Don’t have all your money tied up in bonds and stocks; keep some in cash for emergencies so that you have it available for unexpected investment opportunities.
Why else should I have a portion of my portfolio in cash?
Many experts believe that holding a certain percentage of your portfolio in cash has many benefits for investors. Although it is important always to have a certain amount of cash on hand for emergencies or unplanned expenses, you should also have cash on hand to acquire investments when the opportunity arrives, so you do not have to sell other successful, longer-term positions—and pay the capital gains taxes—in order to purchase more investments. You can simply use cash. Other experts believe in holding a certain percentage of your portfolio in cash as a way to preserve your capital in a down market. Cash also increases value over time during periods of deflation. When purchasing a house or other real estate investment property, using cash to increase your down payment may enable you to obtain better terms on your loan and to make a more attractive offer for the property.
Why else is cash important to my portfolio as an individual investor?
According to experts at The Wall Street Journal, cash plays a very important role for all of our portfolios at different stages in our financial lives. First and foremost, by preserving capital and insulating it from the downward trend of a market, you have more money available to invest later. There is also a big opportunity cost that must be considered when you think of selling off investments—instead of using cash—in order to acquire new investments. By selling prematurely, you may not realize the gains you wished to make, and may actually incur losses. Many experts believe that if you need cash to make big-ticket purchases such as cars or houses, it is better to hold this money in the form of cash than to invest the money and have to sell the investment after poor performance, or at a loss, after a relatively short period of time. One expert cited the fact that many central banks have priced cash at levels approaching zero (percent interest), creating volatility in the prices of other investment vehicles. So it is best to have a strategy for the proper allocation of cash within your portfolio.
How can I get out of debt?
The most important step to getting out of debt is to understand what behaviors or circumstances caused the debt to begin with, and then focus first on changing those behaviors. This means that if you have incurred a lot of credit card debt because of undisciplined spending habits, you must immediately attack the root cause of the debt in order to reduce it. If you incurred a debt because you obtained a mortgage for more house than you can afford, you must find a way to sell the house without incurring a loss, and purchase a smaller, more affordable house.
What is the second most important step to getting out of debt?
The second step is to save this money you used to pay off loans and credit cards, and to pay special attention not to take on any more debt going forward. In other words, take the money you used to pay for your monthly credit card bill or car loan, and put it directly into a savings account, spending nothing on your credit card going forward. And remember to pay yourself first.
Is there any priority I should consider when paying down debt?
Yes. You should first pay off your highest interest loans or credit obligations. Credit cards are usually a high-interest rate credit obligation. So you must pay as much of your credit card balance, plus the interest on the balance, each month until the balance reaches zero. If you plan it out, and pay a certain amount each month, without taking on any new debt, you will see a light at the end of the tunnel. Pay a consistent amount each month, as much as you can afford. If you feel you can pay off more, because of a wage hike or pay increase at work, use that extra cash to reduce your debt.
What is the average percentage of a typical American’s gross income that is used for mortgage and consumer debt payments each month?
According to the Federal Reserve, Americans spend about 11.89% of their monthly gross income on mortgage and consumer debt payments. Homeowners (those who specifically purchased homes with mortgages) spend about 15.27% of their monthly gross income.
Why is debt management important to an investor?
There are many reasons why managing your debt is an important component of investing. All debts carry some sort of obligation and fee associated with the use of the money. In addition to the principal that needs to be repaid by a certain date, so do all fees and interest on the debt. In order to repay this debt, money that would normally be invested from your current earnings must be redirected to pay off this debt. So you lose both the current earnings and the potential to earn more on this money if it were to be invested.
What is the hidden cost of debt to an individual investor?
The hidden cost of debt to the individual investor is the opportunity cost or lost opportunity of using money that could have been invested earning some return, in order to pay off debt and interest charges.
What are some warning signs that my debt may be a problem?
According to the U.S. Department of the Treasury, many signs that help evaluate the health of a financial institution are relevant to individuals as well. Among these warning signs are failure to file taxes and other financial statements in a timely fashion; slowing or decrease in one’s income over time; deterioration of our available cash; decline in our assets as percentage of our total assets (e.g., the value of our principal residence and its equity declines); our debt increases; and keeping poor financial records (not knowing our current financial situation).
What is a front-end ratio?
A front-end ratio is calculated by dividing your total monthly housing cost by your gross monthly income.
What is a back-end ratio?
A back-end ratio is calculated by dividing your total monthly housing cost plus all other debts by your monthly gross income.
Why are front- and back-end ratios important?
Front- and back-end ratios are important because they indicate to lenders and creditors how much debt you can afford.
Why use a debt-to-income ratio?
In order to prevent people from buying a house they may not be able to afford, lenders will establish how much debt you can handle, and use this as one factor to determine your loan amount.
How much debt can I afford?
The amount of debt you can afford depends roughly on your front-end and back-end ratios, or debt-to-income ratio. Although the use of the ratios differs from lender to lender, on average your front-end ratio should never exceed 28%, and your back-end ratio should never exceed 36%.
What if my debt-to-income ratios are higher than average, and a lender still will give me a loan?
Just because a lender qualifies you for a loan, that does not mean you should take it. The lender may not care about your long-term financial success. Having a worse than average debt-to-income ratio means trouble on the horizon if not corrected, and should signal action on your part to reduce the debt.
What is “debt consolidation”?
Debt consolidation is the act of taking out a loan in order to pay off several others. Assume that you have credit card debt carrying interest rates as high as 20%, and you have a home mortgage (with some equity in your house) with an interest rate of 5% for 30 years. In a consolidation, you take out a home equity loan (which charges a smaller interest rate) for the value of your high-interest credit card debt, and then make payments on your equity loan until the debt is repaid.
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