Some want to Outlaw Subprime Mortgages.. I Have a Better Idea.

Umm, let’s not and say we did.

The American Prospect, one of those high-brow magazines you see in the doctor’s office that you don’t bother picking up, has a suggestion on how to avoid the subprime mess going forward. They want the Federal Government, (who brought you the amazing Katrina response and the Walter Reed medical story last year) to help you sub-primers out there. They want to stop those bad ol’ loan-sharking lenders from ever giving out those stupid mortgages again—by banning them.

While it sounds great on paper, I think this is yet another time where we should not let the government step in and try to “save” grown adults from themselves. Usually, nothing good comes from such moves. Most people got into the subprime (adjustable rate) mortgage market to start with because they were (a) looking for a cheap and temporary teaser rate and were planning on preparing for the adjustable part “later on,” or (b) looking for a low rate because the fixed rates at the time were too high to get into a home. For the future, buyers should beware of such temporary fixes.

The blame doesn’t completely rest with the borrower though—some of the lenders who wrote out these “bad” mortgages were receiving excellent commissions to keep the debt pile growing. Eventually, someone had to take care of it; now bank after bank continues to write down billions (yes, with a “B”) of dollars in debt

Stay away from adjustable rate mortgages (ARMs) and interest-only mortgages because you never know what the future holds in terms of your ability to pay. Stick with the fixed-rate mortgages, and you’ll be less surprised (if at all) about how much you’ll be paying five, ten or fifteen years from now. And above all, don't depend on the government to bail you out of poor decisions--it creates a culture of dependency that usually allocates more power to the feds, and usually that's not a good thing, no matter how good it may sound.

Raiding the Emergency Fund – The Road Back

Good morning readers! It’s been nearly a month since I’ve written an article, and today I’d like to talk about the use of the emergency fund. There will be a time where you will have to use it—for me, it was definitely this past month through back surgery. We want to address the question of what to do when you have to use your fund.

To review, remember that the purpose of the emergency fund is to insulate your budget against unplanned “shocks.” For instance, if your car radiator goes on the fritz, chances are you didn’t have a “Radiator Repair” line item in your budget worksheet. (Some of you may have a “car repairs” section, which is essentially the same as an emergency fund, just a little more defined). Of course, getting an Aquos big screen before Super Bowl Sunday doesn’t warrant an emergency expense, although it’d be nice to have.

For me, I had to make some purchases that I did not forsee. I spent a couple days in private rooming in the hospital, which cost money. I made some home purchases to improve the upkeep of my house for the recovery period (which has gone on longer than expected). I had to change flight plans at the last minute which also cost money. But, these unforeseen but necessary expenses are perfect for emergency fund spending.

Instead of panicking, it’s best to lean on your emergency fund and to not dip too far into credit card debt, which is far easier to do. The key, however, is to ensure that you work to restore your emergency fund back to its prior standing before moving on. You wouldn’t drive a car after an accident without repairing the car and restoring the airbag (unless you’re just too cheap—and I won’t be riding with you). The emergency fund is there to help ride out the bumps Life sometimes presents. Use it wisely, and work to restore it when necessary.

See you next week.

Happy Thanksgiving

Hello Readers,

The surgery was for the most part successful, but the recovery process is not as short and sweet as I thought. I'll be out until at least mid-December, but if I have the energy to write an entry, I'll get one up soon. Til then, I hope you and your family have a wonderful Thanksgiving holiday, and if you want to read some personal finance stories, check out the NewsReader Hot Box over to the upper right (facebookers of course, should click through to the Main Site to see this.)

Thanks and take Care.

Surgery this Week!

Readers,

I will be going into my very first surgery (back surgery) this week, ever. In fact, the only time that I've ever been in a hospital room (outside of checkups) was to see others who've been through surgery. So, I'm preparing for that. I don't know how long I'll be in recovery--maybe it will be a week, maybe 2. Either way, I will be unable to post until perhaps the second week of November. However, please check the Hotbox Newsreader over to the upper right (facebookers click through to the site).

Take Care,

Charles

Our Scary Future? Not so much.

Halloween is nearing, and if you take a look around the world, on the surface things appear pretty gloomy—especially for those who plan to invest in the stock or housing market. Check out this scary quote:

US FED CHIEF WARNS WALL STREET

The weakness in the U.S. housing market "is likely to be a significant drag on growth in the current quarter and through early next year," U.S. Federal Reserve Chairman Ben Bernanke warned.

Source: http://www.cnn.com/2007/BUSINESS/10/16/bernanke.speech/

Ooo..scary.

That is, until you read, the very next few sentences:

But he hinted that it may not get that much worse and that investors and lenders may have learned from their mistakes.

"Rather than becoming more crisis-prone, the financial system is likely to emerge from this episode healthier and more stable than before," he said in a speech to the New York Economic Club Monday night.

Reading that, I know what you're thinking—who goes to economic club meetings? Nah, more likely I hope you realize that the Fed Chair says our dire situation won't last much longer. He hints towards refraining from a rate cut, and I think it's all to the good that he takes that path of action. You see, constantly tinkering with our economy every time it corrects itself does nothing but slows the correction process.

Today's society goes through great length to protect your from risks—toilet gaskets, scares from China, and yes, the Fed will try to interject to save investors from making poor decisions. However, great risk brings great reward—and sometime great failure. However, you are designed to rise from failure, not be destroyed by it. Failure makes you battle-tested—and when people jump through hoops to insulate you from failure, then it hurts even more down the road.

Another hyped craze is the alleged Housing Market craze. (Yes, I know, I've been sucked in myself). However, it's sometimes better to focus on the bigger picture. About 90% of all mortgages are being paid on time an actual homeownership is relatively stable.

All You Need to Know

Look, I'm not saying the road won't get bumpy from sometimes. It doesn't mean however, that you should stop driving altogether. It doesn't mean you start looking for someone to bail you out of your decisions either. All you need to know is to focus on the long-term future and to ignore the weekly scares blasted to you on the news shows every week.

Can You Haggle?

We do it for houses, cars, and even airline tickets. Some call it negotiation, others call it "being cheap." But does the art of haggling, or "negotiating" for lower prices on other consumer goods and services really work? Here are some excerpts from a New York Post article that commented on a personal finance study:

"According to a new study by Consumer Reports, the ancient art of haggling is a lot more useful these days than most people realize, and can lead to bargains in surprising places.
The magazine surveyed 2,167 Americans and found that up to two-thirds of people have had success in getting lower prices by negotiating for products."

And what are consumers getting discounts on these days?

"Consumer Reports also found that people could get lower prices on cellphone plans, jewelry, appliances, electronics and collectibles if they showed they were willing to walk away.
Furniture had the most successful rate of negotiations, with some 94 percent of people who haggled for things like beds and couches saying they got a lower price..."

Looks as if you can get some discounts on goods that are quite popular! However, although the opportunity exists, many people refrain from taking such a discount on goods because they fear looking cheap or foolish in front of the salesman. (I don't understand this, however). The article closes with some good tips on how to do a better job "closing the deal" on price negotiation:

* Work with the salesman - don't issue "take-it-or-leave-it" ultimatums.
* Be discreet, and refrain from telling everyone in the store about the deal you are trying to get.
* Make sure you are talking to a person with the power to negotiate.
* Try to make an offer at a time when a seller wants to unload a product, such as when it has been sitting around unsold for months.

The article even talks about how haggling is "not allowed" in big chain retailers, but I don't see why this is true. Just because a retailer has "Circuit City" written on the outside of their building doesn't mean that prices are final--especially if there is no sale prices on the particular item you seek.

I encourage you to give it the old college try when you walk into the store next time to purchase a "big-ticket" item, especially electronics and furniture. Speak with confidence. Show your interest (if you are indeed interested) and use a line like "How much will you take for this...?" Who knows, you'd be surprised what discounts you can get. I know I'll be trying it in the future.

Worth of Stuff, Part III: Shop Wisely. Shop Privately.

Last week we analyzed the importance of looking past marketing tricks common in the food and grocery industry. People are sometimes fiercely loyal to products they "grew up with" and often skip private (store-brand) products because they feel they are "inferior" in quality. Sometimes they are, but many times they're not. Click here to review last week's article.

My guess is that it extends beyond just groceries. People are thoroughly convinced that their name brand clothing, cleaners, and personal-care products are far and above their national counterparts. Historically, that may have been true; there was a time where store brand were just not good at all--just a cheap imitation of the leading brand. However, as many grocery stores and drug stores sought to improve their margins, they invested in their own products, and they can choose their own shelf space and don't have to market it. Often, distributors would make the same brand and quality of product and distribute it to private labels! Bottom line--private labels no longer equal substandard quality if you know what to look for.

So, How to Tell a Bargain from a Cheapo?
Generally, the more common a product is (the easier to produce), the better the chance you have of buying a great product. For instance, I have a friend who used to work in the beer industry and he explained to me the difference between "cheap" beer and the seemingly better-tasting brand. Essentially what happens is that the beer company produced their "quality" product from a more advanced fermenting process and took more time to produce. The cheapo beer was made from the remnants of said beer product. There is a clear-cut quality difference here.

However, what about when it comes to more common products like milk/eggs/butter or products that require a specific makeup (like ibuprofen) you can definitely find ways to choose a better bargain by going to the right private labels. First, study the information provided. If its medicine, check to see if the concentrations of medicine are the same. If you are still unconvinced, ask the pharmacist!

As to other goods (as far as groceries concerned), I encourage you to just try private labels one at a time. When I was down South I frequented Kroger and tried their products one at a time--I tried their brand of Cheerios (a good move), their brand of garlic bread (another good move), and their brand of Ranch salad dressing (bzzzt). So you should try a little trial and error and see where it leads. You'll be surprised not only how much money you can save by shopping a little wiser (and more privately). And you won't be alone. National brands are losing their grip on many products because private labels are simply investing more into their products, and they don't have to advertise.

If you have taken the Private Label Challenge, let us know what brands you buy from around your way. I see that we're getting national and international visitors, and would like to see what you guys are buying and if name brands work for you.

I will be out next week, so make sure to check out our Newsreader hotbox over to the upper right. Take Care.

Worth of Stuff, Part II: What Really is the "Best"?

Countless number of times I hear people go on and on to justify why they buy only brand-name "XXX," or go to this or that restaurant. Most of the reasons revolve around the "best." People buy certain brands of cars because they are "safer" or "more reliable." They buy certain types of brand-name foods because they "taste better," without even venturing out to try the store brands or private labels. Sometimes such decisions are worth it, but many times they are not—this week we will focus on the "they are not" portion.

To illustrate our point this week, take a moment and watch this short video. Be warned, there is some strong language placed here and there, but overall the main point takes a look at how people interpret the expense of items (and a marketing department's power of suggestion).

If you decided to skip the video it basically analyzed consumer's perceptions of what is considered to be the best, which is often in the mind. Confounding evidence in the video could have shown that people didn't want to look uncultured in such a "cultured" restaurant, but that's not a reason to overpay for crap concentrate.

When I was a student at Georgia Tech, we ran an investment club and I performed an experiment where people were given name brand soda, and cookies compared to the Kroger store brand version and had them rate the products based on taste. (Our budget was somewhat low, so we worked with what we had). Most chose the private label (store) brand over the national brand or had no preference toward the name brand. Yet, few could be convinced that buying private labels is worth the financial savings.

Now don't get me wrong—some brand names deserve their respect. Take cookouts for instance. I can definitely tell the difference on something like aluminum foil—Reynolds's Wrap tends to be a more superior product versus er.."Wrap-It" Foil. You can usually tell when you get to the grill and the integrity of the foil fails under heat. However, there is no real difference between condiments, relish, plastic utensils and cups, etc. Buying brand names for such products when having a large event can definitively dent your budget if you're not careful. The purpose is not to be "cheap," but to know a quality product when you see it and to know if it's worth your money.

Next week, we conclude our analysis of the "Worth of Stuff" by analyzing why people think that store brands are usually better, and we suggest ways to choose store brands and private labels designed to save you money without losing quality. See you next week.

Worth of Stuff Part 1: Government "Bling"

So before you think that only entertainers, rappers, and the immature members of the class of nouveau riche are the only ones who know how to ball out of control, have I got news for you! These guys have nothing on that ultimate King of Bling, the US Government. For most of you, this should come at no surprise--the government collects your money through taxation, and spend it on various things they think you "need," usually without your input. This week we get a special taxpayer report on the US Department of Justice:

An internal Justice audit,(pdf) released Friday, showed the department spent nearly $7 million to plan, host or send employees to 10 conferences over the last two years. This included paying $4 per meatball at one lavish dinner and spreading an average of $25 worth of snacks around to each participant at a movie-themed party.

The prices above include an 18% service charge, but its beside the point.

First, let me congratulate the US DOJ for putting the audit out there for all to see. What's frustrating is that though the government spending of your tax money its evident that they need some leadership in selecting vendors properly. Think about it--how many of you out there can truly tell the difference in the taste of a $1 meatball and a $4 meatball? This is an important point, because most people can't. And in most cases, there isn't a difference--it's all in marketing (we'll cover this more in a later article).

You can get the report here, (if you're that big of a nerd). The point of reference mentioned above starts on page 76. Under the table of out-of-control spending detail, we find the the costs"...were so expensive that they may not be considered reasonable uses of appropriated funds..."

I bet.

Point being, if the government cannot control its spending with any reasonableness, and won't even try, they're probably not the folks you want to look to for help with your financial future. Now if they're looking to help out with the receptions at the MTV Video Music Awards next year, let them handle it. They've gotten the overspending down.

Next week, we put ourselves on the firing squad. How good at we at determining the true cost of "stuff"? Cars? Houses? Food? We'll take a look at it.

Vacation this Week.. Read the Hotbox!

Readers,

I will be taking a short vacation this week, so I won't have an in-depth post this week. However, I encourage you to take a look at the posts in the Hot-Box to the right, which updates with new articles from around the financial blogosphere every day. I'll try to get a post up a good post later this week, but today I leave you with a quote from Sidney Poitier's Autobiography The Measure of a Man on his approach to money even after making his millions:

"I still watch money, having learned the hard way, and I spend it with a certain mindfulness. I try to be reasoned in my dealings with money, because somewhere inside myself I've always been afriad that I'll be judged unworthy of it..."

Renters Not Escaping the Mortgage Meltdown

From USA Today, there's word that the mortgage meltdown (correction) isn't just affecting the homeowners, but those who are in the rental market are feeling the pain as well:

Already, one in four renters are paying more than half their income on rent — the highest level in at least two decades — according to a study being released Thursday by the Center for Housing Policy. That's up from one in five renters in 1997.

As a renter, all I can say is "Yay, just great.." I personally have locked in my rental rate for the next two years, but I can definitely see it happening. My rent went up about 15% over last year, which did put a significant dent in my budgeting. "Well," you make ask yourself, "How would it affect me, in the future?"

Rents are projected to rise about 4% this year and next. In part, that's because of a shortfall in apartment construction. At the same time, more renters are renewing their leases because they can't qualify for a mortgage. And rising foreclosures are turning some homeowners back into tenants.

I think this 4% number is a bit low. As the mortgage industry continues to shake out those who made a poor choice by buying homes too soon, people will move into rental units in larger numbers. I've also spoken against a bailouts for Wall Street, lenders, and homeowners alike--and actually in support of foreclosed homeowners downgrading to rental units until they can get back on their feet.

I know there are those who may disagree, but I think it definitely will go a long way in preventing this debacle again. What happened is Wall Street took sub-prime mortgage lender debt which are comprised of and sold it on the world markets--often with AAA ratings (meaning that the loans were guaranteed on the same level as the US Treasury). Then, they were astonished when the borrowers, many who weren't saving and overusing credit couldn't pay the lenders, and of course the lenders bombed (and so did Wall Street, at least until they got their bailout).

Long story short--unless you locked in a fixed rate as a homeowner, you may feel the burn of the sub-prime correction until it shakes out. Renters should brace for impact--it won't hurt as much as homeowners feel, but you'll feel it nevertheless.

Discuss: Let's Fix Taxes this Week!

So this week I participated in a blog and the issue of how to fix the tax code came up. My answers appear with the questions below (with links for taxes you may not have known about) and I would like to open it up to you readers. If you were the tax guru and had the opportunity to fix the tax code, how would you do it? Use the questions below as your guide. I'd love to hear your opinions. (And you don't have to answer every question if you don't want to).

- Would you retain a progressive system or switch to a flat tax?
Flat tax. Hands down. It would involve no altering of the Constitution (like the Fair Tax requires). I would put forward a "20-20" plan, I would exempt the first $20,000 from any tax, then tax each dollar above that amount by 20%. I would also raise the interest income to 20% as well (currently it sits at 15%), so no matter where you make money, it's taxed at 20%. It would bring a steady flow in, and even if you live off your interest (meaning you don't pull an income), you would be taxed at 20%. Sounds fair to me.

- Would you decrease income tax and increase usage (eg, gas) taxes?
Sure. I know Libertarians suggest this all the time. They tend to follow a "legalize it and tax it" approach to things like prostitution and marijuana. I'm not a Libertarian, but I don't think it's a bad idea. If red states like Nevada and Colorado don't have a problem with it, I don't see it as a major issue.

- Would you alter our withholding system so employees keep more money until taxes are due?
No. the reason why it was put in place to begin with is because as a whole we tend to spend what we make. Some people are convinced that "they don't even pay taxes, because the government pays them," when actually they are getting a refund. Withholding enforces the idea of "out-of-sight, out of mind," and keeps people from going into bankruptcy when they get a $7500 tax bill in April.

Would you tie the AMT to inflation, scrap it, or leave it?
Scrap. AMT (Alternative Minimum Tax) was an envy tax, and now everyone is getting bitten. Let the government find a way to budget properly and cut spending, like the rest of us do.

Would you change SS (Social Security) and Medicare payroll tax rates? Change the SS cap? I might leave it the same, but I just don't feel as if I'm getting any SS anyway. SS is supposed to go under in 2042, just when I turn 62 and can start to claim benefits. Knowing that I probably won't get any return on my "insurance investment" will probably make me more reluctant to raise the cap on how much more of my hard-earned paycheck they can take.

- Would you (continue to) promote saving and investment through tax policy? Home owning?
You know it! Saving is very important, and we need to convince future Americans to save like their grandparents did, to have a supplement for Social Security. And I would favor responsible home-owning and discourage giving out loans to people who cannot pay them (like we see in the risky sub-prime market).

- Would you permit taxpayers to target a portion of their payment towards specific programs?Not a bad idea, as long as it's properly regulated. I wouldn't want people to cheat the system by having John Smith donating to the "Smith Family Empowerment Fund." However, it would be interesting to direct your tax funding to a certain government department (education, energy, defense, etc.)

- Would you change the child tax credit? Change rates for married filing jointly? Nah, I'm not heartless. The EITC and Child Tax Credit is helpful to families who need a little help sometimes. I would extend this. If you're married filing jointly, I would not penalize you for this either.

Would you eliminate the gift tax? The inheritance ("death") tax? To compromise, I would bring both down to the flat tax rate of 20%. 55% is kinda harsh. I agree money can be taxed "every time it changes hands," but we should be reasonable, so that we won't have an AMT-type problem in the future.

-Would you tinker with the rates for different brackets? With what goal in mind? See first answer above. My goal is to help educate people that they are funding the government and they should keep an eye on how their money is being spent in Washington.

Now it's your turn. Discuss!

Energy (Money) Saving Tips Around the House

This week, a few savings tidbits:
Those of you who run your A/C regularly in the summertime (and you pay for your electricity), Con Edison has a cost to run it--about $0.25/hr. Now, that may sound like small change, but it does add up. Say that you run your air from 7pm (when you get home) until 7am (when you get up). That's 12 hours of consistent running of cooling air. At 72 degrees, that's 0.25 X 12 = $3/day. For 30 days, this brings us to $90 per month, which does not include other items in your home running on electricity.

Now, I understand that there's nothing like coming home from a long commute to a cooled, welcomed home. However, it's probably best to set your AC timer (if you have one) to start about 30 minutes before you are expected to arrive home.

By the way, most energy companies suggest you set your thermostat to 78 degrees--this is the "sweet spot" for savings. Every degree below that adds about $4 to your total cost per month. So, if you raise your thermostat from 72 to 78, you could save about $24/month on your average $100-a-month power bill.

1 - If every home in America completely replaced the five light fixtures they use most with Energy Star qualified models, we would collectively prevent greenhouse gases equivalent to the emissions of more than eight million cars.

2 - If every household in the country replaced four 75-watt incandescent bulbs that burn four or more hours a day with four 23-watt fluorescent bulbs, we would save as much energy as is consumed by approximately 38 million cars in one year.

OK, so as far as the environmental impact, I doubt much will matter in this case. The bigger issue I can see here is the bonus savings you can get economically. Although compact fluorescent bulbs are not the safest thing out there, it will definitely bring you long-term savings to your energy bill.

You can find more savings tips here from Georgia Power. We'll put more up later on. Take care!

Good Advice, Bad Advice.

The Financial Markets took it on the chin this week. However, while everyone around you is in full panic, it's important to keep your head. Those of you in our year-long Stock Market game (it's still not to late to jump on in), probably have experienced first hand the perils of day-to-day monitoring and trading in such a volatile market. This CNN Finance article provides some sound insight on the importance of investing a few nuggets, especially for you who hold 401(k) portfolios:

Fluctuations in the market shouldn't get to the 401(k) investor. Keep in mind your time horizon - most of us are going to be invested in the market until we retire, often decades from now.

On average, stocks move higher - their long term average gain is 10.8 percent each year, according to Hugh Johnson of Johnson Illington Advisors.

Over those long time horizons, stocks will move up and down. It will be nearly impossible for you to call the highs and lows. If you sell now, you run the risk of missing gains and paying fees to re-invest in the market.

Here's an example of how damaging moving your money around can be:

If you sold your stocks at the market bottom in September of 1998 when the Dow was at 7539.07, you would have missed out on portfolio gains of 21.8 percent by the end of that year.

Amen to that. Main point here--trust the long-term returns of the market, and shun the emotion to sell off your investments, especially if you have established, blue chip companies or sound value stocks in your folder.


ON the flip side:

Sometimes, conventional wisdom and common sense coincide. The problem is, people often times cannot find this part of the Venn Diagram of Realistic Thinking. This young unfortunate soul, who actually works for a company that gives out investment advice (although he apparently was not hired on much merit) encourages shunning Personal Responsibility and instead bumming off of your friends, family, and Credit Card companies.

No really--I'm not kidding:
To wit:

What happens if your car breaks down and you need money to get it running again? What happens if you lose your job and need to support yourself? What happens if you get arrested and need to bail yourself out of jail?

If you get in trouble and need to bail yourself out, the last thing you want is to spend your own money. The best way to avoid that is to make sure you can't afford to fix whatever the problem is. Young people are better positioned to pass off the cost of emergencies than any other group...

Every financial hardship is an opportunity -- an opportunity for your parents to show you how much they love you. Nobody's going to label you a parasite if you ask for help when you're in trouble -- that's the beauty of it.

Yikes!

If you're wondering what Estate this sheltered young man came from, understand that he is a Harvard Grad. (Not the common-sense Harvard Grad, but the stodgy, trust-fund, stereotypical kind you see on TV.)

So what do you guys think? Am I misjudging here? Perhaps up is down, and bad advice is the new good advice (and vice-versa). I'm sticking with my guns, and hoping this guy is just trying to build an audience to give real advice. Let me know if I'm missing something.

Also, what more would you like to see from our site?

See you next week.

Forbes' 10 "Hidden" Taxes you Probably Pay, Part I

With the 2008 election season in full swing (really?!), you've probably heard quite a bit about tax plans—some want to raise taxes on certain groups; others seek to either flatten the tax system to a single bracket for everyone, or even change the entire system altogether (fair tax/national sales tax). However, there are certain taxes you take for granted everyday that you probably didn't realize you pay. A Forbes article describes the "everyday" taxes regular Americans hit all the time. Here are five of them.

1. Gas Tax – Those of you who drive and are tired of the high gas prices know that taxes are already "built in" to the price, but ever wonder how much? Try 18.4 cents per gallon. And this is only the federal tax built in. State taxes bump it even higher—on average, the combined federal, state, and local taxes levied on gas is about 45.8 cents on every gallon. Want to know more on how your gas dollars are spent? Click Here!

2. "Sweet" Tax – Not a purely tax outright, but usually it's built into products like sugary cereals.

3. Payroll Tax (Good old FICA). From the article:

Employers and employees split the cost of payroll taxes--the Social Security, Medicare and miscellaneous taxes you see listed as "FICA" on your paycheck. But many economists argue that you're paid less so that your employer can compensate for tax it pays just to keep you on the payroll. If you earn $97,500 or less, this could mean a 15.3% reduction in your take-home pay. (Half in the payroll tax you pay, half in your employer's share.) According to the Tax Policy Center, about two-thirds of all wage earners fork over more to Uncle Sam in payroll taxes (including the employer's share) than in income taxes.

4. Airline Tax – When you buy a ticket, the price "skyrockets." Again, from the website, we get the following "blurb."

Ever wonder why the price of an airline ticket jumps by $50 or so when taxes and fees are applied? Under current law, you pay a 7.5% ticket tax, a $3.40 segment tax (which increases by about a dime every year) for every leg of your trip, and an airport fee of up to $4.50 per ticket. Fly overseas and you can be charged as much as $30.20 for an international arrival and departure tax. All money goes to fund the Federal Aviation Administration. And these amounts don't even include various Homeland Security Department taxes, such as the $2.50 per ticket "Sept. 11" fee that goes to pay for airport security.

Yikes. Something to think about, especially if you fly on your own a lot.

5. Alternative Minimum Tax – Perhaps the most ridiculous tax of them all, I just call it the "envy tax." Back in the 60's this tax was written by our government to make sure that a couple hundred rich folks pay their "fair share" to the government (who of course, went on to frivolously spend and run deficits on the money). They didn't index it for inflation, and because of it regular people pay much higher taxes. How many people? Well, if nothing is done, about 50 million people will be hit by the AMT within the next 3 years. Astonishingly (but not really), Congress hasn't bothered to permanently alter it or even index it for inflation. Don't expect them to—the AMT brings in about $800 billion a year.

So, apparently there's no escape from them. Personally, I take a measured approach to taxes—some I don't mind, others are ridiculous. But just keep this in mind—for your awareness' sake.

Why Don't the ultra-Rich Play the Lotto When the Payout Exceeds the Odds?

Can the Rich Get Richer from playing the lottery? Let's look at this together.

If there's a mega-lottery in your state, you've probably noticed that the state usually has no problem in updating you about how the lottery jackpot has risen. In the Mega Million Jackpot Game, for instance, we can quickly calculate the total number of possible odds:

The game is as follows. There are two barrels of 56 balls each (numbered 1-56). 5 are chosen (without replacement) from one barrel, and 1 from the other, called the Mega Ball. So technically, you can have a number output of 13,18,21,31,47 and Mega Ball 47. The total number of combinations possible is a shade over 175 Million. If you're an avid lottery player, you should understand that you will ALWAYS have less than 1/175,000,000 chance of winning, no matter what the payout is. The payout is independent of your odds of winning. However, there is a better chance of the winning combination being selected as the jackpot rises (because more people play).

The game costs $1 per ticket entry. Which brings us to an interesting question--why doesn't Bill Gates, Warren Buffet, Oprah, or even high earners with say, $300 Million in Cash play the lottery when the payout is over $175 Million? If the Jackpot reaches $200 Million, and you play all 175 Million Combinations, you are nearly guaranteed a $200 Million Payout, right?

Well, this would be a good case where statistical analysis seems to make sense, but it's the real-world analysis that brings such a pie-in-the-sky idea back down to earth. Even if a billionaire put up the numbers, it would be as impossible

1. It would be a Logistical Nightmare.

- Imagine trying to go and print 175 million ticket combinations. Let's say it takes 1 second to print 1 line of numbers. 175 Million seconds of consistent printing would be needed--2,025 days--that's if it prints 24 hours a day, 7 days a week.

- The lottery numbers are drawn every Tuesday and Saturday, so you will need to draw it down to less than three days. Which means say rich guy would need some help. A lot of it. You would probably need about 2,100 people (700 people, 3 shifts) to convince 700 lottery retailers to allow them 24-hr, dedicated access to their machines (with NO pesky other customers), and they could do it under three days. (You will have to pay them all of course).

- Plus, we haven't even counted all the time it takes to fill in all those bubble-in sheets (Quik-Pik won't work because you run the risk of selecting the same numbers twice).

2.They Better be the Only Winner. Getting past the near-impossible logistics of actually playing all the numbers in the alloted time period, the rich guy would have to win the entire jackpot. If there is even one other jackpot winner, your "potential benefit" becomes an guaranteed loss.

3. Uncle Sam Gets a Cut. Also, you must take into account taxes, Capitalism's Conscience. A $200 Million Jackpot will only net you about $69 Million after taxes according to this lottery tax calculator if you live in a state with 6% income tax. (This assumes a "middle class" tax bracket as well).

4. Most millionaires are too smart to play. If you're a self-made millionaire (and most are) chances are the lottery didn't get them to where they are. There are an estimated 2 - 8 millionaires in the US, and even controlling for Fortune 500 Execs, Professional Athletes, Actors, and Entertainers, and Lottery Winners, there are still Millions more who got there without having to have superior talent. You just have to be smart with your time and your money. Small businesses, regular investors, retirees, etc., are the ones who make up the bulk of the millionaire pie. And there's plenty of room for more.

I would encourage you not to stuff more than 1% (if any) of your income into lottery playing--and it should still be included into your regular "entertainment" spending.

MSN to Twenty-somethings: Take Note!

So last week I posted an article on "Reckless Saving" on which I..disagreed with. There was an excellent rebuttal written by another writer for the same website which you can read here. Ok, on to today's topic.

I think it's important to re-emphasize the importance of time vs. money when you are working and investing a portion of your salary. Starting in your 20s to prepare for retirement is no new trend--I've come across many folks who plan to "retire" at 30 or 40. I don't know what they plant to do for the next 40 years after that, but that's another story that you can share in the comments section if you fall in said category.

But if you plan to slowly build up your investment income and retirement level, consider the following insight from MSN:

Imagine, for example, that you want to have $1 million by the time you retire in 40 years. That would be enough to provide an annual retirement income of $40,000 for the rest of your life.

But in fact, you’ll need $3.26 million, because if inflation averages 3 percent a year, that's how much it will take to buy what $1 million buys today. The $3.26 million should produce an annual income of $130,000 — equal to $40,000 in 2007.

I know what you're thinking--$1 Million would be plenty to live in retirement, right? I mean by then you would have paid off your home, sent the kids to college, and cut down your diet to the essentials of applesauce and medicine. (Well, maybe it won't be that bad.) However, there is some truth to the hidden tax of inflation--$1 Million went way farther in 1967 than in 2007 and rest assured that in 2047 $1 Million would get you even less.

As we've said before, it's not the money that matters. It's the time:

Start investing now and earn an average annual return of 10 percent — ambitious, but possible — and you’d have to invest about $7,400 a year to get to $3.26 million in 40 years. But if you wait 10 years to start investing you’ll have to set aside nearly $20,000 a year.

Yikes! Waiting a simple 10 years (meaning if you start at 33 rather than 23) you would have to expend three times as much money to retire with the same nest egg at the same point. (And that's over a 40-year horizon). It's tough sometimes--you get out of school and being responsible is the last thing on your mind--most feel that they will "always have money" and don't bother investing at all. Then you'll hit 30 or so and suddenly it's time to "get serious." Why wait till then?

The source of my quote above come from an informative MSN Article on advice for young investors. There's other tidbits on getting involved in mutual funds (and less on individual stocks), watching those fund fees (just get an index fund), and having the discipline to pull out of the market as it ebbs and flows. Good reading material.

I'll be traveling again, so make sure read about other blogs to the right (Face Bookers click through to see what I mean). And do me a big favor? Make sure you mention that I referred them to you. Traffic exchange and all :-)

See you soon.

Young and Confused…or Maybe Not?

So I found this article via TheStreet.com, written by Cliff Mason an-up-and-coming 20 something who wrote about "reckless saving." I read with interest with the pull-in line that advised young people "not to save money." Continuing in disbelief, he continues the theme with the following gem:

Many of you thought I was being reckless and irresponsible when I advised young people not to save money. I couldn't disagree more strenuously. There's no percentage in being a paragon of self-restraint and spending discipline while you're in your early 20s.

I was stunned that this guy works for a major financial media agency. The only saving point I can pull out of this is "early" 20s (he's 22). I'm 26, and I think I'm starting right on time (I began funding my 401(k) at 25). Perhaps he says this because most people in their early 20s have little or no money to save. However, he kills any last remaining hope I have for his philosophy when he states the following later in the article:

If anything, you're taking a dangerous and unnecessary risk if you try to be disciplined about money in your 20s. The risk is that you might make it to 30 or 40 without ever having had a prolonged period of irresponsibility in your life. And it's not just your youth that's at stake, it's your future.

If you spend your 20s grinding away, trying to follow all the financial disciplines that we're told make you a responsible adult, you'll never get the recklessness out of your system.

So, this is what he's going with. The two main points I've pulled from his article (you can read it to see if I've misled) is that between 20 and 40 there two extremes—you either save/invest your money OR you can live the fantastic life, but definitely not both. It's an unfortunate false choice.

As with anything in life, balance is the key. You should work to save what you can as early as you can. If you start in your 20s, saving 8-10% of your income in a 401(k) is a great idea because you have time to outlive the risks and market fluctuations and still do well. Not to mention that many companies will add more money to your contribution (free money). Waiting until you're late 30s or 40s to get started just makes things much harder. Plus, we've covered the importance time has over the actual money invested, here—with the actual Excel math calculation.

That being said, I think Mr. Mason is smart—he probably wrote the article to get a rise out of some readers. (He got me). I also think he makes some good points about how kids can't be kids these days with over-scheduling and rigid discipline (but I thought our generation was lazy and undisciplined…) which I could agree. It's not all about money, but with the protective safety nets projected to get smaller (Social Security, rising costs of health insurance, decline of pensions, and rising taxes) the burden of providing for your future days are falling more on the individual.

But maybe I'm just being too much of a financial "stiff"...what do you readers think? Does this guy know what he's talking about?



By the way, regarding our stock market game. Two points to understand-- (1) It's not too late to join us. (2) This game is to help people have a long view of the stock market. If anything, the game should be even longer, but I figured that it would be hard to keep people's interest for a year. Also, I don't know who 2win or SS07 are. If those are you, send me an e-mail or Facebook message.

Total Investing, Chicago Style

Ever Heard of John Rogers?

Maybe you've heard of his company--Ariel Capital Management. I was reading an article posted on CNN and was quite intrigued with his "investment plan." Summed up in the article title "Buy. Hold. Profit. Give Back." Here are some of the highlights of the article:

Rogers typically holds a stock for four or five years, an eternity compared with the 14-month holding period of the average mutual fund...In the past decade his fund has earned nearly 14 percent a year, beating the market by more than five percentage points annually and outperforming three-quarters of all similar funds.

Ariel appears to refrain from loads or high fees, but if you have a 14-year record of beating the market by an average of five points is not too shabby at all! It just goes to show the superiority of patience and risk-taking by buying and holding the right stocks, without running up fees by having a high turnover (the flagship Ariel Fund has a turnover of 28%). To be fair however, compared to others in the business under the same investment strategy, he is par for the course in terms of performance--about average. But let's not stop there.

What really stands out is the "give back" portion of the investment strategy, on how he decides to empower inner-city students by teaching them the importance of investing.

Question: Why don't African Americans save and invest more?

Answer: I think it comes down to public education. The "three Rs" need to be the three Rs and an I: reading, writing, arithmetic and investing. Financial literacy is just as important in life as the other basics.

Question: How have you tackled that problem?

Answer: We wanted to start with very young kids. So we adopted a public school on Chicago's South Side and made investing part of the curriculum.

We give a $20,000 class gift to the first grade and manage it, with John Nuveen & Co., until they are in sixth grade. Then the kids take over and pick real stocks with this real money.

When they graduate in eighth grade, they give the original $20,000 back to the incoming first grade. They donate half of any investing profits to the school and divide up the rest.

With that money each student opens a 529 college savings account, to which we donate another $1,000. So they leave with something tangible. And the investment curriculum helps these kids with their math skills; the test scores are really high.

I think this is a great idea, and I hope to do something similar in the future--I may not be able to pull from millions to give back, but I definitely admire and will support results-oriented programs like the one above in any capacity that I can, financially or otherwise. I also encourage you readers to seek out and support similar programs in your area--whether it's through corporate responsibility programs like Ariel is doing in Chicago, or giving regularly (financially and by volunteering) to your place of worship or civic organization. Seeing this makes me hope they will pull out a similar program here in New York City. It also shows how investing in your community will help us all over the long term.

Well, there's a thunderstorm a-comin,' so I'll get off this computer. I will be traveling over the next two weeks, so if you don't see any articles from me directly, please don't hesitate to check out our Newsreader over to the right (which is updated every day). Those of you reading through Facebook will have to click through to our website.

See ya soon!

Dispelling an Investment Myth – You Have to Be Rich to Invest

I was participating in an online discussion forum and the topic of investing came up. The person in question mentioned that the capital gains tax shouldn’t be low (they are currently at 15%) because no one would really benefit from such low rates because (I’m paraphrasing):

“you have to be rich to invest.”

Yikes!

I thought that this myth was pretty much dispelled a long time ago. I would argue that the reason that capital gains taxes are as low as they are is because it encourages Americans from all walks of life to invest in the stock market, real estate, and other securities. It would especially be beneficial to those who may end up living on a fixed income later in life.

Remember those film strips in elementary and middle school which covered such topics like safe sex and smoking that seemed just a little bit “dated”? Well, the link below is just one of such films. (Though not in filmstrip form, and no sex--it was 1957). It’s from the 50’s, but I still think the main points still apply. Hat tip to the Get Rich Slowly blog where I stumbled across this (it’s available on YouTube). Check it out here.

If you decide not to click through, the key points in this video (once you get past all the skips and jumps in it) talk about how to invest your money wisely using a dividend re-investment plan, or DRIP. You set aside a certain amount of money each month to go towards purchasing securities, and over time, you can amass a sizable amount of money over time.

Just to be clear, don't think you have to be rich to invest. In fact, the opposite is more often true. People get wealth by investing--investing not only in money, but also in themselves (through knowledge acquisition and giving back to their community). It simply involves balancing risk and not expecting the government to cover everything for you cradle-to-grave.

CNN Finance - Rules to Grow Rich By...

Besides the convoluted title, I read with interest some of CNN Finance's "25 Rules to Grow Rich By." I will post a couple of them here (with comments) but you should click the link for the full list.

12. If you're not saving 10% of your salary, you aren't saving enough.
The earlier you start saving, the less you'll need to set aside every year to meet your goals. That's because you allow your money more time to grow -- the gains on your invested savings will build on the prior year's gains. That's the power of compounding, and it's the best way to accumulate wealth.

Saving at least 10% of your annual salary for retirement is recommended, but the older you start saving, the more you'll need to save. If you start at 50, you may need to put away 30% a year and still postpone retirement by a few years.

From site stats, it appears most of the readers here are well under 50 and can probably meet this one, although I can see how it can be pretty tough starting out. I personally am saving 8% because I'm setting aside a good bit of my savings for shorter-term endeavors (house down-payment, and Other Things).

7. To figure out what percentage of your money should be in stocks, subtract your age from 120.
Since 1926, stocks have returned an annual average of 10.5 percent, long-term government bonds returned 5.1 percent, and "cash," measured by Treasury bills and other short-term investments, has returned just 3.1 percent. In other words, if you're investing for the long-term, stocks are the place to be. But in the short term, the stock market can be downright dangerous, with much more severe drops than the bond market has.

That's where this rule comes in - the younger you are, the more time you have to recover from stock-market crashes. As you get older, you should gradually move money out of stocks and into bonds.

Note that these returns are over a long-term period. If you are looking for short-term (less than 5 years) place to park your money, I wouldn't advise you to place it in the stock market. Over longer periods though, there's no better place to put it--even real estate returns about 4-6% on average. And to get that market average, the best place to be invested is probably a market-tracking index fund.

13. Keep three months' worth of living expenses in a bank savings account or a high-yield money-market fund for emergencies. If you have kids or rely on one income, make it six months'.
An emergency fund is a hassle to build, but you'll be glad you did next time your transmission sputters or your boss hands you a pink slip.

I was talking to some mentees of mine and made sure they were aware of this rule at a young age. You won't be able to build six months of income in a month or two (unless you're very good.. Nah, I don't think anyone is that good.) It will take probably 4-6 months to get a secure account unless you spend much less than you earn. Nevertheless, it's a very important step. And don't use just any old "bank saving account." Loook for a high-yield savings or checking online.


Next time I want to tackle this myth I keep hearing that you have to be rich to invest. We'll try to convince you that you should look at that the other way around. Take Care.

Take your 401(k) Up a Notch!

Most of you already know the basic of personal finance--properly planning your spending, developing an emergency fund, saving as much as you can, preferably in an interest-bearing account. If you're working, and you're ready to place 8 -15% of your money in your 401(k), it's important to take charge of the options placed before you. Most individuals do little research on their investment strategies, often opting to

(a) let the company you work for allocate (spread around) your money, which usually means it will fall 100% into company stock, or
(b) finding the fund with the highest percentage and stashing your money there, or
(c) get confused and NOT save at all (give up).

If you've chosen (c), I implore you to come back to the table and not give up. The only way to learn is to learn about your investments and to try. (Take risk). If you've chosen (a) you're putting yourself in quite a high-risk situation.

Let's focus on (b). Since most mutual funds under-perform the market average (especially after deducting for taxes and portfolio turnover), you should seek with caution how you stash the money in the fund with the highest return. You should first check to see what number you're looking at. Make sure the return percentage is annualized over at least 5 years. (The longer the return period though, the better). Don't bother looking at how the fund performed over a 1 or 3 year period. 5 to 10+ years of having returns greater than the S & P 500 (after deductions) shows a consistency in beating the market.

Second, you should look at the prospectus on the fund. Your company should have these readily available. If it is not, then you ask them to provide them for you, or they should at least be able to answer whether the returns you see included loads, taxes, and turnover. (A quick note--turnover basically measures how often the mutual fund you hold trades in and out of securities. The more turnover, the higher the capital gains taxes, which will come out of your returns).

Consider investing in an index fund if the company offers one. This fund type invests in the S&P 500 (or another market index) proportionally across the entire index. Remember when I told you above that most mutual funds under-perform the average? Well, an index fund is the average. And the fees, taxes, and turnover are low enough to give you strong returns. (We'll explore Index Funds again in detail later).

Finally, consider investing in international stocks. An index fund that invests in international stocks is usually a pretty good bet because you can invest in an international sector and you can spread your risk around a bit.

So if you haven't checked it in a while, visit your 401(k) and make sure you're on the right track. Make sure your invest wisely, and don't get jittery with market fluctuations. Work towards allocating your investments towards index funds in your portfolio (if you have that option). If you don't have that option, complain to human resources, but then place your money in funds with low turnover, low fees, no loads, and consistent returns over at least 5-10 years. Supplement it with some international funds. Then relax. You'll be fine.

Questions? Comments? Drop us a line.

Happy Memorial Day

Just wanted to wish you all a happy Memorial Day and we'll put up an article later this week. In the meantime, check our newsreader on the right and see what others have up right now. If you read an article on another blog, please take a quick moment and tell them that you were referred by Wealth Weekly in the visited blog's Comment Section. Take care, and remember, as you digest/eat your meals today those who have fallen and who still fight to defend our freedom.

Change Your Comfort Level

News Flash: People don't like being made uncomfortable.


In the wake of the two boycotts from last week--one by the e-mail chain letter many of you probably received (and will get next spring) and one by rapper-now-blogger Twista, the price of fuel responded in kind—by going UP last week. Note that the two actions are probably not linked at all, but what this shows is that one-day boycotts generally don't work. The most famous boycott I can remember was the Birmingham Bus Boycott, and it lasted over a YEAR.


Thing is, in order for major change (of any type) to happen, people have to change their behavior over a long period of time. Let's use some finance examples. Generally, people don't mind making changes to their financial behavior as long as it doesn't involve a lot of work. So people who haven't really developed spending plans on paper in the past won't do it moving forward. Oh sure, they'll start and may get a couple months into it, but sooner or later it gets annoying and they stop.

Oftentimes, this refusal to change behavior can be taxing to your finances but the perceived cost is not worth the behavior change. A one month gas boycott, for instance, sounds as if it could work... Maybe.

However, people may not be very conducive to using mass transit, biking, or even carpooling to work because it would require a major lifestyle change, even if it saves money. It removes you from your comfort level.


So, what to do? Well, a disciplined lifestyle is the foundation needed. Make a decision and set a goal-meeting timetable. You should also visibly track yourself, which will keep you inspired to go on. More specifically, try to take the tough decisions on how to better manage your money, or try to generate extra funds for saving purposes by taking on more work. Let's face it—gas prices probably won't be coming down any time soon. It's probably best to adjust and adapt while others complain.

Can We Stop with the Gas Boycotts?

So it's that time again. Summer is approaching, and school is letting out--which means trips to theme parks, cookouts, family reunions, and the requisite increase in gas prices.

It's no surprise that the e-mail boycotts are back. This one calls for a strike on May 15th that for that day we don't buy gas, which will apparently (and inexplicably) lead oil companies adjust their prices down for the American consumer. From the Charlotte Observer:

A one day "gas out," the note claims, will cost oil companies billions of dollars and tempt them to lower fuel prices. A similar campaign 10 years ago led to a 30-cent drop, it alleges.

Of course, the 30-cent drop is unproven. More from the Observer:

Boycotting gasoline at the pump for a day is analogous to the fat guy who boycotts the "Biggie Fries" for one day as a means of dieting," said Tom Kloza, chief analyst for the Oil Price Information Service. "It accomplishes nothing."

Mr. Kloza is right. Boycotting gas for 1 day will accomplish nothing, especially when you consider most people will fuel up the day before or the day after, making virtually zero impact to any oil company's balance sheet. The money they didn't get on the 15th they get on the 14th or 16th.

Another newspaper states that the boycott is high on symbolism, and less on effect.

My advice?

- Consider purchasing some stock in these companies. They have a product that is always in demand, and the demand GOES UP as they raise the price. If demand stayed flat or went down, I could understand, but apparently people have too much "stuff to do" to bother changing their driving habits. Which also leads to...

- Consider changing your driving habits. Carpool once a week. Try talking your employer into teleworking once a week (or every other week). Use mass transit if you have access to it. Plan better driving trips. Slow down. All these can be helpful.

Ok, that's my rant.

I'd be interested if anyone is going to boycott on May 15th. Let's pay attention to keep note how the 15th Boycott impacts anything. I'm not holding my breath.

The Price of Milk - An Udder Shame?

So says the New York Post at least. They released an article lamenting the price increases coming in Milk. It seemed to bring doom and gloom to those poor families who are expected to feel the pinch. To wit:

"I have a 10-year-old daughter, and all she drinks is milk. We drink at least two gallons of milk a week in the family," said Rachel Harkel, 49, an actress who lives in Boston but is often in New York for work.

But she said the increase in price, along with the rising cost of gas, taxes the family budget.

So how much is the price supposed to increase? Two Bucks a gallon? Five bucks a gallon? From the article we find that in New York that "...the state-set price of a gallon of milk in New York rose 16 cents to $3.54." Sixteen cents. Even if you buy four gallons a week (most families average 1-2) that means you'll be paying $2.56 more per month. I'm pretty sure you can find $2.56 to continue to pay for milk the family! I think the media is being a bit alarmist here, but maybe it's just me.

Now, I understand when it comes to businesses who use large amounts of milk regularly, however we cannot expect the price of goods to remain stagnant. Those costs may be passed along to the consumer, but I think they may be able to handle a ten- or fifteen-cent increase in their family budgets.

The key here is to avoid panicking or using irrational measures because of the increase. If the Wal-Mart/Target/BJs location near you offers a lower price for milk yet its 15 miles away but the local grocery store is 3 miles away, it will not be in your best interest to drive 12 extra miles (wasting gas) to save twenty cents on milk.

What do you think? Am I missing something big here?

Tax Freedom Day and Subprime Bailouts

So today is Tax Freedom Day, the day where most Americans have worked off their tax burden for the year. In other words, because the "average American" falls in the 25% tax bracket and assuming you receive relatively equal check payments across the year, all the money that you've made up to this point is about the amount you owe the government. For the remainder of the year, all the money you make is "yours." (A quick note--Tax Freedom Day varies by state because some states have state taxes as well, so in some areas it's later than April 30, in others its earlier, but generally it falls about 1-2 weeks before or after April 30.)

Of course the government already knows that if cannot send you a bill for three-month's salary. The reason is because the government knows that most Americans cannot budget. (Most of us don't know how much money we spent last week, let alone how much we spent in the past month). So, the government gets its cut upfront by taking three months worth of pay from you but they spread it over the whole year.

In other news, some words on the "subprime meltdown." There is word that US Senator Chuck Schumer (one of my Senators, no less) is out to craft a bill that would "bail out" those who received bad loans from subprime lenders. Luckily, it appears not to be gaining traction. From the Washington Post:

"I'm not interested in (a bailout) at this point. I think this problem can be addressed without going down that route," said Sen. Chris Dodd, the Democratic chairman of the committee.

Sen. Richard Shelby, the most senior Republican on the panel, said he would be "unalterably opposed" to a costly federal program to rescue troubled mortgage borrowers and lenders.

"I believe the subprime problem will go on for several years," Shelby said, but added that market forces would be corrective.

Perhaps the spirit of bipartisanship in government isn't completely over. Personally, I think there is too much emotion wrapped up in the debate here. Some feel that they were "tricked" or "teased" into an introductory rate (from adjustable rate mortgages) that went up too high, but I also think it's the responsibility of the person receiving the loan to know what they're getting into. I'm sure the emotion of owning your own home is great—however, as home buyers we should jump into home ownership with caution—saving a couple years for a down payment and buying a home within you means is still the best way to go. Don't be in a rush to buy a home, otherwise you can end up in over your head. They'll still be making homes in the years ahead—I promise.

I also don't think the government should bail out the businesses who made these loans either. Lenders who lent to people with bad credit at teaser rates probably knew exactly what they were getting into. Bailing out either the lenders or the borrower is a bad idea because it sends a message that its OK to buy a house out of your range or to extend loans to those who most likely can't pay it back. It's a tough lesson for many, but it's necessary.

What are your feelings on bailing out those who chose sub prime loans? What about the lenders who issued them? And do you think our tax system is fair? Speak your mind!

My Credit Score – Is it Really Necessary? (Repost)

So recently I have seen some responses on a conversation over at Free Money Finance regarding the need for a high credit score. There are two major schools of thought regarding the importance of the credit score. One side, championed by such personal finance gurus like Dave Ramsey, says that there is no need to have a solid credit score, while others say that a healthy credit score is needed to get favorable rates on insurance and loans (especially like homes and cars, which are the two largest purchases most Americans make over their lifetime). They also advocate using the cards to get the cash-back rates and rewards points.

Where do I fall? Not surprisingly to regular readers, somewhere in the middle. I hold three credit card accounts but I haven't used them in over a year. My largest monthly expense—rent in New York City—is with a company that doesn't accept credit-card payments. Even my workplace has converted to using a cash card system in place of using credit cards. The remainder of my spending is pretty low—to the point where a 1% cash back reward would be pretty meaningless. So my score will probably be pretty flat from where it is now.

But don't you need it?

Not really. Over the years most lending companies have used the credit score to make up-or-down approval decisions as well as determining who gets what rate. But since the credit score is basically a measure of how well you manage debt, wouldn't it be unfair to use such a measure against someone who has managed their finances well enough not to need debt? Think about it—if you received scholarships to pay for college, paid for used cars, and paid your rent on time, shouldn't that count? FICO says no. In fact, your current income or the amount of money you have saved does NOT figure into your credit score!

However, there is another way.

(The following portion of this article was originally truncated. Sorry for the inconvenience.)

Manual Underwriting

Seek a company that performs manual underwriting—which looks at things you have more control over, including:

- employment history

- salary

- rent records

- financial statements i.e., your 401(k)/IRA history, budgeting techniques, etc.

In other words, a good company that uses manual underwriting includes indicators on how you manage wealth, not debt. To be sure, they still look at your credit score, but it holds a lot less weight than real-world indicators do. Before FICO, manual underwriting was the case-by-case, more personal indicator that loans were made.


What about Employers and Apartments?

Some employers and apartment rental agencies include the FICO score in their decision when they decide who gets into their business. If your score is low or non-existent, they could lose your business. (At least that's how I look at it). However, if the agency in questions asks for your score and its not as high as you think they'd want it to be, take some initiative—write a letter explaining how the FICO score may not be truly representative of your ability to not be a liability. Provide evidence—your latest W-2, previous rental history (if any), proof of employment, etc. If that's not enough, then take your business to someone who will value your whole record.

Hedging Doesn't Hurt

We at Wealth Weekly don't encourage our readers to get into debt to boost their credit score. However, if the solutions we've provided above don't fit you, then take on credit at your own risk. You should never, ever carry a balance. Also, be careful not to use that piece of plastic to buy things you know you wouldn't have bought in the first place. That way you could have a two-pronged strategy when shopping for a good rate on your particular loan. In our free-market system here in America, you can always go to another company if you don't feel your business is being respected.

So don't make it your Life's goal to get your credit score high—if it happens, great, but it's not necessary—there are other ways that may leave you in even better shape financially.

Store Up on Your Savings!

Hi Readers,

This week I've decided to tackle an "everyday" situation we face every day. Let's take a typical example--going to the grocery store. There are many of you out there that are anti- store brand types and there are some out there giving it the old College Try. I fall in the latter category and wanted to put up a few points for you to consider on your next visit to your grocery store.

- Although in many cases people claim to "know" their national brands and so claim a clear preference for them, a 2005 double-blind taste study found the opposite was true in many cases:

Testers (80 percent of whom claimed to "regularly" buy national brands) said snack foods were almost a toss-up, although store-brand chocolate-chip cookies got the nod, 56 to 44 percent, and national-brand potato chips topped the store brands, 53 to 47 percent.

What about the Quality? And what could this mean from a cost perspective?
What's stunning is that people are completely unwilling to try store brands because of upbringing, and misinformation about how the store brands and how their products are made.

Generally, the store brands are made by smaller manufacturers who use the same techniques and formulas. For example, think about orange juice. If you could buy juice concentrate from the same place as the big guys, and you can make the same type of product line as the big guys and get it to a grocery store with virtually no advertising expenditures, you can splurge a little on the packaging and undercut the national brand at the shelf. It's happening in large numbers.

A University of California, Davis, Graduate School of Management analysis published last winter in the Journal of Product & Brand Management found that for the one out of four product types (from tuna to soap to instant coffee) in which the store brand was higher in quality than the comparable national brand, the national brand cost 30 percent more.

Store brands have come a long way indeed. When I was little, stores generally seemed to have taken a very lax approach to presenting their product next to the Big Guys. I could see why people would shun the black-and-white box Honey Round-Os when compared to the Honey Nut Cheerios in the crisp honey and gold colored box. At some point though, the private labels decided to take a more forward position in their products and are now being rewarded.

In closing, I would urge you to consider experimenting with store brands and other private labels in the stores. Try substituting your garlic bread for the Kroger brand. Try the Wal-Mart Honey Nut Spins, Publix Orange Juice, or the Pathmark Chips. If you don't like it, you can switch back. You could really make a good dent in your shopping bill.

What do you all think? Share your experiences (positive, negative, etc.) with the brands you've tried at stores near you. Perhaps there are more of you out there than you think.

The "Future" of Social Security

The "Future" of Social Security is in doubt.

So this week I wanted to explore in depth the impact of the Social Security issue. I was inspired to write this from an extension of a highly-debated article written over at Free Money Finance. You can read his excellent article in its entirety [here]. To summarize, he looked at the impact of allowing workers take a look at contributing their own money into a fund rather than having the government do it for them. Turns out that the contributor would be entering retirement with a nest egg of nearly 1 Million Dollars! It may not sound like much, but imagine having a million dollars paid to you in retirement assuming that you would've paid off your house and car!

Well, back in Reality, it probably won't happen. Social Security after all is not a retirement program, but I'm not convinced that it's even security. The program is showing signs that it's no longer sustainable, and younger workers are all quite aware that they're paying into a system in which they will see very little benefit.

To illustrate, let's look at Social Security like a pot. You and your friends contribute a portion of your money into a pot, which will be distributed to older folks who have little or no pension and are too old to work—you don't want to put the elderly on the street. The system continues, so when you get older, you get to pull from the pot while younger workers pay in, and the cycle goes on. In theory, at least.

However, you don't get out as much as you put in because there are more people retiring than entering the workforce. More people living longer, and a shrinking ratio of workers are paying in. To exacerbate things, the money distributor (the US Government) decided that the program was working so well, that they can use some of the "surplus" money to pay for other things and write IOUs.

Well, that's the problem we have today. The ratio of those putting in vs. those taking out is shrinking. So the government has tried several "solutions" to keep the system sustainable. One example: raising the age at which you can take money out, and/or lowering the amount of money you can take out. These are only temporary fixes and you can see that as people live longer it gets harder to do that. And if you are a black male, the stats say you'll die before you're eligible to receive SS funds anyway.

Which is why I don't think it's that bad of an idea to allow younger workers to take a portion of their earnings and to place it in an account of their choice to collect a higher return on the money put into the system. At the rate we are moving now, we won't have enough "government security" to ensure any person any respectable amount of money in the future. And remember—government employees are on a totally different plan than most Americans, so don't expect them to take more than a cursory interest in your future.

So, as a younger worker, I encourage you to plan for your future as if the government will stick you with the raw end of the deal. Inquire about 401(k) programs as soon as you start working and also start contributing to IRAs before you budget yourself to a point where you "can't afford" to contribute. Then, if the feds do find a good way to keep Social Security solvent, you won't be depending on that government check.