Is It Time to Invest in Real Estate?

Earlier this month, CNN/Money reported that the number of delinquencies in the real estate market nationwide have begun to increase. In a housing market such as this, those with some dispensable income or cash on the sidelines may be considering the purchase or real estate as an alternative to equities or bonds. But those who invested in the wake of the last real estate downturn may not have recouped their initial investment, a fact that could keep cautious investors on the sidelines despite the deals to be found around the country.

All investments incur risk. Investing in this real estate market is no different. But, when you consider that the equity and bond markets have provided somewhat lackluster returns in recent months, and the amount that prices within the real estate market have fallen in the past several years, the proposition seems lucrative.

Is it time to invest? Maybe. As this study by Harvard University points out, demand in the short term may remain low, but proponents of taking advantage of the current market point to the following factors.

Low Prices: Prices are at historic lows. Despite the fact that no one can predict the market and whether real estate prices will go up any time soon, the fact is, real estate investing offers a tangible and useful asset to investor that can provide a place to live, or rental income.

Traditional Financing Is Back: ARM mortgages are at an all time low, with buyers and lenders like Aurora Loans alike wary of recreating the circumstances that led to the sub-prime mortgage collapse. This push towards the recreation of responsible lending practices means that although it may be more difficult to qualify, the terms of your loan are likely to be much more favorable over the long term.

Low Interest Rates: Aurora Loans and other lenders are currently offering the lowest interest rates seen in the last 50 years. In fact, average rates for a Fixed Rate 30 Year Mortgage are currently hovering around 4.375%, and rates for a Fixed Rate 15 Year Mortgage are currently near 3.375%. Compare this to mortgage rates in 2007 which were upwards of 6%, and it's clear that current interest rates can save you a bundle in the long run.

Interest Rates Will Rise: Economists predict that mortgage rates will climb to above 5% by 2012. The difference between current rates and predicted rate increases will result in huge savings over time for those who choose to purchase now.

Builders/ Owners Are Eager to Sell: No doubt about it, its a buyers market. The number of short sales and foreclosures remain well above historical averages, and with many homeowners under water or facing economic difficulties in a tough employment market, buyers can likely negotiate for a price well below asking, and come out far ahead in this weak market.

Buyer Beware:

Despite the weakened condition of the current market, buyers should still consider the long term effects of buying a home, especially in a market that may not recover any time soon. If you are still on the fence over whether to buy or rent, check out our article Buy vs. Rent: When Does Renting Make Sense.

Photo By: John Hall and Associates

Strategies for Extremely Early Retirement

Admit it, the thought has crossed your mind. Retiring early. You've likely heard a story or two about people who have managed to hang it up at 40 or 50 without the need to work. Can it be done? Sure. In fact, it may be possible to retire earlier than you ever imagined.

Recently, I read the book Your Money or Your Life: 9 Steps to Transforming Your Relationship with Money and Achieving Financial Independence. This single volume changed my perspective in a big way. Where I had always thought about retirement as an elusive long term goal, and focused on time tested and tax smart ways of saving such as Roth IRAs and 401(k) investing, since I read Your Money or Your Life, I've begun to think about the possibility of retiring before the age of 40. And every day of work which goes by, the idea becomes stronger and more attractive. Retiring at thirty-something...

Will it be possible? Perhaps. Many factors will play in to whether or not this goal is achievable. If you haven't yet read the book, it's really an excellent read. Your Money or Your Life: 9 Steps to Transforming Your Relationship with Money and Achieving Financial Independence offers a great road map to truly embracing frugality and changing your relationship with money while allowing the reader to envision a life beyond work, one in which your focus is not on the accumulation of money for money's sake, but rather on achieving enough passive income to indulge your passions and pursue your true goals early in life. 

So what are the keys to achieving financial freedom and retiring long before you ever thought possible? Want to retire early, you'll need to at a minimum follow the steps below. 

Build a Budget: 

Budgeting is absolutely the most important and first step in any plan to retire early. You must know how much money you make, and take steps to reduce your monthly expenses. One technique that works for many people, is using Mint to manage your budget. This single site will allow you to monitor your individual accounts and create a budget that automatically tracks your spending without requiring the old, labor intensive pen and ink method.

Be Frugal: 

Got a budget? Good, you'll need it. If you want to retire early, you will have to give up on the constant pursuit of material possessions that is so prevalent in modern society. If you want to retire early, you'll need to lower your expenses to the lowest possible level. This will allow you to both live on very little, and also to save an impressive amount of money in your accounts for your early retirement plans.

As a benefit, nowadays frugality doesn't mean what it once did. In fact, its possible to become much more frugal without completely changing your daily habits. Whether you choose to learn how to start extreme couponing, or decide on less aggressive strategies like signing up for daily deals from Groupon, extreme frugality is much easier now than it has ever been, thanks to the advent of the internet and sites like Extreme Couponing with Power Couponer.

If you want to learn to save, without changing your whole life, visit our recent post on discount sites for the not-so-extreme couponer for more information.

Earn as Much as Possible: 

Any logical person will admit that it's much easier to save a huge chunk of your pay when you're earning $200k a year than $20k. At compounding returns, we agree. But, if you are not lucky enough to have one of the highest paying jobs in America, it is still important to increase your earnings as much as possible while you are in the workaday world.

Earning more could mean many things. For a dual income household, it may mean having both spouses work. For single folks, it may mean getting a second job or spending more time earning at your current job. Fortunately, for the person aiming to retire as early as possible, these sacrifices are no big deal since you'll be leaving the workplace in a finite and (hopefully) short period of time.

Save an Extreme Amount: 

If you are really devoted to the dream of early retirement, it is important to save at a pretty extreme rate. Think about this. If you save 50% of your income, every year you work buys you a year off. If that's not motivation, I don't know what is.

But as you seek to increase your savings rate, always keep an eye on increasing your compounding returns by focusing on the best, and safest rate of return. For online savings, we recommend ING DIRECT, an FDIC Insured online bank account that continues to offers some of the best yields available within an insured account.

Invest for Passive Income: 

If you want to retire early, you'll need to invest for passive income. There are many sources of passive income, including investment real estate, dividend stocks, and bonds. All of these methods can provide a source of passive income. Overall, however, the only sources of income that are truly passive are stocks and bonds, since real estate investing can require a great deal of work.

Stocks and bonds offer many advantages. Dividend stocks offer a low tax rate on dividend income, and bonds issued by state and federal governments can offer tax free income for your early retirement. In fact, a $500,000 portfolio of stocks and bonds yielding 5% would provide an extremely low tax rate on $25,000 a year in completely passive income.

Know When You Have Enough: 

All the lowered expenses and passive income in the world won't satisfy  you if you have no idea how much you truly need to be fulfilled. Remember, this plan is not about accumulating possessions, but rather about amassing enough to meet your needs without having to work on a daily basis.

Photo By: Virtual Photography Studio

Benefits of Using Credit Cards the Right Way

Credit card debt is without a doubt one of the worst types of debt that one can carry. Not only is this credit card debt unsecured, but it often carries interest rates in the double digits, meaning that over time, those who carry a credit card balance will pay much more for the goods and services that they finance.

If you find yourself trapped in credit card debt, visit our debt reduction page, where you will find an easy to follow checklist to paying off your credit card debt. This checklist is very similar to the method advocated by Dave Ramsey in The Total Money Makeover: A Proven Plan for Financial Fitness and provides a run down of the simple steps to changing your relationship with credit and building wealth. The Total Money Makeover and our checklist both seek to offer time tested strategies for those struggling against the crushing weight of debt.

If you don't have a "credit problem", and are able to pay your bill in full every month, however, the steps found in The Total Money Makeover: A Proven Plan for Financial Fitness, and our own refined version of the guide will not apply to your situation.

In fact, if you do it right (pay off the balance monthly), using credit cards to pay your bills can offer numerous benefits to the average person, especially if you search through credit card reviews to find the best offer for your particular situation.

Benefits of Using Credit Cards the Right Way:

Interest Free Loan. If you pay the balance in full every month, using a credit card for normal expenses can be very much like getting an interest free loan, allowing you to earn interest on your money prior to repaying your creditor in full. This can offer an excellent way to manage your capital, and grow your money monthly.

Automatic Budgeting. Using a credit card to pay your monthly expenses offers an extremely easy way to track expenses, allowing you to build a budget much easier than was historically possible. This added convenience may just help you stick to your new spending plan.

Cash Flow Manager. Credit cards offer a great way to manage the cash flow in your life, while automating your finances. With more and more businesses allowing you to pay your bill automatically every month, using a credit card just makes sense when automating your finances and can help reduce your financial stress a great deal.

Track Spending With Mint. Using Mint or other automated budgeting software to build your budget? Using credit cards offers the easiest way for automated budgeting software or websites like Mint to track and categorize your spending on a regular basis. The ease of using Mint might not only help you spend less and save more, but might also reveal hidden categories where you are spending more than you think.

Credit Card Rewards. Probably the best thing about credit cards is the rewards you can get from using credit cards on a normal basis. Frequent travelers get airline miles, savers get cash back. Whatever your passions, there's likely a credit card that will reward you with the things you care about.

The Bottom Line:

Despite what you may have heard from books like The Total Money Makeover: A Proven Plan for Financial Fitness, credit cards aren't the enemy. In fact, the use of credit cards can be a great move in your financial plan, as long as you pay the bill in full monthly.

How do you use credit wisely?

Photo By: Images of Money

Pay Yourself First. Automate Your Savings.

If you are a frequent reader of compounding returns, you will likely be familiar with the fact that we are huge fans of automating your finances for long term success. In fact, in our humble opinion, automating as much of your financial life as possible, including your online savings, is one of the most important things you can do, especially in an increasingly automated and financially complex world.

If you are looking for more information on how to automate your finances, save for the future, or learn how to invest, visit MyMoney.gov, a government sponsored site designed to explore some of the basics of personal finance, one of which is "paying yourself first", which means setting aside savings before you begin to spend your income.

Paying yourself first and automating your finances have become synonymous in an increasingly automated financial landscape. By automating your savings, you can ensure a certain amount is deducted from your paycheck on a weekly or monthly basis, allowing you to spend the remainder of your income without having to worry about whether there will be money left over at the end of the month. But paying yourself first through financial automation has many additional benefits, which include:

Benefits of Paying Yourself First Through Financial Automation:

Automates Savings. Probably the most obvious benefit to automating your finances (and your monthly savings goals) is that it creates an automatic savings fund over time, that will grow exponentially through the power of compound interest.

Creates a Saving Habit. An extremely powerful force in nature, as well as behavioral finance and long term investing success is what is known as inertia. The law of inertia states that "an object in motion tends to stay in motion", and nowhere is this more true than in saving and investing for the future. Success creates motivation, which creates more long term investing success.

Creates an Artificial Budget. By saving a portion of your income before you begin to spend money on your bills or splurges creates a simple budget by allowing you to live beneath your means. Although this may not be the elaborate itemized budget you may think of when "budgeting" springs to mind, living on less than you make is in its very essence, living on a budget.

Allows for Guilt Free Spending. Ever wanted to purchase something but were conflicted by your desire to save money? With the pay yourself first strategy put to use in your online savings account, you can splurge on your favorite spending categories without overspending your budget.

Looking for more ways to automate your saving or spending? Visit compounding returns' automate your finances category today!

Proposed Changes to Military Retirement: Explained

If you are an active duty service member, it's highly likely that you've heard the rumors of possible changes to the military retirement system. Fact is, there are a lot of rumors going around regarding the proposed changes to the current 20 year military retirement system. 

How the Rumors About Retirement Cuts Started:

The rumors you have heard are likely based in fact. Several debt reduction panels in recent memory have proposed different forms of a similar plan. These panels have included the oft-quoted 10th Quadrennial Review of Military Compensation (QRMC), The Bowles-Simpson Commission, and the Domenici-Rivlin Plan. Each of these separate plans has at least on some level addressed the issue of military retired pay and proposed major changes to the current military retirement system.

The Long Term Costs of the Current System:

Each of the panels above have focused on reducing the long term costs of the current military retirement system for a number of reasons. The most important reason is that the current system is seen as unsustainable. The long term costs of a military retirement, especially when you factor in health care benefits and annual cost of living adjustments are enormous and only continuing to grow.

When you consider the fact that the military already spends more than 50% of it's annual budget on pay and benefits (for active duty and retirees), you can see how paying lifelong pensions in an increasingly sparse budget environment and a country with an ever increasing life expectancy is an unsustainable system (especially when you consider that military members can retire at 38 and qualify for lifelong health care and a pension with annual cost of living adjustment).

The Effects of Changing the Current System:

Lets not deny the fact that the generous pension system as it currently exists is what keeps most members in the military for 20 years. Without this system, it is likely that retention and military readiness will suffer.

Panel members cite the fact that only a small minority (around 17%) of service members are eligible for a 20 year retirement. Armed with this statistic, they have proposed overhauling the entire system to allow for limited retirement benefits for members who serve 10 or more years in a weak attempt to mask the fact that although this might be a good plan for members who serve for 10 or 12 years, it is an absolute slap in the face to future members who serve for 20 years or more.

Details of the QRMC Proposal (The Cost to Future Members)

The Quadrennial Review of Military Compensation is the most likely proposal to be discussed within the halls of Congress (who will need to approve any decrease in benefits). The plan proposes the following:

• Convert the military to a civilian-style retirement system under which full retired pay wouldn’t be paid until age 57-60 
• Vest retirement benefits after 10 years of service 
• Authorize the Services to pay flexible “gate pays” and separation pay at certain points of service to encourage continued service or encourage people to leave as their skills are no longer required.

The Military Officer's Association of America (MOAA) recently did an analysis of how much money an average military member who serves for 20 Years and retires as an E-7 would lose if this plan was accepted in its entirety.

Assuming a member retired at age 40 as an E-7 with 20 years of service, MOAA calculated that the proposed changes to the military retirement system would result in a net decrease in benefits of $1.7 Million.

The Cost to You:

If you are serving on active duty, you are likely concerned that these proposals will affect you. You should be. Current proposals for how to institute this new retirement system only grandfather current retirees and fully disabled veterans.

For members remaining in active service, there have been two proposals for how to integrate these members into the current system.

• A “high-cost” option would apply only to new service entrants, and grandfather all currently serving members under the current retirement system. 
• A “lower-cost” option would immediately transfer all currently serving members to the new system, while crediting any time already served under the current system. 

If they go with the high cost option, you'll be grandfathered into the old retirement system. If they choose the lower cost system, you may not be entitled to the retirement benefits you expected when you joined the military.

The low cost option is expected to work like this: A person who has 10 years of service would get an annuity of 25% of High-3 basic pay upon retirement. Upon implementation of the new system, however, said person would stop accruing service time towards an immediate pension and rather start contributing to the 401(k) system which can begin to be withdrawn at age 60.

Fight Back: Contact Your Congressional Representative

If you are an active duty service member and you don't like the sounds of this proposal, you need to make it known. Let your congressional representative know how you think this new system will compromise national defense or retention. Let those in power know that despite the costs, currently serving members should (if nothing else) be entitled to a choice of high cost or low cost systems. Remember, every letter they receive is thought to represent thousands of constituents.

Photo By: DVIDSHUB

Take Advantage of Market Volatility. Buffett Is.

In the past few weeks, the stock market has taken investors on a good old fashioned roller coaster ride; gyrating wildly from dizzying rallies to crushing free-falls in what seemed like the blink of an eye. In fact, it's likely that since you last logged on to your online portfolio manager or spoke to your stockbroker, your investments have lost a great deal of value, despite today's rally.

The reasons for the market volatility are numerous. European debt concerns continue to plague the global marketplace, and coupled with domestic political uncertainty and lingering unemployment it is easy to see why many investors have lost confidence in the future. This loss of confidence has caused what many would call a fire sale on Wall Street.

But while some investors choose to log into their favorite portfolio rebalancing software, panic and sell in a weak attempt to anticipate the future, others, like billionaire investor Warren Buffett, are licking their lips for the opportunity to purchase their favorite stocks at a discount.

In an interview with CNN/Money earlier today, Buffett was quoted as saying "the lower stocks go, the more I buy." And for good reason. The most successful investor in history didn't get there by being a fool. Rather Buffett knows that the underlying companies that comprise the stocks in a seeming free-fall are solid, and have in most cases taken extreme measures to ensure their survival in the event of a secondary recession.

The markets may remain uncertain for a time. In the short term, investors may even continue to lose money.

But, if you are into do-it-yourself portfolio management, you know that buying stock in misvalued dividend paying equities trading at historically low P/E ratios is a great way to take advantage of the current market volatility, and almost guarantee yourself market beating returns over time.

So before you log into your favorite online broker or call your portfolio manager with plans to frantically sell your holdings to insulate your portfolio from the wild gyrations in the market, consider this: underlying corporate earnings remain strong, and stocks are trading at wildly discounted prices from their historical valuations, while in most cases maintaining a historically robust amount of cash on hand to weather the financial storm.

I intend to follow the lead of the most successful investor of all time, and buy some additional shares of my favorite companies, despite market volatility. How do you intend to weather the unpredictability of the current market? Are you a buyer or a seller? Respond in the comments section below.

The Benefits of Prepaid Credit Cards

If you have run into credit problems in the past, you likely know the inconvenience of the lack of a major credit card.

Not having access to plastic can be a real bummer, especially when it comes time to rent a vehicle, purchase a plane ticket, or check into a hotel. 

If you are in a pinch and don't have access to credit, you may have considered prepaid credit cards to help you rebuild your credit rating and decrease the inconvenience associated with the lack of access to credit. 

But will prepaid credit cards like My Green Dot help you rebuild your credit? Turns out, the answer is no. Prepaid cards require a deposit which is drawn upon for purchases, meaning that these cards cannot be used to rebuild credit. 

But before you decide against prepaid cards in the quest to rebuild your credit, it is wise to note that there are some advantages to prepaid credit cards, especially for those with a less than stellar credit record.

Advantages of Prepaid Credit Cards:

Safer than cash. Just like a regular credit card, you are not liable for fraudulent charges made with a prepaid credit card, making prepaid cards a smart choice for the budget conscious traveler or online shopper. Before you choose a prepaid card provider, however, review the reporting requirements for unauthorized charges, as they can be very different from those of a regular credit card.

Worldwide functionality. If you are like me, you probably can't remember the last time you were in a business that didn't accept Visa or MasterCard. And it's likely you won't soon be in any businesses that refuse to accept credit. When you consider that credit card companies often receive the best possible exchange rates for their customers in the foreign marketplace, prepaid credit cards may offer the perfect financial solution for your next vacation.

No bills or debt concerns. Nobody jumps for joy when they receive their credit card bill. With prepaid cards, bills are a thing of the past, offering all the benefits of credit with none of the stress of opening your monthly bill and hoping you stayed within budget and have enough to pay the balance. 

Overspending is impossible. If you are looking to save money or stick to a budget, prepaid cards like My Green Dot may be just the ticket to keeping yourself and your budget in check by imposing limits on the amount you can spend, since the balance of your deposit creates an artificial spending limit. 

Guaranteed acceptance. Prepaid cards are a great way to get access to some of the benefits of credit cards without the uncertainty that comes from filling out a card application and awaiting acceptance. In fact, all who apply are accepted, since the cards require an up front deposit. 

Photo By: Images of Money