A first time homebuyer can calculate the mortgage insurance premium with the help of a loan mortgage calculator easily. Thereby, he can know whether he can afford to pay the insurance premiums.

How to calculate mortgage insurance premiums

A loan mortgage calculator can help you to figure out the amount of money that you have to pay for private mortgage insurance premiums. A loan mortgage calculator also helps you to calculate the overall payment that you have to make on the home loan.

For example: Suppose you are buying a home for about $300,000 and making a 8% down payment ($24,000) on a 30 year Fixed Rate Loan. The rate of interest is around 0.78%. You are financing around 92% of the purchase price which is $276,000. You can calculate private mortgage insurance premium by making the following calculation: i) $276,000 x 0.0078 = $2,152.80 ii) $2,152.80 ÷ 12 months = $179.40. $179.40 is your monthly private mortgage insurance premium.

You have to pay this insurance premium on top of the mortgage interest each month. You can calculate the total amount of money that you have to pay each month with the help of a loan mortgage calculator without any difficulty.

Note: This is a guest post from Stacey Flintoff. Although D’ Intelligent Investor is a site focused on stock market investing, from time to time we include personal finance articles.

In that post I talked about the first investment vehicle, which is investing in real estate. I talked about why real estate investments yield more than 15 % per annum. I also discussed the disadvantages of investing in real estate.

Now let’s go to the second vehicle of investment that will give u a return of 15 % per annum compounded – BUSINESS.

2.) Investing in a business – Being in business is the most rewarding. In fact it is more rewarding than investing in real estate as the returns will always be greater. I heard from somebody that for the past 10 years nobody in the top ten billionaire’s list of the world got there by investing in real estate. All of them were engaged in business. Those who got rich by real estate appeared only until after the top 20. (Anyway it seems that way if you look at the list, but I need to check this out)

Anyway, there are several ways of doing business but I will only talk about three most common ways of business investing these are: active, semi-passive and passive business investing.

a.) Active business investing – This simply means you devote not only time, but also effort and money or try to secure money to finance the business. There are advantages and advantages of doing this. Some of the advantages are, since you are running the business, you will do your best to succeed since you have put it in your own time, effort and finances. With this advantage comes the disadvantage of you becoming busier and living a more stressful life as your business grows. Add to this fact as is any other kind of business investing, is the possibility that the business will fail.

b.) Semi-passive business investing – This means that you are just the “Capital investor.” You merely invest your finances. Of course you still have to devote a little bit of time since you will be attending board meetings or meetings of your partnership or your managers.

There are various ways to do this. If you are starting a business from scratch, you get an industrial partner; let him manage the business while you merely provide the capital. Then there’s the franchising possibility. You put in capital by getting a franchise like McDonalds, Kentucky etc. and hire professional managers to run it. Another way of doing this is buying an existing business and let professional managers run it. The advantage of this is of course is lesser headache and stress for you as you are not involved in the day to day operations of the company. However the disadvantage is that since you do not run the business yourself, there is this possibility that your managers or your industrial partners will mismanage it.

c.) Passive business investing – This is similar to semi-passive business investing wherein you are the one who provide the capital, the only difference is that you don’t get to directly choose the management, and you may or may not attend board meetings. There is only one way to do this and that is to buy a small part of a business wherein you are not a majority stock holder.

This type of business investing is where I formally introduce to you the main topic of this blog which is, stock market investing. I believe the only way to do passive business investing is to buy shares of stocks in the stock market.

Stocks are “small pieces” of a business. Remember this fundamental principle in stock market investing. Stocks are not merely blips in the screen or graphs in a chart. A stock is a piece of a business. WHEN YOU BUY A STOCK, YOU ARE BUYING A BUSINESS. This is the most serious error committed by 95 % of stock market investors that is, they buy a stock without considering that such shares of stock are part of a business. They only buy stocks for speculation hoping that the market will push the price up. They don’t care what the underlying business behind a certain stock is. All they care about is the stock price. No wonder a lot of people get burned in the stock market. I don’t blame people for thinking that way because this is what is being taught by the pundits. Anyway, we we’ll do some technical investing bashing later on. For now let’s focus on our topic.

Again there are advantages and disadvantages of investing in the stock market. An advantage is that this is what I personally call as stress free business investing because you invest only as you wish, you don’t have to directly choose management and you don’t even have to attend stock holders meeting if you don’t want to. You can freely choose which company to invest and which company not to invest in. You can even decide to refuse to invest for certain periods and just go fishing and come back when you think the prices are right. If you frequently did your homework and studied the company thoroughly, you can sit at home all day and watch your favorite movie or play with computer games while the company that you invest in grows money for you.

The disadvantage is of course you will have to make sure that you know exactly what you are doing and make sure that you choose wisely which company you are investing in. To do this you have to spend a lot of time reading financial reports and spend a lot of time analyzing if a company is a good investment. Since you don’t get to choose management directly, (Although technically you are entitled to cast your votes in stock holders meeting as to who get elected into the board) you will have to study carefully who good the management of a certain company is before you make your investment. This approach to investing is commonly called as “value investing.” No school of business (At least not in the Philippines) is offering this approach to investment or is at least emphasizing this approach. So initially you will have to do your homework by reading books and materials on value investing. Did I mentioned that you have it also helps to read this blog regularly to learn more about value investing ? hehehehe

So now that I have formally introduced the topic on the next post, let’s me give you ten reasons on why I love stock market investing.

]]> http://www.stockmarket-investing.com/investment-vehicles-that-yields-15-return-part-2/feed/ 10 http://www.stockmarket-investing.com/investment-vehicles-that-yields-15-return-part-1/ http://www.stockmarket-investing.com/investment-vehicles-that-yields-15-return-part-1/#comments Sun, 07 Feb 2010 06:19:30 +0000 zigfred http://www.stockmarket-investing.com/?p=41 In my last post, entitled “What is the ideal rate of return for investments?,” I have cited the reasons why an investor should target an investment that gives at least 15 % return per annum.

In this post we are going to answer the difficult question as to where we are going to get a vehicle of investment that gives us an interest rate of 15 % return per annum compounded.

Ruling out scams, as of the time of this writing there are only two vehicles of investments that I know of that gives a return of 15 % per annum. Bonds are out of the question as the highest return I know in the Philippines is about 12 %, and this was almost a decade ago. I don’t know if it will ever return to that level or even exceed 15 %.

Anyway, the two vehicles of investments I am referring to are Real estate and business. Let’s discuss them one by one.

1.) Real Estate – When we talk about Real estate as an investment vehicle, there are many variations. Now I am not talking about brokering, since this is pure selling. I am talking about investing in real estate.

The most common form of real estate business is buying a piece of property and waiting for the price to go up. (Read – speculation) Other variants include buying beat up houses, renovating them and selling them outright or selling them in a buy to own scheme ala Robert Kiyosaki style. This model has already been tried in the Philippines and I heard that it works. The Robert Kiyosaki of the Philipppines, is Larry Gamboa and in his two books, I’ve read how successfully he has applied the Robert Kiyosaki path to financial freedom in the Philippines.

Real estate is fine with me. In fact, for most Filipinos “real estate” immediately comes to mind as the only form of investment aside from ordinary savings account. I have no quarrels with those in the real estate industry when they claim that real estate is the ticket to financial freedom and even riches. In fact my parents and grandparents have always argued with me about this. They firmly believe in real estate and argue that since it is something that is tangible, it is considered relatively safe. Most Filipinos believe that real estate prices always go up. (Tell that to the Americans!)

However just like any other vehicle of investment, it’s not all a bed of roses for those who use real estate as their ticket to riches. Real estate also has its disadvantage. (Read – Problems and headache) Here they are:

a.) Illiquidity – First of all real estate is not very liquid, it will probably take months or even years for you to sell your investment. Worst you might even be force to sell your property at a bargain if you desperately need the money.

b.) Expensive – You will have to spend more to “maintain” the investment. You will be paying taxes and you will be hiring a guard or an administrator to take care of your property. If you are engaged in the ala Kiyosaki business, you will have to spend for renovation etc. Take note that you will also need a lot of money to invest in real estate.

c.) Complicated - There’s so much paper work involved in real estate. You will have to make deed of absolute sale, register the property, work out the taxes, transfer the property in your name etc.

Add to this are the problems about squatting, the risk of buying a problematic property, (Read – submerged properties – ask Governor Gwen Garcia and Board Member Juan Bolo of Cebu Province as they have a lot of experience about this) and the risk of acquiring enemies, especially if you brought the property from a family that has been quarrelling over it.

Well with all the negativity about real estate I have mentioned, why is real estate still considered a good vehicle of investment. Well mostly because it gives you a return of more than 15 % per annum compounded, there’s always a demand for it and besides what vehicle of investment does not have its disadvantages?

Next post we are going to talk about Investment vehicles that yields 15 % return – Part 2. Stay tuned!

]]> http://www.stockmarket-investing.com/investment-vehicles-that-yields-15-return-part-1/feed/ 2 http://www.stockmarket-investing.com/what-is-the-ideal-rate-of-return-for-investments/ http://www.stockmarket-investing.com/what-is-the-ideal-rate-of-return-for-investments/#comments Sat, 06 Feb 2010 16:48:07 +0000 zigfred http://www.stockmarket-investing.com/?p=25 In previous posts, we have learned all about the Rule of 72. One lesson that we have learned about the rule is that the higher the higher rate of return for a certain vehicle of investment, the shorter the time it takes for money to double.

So the question that faces us now is what is the ideal rate of return for investments? How do I determine the ideal rate of return of investment?

Before we delve into the topic let us first discuss the concept of rate of return of investments.

Rate of return according to Wikipedia is “the ratio of money gained or lost (realized or unrealized) on an investment relative to the amount of money invested.” In finance parlance, most often it is called as “Rate of return of investment”

Majority of investors view rate of return as an important thing to consider when scrutinizing an investment. More often, “rate of return” is the first question usually asked when an investor is presented a certain investment. Rate of return of investment is often associated with a certain period.

The big question that all investors face is this, how much is the appropriate rate of return? What is the appropriate, ideal or rate of return wherein all invested should be measured against? For instance if your bank tells you to put your money in a time deposit account growing at 5 % rate of return compounded annually, can you consider this a good investment with a good rate of return ?

To properly answer this it is necessary that we seriously consider three things. These are inflation, taxation, and the highest rate of return for what is considered as the “safest investment.”

So what is inflation? Wikipedia defines it as “a rise in the general level of prices of goods and services in an economy over a period of time.” Inflation eats away the value of money. P 1000 now may not what it may be worth 20 years from now because of the rise in prices of good and services. You may probably not be able to buy 3 years from now what you can buy with your P 1,000 today.

Secondly let’s talk about taxation. Of course everybody understands this subject. Taxation is the lifeblood of the government. The rate as to how much the tax is will vary depending on who is in power.

Thirdly, the highest rate of return which is also considered as the safest investment is of course government bonds. Government bonds are considered very safe because these are backed by the government. It unlikely that a government will go bankrupt (Except of course of a country is in political turmoil) hence it is unlikely that the government will renegade on its obligation.

Putting all of these three together, we are then provided with a clue on how to compute the ideal rate of return.

In the book “Buffetology,” Mary Buffett and David Clark discusses extensively the interplay between these three factors. (For those of you who want to get a copy of the book Buffetology click here to get it at my Guerilla blogger eStore)

In that book the author reveals that Warren Buffett insists that the minimum rate of return for a certain investment should not fall below 15 %. In Chapter 25 of the book they wrote that just to stay even with inflation and taxation you would need a 7.2 % return on investment. Because of this they come to the conclusion that “to have a real increase in your wealth, it is necessary that the return on your wealth be at least equal to the effects of taxation and inflation.”

For those of you who do not know Warren Buffett, he is one of the world’s billionaires and probably the only billionaire who derived his riches from solely investing in stocks. We will discuss more about him in future post.

They take the discussion further by stating that if you invest in bonds with an annual compounding rate of return of 8 % you would probably end up with a rate of return of only 0.5 % (8 % less 31 % income tax, less 5 % inflation) If the inflation rate goes up to 9 % then you end up with a zero rate of return. Hence, it can be concluded that it makes no sense to invest in government bonds or any investment for that matter that offer an annual rate of return below 8 %.

Warren Buffett loves the concept of having a “wide margin of safety.” That is why he insists on 15 % rate of return. Less inflation and taxes, he is always ensured of a growth of about 8 % rate of return compounded annually.

Since the authors are American they have assumed their own inflation rate of about 5 % and an average tax on income of 31 %. To apply what they disccused, let us look at our own average inflation and tax rates. Most financial planners hold the view that the average inflation rate is at 7 %. Taxes, etc. is about about 13 %. In short we need about 7.1 % to stay even with inflation, taxes and trading fees.

Since we need about 7.1 % rate of return to stay even with inflation and taxes. Similarly we must also insist on a 15 % return just as the authors suggested.

With regards to why we should consider government bonds, well the answer to this is simple. Government bonds are considered as the safest investment there is that can give the highest possible rate of return. Hence all investments should be measured against the rate of return of government bonds. So if in your calculation an investment will only give a 8 % rate of return for your investment then it is better to invest in a government bond that gives a consistent 8 % return considering the risk involved if you invest it in other investments. However if you think that the rate of return of a certain investment is over an above 15 %, than it is much wiser to put your money in that investment rather than government bonds.

So there you have it! The ideal rate of an investment is 15 %. The question now is where on earth are we going to get a vehicle investment that gives you a return of 15 % or more? Find out in the next post entitled “Investments vehicles that yield 15 % return.”

Before you in the banking industry react to the title of this post and before I get tons of negative comments from those who are involved in banking let me first tell you to read the entire post first before making any reaction of any kind.I’ve chosen this title just to attract attention. Banking is of course an honorable business and oh what we do without banks!

However, just to get the point across, let’s take a close and serious look at the illustration I am about to give. I’ve been ranting about the Rule of 72, how it is the foundation of all investing and what are the lessons that we can learn on the Rule of 72. To further emphasize the importance of the Rule of 72, let us study this illustration. I always give this illustration in my business law class.

A 29 year old Overseas Filipino Worker (OFW) decided to put aside P 100,000.00 (Philippine peso) for investment. Unfortunately, the only thing he has learned or has been taught about investing is to put his money in a bank.

So he went his way to see the bank and explained the situation to the bank manager. The bank manager, wanting to help him, suggested that he put his money in a time deposit account which earns interest at 4 % per annum. He decides to follow the bank manager’s advice considering that he is planning to lock away his money for a long period of time.

He went back to his job abroad and worked hard until the good old age of 65. Contemplating retirement, he went back to the bank and asked about the status of his P 100,000.00 placed in a time deposit. He was quite happy that his P100,000.00 has grown to P 400,000.00 because of compounding interest interest. He was overjoyed! His money really worked hard for him. The bank manager with a big smile on his face approved the withdrawal. He withdrew his money and retired happily.

Do you consider this a successful investing story? Did his money really work hard for him? What made the bank give him an extra P 300,000.00 after 36 years? Look closely at the following table:

In order to understand this table more precisely, you need to understand how the rule of 72 works. As I said in previous post, The Rule of 72 simply gives you the number of years it takes for your money to double. To solve this divide 72 by the interest rate given.

In our OFW story, we can compute that every 18 years his money will double. (72 divided 4 % per annum = 18 years.) Since he deposited his P 100,000.00 at age 29, at age 47 his will double to P 200,000.00. Finally at the age of 65 his money will double to P 400,000.00.

While he works his ass off in some foreign land, the bank, sits around and works smarter not harder. They take that P 100,000.00 and invest that money by loaning it to other people at a higher interest rate. They also invest the money in various other investment vehicles such as the stock market, the money market, government bonds, corporate bonds etc. Of all the investing activity that the bank does, it averages a 12 % return on the same P 100,000.00 that is placed in time deposit by the OFW. Using the Rule of 72, the bank doubles the P 100,000.00 every 6 years. (72 divided by 12 % interest = 6 years)

No wonder that after 36 years when the OFW went back to the bank to claim his P 100,000.00 the bank manager had a big smile one his face when he gave him back his P 100,000.00 plus the interest of P 300,000 totaling to P 400,000.00. The bank already made P 6 million pesos out of his P 100,000.00 ! What the bank gave back to him are just bread crumbs compared to what they made out of his money! Now that’s hi-way robbery! (That’s according to one of my former professors in corporation law)

Well I really don’t personally think that the bank committed hi-way robbery or something akin to that nor am I implying that bank managers are evil greedy agents of bank owners who are looking for gullible persons to victimize. As I said, I just used this controversial title to shake you up a little bit and to illustrate an important point. Elements of the story might be fictional and blown out of proportions but it has tremendous real life application.

What the bank did was just to apply the Rule of 72 to invest their money wisely. They know the tremendous power of compounding interest and they used the Rule of 72 to their benefit. With access to stock piles of cash, more profits could be made by banks. Truly there is no other business like the banking business!

Don’t let the banks rob you of the profit that should be yours! Learn to invest wisely. Use the Rule of 72 to your advantage!

The Rule of 72 is just a fancy term for the concept of the principle of compounding interest. It also gives you a simplistic mathematical formula that shows you how money grows. Compounding is simply earning interest on your money and investing said interest. The Rule of 72 gives a simple demonstration on how this is achieved.

So what are some things we can learn from the Rule of 72? Here some things, I believe we can learn from this magical Rule.

1.) Money is like a fruit tree – Money is like a fruit tree, you don’t expect to plant something and get to eat its fruit the next day. What I am saying is that it will take time for money to grow. The Rule of 72 teaches you that the more time you “compound” your money the greater will be its return. You will learn more about this in the illustration that I will give in my next post.

2.) Its the interest rate stupid – The Rule of 72 teaches us that the higher the interest rate, the lesser time your money will double and the lesser time your money will double, the more your money will grow especially if you lock it in for a long period of time using your desired vehicle of investment.

3.) Money does not grow on trees – This saying simply means that it takes “effort” in order for money to grow. There is no such thing as free or dumb money. The Rule of 72 teaches us that in order to get more out of our money we must make an effort to get the highest interest rate and the at the same time making sure that we do not loose money in the process by engaging in “uncalculated risky investments” or “too good to be true” investment deals.

4.) Make money work hard for you – Some people say that we should not work hard for money but that we should let money work hard for us. I definitely agree. There is no better way to financial freedom than to let money work hard for us. Unlike us, money doesn’t get sick, money doesn’t get tired and money doesn’t complain. Since the Rule of 72 is all about the concept of compounding interest, it demonstrates for us how interest when re-invested again begets interest.

5.) The concept of the “Automatic money machine” – The Rule of 72 helps you understand a powerful concept in personal finance, the concept of Passive income. Personal finance gurus tell us that there are two types of income, active income and passive income. In active income, you have to do something to get income; an obvious example of this is your day job. You have to be physically present and doing something in your day job in order to earn an income. Passive income on the other hand is an “automatic money machine” In passive income; you don’t have to do anything to earn an income. You just sit down and wait for income to come. Passive income does not come automatically, you have to do something first afterwards you will reap the benefit and just wait for income to come. An obvious example of passive income is interest income wherein your money earns money without you doing anything to earn said interest. The Rule of 72 gives you clear demonstration of what passive income is all about.

So there you have it! See what important and powerful lessons in investing, business and personal finance the Rule of 72 has taught us? This is the reason why I have called it as the foundation for all investing.

]]> http://www.stockmarket-investing.com/lessons-that-we-can-learn-from-the-rule-of-72/feed/ 0 http://www.stockmarket-investing.com/the-foundation-of-all-investing-the-rule-of-72/ http://www.stockmarket-investing.com/the-foundation-of-all-investing-the-rule-of-72/#comments Fri, 05 Feb 2010 17:24:49 +0000 zigfred http://www.stockmarket-investing.com/?p=10 This blog is all about investing, more specifically about investing in the stock market. However before we go into stock market investing proper, I would like to discuss a concept that could blow your brains away. (Just figuratively though not literally hehehe)

When I first heard about the Rule of 72, it just blew my mind! That was one of the defining moments of my life. In future post, I will tell you later on about the story of my journey to financial freedom.

I teach business law at one of the schools here in Cebu. Before I discuss the Corporation code, I give a little bit of introduction on the Rule of 72. Every time I give out this discussion, it never ceases to surprise me how students are amazed at this simple yet very important and profound concept.

Albert Einstein once said “The most powerful force in the universe is compound interest.” The rule of 72 is simply compounded interest expressed simply and mathematically.

Some people would even go to the extent of saying that Albert Einstein’s greatest discovery was not the theory of relativity, but rather it was the Rule of 72. There are those who say that the rule existed long before he was born. However most would agree that he was the one who popularized it.

So what is the Rule of 72 and why do I consider it as the foundation of all investing?

The Rule of 72 is important because it helps you determine the following:

1.) What is the interest rate that you need to have in order for your money to double quickly.

2.) In how many years does it take for your money to double.

To determine this simply divide 72 by a given interest rate. The result is that you get the number of years it takes for your money to double. Mathematically, the Rule of 72 can be stated as follows:

n = 72 / i

Where n = the number of years it takes for money to double and i = the interest rate.

In order that you can understand this more clearly, let me give you an example, if you put P 100,000.00 in a bank account, it will take 72 years for your money to become P 200,000.00 since the bank only offers a 1 % percent interest rate. (72 / 1 = 72)

Since ordinary savings account offer a very low interest rate, let’s say you put your money in a time deposit account. Time deposits in the Philippines  have an average of about 4 % interest per annum. So if you put P 100,000.00 in a time deposit account it will approximately take 18 years in order for your money to become double or become P 200,000.00 (72 / 4 = 18)

Imagine if you put your P 100,000.00 in an investment vehicle that would give you a 12 % interest rate. This time it will only take 6 years for your money to double (72 / 12 = 6)

Now let me give a word of caution. Since the Rule of 72 is only an approximation, it is more accurate if you apply the formula using low interest rates. If you use this formula using high interest rates, the higher the interest rates, the more inaccurate the Rule of 72 becomes. For example if you have P 100.00 and you put it in an investment vehicle that gives you 72 % interest rate per annum, according to the Rule of 72 your money will double, that is it will be P 200.00 in 1 year. However if you think logically and do the math, this is not entirely accurate since you will need a 100 % interest rate in order for it to become P 200.00 in 1 year time. Anyway, this is just a little caveat. Nevertheless, the Rule of 72 is very useful to illustrate the power of compounding interest. Not only is the Rule of 72 useful in this area, the Rule of 72 can also be used to manage debt wisely. I will write more about this in future post.

If you want to know how many years it would it take triple your money, you can use the cousin of the Rule of 72 which is the Rule of 115. The idea is the same, just substitute 72 with 115.

To further understand the Rule of 72, click on the youtube video below. You will have to be patient because the Rule of 72 is introduced later on the video. In the next post, we will talk about the lessons that we can learn from the Rule of 72.