The Money Post

Thanks to the subprime mess, and the huge losses in the housing market, banks have been more reluctant to lend money. Although I think the credit crunch is greatly exaggerated, if you want to get a loan, you need to be able to show that you are credit-worthy. One of the main things you can do to help your cause, is to take care of your FICO score. Here are some things you can do (and avoid doing) to rack up points.

Things to do:

• Pay your bills on time. Your track record for making timely payments accounts for about 1/3 of your FICO score.
• If you are having trouble making ends meet, contact your creditors.
• Use different types of credit. Having a blend of revolving credit, like credit cards, and installment loans can help boost your score.
• Once a year you can get a free credit report from www.annualcreditreport.com. Here you can check for any mistakes and dispute them.

Things not to do:

• Don’t max out your credit. Keep your balances low relative to your credit limit.
• Confine loan shopping to a few weeks so that credit inquiries won’t weigh on your score.
• Don’t open credit card accounts that you don’t need. Your FICO score usually drops a few points for every new account opened.
• Don’t close old credit card accounts with a good payment history. If you lower your total available credit, it can have a negative impact on your score.
• Don’t open multiple accounts too rapidly. New accounts will lower your average account age, which will have a larger effect on your score if you don’t have a lot of other credit information. Also, rapid account buildup can look risky if you are a new credit user.

According to myFICO.com, a FICO score is calculated based on your rating in 5 categories. Payment history accounts for 35%, amounts owed 30%, length of credit history 15%, new credit 10%, and types of credit used 10%.

The median FICO score in the U.S. is 723. If you follow the tips above and use credit wisely, it can save you a lot of money and stress in the future.

In my post from a couple days ago, detailing the Investment Advice Of David Swensen, I thought there was a good lesson in diversification. I thought I would breakdown the different ways you can diversify your investments, and hopefully avoid getting hurt in an unstable market.

• Owning many different stocks: If you have the bulk of your money in company stock, and your company tanks, you could easily lose a large chunk of your savings. If you have a diversified portfolio you take away much of that risk. One way to own many different stocks is through mutual funds, index funds, and exchange traded funds.
• Own stocks in different sectors: Energy companies have been doing great lately, but financials and home builders have been hurting. If you were heavily invested in the wrong sector recently you would have likely seen your savings shrink. Owning stock in multiple sectors will cut down on your risk of big losses.
• Own the world: Given strong economic growth in countries like India and China, investing solely in U.S. stocks no longer makes sense. Many emerging market countries will have higher returns than we will see here in the states. International index funds are a good way to start diversifying geographically.
• Buy companies of all sizes and types: Value, small-cap, large-cap and growth stocks are examples of asset classes. Each category will have their up years, and down years.
• Invest outside the market: Fixed-income investments such as bond funds can be a great stabilizer. Just how much fixed income you need though will depend on your age and circumstances.

I have been contemplating a cross-country move from where I live in Arizona, to South Florida for the last couple of months now. I haven’t officially decided what to do, but I know that if I go, selling my house will probably not be easy. The market here has seen home prices dropping, and taking much longer to sell than in the past.

Lately I have been fixing various things around the house, and making any improvements I can think of. New paint, landscaping, new flooring, bathroom and kitchen upgrades are kind of a given when it comes to getting top dollar for your home. In doing some research for cheap, but effective home improvement tips, I landed on THIS PAGE, which details some recession-proof home improvements.

As flipping has stalled, and many would-be sellers are sitting out the market, they’re turning to green changes as a way to reduce their energy bills and improve their quality of life. The 10 recession-proof changes they recommend are:

• Cork Floors: Cork is quickly becoming an alternative to pricier tile and wood-plank flooring. Low-density cork is an effective insulator, plus it doesn’t rot when exposed to water (think wine bottles), nor does it absorb dust.
• Bamboo Countertops: Compressed to the thickness needed for a countertop, bamboo is significantly harder and more dense than woods such as maple–often used for cutting boards–which makes it last.
• LED Lighting: LED lighting systems use less energy than standard bulbs, which translates into a lower electric bill. LED lights are more expensive than conventional light bulbs, but can pay for themselves over time.
• Garage Doors: Luxury carriage-door models and revamped pavement leading up to them can boost your home’s curb value; this is especially important if your garage is one of your home’s dominant features.
• EnergyStar Windows: You’ll definitely pay a bit more for an EnergyStar certified window, but you’ll get a 10% rebate from Uncle Sam. You’ll also enjoy hundreds per year in saved heating costs.
• Water-Saving Toilets: Based on the American Institute of Architects’ 2008 research, homeowner demand for water-saving toilets has grown.
• Water Heater: Conventional heaters warm water continuously. Some models heat water on demand, a more energy-efficient system that in some households might pay for itself in a year.
• Radiant Heat: The U.S. Department of Energy estimates that radiant heating is 20% more efficient than conventional heating systems.
• Landscaping: Besides the aesthetic and health benefits of a garden and yard, it’s often the first thing buyers see when they’re looking at a home. The National Association of Realtors estimates that 70% of home buyers start the buying process online, and if your front yard pushes people away before they even come to visit the house, you’re in trouble in this kind of market.
• Doorless Showers: Also called walk-in showers, this is a design trend that likely isn’t the function of a down economy, but is mentioned again and again by builders and architects as something consumers want. They are popular among boomers as they get older, and are a design element that can also be found in high-end urban apartment complexes.

I think for certain situations these could be some great upgrades to look into. Obviously they won’t work for all homeowners in all markets, but “going green” is a trend that looks to only get bigger.

There is a really great piece from NPR about David Swensen, and how he managed to grow Yale’s endowment at an average of 16.8 percent a year over the past two decades. Swensen’s basic formula for creating an investment portfolio for good returns while managing risk:

• Domestic Equity (30 percent) - Stocks in U.S. based companies listed on U.S. exchanges.
• Emerging Market Equity (5 percent) - Stocks from emerging markets across the globe. Brazil, Russia, India, China, etc.
• Foreign Developed Equity (15 percent) - Stocks listed on major foreign markets in developed countries, such as the UK, Germany, France, and Japan.
• REITs or Real Estate Investment Trusts (20 percent) - Stocks of companies that invest directly in real estate through ownership of property.
• U.S. Treasury Notes and Bonds (15 percent) - These are fixed-interest U.S. government debt securities that mature in more than one year. Notes and bonds pay interest semi-annually. The income is only taxed at the federal level.
• TIPs or U.S. Treasury Inflation-Protection Securities (15 percent) - These are special types of Treasury notes that offer protection from inflation, as measured by the Consumer Price Index. They pay interest every six months and the principal when the security matures.

Some words of wisdom from the man himself.

On investing in scary economic times…

“The human tendency in this kind of environment is to do something — to make a change,” he says.

Stocks seem risky, especially since they’ve been falling. Swensen says most people he talks to get nervous and want to sell stocks.

“And that’s exactly the wrong reaction,” he says. “Buying high and selling low is not a way to make money. It’s not hard, right? It’s very simple: You want to do the opposite.”

On paying for financial advice…

Investment services provide pretty mediocre advice, and it’s just not worth giving them a percentage of your life savings.

“That’s the wrong path,” Swensen says. “And the reason it’s the wrong path is it’s a very, very expensive path.”

On index funds vs. mutual funds…

Fees are also the big reason you should buy index funds instead of classic mutual funds. Index funds, which track market segments like the S&P 500, are a lot cheaper.

Swensen says the vast majority of professional mutual fund managers fail to beat those indexes.

And finally, on rebalancing your portfolio…

Swensen says people should rebalance their retirement accounts at least quarterly — four times a year. He says the technique is a disciplined way to buy low and sell high over time. It also keeps your risk profile where you want it to be.

Something you should keep in mind though, is that rebalancing can create tax liabilities. One way to avoid that is to do rebalancing only in the tax-deferred portion of a portfolio. New contributions may also be used as rebalancing tools, so that investors sell fewer existing investments.

If you go HERE, you can read the full article and listen to the segment. It goes into detail about his rebalancing techniques, how he has managed Yale’s endowment, and gives some investment ideas. If you have some time I would definitely check it out.

I was just recently doing a bit of traveling. If there is one thing I learned all over again, it’s that vacations can be expensive. Whether you are just trying to get away for the weekend, or planning an all out adventure, there are some simple things you can do to stretch your money.

• Be flexible. The more flexible your schedule, the more opportunities you’ll have to save. You’ll be able to take advantage of airline ticket sales and the cheapest days to travel. It’s usually a better deal to travel during the week than over the weekend.
• Find deals. Saving money on airfare and hotels can be as simple as looking around at a few travel sites. Hotwire, Travelocity, Expedia, Orbitz, are a few places to start looking for deals.
• Plan your transportation. Transportation costs can vary depending on where you go. In places that have great public transportation, take advantage of it. In other places it might make sense to rent a car rather that take cabs/buses/shuttles.
• Eat smart. Dining out can drain a budget quickly. Instead, try eating before you head out and take snacks with you.
• Negotiate. Travel with the idea that it never hurts to ask for a little more. You can always ask for upgrades, whether it’s a hotel or transportation.
• Buy smart. Tourist areas sell everything you need… at a high markup. If you are going to travel, make sure to buy your sunscreen, film, sunglasses, and everything else you may need ahead of time.
• Avoid tourist traps. By going to places that are off the beaten path, you can have a great time and avoid the higher costs of tourist areas.

If you follow these tips, and don’t get too into a vacation mindset, you should be able to have a great time without blowing your entire bankroll.

There is a good article at Kiplinger.com by Erin Burt, about the lessons she learned from being broke. Times are tough for a lot of people right now, so hopefully everyone can learn these lessons and improve their financial situation.

The lessons she mentions in the article are:

• Know your priorities. Learning early on how to prioritize and to sort our needs from our wants.
• Debt is a vampire. Learning quickly how debt can steal your money. Making the minimum payments but never making much headway.
• Have a cushion to fall back on. Life is full of unexpected expenses. If something comes up when you’re living paycheck to paycheck, even a small expense can mess up your finances in a hurry.
  
• Set goals and tune out peer pressure. See your situation clearly and don’t compare yourself to others.
  
• Small sacrifices add up to big rewards. Whether it’s saving to buy something, or putting away a little money at a time to invest, small changes can add up to big savings.
  
• The size of my bank account doesn’t matter. 

Too many people have the wrong mindset about money. It’s not about how much money you make, but rather what you do with it that will decide your financial future. That’s why I think these are lessons everybody should learn.