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.

Happy Easter!

Readers,

Wealth Weekly will not be releasing any articles this weekend in observance of Easter. Please take a moment to read some of the articles in our Archives, or take a look at our personal finance channel section to the right, which pull articles from some of the best writers form the web. I'll have an article up next week. And if you're still interested, join our MarketWatch game (see preceding article below).

Thanks, and have a wonderful Easter Weekend.

--Charles J