CFP Board eNewsletter
November 2007
Faith and Financial Planning
The Meaning of Mortgages I: The Basics
Financial Alerts
Survey: How Does Your 2007 Holiday Gift Budget Compare to 2006?
Holiday Gifts and Values
About This Newsletter

Faith and Financial Planning

Open your wallet, take out any bill, look at the back, and you’ll see it right there: "In God we trust." That may seem like a strange thing to see printed on the back of a $10 bill, since many faiths teach that spirituality and money don’t easily mix. But increasingly, consumers are trying to integrate their religious beliefs into their financial lives. The move towards faith-based personal financial planning is partly a result of a broader trend towards "holistic" financial planning, in which a person’s lifestyle and values are considered just as important as his or her bank balance. It is also due, in part, to the realization that the ancient scriptures of many faiths contain practical financial advice for modern times.

Some of that advice makes simple economic sense. All religions warn, for example, that over-consumption is a moral as well as a financial hazard and that excessive debt should be avoided. Other guidance is based on a religion’s specific tenets or prohibitions. Islam forbids interest, for instance, so Muslims who want to conduct their financial affairs in accordance with Islamic law (known as Shariah) must not incur or charge interest on loans. Jewish investors who want their portfolios to reflect the spirit of Jewish law (known as Halacha) must avoid holding shares in companies that operate on the Sabbath. Some banks and planners work with clients of faith to offer financial products and advice consistent with their religious beliefs.

The Kingdom Advisors is one group that provides financial advice from a Christian perspective. The firm trains advisors in all the areas you would expect from a financial planning professional — college savings, debt, insurance, investments, retirement, and tax preparation, among others. But it does so with an emphasis on integrating Christian beliefs into every aspect of the advisor’s practice. According to Ron Blue, president of Kingdom Advisors, "A Christian financial advisor is uniquely positioned to address financial issues from a biblical worldview, and to offer biblical wisdom in the context of advice to clients."

Dan Hardt, of Hardt Financial Services in Louisville, KY, is a Kingdom Advisor who offers "biblically responsible investment" (BRI) advice. For Kingdom Advisors, biblically responsible investing means avoiding companies that support or promote abortion, pornography, gambling or non-married sexual lifestyles, among other things. "BRIs are like other investments: Some have performed well, some not so well," Hardt says. "I don’t believe this is caused by their biblical focus; it’s just the normal bell curve. Clients must weigh this trade off, real or perceived, for themselves. My experience is that most Christians have a stronger conviction about following biblical principles than they do about trying to squeeze out that extra possible marginal return."

Christian churches are often places where the spiritual and the financial meet. Crown Financial Ministries has been teaching Christian financial principles at churches, both inside and outside the U.S., since 1976. Through Crown Radio, the group also produces several radio shows offering practical money tips for Christians. "Money Matters" is a daily call-in show that gives listeners an opportunity to discuss consumer-oriented topics and hear Bible-based commentaries; "How to Manage Your Money" is a daily, three-minute program focusing on biblical guidelines for money management.

Muslims who want to make their financial lives compliant with Islamic law must arrange their affairs so that they do not pay or charge interest. That’s because, according to Islamic principles, money has no value in itself; it is merely a measure of the value of other things. For that reason, Muslims believe there should be no interest attached to borrowing or lending. The prohibition against interest applies only to money, however. There is no prohibition against earning a rate of return on investments, for example, since an investment is based on the ownership of shares, which — unlike cash — have value in themselves.

But how do you purchase a home, for example, without incurring interest on a loan? One way is to take out an Ijara mortgage, an increasingly popular option among the estimated 6 to 8 million Muslims living in the U.S. In an Ijara arrangement, the lender purchases the property and then sells it on to the borrower for the same price. The borrower pays back the lender through a lease agreement, incurring an additional monthly rent on top of the mortgage repayment. The monthly rent is considered a fee for the use of the property rather than an interest payment.

"Shariah-compliant financial products are more widely available than most Muslims are aware of," says David E. Upton, professor of finance at Virginia Commonwealth University in Richmond. "There are a number of organizations that offer Shariah-compatible investments, and Shariah-compatible mortgages are available in many states, too." Devon Bank, based in Chicago, and Guidance Financial Group, in Reston, VA, are two firms offering home financing and other financial products that comply with Islamic law. The Amana Mutual Funds Trust, based in Bellingham, WA, invests only in Shariah-compliant firms, and this year won an industry award for three-year performance in the U.S. equity income category.

In Israel, a handful of financial institutions provide investment products in accordance with Halacha principles. Mercantile Discount Bank, for example, offers two mutual funds that only invest in Halacha–compliant companies. Identifying firms that operate according to Halacha requires intensive research, since mutual fund managers must investigate everything from the company’s working practices to the composition of its supply chains.

A similar challenge faces consumers who want to invest according to the Buddhist principle of "right livelihood," which requires that an individual’s work and income benefit him- or herself without harming others. For many, this means avoiding employment or investments that involve alcohol, for example, or the meat industry.

One of the most innovative Buddhist economic ideas is that of gross national happiness. Jigme Singye Wangchuck, King of Bhutan, came up with the term as a complement to the practice of measuring a country’s prosperity by its economic output, or gross national product. According to Buddhist teaching, economic growth is not the only — or even the most important — measure of wealth. For Buddhists, true prosperity occurs when material and spiritual development complement one another in ways that are socially and environmentally sustainable. Which makes gross national happiness an idea everyone can invest in.

— James Geary
 
The Meaning of Mortgages I: The Basics

The "sub-prime crisis" may sound like some kind of prehistoric disaster — maybe when a species of dinosaur was wiped out by a meteorite strike or something — but it has actually hit much closer to home. "Sub-prime" is the term used to describe mortgages taken out by borrowers with poor credit histories. The "crisis" began last year, when interest rates rose while house prices fell, leaving many homeowners unable to meet their mortgage payments and many lenders with a load of bad debts.

The fallout from the sub-prime crisis is still hitting stock markets, mortgage lenders and homeowners around the world. Foreclosures (the process initiated by a bank to repossess a house) are increasing and credit to buy a home in the first place is harder to come by. So it seemed like a timely moment for It’s Your Turn to present a three-part series on the meaning of mortgages.

For many people, taking out a mortgage is the biggest financial commitment they will ever make. Though the mortgage application process is complex, it can be boiled down to three main parts: the amount you need to borrow to purchase the house, the interest rate you will pay on the loan, and the period over which you will repay the loan, known as the "term."

The Amount
The first question to ask when preparing to buy a home is: How big a mortgage can I afford? A bank or other financial institution may be quite willing to lend you money, but that doesn’t mean that you can afford to pay it back. This is, in fact, part of what caused the sub-prime crisis — too many borrowers took out mortgages they really couldn’t afford.

To avoid this mistake, make sure to borrow only what fits your budget. A popular rule of thumb used by lenders to determine loan amounts is the debt-to-income ratio. This simply shows how much of your gross (pre-tax) income you can afford to devote to mortgage repayments. Industry guidelines suggest that a reasonable debt-to-income ratio is 28% or less. In other words, the average borrower should spend no more than 28% of his or her gross income on mortgage payments.

If, for example, you earn $40,000 a year, you should probably pay no more than $933 in monthly mortgage payments (28% of $40,000 is about $11,200, or roughly $933 per month). If you earn $60,000 a year, the target amount would be $1,400; if you earn $80,000 a year, it would be $1,866.

Of course, how much mortgage you can afford is also determined by how many other debts you have, including student loans, car loans, and monthly credit card payments, among others. The investor information site The Motley Fool has a range of online tools to help you determine how much you can afford to borrow; go to the Calculators page and scroll down to the "Home" section.

The Interest Rate
There are three basic types of mortgage interest rates: fixed-rate, adjustable-rate and hybrids. In a fixed-rate mortgage, the amount of interest remains the same for the duration of the loan. In an adjustable-rate mortgage, the rate of interest changes according to changes in the credit market and the economy as a whole. A hybrid mortgage combines a fixed-rate period with an adjustable-rate period.

Adjustable-rate mortgages usually have lower interest than fixed-rate loans, at least to start. Borrowers benefit when interest rates drop, because that drop is immediately reflected in the amount they pay each month. On the other hand, borrowers feel the pain when interest rates rise, because that rise is also immediately reflected in the amount they pay each month. Before taking out an adjustable-rate mortgage, calculate whether you could still afford the payments should interest rates rise dramatically. One way to prepare for a scenario like that is to set aside some money each month as an emergency mortgage repayment fund.

Fixed-rate mortgages offer the certainty that your interest rate will not change for the life of your mortgage. If you take out a mortgage at 6%, it will remain at 6% even if rates rise to 7% or 8% or higher. The downside is, it will also remain at 6% even if rates fall to 5% or 4% or lower. Hybrid mortgages offer additional flexibility, by mixing the advantages and disadvantages of both fixed- and adjustable-rate loans.

The Term
The terms for adjustable-rate mortgages can vary widely, but most fixed-rate mortgages come in 15- or 30-year terms. And, just as with fixed or adjustable interest rates, there are advantages and disadvantages to both.

A 30-year fixed-rate mortgage offers long-term security that your payments won’t go up or down. The monthly payments are normally lower than for 15-year loans, and any money not earmarked for the mortgage can be invested, saved or used for other purposes. On the other hand, the amount you ultimately end up paying in interest will be much higher than for a 15-year term. Still, you can claim interest payments as a deduction on your tax returns.

With a 15-year fixed-rate mortgage, interest rates will generally be lower than for a 30-year term, so the amount you ultimately end up paying in interest will be lower, too. On the other hand, monthly payments can be significantly higher than for 30-year loans because the loan has to be repaid over a much shorter period.

Mortgages are complicated. If you have any questions, or doubts about what type of mortgage is right for you, talk to a qualified financial advisor. The financial information Web site Bankrate.com has a helpful list of "10 Questions to Ask Your Mortgage Lender" that includes such basic queries as, ‘What is the minimum down payment?’ and ‘How long will it take to process my application?’ If you want to be sure you’re dealing with a reputable mortgage broker, check out the "Find a Broker" section on the Web site of the National Association of Mortgage Brokers, the trade association representing the mortgage broker industry.

This is the first of three articles on mortgages. Next month: Pre-qualifying for a loan, checking your credit rating, and the basics of mortgage insurance.

Online Resources

Federal Housing Administration (FHA)
The FHA provides mortgage insurance on loans made by FHA-approved lenders, thus protecting them against loss if homeowners default on loans. The FHA specializes in insuring loans to low- and moderate-income families and individuals who have experienced credit problems. The FHA Web site has comprehensive information resources for "New Homebuyers" as well as existing "Homeowners." The FHA "Lender Search Engine" provides a state-by-state list of FHA-approved lenders.

Several organizations tasked by the federal government with expanding affordable housing in the U.S. also have consumer resources on their Web sites:

Fannie Mae has a "Becoming a Homeowner" section that walks you through the initial stages of the home-buying and mortgage application process. The "Getting a Mortgage Checklist" outlines recommended steps to take.

Freddie Mac offers "Buying and Owning a Home," an online guide to the home-buying process, and "All About Mortgages," which can help you select a mortgage that’s right for you.

Ginnie Mae specializes in affordable housing for low- and moderate-income households. Its "Homeownership Information Center" contains information about everything from choosing the right mortgage to credit counseling. Its "Home Zone" section has information for young adults about the value of saving, investing and home ownership.
 
Financial Alerts

As Americans rely more and more on electronic communications, the number of unwanted solicitations and potential scams delivered by fax, e-mail and even text messaging continues to grow. The Financial Industry Regulatory Authority (FINRA), the Internal Revenue Service (IRS) and the U.S. Securities and Exchange Commission (SEC) have all recently issued alerts regarding scams carried out through electronic means.

Save Your Energy and Money—Don't Fall for Energy Stock Scams

Factors such as rising gas and oil prices and a skyrocketing global demand for energy have investors putting more of their money in energy and alternative energy stocks. Interest in such stocks has sparked the imagination of scammers, who have grabbed hold of the latest communication technologies to try to find their latest victims. FINRA (formerly NASD) has issued an alert to warn investors about fax, e-mail and cell phone text message scams that promise high investment returns for little risk. Learn how these scams start and how to avoid them at: www.finra.org/InvestorAlerts/DontFallforEnergyStockScams

IRS Warns Taxpayers of New E-mail Scams

Scammers work hard to get people’s attention, and one way they do that is to pretend they’re working on behalf of well-known organizations. Several recent e-mail scams purport to be from the IRS and direct people to visit Web sites designed to look like the IRS Web site. One of these scams gets people to the fake site by promising a tax refund, and another scam solicits charitable contributions on behalf of victims of the recent Southern California wildfires. Both scams attempt to collect personal and financial information from victims. If you receive an e-mail claiming to be from the IRS, before you open the e-mail or click any links embedded in the e-mail, visit the IRS Web site for updated information about e-mail scams at: www.irs.gov/newsroom/article/0,,id=170894,00.html

Avoid Internet and Junk Fax Investment Scams

The SEC has issued two investor alerts that address internet investment scams and investment-related junk faxes. The former informs you about how to spot different types of Internet fraud, what the SEC is doing to fight Internet investment scams, and how to use the Internet to invest wisely, while the latter tells you what you should know about investment-related junk faxes, including the steps you can take to try and stop them. Learn more about internet investment scams and junk faxes at: www.sec.gov/investor/pubs/cyberfraud.htm and www.sec.gov/investor/pubs/junkfax.htm

Read more financial alerts.
 
Survey: How Does Your 2007 Holiday Gift Budget Compare to 2006?

According to the 2007 Holiday Consumer Intentions and Actions Survey conducted for the National Retail Federation, the average shopper plans to spend more than $816 on gifts to others during this year’s holiday season. That amount is a slight increase from the $791 shoppers planned to spend in 2006. Share how your 2007 holiday gift budget compares to last year’s.

Take Our Survey
 
Holiday Gifts and Values

Nearly half of Americans planned to wait until the last two months of 2007 to do holiday shopping, according to the 2007 Holiday Consumer Intentions and Actions Survey conducted for the National Retail Federation (NRF), a trade association for the retail industry. Many retailers depend upon year-end holiday shopping to make their year profitable, so it’s no surprise that when the Friday after Thanksgiving comes around, many pull out all the stops to encourage a sense of gift-giving urgency. And as holiday shopping becomes frenzied – with overflowing parking lots, crowded stores and tired shoppers and salespeople – it’s easy to see why some people give up and wonder what happened to the values the holidays are meant to represent.

The process of deciding how much to spend on holiday gifts is, like any other financial matter, a decision that can benefit from planning. Similar to the way a financial planner can help you align all aspects of your financial situation to help you reach your life goals, with a little planning, you can make your holiday gift-giving more meaningful than a mad dash to check items off a shopping list. Take time as you plan your budget to reflect on your reasons for giving gifts and how to align your gift-giving goals with your values. Here are some ideas to help put your focus on values as you plan your holiday giving:

Remember Holidays Past
Before you get to your holiday budget or gift-shopping list, think back to last year’s holiday season and take a good look at what memories were created. There may be not-so-special moments you hope not to repeat. If there were more frantic moments than memorable ones, think of the factors that contributed to that frantic state and the steps you can take to make sure this year’s holidays don’t follow the same pattern.

More importantly, remember the parts of the holidays you enjoyed and the moments that reflected what you most value about the holidays. Did holiday events bring the right people together in an atmosphere that allowed everyone to connect and share in a positive way? Did you receive a special gift, or did someone find a gift from you especially meaningful? How did the memorable events demonstrate your values and the values of your family and friends? If there were moments with family or friends that you’ll remember always, think of ways to create similar moments this year.

Start with a Thank-You List
Jot down the names of everyone to whom you might give a gift. Don’t forget to include the names of any service providers to whom you’ll give a holiday tip, such as your hairdresser or barber, day care providers or babysitters, or the person who delivers your newspaper. When you have your list of names, and before you write down any gift ideas or assign part of your holiday budget to anyone on your list, take a moment to think about why you’ve added each person to your list. What about each person are you thankful for? What qualities about that person do you appreciate? Remembering what you especially admire about each person’s personality, interests and experiences can help you think of meaningful ways to express your appreciation, whether it be through a gift or other means.

Work within a Budget
Review what you spent during last year’s holidays and recall how long it took to pay off any debts you incurred from holiday shopping. If you enjoyed last year’s holidays and managed to enter the new year without debt, consider setting your budget at the same level. If you’re still paying off last year’s holiday debt or remember struggling to pay off debts earlier in the year, think about ways to trim this year’s expenses and avoid paying for your holidays long after they end. Set a maximum gift budget that you’re comfortable with, and think about adding a little wiggle-room in your budget for those last-minute surprises that always come up.

Once you have your total holiday budget, begin to assign dollar amounts to each person on your list. Think again about why each person is on your list and how your gifts might show your appreciation and a bit of what the holidays mean to you. Then begin to list gift ideas that fit within your budget. A gift doesn’t need to be expensive or extravagant to display appreciation. A shared meal or a visit to a special place you can appreciate together can be more memorable than a costly gift that will eventually gather dust or get stuck in the back of a closet.

Gift cards may seem an easy out, but they can be a gift well-appreciated. Sixty-two percent of consumers in a recent Consumer Reports National Research Center survey indicated plans to give gift cards, and more than half of the consumers in the NRF study indicated that they wanted to receive a gift card or gift certificate this holiday season. A short note expressing your appreciation to a gift-card recipient can go a long way to make it feel like a gift given with some thought.

Like any other planning process, the more thought you put in as you plan your holiday gift budget, the more likely you are to stick with it, and more meaning the gifts will have for you and those to whom you give. With a little organization and thought placed on your values, you'll be on your way to a more meaningful holiday season.
 
About This eNewsletter

CFP Board's "It's Your Turn" eNewsletter is sent monthly to those who have subscribed through CFP Board's Web site, www.CFP.net/learn. CFP Board exists to make people aware of the benefits of financial planning and to encourage people to seek out individuals who can help them apply the financial planning process to improve their financial lives. This eNewsletter is designed to provide information about financial planning, financial planning tools and resources, consumer alerts and more. Suggestions and feedback are welcome at mail@CFPBoard.org.