Wealth Weekly

Humor Tells the Truth, Case # 129,812

2010-01-25T11:49:00.000-08:00

The Small and Medium Bank Quiet Revolt: What to Consider

2010-01-22T14:34:00.000-08:00

I first ignored the small-bank movement because I thought it sounded weird. But after doing a little research, it sounded compelling. The whole idea is based on "people-powered" (read: populist) regulation of the Too Big to Fail (TBTF) banks. It encourages consumers to move their money from these large, risky banks to smaller community banks and credit unions who invest with the local community. Who can argue with that?

So I sat down and considered all that had to happen to make this a possibility for me. And it's a pain to do. Think about all the things you have in the typical checking account: your paychecks and refunds, and other "income" are linked to this account. You have online billpay for all your "outgo" spending. Your PayPal, Amazon, and other store accounts, credit cards etc., are all connected to your account.

However, banks are getting more and more annoying. You get charged fees out the wazoo for withdrawing money from the wrong place (like other ATMs), paying money in the wrong place (like international payment fees), drawing out too much money, etc. Also, many banks (especially the TBTF Guys) tend to engage in mean practices to extort as much money as it can from its customers. For instance, some banks like to screw over smaller customers with balances close to overdrafting by debiting larger transactions to draw them in the red, then processing the smaller charges one-by-one to build up overdraft fees. The industry is indeed shady; and it may not need to be taken over, but you need to protect yourself.

Plus, there are other, intangible benefits you can experience by going local:

...community banks offer something big banks find nearly impossible to compete with -- local ownership and the ability to talk with a familiar face in the event of unexpected financial hardship, said Tyson of the community bankers group....

Here's a link to Move Your Money, a site that will help you identify area banks with a grade of "B" or better with respect to financial strength and customer service. I'm not advocating you make that jump just yet. I haven't. But it's a good way to start the research that I'm doing. But you should also ask yourself these questions.

What Values Matter to Me?
It may seem strange to consider, but you should try to find a bank that can align with your values. Do you want a banker you can talk to when you get in a tough spot? Or do you value the "long-distance relationship" where everything is done online? Remember--you may need a loan for a car or home one day, and better rates are given to the well-known customers.

What are the Fees Like?.
Some banks like to lure you in with a free "X" but it's only for a few months. Then you can get gouged on the back end with loads of fees for minimum balances, checks written, ATM withdrawals, etc. think about how many hand-written checks you write per month how often you withdraw from ATMs, and where. Just walk into the bank, and tell them you're interested in opening an account, and ask for a fee schedule for various accounts. Some will hand it over, others won't. Its important to track down the schedule of fees for banks to find the right fit for you.

Go Slow
Finally, if you decide to make the transition, do it at your own pace. I suggest opening an account at your small/medium new bank (or banks) and begin transferring funds and switching accounts a few at a time. Maybe start with the online shopping ones. Once you get the rhythm, you can move a little more money a few more accounts. Perhaps you can draw your TBTF Bank's Account down to the required minimum funds (if they have one) and leave it there. Then go to your HR department and redirect your deposits to your new bank.

And enjoy the peace of mind!

Or something. I'm just beginning to do my research and plan to move. We'll see what happens, and I'll keep you posted.

Next Year’s Roth IRA Loophole: Get In If You Fit In?

2009-11-15T07:09:00.000-08:00

We’ll start with a question: when you retire, do you think you’ll be in a higher tax bracket or a lower tax bracket when you quit your job? Let me explain why this question is important. If you have and regularly contribute to a 401(k) or IRA, you are storing money away pre-tax—which means you get to store away some savings from your gross pay, and then Uncle Sam comes and gets his cut. So you’re earning interest on untaxed money. Then at retirement, whichever tax bracket you ended up in is where you will be taxed as you make withdrawals from your account.

In a Roth IRA/401(k), the government gets his cut first, and then you get to save off of the remainder. But at retirement, you get to take out as much money as you want as often as you want without the money being taxed. So generally, if you expect to be in a higher tax bracket in your last few years of work, the Roth IRA is for you.

The problem, however, is that Roth IRAs are subject a several limits. From Reuters:

Only taxpayers who earn less than $105,000 ($166,000 for joint filers) in 2009 can contribute the maximum amount ($5,000 per person, with a $1,000 additional catch up contribution for folks 50 or older) to a Roth IRA. And only people earning less than $100,000, single or married filing jointly, can convert their traditional IRAs to Roths.

That would probably qualify all but a few of you. However, for you unlucky few who are in the upper echelon, that income limit will disappear next year...for one year. You will have to pay taxes on the rollover however, and depending on the size of the nest egg you’re rolling over, you’ll need a pretty significant cash reserve to cover it. For instance, if you have $40,000 in an IRA and fall in the 25% tax bracket, you’d owe $10,000 to the government to switching. So if you can afford it, go for it!

I won’t spoil anymore for the article (and besides, I’m not there yet). But I think you should give the whole article a read. They include other factors to consider if you think about making the switch.

Mutual Fund Fee Lawsuit Heads toward Supreme Court

2009-11-04T18:25:00.000-08:00

Here’s a story that caught my attention as an investor:

Nov. 2 (Bloomberg) -- John Bogle helped create a mutual-fund industry that has grown to $10 trillion in assets. Now the Vanguard Group Inc. founder is backing investors asking the U.S. Supreme Court to limit the fees charged by fund managers…
The dispute pits the fund industry against trial lawyers, consumer-rights groups and Bogle, an industry pioneer who started Vanguard in 1974. Bogle, who filed a brief supporting the Oakmark investors, says mutual fund shareholders are being overcharged with fees that seem low when expressed as percentages yet add up to a multibillion-dollar windfall for advisers.

Emphasis on the last sentence mine. So let’s unpack this. It’s no secret that the mutual fund companies charge high fees for managing their funds. Called an expensive ratio, it’s the management fee the company charges for “taking care of your money.” The article is right that these companies take up to 1.5%, some more, of your returns (or lack of returns) as a fee.

This demands a closer look. Let’s say the S&P 500 returns 5% this year. If a mutual fund company gains you 6%, (1% above the market from your investment over last year) they will deduct 1.5% of it leaving you with and effective 4.5% return. If they LOSE 6%, they STILL deduct 1.5%, leaving you with a 7.5% loss. And don’t forget that “stellar” track record that actively managed mutual funds have. But “what difference does 1% or so make over the long term?” you may ask. After all, you get to keep the other 99%, right? Well:

Assume that you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7 percent and fees and expenses reduce your average returns by 0.5 percent, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5 percent, however, your account balance will grow to only $163,000. The 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent.

This is what the plaintiffs are fighting against. I’m a bit unsure of what they want to happen (certainly they don’t want the feds setting profit rates). I think there is still a large enough amount of mutual fund companies out there where consumers can shop around for a balance of cost and service.

The “No Sugar-Tax” Ad Shows We’re Not Pure Libertarians

2009-11-01T18:50:00.000-08:00

Have you seen it? It’s the series of ads with the “average mom” walking into a home concerned that raising the price of sugary foods will break the family budget. If you haven’t seen it yet, check it out below:

The ad is run by the Americans Against Food Taxes, with a mother agonizing against taxes on sodas and juice drinks, as if it’s the only beverages available at the store. (Full disclosure—AAFT is a consortium of mostly large convenience stores and fast food places that depend on sugar for revenue.) If times are tough, maybe it will require us to cut back on the sugar, you know? I’m pretty agnostic on the issue—if the taxes go up on soda from 1.50 to 1.75, dah well.

I see why the government has decided to propose “mini-taxes” here and there. I’ve never really been anti-tax, but the taxes have to be sensible. If you’re simply raising my taxes to build a monument in your district, then no dice. However, if we’re trying to come up with a way to keep me from paying far higher taxes down the road, then I’ll listen to you.

We as a society don’t fully subscribe to the “live and let live” mantra politicians put forth. We’ve decided that we’re not going to let people die in the street if they didn’t save enough for retirement, or if they are strung out on drugs, or if they don’t keep themselves healthy. Most of us have a rugged individualist streak, but when things go wrong, we turn to others to bail us out of bad lifestyle choices. And now that the economy has gone sour, people are looking to the government, which means they (read: WE) will foot the bill for expensive health-related problems, and entitlement programs like Social Security and Medicare. It’s a choice that we’ve implicitly made.

Such choices have to be paid for—and people are living longer (but not necessarily healthier), which taxes the entitlement systems which is growing to include near-universal health care. We can talk all day about prevention and education on the dangers of consumption of unhealthy foods and drinks in excess, but as the folks over at the Radical Rationalist say:

For some reason, logical arguments based on medical facts do not convince Americans to curtail economically disruptive, physically harmful or just plain stupid activities. What works? Money.

Pretty much.

Discuss: Putting Too Big to Fail..out to Pasture..

2009-10-27T12:20:00.000-07:00

The more I learn about the too big to fail mentality in our culture, the more I get confused about what to do. Both arguments for and against this concept can be are summarized below and are both quite compelling. Maybe you readers can help me get a grip.

Many Americans subscribe to down with Too Big to Fail (TBTF) and use a straightforward, populist argument. The free market is designed to weed out companies that are inefficient. They believe that the Obama Administration and the last one went too far in using taxpayer funds to bailout banks, car companies, insurance companies, etc. deemed TBTF by the government.

Then, there are others who take the I know, but… approach with TBTF. Their reasoning? Many of the companies bailed out were so large and had their reach ingrained into the economy so far that to turn a blind eye would affect more than the direct company. Take the US Automakers, for instance. Letting GM and Chrysler fail would not only affect those who work for the company, but your local GM and Chrysler car dealerships would disappear. So would those who supply them. Auto part stores would be severely threatened with the decrease.

A similar fate would affect the troubled banks, but it’s scarier because most people don’t know who is managing their 401(k) plan. Generally, unless you work for a financial-services firm, your company outsources the managing of your 401(k) funds to an external company (which is a good sign too, because it means your company is focusing its resources on what they do best.) Could you imagine turning on the news one day and finding out some obscure financial management company is on the fritz only to find out that they've been gambling with your money that you've dutifully saved paycheck after paycheck, year after year?

I think the best way to eliminate TBTF is to keep companies from getting too big to begin with. I realize the dangers of this though—what’s too big, and who decides? As a believer in market capitalism, I’d like to say we can let the companies police themselves, but let’s be honest—they won’t until they get caught. And in my recent foray into competition (anti-trust) law, companies collude all the time without the government knowing at all until it’s too late. Everybody is against bailouts of course until it’s their future at stake. Then they want to government to “act up(!!)” So breaking up banks and spinning off car companies into smaller units is the idea. And I’ll leave how they do that up to the experts—but what do you guys think?

Where I've Been

2009-09-19T09:23:00.001-07:00

Wealth Weekly Readers,

As you can see, we haven't had a post since June 25th. I've had some surgery this summer and was away from computers and this site for quite a while. Let me tell you--there's nothing like the irony of laying in a hospital bed for nearly a month watching people ~~yell~~ talk about health care. I'm hoping to get back into the groove very soon and get back to posting regularly again now that I'm sitting at the computer again. Thanks for reading in the past and I hope to see you in the future.

Oh, How Quickly We Forget

2009-06-25T12:34:00.000-07:00

One of the biggest contributors to the downfall of the housing market was the fact that there were too many houses on the market--we were saturated we people who bought houses that they weren't ready to afford yet. Then, when they vacated those homes, property values fell..for almost everyone.

That led to people leaving houses that they could pay for but chose not to because they were upside down on it. (In other words, if they took out a 200,000 mortgage and the value of the house fell to 125,000 they would still owe the 200,000 but would instead balk on the deal, even if they could afford the monthly payments.) This would cause a larger inventory of empty homes, and prices would fall further.

Well, one lesson we definitely learned from that was to tighten up lending standards so that people that bought property were really going to be able to handle the responsibility. We learned that, right? Clearly, Washington lawmakers won't do something crazy like convince two of the biggest lenders in the country to relax the rules again, right?

Uhhh...

(Reuters) - Two U.S. Democratic lawmakers want Fannie Mae and Freddie Mac to relax recently tightened standards for mortgages on new condominiums, saying they could threaten the viability of some developments and slow the housing-market recovery, the Wall Street Journal said.

In March, Fannie Mae (FNM.N)(FNM.P) said it would no longer guarantee mortgages on condos in buildings where fewer than 70 percent of the units have been sold, up from 51 percent, the paper said. Freddie Mac (FRE.P)(FRE.N) is due to implement similar policies next month, the paper said.

In a letter to the CEO's of both companies, Representatives Barney Frank, the chairman of the House Financial Services Committee, and Anthony Weiner warned that a 70 percent sales threshold "may be too onerous" and could lead condo buyers to shun new developments, according to the paper.

The legislators asked the companies to "make appropriate adjustments" to their underwriting standards for condos, the paper added.

OK, any takers seeing something good come out of this? I give it 3-5 years before we start seeing craziness happen again. What say you?

Anyikire: Just Keeping Up

2009-06-08T17:18:00.000-07:00

My fellow colleague Chikaod Anyikire shows his Ramsey Roots in the excellent guest post below. I hope to get him to write for us more in the future.

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The American culture has in recent years evolved around accumulating debt. One of the reasons many people have gained so much is because of the age old adage “Just Keeping Up with the Joneses”. Now, it has become more common to file for bankruptcy and depend on credit cards to maintain a financial lifestyle. Now, after a year of bailouts and stimulus packages there is a small group of people who are saying “I just want to Keep Up”. There are many ways to get your life back on track and gaining financial peace. There are so many spokesmen and women, books, and internet sites that provide information about digging ourselves out of the hole we created.

An effective way is to become conservative when it comes to handling financial decisions. A radio host, Dave Ramsey teaches that aggressively paying off your debt, tearing up your credit cards and never using them, and “Living like no one else, so you can live like no one else” are just a few things he teaches through his books and programs. This means making some tough decisions by sitting down and creating a budget, living off of ramen noodles or rice and beans until you pay off your debt, then taking steps to saving up for retirement, education for our kids, and charities. This financial philosophy creates the foundation to live a life full of financial peace where a person has not to worry about debt collectors, garnishing of wages, and liens against where your family sleeps, your home. The benefits outweigh the future stress that would develop without taking steps to paying off your debt.

Let’s hope that this culture of paying off debt and leaving under our financial means thrives in our culture like a once wealthy Babylon, so that we all can achieve financial peace.

More information about Dave Ramsey … www.daveramsey.com

GM, Citigroup Bow Out of Dow

2009-06-01T07:25:00.001-07:00

The Dow has dropped these "dead-weight" companies from the DJIA and "inexplicably" sees the market rise nearly 200 pts as of 10:30 this morning. GM filed for bankruptcy protection, Citigroup did not (as far as I know). Citigroup has not gotten the negative coverage GM has. I wonder why.

"Good" Credit Card Holders – They’re Headed for You Next…

2009-05-20T10:39:00.000-07:00

First, they came for the late-payers, but you always paid on time and had nothing to worry about. Well, time to start worrying:

Credit cards have long been a very good deal for people who pay their bills on time and in full. Even as card companies imposed punitive fees and penalties on those late with their payments, the best customers racked up cash-back rewards, frequent-flier miles and other perks in recent years.

Now Congress is moving to limit the penalties on riskier borrowers, who have become a prime source of billions of dollars in fee revenue for the industry. And to make up for lost income, the card companies are going after those people with sterling credit.

Banks are expected to look at reviving annual fees, curtailing cash-back and other rewards programs and charging interest immediately on a purchase instead of allowing a grace period of weeks, according to bank officials and trade groups.

Emphasis mine. If companies are moving to implement the above as policy, then you’d best be careful if you own a credit card and call yourself a “responsible user,” because soon it won’t matter. Can you imagine being charged 9-15% interest on a credit card even if you immediately go home and pay off your balance? Once these regulations are signed into law, that may become a reality. At the least, an annual fee will probably be levied if you don't pay one already.

You can find a more extensive list of the coming changes to the credit card companies here. Don't get me wrong, some of the changes I think are very good, like banning credit cards for those under 18 (unless parents supplement their income) and limiting credit cards to 1 per college student (more allowed if credit amount doesn't exceed 30% of college income). These are common-sense measures. Just be aware that the Credit Card Mafia Industry will still work to retain profits, even if it means going after the balance-paid-off-every-month crowd.

People tell me all the time that the reason they own a credit card is so that they can take advantage of the frequent flyer miles and rewards programs. With things like instant interest, those days may soon be coming to an end.

Experts Lament Over 'Paradox of Thrift,' ; "Yeah, And?" Says Americans..

2009-05-03T11:55:00.000-07:00

Welcome back readers. I've been seeing a lot of talk lately on the paradox of thrift, which states that when a group of people save their money instead of spending it (to stimulate the economy), it's a bad thing because that's money NOT going into the economy. Not too long ago, the savings rate in America was near zero, and for a brief while--negative. In other words, Americans were spending every dollar when it came in, and then when there was no money left, started living of of loans and debt. Now, since the economy has tanked, Americans have started saving their money and paying off debt--which is what we do when our futures are uncertain. The experts tell us this is a bad thing when the economy is in a downturn. From the AJC:

If U.S. households are saving more, they are spending less and this change in behavior is hurting small businesses, the major source of job creation in the American economy.

A dollar saved is not a dollar spent. Given that consumer spending accounts for more than 70 percent of our gross domestic product, today’s new-found thrift fueled to a large extent by fear, seriously impairs the odds of a prompt economic recovery. If consumer spending does not pick up, the economy will continue to suffer.

Facing decreased demand for their products and services, the more than 27.2 million small businesses that account for more than 50 percent of U.S. workers on payroll, continue to lay off workers, put on hold expansion plans and reduce capital expenditures —- a confluence of decisions that in the aggregate make things worse for the economy.

This sequence of events contributes to a vicious circle where economic uncertainty creates fear and reinforces the need for increased savings, which leads to reductions in spending and so goes the cycle.

Dah well. We'll get over it.

Honestly, if I were asked, I don't see much wrong with a little savings to shore up your savings. Perhaps bubble-based economics aren't what we need.When housing prices fell in the 1980s, stocks and bonds were up (and so was consumer savings) . When the dot-com bubble burst 9 years ago, housing was stable. Today, both housing and the stock market are way off their previous highs, and I think we need to move away from a culture of debt for everything because it puts us at the mercy of the Credit Card mafiaand loan companies, who, if you've been following the news can turn off the lending spigots even while receiving bailout money or raise their rates to exorbitant highs even if you've been a prompt payer. So when I see the lamenting of expertsabout Americans gaining a bit more control of their spending habits, I urge them patience.

Hot Links: Out of Town

2009-04-15T07:47:00.000-07:00

Happy Tax Day, folks. I've been traveling quite a bit and have been unable to make too many posts, but I think it would be good to check these out..

In there best cracked.com impression, Yahoo lists 7 Myths about Marriage and retirement. In response, all I have to say is to warn you behold the power regressing to the mean.

Bankrate has an idea that many of us overlook--taking advantage of the perks and discounts offered by your alma mater.

I thought this was funny--dolphins are helping fight the pirates near the African seas.

and if you're laid off, check out some of these freebies that can hold you over until you're employed again.

Online Budgeting Tools: Stepping Up Their Game

2009-03-28T18:33:00.000-07:00

We’ve been pre-occupied with all the bailouts so I wanted to go back to basics this week. I’ve found some excellent planned-spending tools that are both online and free! My problem with many of the budgeting tools I’ve seen in the past is that it is only good for tracking and not planning. So you can always see what you spent, but there weren’t many user friendly tools out there to allow you to plan your spending ahead of time and then monitor how you manage your expenses against a set budget. for most, it's pretty pointless to monitor spending that's already gone. You can see that at your typical online bank.

So what I’ve been doing is managing my budget in Excel. It can get a little tedious, plus I have to manually link my accounts in real time to my excel sheet (meaning going online to each account, finding the balances and entering them), and that’s quite taxing. Then this week I came across three nice little secure online spend monitoring programs that do this for you: Buxfer, Mint, and Quicken. Take a look at each one and you can decide which is right for you. All are very user-friendly, they just are tailored to different crowds.

Quicken
You’ve probably heard of Intuit’s Quicken, but now they offer their online service free of charge. Quicken Online is the only one of the three that has an established brick-and-mortar equivalent out there. It probably has the most bells and whistles. Not only can it follow your expenses, it alerts you of upcoming expenses (bills due, etc.) Quicken will also project your “real” balance up to a month or so in advance (by deducting upcoming bills from upcoming paychecks).

Buxfer
Buxfer is probably best designed for the organization/college crowd (those living with roommates, groups of people sharing expenses). Not only can it link all your bank accounts into one viewing location, but it also has an option where it can track group spending and can break it down to each individual. So for instance, if you’re out with a group It also lets users pay each other in a way similar to PayPal. It also allows mobile alerts when user-set spending thresholds are violated.

Mint
I have an account with Mint, which has a nice user interface (but is a bit simplistic). Mint seems to do a better drop categorizing your expenses. Similar the Buxfer, Mint allows mobile alerts and will alert you when you go over pre-set budget amounts. The power of Mint comes in when you start the analysis though. It monitors your spending and determines where you can trim spending and compares your spending (graphically) to those in the US. You can even see average monthly spending data down to the vendor. However, Mint maintains data on their servers, so there is some risk of having your data out there.

My favorite right now is Mint, because it has the cleanest interface and loads faster than Quicken. Quicken is probably the most “powerful” of the three, especially if you own a home and have property to manage. All three are very good online budgeting tools and can help keep your spending in check.

What's Gangsta?

2009-03-17T17:34:00.000-07:00

You hear all this talk about how "gangsta" rappers are. But let me tell you what's really gangsta:

- Gathering so large a foothold in the US Economy that you can convince the American government that your if your business fails, the US fails. That would be the Notorious AIG.

- Asking the US government for 85 Billion dollars for just your company. Then ask for about 40 billion more. Then spend out 90 billion of that with no real results. Meanwhile, throw a party out West. Then ask for (and get) 30 billion more this quarter, no questions asked. That's gangsta.

- Losing 61.7 BILLION DOLLARS (!) over the last three months of 2008, and kicking back 165 million in retention bonus money to over 60 of your boys in the company, prompting Republican Senator Chuck D, er, Grassley to say "Kill Yo'self!"

When asked, tell the government you did it so they won't leave the company. Then let it leak that you gave some of that retention bonus to 11 folks who already left. That's Gangsta.

Acting ignorant (or being punked) by a broke company who seeks to get more money after all this. Not gangsta.

WW Plus: School Reform Ideas - Part 1

2009-03-12T19:53:00.000-07:00

This week’s Wealth Weekly Plus focuses on school reform. While there will be partisans on both sides on the school reform issue, there is less disagreement that we have a problem to solve. Personally, I support public magnet and public charter schools. We'll get to that some other time. But here’s where I think we can start:

Teacher Accountability and Performance
President Barack Obama spoke in broad terms when talking about teacher accountability. It was a smart move on his part because both sides of the school reform issue felt he was taking their side. However, I’d like to dive right in. Listening to both sides of the accountability issue I’ve heard teachers say that the measures of accountability are too narrow, leading them to “teach to the test” because the primary measurement of performance is standardized tests.

So let’s add in other measures and weight them. Standardized test do need to be a part of the weighted system because grading is not the same across the country. From the New York Times:

The nation has a patchwork of standards that vary widely from state to state and a system under which he said “fourth-grade readers in Mississippi are scoring nearly 70 points lower than students in Wyoming — and they’re getting the same grade.” In addition, Mr. Obama said, several states have standards so low that students could end up on par with the bottom 40 percent of students around the globe.

This does not stem from a lack of money, but a lack of discipline. Standardized testing can identify what teaching methods are ineffective, but it shouldn’t be the primary focus of the teacher. The student should know how to think through unfamiliar, unconventional problems by using the knowledge they learned in their basic secondary school coursework. If they are taught about circumference and circle properties and cylinders, they should be able to find the volume of an tire inner tube given the right parameters.

So how do we reward our teachers? I'll try to cover that in the next post on this topic.

FDIC: Can We Hit You Back Next Year?

2009-03-05T20:50:00.000-08:00

I came across a pretty scary story this morning regarding the Federal Deposit Insurance Corporation (FDIC). From Bloomberg:

March 4 (Bloomberg) -- Federal Deposit Insurance Corp. Chairman Sheila Bair said the fund it uses to protect customer deposits at U.S. banks could dry up amid a surge in bank failures, as she responded to an industry outcry against new fees approved by the agency.

“Without these assessments, the deposit insurance fund could become insolvent this year,” Bair wrote in a March 2 letter to the industry. U.S. community banks plan to flood the FDIC with about 5,000 letters in protest of the fees, according to a trade group.

“A large number” of bank failures may occur through 2010 because of “rapidly deteriorating economic conditions,” Bair said in the letter. “Without substantial amounts of additional assessment revenue in the near future, current projections indicate that the fund balance will approach zero or even become negative.”

So, in everyday speak: “Uh, look. We promised you that the money you have your bank would be insured up to 250,000 if the bank goes under. Will you be cool if we went back on that promise?”

This is not trivial. Remember how the FDIC works. Say you have a bank account with $120,000 in it. (First of all, if you are in this situation, what are you doing?!) The FDIC will (currently) insure all of this. So if your bank fails (like IndyMac did last year); the government (usually) steps in, takes over the bank, and tries to sell the bank after writing down the losses. If the FDIC goes insolvent however, they won’t be able to pay these obligations. So your entire balance will be uninsured.

And What is the FDIC doing to meet this shortfall?

The FDIC last week approved a one-time “emergency” fee and other assessment increases on the industry to rebuild a fund to repay customers for deposits of as much as $250,000 when a bank fails. The fees, opposed by the industry, may generate $27 billion this year after the fund fell to $18.9 billion in the fourth quarter from $34.6 billion in the previous period, the FDIC said.

The fund, which lost $33.5 billion in 2008, was drained by 25 bank failures last year. Sixteen banks have failed so far this year, further straining the fund.

Any takers that this won’t be a “one-time” thing?

What should YOU do?

I don’t have all the answers, but what I’m doing is making sure that funds are spread across several banks. If you have a very large amount of money in one big bank, it’s best to spread it around. Even if you have a small amount of cash, stay informed about your bank's operations, especially if it's a big bank.

(Cross-posted at Swords Crossed, Facebook, and Wealth Weekly).

Just a Thought: Chartered Success

2009-02-28T17:31:00.001-08:00

My other passion other than personal financial empowerment is education reform. Here and Harlem, public charter schools and public magnet schools have a niche, although currently they have to share resources (buildings) with other public schools. Leaders are working to help charter schools move into their own buildings to prevent divisiveness in the student body. However, some areas, like the community of Watts in Los Angeles, have bigger struggles. The following is a clip from Reason.TV: (Facebookers, you'll have to click through to the main site)...

I think that public charter and magnet schools could help improve a community in innovative ways. When people move into a community, one of the biggest factors is the quality of schools. Parents will often look over a neighborhood if they don't like the caliber of schools offered. Often, lower-income communities have lower-quality schools that will have a very difficult time improving because of a reduced tax base. By introducing charter/magnet options into a community parents from a wider range of incomes will move into communities, adding to the tax base. This could theoretically funnel resources into all the schools in the neighborhood/zone and can encourage info-sharing between schools so that they can all improve.

What Does "Credit Freeze" mean?

2009-02-20T13:05:00.000-08:00

Good afternoon readers!

What follows below is perhaps the best explanation of the credit freeze (and what caused) I've seen to date. It's very balanced, explaining how some Wall-street exuberance and some Main-Street irresponsibilty all played a part in this economic decline we're experiencing. Check it out, and shoot some questions/comments my way. Have a terrific weekend.

The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

A Few Thoughts, Week Ending February 14th..

2009-02-15T16:26:00.000-08:00

So Microsoft is considering opening it's own stores. Let me make a prediction what's going to happen: at the store opening, people will be in awe of how pretty it looks, the excellent product placement, and consumer-friendly features, and when they go to check out, the registers won't be able to make change. There will be an immediate issue of a ChangeMaker.Sys patch. Once installed, you get correct change, but then you won't be able to get out of the store because the exit doors won't open, forcing people to go out of the entrance doors, slowing traffic flow. But people will live with it rather than going to deal with the pretentious folks at the Apple Store down the street.

Friday the 13th and Valentine's Day (in my mind) are approaching the same point in my life--arbitrary days on the calendar. Not that I don't like celebrating V-Day, it just feels weird picking a special day to do something for a special someone.

As I progress through this whole wedding-planing thing, we're admittedly a little worried about getting everything together--especially the cost. Before you think you have to go into the red 20,000 for your special day, check out this article from Bankrate. Our most contentious point? Definately #2.

If you have a cold, this report says blowing your nose improperly can really make things worse.

OK, so if the Recession Monster swallowed your job (or will), you may be enticed to look at those "Work at Home" ads more intensely. Know what you're getting into.These guys are at their best when they can take advantge of your emotions.

I'll have something else up later this week.

Will Executive Pay Caps Work?

2009-02-09T17:17:00.000-08:00

I think it will, and here's why.

As a reminder, the Obama Administration has proposed a new approach to the companies seeking bailouts: Top executives at these companies must cut their pay to $500,000 (excluding stock) The average reader may think "That's a nice piece of change!" until you realize that these cuts are very, very deep. However, extraordinary circumstances warran extraordinary ideas. Obama's plan is creating, at least on the surface, even conservative political allies on this idea:

"In ordinary situations where the taxpayers' money is not involved, we shouldn't set executive pay," said Sen. Richard Shelby of Alabama, the top Republican on the Senate Banking Committee.

"But where you've got federal money involved, taxpayers' money involved, TARP money involved, and the way they have spent it, with no accountability, is getting close to being criminal." Source

Supporters of his move on executive pay included the leader of the Republicans in the U.S. House of Representatives, John Boehner. Many Republicans in the Democrat-controlled Congress have been resistant to government bailouts, even when fellow Republican Bush was president.

"I think if anybody is looking to the taxpayer to help bail their company out, these kind of executive compensation limits are appropriate," Boehner said.

Republican Representative Mike Pence, who said he had opposed the finance sector bailout to begin with, said, "maybe it is going to wake up American business -- that there is a cost when you invite the 800 pound gorilla of government into your boardroom." Source

I think executive pay restrictions is a good way to make the private industry think twice before heading to the feds for public funds. But there's more--as I mentioned above, the 500,000 cap excludes stock. The Obama Administration wants to allow companies to pay their top executives past the 500,000, but it has to be in frozen stock. By frozen, I mean they cannot cash out that stock until they pay the government back, then all caps (including the salary) will be lifted. How is this "good"? Well, if the executives has enough strategy to turn around a company, the stock price will most likely rebound, and the CEO is rewarded for..let's say it together now...PERFORMANCE!

A Few Thoughts

2009-02-04T05:49:00.000-08:00

(cross-posted at Wealth Weekly and Swords Crossed)

8,000 more job cuts were announced as of today. Coupled with Macy's 7,000 cuts yesterday we're up to 15,000 and it's only the third day of February.

- In a not-too-unrelated story, the American savings rate is up to 2.9% of income. Read this article entitled "Americans Saving More, Spending Less" and watch in horror as they tell you why this is a bad thing.

- Dear DC Elites: Pay. Your. #$@%Taxes....and don't wait until you get caught to do so. Signed, The American People.

- And finally, let's try a hypothetical. Imagine that you work for GM or Chrysler, paid hourly on the line. Now when you get home, you check the mail and discover that the Company offers you a $20,000 and BRAND NEW CAR!!! Oh, and you have to quit your job. In this economy. You call your co-workers and discover all the hourlies have been extended the same offer. Would you do it? Ok, now stop imagining and read this.

Pilot: Wealth Weekly Plus

2009-02-03T14:45:00.000-08:00

So I'm thinking of adding a new dimension to the site. In keeping with my theme, I would still like to put in at least one article every week to improve your knowledge of the personal finance world. But to drive more interest, I want to add other topics to the site this year and I'll probably add shorter, but more frequent posts. Some of the other topics include articles of interest, education reform,and stronger topics on economic-related ideas.

In addition, we will be cross-posting on a site I frequent very often--Swords Crossed. so consider the next few posts over the next few weeks as our pilot in expanding the scope of the site. If you've been a long time reader, let me know if you think.

Circuit City Liquidates--What to Know before You Go

2009-01-23T14:31:00.000-08:00

So after 60 years, Circuit City is going out of business. It will lay off 30,000 of its 34,000 workforce (the Canadian business will remain). And it is liquidating. To those who were Circuit City associates, I hope you are able to find work soon.

When a company liquidates, it simply does whatever it can to eliminate all of its in-store and warehouse inventory off its books in exchange for cash. Not only does it do this by reducing prices* for customers and bringing in outside help (liquidators) to develop inventory, placement, and exit-pricing strategies, but other wholesalers come in and try to buy up whatever they can.

*However, just because a store is under liquidation doesn't mean that you're about to get great pricing.

As a matter of fact, I stopped by CC last weekend (on the 16th) and went over to the gaming section to be bombarded with an almost sarcastically large amount of Guitar Hero III game packs priced at a 39.99 clearance price with an additional 10% off markdown at register. Guitar controllers sold for 19.99. I waited. Today (the 22nd) 6 days later, I was a bit shocked to find the prices jacked back up--on the same inventory--to $55, with a 20% markdown. So even liquidators find ways to be slick.

So if you plan to drop in, CNN Money has a few tips you should watch for when entering the store:

First of all, you may find better prices online or at other retailers. Keep in mind that liquidators can raise prices that the original retailer already set. They can also get rid of any of any previously scheduled sales.

In fact, since ads that scream "going out of business" just attract consumers who assume they're getting a good deal, there is little incentive to actually give those big discounts…(Emphasis mine)

Yes, a going out of business sale where prices are actually raised. So generally these sales go on over the course of a few months, so you'll have some time to compare the "liquidation price" online. And don't bother going to the circuit city website. It's gone. You should (as I do with most electronics, games, books, etc.) consider looking at http://froogle.google.com and Amazon and comparison shop.

You may also want to give it some time. Circuit City's liquidation will continue through the next few weeks, and the longer it takes to empty the store, the cheaper the products will become. It may allow you the perfect opportunity to get some good stuff for a decent price.

Really?!

2009-01-09T19:28:00.000-08:00

I hope this is just a blip on the screen:

After nearly a year of flagging sales, low gas prices and fat incentives are reigniting America's taste for big vehicles.

Trucks and SUVs will outsell cars in December, according to researchers at the automotive Website Edmunds.com, something that hasn't happened since February.

Meanwhile, the forecast finds that sales of hybrid vehicles are expected to be way down.

You know, I have no qualms about people's buying decisions; but when prices go back up again by say, oh..this summer, people will be screaming again. Let's hope for the average American consumer budget's sake that we still have the fortitude to make tough decisions. We're going have to make tough decisions in the 2009. Gas is cheap(er), but perhaps its not the time to pick up old habits again?

Hot Links: Holiday Version

2008-12-22T06:48:00.000-08:00

What I’m Reading this Week:

Check out some of the best bloggers and stories this week.

Free Money Finance posts a Christmas Sermon.

US News gives details on tactfully handling relatives who ask for money.

Vik Dulat gives 7 rules for grocery shopping.

A Guest Writer at Get Rich Slowly explains when to buy new vs. used.

And if ING Direct’s rates are too sub-par for you, consider FNBO! (No minimum balance, but there is a $1000 MAXIMUM balance).

Merry Christmas, Happy Holidays, and we’ll see you soon.

Seriously, How Much Is a Trillion?

2008-12-14T16:07:00.000-08:00

I’ve been perusing the Internets trying to find a nice, visual idea of a (US) trillion dollars. It’s really hard to find. Go on, look at Wikipedia. You’ll be sorely disappointed. However, I found a guy who explained the concept in pretty recognizable terms here.

Here’s a modified version of the visual amount of 1 trillion dollars. And it involves something most of us do every day: drive!

So let’s say you have a $100 bill. A stack of $100 that reaches 40 inches in height (just slightly taller than height of a typical desk or table) would total $1 million dollars. So you gather that amount of cash and toss it in the trunk of your car and you begin driving from your house. Now let’s say that you live close to the freeway/interstate and as soon as you enter the on-ramp, instead of the white line on the shoulder you see $100 bills stacked sideways along the side of the road. The distance 1 trillion dollars would cover almost 680 miles—that’s the distance from Atlanta to Baltimore, or New York City to Flint, MI.

That’s only 1 trillion. The US GDP (economic output of the US) is $13.8 trillion per year. We currently have debt obligations (to other countries, Medicare/Medicaid, and Social Security) of over 54 trillion. And as I mentioned before, we have committed about 8.5 trillion to help “save the economy” over the next two years, pending a stimulus package that will total 500-700 billion over 2 years, and we haven’t started talking about universal health care plans yet. For all the economists out there who say debt doesn’t matter and we need to spend our way out of this—let see what happens.

Bailout Bonanza!

2008-12-08T14:55:00.000-08:00

Remember that 700 Billion Bailout? It's a "shade" higher now…

And the shade we're talking about is the size of the one caused by a solar eclipse. The government, hoping you don't know how to add, wants you to believe that they're asking for "only" $700 billion in bailout money from the much-publicized bailout. However, the number now is about 10 times the original asking amount. Again: the number now is about 10 times the original amount—about 8.3 TRILLION dollars. Here's the invoice, as of Monday December 8th:

Not included: a $15 billion bridge loan to the Big Three American automakers.

Some numbers are so big most people just gloss over the number. But taxpayers are on the hook for it, and it is a really big number. Just how much will $8 trillion cover? Look at the federal departments' average annual budgets below, funded primarily with taxpayer dollars:

NASA: $17B

US Postal Service: $34B

Dept of Labor: $10B

EPA: $7B

Dept of Treasury (in a normal year): $12B

Dept of Energy: $24B

Dept of Transportation: $12B

Dept of Justice: $20

Dept of Agriculture: $20

Dept of Interior: $10

Dept of Homeland Security: $120B

Dept of Defense: $515B

Total: $801B

So the money the government has pledged to save our capitalist system is enough to run these government entities for 10 years, and they are giving this money out to a handful of banks and financial entities within the next year or two. There is now a plan to give the Big Three auto companies $15 billion, (small potatoes now) and a pending stimulus package of between 700 billion and 1 trillion dollars. And the automakers are, in my opinion, trying to scare people into believing that they either need bailout money or that they will cease to exist. It's a false either-or choice (but more on that later on).

Our leaders are telling us deficits don't matter. I'm not an economist by any stretch, but to me it doesn't seem to pass the common-sense test. But man, I really hope they're right. I really want their plan to work. Because if it doesn't work, we're really going to be in trouble after we add more to the stratospheric rise of our debt to other countries if said countries lose faith in our ability to pay the debt back.

Want a Piece of Bailout Money? Become a Bank! (Or a car company)

2008-12-02T17:31:00.000-08:00

Seriously. Learn to follow the money. You may have heard of many of our investment ban king firms re-organizing themselves as bank-holding institutions. Want to know why?

Well, investment banks, unlike the commercial bank you visit each week to deposit checks and/or withdraw money, are not secured by the US Government. Investment banks insure their money privately. Commercial banks get FDIC insurance, which means you can get most of your money back if the banks "fail." Up until this year, the insurance limit was $100,000. Now it is up to $250,000. Many private firms were under private insurance, but by spinning themselves into commercial banks, they now can get a piece of the $700 Billion bailout plan. Goldman Sachs, Morgan Stanley, American Express, and even General Motor's lending firm, GMAC have magically turned themselves into commercial banks so that they can get in the government-bailout line.

And while we're here, let me also take a moment to formally take a stand AGAINST the bailout for the car companies. Continued pleas from the CEOs plead that if the Big Three don't get billions of dollars from the American taxpayers, their companies will fail. I don't see it. Companies go into and out of bankruptcy all the time. Injecting cash into companies does not provide an incentive to really get their acts together. Giving the companies $25 billion now won't assure us that they won't need another $25 billion next quarter. See what's going on with AIG.

*Note: I've also been against the bailout for the banks as well—I don't have anything against GM in general. They make great cars now.

Ha! You Got (Tax) Shifted!

2008-11-23T19:28:00.000-08:00

It’s what happens when state governments get real smart at taking your money away. Let’s say that you really don’t like taxes (that would probably be all of you). Well, because taxes are really unpopular politically, some state governments have engaged in long-practiced method of collecting needed revenue when times are tough (and sometimes when times aren’t so bad). Let’s call it… You Got (Tax) Shifted!

Here’s how it works.

You want low income taxes despite the fact that the cost of running the state/federal government gets more expensive? OK, lawmakers say. We won’t raise your income taxes. So they appeal to the federal government for “relief” (that means cash). However, people across the country don’t want that to happen either. Thus, local governments will increase their sales taxes. But then if that fails, what happens next? Something has to go to be cut, (or go up to bring in more revenue) So what will go up are...other things you don’t really get as upset about. Like:

- Bridge and Road Tolls
- Mass Transit Fares
- License Vehicle Registration/Tag Fees
- Monthly/Yearly Parking fees
- Parking Ticket fees/Speeding Ticket fees

And/or they start cutting back on services. Libraries and other public-service entities close earlier and shut off lights. Small businesses raise fees and cut back on hours as well. People work less. Here in NYC they are talking about eliminating entire lines of subway service and raising fares...again. These consumption fees are not “taxes” per se, but they still work in the same way by bringing in revenue to keep businesses are state-run services afloat. Of course, you can avoid many of these by not consuming these services, but it’s unlikely that you will stop driving, stop parking, flying, riding, etc. Otherwise, our economy, which depends on you spending money, will continue to tank.

Americans Are Going Generic

2008-11-17T16:53:00.000-08:00

Welcome back readers. I'm slowly getting the site back, but let's talk personal finance. It took a recession, but Americans appear to becoming more generic consumers:

Many Americans are changing their everyday purchases and abandoning brand loyalty, prompted by the persistent financial pressure of rising food, gasoline and electricity prices.

It didn't seem like it was too far off. Most consumers don't buy brand-name basics like butter, milk, and eggs. But consumers appear to be branching out into private-label brands over their national counterparts, and not just on basic items like milk, eggs, and butter:

From coloring hair at home instead of at the salon to trying cheaper laundry detergents, new evidence indicates that Americans are modifying even minor household habits to save money.

I get to see the result of these consumer decisions while working for a consumer-products company. But even outside of the private-label and store-brand products, consumers are eating out less, buying fewer prepared foods, and stretching our cleaning products.

These small-ticket, everyday purchases can secretly eat into your budget before you realize it. If the price of your cleaner increases 30 cents, milk goes up 50 cents, cereal goes up 50 cents, butter goes up 40 cents, and so on, you'll easily find yourself spending $20-$30 more per month than you realize. I remember when I first moved to New York I could buy 2 movie tickets for $17. Now they are $22. All these little costs add up, leaving you wondering where the money went.

The lingering question many of you may ask is whether the private-label substitutes are of the same quality despite their significantly lower costs. In many cases, the answer is yes! Note how private-label manufacturers are printing "Compare to XXXX Brand" on the package while placing their products right next to the national leader. The ingredients are very often the same—except they don't have to pass advertising costs on to you.

But as I always encourage you to do with these product types, try them out on a case-by-case basis. Some will be better than others—you may even find yourself converted (as I have with many products). You'll save yourself a bundle—that you can use to close holes in your budget and invest in this fire sale going on in the stock market right now.

Site Repair

2008-11-07T15:57:00.000-08:00

So I take a short hiatus and come to find the formatting of this site is...well..very weird. I will be taking a short break to fix whatever is going on here. Excuse my progress.

The Market Has a Cold 'Tussin Can't Help!

2008-10-12T15:05:00.000-07:00

I know many of you may have some jitters regarding the stock market. The government has decided to spend $850 billion to "fix" whatever is plaguing the markets. As I mentioned last week, there are a lot of things I don't like about it, but the government has decided to give it a whirl, and well, us regular folks are just going to have to sit back and watch what happens. In one year, the Dow has fallen nearly 5,000pts. Panic still continues to be prevalent in world market, and even rational investors tend to be nervous. But let me attempt to explain what you as an individual investor should be doing.

I can only speak to long-term investors at this point--those who have at least over 5 years or so until they can retire. You have to look at as if the stock market has a "cold." All these Fed Rate Cuts, nearly nationalizing companies, buying up bad debt, and propping up real estate prices are like cough suppressants--it will only prolong the process. in a common cold, the body "coughs" to try to expel that Nasty Green/Yellow Stuff from your body. A cough suppressant keeps you from coughing, and forces the body to expel it in other ways. The market has a cold and has to cough out all these bad things we've done over the past few years.

I STILL hear real estate commercials asking if you want to "Flip and Grow Rich." Some will never learn. We have a housing glut now--too many houses on the market--and prices have to fall to a reasonable point to adjust to market conditions. Yet, some still don't want to let the market "work this out of its system." Remember when computers used to go for $2000-3000 or more and this was seen as "reasonable"? Now you can find a computer with the processing speed, performance, and quality for a third of that price because the technology has become so abundant. Housing is no different. Don't get me wrong--I think housing is a great investment, but banks are getting very conservative now and not lending as freely as they used to. The era of NO MONEY DOWN!, CDOs, and Adjustable Rate Mortgages are (hopefully) on the way out.

Bottom line, if you cannot take these stick market dips, then you probably need to pull out, but you do so at your own peril. Me, I'm staying put. A good investment portfolio has you nearly 100% invsted in stock in your twenties, and probably shifting to more conservative investments (like bonds, annuities, and by 10% increments in your thirties and forties and then 15% increments in your 50s and 60s.) That way, if you are close to retirement, your investments will be less dependent on the whims of the market. My 401(k) investmetns at this point
are in 100% stocks right now. In my late thirties I'll probably go to 90-10 (stocks/bonds), then 80-20 in my forties, then 65-35 in 50s, and down to maybe 35-65 in my 60s and beyond. These short-term market jitters should not be bothering you if you have a long way to go.

Yes, I know that Wall Street has done some stupid and greedy things in the past few years and we all have to pay for it now. They are taking it on the chin right now, and should. Next week I'm thinking of covering Credit Default Swaps and how it adds even more stupidness to our current situation. I know such topics may be a bit dry, but once you know how we left our Store to be managed by irrational folks before, you'll be alert if it ever rises again.

Bailout Passes..Now What?

2008-10-05T12:40:00.000-07:00

So the bailout package is now law, and although no one liked it, it does a few good things. However I think the immensity of this package is only the beginning. Of course, we all know that when Congress tries to save us, often we get the short end and this one is no different. The $700 billion dollar approval package ended up being about $850 billion dollars when it was passed, and will probable explode into the trillions before it's all over. I know such large numbers are very abstract to most of us, but it basically boils down to an additional $2300 in debt for every person in the country.

So what are the "good" parts? The most important thing is that it provides some money to the credit markets so that banks can lend to people and each other again. However, I think it will be very limited--banks are probably still spooked and won't be lending money out as freely as they did over the past few years. Think of all the things we do in America these days "on credit": buying large appliances, cars, and yes, homes..now imagine if no bank or business could extend credit and instead demanded full cash payments. Americans generally don't have large savings put away. Lay-a-way would probably make a full comeback, and this economy would really come to a grind. So the bill did address that situation. Secondly, people are allowed to stay in their homes--now this could be both good and bad: people who can afford the house but need a refinance can stay in their homes, but apparently, so can the guy who bought more house than they could afford.

Also, we as Americans have to become more comfortable with being saved by other countries. From an article I read this afternoon:

Even though the dollar has strengthened a bit lately, we are going to need foreigners and sovereign wealth funds from China, Asia, Europe and the Middle East more than ever to survive this crisis — and they are going to need us to be healthy as well. In the process, we are going to become even more intertwined and dependent on the rest of the world.

So what does being a debtor nation have to do with you as an individual? Well, all I can urge you to do is to work on eliminating your debt positions as fast as you can. Are you making payments on a car? Thinking of buying a large house? Proceed very cautiously. Do not, in the rush to get everything in life, take on debt on the gamble that One Day you'll have a higher salary to afford it. Job losses these days have struck both blue collar line workers and white collar folks as well. I'm sure that some Lehman Brothers employees felt insulated walking into their building, thinking that their job was safe. Make sure that you have enough liquid funds (cash) to cover expenses for at least 3 months. Because one day, even the US Government won't be able to legislate a bailout big enough, and you'll need to depend on your self-reliance and self-determination to carry yourself through these turbeulent ups and downs.

Financial Markets--What Just went Down Last Week?

2008-09-23T19:08:00.000-07:00

AND WHY IT IS EXPECTED TO CONTINUE...

I want to keep this one simple this week. The following is my attempt to explain what's going on with the government bailouts and explain if it will have a direct effect on you. This week, I hope to explain how everyone--the mortgage borrowers, the mortgage lenders, investment banks, and even the federal government have some of the blame in the debacle we have now. it almost reads like a script with the way all the pieces to this issue fall into place:

The Backdrop
It started when the government started to put more pressure on lenders to help increase home ownership among Americans and end borderline racist processes like redlining (where lenders couldn't give you loans if you lived in certain zip codes). The government also promised to guarantee (co-sign) on the loans. Lenders then aggressively started seeking ways to give our risky loans and to make nice profits while spreading the risk. Thus you saw the re-emergence of adjustable-rate mortgages, intro (teaser) rates, and sub-prime mortgages among buyers. Also, construction companies begin to build lots of homes in anticipation of buyers filling them.

The Ingenious Plan
Buyers applied and refinanced for home loans they couldn't possibly afford, and lenders were eager to give them out. You see, financial engineers had a genius idea: local banks could collect all the loans they gave out (good and bad) sell them to investment banker firms who would "package" and sell them as an investment. Buyers of these packaged, of 'securitized' loans were then sold on the secondary market--businesses like Bear Sterns, AIG, Lehman Brothers, Freddie Mac, Fannie Mae, and Eula Jean (well, maybe not that last one) spread the risk of these securities among investors (remember, they are a collection of mortgages). Investors would make money as people paid their mortgages, and as people sold their homes for a profit (because housing prices ALWAYS go up, right) investors got paid too. These securities were sold everywhere. Investment banks. Businesses. People who owned mutual funds bought them if their mutual fund invested in it.

Trouble
Then, problems started to arrive. Anticipating a sharp rise in the number of homes needed, contractors and construction companies built. And built. And built. And you know what happens to the value of product if the market is flooded with it right? Prices fall. And people were not about to move out of a house that's losing value right? So houses continued to fall in value. No one was moving/upgrading to newer houses because the prices were too expensive and the housing inventories got larger. Then, those teaser rates expired. The adjustable rate mortgages..adjusted up (they were already at 40-yr lows and had nowhere to go but up). Suddenly, people couldn't afford those mortgages they had anymore.

The Perfect Storm Develops
More trouble developed--the economy started to slow down and companies began to cut jobs in manufacturing--people then got under-employed and still couldn't keep up with house payments. They tried borrowing against the increased value of their home, but remember there were too many houses on the market so it wouldn't go up much. Up the chain, those people who were holding on to those mortgage-backed securities saw that people were not paying up, and so they began to bail. However, some of these companies were so heavily invested in these securities that they didn't have the cash on hand to pay everybody who wanted their investments back.

Remember how a bank works? Simplified, a bank takes the money you deposit and keeps maybe about 10% and lends the remainder to other banks and business. So if you deposit $100, they may keep $10 on hand and lend $90 to another bank, who keeps $9 and lends $81, and so on. So your $100 in this could easily turn into $1000. Back to our story.

What happens when a bank can't cover all it's deposits? Who do banks, keepers of money, turn to? Other banks. As long as they trust each other, banks can borrow money from other banks so they can continue making loans to people and businesses and (by extension) keeping the economy going. So we're cool, right?

Trust
Except that the trust was beginning to disappear. Soon banks stop believing other banks would pay the loans back after customers and businesses--even big businesses began filing for bankruptcy because they couldn't pay their loans back. Banks started raising the interest rates (the cost of lending out the money). Some banks stopped lending money altogether, which is bad. The federal reserve stepped in and tried to calm things by lowering the interest rate, but the problem continued to worsen.

And Now?
Well, last week we dodged a huge bullet. When you hear people talk about the "credit tightening up in the market," it refers to money banks lends to corporations (and each other). Basically, companies large and small go to banks all the time to get money to run their everyday operations until the money they get for their transactions come in. Companies depend on banks extending these lines of credit, called commercial paper, to start new businesses and ventures. Well, last week, the banks ran out of this commercial paper. The federal reserve stepped in at the last minute and (ahem) "made more money available." without it, US company operations would have started shutting down pretty quickly.

So I'll leave it there for this week. Next week, we'll get into what's next and the ideas people have on how to fix this problem. If you need a funny summary of this issue, click here (warning, there is strong language there).

Corporate Socialism: More Camel Straw...

2008-09-15T17:14:00.000-07:00

The corporate conga line continues this week as more companies continue to line up to ask the federal government to bail them out, er, to provide temporary funding in an unsteady market. You may have heard the term corporate socialism, which has been defined as the phenomena when companies reap profits and socialize the losses (meaning when the market is bad to them they look to the federal government to cover the losses).

How does this affect you? First, a quick reminder of what the heck is going on. I think the blogger from Electoral Vote has a pretty good look on this:

Decades ago, when you wanted to buy a house you went to local bank and applied for a mortgage. If the mortgage was less than three times your annual income and you had a good credit history, the bank would loan you the money and you would pay them interest and some principal every month for 30 years. Then Wall St. got a bright idea: buy up all the mortgages from the banks, collect a few thousand into a pool called a CDO (Collateralized Debt Obligation) and sell shares in it. The owner of each share would get a pro-rata share of the incoming monthly mortgage payments…

What happened? It sounded like a great idea and soon all mortgages were sold and repackaged into shares. It didn't take long before the banks realized that they could issue mortgages of five, six, even eight times the buyer's annual income or sell them to people with terrible credit histories. After all, the shaky mortgages would soon be somebody else's headache. That's what happened. Lehman, Merrill, and others bought billions of dollars of mortgages that the homeowners had no hope of ever repaying on schedule and nobody wanted to buy shares in these worthless CDOs, so the brokers got stuck holding the bag with billions in worthless loans.

So essentially,

Remember earlier this year when Bear Sterns had the Fed bail them out (with the help of the federal government). That was only the start apparently.

- Then there was the nationalization of mortgage companies Fannie Mae and Freddie Mac which own a large percentage of the mortgages held in the U.S.

- This week, Lehman Brothers filed for bankruptcy protection,

- Bank of America, who bough Countrywide financial has now bought Merrill Lynch.

- Washington Mutual is in a danger zone,

- And so is AIG, which was "helped" by the State of New York, who not only let AIG lend $20 BILLION to itself, but apparently has a lot of money they haven't told us New York Residents about.

Basically, it almost seems if you have a commercial on TV, you've got problems.

…and not too far behind these guys is the three major car companies from Detroit, who are all looking for help resolving their debt but haven't come hat-in-hand..yet. All these companies are now asking for help from an over-burdened government which already has a $400 BILLION dollar shortfall. For our sakes, they'd better pick their battles. Because in the end, it's not "The Government" that will pay these bills. They will either print more money to pay the balance off (really bad) or just spread the costs among the taxpayers (bad, but not so much in the eyes of the government).

Don't Teach Financial Education? Are you crazy?

2008-09-09T16:21:00.000-07:00

I recently read up on an interview CNN Money had with law professor Lauren Willis on the importance of teaching financial literacy, or rather the importance of not doing it. I was actually puzzled about some of the reasoning behind the idea. To wit:

Lauren Willis, an associate professor at Loyola Law School in Los Angeles who specializes in financial products regulation, says that's the wrong move. She argues that trying to teach consumers to make wise money choices is not only a waste of time and resources, it may be dangerous.

Dangerous? Let me be clear: I think we should approach the teaching of personal finance very carefully. If there are classes that focus directly on this topic, it should probably be carefully evaluated. But to not include it at all in high school or college curriculum raises concern to me. However, here is the point in the interview that concerned me the most, a back-and-forth on budgeting (and shouldn't it be taught):

Q. But aren't basics such as budgeting always applicable?

A. Teaching them is a waste of money. Studies show that sending people to either high school personal-finance classes or adult retirement seminars does not result in better financial behavior.

It may do the opposite. Financial literacy classes give people the illusion that they can successfully manage their finances. So rather than seek help, they end up making worse decisions.

Q. Then what should we do?

A. Stop trying to turn everyone into a financial planner. Instead, try to get everyone to understand that the people selling you financial products often don't have your best interests at heart.

The strange, almost contradictory language I see here is striking: You shouldn't teach people to budget because they may (heaven forbid) try to manage their own money instead of seeking (often overpriced) help, yet you should make sure to tell people seeking help is risky because they may be overcharged.

Here's how I feel about it. Teaching someone how to budget is not difficult. It's pretty simple addition and subtraction. Take out a sheet of paper (or spreadsheet), add up your income and subtract your outgo per month. If you're in the red, that's bad. Avoid that (by increasing income or decreasing spending.)

I would question the studies that determined why teaching people to manage finances don't work. Is it the way it's taught? Is it because most high school kids don't have to shoulder the burden of paying rent or a mortgage and a set of bills?

Bottom line—I think it's the lack of teaching and awareness that causes people to make risky mistakes. The biggest example being the housing debacle the country is still feeling right now. Many people signed on to risky mortgages that have affected the entire market and have caused many banks to fail (and of course, lenders were complicit in these behaviors). Now, we have the government stepping in this week and assuming the debt of big lenders Fannie Mae and Freddie Mac because they are "too big to go under."

This is all because of shady lending practices and consumers who took on the debt without being more educated on the associated risks of such loans. Education is important and counts. At minimum, I think budgeting should be a base minimum teaching for children and adults. Shoot, I still have a lot to learn.

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Hot Links for the Week

2008-09-04T18:34:00.000-07:00

Hi guys, sorry for the slowdown in posts, but with the Conventions going on the past 2 weeks, I've been quite occupied. Check out some of these posts of the "Best of the Web:"

* Everybody thinks that we need to put financial education in the schools. Free Money Finance explores the real question: Is it a waste of time?

* Get Rich Slowly lists 5 basic steps for handling credit better. [My suggestion: If possible, avoid using credit ;-)]

*Need cash in a hurry? The Frugal Wench has some ideas.

* And the Harvard Business School blog has a very interesting article up on Indulgence Vs. Regret.

And as far as it comes to me getting my posts together, I will do better!

America Gives Even in Tough Times

2008-08-27T17:22:00.000-07:00

I uncovered an interesting report about the charitable giving of Americans. You would probably think that in this tough economic time we are going through as a country, charitable giving would be the first thing to take a hit. After all, it would be an "expense" for you to cut back on, right?

Not so:

Americans shook off economic uncertainty and gave a record 306.4 billion dollars to charitable causes in 2007, an increase of 3.9 percent for the year, a survey showed Monday…George Ruotolo, chair of the Giving Institute, said charitable contributions held up even with Americans fretting about high oil prices, the subprime real estate crisis and the ongoing war in Iraq.

"People don't appear to be panicking, they feel that it's going to be OK in 2008," Ruotolo told AFP.

"I'm not bullish but I am satisfied. Even when you adjust for inflation giving still was on the plus side in 2007."

The overall total is up just one percent when adjusted for inflation. It also represents 2.1 percent of US gross domestic product.

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Read the Whole Article Here
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Although there are again "expected cutbacks" again this year, these stats are pretty cool huh? Even though we are hurting (overall, not necessarily on an individual level) people still give to the causes--306.4 billion dollars. In case you were wondering, it's the most giving of any country in the world, both on an overall amount and a per capita basis. Most of the giving went to religious, educational, human service, health, and fine arts organizations.

Why do you think this is?

Personally I think part of it has to do with partly with our generosity and partly because of how people in general respond to crisis-type situations. Churches generally have programs to directly address poverty, and so do other community organizations. We give in disasters both here and abroad. Plus, despite our country being rich, we're certainly not uptight with our earnings.

Why Financial "Firm Nudges" Work

2008-08-13T15:30:00.000-07:00

This week's topic comes from an excerpt of the Financial Times (a Wall Street Journal competitor) touched a bit on behavioral economics and finance as part of a larger article. Here are a few excerpts that I'd like to expound on:

They first give some examples of behavioral economics in everyday life:

If people's magazine subscriptions are automatically renewed, they renew a lot more than if they have to send in a renewal form. Moreover, people are influenced by how problems are framed. If told that salami is "90 per cent fat-free" they are far more likely to buy salami than if they are told it is "10 per cent fat"…

Findings of this kind suggest that even when people have freedom of choice they are influenced, or nudged, by the context in which their decisions are made. This power gives business and governments opportunities. Automatically enrolling people in a savings plan dramatically increases participation, even though people retain the right to opt out.

My first impression after reading the article was the seriousness this newspaper commands even though it's printed on pink paper. But seriously, it's the last sentence in the quote above that I found to be interesting. If sellers can exploit the complacency of the American consumer, why can't savers do the same? I think the idea of automatic enrollment programs would definitely be a good thing. It plays to the out-of-sight, out-of-mind mentality we all have in some aspect. If you automatically enroll people in a 401(k) or IRA while giving them the opportunity to opt out, you don't take the freedom of choice away, and you get people to save.

Some people may be against this on "nanny-state" grounds—many feel that they should be able to do whatever they want with their money and they shouldn't have a company "making" them save money. In response, I'd say that (1) an opt-out feature is available for those smart enough to take it, and (2) given the state of Social Security and Medicare solvency, it's important to have a "safety net" available just in case said nanny-state haters get to a point where they will need the government to help out in old age.

Feds Will Bust the Clock

2008-08-02T08:38:00.000-07:00

Feds Will Bust the Clock!

The great National Debt Clock is running out of numbers. I took this picture of the clock after the government released its budget numbers for the next fiscal year, which will soon push our debt to TEN TRILLION DOLLARS. The debt clock can only go to $9,999,999,999,999. So that means...a NEW RECORD! Woohoo! For those of you who care about such things, and are still reading this, allow me to explain how this will affect you and your future generations.

Think of all the “Big Things” that the government gives out that most citizens think about—Social Security, Medicare, Medicaid, and other programs. Politicians have also tried to talk about other “free” things they want to give out to you like education, tax breaks, stimulus checks, subsidies, federal grants, etc. Nothing on that list is terrible, per se; but all this is often mentioned without how it’s going to be paid for. You see, the government doesn’t have a lot of money stashed away in a bank somewhere to pay for these things. Most of these things are paid for through a tax, which means you are paying for them.

Consider the future of some of our current programs: Medicare is running a large deficit. Social Security will also run a large deficit soon. Remember last week when we talked about when banks fail? Well, the government assumes the debt for those as well. This week, a mortgage bailout bill was passed, adding onto the deficit. But unlike you, when you run a deficit (by putting more things on credit cards than you can pay off at the end of the month), you can max out and the credit companies can call the debt. The government doesn’t “max out” anymore. They simply increase their own debt limit. Can you imagine what you’d do with such power? What if you could set your own credit limit and change it when you got close to maximum, over and over again?

Ballin!

And like a hopeless debt monger, the government doesn’t seem to see any reason to pay for the slew of new programs they are putting forward. Making more money available (by printing more of it or by lowering the rate at which people banks can borrow it) does not solve the problem—an increase in quantity of something usually means a decrease in quality (or value).

So, as we always say, don’t look for the government to take care of you, because at some point it just won’t be able to. Let the politicians debate the finer points of whether Social Security, Medicare, and other such programs will be there for Our Children. Instead, focus on guarding against future shortfalls by getting in the habit of investing (and diversifying those investments) as early as you can. You never know when the next economic shortfall will come, or when the next housing bust will be here.

When Times Are Tough, Americans Spend Anyway

2008-07-21T18:23:00.000-07:00

Consumer confidence may be down this summer, but it hasn't really diminished the American Shopper's desire to do (and acquire) some neat stuff. I read a very interesting article over on CNN regarding our spending plans over the next few months. Here are a few excerpts:

Nine out of 10 Americans said they are cutting back expenses or discretionary spending at least somewhat because of the current economic conditions; according to a recent study from market research firm GfK Roper Consulting.

Only 11% of Americans believed it was a good time to buy things they want or need, down from 16% a year earlier.

Here's the interesting part(s):

Many Americans are leaving the car in the garage and staying on their living room couch. A whopping 50% of Americans plan to buy an HD or flat-panel TV in the next year, the study showed, with little difference between those who are hardest hit by the downturn and those who are not. Cable and satellite TV subscriptions are also way down the list on cutbacks.

Even in these tough times, 59% of Americans plan to take a trip of 100 or more miles in the next six months - only slightly below the 61% average of recent years.

But that doesn't mean they haven't changed their plans. To grapple with the rising cost of fuel, many consumers are opting for trips closer to home. This year, they may be packing up for Epcot instead of Europe.

First, my statistics training raised a flag—50% of Americans plan to buy an HD or flat-panel TV? It sounds a bit sloppy—50% of those polled probably said that, but I think that's about as far as it goes. The travel numbers and behaviors are probably legit though. Despite the high cost of fuel, people are (hopefully) saving more and watching their spending more closely.

And I guess I need to step my game up—I haven't had the 'Well, I guess we can't make a yearly European tour this year' conversation yet. But, I think these little studies do show that there is a segment of the country that is still finding ways to enjoy themselves—many are just finding better ways to do it.

Will You Be OK If Your Bank "Fails"?

2008-07-14T18:36:00.001-07:00

If you haven't heard, a major West Coast bank IndyMac has been taken over by the government. There has been a small panic as many customers made a "run" on the bank--meaning they withdrew large amounts of money at once. Most banks cannot sustain such a large withdrawal amount over a small time period.

Not long ago, when banks failed, they went away. In today's age, the government tries to stem public panic by taking over the bank when it fails. Usually the FDIC (Federal Deposit Insurance Corporation) sends officials to assume the roles of executives (like CEO, CFO, etc) until the government can find another bank to purchase the assets of the failed bank.

You may be familiar with the FDIC--this is a government-run insurance corporation. Usually they have a sticker on the outside of your local bank, assuring that your accounts are insured up to at least $100,000. If you have an IRA (Individual Retirement Account) the government bumps it up to $250,000. There is also a lesser-known SIPC (Securities Investor Protection Corporation) which insures any stocks, bonds, CDs, etc up to $500,000.

So what does all that mean to you? Well..

It's time for this weeks episode of 'What Do We Learn'?

SCENARIO 1
Let's say you have $400,000 in cash in one account at JustTrustUs (JTU) Bank. If you're a regular reader here I don't know why you'd do that, but follow me. If JTU fails and is taken over by the government, how much money would you get back?

If you got the same deal the IndyMac customers got, you'd get $100,000 + 50% of the balance--in other words $100,000+($400,000-$100,000)*0.5 = $250,000. So you won't be starving, but you'll be out $150,000, which is nothing to sneeze at.

SCENARIO 2
Let's say that instead you take your $400,000 in cash and take half of it out of JTU bank and you deposit it into GiveusSome (GUS) Bank across the street. Now you have $200,000 each in JTU and GUS. Now what happens?

If only one bank fails (JTU):
JTU (failed) will give you 100K + (200K-100K)*0.5 = 150K
GUS (OK) will still have: 200K
You now have 350K!

If both fail:
You'd have 300K (through similar math).

So basically, you save 50-100K of your money by simply splitting. Not bad, but you can see where we are going here. If you have large amounts of cash and don't want to invest it, never have more than 100K in one account in one bank. Spread the wealth across several banks. With securities that you have invested, you should talk to your account holder about splitting the account if you are worried that it will fail --but be assured that established national companies most likely (emphasis on most likely) will not fail.

What do we learn?
- Never keep more than $100,000 in cash in one bank.
- Be cautious when keeping millions of dollars in one mutual fund or IRA.
- And if you have significantly less than 100K, let alone in one bank..relax, you're insured.

About Those Stimulus Checks...

2008-07-10T17:49:00.000-07:00

Word is coming in on how the stimulus checks are doing—

Wal-Mart and Costco has good news to report:

Wal-Mart Stores Inc. and Costco Wholesale Corp. led U.S. retailers reporting higher June sales as shoppers facing soaring gasoline and food costs used federal tax rebates to buy discounted clothes and groceries…

Certainly the stimulus checks gave consumers additional money to spend,'' Britt Beemer, chairman of America's Research Group, said in an interview. ``Consumers are buying the deals. If retailers offer consumers great deals, they'll go out and shop for back-to-school. If they don't, consumers won't.

So consumers indeed are spending those stimulus checks, but many are saving them for worse times as well and are paying off debt.

Some households apparently used tax rebate checks to pay down debt and help offset rising costs for food and fuel, Federal Reserve Bank of Richmond President Jeffrey Lacker said on Tuesday…He said that anecdotal evidence indicated that workers were "putting their checks to paying off ... some credit card debt," adding: "It will take until next year before we disentangle (this)."

But before you go on thinking that we Americans are all high-brow and responsible, there have been other areas where a significant amount of those stimulus checks are going:

Adult entertainment Web sites began seeing a spike in business shortly after the first wave of checks went out in mid-May, according to Adult Internet Market Research Co., a New York firm that tracks the adult online world…Thirty-two percent of respondents referenced the recent stimulus package as part of their decision to either become a new member or renew an existing membership," said Jillian Fox, a spokeswoman for LSGModels, the company that tipped off the research firm.

Even in a period of near-recession in the America, there's always time for entertainment.

Happy 4th of July!

2008-07-02T18:06:00.000-07:00

We're on break at Wealth Weekly. Please have a safe 4th and don't spend too much on firecrackers! Aww...go ahead--it's the 4th! I kid of course. (Or maybe I'm not).

Five Hot Links for the Week!

2008-06-23T16:44:00.001-07:00

Summer has officially arrived! Check out some of these summer articles on blogs and finance sites across the net.

1. Get Rich Slowly explores the benefits of vacationing near home. In today's economic challenges, you'd be surprised at what you'll find just around the corner from you.

2. Free Money Finance explains rightly why index funds are still the best mutual funds to have as a central part of your portfolio.

3. Five cent Nickel details what works in improving your gas mileage, and, exploring further-- what doesn't.

4. CNN Money asks if Obama's plan to match the savings of families (up to $500 if you make less than 75K/yr) will work.

5. And if someone asks you for money, should you give it to them? Bankrate says It depends. -

We Aren't Marketing Slaves...

2008-06-16T17:37:00.000-07:00

When it comes to reasons why people chose spending themselves into oblivion over saving and investing, you often hear two compelling and popular ~~excuses~~ er, suggestions :

The first falls along the line of the "Livin' La Vida Loca" and appeals to the younger crowd. The premise is that you shouldn't be saving in your 20s because you have "your whole life" to save. Furthermore, you shouldn't save because Life Isn't about Money, and You Can't Take it With You. I actually can respect this argument because the person has at least established that they don't care about long-term goals (money-wise at least). But it's a bit of a strawman argument--just because you save for the future doesn't mean you can't "have fun." and when you think about it, you don't really have to spend a lot of money to have fun anyway.

It's the second, more academic argument I have a problem with: the Addiction argument. It's the one that bases our tendency to spend all of what we make (and beyond) on the premise that we are "bombarded" with marketing, and as a result, are conditioned to spend, spend, spend. We see rich people on TV, our neighbors next door, our friends' possessions, and we want what they want. So we are "conditioned" to continually purchase things against our will and our budgets suffer as a result.

The problem with both of these arguments is that they seem to encourage people to shirk their own personal responsibility--the La Vida Loca argument suggests that you shouldn't worry about the future because "anything can happen," and the second argument basically says you can't help yourself--that we are slaves to marketing. Both eventually lead to dependence on the Government later in life, an entity will of course, turn to citizens to subsidize the results of these behaviors through higher tax rates to fund entitlement programs.

The solution? Well, I don't see tax rates going down in the future, no matter what the talking heads and politicians on TV say. Programs like Medicare and Social Security will probably be around and will claim a larger share of our nation's production. So, if you still can, it's probably best to divert some of your funds into a Roth IRA, which taxes the money before you invest it, so that upon retirement you can withdraw the funds completely tax free. Also, learn as much about planning your financial future as early as you can. However, don't become obsessed with your financial planning--or you may do more damage than good. Many times people dedicate large amounts of their day with their eye on their fund and may move it around with every market fluctuation and will lose out over the long term.

Finally--remember you are a human being and not a machine. You have control over your purchasing decisions, and as a grown up are equipped with the ability to reason. You have power over still and moving images encouraging you to buy things. You are not a slave with uncontrollable buying habits and if you think you are, its time to re-think that and simply dedicate yourself to bring your buying power and decisions back under control. Now, if you'll excuse me, I will get off this dusty soapbox and watch the ad-supported, corporate sponsored Lakers-Celtics basketball game in peace.

Bankrate: 12 "Necessities" That Drain Your Budget

2008-06-06T17:26:00.000-07:00

Here is an insightful article from Bankrate.com about 12 "necessities" that can drain your budget. I've shortened the list and will comment on a select few. Back in the day, "necessities" covered things that were necessary (hence the term) like food, water, and shelter. Yet, in these touch economic times people tend to place necessary value on things like:

1. Daily latte/coffee (bought from a coffee shop)
2. Cable TV
3. Manicures/Pedicures
4. Botox
5. Bottled Water
6. Second Car
7. Lawn Service
8. (Expensive) Clothes
9. Childhood Parties
10. Cell Phone
11. Private School
12. Pet Grooming

Comments:

1. I don't get the whole coffee thing, let along getting it every day. Is it the ambiance people are paying for? It's just coffee, and I bet you could get it for cheaper by (as Bankrate suggests) making it at home.

2. I have cable TV and DVR and would probably be the first thing to go if I had to make serious budget pare-backs. That could easily save you 1,000 per year easy.

4. Who thinks botox is a necessity? This is definitely the "outlier" on the list if you ask me.

5. Bottled water isn't what it's all cracked up to be. As mentioned in the article, tap water isn't all that bad, especially if you buy a filter of some sort. Just because water is in a bottle doesn't mean its any cleaner/better. I agree with them here.

10. My cell phone plan is fairly affordable, and its the only phone I have. I haven't had a land line in over 5 years. Yikes, it's scary how long it's been. I'm rarely home except in the evenings, so it usually works out. However, with these "get everything for $99" plans I see now, I still think premium cell phone service is overpriced.

I don't have kids yet, no pets, no car, and no lawn. Those things will come, but I think the theory of look for smart options should be your guide here. Instead of private schools, consider Charter Schools or Magnet Schools which are (usually) better-performing and in most cases, free. And besides, you're already paying for public school, just look for a quality one. As for those other things, I'll speak on them when I have more experience with them. Perhaps readers with children can shed some light.

This Week's Hot Links: Bring Out the Violins...

2008-05-29T19:33:00.000-07:00

1. The New York Times explores the stories on how young hipsters live in Manhattan on non-investment banker salaries (and nope, they don't have trust funds either). Although I make far less than the IBs in the city, I resisted the urge to pull out my violin as I read this story. However, it is a good story to check out for those who 'have' to live in The City and need ways to trim their budgets.

2. And here's a similar story about older "middle class" Americans struggling to "make ends meet." I refer you again to Drew Carey's insight we highlighted http://www.blogger.com/post-create.g?blogID=22424944 for a little balance.

3. The USA Today raises alarm that Generation X is not saving enough. I'm hoping that they're just over-blowing the savings thing--my prediction is that they'll be OK. Otherwise, the "Y Generation" (born between 1980-1999) will be there to bail them out via higher taxes.

4. Free Money Finance profiles a person who got an unpublished discount by..well..asking for it.

5. And if you're still worried about gas prices, CNN Money lists six ways you're probably wasting gas. When I drove, I was guilty of at least four of the six. How many did you do?

How Much Does Your 401(k) Cost?

2008-05-22T15:26:00.000-07:00

Investing in Your 401(k) is not free, but because you don't get a bill showing how many fees are withdrawn every quarter (or every year), many don't know they're paying or how much they're paying to invest in their Company's Plan.

And if you don't know, you should work to find out. Admittedly, I don't know exactly how much I pay but I have an idea. If your company allows you to see your 401(k) information online, chances are all you see is fund performance. You don't know that you're paying fees. Our company offers about 12 different funds, and I have 4 major funds in my account. Two are with Vanguard, one with Neuberger and one with American Century. I really had to dig to find out the fees associated with each, because they're not really all that apparent.

These management fees can eat into your returns if you're not careful. Consider the example below:

Fund A:

1-yr return: 5%

5-yr return: 10%

10-yr return: 11%

Management Fee: 2.0%

Fund B:

1-yr return: -5%

5-yr return: 13%

10-yr return: 10%

Management Fee: 0.35%

Fund C:

1-yr return: 33%

5-yr return: 13%

10-yr return: 7%

Management Fee: 0.75%

Think of the management fee as the "cost" of managing your money. Which fund would you choose if you were finding a place to put your money for a long time (5+ years)? Smart money would be in (B) of course. Some investors love to see those high returns in the 1-yr numbers, but it's unproven. Long term returns are what count. Note that although choice (A) may have a higher return, the management fee is deducted from the returns. Also note that your returns should be at or above the S&P 500 long-term average. One more thing: that fee is deducted from your account yearly regardless whether you make money or lose money.

So, if your 401(k) is accessible online with your employer, you should try to get access to the prospectus, which gives all the details on the fund you own. (Or, go to the fund's website) and download it from there. Inside you should look for the management fee section, which will give upfront cost (usually) of owning that fund. Some of the older funds may charge fees as high as 2-3% of your account balance, while others (like Vanguard) charge very low management fees.

Frugal or Cheap? Let's Be Real.

2008-05-15T16:53:00.000-07:00

Through my own financial journey I have made some missteps and some milestones. One of the evolutions that I go through all the time is making a choice on whether my purchasing and saving decisions are an example of being frugal or being cheap. The best way to measure this, in my opinion, is to use common sense (well, perhaps uncommon sense now).

For instance:

If you buy quality store brands instead of the national brand when shopping, then this would be an example of being frugal.

However, if you buy substandard store brands just to “save money,” that’s being cheap. The idea of being fiscally responsible is to increase sound purchasing decisions and reduce silly ones. The idea is to get decent, quality products for the best price for you.

One more thing--if the money you save is actually saved, rather than being spent on frivolous purchases you wouldn’t have made if you didn’t have the savings. (Because the chances of you actually depositing the saved money in your bank account are minimal). Perhaps you can start a “money storage envelope” and put the savings in there when you get home—then put the envelope in an out-of-sight out of mind place like a home safe or between the books on your bookshelf (Chris Rock may be right), or just somewhere where you won’t be inclined to grab the cash and go. Many of you probably have a loose change jug/jar already, so an envelope may not be a far reach for you.

Bottom line: If you are budgeting correctly (meaning you are spending less than what you make rather than spending at or above your income), and you are regularly contributing to retirement and have no need to free up cash flow, then you most likely know what is a “being cheap” purchase versus being fiscally responsible. But there are extremes in both directions—if you plan to make decisions based on “saving money,” then make sure you actually save it.

See you next week!

This Week's 5 Hot Links

2008-05-07T15:26:00.000-07:00

An ATM scam story has made small ripples across some places in California, where a “skimmer” is attached to ATM machines and can steal your card info. It’s doesn’t appear to be all that serious, but Cali readers should be on guard.

If you haven’t noticed, those much-publicized economic stimulus checks are already arriving in bank accounts electronically for those of you who received tax refunds via direct deposit.

And already, (as we mentioned before) tourist locations and stores are offering deal, after deal, after deal to make sure you don’t hold on to it too long.

If the economic slowdown is really hurting your budget, The Street suggests stocking up on non-perishables. If you’re single, it might not make much difference, but hey it depends on you.

And the blogger over at the highly recommended Free Money Finance gives some high-school based tips for shopping smarter.

Enjoy your week guys. Spring is finally arriving here in New York.

Summer Gas Tax Ax? Gee, thanks (sigh)..

2008-04-30T16:58:00.000-07:00

Ok guys, some of the presidential candidates have an idea--they want to get the government to help you through these tough economic times by sending you a check for $3.68 (that's three dollars and sixty eight cents) each week during the summer. Why? Because times are tough and Every little bit helps, right? Any takers? No? Well, let's put it another way:

You've probably heard talk about a possible suspension of the federal gas tax over the summer, when prices are expected to be at their highest. Don't count on it making a dent in your fuel budget though. Let's take a look at why, using the great equalizer: straight arithmetic.

The federal gas tank is about 18.4 cents per gallon (and amounts to $10 billion deduction form the government's already deficit driven budget, if you care about such things.)

Let's say you have a 20-gallon gas tank, and you fill up once a week.

Saving 18.4 cents for every gallon you put in your car, you get (20 x $0.184) = $3.68

Over the 14 weeks from Memorial Day to Labor Day, we get (3.68 x 14) = $51.52.

People make a similar everyday decision when they drive 5 to 10 miles out of their way to save 5 cents on their fuel consumption, losing all the savings on the way (and probably costing more, especially if you don't fill the tank from empty once you do). So, over the entire summer, after spending over $1000 in fuel, you'll save $50, enough to fill your tank…a little over halfway one time, if we assume gas prices are at say, 3.75 on average for Regular Octane (87). If average fuel rises above this, you'll still only save $51.52 for the whole summer! $4 gas? You save fifty bucks over 14 weeks. $5 gas? fifty bucks back over 14 weeks.

What's worse, the idea that gas drops 18 cents will only drive up demand because people will "think" they're getting ahead—people will drive more and use more fuel, and prices will go even higher, all for fifty bucks...and more upset consumers. Suspending the tax may help make candidates for higher office look as if they care, but it either shows a lack of understanding of economics (which is unacceptable) or simply pandering for votes (which is expected).

So what should we do? I think we have to be honest that relative to the world we have always paid a lower price for fuel. I know, it sucks to hear that, but with other countries asking for more gas from the same people we get it from, and they are willing to pay more for it than we do, our demand for lower gas prices will be a lower priority in the eyes of the Oil Keepers. So, in the short term, we consumers should work to:

Drive Slower (which saves fuel).

Combine Trips by Planning ahead of all the places you need to go and find the best way to get there while conserving less fuel. Or Carpool, if you can.

Consider asking your employer if you can work from home once a week, if you have a job where you can work from home.

Use mass transit where it's effective, even if it may be a little uncomfortable.

In the long term,

Encourage your government officials to invest in sensible energy policies. By considering alternative energy sources that can replace the need for oil-based products, or seeking more efficient ways to heat and power your home, you can lower your energy bill, which can offset the increase in fuel costs.

What are some of your ideas and feelings on the possible gas tax rebate? Good Idea?

Feds: Rebates Checks Are Coming Next Week

2008-04-25T12:18:00.000-07:00

If you filed your taxes electronically and received your tax refund via direct deposit, the government will be sending your stimulus money as early as next week, ahead of schedule. This is probably one of the few instances in American History where you'll hear "government," "sending your money," and "ahead of schedule" in the same instance, so they must really think we're in a pickle economically. The Economic Stimulus package checks will be sent to you via direct deposit if you filed for a refund using direct deposit.

Here is the schedule for the payments, based on Social Security number:

Those who sign up to receive a 2007 tax refund via direct deposit will receive checks first.
According to the Internal Revenue Service, direct deposit payments will be made the week of April 28 to recipients whose Social Security numbers end in 00-20.

Direct deposit payments will be made May 2 to people whose numbers end in 21-75.

The final round of direct deposit payments will be made May 9 to people whose numbers end in 76-99.

…and for you paper people out there, you will receive a paper check:

[Paper] Checks will be mailed May 16 to those whose numbers end in 00-09. A second round of checks will be mailed May 23 to those whose numbers end in 10-18.

A May 30 mailing will be made to people whose numbers end in 19-25.

Mailings will be made June 6 to those whose numbers end in 26-38; June 13 to numbers 39-51; June 20 to numbers 52-63; June 27 to numbers 64-75; July 4 to numbers 76-87; and July 11 to those whose numbers end in 88-99

Source: http://www.wkyc.com/news/news_article.aspx?storyid=85299

Well, the big question now becomes: What will you do with yours? Spend? Pay off debt, or save? (And yes, I know this money is most like borrowed, will run up deficits, and will most likely be funneled to foreign countries, most likley China and Japan). Me, I probably plan to split mine among all three options, being that it's money I never counted on having in the first place. $200 will probably go to savings, $200 to finish off a small credit card debt, and $200 to defer the high cost of to airline purchases I'll be making for the summer. (Or a Wii-- it depends on things).

How about you?

Thursday Double-Dip

2008-04-17T17:51:00.000-07:00

Hi Readers,

Today there are two articles I'd like to highlight for your enlightenment and reading pleasure. (By the way, If you haven't guessed, I'm still in the process of deciding what font to use. Sometimes it's to big, other times, too small. I'll find a delicate balance soon to stay easy on your eyes. ) OK, to the stories:

First, we have a good one from CNN Money which talks about ways to enhance your 401(k) offerings at your job. Believe it or not, you can have some impact on how it's set up, no matter if you are a senior manager , the entry-level analyst, or secretary. It's your future, so consider some of the options mentioned in the article. One of the more intriguing ideas I read was on the Roth 401(k):

Unlike a regular 401(k), the Roth version - permanently greenlighted by Congress in 2006 - lets you make contributions only after the money is taxed. But withdrawals are tax-free. If you'll be in a higher bracket in retirement, a Roth 401(k) can be a better deal.

Overall, it's a good read, but some of it seems somewhat suspect to me, like one that mentions choosing a re-balancing service that will buy and sell stocks and bonds for you in your 401(k) quarterly. I think that's far too many times to trade considering the fees you'd rack up. And then, what if you under-perform the market? You'd still have to pay them a certain amount of your balance.

For those of you who've been making it through the "recession" we're going through, congrats! However, if you think you may be a part of a workforce reduction (I prefer the term FIRED, but I guess that's not euphemistic enough), then consider reading this article from the NY Post on a graceful way to exit the stage (and set yourself up for the your next performance at your future job). And even if you feel safe, it won't hurt to give it a read.

Should We Allow Retirement Funds to be Used for Real Estate Investing?

2008-04-10T18:39:00.000-07:00

No.

That’s it, no….

Oh, still around? Let’s talk about why. But first, some background. John Crudele, a columnist for the New York Post, penned

this article —in it, he talked about how the two major political parties are not facing reality, blasé blasé..you’ve heard the drill. To note, he says:

…my belief that the only stimulus package we can afford right now is one that allows people to spend their own money.

He was on the right path. It’s good point. Then, he goes wildly off course as to what this entails:

In other words, what we need is a simple law change that will permit Americans to use their own retirement money - without being killed by taxes - for such things as buying real estate.

What? Use their retirement money to buy real estate? But you can already do that you say. Yes, but with limits. It’s used to purchase your first home, and it’s limited to $10,000. Some employers require you to roll over the money to an IRA (and you have to pay it back). But there is a reason that the government makes it very difficult to pull money out of 401(k) and IRA plans—they are made for retirement purposes. Hence, the name.

Imagine for a moment that after running up student loan debt, credit card debt, and then home-equity loan debt, Americans start tapping into their last basket of (usually) forced savings—the 401(k) or IRA plan. What happens if we as a country haven’t learned from our lesson and begin buying homes way above our means because the “attractive” intro rates? You end up in a very bad position. You end up with millions of Americans (with the help of the doom-and-gloom media) playing on the emotions of everyone to bail us out of our problems (again). Only this time, it would cost a whole lot more because we would put a lot more stress on an already-fragile Social Security and Medicare program. Basically we’d further the citizen’s dependence on the government to survive. And that’s not a good thing.

Stock Market Game Final Results and Hot Links for the Week!

2008-04-06T14:47:00.001-07:00

The table shows our final results from our year-long stock market game.

These are our closing Stock Market Game Results. Starting with 10,000 this is how we turned out. So if you kept 10,000 under a mattress last year, you may have made out pretty good. And if you invested in a Treasury bond or ING account, you made off with 10,300 since this time last year. Thanks to all who played, and if you’re down for another game or would like to play this year (for those who missed us last year), let me know.

As for what’s up around the personal finance blogosphere:

Free Money Finance tells you how to make sure your church is properly managing money.

Five Cent Nickel talks about timing the stock market, even in this unstable time.

CNN Money has an expert explore foreign CDs as investments.

And The Motley Fool tells you how to stretch your employee benefits (with some nice worksheets).

So take a look and get some knowledge!

What’s Up with Medicare?

2008-03-27T18:58:00.000-07:00

2010 and 2019—these are 2 very important numbers in your head. The first represents the year where we will start paying out more money than we take in. Those of you who did those rates of change problems in Calculus know that it won’t take long for the money tank for such a system to empty—which brings us that second number—2019, where the Medicare system is expected to be bankrupt. What’s scary is that the current candidates left in the Presidential race aren’t speaking about it.

From the LA Times:

Sen. John McCain of Arizona, the presumed Republican presidential nominee, had little to say when the latest numbers were released projecting Medicare going into the red by 2019 and Social Security following in 2041. The Democratic contenders, Sens. Barack Obama of Illinois and Hillary Rodham Clinton of New York, also sidestepped the issue.

Most of the people who read this are not planning to lean to heavily on Medicare anyway, resorting instead to building a strong 401(k), work benefits plan, or IRA to provide them with the needed funds to handle medical expenses in their old age. At least I hope so. But your parents and grandparents most definitely will. And the Medicare program is in serious trouble, even more so after the Part D prescription plan was added in 2003.

Expect the candidates (except maybe for McCain) to adopt the populist solution:

Tax “The Rich.”

Social Security operating in the red? Tax the Rich.

How about that Universal Health Care? Roll back those tax cuts on The Rich.

How to keep Medicare solvent? You got it.

But no one talks about the outlays (the cost). Rolling back the rich folks’ tax cuts (which means any person, family or business making 200,000+) won’t cover all of this. Which brings us to two solutions: either admit that everyone will have to shoulder an increased tax burden, or admit that some of these programs will unfortunately have to go or benefits will have to be sliced.

Let’s be frank: if the operators of Medicare and Social Security were a private business, investors would be running scared from them. Now imagine if the US Government forced you to own shares in the business… Now I know that these entitlement programs have been around for awhile but they were never meant to fund your retirement—it was simply meant as a supplement to retirement income. At some point some tough decisions will have to be made. Taxes will need to be raised. On everyone. Benefits will need to be cut, especially for younger Americans who have the opportunity to own and fund 401(k) accounts…or IRAs…or start successful businesses—like we always have.

So keep your eye out for Medicare, Social Security, and the coming burden of Universal Health Care. One would hope we can have these things and not pay for them, but if we want them, we will have to pay one way or another.

Your Thoughts?

What’s Hot on the PF Blogs: 5 Hot Links!

2008-03-24T18:36:00.000-07:00

- Free Money Finance Warns about Ordering the “Special.”

- Get Rich Slowly has words of comfort on the current economic crisis.

- CNN Money chooses doom instead.

- But not without telling you how to protect yourself.

- And FiveCentNickel tells us how to avoid an audit, so you can get your rebate check.

See you next week. And if you comment there, let ‘em know we linked you there!

Fed Cuts, Bear Stearns, and March Games

2008-03-17T16:49:00.000-07:00

Our Stock Market Game has gone on for almost a full year—that was quick, wasn't it? With 15 days left before the end, the market has been tanking, and we have some high fliers and some low-ballers in our game. Percentage gains in one year have ranged from 2.5% up to 32.3%
down (as of today).

IN THE NEWS
Bear Stearns has nearly collapsed, and was snagged by JP Morgan Chase for $2/share, about 270 million. Friday, Bear Stearns was at $30/share. Hope none of you fine folks out there were heavy in banking stocks—well, unless you were holding JP Morgan. However, diversification will get you through this shakeout of the
stock/housing market. What you won't hear much is who's funding this transaction: you think it's JP Morgan chase who's funding the purchase? Nope—the Federal Reserve is funding the purchase of a private company. Not sure if this is the first time it's happened, but I hope it's the last. Businesses, no matter what the size, should be allowed to fail and rise without the intervention of the government or
the Fed.

Speaking of the Fed, they, being the enabling parent to our shaky economy, made another cut this weekend of a quarter-point down to 3.25%. For those of you holding emergency funds in high-yield savings like ING Direct or Emigrant Direct, you should expect your returns to
sink to around 3% or lower.

March Madness is upon us, which means it's time for the obligatory news stories about how much work productivity is being lost.
See

here.

Or here.
Or maybe here.

I think that the complainers are simply (a) worse at picking NCAA pools than the general public, or (b) hitting a popular event while forgetting how unproductive we get on Fridays, the day before long weekends, or when people take smoke breaks or tank after 3pm.

So stay tuned folks. The dollar is weakening, we may be in a recession, and this time next week, your brackets for March madness will be in disarray. Relax. All these things shall pass—and be
corrected for the better.

What Won’t Work in the Economic Slowdown Ahead

2008-03-08T21:24:00.000-08:00

So the word on the street is that we’re taking it on the chin economically. The dollar is falling, there is talk of banks failing, gas prices and the price of goods are up, and the stock market is tanking—it’s fallen below the 12,000 mark as of this writing. The federal government and the Federal Reserve are trying several options to get us on the right track, but I don’t think it’s going to work. Let’s look at some of the numbers:

- Taking profits of oil companies won’t work. There is talk of reviving the windfall profits tax and repealing subsidies from the oil companies. Ultimately, the amount of money they pull in pales in comparison to the government’s operating budget. Oil prices at the pump are determined further up the chain. The President cannot control oil prices—the prices are set by OPEC, which some argue is a cartel (and I really don’t disagree there very much). Besides, chances are that a large segment of Americans who own a 401(k) retirement plan profit from the oil companies revenues anyway. Taking away profits probably will hurt more than help.

- Cutting Interest Rates won’t work. The Federal Reserve will be meeting soon and is expected to cut interest rates again for the 5^th time this year. What this does is makes it cheaper for banks to lend money to each other. Unfortunately, it also discourages investment in our dollar (money markets). A good example of this is the interest rate you get at your ING Direct account. Notice how it falls when the Fed cuts rates? Many people choose to move their money to a currency with a higher return on interest. When people leave the dollar, the value falls because the market will be flooded with low-interest dollars—which means it would take more money to buy things.

- Creating Money Won’t Work. The Feds also just made $100 million dollars and injected it into the market. Not because of increase in labor output or anything logical. The stock market and credit lenders needed more money to bail out their bad lending decisions and so the Feds pressed “print,” and sent the money to the banks. That does NOT improve the dollar. It’s like giving everyone a million dollars—people would be a whole less likely to work, productivity falls, and so does the worth of your money.

- Giving out $600 Checks to everybody won’ t work. We’ve talked about that here.

So, the obvious question is: What will work?

I can’t say what will work with any confidence except let the problem work itself out. It sounds callous, but I think it’s the best solution. Sometimes, it’s better to just fall rather than trying to do everything to prevent injury because you can potentially make it worse. Many people got into houses they cannot afford. These folks should be willing to (a) downgrade or (b) consider renting again until they have to funds to truly get into a house.

The government, if they do decide to borrow money, should probably focus on infrastructure improvements. As for the interest rate cuts--they should remain reasonable and not in response to when Wall Street stomps their feet. Rates have been cut several times this year, and we’re not even through the first quarter yet as cuts are expected to continue. I’m not ready to embrace Ron Paul’s Gold Standard idea yet, but I may look into it.

Check's In the Mail in May - Your Plans?

2008-03-01T08:40:00.000-08:00

The Stimulus and the Response

President Bush and the Congress has signed the ~~Welfare for Everyone~~ er, Economic Stimulus Package that will go out to some 150 million Americans starting in May. Most taxpayers will receive $600 if you earned more than $3,000 in 2007, $1200 for married taxpayers, and $300 per child under 17, according to the package details. Here are some more details via WhiteHouse.gov that you probably didn’t know:

- For 2008. Taxes on the first 6,000 you earn ($12,000 for married couples) will not be taxed (previously the tax rate was 10% ). Your adjusted gross income should be less than $75,000 ($150K for couples), including salary and bonuses to receive the full check. Phase-outs begin above these income levels.

- The total spending will be to the tune of $100 BILLION+. Most of us don’t understand the concept of how much money $100,000,000,000 is, but it is a lot of money being sent out to Americans.

So, why is the government doing this? Besides it being an election year and the slowing of the economy, the government seeks to try to soften the blow to the economy by giving you a cushion of cash to fall on. The theory is that if you give people money, they will go out and spend it on American Products that will directly affect the US Economy.

Is it a great idea? I don’t think it’s the best idea, considering some of the news on the ground about how people actually plan to spend their checks. From a Bloomberg article we find that Americans have other plans rather than spending the money on the good old USA:

The stimulus plan Congress approved this month may provide less of a jolt to the U.S. economy than intended, as most Americans plan to save rather than spend their tax rebates, a Bloomberg/Los Angeles Times survey shows.

Only 18 percent of respondents said they will spend their rebate on purchases, while slightly more than three in 10 said they prefer to use the money to pay off debt, and a third said they'll pocket it.

``People in Washington assume that about 40 percent of the money will be spent,'' said Douglas Elmendorf, a senior fellow at the Brookings Institution, a Washington-based research organization. ``Much less would be disappointing.''

I bet it would be. Do "People in Washington" lose consciousness after they enter the Beltway?

There are so many things in this little snippet that I find rather surprising. Less than 20% plan to spend the money—which, honestly, I have to see myself. Expect a huge “Economic Stimulus Sale” Blitz from US companies in May and June to compete with consumers' discipline to save and pay off debt. Then, consider the fact the most of the products you’ll be buying—clothing, computers and other high-end electronics, go to other countries, most likely China. I'm not going to lie to you--I'm blessed to be in a fairly decent spot financially, and that check is going to a splurge purchase--I got my eyes on a new TV or an airline ticket for my family's summer family reunion. I bet I'm not alone.

Lastly, remember that the US Government doesn’t have billions of dollars stored up in a bank somewhere to dole out when times get bad. They will most like follow the China Boon Economic stimulus plan, which is described below:

1. Borrow money from China for the US Economic Stimulus Package and give to Americans to spend.

2. Americans spend money at companies that send most of the profits back to China.

3. The US Government pays back the original money, with interest.

Sound good? Well, it’s probably the most likely scenario. I’d be pleasantly surprised if we use our Federal government check to pay off debt and save for later. The Feds would be happy if you spend the money. Personally, I think the best option would have been to spend the money on improving our Country’s infrastructure and educational pursuits. It would have taken longer to make an impact, but I think we would be better off than we would in say, 6 months from now when we find out the economic stimulus package didn’t go according to plan.

See you next week.

Wachovia's Way2Save: 4U?

2008-02-23T19:51:00.000-08:00

If you have a Wachovia Account, you’ve probably heard of Way2Save; if not, inquire about it. Wachovia has been quite slow about entering the high-interest savings market, but they have finally come to the table…kinda.

Wachovia’s Way2Save (W2S) is somewhat similar to Bank Of America’s “Keep the Change” program. Bank Of America has a program that rounds up any purchases you have to the nearest dollar and they transfer that money into a high-yield savings account. With Wachovia’s W2S, every time you make a debit/check card purchase, $1 is transferred into a high-yield savings account. In addition, you are allowed to transfer $100 a month into this account, which gains an APY of 5%, which is the probably near top in the market right now. To up the ante Wachovia is also offering an additional 5% for money you hold in the account for up to one year, meaning you can pull some serious interest.

That’s the good news.

Here are some of the challenges you should be aware of if you’re interested. First, the 5% APY is for one year only; after that if will fall to about 2%, far below the rates offered by the likes on ING Direct, Emigrant Direct, and E*Trade. Also, the account transferring money does depend on your heavy use of your check card—as long as you don’t run the risk of losing track of how you spend your money and your account doesn’t go into the red, you’ll be in good shape. As we’ve said before, it’s pretty easy to lose track of $10 here, $5 there when there’s no real cash exchanging hands. Studies show that consumers make about 23 debit purchases a month. That’s $23 you have to be aware of that’s going into you new account (and OUT OF your base checking account).

I’m always a fan of finding ways to encourage Americans to save money. Because we have a relatively large safety net, many of us don’t bother saving for the future; so it’s no surprise that we have a small savings rate. If you’re responsible enough and are willing to move your money from your current savings vehicle, then this may be a rewarding step to take. I set my account up (as an existing customer) and it took about 7 minutes. I’ll give this account a spin and let you know how it’s going. If any of you have already tried it out, let us know how it’s working for you.

Check Out Our Archives

2008-02-22T17:50:00.000-08:00

Sorry for the lack in posts folks. If it's not one thing its another. Combine the flu along with my transition to a new position at work, and suddenly time becomes a serious factor. Check out our Archives, and don't forget the Hot Box over to the right (facebookers click thru to the full site) to see some of the hottest financial topic on the net. And I'll be back very soon. Thanks!

War on the Middle Class? A View from Drew Carey

2008-02-08T14:04:00.000-08:00

The media has done a great job of telling you that we're spiraling down the tubes as a middle class. Lou Dobbs has become one of the strongest generals in this "war." But what if we're not as bad off as we're told to think? Check out this Drew Carey Reason Clip:

Thoughts?

Investors are Panicking. Great Time to Invest!

2008-01-27T13:36:00.000-08:00

Unless you’ve had your head in the sand, and many have, you cannot turn on the news without hearing how the stock market has tanked. I’ve been asked by friends and family alike about if its time to “get out” of the market yet, and the answer is unequivocally NO. (Yes, I still use SAT words!)

But let’s look at it another way—when is the best time to buy electronics, clothing, and food items—when it is on sale, or when it isn’t? If you’re not a millionaire and have people purchase these things for you, the answer would be the former and not the latter. Very few people would advocate waiting for prices to go up before going out to make purchases.

So why not look at the stock market the same way? Prices are being dragged down because of the falling dollar, housing market and credit market crashes, and many stocks are being pulled down in the process. Mortgage-backed securities, which we featured [here] before the decline of the housing market, have driven down the market. Lesson learned, yet we move on.

It’s important to make sure you don’t tailor your investments to one particular sector. This has become evident after the dot-com bubble and now the housing bubble. That doesn’t mean you should avoid housing stocks, but you should make smart choices about including the right ones in your portfolio. And if you don’t know enough about making such a choice (I will freely admit that I don’t), its best to focus on the long-term and invest in mutual funds—especially index funds, which are readily diversified. You may also want to consider Growth-focused funds and some international funds. Check sites like Morningstar for more information.

So now is not the time to bail. There’s a stock sale going on and people are bailing out at the wrong time. If you’re in it for the long haul, consider this as buying your investment for a much cheaper price—and rest assured, these prices won’t be here for long! So act today! But wait, there’s more!

Well, no there isn’t. I got a little carried away. See you next week.

Spending More Makes You Feel Good?

2008-01-21T19:13:00.000-08:00

So I saw this on CNN recently:

Researchers in California have uncovered that Americans are more satisfied by a wine's taste if they "know" it's more expensive. Antonio Rangel, associate professor of economics at the California Institute of Technology, has analyzed the reactions of 21 volunteers who were presented 15 wines in a random manner, the only information being the price.

Unbeknownst to them, two of the wines were repeated, but presented with different price tags. The researchers also carefully observed changes in a part of the brain known as the medial orbitofrontal cortex, which plays a central role in many types of pleasure.

They found out that test subjects were more pleased by the taste of wines they thought were expensive.

Well, there you go. Although the sample size in this study was small, I still think it is an important study. This is not dissimilar to the not-as-scientific study performed by the libertarian comedians Penn and Teller, who tried to see how patrons reacted in an upscale, high-end restaurant when they were served very cheaply-prepared food. See the clip in my September article here. But wait! There’s more:

As part of the test, a pricey $90 wine was provided marked with its real price and again marked $10, while another wine was presented at its real price of $5 and also marked with a $45 price tag. In both cases, the volunteers thought that the wine was better when the higher price tag was presented.

This should be no secret to most people; however, most consumers still fall prey to it because they are convinced that more expensive products are “better” and “cheaper” is somehow less in quality. For consumer goods, not just wine, this is just false. But why do people behave this way? From the study:

The results showed that the way in which the brain works is that it mixes pleasure with expectation as to how good the wine should be. Since the expensive wine was supposed to be better, their brains perceived it as the superior drink.

This means that no matter how good a cheap wine may taste, consumers will still likely buy the more expensive wine and believe it tates better.

Again, not all that surprising. But it’s usually the “well duh” stuff that trips up the average consumer in restaurants, in the electronics store, the grocery aisle, and even the car salesman’s lot. I’ve had countless people try to justify why one particular shoe “wears better,” how no mp3 player’s sound quality can rival the iPod, or the name brand grape soda taste better than the store brand. To be fair, sometimes these conclusions are true, usually though its hard to objectively prove. Marketing departments at major companies know this, and it usually works in their favor. People buy more expensive goods with the expectation (feeling) that it should be better, and their brain’s logic center loses out and confirms this “feeling.”

There are times though, when it doesn’t work. Witness the sales race between the PlayStation 3, Microsoft’s Xbox 360, and Nintendo’s Wii. On paper, the PS3 looks as if it should be “better” by a long run, and it is of course more expensive. The same occurs for the Xbox 360. The consumer market however, bucked the trend and opted for the cheaper Wii, and demand continues to outpace supply for the device.

But let this be a warning that you should always consider—never underestimate the power of marketing, and don’t ever think that paying more for something makes it better. Moving forward, you should be aware (and more careful) of your spending decisions.

Two Quick Money Tips for 2008

2008-01-14T15:27:00.000-08:00

Hi Readers. Happy New Year! Sorry for the slackness between posts, but I’ve been a little involved in Presidential campaign activities. I know, no excuse. Now that you have set your resolutions and (hopefully) not failed yet, consider some of the money tips collected from writers around the Web for the new year.

Consolidate some of your banking accounts. This is the most effective way to ensure that all of your money is properly going to the right spots. You should probably try to consolidate your money to one or two main accounts. Because of the ease of checking and direct deposit, I have a brick-and-mortar bank and then I have my emergency/long-term savings with ING direct. You may like other options.

Automate your Savings Plan. Saving is awfully hard to do, especially if you consciously have to move money over every month. By setting up an automatic transfer plan that is connected to your main checking account or a part of your direct deposit, it gets much easier because the savings is out-of-sight and therefore out-of-mind. If you choose a high-yield savings account like ING Direct or HSBC direct you should be in good shape.

We’ll post more as we move along this year. Make 2008 the year you finally take active control of your finances.

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

2007-12-25T19:18:00.000-08:00

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

2007-12-02T08:11:00.001-08:00

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

2007-11-19T13:30:00.000-08:00

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!

2007-10-29T04:38:00.000-07:00

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.

2007-10-22T15:34:00.000-07:00

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?

2007-10-14T07:18:00.000-07:00

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.

2007-10-03T19:38:00.000-07:00

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"?

2007-09-25T16:17:00.000-07:00

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"

2007-09-16T18:01:00.001-07:00

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!

2007-09-11T20:23:00.000-07:00

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

2007-09-04T17:50:00.000-07:00

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!

2007-08-28T15:54:00.000-07:00

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

2007-08-20T17:19:00.000-07:00

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.

2007-08-13T15:22:00.000-07:00

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

2007-08-06T17:11:00.000-07:00

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?

2007-07-18T18:36:00.000-07:00

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!

2007-07-13T11:31:00.000-07:00

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?

2007-07-06T11:24:00.000-07:00

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

2007-06-21T16:31:00.000-07:00

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

2007-06-16T07:01:00.000-07:00

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...

2007-06-08T11:11:00.000-07:00

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!

2007-06-01T17:39:00.000-07:00

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

2007-05-28T19:04:00.000-07:00

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

2007-05-21T17:41:00.000-07:00

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?

2007-05-09T19:55:00.000-07:00

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?

2007-05-06T09:56:00.000-07:00

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

2007-04-30T19:51:00.000-07:00

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)

2007-04-24T16:48:00.000-07:00

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!

2007-04-18T17:14:00.000-07:00

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

2007-04-10T16:00:00.000-07:00

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!

2007-04-06T07:19:00.000-07:00

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

Join Our VSE Stock Market Game!

2007-03-26T17:10:00.000-07:00

Join Our VSE Stock Market Game!

Dear readers of Wealth Weekly,

When it comes to stock market investing, we always encourage you to look at directly purchasing stocks only after getting your financial foundation in order. That means eliminating (bad) debt, establishing an emergency fund, fully funding your 401(k) and IRA (using index funds wherever possible) , and THEN look at investing in individual stocks. It's a guideline that will ensure the most success, so you can follow or ignore as you wish. Later this week I will be posting a conversation from a talk given to the NSBE Chapter at Columbia University, which I thoroughly enjoyed. So this week I will actually be posting 2 articles (well, only if you include this one).

So we wanted to get people's minds wrapped around the concept of what investing in the stock market entails, so that when the time comes, you will know what you're truly getting into. Unlike most games where you start with a large sum of money and manage it over a couple months, our game will run for 1 YEAR—this will show us just how readers, fellow bloggers, and others endure the ups and downs of the stock market for 1 year. You will be given $10,000 (fake money) and will invest it for over a year.

Click [here] to register for the game and join in.

When the page loads, look in the lower right-hand side of the screen for a box called "Create or Join a Game" and enter the Game ID: PF_Investors. If you haven't been registered, you should register (its free) and follow the instructions to join our game.

The game officially begins on April 1, 2007 and runs through April 1, 2008. I haven't discussed any prize information, but I may try to come up with something to spur participation as we move on. Take a moment to register at MarketWatch and join our game. I'll be sending reminders for the next week encouraging you to get involved.

Good luck!

--Charles J