Who Controls Gas Prices?

Gas prices are all over the news right now, and I'm sure that the amount of your budget dedicated to fuel has increased dramatically over the past year or you have made significant changes to the way you use fuel. Without taking a political stand in this blog, I would like to shed some light on the fuel price situation, because a lot of unsubstantiated information and claims are coming across the media, and you deserve to know the truth!

The gas price that you pay includes all of the following expenses:

• Crude Oil (72%)
• Marketing and Refining costs (18%) - Includes Port of Entry to Refinery to Local Gas Station
• State and Federal Taxes (12%)

With crude oil now topping $100 per barrel, and no end in sight, the proportional cost of crude oil will continue to increase. Now, you might be outraged to know that it only costs the Arabs $2.00 to get one barrel of crude oil out of the ground. That is not a misprint, IT ONLY COSTS TWO DOLLARS TO PULL ONE BARREL OF OIL OUT OF THE GROUND!

In case you don't know, one barrel of oil is 55 gallons, so at $110 per barrel, the cost of crude oil is $2 per gallon. For those who think that the US oil companies are taking advantage, get over it! It's not true. They keep about 9% of sales as profits, which seems like a lot, until you start to compare with other industries. Also, much of their profit is reinvested in exploration and R&D activities. You may also be surprised to know that the oil companies give more money to the government in taxes than they keep as profits.

Why are we in this mess, anyway? What do we do about this? Who can fix this?

Well, worldwide consumption has increased, and continues to increase. You can blame China and India for this. Global oil demand is about 87 million barrels per day. At $100 per barrel, about $9 billion worth of crude is sold worldwide daily for an annual figure that staggers the mind at about $3.175 trillion!

We all know that OPEC in the Middle East controls the worldwide supply of oil, because they pull more of it out of the ground than anyone else. Good ol' Hugo Chavez in Venezuela makes a bunch of the stuff, and we have some here, but we can't drill for it. I'm sure it will surprise you to know that the Middle East only supplies 14% of the crude oil consumed in the USA. In fact, 55% of the crude oil we use comes from within our own borders. 12% of our oil comes from South America, and 15% of our oil comes from Africa. Africa could be the answer to a very interesting trivia question! Who knew we bought more oil from them than from the Middle East?

The falling US Dollar is another factor affecting oil prices, because oil prices are always set in Greenbacks. Some have called for the Euro to become the standard, although I don't think the argument has much traction. Regardless of the currency used, the effect is the same. A falling dollar increases our cost of imports. This is a basic Macro-Economic principle.

Crude oil prices are set based on Supply and Demand. OPEC has the capacity to produce a lot more oil, but they have no economic incentive to do so. Even as prices rise, our demand has not diminished greatly, yet. If OPEC made more oil, they would lower the price and their own profits, because a lower price would not increase demand to a point that would increase their overall profits. We need to find a way to increase the supply of oil, without counting on them to do it.

We have enough oil in the USA to serve our nation's needs for the next 100 years or more. Why don't we increase drilling here? Short Answer: The Environmentalists won't let us. Even if we opened Anwar (Alaska), allowed drilling off the coasts of Florida and California, and increased drilling in South Dakota and other oil-rich areas, it would probably take ten years for us to be producing enough oil each day to really make a dent in the world market.

We are going to have to find a way to decrease our demand, if we want to see any lowering of prices. Keep in mind that crude oil doesn't just affect the price of gasoline. Crude oil also affects the cost of heating your home. The high price of gasoline affects the price of every product you consume and most services that you use. Trucks need fuel to operate, and these increased costs are added to the price of the products you buy. Airlines use a lot of fuel, and they are already losing billions of dollars due to the rising cost of fuel. Airlines are instituting new fees to offset these costs, because they can't charge more for the tickets; we simply won't pay higher fares.

The best recommendation at this point is to limit your driving, if possible. Join a carpool. Use public transportation (buses and trains). Ride a bike. Consider buying a vehicle with better fuel economy, but be careful about hybrids. The higher price of a hybrid can take from one year to sixty years (no fooling!) to recover through gas savings, even at $4.00 per gallon.

As we are about to enter the general election cycle for President, it may become harder for me to avoid political issues, but I will do my best to discuss some of the topics, so that you can make an informed choice. I won't tell you how to vote or for whom to vote, unless you ask for my opinion.

See you next week.

Mortgage Modifications

After last week's post, many of you have sent emails asking about Mortgage Modifications, which I promised to discuss this week. Sorry for making you wait, but I was out-of-town most of this week. (Actually, I traveled back to California, arriving on Monday, El Cinco de Mayo). I then spent some time in Bakersfield and Fresno, and just got back to the LA area yesterday.

A Mortgage Modification is a renegotiation of the terms of your existing mortgage. This is another tool that we use to help people to avoid foreclosure. For the most part, you will have the best results renegotiating for your personal residence. If you have investment property, you may face more resistance from the lender, but approval is not an impossibility.

Mortgage Modification makes sense if any of the following apply to your situation or your loan:

• Your property value has declined to the point that you owe more than its market value
• Your loan interest rate has increase or adjusted (ARM loans) to a point that you cannot afford
• Your job situation has changed or your income has been reduced for any reason beyond your control
• You are now behind in your mortgage payments due to a temporary situation that has now passed, but you are unable to raise the money to bring your mortgage current

If your mortgage is current, you may have a tougher time trying to get a modification on your loan, but if you just explain to your lender that your income situation has just changed, they may be willing to work with you, before your credit score goes into the toilet.

If you have one of these situations, you may be able to get a modification of terms from your lender. A modification may include changing your ARM to a fixed-rate mortgage, an increase in the number of years of your mortgage, which would lower your payments (i.e. 30-year to 40-year), a permanent lowering of your interest rate, and forebearance, which capitalizes your late payments, and adds them to the principal balance on your loan.

Every modification plan is different, so the only hard-and-fast rules here are those that the lenders place upon their loan negotiators. Generally, if you are three months behind in your payment, you are in a position to renegotiate your terms.

Now, you may be asking, "Should I contact my lender and negotiate this myself, or should I pay for help?"

You could try to do this yourself, but this is about as effective as trying to beat the dealer when buying a car. They play this game all day, every day, and you are (hopefully) only going to attempt this once. My recommendation is to get help. A third-party, who is not emotionally involved in your situation, and has the experience and relationships with the lenders from having done this many times, will negotiate a much better deal on your behalf, than you would ever be able to negotiate on your own.

As part of the negotiation, your loan will be brought current, and you generally will get to skip one month's payment, while the lender goes through the paperwork process of modifying the terms of your loan.

You will want to stress to your negotiator what is important to you with regard to the mortgage, so that s/he may best represent you. You should determine how much payment you can afford, how long you plan to keep your home, and convey any other information that may be helpful, such as any knowledge of recent sales prices for similar homes in your area.

We offer mortgage modification services, which are provided by a legal team that we have under retainer. Generally, we charge the greater of $1,995 or one month's mortgage payment (after modification) as a fee. Our negotiators will save you much more than the fee by getting you a much better deal than the lender would likely offer, if you were to negotiate a plan yourself. We also have a 72-hour turnaround on most files.

You will need to provide information on your income and debts, including credit cards, student loans, and support payments. If you have additional regular expenses, such as children's or your own current educational costs or ongoing medical expenses, be sure to include these as well. We will determine what payment you can afford, based on your financial situation.

If a workable agreement cannot be reached with the lender, then go back to last week's article, and read up on short sales. If this is the route for you, let me know, as we can refer you to a short-sale experienced Realtor who can assist you.

As always, I hope this information proves helpful. Your comments and subscription to this blog are always welcome. See you next week!

*** Just a reminder: All reader comments to this blog are moderated and approved before they show up on the website. You may contact me via email at randall_parker@yahoo.com or by posting a comment to this article, and I will contact you, but remove your comments, so that your personal information does not appear in the blog. ***

Personal Savings: How to Start

If you are like most people (most of you are), you find it hard to put money away in savings with any regularity, and even if you do put money away, you have trouble keeping it there and building it to any sizeable amount. Today, we will explore ways of building your savings and protecting yourself from yourself.

When we speak of savings, we must keep in mind all of the reasons that we save money. We might put money aside for emergencies, or we might be saving for a major purchase (i.e. car, boat, house), or perhaps for major needs such as college for the kids or our own retirements. In todays issue, we will speak mostly to saving money for emergencies and major purchases. College and retirement savings encompass many methods, uses, and tax consequences, so these will be dealt with individually in future articles.

Emergency fund savings seems to be the hardest for people to latch onto, because it is so hard to define a true emergency versus an inconvenience. In addition, if you carry debt, it can be all too tempting to just pay down credit cards, and use the credit cards when an emergency happens. I know. I've been there. However, a cash emergency fund is the way to go. If you have a credit card spending problem, raiding your savings account is not the way to fix it. We'll deal with credit card misuse and traps in a future article as well.

PAY YOURSELF FIRST!

The first rule in establishing personal savings is to PAY YOURSELF FIRST! I know, I know. You have been trying to pay all of your bills, and you are afraid that if you pay yourself first, you won't have enough money for the bills. Trust me. You can make this work, but ONLY if you pay yourself first. The government may not do a lot of things well, but even they know that if you pay them first, your taxes will get paid. Follow their lead here.

Your payroll check includes deductions for Income taxes (state and federal), FICA/MEDC for retirement (as if!) and future medical care, SDI (State Disability Insurance), and may also include withdrawals/contributions to retirement plans, 401(k), and other withdrawals that you have authorized. I will ask you to either authorize a 5% to 10% automatic deposit to your savings account by your employer, or implore you to make this deposit to savings yourself, when you deposit your check each pay period. Once you make this deposit, forget about touching that money.

Now, if you are used to living paycheck-to-paycheck, this may be difficult at first. You may find yourself running short on money near the end of your pay period. This may mean going to a couple less meals out or see fewer movies, or perhaps making some dietary adjustments. This is a good thing. You need to reign in your expenses, and a pay reduction is good medicine for that.

Where I find great success in this is when a client receives a promotion or changes jobs into a higher salary. If this happens to you, take at least one-half of the increase, and add it to what you are saving. If possible, take all of the increase. If you are just starting out, graduating college, or getting a first job, it may be easier to put money away, because you aren't used to having much anyway.

Your emergency fund should build to six months' expenses over time. (Some planners recommend six months' income, but I find that this sets the bar too high for most people.) This assumes that you are able to maximize your contributions and not touch the money. This can be hard when life throws you a curve ball, but if you can increase your emergency fund by one month's expenses every year, you will improve your financial security over time.

TAX WITHHOLDING AND REFUNDS

If you are receiving a large tax refund every year, I recommend that you submit a new W-4 to your employer that will eliminate this refund. This will result in a bigger paycheck, and I recommend that you take this increase, and add it to the 5% to 10% that you are already saving. It amazes me that people will struggle all year with credit card debt, and then use their tax refund to pay off the credit card. The IRS paid you 0% interest on that money, while you paid your bank up to 20% or more! Save the interest, and just take the money when you earn it.

Now that you have a savings account for emergencies, let's talk about major purchases. Since we live in an era of (usually) easy credit, many fall into the temptation to purchase expensive items that they cannot afford. I know that you would never do this, but I have a theory on how best to prove to yourself (risk-free) that you can afford something, while saving you a lot of money in the meantime.

BUYING YOUR FIRST HOME

If you want to buy a house, I make this recommendation (especially if it is your first house): Don't buy it yet. This is my recommendation in most markets, but in the present housing market, you have two years before things are really going to get back to normal, as short sales and foreclosures are going to depress markets for at least that long. Banks are starting to recover from the sub-prime fallout, but I think that more writedowns and closures are still possible.

What I would recommend instead is to find a house that you would really like to buy, and that you think you can afford. Take the sales price into account, and see a mortgage broker to find out what kind of terms you could get for a loan in your current situation (income, credit score, and other factors). Calculate taxes and insurance based on the listed price. Once you compute the total house payment (PITI), get an estimate for the upkeep costs on the property. Figure 10% of your monthly loan payment for maintenance, find out the cost to do yard maintenance if you would hire that done, and get an estimate for the utilities (gas, elec, water, trash, pest control). Add all of these numbers together. This becomes 'X'.

Take 'X' and subtract from that number the amounts you now pay for rent and utilities each month. This new number is 'Y'. For the next two years, I want you to deposit 'Y' into a separate savings account on the 1st of each month. If things happen, and you can't pay on time, and you happen to pay yourself after the 15th of the month, I want you to add 5% of 'X' to your savings deposit. If you can maintain this payment for two years, you have proven that you can afford the house, and you should have a sizeable kitty to use for a down payment, closing costs, and reserves. You may also find that you now qualify for a better interest rate, because your financial situation has improved over time.

CAR PURCHASE STRATEGY

If you want to purchase a car, I recommend a similar approach. Find out the cost to purchase the car you would like to have, determine the payments, insurance, registration, and maintenance costs of that car. Then, take the money that you would use for a down payment, and purchase a passable, but dependable, car for that cash. Each month, pay into a separate savings account the amount of costs that you would have had, if you had purchased the car you had in mind.

If the car you bought requires any excessive maintenance (repairs over $200), you may take the money from the savings account for those repairs. If you get an exceptionally large estimate, you can use the accumulated savings to buy a new car. If you only put $400 per month into the account, you will have almost $5,000 by the end of the first year. If your POS (lousy) car lasts two years, you should have about $10,000 available, less any repair costs withdrawn.

When the car dies, spend up to the total amount of cash you have saved on a replacement vehicle. Be sure to update the amounts you are saving to take into account the inflated costs at this point, and continue to place this new amount into your savings account each month. If you do this properly, in a few years, you will be able to afford almost any car you want for cash. Keep up this habit, and you will save yourself tens of thousands of dollars in interest payments over your lifetime.

If you want to purchase a boat or jet skis or any other non-essential item, do the same thing as with a car, but spend two years saving money towards the purchase. You might change your mind about buying the item, in which case you can apply the money to any other purpose, or you may be able to pay cash or a significant down payment when you are ready to buy.

These are just a few ways that you can save money. Build your emergency fund, plan ahead for a house, pay cash for your cars, and delay your gratification for other major purchases, and you will keep yourself from biting off more than you can chew financially. You may also find that this sort of discipline pays a benefit to you in that you will be less likely to act on a whim that can spell financial disaster for you and your family. If something really bad happened, but you were saving money for a car or house, you will be grateful that you had the extra cash on hand. Having extra money can also enable you to take advantage of opportunities as well.

I welcome your comments, suggestions, and stories. Blog to you soon!

Welcome!

Hello World and Reader:

I have finally relented to pressure from family, friends, colleagues, and others, and I am making my vast body of knowledge available to the rest of the world.

First, allow me to welcome you to "Personal Finance for Real People." This blog will attempt to provide useful financial planning tips that almost anyone can employ immediately, in order to improve their financial future.

Some of the topics planned for discussion include:

1. Income Generation (Ways to increase income, reduce taxes, and supplement income)
2. Debt Management (Consolidation techniques, credit enhancement and repair, ways to avoid debt)
3. Personal Savings (Emergency Funds, Goal Setting, Priorities)
4. Long-Term Savings (College Funds, Retirement, Major Purchases)
5. Risk Management (Proper Insurance Protection, Scam Avoidance)
6. Estate Planning (Wealth Transfer, Minimization of Death Taxes, Probate)
7. Real Estate (Your First Home, Income Property, Commercial Investments)
8. Mortgages (Saving Money, Choosing the Right Mortgage)
9. Business Topics (Incorporation, Funding, Managing, Planning, Business Credit)
10. Other Topics (Chosen by Readers or Dictated by Current Events)

Of course, each of these subjects has sub-topics, and each sub-topic provides many areas for discussion. Over the next few weeks, I will be posting a large number of informational articles touching on these points. These articles will provide a starting point for discussion, and I want your comments, so please feel free to contribute.

Once I get the core topics posted on this blog, I plan to submit at least one weekly post that deals with current issues. As of this writing, the sub-prime dilemma has touched almost everyone in the world, either directly or indirectly. Many people wonder how to take advantage of the situation for their own planning, while some just wonder how to get back to zero. Topics such as these will be fodder for this blog.

My goal is to set this up as a resource that will provide ideas for you to improve your financial life for the long haul. Having said that, I must request some things from you. Your willingness to read and participate in this blog are subject to the following disclosures, acceptances, and restrictions:

Anything that I have written on this site is copyrighted by me, unless stated otherwise. Rights to my content are mine alone, but I will authorize limited usage of this information:

1. By currently-enrolled students at no charge, as long as they provide proper credit to me.
2. If a student posts their work online, they must include a link back to the source of the material in addition to giving proper credit.
3. Teachers must request permission to use specific materials before use (usually granted at no charge)
4. To those who request and pay for a license to use the materials.

Furthermore, you agree to indemnify and hold me harmless for any use of the information that you read here, as it is offered for entertainment purposes only, and carries no guarantee, warranty, or other representation.

Having said all of this, I hope that you will bookmark this page, subscribe to my RSS feeds, click on my sponsors' links, and enjoy this blogsite for years to come.

I sincerely thank you for your visit and your support!

Randall Parker, MBA