Rich Hayden - Financial Coach

By Jeffrey Strain - The Street.com

Little amounts can make a large difference to your finances.

As gasoline and food prices continue to rise, the squeeze to make family budgets balance each month becomes more of a struggle. After the big savings have been found and taken, smaller savings have to be found to make ends meet.

This can be frustrating as it can feel like everyone is being nickled and dimed to death. That's why it's important to realize how these small amounts can make a huge difference in your overall financial health.

You've likely heard about the little ways to save money a million times. Money-saving advice includes standards like packing your lunch instead of buying it at work, skipping the Starbucks and making your coffee at home and watching videos at home instead of going out to the movies. While you may have grown tired of hearing them, they are still as true as ever and even more important when the economy is struggling.

Saving small amounts of money is good advice for everyone, it's not as essential for people that are currently living well below their means. If you spend $5 on a cup of coffee each day, but you're still able to put away five times that amount toward your savings, that coffee splurge isn't going to hurt as much as for someone who isn't saving anything. For those that are barely making ends meet, spending small amounts of money can be the difference between deep debt and a nice retirement account.

When you are faced with a budget that isn't balancing, you have two main choices: earn more money or cut more expenses. Unfortunately, many turn to a third alternative. When they can't seem to make their budget balance, they decide that it's acceptable to place the difference onto a credit card. Even though the monthly shortfall in the budget is small, placing it onto credit cards is one of the worst financial moves that a person can make. The result will be a downward cycle that will not only keep you in debt, but also create a tremendous amount of stress.

There is often a false assumption that saving $10 and spending $10, although opposite, are relatively the same. For example, if a person saves $10 a day, after a month their account will have $300 while if a person spends $10 a day, that will result in a debt of $300. While on the surface this makes perfect sense, the problem lies in that these numbers fail to take into account the interest that can be gained or charged on this money. It is this failure to understand the concept of compound interest and the dramatic effect it can have that greatly changes these results.

It's important to understand that it takes very little to start sinking into debt. For most people, spending $10 a day would not be considered extravagant spending by any means, but $10 can result in tens of thousands of dollar of debt. It's simple to see when you compare the results of what happens when one person saves $10 a day while the other spends $10 a day that he doesn't have.

If a person were to save $300 a month (approx. $10 a day) and invest it to get a 5% yearly return, that person would have $20,402 in the bank after five years. On the other hand, if a person ends up spending $300 a month more than he has and puts it onto a credit card that he doesn't pay off over the same 5 year period, that person will owe $36,259, assuming a 26% credit card interest rate. After five years, the difference between saving $10 and spending $10 each day results in a $56,661 gap in net worth between the two.

Add another five years to the same patterns, and the results are even more dramatic. After 10 years, the person who saved $10 a day would have $46,585 in the bank, whereas the person whop spent the $10 he didn't have would be $167,470 in debt, resulting in a net worth difference of over $210,000.

Of course, there are many other factors that could alter these calculations. The interest you can earn and what your credit card interest rates are will vary from this example. There is a minimum amount that the person would need to pay on a credit card each month. If debt to this extent began to occur, the person would have their credit cut off long before this amount accumulated and would likely need to declare bankruptcy. The point is that over time, small amounts added to debt can result in far more debt than most people realize.

Once you learn that saving a small amount and overspending a small amount aren't simple opposites, you understand the importance of having a budget and strictly sticking with it. If you are able to fight through the hard times and keep your budget balanced, then you set yourself to reap great financial rewards when the economy finally turns around.

U.S.News & World Report

Wednesday April 30, 3:02 pm ET
By Luke Mullins

How will the rates change over the next several months? With several factors pushing interest rates higher--and not much pulling them lower--fixed mortgage rates are likely to increase modestly in the coming months. "They are right around 6 percent now, [and] they are probably going to stay there the first half of this year," says Gus Faucher, the director of macroeconomics at Moody's Economy.com. "Then they are going to gradually move higher in the second half of this year."

Is that because of what the Fed is doing? No. This upward trend has little to do with monetary policy. The federal funds target rate--the Fed-controlled interest rate that banks charge one another for overnight loans--plays only an indirect role in setting mortgage rates. Instead, the rates are being driven higher by recent developments affecting the yield on 10-year treasury notes, which influences mortgage rates more directly.

What's happening with the 10-year treasury yield? It has been on an upswing. With fear reaching teeth-chattering levels in the days after the Bear Stearns investment bank came close to collapse in mid-March, the yield on the 10-year treasury--where investors head for safety during times of turmoil--fell to near-historic lows. But after the Fed cut interest rates and created innovative new ways to get cash to banks, the market staged a turnaround. Yields climbed nearly 17 percent, to 3.87 percent, from March 17 to April 25.

So, what's driving the yield higher? There are two key reasons behind this about-face:

--Risk looks better. Some market participants think they see an end to the credit crisis. "The worst is behind us," Lehman Brothers CEO Richard Fuld recently told shareholders, according to Bloomberg. With credit markets on the mend, those safe but low-yielding treasuries suddenly don't look so appealing. Investors are "pulling money out of the safest places in order to put them back to work in perhaps somewhat more risky assets," says Keith Gumbinger, vice president of HSH Associates. Less demand for treasuries means lower prices and higher yields.

--Angst about inflation. Rising concerns over inflation are also pushing 10-year treasury yields higher. For example, in early April, the government reported that the cost of imported goods jumped nearly 15 percent in March from the same month last year. "The data only goes back to 1983, [but] we've never see inflation this high," says T. J. Marta, a fixed-income strategist at RBC Capital Markets. With inflation worries increasing, bond investors are demanding a higher return on their money at risk. "You see the yields start to rise fairly sharply because now people are focused on inflation," Marta says.

Is there anything that might help moderate this increase? There is. Not all of this increase will be passed on to consumers in the form of higher mortgage rates. Typically, rates on a 30-year fixed mortgage are about 1½ percentage points higher than the yield on the 10-year treasury. But after the housing crisis hammered their portfolios, lenders and investors have grown wary of mortgages and are demanding higher returns. As a result, the difference between the 30-year fixed-rate mortgage and the 10-year treasury yield--known as the risk premium--has ballooned about 50 percent, to 2.32 percentage points, over the past year, according to HSH Associates.

But with lenders having tightened underwriting standards--making mortgages safer investments?--these risk premiums could narrow, Gumbinger says. "If underlying interest rates do rise, my suspicion is that there won't necessarily be a corresponding increase in mortgage rates," he says. "They will probably be influenced to some degree, but there is an awful lot of spread which could be compressed." So while higher 10-year treasury yields will put upward pressure on fixed mortgage rates, some of that increase will be absorbed by narrowing risk premiums--helping moderate the rise.

What's the outlook for adjustable-rate mortgages? Adjustable mortgage rates will face similar upward pressure from rising treasury yields. The conforming 5/1 adjustable-rate mortgage--which offers a fixed interest rate for the first five years and then adjusts annually for the remaining 25--stood at an average of 5.89 percent for the week ending April 25, down from 6.08 percent a year earlier, according to HSH Associates. "By the end of the year, we might be working toward around 6.25 percent," says Mike Larson, a real estate analyst at Weiss Research.

Has the Fed's rate-cutting campaign helped struggling adjustable-rate-mortgage holders who may be facing foreclosure? Yes, but you might not see it. Although adjustable-rate mortgages are more closely linked to the federal funds rate than fixed-rate home loans are, they have fallen only about half a percentage point since September, despite the Fed's aggressive series of rate cuts. That's because exotic mortgage products have played a key role in the foreclosure crisis, making them radioactive to investors. When investors aren't eager to buy these loans, rates must increase to attract buyers. As a result, adjustable-rate mortgage holders have not seen their monthly payments decrease a great deal.

But that doesn't mean the Fed's actions have not helped borrowers who have ARMs, says Faucher of Moody's Economy.com. "The truth is that if [the Fed] hadn't cut [the federal funds rate], adjustable rates would be even higher...and the problems would be much more severe," Faucher says. "So you can't just say, 'Well, the Fed hasn't done anything.'"

WASHINGTON - Homeowners staggering under mounting mortgage debt and facing foreclosure could get cheaper, government-backed loans under Democrats' housing rescue plan.

But first, lenders would have to agree to wipe out part of their debt. And the borrowers would have to show they could afford the new mortgage. They also would have to agree to share any future profits on the home with the government.

The plan would be a massive expansion of the Federal Housing Administration, the Depression-era mortgage insurer. FHA would take on $300 billion in new loans for as many as 1 million distressed homeowners, most of whom otherwise wouldn't qualify for a government-backed loan.

Taxpayer dollars would be at risk should borrowers default on their new mortgages. The FHA, however, would have some non-taxpayer money to cover losses. The agency would collect a 3 percent fee on the refinanced loans, as well as annual 1.5-percent premiums, and share a portion of borrowers' future proceeds if the property is refinanced again in the future or sold.

The measure by Rep. Barney Frank, D-Mass., the House Financial Services Committee chairman, is scheduled for a committee vote this week and is expected to move through the House in early May. A similar bill is taking shape in the Senate. The Bush administration is backing the same concept, although on a much smaller scale.

By relaxing FHA standards, Frank's bill would allow a whole new swath of homeowners who are currently too financially strapped to qualify for a government-insured loan to do so. That includes people who are badly behind on their mortgage payments, have poor credit and hefty debt, and those who owe more than their homes are worth.

It's unclear how many would qualify, however, even under far looser FHA standards. Also an open question: whether mortgage servicers would agree to participate in the voluntary program.

Today, a homeowner who has fallen behind on the mortgage might get a chance to work with his loan officer to lower the payments to an affordable amount. A homeowner who couldn't keep up would likely face foreclosure.

Frank's two-year program is designed to offer another option that would let borrowers keep their homes and give mortgage holders a chance to get a heftier chunk of what they're owed than they would with foreclosure. Typically, mortgage holders lose up to 40 percent on foreclosures.

To take part, a loan officer could contact an FHA-approved lender, who would calculate the terms of an affordable mortgage the borrower could be expected to repay. If the existing mortgage holder agreed to take a substantial loss — he would get no more than 85 percent of the home's value and pay FHA fees and closing costs — the FHA lender would pay off the loan.

The new, fixed-rate loan would be for no more than 90 percent of the home's value.

The idea behind the plan is that mortgage holders could do better accepting a loss now in exchange for getting a delinquent borrower off their hands than they would if they went to foreclosure. In some cases, however, a homeowner will be so financially strapped that the lender would stand to lose too much from the deal and would opt to foreclose instead.

Critics say mortgage holders would have little incentive to participate in any case, because they would have no chance of recovering a substantial chunk of what they're owed.

To qualify, borrowers would have to be devoting at least 35 percent of their monthly pretax income to a mortgage payment on loans originated before Jan. 1, 2008.

With the new loan, FHA could allow a borrower's total monthly debt load — including student loan, credit card and car payments — to reach as high as 55 percent of monthly net income if he made at least six months of timely mortgage payments on the original mortgage. That's a substantially looser standard than the agency's current 43 percent limit.

Homeowners also would have to share with the FHA any profit or gain in any future refinancing or from selling their homes. FHA would get at least 3 percent of the original loan amount when the borrower sold or refinanced. To discourage borrowers from using the program to quickly "flip" their house for a profit, FHA would reap all of the proceeds if the sale or refinance was within a year. That percentage declines 20 percent annually.

The plan is aimed at homeowners hit by the double whammy of the credit crunch and housing downturn. Many of them have subprime loans that are resetting at much higher rates, and can't sell or qualify for a new loan because — due to slumping housing prices — they owe more than their homes are worth. That is known as being "underwater."

"It won't help everybody, but would help some people who are stuck. They can't sell or refinance because they're under water. They've gone to their servicer and cannot get a modification of their loan. Now the only option is to lose the house to foreclosure," said Eric Stein of the Center for Responsible Lending, a nonpartisan research and consumer advocacy group.

The program would only be open to owner-occupied properties; not second homes or investment properties.

Architects of the plan believe mortgage holders would likely give their borrowers broad guidelines for who might qualify for the new program, rather than decide on a loan-by-loan basis.

Key elements of the program will be decided by a new oversight board comprised of officials from the Federal Reserve and the departments of Treasury and Housing and Urban Development.

One major task of the board will be to figure out how to compensate those who hold secondary claims on a home, who would walk away with no more than 1 percent of the home's value