Business

I thought I'd reprint this post I did back in November on how to creatively use lines of credit. With the economy in recession, I wonder how many people have had their lines of credit or credit cards unceremoniously closed or reduced? I know some business are facing this possibility and are having their lines of credit lowered or simply eliminated.

NOV 1/2008

Most of us have lines of credit (LOC) these days, either racked up with debt or just sitting there waiting to be used. Rather than just filing away your statement month after month, why not get creative with the way you use them?

Here are a few ways that I try to be creative with the bank's money:

Bank Account - if you have a balance, why not use your line of credit as your bank account? My brother-in-law does this – he has his paycheque and anything else deposited directly to his LOC. He also writes cheques directly from it. The advantage is you’ll minimize your interest and there are no bank charges! The disadvantage is your banker might not like you if you happen to have a credit balance.

Emergency Fund - Many people advocate having an emergency fund of at least six months cash in case something seriously happens to you. I fully agree but I want my cash working for me. So, I keep an empty LOC around just in case – I take the emergency fund cash and invest it in something more worthwhile than a bank account. Quite often, if you invest the cash in something more worthwhile, it may not be that liquid so the LOC takes care of this.

Investment Opportunities - if you don’t have the money to make that stock purchase that you know can’t ‘go wrong’, leverage your finances and borrow. The interest on the LOC may be tax deductible but keep in mind leverage works both ways – if the investment doesn’t work out, you’ll have a nasty debt to contend with. Another option is buying real estate and using the LOC for your down payment - but, you’ll have to qualify and money is pretty tight these days.

Debt Consolidation - pay off your high-interest credit card debt with your hopefully, lower-interest LOC. You’ll save on interest charges but don’t be tempted to rack up those cards again!

I’ve got several lines of credit which are just empty and waiting for the right time to use them – thankfully, none of them have any balances. One of them is kept as my emergency fund and is hooked up directly with my bank account in case I need it. I have another one that is only to be used for investment purposes – this make it easier at tax time to keep track of any interest I’ve paid to earn investment income.

I have fairly good credit, so I’ll probably try to get as many LOC’s as I can, in case I need them.

With the market the way it is, I am biding my time, until the perfect ‘opportunity’ comes up.

UPDATE

Thankfully, I still have my lines of credit and the bank hasn't lowered any of the limits … yet. I'm hesitant to use them right now due to the state of the economy and the fact that I may be looking for a new contract in November.

I could use them for investing purposes … but I don't think I'm willing to do that yet.

Also, with the new credit card legislation soon to be introduced in Canada and already introduced in the US, are credit card companies and banks going to be taking out their frustration on consumers? Will it trickle over into other areas of the banks' business?

Has your bank cancelled or lowered any of your lines of credit or credit cards?

RELATED POSTS:

• Stocking Up On Credit

FOLLOW ME on TWITTER

If you like this post, then subscribe for free email updates HERE or click on the bright orange logo on the TOP RIGHT section of my blog. You can also sign up for updates via RSS FEED. What is RSS?

By now, you've all heard about the AIG fiasco and those executives who still got their bonuses … even though the company needed to be bailed out. While some bonuses have been repaid, I have to wonder how much will be recovered in the end. This post isn't about AIG, but I'll just say that the company went broke! Had they not been bailed out they wouldn't have gotten anything … but I digress.

There is much talk that executives are overpaid and the amounts they receive don't reflect the true value to shareholders. I would say I agree – when I hear about CEO's making millions of dollars it kind of concerns me, especially if the company hasn't done that well. So, if a company underperforms, why do they still get paid so much?

TOURNAMENTS

On way to explain this is something called tournament theory. Quoting the article I link to, 'Workers are frequently ranked relative to each other and promoted not for being good at their jobs but for being better than their rivals.' It's not they provide more value to the company, it's simply that they were better than everyone else. In a way, office life (the rat race) is somewhat of a game – high salaries are a way to motivate employees to make it to the top, where a huge bucket of gold awaits.

There are several side effects of this theory:

• One way to win the game and get promoted is to sabotage your rivals – this could explain nasty office politics.
• Risk aversion – why take risks and do a great job, when it could lead to you being fired?
• The more luck that is involved in the process, the larger the pay gaps should be between the winners and the losers.

This goes a long way to explain why some highly paid executives are clueless, yet keep getting promoted – they're either good at the game or they got really lucky. High salaries are simply the lure to get employees to aspire to move up the ranks. It also explains why a CEO could do well and still have performed poorly – they still ended up doing better than everyone else.

STOCK OPTIONS

Some executives don't just get salaries – they also get paid in the form of stock options. If the company does really well, they have the option to buy the stock at a cheaper price and sell at the current market price, potentially making a killing. The theory is this should motivate the executive to increase shareholder value and in turn, increase their own earnings. This is why why some CEO's get millions of dollars in compensation – they happened to do very well that year and the stock price went up. There are problems with this kind of pay, though:

• It's short term oriented – a company could do well one year, but tank the next year; meanwhile the CEO already got paid millions of dollars while closing down plants.
• Possibility for unusual transactions – stock option backdating and other ways to defraud shareholders.

In theory stock options are a great idea because they're performance-based but they are not without their problems. Obviously, companies have to wrestle with these issues and there isn't always a clear solution – there has to be some happy medium but you're never going to keep everyone happy.

I have to be honest, if I were offered a high-level executive job, I wouldn't consider it unless the compensation package was fairly generous. There are just so many risks in the corporate environment and the days of job security are over. Stock markets and human are so short-term oriented, the pressure to perform well quarter after quarter is so great, the stress would be equally high. I'd want to be compensated for this stress and lack of job security.

I'd probably want a bit of a golden handshake at the end if I were suddenly terminated – this would go a long way to alleviating some of the worry of being fired and would allow me to focus on doing a better job. I'm sure people read about these payoffs and become furious.

I'm certainly not being an apologist because clearly, there are problems with executive pay. I'm not sure what the solution is, but hopefully, someone will come up with something in the future.

If you like this post, then subscribe for free email updates HERE or click on the bright orange logo on the TOP RIGHT section of my blog. You can also sign up for updates via RSS FEED. What is RSS?

A couple of years ago at work, I started to adopt a new philosophy – I decided that I would give back more than someone asked for. In fact, I would do much more than the minimum required. I would go out of my way to be a great employee, business partner or friend.

If my boss asked me to analyze a set of figures, I'd do the following: Compare to last year's and this year's figures. Offer a forecast for next year.  Write a brief blurb on my thoughts and make useful recommendations. I'd then follow up a few days later to see if the figures were correct, or if anything else was needed.

If a friend asked for help, I'd do whatever they ask (within reason) and then call them the next day to make sure they're ok. I'd also make sure I called on a regular basis and made an effort to keep in touch. I'm actually very good with keeping in touch with my friends.

If someone did business with me or I sold them a product, I would back up it up completely. If they're weren't happy with it, I'd offer them a new one or give their money back. I also wouldn't try to rip them off and try to take all the money. I fully believe in sharing the wealth. This is how rich people get richer. They form partnerships and share in the wealth.

It wasn't always this way with me. I used to do the minimum and try to get away with second best … I thought people who were overly helpful or tried too hard were ass-kissers, especially in school. We used to make fun of the keeners but now that I think about it, they had the right idea because they were always happy. Something also started to happen … I felt crappy all the time and it showed in my body language. It seems that crap begets crap.

I actually see it everywhere now. Quality and service are going down the toilet yet prices are going up. I go to department stores which are understaffed AND full of rude people. Don't they see this is self-defeating? No money is being saved because of high turnover and upset customers.

As an accountant, I see so many people do business together and just try to rip each other off. It's silly – the amount of energy and money that gets wasted is phenomenal when it would have been easier just to share in the first place.

So there it is – my new philosophy. I can already see the changes – I'm happier, in better shape physically and mentally and I've let go of resentment and bitterness.

Photo: darrenscicluna

If you like this post, then subscribe for free email updates HERE or click on the bright orange logo on the TOP RIGHT section of my blog. You can also sign up for updates via RSS FEED. What is RSS?