Earlier in the day I was reading an article on Yahoo called, “Banks: The Final Death Of Free Checking?”

With financial reform coming to the aid of consumers (or so we are lead to believe everything is in our best interest), we may have seen the last days of free checking accounts.

Why eliminate the free accounts? It’s simple; banks are a business like any other and need to make money, not just be a service provider holding money until it’s time to pay for an Xbox or iPhone.

Through out my book, Barking With The Big Dogs, I mention what’s really consumer protection and what is disguised as consumer protection.

I explain in simple terms how banks use and make money not commonly discussed. So simple, I explained it to my daughter as I did in the short chapter “$49 Snow Cone” – and I talked about “free” checking accounts too.

In about two weeks, Barking With The Big Dogs will available in paperback and Kindle. Get a copy and avoid the $49 Snow Cone.

Make Money In 2011:  Your Home is the caption from an article in Yahoo finance.

There are a few problems with the article as opposed to the title – when you read the Action Plan: Owner, you are encouraged to save money, decrease cash flow and increase equity.

If you want to see how to make money on your home read “Barking With The Big Dogs“.

Paperback is due out on Amazon.com February 1 and will be available on Kindle as well.

I was reading an e-mail regarding debt strategies for struggling businesses.  The question was part of a series.  Today’s topic describes the current situation for people wanting to stay in business, but cash flow is tough and the business is past due with creditors.

(The question is straight-forward and no other assumptions are implied.)  “What is your best option?”

Choices ranged from ignoring the creditor’s attempts to collect the money to telling them the truth about the situation and seeking cooperation.  Other possibilities included setting for a lump sum amount for pennies on the dollar to a payout over a couple of years time.  The final choice is to pay the full amount plus interest over a year, but ask for no payments for the first year.

As it turns out, the answer to the aforementioned question is the final option.  No payments for the first year and the rest paid out over the second year.  This option will be the most expensive, but makes financial since as described by the party producing the question.

My take from a struggling business would concur with the answer.  No payments protects immediate cash flow and limited resources while reducing some risk; and, the no payments choice allows the business the ability to continually try to make money over the course of time to stay in business and hopefully turn things around.

However, from a creditor’s viewpoint, I’m not going a full year without getting paid.  (Even though the question was around you or me as a struggling business and our options, look at the other side as if we are the ones dealing with struggling business as well.)  I want some type of monthly cash flow myself.  As a business, I’m not the bank.  Furthermore, working things out, but collecting some amount regularly might keep their doors open long enough to get my money back; or, at least I will settle for some monetary amount, but I won’t settle for a customer not being upfront.

If the business avoids my calls and doesn’t want to structure some type of agreement, one last thing I might do as a creditor if I do not get my money, I might just send them a 1099-Misc. and treat the amount they owe me as a GIFT!

Why would I send the business or person owing me money a 1099?  First, I’ve lost.  I’m out either the merchandise or my time for services and can’t recover the loss of profit or the cost.  Next, the 1099 is a revenue form filed with the IRS that shows income to the other party.  I might not get paid, but the party owing me the money will have to show the amount as income and pay the taxes (or adjusts their taxable income) to the IRS.  One or two of these 1099′s can earn the reputation that when doing business means honoring commitments by the customer, not just allowing people to walk away.  Go to the bank for financing.  Look at what happened to furniture stores, such as Lacks Furniture in Texas.  They got in trouble financing the furniture and are now out of business.

Getting back to the main answer though, the key is cash flow.

No payments increase cash flow, but what you do with the cash flow difference is very important too.  Speaking of the importance of cash flow, payments, etc. and although I’ve written Barking With The Big Dogs primarily around the house and a mortgage, the concepts apply to any business.  Many business examples will be demonstrated as well.  One such business is the bank itself and you can read the importance of payments and other business tactics and use them on a business or personal level.

I was listening to a commercial talking about reverse mortgages. We will probably continue to see and hear more about these loans since with the baby boomers and population are getting older and the market for the reverse mortgage grows.

What I found interesting on one radio slot was the statement about getting monthly income tax free. (Not quoting exactly, but if I recall the statement was very similar.) Tax free income from your home each month, really? I’m not sure if that is entirely true, but taking profits without selling the home may be more inline. And, definitely getting equity money out is true too.

Really though, are people getting income, or simply a monthly draw against the equity in the house in the form of a loan? A loan, not income. The balance has to be repaid at some point; either if the house is sold or the estate pays the balance, plus interest. Income does not have to be repaid.

The following paragraphs are excerpts from Barking With The Big Dogs…

“The reverse mortgage lets the owners get the money back out of the house without selling the home. Of course, many reasons, from living expenses to investment purposes, exist for wanting the money out of property and making the choices to access funds. ”

To continue from the chapter Refinancing By Design…

” A reverse mortgage is an adjustable rate mortgage the owner does not have to make payments on, or pay off, provided the owner lives in the house or until the surviving spouse dies. The heirs or estate will be responsible for the debt.

The bottom line for reverse mortgages is simple. If people use their mortgage and resources correctly to begin with, they may want and get a reverse mortgage, but will not need one.”

Believe half of what you see and none of what you hear is an old expression. Even older than the internet itself, because if memory serves me correctly, Al Gore – the “father” of the internet was not around when Ben Franklin made the statement.

Then again, I found the statement on the internet and wasn’t there either, but I remember the quote as a kid and we didn’t have the internet. Therefore, the statement, or one similar has been around a long time.

What made me think of famous quote happened the other day after I was giving an interview on the radio. The host made the comment asking what, and if, we can really believe “stuff” on the internet is true; thus questioning the validity of the most stories circulated throughout the internet and passed on in e-mail forwards. According to Ben Franklin, we shouldn’t believe anything on the radio since the messages coming through airwaves are spoken, thus heard.

While listening to the radio the other day, I caught a few seconds of Crown Financial Ministries talking about mortgages. The host stated mortgage requirements are getting lax again believes everyone should use a 20% down payment when getting the loan. Why 20%? He didn’t elaborate. I assume he is just repeating everything he has heard as well, because the answer was not detailed, just a quick opinion. Stating the obvious is an easy sell, and yes, talk shows are selling a product – the agenda. (Read Monkey Business in my book Barking With The Big Dogs and I’ll explain in detail. In addition, I’ll explain what is key about a 20% down payment – not just repeat what is typically spoken.)

Moving from the radio to the internet and speaking of e-mails, I get the Bleacher Report delivered via e-mail. One day while talking to a colleague of mine, he stated he didn’t like the Bleacher Report because it was a bunch of bloggers. “Bloggers are biased” he said. Okay, so are newspapers; otherwise, why would the newspaper endorse a candidate such as Bill White (candidate for Governor of Texas) as the Abilene Reporter News and their other affiliates did? They are biased for Bill White, not equally for Rick Perry. Furthermore, showing bias, I had a comment not published that was in direct response to a previous post on their website. Moreover, newspapers are aggregators of information just like the Bleacher Report. (An aggregator is a collection of items.)

The Bleacher Report collects and distributes sports stories from The Austin Statesman, The Dallas Morning News, ESPN, etc., and yes has bloggers too. The Abilene Reporter news collects stories from the Associated Press (AP) and has bloggers as well on their online site too. They post videos from other sources just as many websites do. So, what’s the difference? Nothing, just the agenda.

When reading the paper, checking out the latest story on the internet or listening to the radio, what we read and his is not always the complete truth, but it’s not all a bunch of lies either, and maybe , consists simply of partial truths.

The main thing when getting information from the internet as opposed to other sources is not to buy the hype – just about everyone, everywhere repeats what is commonly known and has their opinions about what is seen, read or heard thus tilting the information to fit some kind of agenda which promotes (either directly or indirectly) some business, whether the businesses are private sector companies or public agencies.

In my last post about Gold – Guaranteed, I mentioned I get quite a bit of windshield and radio time. This morning while driving to work, I was listening to the Bill Bennett show in which Ernest Istook was the guest host. I don’t have a problem with him, but he did mention the Fed printing money. In addition, while looking at at a past Washington Time’s article on buying bonds to spur the economy, the writer also mentioned the central bank printing money.

Here’s the thing though, and it may seem trivial, but both the show host and news writer either made misstatements or misprints, and I’ll explain in just a minute. I’m not hear to criticize either party, just simply to clarify and make a distinction. In reality the statements are probably close enough for government reporting and sounds good enough to the masses anyway.  In addition, a couple of important aspects are noted later as well.

However, to speak about the Fed and the misstatements, let’s talk about what it is and does looking at an excerpt from Barking With The Big Dogs…

“To begin though, what is the Federal Reserve? Is the “Fed” a government agency? Not exactly. Depending on which source you read, some people will say banks themselves set up and/or control the Federal Reserve. You can research President Woodrow Wilson and come up with your own conclusion. However, the Fed is setup as independent from both. The Fed has to operate within the laws and banks must oblige by the regulations set forth. The Fed does act in the interest of the banks, but for the economy as a whole as well. The Federal Reserve is more like the bank’s bank. In a nutshell, banks send excess money to the Federal Reserve to borrow from or lend to other banks when needed.

For banks to borrow from each other, the rate they receive is the Fed Funds rate. As described in summary by a former bank examiner, (who wishes to remain anonymous) and that I have had numerous conversations with, this individual said the “Fed funds rate” is a rate that banks lend and borrow amongst themselves. The rate is an overnight rate. Selling Fed funds is a method used for excess liquidity, but not long term. Banks would rather lend for longer terms rather than lending to other banks.

To continue with the examiner’s comments, he went on to say when banks look for sources of funds, they borrow from the Fed as a last resort, such as a liquidity issue. The only way the Fed will loan directly to a bank for a medium or long term is if the bank is in danger of closing its doors due to a liquidity crisis or some community catastrophe. A major event is the reason for the fed discount rate. The rate is also a longer-term loan, thus a higher rate. If a liquidity crisis becomes a system wide problem, then the U.S. Treasury enters the picture, not the Fed.

Then what is the U.S. Treasury and how does the Treasury fit into banking? The Treasury supervises the banking institutions. The Treasury manages the country’s money, or finances, collects taxes and pays the bills. The Treasury produces currency (dollars) and coins. The Treasury also advises on economic, tax and trade policy. (By the way, Congress, not the President, actually controls the money. The President makes requests.) The Treasury also enforces tax laws.

When the Federal Government needs more money, Congress raises taxes. To raise money, the government also borrows in the form of “Treasuries” – T-bills, notes, bonds and inflation protected securities. For more money, the Treasury prints more money. So how do these actions by the Treasury affect you and me?

Very simple, our taxes go up and the value of the dollar declines.” (Chapter 35 Interest Rates Aren’t Sexy)

Interest rates at the Fed are low because of supply. Borrowing is down and saving is up. Big businesses and banks are sitting on huge amounts of cash in deposits.

Having huge amounts of cash as well as the Treasury printing more money may keep borrowing rates low for a long time, and our investments in savings accounts and CD rates too!

As I wrote in Barking With The Big Dogs, the saying is true, “debt is a four letter word…it has four letters”. However, borrowing money is not always a bad thing to do, unless you preach debt is dumb.

Many times saying all debt is dumb is easy advice to give. For example, let me ask the question, “do you like to pay interest to someone else, or do you want to save and keep the dollars for yourself?” From a salesman’s perspective, the previous question was a leading question. The answer was already known. Everyone wants to keep money versus giving the funds to someone else. Therefore, telling people debt is stupid or dumb is easy advice to give (or sell). No other explanations are necessary.

Well, I’m not interested in stopping here, some explanation is required for true financial knowledge instead of simply rehashing the obvious mass amount of common knowledge already in existence.

Read the entire article below. It’s short, sweet and easy to read…

Is it smart to pay 10% interest on inventory?

When reading an article in today’s MarketWatch, Chicago Fed President Charles Evans calls for more ‘easing’ in monetary actions. With high unemployment, things are not moving as fast as they should. Ben Bernake said the Fed will do some more bond buying. In summary of the article, this means a rate cut of up to 3/4% might happen. (See the article here.)

The only problem is that rates are extremely low right now. Look at mortgage rates, Prime rate, LIBOR rates, and just about any other rate. Look at CD rates.

The banks are paying virtually nothing on CDs and savings accounts. What this means is that money is sitting around, or available. A further rate cut is like putting a sale on an item already on sale.

Sure everyone needs money, but the demand for loans is down due to uncertainty in the economy, the expiring tax cuts (BTW – a vote was put on hold until after the elections), government control of industry, etc.

What needs to happen is demand needs to increase, and not just demand for handouts as some people think are going to happen in the small business jobs bill. That’s right, people think there is money coming directly to business, when in reality, the bill has to do more with loan guarantees and accounting tax laws for example than funneling money to small business.

Now is a good time to borrow with rates so low; money is cheap to buy. However, why go into debt to lose money? The idea is to go into debt to make money.

Last week, the House passed a $30 Billion small business bill previously passed by the Senate. Obama is expected to sign as well. More help is on the way to small businesses. However, will the bill help, or was the passage and signing more of a political move?

To begin, as I sat in some seminars this past week, cheers went out when news flashed a bill had been passed. On the surface, I would agree, any business assistance is great right now. However, the news may only be temporary.

Coming from a couple of speakers, including one from a branch within the SBA, the comment was made that the bill has a set a specific amount of funding, or will last until the end of the year, whichever comes first. That’s right, December 31 which is only three months – just after the elections. As I see it, the talking points for politicians are:

1. We passed a business bill to help small business. (Too bad no one is mentioning the time frame.)
2. Banks aren’t lending. (They are the bad guys, or fat cats, creating the problem.)
3. With the taxes set to expire December 31 as well, only the rich will be affected.

Pretty lame talking points in my view. Here’s why.

Reducing fees for borrowers as well as upping the guarantees for banks does make borrowing more attractive for both the business and the bank. Unfortunately, as another speaker said at the conference, only about 1 in 5 businesses are safe enough to lend to right now. As a result, banks are not lending to business because of risk and borrowers do not want to take on additional risk either. Kind of a stalemate. In addition, banks have not only regulatory compliance and increased FDIC amounts to pay, for example, which limits activity, but also SBA guidelines to comply which are rarely mentioned in headlines or quick commentaries.

With a risky economic situation (no one except economist believe the recession ended), elections and uncertainty in taxes next year, everyone is really sitting on the sidelines.

Speaking of taxes, are the rich really the ones who will be hit next year? Doubtful. The rich, including politicians, have financial vehicles – legally – such as corporations, charitable trusts, partnerships, etc. to use for limiting taxes – including estate taxes, which many average Americans do not have.

In the end, hopefully business will be helped, yet last week and this week’s headlines may be more political than practical.

I always keep a cash flow statement close to me. So close, it’s not on a computer or piece of paper, rather I keep it in my head.

Cash flow statements in business are easy to understand. Money coming in versus going out. Cash flow on a personal level is easy to understand too. Paychecks coming in, bills taking money out. Either way, business or personal, if more money is in the checking account at the end of the month, the cash flow is positive. If more money is going out than coming in, cash flow is negative and can lead to deficit spending. (I wish Washington would look at their budgets this way. But I guess this is too simple.)

When looking at a house, figuring the math is very simple.

First, I’ll start with buying a house with a mortgage. Typically, a 30-year mortgage is common.

(I won’t use a 15-year mortgage, because I think the 15-year loan is the most risky loan on the market for the average person. Read Barking With The Big Dogs and you’ll see why.)

Let’s start with a $250,000 house and a 20% down payment.

Using a 30-year mortgage, a loan amount of $200,000 at 6% interest runs $1,200 per month. Taxes and insurance vary, but a good, high estimate is 3% for taxes and 1% for insurance on the value of the property.

3% = $7,500 or $625 per month
1% = $2,500 or $208 per month

When combined, taxes and insurance are $833 per month. Add $833 to $1,200 for a total payment of $2,083 per month.

$2,083 / $200,000 is approximately 1%; therefore, look at paying 1% of the loan amount to own a home. Pretty simple.

(Just as an FYI, the percentage will go up with a smaller loan amount, say 1.5% of the loan amount, but the payment will be less over all, which is what is important. With the maximum amount borrowed, say 100% financing, the percentage is just below 1%. So, for conservative estimates, use 1% of the value of the house. Pretty simple.)

You can see a calculator by clicking here for more precise scenarios.

Now, for those who do not want a mortgage, taxes and insurance are payments you will have every month, year after year, so don’t be fooled in thinking you own a home free and clear. Don’t pay the taxes and see who owns your home.

Also, don’t buy the hype that paying cash is the wisest financial decision either. Yes, paying cash has advantages, but not always financial advantages.

Next, did I mention repairs? Nope.

According to a realtor, expect to budget and pay 3% each year for repairs and maintenance. 3% budgets to $625 per month, just like taxes. More if a foundation or roof needs replacing.

Taxes, insurance and repairs won’t go away just because a loan does.

Read Barking With The Big Dogs for more – and easy to understand – information regarding home ownership, money, loans, investing, that is not commonly discussed – but very important financially.