A Management Tool for Expenses The Dollar Stretcher by Gary Foreman gary@stretcher.com Dear Dollar Stretcher, I want to make a grocery budget but I am not sure what to include on that list. Do you include your household items such as light bulbs and laundry needs? Regular household needs such as bath tissue and paper towels? My husband and I would like to reduce our grocery bill but as it stands everything for the house comes from our grocery budget. Kathy Kathy asks a good question. According the federal government the average family spends about 14% of their after tax income on food and another 1% on household supplies. So keeping track of these expenses is important. She's on the right track. Her budget should be a management tool. It's purpose is to help you quickly identify problems and possible solutions. You 'read' a budget just like a management report. Begin at the bottom and work your way up. You'll start with the bottom line totals. Then check the subtotals. Finally, if necessary, you'll look at the detailed part of the budget. Start by finding out two things. Was your income near the expected level? And were your expenses close to the budgeted amount. If both totals were close to what you expect you can be pretty sure that things are under control and you don't need to spend a lot of time looking for problems. Next you want to look at the subtotals. That's how you find what category is the source of any unexpected mismatch. Most managers will start with the groups that include the biggest expenditures. For families that would be housing, autos and food. If your actual and budgeted subtotals match in a category you can pretty much skip the details that make up the subtotal. It's taken just a moment to verify that everything is fine. An efficient use of your time. If you find a difference between the actual and expected subtotals you'll want to look at the individual expenses that make up the total. Again you're looking for actual expenses that are much different than what you expected. In most cases by going from the totals, to the subtotals, to the individual line items it's easy to find any problems. That's because you've narrowed the search to a reasonable area. And once you've found those problems you can decide what changes are required to get things back into line again. Consider Kathy's food/household products situation. By combining the categories she has found it difficult to determine what's causing them to spend more than they want. So until they can get that area under control they'll want to split out household from grocery items. And even that might not be enough. They may even need to separate meats from vegetables and canned goods. Or any other division that will help her understand the problem. Once she's brought the offending expense back into line they can combine the two categories. It only saves a few minutes when she enters the data, but her time is valuable. Another thing to remember is that you don't always have to do things the same way. For instance, Kathy may combine the category without problems for a year and then suddenly begin to have troubles. She has two choices. She can go back to her receipts and split the category for the last month or two. Or, if it's not a crisis, she can beginning splitting into two categories this month. The same thing is true for other categories. For instance, if your entertainment category is growing you may need to separate video rentals and movie tickets from dining out. Whatever will help you easily identify where your money is going. The key to remember is that you only want to collect as much information as you'll need to find problems when they occur. The trick is to not waste time collecting info you won't use, but to still have enough data when you need to find a problem. That means that there is no one right answer to Kathy's question. It all depends on how much info you need at the time. _______________ Gary Foreman is a former purchasing manager who currently edits The Dollar Stretcher website www.stretcher.com/save.htm You'll find hundreds of articles to help you stretch your day and your dollar. Visit today! More >>

Band Instruments The Dollar Stretcher by Gary Foreman www.stretcher.com gary@stretcher.com Hi Gary, I just read your article about the rent to own question. Your examples are easy ones. What about the difficult ones - namely school band instruments? I read somewhere that the rule of thumb is if they are going to play the instrument for more than 2 years it's cheaper to buy. If they play it for less than 2 years it's cheaper to rent. My husband got stuck with a saxophone and a drum kit. We sold them so we got a little money back. But not what he paid. Our daughter never stuck with one instrument longer than 2 years, but every year we were renting something for her. I returned each instrument when she switched to another. Our son, on the other hand, played the trumpet 2 years. So I purchased a trumpet. Then he played for 2 more years and quit! I'd appreciate your thoughts on this, even though it seems like a no-win situation. Thanks, Mary A lot of us share Mary's experience. We have a child who wants to try band or orchestra. And, like good parents, we encourage them. But, we all have the same problem. No one can see into the future. And that means that there's a good chance that you'll end up with an old clarinet in your closet! Mary's estimate of two years on band instruments is about right. Most instruments will cost between 15 and 30 times as much to buy as they will to rent monthly. So the simplest way of looking at it is to divide the purchase price by the monthly rental to figure out how many months Junior will need to stay with the program. Will he be interested that long? All you can do is to take your best guess based on other similar circumstances. Some children are naturally more persistent than others. One thing to consider is why he wants to try this instrument. If his motivation disappears Junior will probably take the earliest opportunity to quit. For instance if his best friend quits don't be surprised when he follows. A better solution might be to compare renting to buying a used instrument or borrowing. You're not the first parent to face this question. And some of those parents would be glad to recapture the closet space currently occupied by a snare drum. If you have enough time you might want to run a 'wanted to buy' ad. The school paper would be an excellent place to find a seller. Look for other ways to avoid buying new. It would be fairly easy for the band teacher or a parent in the class to make a list of parents who will want to sell their instrument when the class is over. That list could be circulated at the beginning of the next school year to parents of band students. I'd suggest that any parent give serious consideration to renting. The fact is that not too many students will stay with an instrument for more than one year. Many kids start in the early grades. But very few students are involved with band or orchestra as they approach graduation. And even a student who plays for more than two years can outgrow an instrument. Violins are one example. Student violins are available in special smaller sizes. Your budding virtuoso might get too big for the smaller instrument you purchased. So unless you're pretty sure that your student will be able to use the exact same instrument for more than a couple of years it's probably best to either buy used or rent. One final note. The average house in the U.S. has grown from 1100 square feet in the 1950's to 2000 square feet in the 90's. Part of the reason for bigger homes is storage for all the things that we're accumulating. So follow Mary's example if you buy. When Junior finally lays his horn down for good sell it. Not only will you make a little more space in your closet, but you'll also help another family find a good deal on an instrument. Gary Foreman is a former former purchasing manager who currently edits The Dollar Stretcher website http://www.stretcher.com/save.htm You'll find hundreds of articles to help stretch your day and your dollar. Permission granted for use on DrLaura.com More >>

Reducing Investment Expenses The Dollar Stretcher by Gary Foreman gary@stretcher.com Dear Dollar Stretcher, I'm interested in cheap ways to invest. If I want to begin investing extra money, what are some inexpensive ways to do it? Going through a discount broker can really cost money. Of course, with mutual funds, you can invest directly with the company, but are there other ways to cheaply invest other kinds of investments (e.g., stocks, Treasury bills)? Thanks. Allison Congratulations to Allison for beginning an investment program. And, she's right to be concerned with the costs of investing. Commissions, fees and transaction costs can significantly reduce the growth of your money. Generally you'll find cost in three areas. A fee or commission when you buy. Management fees during the time that your money is invested. And, exit fees or commissions when you sell. Usually the safest investments are also the ones with the lowest expenses. Savings accounts, CDs and savings bonds are all good examples. You won't pay to open, manage or close these accounts. Yes, the issuer will make a little money on you. But you'll have a pretty good idea of your rate of return before you open the account. Allison should begin her savings program in a money market account. Technically there are two types. You really don't need to worry about the differences. The main thing is that you can be sure that $1 invested will be worth $1 plus interest when you choose to take it out. And, that you can take any or all of your money out whenever you want to. Treasury securities (bills, notes and bonds) are usually for the person who can put away tens of thousands at a time. If you want the safety of U.S. Government backed debt but don't have that much money, take a look at U.S. Savings Bonds or some of the mutual funds that buy treasury securities. Most have very low expenses and will allow you to add smaller dollar amounts to your account. The riskier and more complicated type of investments will have higher expenses. Even with all the technology available today buying a stock is still a complicated transaction. And that costs money. As a rule of thumb, unless Allison can afford to commit $2,500 or more to a specific stock, she shouldn't consider buying shares in individual companies. The transaction costs are too high. She'd be better off using mutual funds to own stocks. Many mutual funds do not charge you to invest with them. They're called "no-load" funds. "Load" is a term that describes a sales charge that's "loaded" onto the fund. No-load funds are sold directly by the fund company to the investor. Load funds are sold by brokers. Part of the load is paid to the broker as a commission. Studies have shown that no-load funds perform as well as load funds. But that doesn't automatically mean that you should ignore load funds. Since a broker sells the load funds, they will do the necessary research to find a good fund that meets your objectives. The load is the price you pay for them to do that work. You can find a good no-load fund for yourself. But you need to be willing and able to sort through the thousands of funds available to find the best ones for your situation. Don't kid yourself. Even with the help of magazines and websites that rate funds, you will spend some time and effort in finding the best one. Remember that cost is not the only consideration. You would gladly pay a few dollars if it meant that you could earn many dollars. Mutual fund management fees should be clearly spelled out in the prospectus. For actively managed stock funds you can expect to pay up to 1.75% per year. Sometimes you get what you pay for. Cheap management fees are no bargain if your investment doesn't grow. Conversely, higher fees are no guarantee of superior performance either. The bottom line is either you or a broker will need to compare records and study the investments. Usually, beginning investors will do best with two types of investments. The very safe, like money funds and savings bonds. And mutual funds for long term growth. One final thought. If Allison is carrying a balance on her credit cards, paying them off first could be her cheapest and best investment. Paying more than your minimum payment doesn't trigger any fees. She's guaranteed to earn whatever interest rate that the credit card company is charging her. That could be much better deal than she'd earn on any safe investment. Gary Foreman is a former Certified Financial Planner who currently edits The Dollar Stretcher website http://www.stretcher.com/save.htm You'll find hundreds of articles to help stretch your day and your dollar. Permission granted for use on DrLaura.com More >>

Enron Lessons for the Little Guy The Dollar Stretcher by Gary Foreman gary@stretcher.com Much has already been written about the fall of Enron. Most has been on the political and business ramifications and deciding who to blame. I've been surprised to see that there hasn't been much that would help the average Joe protect himself from the next Enron. So let's see what lessons can be learned from the current mess. There will always be bad guys in this world. Insiders will know more than you do. Some will use that knowledge to their advantage. And, some won't care if you get hurt while they make money. That's no surprise. Never trust the insiders to be on your side. Always take steps to protect yourself. You may be fortunate enough to avoid the bad guys. But you still need to be cautious. If you can't explain what a company does in two sentences you shouldn't invest in it. Smoke and mirrors are only fun at the carnival. Razzle, dazzle companies often blow up. Complicated dealings are a perfect place to hide mischief. If you don't understand what a company is doing you won't be able to tell whether they're doing it well. You shouldn't invest in anything where you can't judge their performance. Even the biggest of companies aren't immune from failure. Sure, they're safer. But not 100% safe. In fact, it's easier for a big company to hide troubles. At least until they become really serious. Putting all your eggs in one basket is dangerous. It is not a good idea to have all of your assets invested in one company no matter how good that company is. Even if it's your own business it is wise to try to have your money invested in a number of different things. Diversification is the most important tool for small savers and investors. It minimizes your damage when catastrophe strikes a company. And, it also provides for a steadier, more dependable growth of your money. Mutual funds can protect you from being overly exposed to one bad apple. Even if a fund does own the next Enron, it's only a small portion of the fund. Diversify your 401k plan. You shouldn't put all of your retirement money in one investment. You should have a variety of stocks, bonds and guaranteed investments. And even within each category you should have a variety of stocks and a variety of bonds. You don't want to invest too much in the company you work for. If something bad happens to the company you could lose your job and your savings. Even if the future looks bright for your employer it's a bad idea. Some employers will automatically buy company shares with their contribution to your 401k plan. You can still protect yourself from disaster. Use your contribution to buy something besides company stock. And sell the company shares in your account as soon as you can to keep your exposure to a low level. These two steps will provide needed diversification. If you don't have control over an investment you've increased it's risk. Some 401k plans place limits on how soon you can sell the company's contribution. That means that you can't really count on the value of company contributed shares until you have the right to sell them. When plan administrators are changed most 401k plans will freeze your investments for a short time. A lot can change in that time. If you face a freeze, you should consider moving the vast majority of your money into the safest place you can find. Often that's a CD or money fund within the 401k. You can always rebuy the stock or mutual once you regain control of the account. Counting on others to protect your money doesn't always work. Even the most honest accounting and regulatory groups can make mistakes. And, some of them will even be dishonest (gasp!). Putting all of your money in one company and assuming that the auditors will catch any problems is foolish. A big failure like this doesn't mean that you should avoid Wall Street and all stocks. Doing that would eliminate the best way to grow your money. Stocks have the best long term growth rate of any investment category. We'll probably see some changes in the law. But you don't need to wait for Congress to protect your money. You can use common sense and diversification to protect you today. Why not take a look at your statements and make sure that you won't be a victim of the next big business flame out? Gary Foreman is a former Certified Financial Planner who currently edits The Dollar Stretcher website www.stretcher.com/save.htm You'll find hundreds of free articles to stretch your day and your budget. If you have a question or comment send it to gary@stretcher.com Permission granted for use on DrLaura.com More >>

Maximize Your Tax Refund The Dollar Stretcher by Gary Foreman More >>

Random Thoughts The Dollar Stretcher by Gary Foreman gary@stretcher.com Have you ever had an idea pop into your mind and just 'hang out'? That happens to writers, too. So here are a few of those random thoughts that just won't go away. What do you think? You do something twenty times and got the same result each time. It's really amazing when we repeat the same mistake over and over and still think that somehow it will come out different if we try it yet again. They say that man is brighter than the animals because we have the ability to learn. Sometimes when you watch people make the same financial mistakes over and over you can't help but wonder. Have you ever thought about the phrase "spending time"? It's a good reminder that we spend our time just like we spend our money. Each day we start out with a certain amount of time that we can use for work, family, chores and entertainment. Almost makes you wonder whether we should try to budget our time. Another thought about time. Have you ever brought a new purchase home and then been surprised by how much of your time it consumed? It's almost as if this item eats holes in your day that you're helpless to avoid. Am I the only one bugged by ads that claim 'only 24 easy monthly payments'? Every payment that I've ever made in my life brought some degree of pain. And what about the ads that offer something for three monthly payments of $39.95 plus $7.50 shipping and handling. Are we really so slow on math that we don't realize that we're paying nearly $130 for whatever it is? It must work because the advertisers keep doing it. If you think about it, almost all scams have one thing in common. Somewhere in the pitch you'll be told that you must act now. Be smart. Don't miss this opportunity. Yes, successful people often act decisively. But, they usually already have quite a bit of information about the decision that they're about to make. Usually at the exact time that you're asking for more information is when they want to rush you. Why is it that people want to get rich quickly? Take the current crop of shows giving away a million dollars. Everyone wants to win. But do the winners really go on to a better, more satisfying lifestyle? Ask the first winner of the Florida lottery. Not too long ago I saw a report that said winning the lottery made his life miserable. Everyone looked at him as a possible source for cash, not as a friend. Soon nothing mattered but the money. Years have passed since he won. Today all the money is gone. So are his 'friends'. And he earns his living cleaning restrooms on the Florida turnpike. How many things do you really, absolutely need to buy today? Would your life come to an end if you delayed the purchase of that new DVD or car?Maybe tomorrow you'd find a better price or a model that you liked better. Maybe you'd even come to the conclusion that you didn't need it at all. Did you know that most studies have found that people with lower income and education levels are more likely to play the lottery? Wonder if they'd buy fewer tickets if they knew that they had a greater chance of being hit by lightning than winning the big prize. "Only $19.95 plus $4.50 shipping and handling. Visa and MasterCard welcome." Well, yes, sort of. But, if you put that on a credit card and pay the minimum amount each month you'll really be paying about $45 for that 'limited time offer'. After you add income taxes and social security taxes you really need to make $56 to pay for it. How many hours of work is that for you? Here's a trick that could make you look smarter the next time interest rates are discussed. It's called the "Rule of 72". If you ever want to know how quickly your money will double at a certain rate of interest (say 6%), divide 72 by that rate. That will tell you how many years it will take before the original amount doubles. At 6% our money would double in 12 years (72 divided by 6). While it's not accurate to six decimal places, it is a good quick way to figure things in your head. Don't know about you, but I certainly feel better for getting that off my mind! Gary Foreman is a former Certified Financial Planner and purchasing manager. He currently edits The Dollar Stretcher website www.stretcher.com/save.htm You'll find hundreds of free articles to help you save time and money. Visit Today! Permission granted for use on DrLaura.com More >>

Building Credit The Dollar Stretcher by Gary Foreman gary@stretcher.com Dear Dollar Stretcher, I am a college student looking for a credit card. When I tell my parents this they say, "no, you don't need one". I feel that I am financially responsible and in control of my money. I am not looking to spend money I don't have but merely to build credit. I've read all about college kids in debt, etc. But what about the rest of us that are responsible and ready to start our lives? How do I even get a credit card? And is there any better way to build credit? David H. Chicago, IL David is smart to take an interest in managing his credit. Like most young adults, David is anxious to grow up. And getting your own credit card is part of that process. But he needs to be careful when he begins this journey. There are more than a few perils along the way. First, he should consider why he needs to 'build credit'. Sure, credit scores are being used for more things these days. It's even possible that David's college checked his score before accepting his application for enrollment. But typically, the only time that you really need good credit is when you want to borrow money. In fact, he probably won't need to have much of a credit history until he wants to finance a major purchase like furniture, an auto or home. So there's probably no hurry to 'build credit'. That's not to say that David shouldn't get off to a good start now. One advantage to getting a credit card early is that David can begin to establish a consistent history of responsible use of credit. Of course, the younger David is, the more likely that he'll fall into trouble. David needs to remember that having a credit card does not necessarily help his credit rating. If he gets a card with a low credit limit and pays his bill in full each month he will begin to improve his credit score. But, that same credit card could also hurt his credit score. All he has to do is to begin to carry a monthly balance. In fact, if he just has a credit limit that's too high in relation to his income, he will be less attractive to future potential lenders. Is there another way to build credit? Not really. There are other things that go into his credit score. But most of the information relates to how much credit is available and how dependable the borrower has been. So information on credit cards is a big portion of most young adults' credit rating. Once a year David should get in the habit of checking his credit report. There will be a small charge unless he's been refused credit. The three major credit reporting agencies are:Equifax, PO Box 740241, Atlanta GA 30374-0241; 800-685-1111Experian, PO Box 2002, Allen TX 75013; 888-experianTrans Union, PO Box 1000, Chester PA 19022; 800-916-8800 Getting a credit card shouldn't be too hard. On most campuses credit card companies are aggressively going after students. If he doesn't have a regular source of income he may need his parents to co-sign on the account. David should recognize that a credit card is a dangerous tool. Less than 50% of all credit card accounts held by students are paid off each month. It's very easy to charge a few things during the month only to find that you don't have enough money to pay the bill when it comes. According to Nellie Mae the average college undergraduate carried a balance of over $2,700 in 2000. That's a lot of debt if you have limited income. If David feels he can't use credit responsibly, he would be wise to wait. When he does get a card, David should leave it at home. The only time he needs it is when he has planned to make a specific purchase and he knows that he has the money to pay for it. Carrying the card with him is an invitation to make impulse purchases. Very few students can resist that temptation for long. In fact, he might do better with a store credit card. The reason is simple. It's hard to buy pizza or movie tickets on a Sears' card. Given what's known about college students and credit, David would be wise to move cautiously. He needs to recognize that most students are not 'building credit'. Instead they're damaging their credit worthiness and digging a financial hole that will make it hard to rent apartments and buy cars when they graduate. Hardly a smooth road to adulthood. Gary Foreman is a former Certified Financial Planner who currently edits The Dollar Stretcher website www.stretcher.com/save.htm Permission granted for use on DrLaura.com More >>

A Cheap Used Car The Dollar Stretcher by Gary Foreman gary@stretcher.com Dear Gary, I'm a struggling, hard-working single mother who is in dire need of a car, but I can't stand the thought of making car payments for 5 years because of my bad credit. I have $3,000 saved and I'm considering going to an auto auction. If this is not a feasible way to get a car, could you please tell me the best way to get one? Julie Julie is wise to avoid car payments. Paying interest on a car loan only jacks up the price of the car. And, while Julie should be able to find an acceptable car in her price range, an auction might not be the best place to look. She probably already knows that any car in this price range will have some defects. The trick is avoiding major repairs. She would be wise to ask a mechanic or knowledgeable friend to look over any car before she buys it. Most major failures do not happen suddenly. There are warning signs. Watch out for cars that have been 'totalled' or flooded and rebuilt. Many are recycled to unsuspecting consumers. Julie might want to visit carfax.com. For a small fee she can check a car's VIN number for accidents and other problems. Always make sure that you get a good, clean title with your car. If a seller cannot produce the title at the time of sale don't buy the car. Unless Julie is in desperate shape she should take her time. There will be many junkers within her price range. It takes time to find the good rides. Julie can expect to spend some money on repairs each year. But that's not an argument for a new car. Payments would be more expensive than repair bills. Should Julie begin her search at an auction? There are some good buys to be had. But there are also big risks. The best deals are at wholesale auctions. Julie will need a someone who has a dealers' license to get her in. If you want to try an auction, plan on getting there early. Examine your potential purchase carefully. Take a Kelley's Blue Book or NADA guide with you to help with pricing info. Then hope that no one else bids on your favorite car. Auctions bring some risks. Cars are sold 'as is'. So if it doesn't run that's just too bad. Generally you be unable to get out of an auction purchase unless the title is defective. So you need to carefully examine any car that you bid on. And you must do it at the auction site. You can't take the car down to your favorite mechanic for an an unbiased opinion. The vast majority of auction sellers are honest people that you'd be happy to do business with. But auctions are an easy place for the dishonest to move a car with a bad history. It's hard to judge a seller's honesty when you don't even meet them. Finally, Julie should remember that auctions have something called a "buyer's premium". That's a commission that's added to the winning bid. Sometimes it's a fixed amount. Other times it's a percentage of the winning bid. Perhaps a safer option for Julie would be to buy from a private party. It's takes more time, but could get her a better car. Remember her goal: a well maintained car. Where can she find one? Naturally she can look in the local paper. But, Julie's best bet is to tell friends and co-workers that she's looking for a car. A well maintained car won't get much more as a trade-in for the seller. So they'd actually do a little better by selling to Julie. She'd have the advantage of knowing more about the seller. And she'd have enough time to have her mechanic look at the car. What can Julie expect to find? We went to KelleyBlueBook.com for pricing. We priced three popular family models. All three cars were assumed to have 100,000 miles. And all three were 4 door sedans with automatic transmissions, air conditioning and the standard engine. A twelve year old Toyota Camry and eight year old Ford Taurus were under Julie's $3,000 limit. A twelve year old Honda Accord was slightly over. So it is possible for Julie to find the bargain that she's looking for. She'll need some patience. A good mechanic or friend who knows cars will be helpful. Hopefully Julie will find a dependable set of wheels for her family. Gary Foreman is a former purchasing manager who currently publishes The Dollar Stretcher website www.stretcher.com/save.htm where you'll find hundreds of free articles to save you time and money. Permission granted for use on DrLaura.com. More >>

Bi-Weekly Mortgage The Dollar Stretcher by Gary Foreman gary@stretcher.com Dear Dollar Stretcher, I just received something in the mail saying that if you breakup your mortgage payments into twice monthly payments thatit helps you pay off the loan faster. So instead of payingour $2,000 per month payment, we would pay $1,000 twice a monthand end up cutting 7-9 years off our mortgage. I know better than to pay someone $200 to set up something that I can do on my own, but I was wondering if what they said was true? Any advice? Pam Pam has an opportunity to save thousands of dollars. But, she's also recognized that she can waste some money here, too. Let's start with a couple of facts to help understand the issue. The first thing to recognize is that a lot of your mortgage payment doesn't reduce the amount that you owe. All it does is pay the interest that you're being charged each month. That's especially true in the early years of a mortgage. For instance, at current rates (6.75%) you will make payments for a full year to reduce the amount you owe by 1%. So in one year Pam will have paid $24,00 and still owe 99% of the principal amount. Paying twice a month will only do a little to reduce Pam's mortgage. The idea is that making a half payment midway through the month will reduce the amount of interest owed. And with less interest owed, more of your payment will go to reducing principal each month. There are two problems with this approach. First, you're not really doing much to reduce the principal or the amount of interest that you owe each month. Second, many mortgage companies will just credit any early payment to the next payment that you owe and not even give you credit for being early. In that case there's no financial gain. Paying twice a month will not reduce Pam's mortgage by 7 years. It would only reduce the term of the loan by a matter of months. But there is a way that Pam can get this strategy to work for her. Instead of paying twice a month, some people adjust their schedule to pay half of their regular mortgage payment every two weeks. That may be what the company is proposing to Pam. It doesn't seem like much, but at the end of the year you would have made 26 half-payments or 13 full payments. And that's one additional full payment each year. That one additional payment will reduce the loan term by five and a half years. So the strategy can work. But it's not necessary to pay someone to achieve this result. All Pam needs to do is to add a little extra to her payment each month. In fact if she can add just 1/12th to each payment, a 30 year mortgage will be paid off 6 years early. All Pam needs to do is to add $166 to her $2,000 a month payment. Prepayments will reduce the length of your mortgage dramatically. Especially if you make them in the first few years of the mortgage. That's why 15 year mortgages are popular. A relatively small increase in monthly payment can build a lot of equity in your home. And there's no requirement that Pam prepay every month. Even if she misses many months, any prepayment that she has already made will still reduce the length of her loan. What's the advantage of a service to handle prepayments? They track two things for customers. First, they verify that the mortgage company applied your prepayment to reducing principal. They also provide current information about your mortgage balance. Both of those tasks are important. Mortgage companies make mistakes. And in this case any mistake works to their advantage. It's easy for them to take your prepayment and apply it to your next monthly payment. That would eliminate the benefit to you. Pam doesn't need a tracking company if she's willing to do a little bit of work. Begin by checking with your mortgage company to make sure that prepayment of principal is allowed. In almost all cases it is, but she needs to make sure. Also find out if you need to do anything special when you send it in. Second, send any extra payment with a clear notation that the extra is to be applied "to principal reduction". Finally, check your mortgage balance after each prepayment to make sure that it was applied properly to reducing principal. A simple phone call should handle it. Pam has an excellent opportunity to reduce the long term cost of her home. This is definitely a case where a little sacrifice now can pay big dividends later. Although it's hard to imagine being without a mortgage payment, if you plan on owning your own home for 15 to 20 years, it's a goal than can be reached. Gary Foreman is a former purchasing manager who currently edits The Dollar Stretcher website www.stretcher.com/save.htm Permission granted for use on DrLaura.com More >>

Mutual Fund Expenses Explained by Gary Foreman gary@stretcher.com Is your mutual fund management company getting rich whileyou're not? You know that they make money by managing some ofyours. But are they charging you too much? How can you tell?Let's answer some of the most common questions about mutualfund expenses. What are operating expenses? They'll include the payrollfor investment analysts, phone bills, rents for office spaceand the cost of printing and mailing your statements.Basically, it's the cost of managing your money. One notableexception is the commission that the fund pays to buy and sellsecurities. That's not included under operating expenses. It'sconsidered a 'transaction expense' in most cases. How do you calculate expense ratio for a specific fund?The math is pretty simple. Just take the operating expenses anddivide them by the average assets. Both figures will beavailable in the prospectus or quarterly report. For instance, afund with $10 million in assets and expenses of $100,000 wouldhave an expense ratio of 1.0%. How much is a 'reasonable' amount to pay for fundexpenses? That depends on two things. First, how hard is it tomanage the money and, secondly, how aggressive your managersare. Let's take two simple examples. First, consider a fund thatbuys US Treasury bonds and plans to hold them to maturity.There's not much research required so the expenses should below. In 1996 the average expense for a government bond fund was1.02%. Compare that to managing a long-term growth stock fund.You'll want your analyst to do a good job in finding the nextMicrosoft. That takes time and effort. And the average cost ofmanaging a growth fund was 1.42% in '96. As you would expect,the cost to manage international funds or find small emergingcompanies is even greater. Can higher expenses 'buy' better managers? Sometimes.The most talented managers should make more. What you reallywant to know is if the extra expense is worth it. The best wayto see if a fund really deserved a higher expense ratio is tosee how they've performed in direct comparison to other fundsand the market. If they've done a better job on a regular basis,the higher expenses shouldn't bother you. Conversely, if theyhaven't outperformed, find another fund. How am I charged with the expenses? Is it on my quarterlystatement? Unfortunately, you'll have to do a little bit ofdigging to find out how much of your money the fund spent. It'snot found on your statement. You'll need to go to the fund'sincome statement in the quarterly report to find the answer.Most people toss the report without looking at it. A number of industry 'watchdogs' are pushing to have fundexpenses shown on your fund statement. They argue that ifpeople knew how much they were spending on expenses there wouldbe more pressure to control the cost. Fund managers counterthat the increased cost of collecting and reporting thatinformation would only increase the expenses. How do expenses affect my earnings? They're subtractedbefore you see your earnings. If a fund earns 10% and theexpenses are 1.2%, you'll see a return of 8.8% (10.0 minus 1.2equals 8.8). That's not so bad when markets are going up, butremember that the expenses go on even if a fund is losingmoney. A half-percent difference in expenses can seem huge ifyour fund is only making a couple of percent. Are 'big funds' less expensive than smaller ones? Yes,but not by as much as you'd think. Obviously, it doesn't costtwice as much to manage a fund that's twice as big. But youneed to remember that the mutual fund companies want to make aprofit, too. All of the savings of a big fund don't come backto you. Some of that savings goes to the fund company asadditional profits. What should I look for when I consider fund expenses?Look for two things. First, how does the fund's expense ratiocompare to other similar funds? If it's higher, check to seeif it's justified by performance. Don't forget to make surethat the manager that produced the past performance is stillmanaging the fund. Second, if the fund is part of a family, take a look atthe average family expenses, especially if you're buying a loador 12b-1 fund. You may want to switch to a different fundwithin the family some day. That could be less attractive ifthe whole family has higher expense ratios than the average.And there's quite a bit of difference in average familyexpenses. Some have a ratio of less than 3/4 of a percent andmany others are over 1.5%. One final thought. You do need to keep all this inperspective. In some ways it's the same as deciding to orderpizza. How much time and money would it take you to make thepizza? Is it a good value? Unless you're really into trackingand researching stocks, you may be getting a pretty good dealfor your one percent or so. That doesn't mean that youshouldn't consider expenses in picking funds; just rememberthat it's only part of the equation. Gary Foreman is a former Certified Financial Planner who currents publishes The Dollar Stretcher website http://www.stretcher.com/save.htm. Permission granted for use on DrLaura.com More >>