Beware Of The Warning Signs Of Too Much Debt

Using credit and good debt can be very powerful to allow you to buy a home, a vehicle, or send your children to college, and provide leverage for other purchases. But if you accumulate too much debt, it can pose a serious debt issue. You should not let it happen to you because bad debt can bog you down and prevent you from reaching your financial goals. Keep yourself alert with the warning signs of too much debt as stated below, so that you can handle it as early as possible before it become too serious to address.

Sign #1: Big Portion of Your Income Is Used To Pay Debt

You are afford to pay the monthly due for your credit card and loan payment, but the debt payment has eaten up a big portion of your income. After paying down your debt, the money left is just enough for you monthly expenses, you do not have extra money for savings and other wealth creation plan for the future.

Sign #2: You Do Not Have Savings For Financial Emergency

Financial emergencies can come in the form of a job loss, medical expenses or auto repairs. If do not have extra money to save for any financial emergency needs because your income is used to pay your debt and cover your existing expenses. It can be a sign of too much debt that prevent you from having a savings.

Sign #3: You Pay The Minimum Due Of Credit Card Balance

Paying the minimum due of credit card balance is one of key factor that caused many people trapped into debt problem. If you tend to pay just the minimum due of your credit card balance, the rest of credit card debt will snowball to a bigger debt with new debt added by your credit card purchases and high interest rate charges. It is a clear sign that you will face debt trouble if you continue your spending behavior and no action being taken to resolve your debt.

Sign #4: You Have At Least One Credit That Reaches The Maximum Credit Limit

If you have paid your credit card balance, it will not reach to the maximum credit limit, unless your keep buying your credit cards and pay just the minimum because your income is not enough to cover your expenses. This type of spending behavior definitely will drag you into a debt trouble. If one of your credit cards reaches the maximum credit limit, you are at the high risk of facing debt trouble.

Sign #5: You Use Cash Advances From Credit Card To Pay Bills

You use your credit cards like ATM cards: withdraw cash advances to pay your bills. The use of cash advances to pay for bills shows that you have negative cash flow which your outgoing cash (spending) is more that your incoming cash (earnings). Cash advances carry high interest rate, it is a bad idea to use the cash advances to pay bills. If you have done so, it’s a clear sign of too much debt.

What You Need To If You See The Signs Of Too Much Debt?

Takes Actions Now!! Don’t let your debt snowball to bigger debt, until your financial can’t afford to pay it. You should come with a budget plan and cut away those excessive expenses. Don’t ignore the signs of too much debt; instead you must take action to bring your financial to a healthy level.

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5 Ways To Leverage Credit To Generate Wealth

According to the Spectrem Group, in 2005 there were 7.5 million millionaires in America. One way to leverage credit to generate wealth is by having a good credit score. Having good credit can save you thousands of dollars over the life of a loan. Even just 1 percentage point can save you $20 to $300 dollars a month. The money saved can be used to invest, or borrow money to purchase assets to generate wealth. A good credit score usually 700 or above can help you in a number of ways, including the following:

Increase your financing options
Get the lowest interest rates
Allow you to pay less for purchases
Spur competition between companies for your business
Invest in profitable opportunities
Establish a solid credit rating
Get approval for larger loans and higher credit limits
Provide quicker approval times
Look favorable when applying for a job

Here are 5 ways that you can leverage your credit to generate wealth:

1. You Should Become a Homeowner. Becoming a homeowner increases your credit score, proves that you are a responsible spender, provides a tax write-off, and provides you with an asset that will appreciate over time which increases your net worth.

2. You Should Purchase Investment Property. Investment property provides cash flow that can be used to generate wealth and allows more opportunities to become available to you. Do research and buy books on buying investment property, join a real estate group, and listen to financial investment shows to find out the best way to get started.

3. You Should Start a Business. Discover what you love to do more than anything else. Do your research before starting your business and take small steps. Start your business in your home to get the feel of running a business. There are also many tax write-offs for home based businesses.

4. You Should Use Venture Capital. Use venture capitalists to invest in your business. Venture capital is a fund raising technique for companies who are willing to exchange equity in the company in return for money to grow or expand the business. Venture capital firms often want a high rate of return 20% or more and will finance the business with $500,000 to millions of dollars. A venture capitalist also wants greater control of a company and a quicker return on their investment.

5. You Should Use An Angel Investor. Use angel investors to invest in your business. An angel investor is an affluent person who provides capital for a business start-up, usually in exchange for convertible debt (a bond that can be converted into shares of stock in your company) or ownership equity (remaining interest in all assets after all liabilities have been paid). If assessments of assets do not exceed liabilities this will result in negative equity and cannot provide ownership equity.

The key to leveraging credit to generate wealth is to develop good spending habits, live within your means and maintain a good credit score. The higher your credit score the less you pay for a loan and the easier it will be to establish business relationships, gain new clients, and generate wealth.

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Leverage Land Mines

Financial leverage is like a land mine. You might be unaware of it until it blows up. Buying stocks on margin is an obvious form of leverage (the mortgage on your home is another) and all of us understand how risky it is to buy on margin.

Simply put, leverage magnifies your gain or loss and, since you’re borrowing money which must be repaid, you can lose more than your entire investment (the investment and the loan amount). Okay, you say, point made, but I don’t leverage my investments. Are you sure?

Did you know that many mutual funds use leverage to enhance their returns? To illustrate, let’s take a look at two Nuveen municipal bond funds (Nuveen is one of the top municipal bond mutual fund companies): Nuveen Municipal Market Opportunity and Nuveen Municipal Value. It’s kind of hard to tell how they differ from the names, so let’s look further. Both funds are mostly invested in triple A municipal bonds, the average maturity is approximately 20 years for the bonds held in each fund and, for you quants (quantitative analyst), the duration is 5.5-6.0 years. The funds are quite similar.

Let’s look at the five year returns (as measured by NAV). Municipal Market returned 6.21% annually; Municipal Value 5.90%. 31 basis points annually for five years is a noticeable difference for municipal bond funds. Why did Municipal Market perform better? There could be a number of reasons but an obvious one is its leverage.

Municipal Market is leveraged 36%. In a period of stable or declining interest rates we’d assume it would outperform Municipal Value, as it did. But, what if interest rates rise? Shouldn’t its leverage reduce its return. And, if you aren’t sure which way interest rates are going, or think they’re going up, you want to avoid funds with leverage.

The leverage employed by the Municipal Market fund, and many other funds, is an “auction rate” preferred. Like any preferred stock, the principal does not have to be repaid-that’s good. But the “auction rate” means the dividend rate (think interest) is reset regularly, typically every week or month, depending upon the instrument.

If interest rates rise, the cost of the preferred increases. The result of rising interest rates can be a decline in the NAV (due to a decline in price of long term bonds) and an increase in expense (the rising cost of the preferred), which further reduces NAV. A double whammy (not a defined financial term).

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