Monthly Archives: December 2011

The Ugly Truth Regarding Refund Anticipation Loans

When it comes to filing income taxes, you often see all the advertisements that claim that you can get your tax refund instantly or within 24 hours. This really isn’t true. In fact, the IRS will not release an income tax refund until at least 10 days after it has accepted it electronically. These fast refunds are, in fact, not refunds at all. They are temporary, high interest loans made by a financial institution. Once the IRS releases the refund, the financial institution gets paid back. Many people who get refund anticipation loan products don’t realize they are getting a loan.

Is this a scam? Well, that depends on what your definition of a scam is. This is similar in structure to a payday loan. They are temporary loans that don’t seem to cost very much. However, when you annualize the cost of borrowing, they are a complete rip-off. Payday loans and automobile title loans are illegal in some states because they make no financial sense whatsoever. To someone who is getting a refund of $3,000, an extra $200 for filing a tax return seems like it’s chump change. The real problem is that the people getting these loans are those who can least afford them.

Most people who get these loans are people who are married with children or are a head of household. Because they struggle financially the entire year on a small income, their tax refund is the largest amount of money they will see for the whole year. Generally, those who are not used to having that much money at once manage that money poorly. Once they obtain that refund check, it’s usually gone fast.

Much of this money comes from earned income credit (EIC). EIC is a refundable credit that is intended to aid low income earners with dependents. This is structured badly. Instead of allowing people to get this money as a single lump sum, it should be structured that this money gets paid out in installments throughout the year. There is an advanced earned income tax credit program in place that enables this, but very few taxpayers get it because they want that large refund check every year. That being said, requiring the installment payments would accomplish a couple of things. First, those getting EIC would not get the high interest loans.

Second, more of the EIC money would be used for the program’s intended purpose. Most people who get a large tax credit from EIC will spend the money on a new car, vacation, or other non-essential item. The intended purpose for this program was to help low wage earners put food on the table and pay rent. By dividing EIC payments into installments, a bigger portion of that money would be used for what the program was created for, leaving less money for non-essentials and banks.

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A Few Ideas for Increasing Profits

There are multiple ways in which you can raise your income. The most often pursued route is trying to get new customers. Most people think this is the only answer. First of all, it isn’t. Secondly, it’s one of the more difficult ways of raising your income. Getting new customers generally has substantial costs whether it’s money paid in advertising or time spent networking. Although you should always put effort into getting new clients, there are other options that are easier for increasing profits.

One of these is increasing the average transaction value. This partly involves raising prices. Many business owners are hesitant to do so. However, you need to look at the value of the product or service in which you are providing. Also, look for items that complement the product the customer is buying. For example, McDonald’s raises the average transaction value by supersizing. That is, asking customers if they want to get a larger soda and more fries. Look for creative ways to do this with your business.

Over time, you should develop a system for selling back-end products. These are products that aren’t your main product or service. They may be complements to main products. Or, they could be a product or service you introduced that are fairly similar to your other products. You were able to produce this product using the expertise you developed with selling your main product. Many of your best clients will be willing to buy back-end products from you.

Another technique involves increasing the frequency of customer purchases. The easiest customer to get is the one you already have. It has become a popular cliche. Yet, it has always been true. With this strategy, you can offer more promotions and discounts to your existing customer base.

You should also be active in generating referrals from your best customers. Generally, the top 20% of your customers generate 80% of your revenue. This does not just come from them buying directly from you. It also comes from them happily telling their friends and acquaintances about your business. To take full advantage of this, make sure your customers understand the benefits of your services. If you’re a tax professional, show your customer how he/she is saving money on taxes. These techniques should be leveraged simply because they are much less costly than the expense of getting new customers.

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Tough Economic Times Call for More Liquidity

Liquidity is one of the most important factors when deciding on how to manage your financial assets. Tough economic times are usually temporary. During times like these, you should err on the side of caution and have plenty of liquid and non-volatile assets. This does not mean you need to turn into a gold bug. However, when deciding to pay down your mortgage, think twice. Should you need access to that money within 5 years, you should find a more liquid investment for your capital instead and keep making the minimum monthly payments.

The equity in your home is not liquid. This means that you simply cannot withdraw and use it anytime as if it were money in the bank. You must plan for the unexpected. You should always maintain some liquidity because there will inevitably be times in which you need cash fast.

There was a time where people believed that equity was almost equal to cash. In a healthy market, you would indeed be able to refinance or sell quickly to extract your equity. This is not the case anymore. It is much harder to quality for a refinance even if you have positive equity. Your credit must be very good and you need to prove your income has been steady for the last few years. In the current environment, you cannot assume that all of your home equity is readily accessible.

When the economic environment is good, people seldom need cash. And cash is much easier to borrow. This is especially the case when asset prices are rising. When the economy is contracting or at stall speed, it is a different story. Lending will often seize up and the capacity you had to borrow will also be gone. Most people take this for granted during the good times.

The harder times generally present the best opportunities. The real catch is that they are difficult to take advantage of. For example, real estate is a great buy in many regions today. At the same time, how many people can afford it right now? How many people are lendable especially for investment purposes? So, despite the enormous opportunities that exist, they are out of reach for many. The statement that bear markets present great opportunities for investors is only a half truth. This is only true to either a new investor or an investor that is buying that asset class with no prior holdings of it. This also assumes that you both have the ability to recognize the opportunity and the means to be able to afford it.

A cynic usually says that a bank will only lend you money when you can prove you don’t need it. This has been quite true at times.

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Filed under Finance, Investing, Real Estate, Uncategorized

Why Now is a Great Time to Buy a Las Vegas Home

Currently, it’s cheaper to buy then rent even when taxes and insurance costs are factored in. This is a very unusual time. This situation only happens after a market crash following a bubble. When things return to normal, the process is generally chaotic.

The last decade saw prices rise to a point that was far beyond being affordable. Returning to normal was inevitable in the long run. After a bubble pops, things generally don’t just return to normal and stop. A correction is usually opposite in proportion to the bubble that it corrects. Now, prices have fallen below the long term trend line.

Having said that, you should not expect a fast recovery. Even though it is finally a good time to buy, there should be no rush. Another historical fact is that recoveries following a massive boom and bust cycle will take many years. One more important point is that there is no guarantee that prices will not fall further.

This is does not mean that you should wait with the sole purpose of timing the bottom. Like investing in the stock market, timing the perfect buying opportunity is next to impossible. Goldman Sacs predicts that prices will fall nationally a bit further and bottom out in 2013.

If you’re buying for investment reasons, be sure to make a good positive cash flow. In addition, don’t forget to factor in vacancy loss when calculating your investment’s potential. In Las Vegas especially, vacancy rates are very high as many homes are sitting empty. You can use our cash flow analysis calculatorto avoid the most commonly overlooked expenses.

Another reason why buying now makes sense it that interest rates are near record lows. This will not last forever because government deficits and money printing will eventually overwhelm the financial system. If you can lock in a low fixed interest rate, it is likely you’ll pay off your new home with very cheap dollars over the next 30 years.

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Filed under Real Estate

Running a Business in a Sluggish Economy

During hard times, people are generally reluctant to start new businesses or expand the business they are currently in. This is simply not a viable strategy. As we have seen throughout history, cost cutting will not get you very far and only yields short term results. No business has ever cut its way to greatness.

When the economy is bad, you still need to make the effort to continuously innovate and market yourself. Reducing costs will not work for very long. You can, however, allocate your costs in a manner that will offer better value. For example, if you have two different marketing campaigns with one outperforming the other, you can reduce or eliminate the one that’s underperforming and add to the campaign in which you’re getting better results from.

What you should not do, however, is cut your advertising budget when the lifetime value of the new customers you’re getting is higher than what you’re spending. No matter how great your current clients are, you will constantly be losing clients over time. If you run a great business, this will happen slowly. The point is that you will always need a stream of new business. Because of this, you will always need to allocate resources to advertising.

In fact, you can improve your position in your market. If your competitors are either closing or cutting costs, your business could fill that void. The mediocre businesses will go out of business first. Best Buy, for example, prospered when Circuit City went out of business.

Keep in mind also that many great business get started in hard economic times. Apple and Microsoft are two examples of this. In times like today, opportunity costs are low. This means that there are a lack of alternatives. More people choose to pursue their dream because the steady employment option has been taken away. This leaves the choices to either do nothing or start something great.

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