Tag: Monday Money Matters

What are these things called Mutual Funds, really?

           When it comes to investing, so many people hear, “You should invest in mutual funds.” And with out question, most people do. So many people invest in mutual funds that, today, nearly half of American households own mutual funds. This number is staggering considering that the number of households owning mutual funds was 6% in 1980. The increase is due to the increased availability and participation in retirement accounts, where mutual funds are the primary, and usually only, investment option.

            With so many individuals investing in mutual funds, it should be surprising that very few mutual fund owners actually know how they work.  But it isn’t, because the working of mutual funds are clear as mud. Over the next few blog posts, I hope to unmuddy the waters.

What is a mutual fund?

Let’s begin with the definition of a mutual fund. Investor.gov defines mutual funds as “a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt.”  The type of security that the mutual fund invests in depends on the objective of the fund. (We will discuss fund types in another post.) Each mutual fund has a ticker symbol. A ticker symbol is a unique five letter abbreviation used to identify mutual funds on the stock market. When purchasing a mutual fund, it is common to use the fund’s ticker symbol instead of its proper name.

The value of a mutual fund is determined by the value of the stocks at the end each trading day minus the liabilities or the expenses of the fund including management fees, the cost of keeping the “lights” on, etc. This value is called the Net Asset Value commonly called, “NAV.” The NAV is the amount that is quoted for the price of the Mutual Fund.  Note that since NAV is calculated at the end of the trading day, it is the prior day’s information.

For a simple illustration of how mutual funds work, I created my own fictional mutual fund. Since I love to shop, I have created a fake retail mutual fund called, TheIvyInvestor’s Retail Fund (ticker: IIRVX). It has three stocks for simplicity; but note, most mutual funds have hundreds of stocks.

 IIRVX opened on February 7, 2013 with 1000 shares outstanding.

Stock Symbol Company Share Price (as of 2/7/2013) Number of shares Value
JWN Nordstrom $54.91 100 $5,491.00
KORS Michael Kors $56.66 100 $5,666.00
M Macy’s $54.91 100 $5,491.00
$16,648.00

As you can see, the average investor cannot afford to purchase 100 shares of these stocks, let alone this full portfolio, a group of holdings —i.e. stocks or bonds— in a mutual fund.  To get a piece of the “action,” you can buy a share of IIRVX for $22.23. This $22.23 will not purchase individual shares of Macy’s, Michael Kors, or Nordstrom directly; but it will allow you to participate in these companies’ growth by owning shares of the mutual fund which holds them.

 How was the share price of IIRVX calculated on February 7, 2013?

 The NAV is calculated:

$16,648.00 (value of the securities at the end of the trading day)

- $2,500(liabilities)

$14, 148.00

$14, 148.00/1000 IIRVX shareholders = $14.15 NAV.

 IIRVX’s value on  February 7, 2014 with 1100 shares outstanding.

Stock Symbol Company Share Price (as of 2/7/2014) Number of shares Value
JWN Nordstrom $58.79 100 $5,879.00
KORS Michael Kors $94.22 100 $9,422.00
M Macy’s $53.09 100 $5,309.00
$20,610.00

How was the share price of IIRVX calculated on February 7, 2014?

The NAV is calculated:

$20,610.00 (value of the securities at the end of the trading day)

- $2,500(liabilities)

$18,110.00

$18,110.00/1100 IIRVX shareholders = $16.46 NAV.

As you can see, NAV changes day-to-day depending on: (1) the prices of the stocks that the fund holds, and (2) the number of shareholders.

This week’s blog posts will be a series on mutual funds. The next few posts will cover:

1. How do you make money in a mutual fund and Tax consequences

2. An in-depth look into mutual fund fees

3. Types of mutual funds available

Oh the Wild, Wonderful (scary) World of Credit.

Albert Einstein sums up my thoughts on credit (and actually all personal finance matters) in one quote,  “You have to learn the rules of the game. And then you have to play better than anyone else.” We have to know how credit works and use it to our advantage; it’s too expensive not to. Like it or not, our credit score affects us consistently. We know that lenders access our credit report and score to extend offers of credit. But did you know collection agencies can access your credit report to collect a debt? Or insurance companies can access your credit report to provide terms of insurance? Or with your express written permission, employers can access your credit report for employment?  Or interestingly, certain social organizations are accessing credit to extend invitations of membership?

Under the Equal Credit Opportunity Act, you have the right to know why you were denied credit or offered less favorable terms than what you applied for within 60 days of the denial.  You also have the right to request a credit report based on any lender’s adverse action towards you because of your credit.

My biggest concern is that people learn about credit problems or address them too late in the game. They begin to address issues when they decide to buy a house or after they were denied credit. Unfortunately, it’s too late then. It can take up to two years to sufficiently address poor credit to put you in a position for good terms with a mortgage. Your credit determines IF you will get a loan and what cost you will pay for that loan (interest rate). Even if you can have credit extended, bad credit will cost more…  If “no credit, bad credit, no problem,” means driving around a car with a 16% interest rate, there is a BIG problem. I’ve been there, done that!

If you use the debt management program from last week’s blog, then with hard work you should be able to get on top of your financial issues and control them in the future. It’s about changing your mind about money. Although I tell people to put their credit cards away during debt management, I still believe in the use of credit. We must begin using credit as a tool, such as bonus points for flying or coupons at your favorite stores, not a crutch. I’ve had bad credit in the past, not only was it not fun, but it was VERY expensive. Knowing what credit is and how it works, should help you manage it in a way that is beneficial, not detrimental, to you.

First, What is your credit report? 

Your credit report contains your history and the current status of your accounts. Generally, it includes:

  • Payment history and the length of time you have had credit
  • How much credit you have, and of your available credit, how much of it is in use
  • Whether you have any delinquent debts.

Generally, delinquent debts such as collection accounts can stay on a credit report for 7 and a half years. Credit reports may also include judgments, liens, or bankruptcies. Depending on the type of bankruptcy filed, the bankruptcy can stay on a credit report for up to ten years.

However, usually when people talk about credit, they are actually referring to their FICO score. The word FICO stands for “Fair, Isaac and Company.” It is the number lenders use to determine whether to: (1) give you credit; and (2) if so, how much; and (3) at what cost to you (the interest rate). Scores range from 300-850. A score in the 700s is considered a “good” score. Unlike your FREE credit report, you have to purchase your FICO score.  But it can be done when you purchase your free annual credit report. However, there are a scoring models used beyond FICO, these scores may vary depending on which of the three major credit bureaus the lender is using and the scoring model they employ, if they are not using the score provided by the credit bureau.

Second, how often should you check your credit report?

As I said in last week’s post, you should check your credit report at least once a year at Annual Credit Report.com.  As a side note, if you check your credit, it is considered a “soft inquiry” and will not affect your credit score. However, a lender checking your credit score for the purpose of extending credit is considered a “hard inquiry” and will affect your credit score.

Third, what should you look for?

It is so important that you thoroughly examine each of your credit reports. You will find that each agency’s report looks different, but also that the information on the report might be different. On each of your three credit reports from Experian, Transunion, and Equifax, you should check the following things:

(1) The credit accounts reported are yours.

  • Look for loans or credit cards listed that you never opened, addresses of places where you never lived, or names of  employers you never worked for. (Any of these issues could be a sign of Identity theft)

(2) That the accounts reported are complete and accurate.

  • Look to see that your accounts are reporting correctly
  • Look for collection accounts that were not updated after a settlement was reached and satisfied. I suggest that you also look for duplicates of the same debt appearing on your report. There should only be one listing of any debt you owe.

(3) That the information reported still belongs there.

  •  Look out for old collection accounts (over 7 years), bankruptcies over 10 years, etc.

Fourth, what if you find a problem?

DISPUTE! DISPUTE! DISPUTE!

All three of the major credit bureaus allow you to dispute online.  I suggest the online method. Over the years, I have done disputes online and through USPS (United States Postal Mail), and I like the experience online better for ease and cost.  If you are disputing by mail, it is best to do certified mail so you know what date the bureau received your letter.

How Bad Credit Almost Cost Me My Career… (Teaser for today’s Monday Money Matters)

About a year and a half ago, my love/hate (mostly hate) relationship with credit that I had entire adult life went nuclear. Yes, nuclear. How does that happen? Easy. I almost did not gain admission to not only one, but TWO, bars over my bad credit. I take full responsibility for my bad credit because it was a result of years and years, or should I say two separate seven-year cycles, of bad decisions.

My first bad bout with credit happened in college. At the time, it was the credit wild, wild west. Now, there are protections against predatory lending on college campuses. But then, you could get a free t-shirt if you signed up for a credit card and in college, who doesn’t need extra t-shirts to sleep in or better yet, an extra t-shirt, or two to stretch you until laundry day? So if I remember correctly, I had two of those. I also loved to shop at Express so I had one of those too. I’m not sure how any of this was possible considering I was an unemployed college freshman. Fortunately, I was able to squeeze the minimum monthly payments for these cards out of the money my parents sent me per month. This would have been fine until the summer when I could pay off the cards in full but I KEPT using the cards. Talk about under water… I spent the Summer of 2000 negotiating payment terms with debt collectors. Looking back, I made some serious mistakes even in that process, like giving the debt collectors my banking account information for post dated checks. Thankfully, nothing bad happened to me but there’s plenty of stories where bad things did happen for hundreds of Americans.

As if the credit card woes weren’t enough… I racked up crazy utility bills from my off campus living that I clearly could not afford to pay. For someone who never had a full time job longer than three months during the Summer my credit report was getting a little lengthy and not in a good way. In 2005, I paid $250.00 to have a credit repair guy “fix” my credit. Looking back, I could have easily used that money to do it myself. But by 2007, my colleges issues most of my college issues were gone. And you think I would have learned…

Sometimes you have to put your hand in the fire to know it’s hot. This is the one that presented the TKO.  After college, I was able to get three additional cards.  I had a good payment history with all of them until 2009. In 2009, I was laid off from my job (don’t think of this as an excuse). Even during my lay off, I paid regularly on my cards but there were a few notable problems:

1. I carried a balance on my cards when I should have paid them all off.

2. I went to law school and I really couldn’t afford to make monthly payments.

Oh and let’s not forget the issues that I had with PPA, the Philadelphia Parking Authority, or the DC Parking Authority, that ended up on my credit. Or the illegitimate dental bill that miraculously appeared. Or the Bally’s membership that’s been hanging out on my credit too.

Sadly, my credit in 2011, was probably the same as it was in 2002, AND by 2011, I had ALL the education and training to know better.  When you know better, you MUST do better. I worked out payment arrangements with one of my credit cards that I was able to pay with the job I held in law school but everything else remained unchanged. I figured I would handle it when I started working as a full time attorney. Little did I know it was an IF I became licensed.

Most bars have a character and fitness component where you have to report any infractions with the law, including speeding tickets, any instances of dishonesty, and of course, your credit. In March of 2012, when I was completing my first bar application, I started to see how my credit woes would be problematic. With everything I had to report, my application was a book. After passing the bar, I learned that my credit stopped my application to practice law in its tracks. I had to explain what happened and why my credit was so abysmal. Thankfully, by the grace of God (yes the grace of God) I was granted admission.

In November of 2012, I set up a plan to pay off everything I owed, excluding school loans but including my car.  I followed the system in Blog #1 to the “T.” In December, 2012, in full swing of my payoff system, I had to account to another bar for my credit. This bar was not as forgiving as the first. Since I had a plan in place, I was able to provide documentation on what I was doing but I had two looming credit issues from 2005 and 2007 that were erroneous. But when you had credit like mine, two erroneous issues, were hard to believe. But thankfully, I did something right.

I had been claiming these two accounts were erroneous from the moment I started receiving notices for them.  I wrote letters every time I received correspondence from them. I also initiated my own disputes with the credit bureau and the collections agency and documented those interactions.  So when I had to explain why I was not paying these particular accounts, I had years of documentation to prove my claims. After a few months, I was sworn into the second bar. Can you say sweating bullets?

Over a year later, now my debt payoff plan is complete, I have other issues like tons and tons and tons of credit offers. I think I get at least 10 per week. I didn’t even know there were THAT many credit card companies out there.  But I don’t apply for ANY of them. What I did do, however, was that I asked for an increase on my credit card (just to see what would happen) and I found out that I had GOOD credit. After thirteen years of suspect credit, I had GOOD credit! I think I told everyone I talked to that day my credit score. I remember talking to my father about something completely unrelated and said, “Well you know, life’s different when you have GOOD credit.” Indeed it is…

I shared this story for a few reasons. One, to show even as finance person, I have made some terrible mistakes and it wasn’t until I nearly lost everything I worked for that I got my act together. I hope that you don’t have a moment remotely similar to mine before starting to be aggressive with credit repair. Two, to show that it took about a year using the program in Blog #1 to really see results.  Three, to show that the suggestions and knowledge that I will provide later today, I have used successfully.