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.
Monday, December 22, 2008
Sunday, December 14, 2008
Seriously, How Much Is a Trillion?
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.
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.
Monday, December 08, 2008
Bailout Bonanza!
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.
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.
Tuesday, December 02, 2008
Want a Piece of Bailout Money? Become a Bank! (Or a car company)
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.
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.
Sunday, November 23, 2008
Ha! You Got (Tax) Shifted!
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.
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.
Monday, November 17, 2008
Americans Are Going Generic
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:
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:
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.
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.
Friday, November 07, 2008
Site Repair
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.
Sunday, October 12, 2008
The Market Has a Cold 'Tussin Can't Help!
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.
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.
Sunday, October 05, 2008
Bailout Passes..Now What?
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:
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.
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.
Tuesday, September 23, 2008
Financial Markets--What Just went Down Last Week?
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).
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).
Monday, September 15, 2008
Corporate Socialism: More Camel Straw...
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:
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).
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).
Tuesday, September 09, 2008
Don't Teach Financial Education? Are you crazy?
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:
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):
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.
===============================================================
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.
===============================================================
Thursday, September 04, 2008
Hot Links for the Week
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!
* 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!
Wednesday, August 27, 2008
America Gives Even in Tough Times
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:
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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.
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.
Wednesday, August 13, 2008
Why Financial "Firm Nudges" Work
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:
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.
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.
Saturday, August 02, 2008
Feds Will Bust the Clock
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.
Monday, July 21, 2008
When Times Are Tough, Americans Spend Anyway
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:
Here's the interesting part(s):
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.
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.
Monday, July 14, 2008
Will You Be OK If Your Bank "Fails"?
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.
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.
Thursday, July 10, 2008
About Those Stimulus Checks...
Word is coming in on how the stimulus checks are doing—
Wal-Mart and Costco has good news to report:
So consumers indeed are spending those stimulus checks, but many are saving them for worse times as well and are paying off debt.
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:
Even in a period of near-recession in the America, there's always time for entertainment.
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.
Wednesday, July 02, 2008
Happy 4th of July!
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).
Monday, June 23, 2008
Five Hot Links for the Week!
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. -
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. -
Monday, June 16, 2008
We Aren't Marketing Slaves...
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.
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.
Friday, June 06, 2008
Bankrate: 12 "Necessities" That Drain Your Budget
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.
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.
Thursday, May 29, 2008
This Week's Hot Links: Bring Out the Violins...
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?
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?
Thursday, May 22, 2008
How Much Does Your 401(k) Cost?
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.
Thursday, May 15, 2008
Frugal or Cheap? Let's Be Real.
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!
Wednesday, May 07, 2008
This Week's 5 Hot Links
- 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.
Wednesday, April 30, 2008
Summer Gas Tax Ax? Gee, thanks (sigh)..
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?
Friday, April 25, 2008
Feds: Rebates Checks Are Coming Next Week
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, April 17, 2008
Thursday Double-Dip
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):
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.
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.
Thursday, April 10, 2008
Should We Allow Retirement Funds to be Used for Real Estate Investing?
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.
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.
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.
Sunday, April 06, 2008
Stock Market Game Final Results and Hot Links for the Week!
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
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!
Thursday, March 27, 2008
What’s Up with Medicare?
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?
Monday, March 24, 2008
What’s Hot on the PF Blogs: 5 Hot Links!
- 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!
Monday, March 17, 2008
Fed Cuts, Bear Stearns, and March Games
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).
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
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.
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