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I recently watched my student loan climb for the fourth of five (I cut one off!) times during my MBA program.  It is a little disheartening and overwhelming to see my Stafford Loan balances climb.  My total student loan debt today is $15,981.  However, had I not been paying the loans aggressively while in school, my loans would total well over $27,000.

The average student today is leaving school with some form of debt.  In the US, about two thirds of undergraduates leave college with debt.  The average senior has $23,186 excluding federal PLUS loans at graduation.  Masters degree students tack on an additional $25,000 in student debt on average.  Looking for a PhD?  Expect another $52,000.

At 6.8% (the federal student loan rate) over 10 years, the average student loan payments from grad school alone is $287 per month.  If you are just rolling over the average undergrad and graduate student loans into one monthly payment, plan on $554 per month.  I hope you get a good job if you are in that situation.

Student loan debt is a growing problem in the US and around the world.  Fortunately for grads with large debt, most lenders will allow for deferred payments and graduated payments if you are struggling.  You just need to ask.  However, people are not planning ahead when they are taking on student debt.  It might be easier now to take an extra $6000 per year to help with school, but is it better in the long run?

Many students would have lived a less lavish lifestyle in college had they realized what their student loans were going to do.  It is almost as bad for students with credit card debt, though the upcoming law changes will end most of that.

I know a lot of the readers of this blog are either in school or are recent graduates.  How are you all dealing with student loan debt?  Are you paying the minimum?  Are you paying more?  Are you struggling to just keep the loan current?  Let us know in the comments, maybe a few of us have some ideas for how to deal with it.

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Home Equity Ad from Community Bank Delaware

If you pick up the Wall Street Journal on any particular day, you might find an article that mentions HELOCs.  You probably see that word on a poster or rate board at your local bank as well.  You might get something in the mail (or e-mail) from your credit union advertising the best HELOC rates around.  That is all great if you know what a HELOC is.  Consider this post HELOCs for dummies.

HELOC stands for Home Equity Line of Credit.  HELOCs are a form of home equity loan.  Since I have never discussed home equity loans before on this site, I figure we can knock out two birds with one stone.  So sit back, relax, kick your shoes off, and get ready for a short lesson on real estate loans.

First off, you need to own a home and have equity to qualify for any home equity loan, as the name implies.  Home equity is the ownership you have built up in your home.  To calculate your equity, subtract your outstanding loan principal from the present value of your home.  If your home is appraised to be worth $250,000 and you have $100,000 left on a mortgage, you have equity of $150,000.  Equity changes based on those two inputs.  If the value of your property goes up or down, as constantly happens due to market conditions, your equity will change.  If you pay down your mortgage loan, you will also impact your equity.

So, in the example above you have equity of $150,000.  If you need a lot of money for a planned purchase, such as a car or large home improvement, you can take out an installment loan based on that equity.  The rate of a home equity loan is generally the lowest interest rate a consumer can find.  However, it also means that if you stop paying, the bank can foreclose on your house.  If you plan on paying every month (as we all do), you can get a better “car loan” rate if you use a home equity loan instead.

Sometimes, however, emergencies come up.  We don’t all have an emergency fund, even though we probably all should.  For these scenarios, HELOCs come in handy.  A HELOC is a line of credit attached to your property.  Like all lines of credit, your HELOC works kind of like a secured credit card with unique fees.

If you decide you want a HELOC, you will have to pay fees up front to create the loan.  Once it is established, you never have to use it.  If you don’t use it, you don’t have to pay any more.  If you do use it, you have to pay interest on the outstanding balance, like a credit card, and pay back the loan balance at a later date.  Some HELOCs simply accrue interest and require no payment until the end date of the loan.  Some require interest only until the loan end date.  Others institute a minimum payment based on the outstanding balance.  You can generally negotiate this with the bank when you set up the loan.

If my opinion, HELOCs are a good idea for established homeowners for emergency use.  If you are new in real estate, this is just another complicated loan that lets you spend money you will eventually have to pay back.  If you have a lot of equity and want to be ready for when the water heater breaks, you need to replace the furnace, or a plumbing emergency comes up, a HELOC might be right for you.  Just remember, it can take weeks to setup this type of loan.  If you want it in an emergency, waiting for the pipe to break will be too late.

If you think I missed anything or have any questions, feel free to say so in the comments.

Today Narrow Bridge has new incoming links from the popular consumer issues blog Consumerist (I am a longtime reader and fan) and the Carnival of Personal Finance.

I am excited to see all of the new visitors.  Please browse around and subscribe to the RSS feed or bookmark the site.  I am glad you took the time to stop by.

Have you ever heard about people making, or losing, a lot of money quickly by trading on margins?  If you wondered what that means, grab your reading glasses and some popcorn.  It is time for Margin Trading 101.

Investopedia gives a good introduction to the idea of how margin trading works on the surface:

Imagine this: you’re sitting at the blackjack table and the dealer throws you an ace. You’d love to increase your bet, but you’re a little short on cash. Luckily, your friend offers to spot you $50 and says you can pay him back later. Tempting, isn’t it? If the cards are dealt right, you can win big and pay your buddy back his $50 with profits to spare. But what if you lose? Not only will you be down your original bet, but you’ll still owe your friend $50. Borrowing money at the casino is like gambling on steroids: the stakes are high and your potential for profit is dramatically increased. Conversely, your risk is also increased.

When you trade on the margin, you are borrowing cash from the brokerage firm to use in the stock market.  To trade on margins, you will need to be approved by your brokerage.  I would not do this unless you are super rich and can afford to lose 75% of what you borrow.  I would never short sell or buy anything other than large cap equities (stocks), but that might just be because I am afraid of losing everything I have.

When someone is setup for margin trades, they are given a limit (like a credit limit) and terms for what is essentially a loan.  To explain how it works, I will give an example of what an investor might go through when borrowing and investing on the margin.  These are completely made up numbers and do not necessarily represent fair or realistic terms.  I am just using round numbers because they are easy:

Joe Investor has an account at Online-Broker-Company (OBC).  Joe has a portfolio of $500,000 in an account at OBC that is invested with $400,000 in stocks, $50,000 in bonds, $10,000 in options, $30,000 in mutual funds, and $10,000 in cash.  Joe has had the account with OBC for five years and is an active trader (10+ trades per month).

Joe is doing some fundamental analysis and finds that stock XX is worth $20 per share, but is trading at $10 per share.  He also finds, using technical analysis, that the stock is likely going to trend upward over the next few days up to $17 per share.  Because he only has $10,000 in cash on hand, and he is certain of his estimates, Joe borrows funds from OBC that allow him to invest as much as possible into the stock.

Joe is required by OBC to invest 20% of his own funds for any margin buy, that is called the margin requirement.  Therefore, Joe can borrow up to $40,000.  Joe is approved by OBC for the margin purchase and is allowed to purchase $50,000 in stock XX with the $10,000 in his account.  He is also required to maintain a portfolio of at least $50,000 at the company as collateral in case the stock price goes down to zero.  He is considered to be 80% leveraged at this point.

The stock goes up to $25 per share and Joe gets greedy.  He could sell the stock and take the $15 per share, or 150% profit, and leave the transaction that cost him $10,000 with $125,000.  Joe doesn’t.  He decides, despite his analysis that the company is worth $20 per share, to stick it out.

The next day company XX goes bankrupt.  No one saw it coming.  The stock plummets in one hour to $1 per share.  All of a sudden, Joe’s $50,000 investment is worth $5,000.  He not only lost his own $5,000, he owes OBC $40,000 that he borrowed.  OBC will initiate a margin call, which is a request for Joe to give the firm the cash needed to bring his margin rate back to 20%.  Because of the large loss (90%), he has to come up with a lot of cash quickly.  If he can’t, OBC will sell $35,000 of Joe’s other investments and take his $5,000 cash to cover their loss.

This example is extreme, but it is possible.  Margin trading can give you a huge payday or a huge loss in very little time.  Your investment company is not the mafia and will not cut off your hand or kill you for losing their money, but you are legally responsible for paying them back.  If you try to take your assets and run, they can sue you, and will win, for the amount of their loss.

If you have something to add or any questions, please let me know in the comments.  If you enjoyed the post, consider following the blog by e-mail (using the form on the top right of the screen) or RSS.  Also, take a look at the well written comments that explain some of the complexities of margins in more detail.

In what looks like great news for Mint.com investors but bad news for users, Mint is going to be purchased by Intuit, maker of Quicken finance products, later this week.

Intuit offers a very close competitor to Mint, Quicken Online.  That may mean the end for Mint.com in the next few months when Quicken attempts integrate Mint users into their existing service.  If not, Mint may stay around but be changed quite a bit.  Either way, I am not all that thrilled to hear that my favorite staple of the Personal Finance Arsenal is changing hands.

This might be a good time to give Thrive another look.  Or, you can just start using Quicken Online itself, which stopped charging a fee a while back.

Narrow Bridge Adventures is included in this week’s Carnival of Personal Finance hosted by Simply Forties.  The carnival is a magazine of finance blog posts and is definitely worth a read.

A few weeks back I was standing on Canal Street in New York at the center of Chinatown.  I was helping one of my friends haggle the price of a fake Louis Vitton purse down from $100 to $30.  I realized that you can learn a lot about life walking down a Chinatown street trying to get the best deal.

Patience is important.  Knowing what you want and what you are willing to pay is the first step.  Sticking to the plan is much more difficult.  When you get off of the subway stop on Canal, the street vendors know they are getting first dibs.  One of my friends wouldn’t hold out on a fake Rolex and bought one for $10 more than my other friend did two blocks down.  When you are shopping around for cars, it might be tempting to buy the first one you see.  However, patience could save you thousands.

Be persistent.  These people are real sleazy salespeople.  They know that they can talk you into spending $5 more.  However, you have to know where to draw the line and where to say no.  Just walking away can often get you the price you want.

Ask for a fair price, but do not be rude.  A first year college graduate would be pretty ballsy to walk into a job negotiation and ask for $100,000.  For most employers, they would look at that as rude and unrealistic and it might cost someone a job offer.  If you walk up to a fake purse vendor and ask for a Coach bag for $10, he will just tell you to leave.  You can negotiate from a fair starting point, but don’t be arrogant.

Know when to walk away.  Some people just will not give you a fair deal.  I left the mattress store when I was last looking for a bed after the sales guy offered something too good to be true followed by a bunch of delivery fees and a floor model only stipulation.  Don’t be fooled and don’t feel bad leaving a bad deal.

We have talked about automatic investments many times on this blog.  I am a big fan of setting up a system that takes money straight out of your paycheck and puts it away for the day you call it quits.  However, people often get nervous about investing their retirement savings.  I have a couple of suggestions that you might enjoy.

There is a type of fund built specifically for you.  I know, you probably think “nothing is done just for me.”  If you plan to retire at any time in the future, there is a mutual fund just for you.

Most large investment companies offer what are often called target date or destination funds.  Each fund is tailored specifically to the investment needs of someone with a retirement goal of 20xx.  I am invested in a fund called “Destination 2050″ for people who will be 65 around 2050.  There are Destination 2010, 2015, and so on where my 401(k) is stored.

The target date funds take out the guesswork in investing and asset allocation.  As you age, the fund will be tailored for your risk profile.  In your 20s, the funds invest almost exclusively in stocks.  Later on, it moves toward fixed income (bond) securities and funds.  As you near retirement, your investments are slowly moved into cash and treasuries, the safest, though lowest returning, investments.

I have a friend who was not putting money into her 401(k) because she didn’t know what fund to pick.  The target date funds are “funds of funds.”  The managers pick the funds for you to make it easy.  If you are not sure what to put your 401(k) or IRA investments into, seriously look at funds like this.  It is easier to have someone else pick stocks and mutual funds for you.  At least I think so.

Ramit Sethi is a fun and interesting character. I had the chance to meet hima few months back on his book tour and just got around to finishing the book. Ramit genuinely cares about helping his readers be as lazy and financially stable as possible. If you think that is an oxymoron, you should probably read the book.

Ramit’s book, which is billed as ”No Guilt, No Excuses, No BS.  Just a 6 Week Program That Works,” gives readers a well defined six week plan to get your finances in order.  The book is pretty much the Automatic Millionaireby David Bach for 20-30 year olds.

Unlike Automatic Millionaire, Ramit does not talk about saving money by skipping runs to Starbucks.  Ramit actually wants you to spend money on Starbucks, but do it knowingly and willingly with consideration of what you give up.  Ramit’s plan is to save first and spend the rest on whatever you want later.

Ramit’s six week plan gives you a week for each of the following topics:

1. Credit Cards
2. Bank Accounts
3. Investing Accounts
4. Conscious Spending
5. Automatic Money Flows
6. Investing Choices

There is nothing ground breaking about this book (or any other personal finance book for that matter).  Most of it is common sense stuff that you already know.  However, if this book is what motivates you to do it, it is a great investment for your bookshelf.

What I Liked:

I like the style and content of Ramit’s book.  If you read his blog of the same name, you already have a good idea of what you are getting into.  You will get some corny jokes, some fun ideas, and a no bull attitude.  Ramit makes it clear that your finances are under your control and you just need to take the steps to get going.  If you want the easy way to deal with your investments without thinking, follow Ramit’s plan to the letter.

What I Didn’t Like:

Several times in the book, Ramit blatantly says that finance experts are full of crap.  I take exception to that.  I am a finance expert.  I have the degree (almost two) to prove it.  Other than his personal attacks on what I am going to school for, I thought it was a good read.

If you decide to buy the book, please do so through my affiliate link for Amazon.com to help me cover the costs of running the site.

I Will Teach You To Be Rich- Ramit Sethi at Amazon.com.

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The rate of bankruptcies is still increasing, but the rate is slowing down.  A British PriceWaterhouseCoopers study found that the rate of bankruptcies and Individual Voluntary Agreements is still increasing, but the rate of increase is leveling off.  The cumulative rate for year to date is still lower than the comparable period from 2006 and 2007.

The UK has a program called IVAs (Individual Voluntary Agreements) that allows individuals to negotiate payment terms to avoid a full on bankruptcy.  Debt Free Direct describes the IVA process:

The IVA or Individual Voluntary Arrangement was introduced in 1986 as an essential piece of legislation which allows you to avoid the trauma of declaring bankruptcy. It suits many people who are over £50,000 in debt, provided that they are in regular employment.

An IVA is a legally binding agreement which protects you against any further action from your creditors. Once you’ve committed to an IVA, you could become debt-free in sixty months.

With an IVA you agree with your creditors to paying only what you can afford in a single payment each month over the period of five years. Your creditors agree to write off your debt which you’re not able to repay and they will leave you alone.

IVAs are a good alternative to bankruptcy for UK citizens that have found themselves in a big pile of debt.  While I have little sympathy, as they got there through their own actions, it is a much better option than calling it quits and declaring bankruptcy.

The United States does not have a similar system to IVAs, but you can negotiate with creditors and work with credit assistance companies (non-profits) to consolidate and eliminate debt.  The goal here is not to just wipe your slate clean, but to help you clear out the problem yourself.  Remember, a settlement or write off is terrible on your credit report, though not as bad as a bankruptcy.

The banks would rather recoup some money than no money.  A settlement happens when a bank negotiates with a customer to take a lower amount of debt to collect something rather than risking a complete non-payment.  Again, I have little sympathy here.  People buy things themselves, the bank does not force you to.  The bank only gave you the credit card, you make the choice on how to use it.

The best way to avoid insovency, bankruptcy, and mounting debt problems: spend less than you earn.  It is that simple.  Yeah, there are lots of excuses for why things went bad, but those always come back to the person who spent the money.  Don’t be that guy.  I know it is an “ugly truth,” but it is a truth.

Most people who read this blog don’t have this type of problem.  Good for you.  If you do, however, man up and deal with it.  There is always a way to figure things out.

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