt earlier than the mortgage requires.

The bottom line is this: Don’t make extra mortgage payments until you have cleared higher-interest debts. Speaking of higher-interest debt, credit card debt first comes to mind. Also, if you are not saving enough to get a full cover on your employer’s 401(K) or similar account, don’t rush to pay off the mortgage loans first. Increase your savings in that area first. Ensure that you have a decent emergency fund set aside before paying off the mortgage loans.

In reality, your interest rate is even lower than the 5 percent interest rate that you have. You get a part of your interest back each year in the form of a tax deduction. Picture this: Suppose your yearly income is $175,000. You pay 35 percent of it in taxes. If you pay $20,000 on mortgage interest each year on a 5 percent loan, that effectively brings down your yearly total taxable income to $155,000. That means that your total taxable income is lowered by a sum of $20,000. This in turn implies that you shall have to pay $7,000 (35 percent of $20,000) less in taxes per year.

This means that effectively, the after tax interest on your loan is brought down to 3.25 percent. So, any money that you have set aside for paying off the mortgage payments need to bring in a return of more than 3.25 percent. Seems quite feasible in current market situation, doesn’t it?

If you are worried that income taxes would cost you on the amount of money saved by not paying off the mortgage payments, all you have to do is to deposit the money into an account protected from taxes. A health savings account, a 529 college savings account, a Roth individual retirement account- all these would do the trick here. It is best advised to invest your money in some kind of tax-free investment. Otherwise, you may end up spending the money that you saved for paying off those mortgage loans.

The long-term rates for capital-gains taxes can well rise above the current rate of 15 percent. It is safe to have some of your savings in a taxable account though. In case you hit a long stretch of unemployment, banks won’t be willing to loan you money for a home equity loan without a steady income to repay it with. In case you need to sell your home and move quickly to a new town, why waste away extra amount of money on mortgage loan which you could have otherwise used as down payment for your new house.

Having said all this, one thing must be kept in mind. There is always a human factor involved when it comes to paying off the mortgage loan early. Many people want to ensure a good night’s sleep by repaying all their debts as soon as they can. This factor comes to play more strongly with people who are on the verge of retirement- many among them wish to retire without having a debt to their names. Many financial planners have taken this fact into consideration and helped their customers likewise. As one head of a major financial institution puts it- “The whole point of planning is to make life better,” he said. “It’s not to have more dollars at the end of the day.”

Many of the things you think you know about investing are part of a mythology designed to make you bounce around between investment products. Modern day “conventional wisdom” just isn’t all that its cracked up to be. Concepts you worship are inaccurate; indices and averages you trust do not tell the complete story; the basic investment concepts still work — but Wall Street won’t tell you what they are.

It’s time to determine your investment IQ, here’s the deal:

Just take the True-False test below and send me an email list of the statements you feel are generally TRUE — please refrain from including any rationale or explanation. If you don’t get 80% or more correct — you need help.

Here we go: Generally speaking, are the following statements mostly True or mostly False? Note: you’ll do better if you research terms that you are unfamiliar with. Terms in “quotes” have very specific meanings in the Market Cycle Investment Management/Working Capital Model methodology.
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