The rising unemployment in the U.S. is a grim reminder that those of us with jobs should stop complaining and start being thankful.  Unfortunately, one of the real classes of people who are being undeservedly punished by our economic struggles are college graduates.  With unemployment climbing, college grads are finding themselves trying to beat out job applicants with a bigger work histories under their belt.  Without a solid job, graduates are finding it difficult to make their student loan payments that become due upon receiving a diploma.  What are their options?

Talk to Lender. Just like with those having trouble with their mortgages, immediately calling your lender and explaining your situation can pay off.  Your options may vary depending on the lender and the type of loan (federal or private).

Income-Contingent Repayment. Generally, opting for an income-contingent repayment plan will lower your monthly bill.  The bank will decrease your monthly payment depending upon your gross income.

Deferment. If you defer your loans, they will temporarily be suspended and will not be due on a monthly basis.  In order to qualify for deferment, you must have some type of economic hardship, which would include unemployment.  The problem with deferment is that although it provides immediate relief, the interest on the loans continues to grow.  Although, if the loan is a subsidized federal loan then you do not have to pay interest while in deferment.

Forbearance. You can specify a certain amount of time where you will stop making payments on your student loans, however, during this time, interest will continue to accumulate.

Extended Repayment. This option allows the borrower to extend the length of the loan, which in turn would reduce your monthly amount due.  Generally, this option requires that you consolidate (group all of your loans into one) and will cost you more in the long term because of accruing interest.  If you have to opt for this repayment plan right away, try not to get used to your low payments.  Once you can afford to do so, pay more each month to reduce the length of the loan and reduce your total repayment.

Live Frugally. Although there are options to help cash strapped graduates pay their expensive student loans back, the best way is to simply cut back your spending and make your minimum payments.  This option may not be available to everyone, but the most graduates can likely spot areas in their life where money is being spent foolishly and use that towards their loans.  Remember, for graduates, you have nowhere to go but up.  This is the likely the time in your life where you will make the least amount of money.  Use this time to understand the power of saving and living frugal, it will only help you in your  years to come.

For more information on how to afford your student loan bills, visit http://www.ibrinfo.org.

Bonds: Investinginbonds.com. A one-stop shop, this free site provides historical prices and call information for specific issues, plus a wealth of market data.

Stocks and funds: Morningstar.com. For copious commentary and statistics on both stocks and funds, this site is hard to top. The juicy stuff will cost you $159 per year for a premium membership.

Credit reports: AnnualCreditReport.com. Forget copycat sites. This is the official Web site where you can get a free report from each of the three credit bureaus once a year.

Credit score: myFICO.com. Buy your score from one credit bureau for $15.95 or from all three for $47.85. Plus, get advice on how to raise your score, and use the site’s EZ Error Correct system to dispute mistakes.

Tax calculator: Kiplinger.com. If you got a tax refund, give yourself a pay raise by using our easy tax-withholding calculator.

Social Security calculator: http://www.ssa.gov/estimator. Type your name, Social Security number, birth date, birthplace and mother’s name into this secure site, and it will show your estimated benefits based on your up-to-date earnings record.

Health insurance: eHealthInsurance.com. Provides immediate quotes for most major health insurers and compares policies. For personalized attention, call 800-977-8860 or find a local broker through http://www.nahu.org.

Health insurance: Coverageforall.org. Offers strategies for finding coverage, especially for people with medical conditions or modest incomes.

Medicare: Medicare.gov. Chock-full of detailed information about Medicare, with excellent tools to help you pick the best Part D plan or Medicare Advantage policy based on your specific medications and health condition.

Life insurance: AccuQuote.com. An easy way to get term-insurance rates from many of the top companies. Call 800-442-9899 for personalized help, especially if you have a medical condition.

Life insurance: Insure.com. Use this site to see the detailed criteria you must meet to qualify for each company’s term-insurance rates.

Auto insurance: InsWeb.com. Lets you compare price quotes from several major insurers (the number varies by state). Also a good resource for money-saving tips on every kind of insurance. For personal help, contact an agent through the Independent Insurance Agents & Brokers of America.

Homeowners insurance: AccuCoverage.com. For a fee of $7.95, you can calculate how much coverage you need. Plug in data about your home’s age, building materials and other details, and get an immediate estimate of its replacement cost.

Customer Service: http://Naic.org/cis. The National Association of Insurance Commissioners maintains complaint records for each insurer in every state. Focus on the complaint ratio: the number of complaints for every dollar the insurer collects in premiums.

After a couple minutes on Thacher & Bartlett’s webpage I noticed two things that stuck out like a stockbroker in the unemployment lines.  1) The firm brags about the advice they gave Wachovia when they merged with First Union.  2) The firm also brags about the advice they gave in advising Washington Mutual to acquire Dime.

“The Firm also has advised Manulife Corporation with respect to its acquisition of John Hancock Financial Services, advised Wachovia in connection with its merger with First Union and a related hostile bid for Wachovia, advised Washington Mutual in its acquisition of Dime” – Thacher & Bartlett

Wow, there is some great advice (both institutions tanked) that the Treasury better rush to get.  Two companies who failed because of taking on bad debt/bets and acquired companies they didn’t have adequate capital for (thanks to the Treasury’s new counsel).  Is this the best out there?  No.  The Treasury’s own press release announcing the hiring of Thacher & Bartlett says,

“Treasury competitively solicited offers from six firms under compelling urgency to quickly establish the Troubled Asset Relief Program. Two firms made offers.”

Really?  In the worst financial crisis since the Great Depression our Treasury Department with pockets so full they can’t sit down, seek help from only six firms and took only two offers?  Most Main Street folks, including Joe the Plumber, get more bids to have somebody lay a new driveway.

So what was the final contract for?  Well, I’m glad you asked—only a meager $300,000.  One of the leading lawyers for the firm is Lee A. Meyerson, who coincidently was picked to help JPMorgan acquire Washington Mutual.  It seems to me the firm and its lawyers mainly deal with takeover bids.  Why does the Treasury Department need advice in this field?  After all, the Federal Government regulates such takeovers, where are the masterminds behind this?  Lastly, the Government has to pump money into our financial institutions, I understand this.  But if takeovers are in their sites, I’m nervous. $

Some investment firms are now striking deals with cash strapped homeowners who can no longer take out equity in their homes because of the tightened lending standards.  Investors are basically lending money to homeowners in exchange for a share of their homes future value, usually around 30-50 percent.  The loan is repaid along with your homes added equity when you sell your home. I know, I can’t believe it either.  What makes anyone agree to something like this?  There are no interest payments made during the life of a contract is a big reason.

Is this a good deal?  I don’t think so.  It can work out in favor of the homeowner, but really only if they are in desperate need of cash.  Consider this example.  A homeowner takes out a $50,000 “equity” loan from an investor.  In seven years the homeowner decides to move, so he/she sells their house.  During the seven years, the home increased in value by $100,000.  So, not only does the homeowner have to pay the traditional fees in selling their home, but they now have to pay their debts for their “equity” loan.  After paying back the investor the original $50,000 they also have to give up 50 percent of their equity, which is an additional $50,000—virtually wiping away any equity gained over seven years.

I’ll be a little fair and say if your house actually loses money over the seven years (above example); the investor would also be losing out.  You can’t ignore the fine print in these deals either.  If you terminate the contract within 5 years, you could face a steep penalty.  This is in addition to various other contractual problems that can be worked into the agreement.  One last thing, these types of loans—better characterized as investments—are fairly new, thus unregulated.  We have all see where unregulated markets can get us.  Be careful if approach by one of these offers, consider all your options before signing on the dotted line.$

As you have probably heard, the U.S. Senate passed an amended version of the bailout package late on Wednesday, October 2.  Mainly, changes were made to the bill in order to garner enough Republican votes in the House, where a similar package was shot down earlier in the week.  If the Senate’s vote gives us any indication as to how the House of Representatives will vote, then the chances are good because the Senate overwhelmingly passed the measure 74-25.  Both Senator Obama (D-IL) and Senator McCain (R-AZ) voted yes. [UPDATE: Today 10/3/2008, the House of Representatives passed the Senate measure 263-171.]

So what exactly is in the Emergency Economic Stabilization Act of 2008?  The answer is a lot.  When the core draft of the legislation was created by Secretary Paulson, the bill was very short three-page proposal.  After negotiations and a failed House vote, the bill is now 451 pages.  (The text of the bill can be accessed by clicking here.)  Because of the complex nature and length of the bill, below I have outlined the highlights along with what I feel are the positive and negatives of certain provisions.

Outline of the Emergency Economic Stabilization Act of 2008

• Authority to Buy - Gives the U.S. Treasury Department the authority to purchase and eventually sell bad assets (mostly mortgage-backed securities).  If the securities end up going up in value, the Treasury would then deposit the proceeds into the Treasury’s general fund, thus giving the taxpayers a gain.
• Money is Allocated to Treasury in Chunks - Although the $700 billion dollar amount was agreed to, it was in my opinion allocated somewhat responsible way by making the Treasury Department get Congressional approval for more money and makes them report to Congress on the effectiveness of their plan.  Immediately, the Treasury Department will receive $250 billion and would then receive another $100 billion after issuing a report to Congress.  The Remaining $350 billion would need Congressional approval.
• Treasury Can Purchase Non Mortgage Related Securities - The Treasury Department is allowed a little freedom in the types of assets it can purchase.  Most of the assets, of course, will be mortgage related, but this provision allows them to purchase various products.  I understand the motive for this provision, because in theory, if troubled banks need to get additional capital but cannot sell certain illiquid securities, the Treasury will help out.  However, this essentially allows the Treasury to buy assets like student loans and credit card debt off the books of financial institutions, both should not be allowed.  One question I have with this provision is can the Treasury buy securities from a struggling pension fund that was invested highly in mortgage-backed securities?  If this is the case, then if a local government’s pension was heavily invested in bad mortgages, which would result in teachers, firefighters, and city workers losing their retirement money; perhaps this provision would add a little protection to them if not by ultimately leveling out the housing market.
• Keep People in their Homes - The bill directs the Treasury to encourage homeowners facing foreclosure to take advantage of existing programs like the HOPE Homeowners Program under the National Housing Act in order to minimize foreclosures.  In my opinion, this bill does not go far enough to help people stay in their homes.  It’s hard to justify $700 billion for Wall Street when we just direct those losing their homes to existing programs.
• Executive Compensation - Interestingly, this bill would cap tax deductions for executive compensation and bonuses at $500,000 to make sure bad CEO’s do not get to cash out when they run a company in the ground.  In addition, this provision would not allow companies to give “golden parachutes” to their underperforming executives if the Government has completely taken over the company.  I like this provision because it doesn’t allow failing CEO’s to make millions, but it’s limited so that government doesn’t play a role in the executive compensation of other business it has no hand in, this is important.
• Oversight - The bill has a couple of different oversight measures, which is extremely important considering the magnitude of the sum of money.  (Sec. Paulson’s original draft did not include any oversight, essentially giving the Treasury a blank check with no limits or checks).  Included forms of oversight are: GAO studies (non –partisan), an inspector general (most government agencies have an inspector general), a Congressional oversight panel, and a board made up by our Government leaders (SEC, Fed, Treasury, HUD, and FHFA).
• FDIC Insurance - The bill temporarily raises the Federal Deposit Insurance Corp.’s deposit insurance coverage from $100,000 to $250,000. The reworked plan also would give the FDIC an unlimited credit line from Treasury.  This is a good thing, but after the temporary level is lowered again, customers must look for other accounts to ensure their money is insured (The FDIC insures your money in bank accounts up to $100,000, but if you are rich, you can open multiple accounts at $100,000 to insure all of your money).  [Ben edit- And isn't this only going to be in place for 1 year?  What happens afterwards?]

And what about you, dear reader, what do you think about this bailout?  Does this work for you?  Or does it further cripple our economy? $

How did we ever get to the point of needing $700 billion dollars from the Federal Government?  Were the regulators asleep at the switch or were they simply out smarted by the markets?  Did greed win over principles on Wall Street?  These are great questions that will probably be the topics of countless books over the course of the next ten years.  Of course, I don’t have the answers, but I do have an opinion, that you can take for whatever it’s worth.   Here is my quick and dirty version of the root cause of our current financial crisis, described by the following primary actors:

The Federal Government’s Role- The Federal Government has advocated home ownership for some time now.  The idea has essentially been the cornerstone of the American dream.  The Government practically begs citizens to purchase a home by offering tax incentives, Government backed mortgages, and various other programs designed to aid in purchasing a home.  The reality is that many people simply should not purchase a home, even if on paper it’s somewhat affordable.  (If you have time, read this article where we weigh the pros and cons of Renting vs. Buying).

As a homeowner, I completely understand the desire to own a home, and I think everyone should purchase a home at some point in their life to avoid rent or mortgage payments during retirement, but our desire to own homes has helped banks create exotic mortgage products that put us in the situation we are in today.

Securitization- You have likely heard this term thrown around in the news the past couple of months.  Securitization was a major reason we had a housing bubble and the major reason banks could offer so many nontraditional mortgage products.  Think of securitization like a mutual fund, its the process that bundles multiple mortgages into one security, like a mutual fund that holds various stocks.  As banks sold loans to homeowners, they would then bundle these loans or securitize them into securities that could be purchased by investors.  Investors of all types (this is where investments banks really lost their wallet) would then purchase these securities full of mortgages from the banks.  In turn, the banks would have capital from selling these loans, which allowed them to sell even more mortgages.

As the housing business began to boom and home values started going through the roof, everyone wanted in on the action.  Thus, more consumers took out mortgages, more investors purchased these mortgages through securitization, and the banks were rewarded with even more capital, which allowed them the freedom to become creative (the creation of ARM loans).  Investors were particularly drawn to these investments for a couple reasons.  For one, mortgages were originally thought of as one of the safest investments you could make.  Two, because a lot of these loans reset to higher interest rates, investors would only see their profits increase, which made these seem like no brainers.  Lastly, these securities or bonds were rated by credit rating agencies AAA, the best rating a bond can get (we’ll get to this later).  As you can see, securitization of mortgages was the fuel that fed our housing fire.

Credit Rating Agencies- As I just mentioned, credit rating agencies also played a role.  The main job of credit rating agencies is to examine securities like bonds, and assign a rating to it—the higher the rating, the safer the investment.  Investors took a lot of comfort in securities loaded with bad mortgages because of the high rating assigned to them, which only helped encourage the lending of these mortgages.  Credit rating agencies have come under fire since our housing crisis has unfolded and deservedly so.  They are now under the radar and regulators are paying closer attention to them.

One of the main problems I see in the system of credit rating agencies is the conflicts of interest that exist.  Basically, the system works like this; financial institutions will go to a credit rating agency as a customer and pay the agency to rate their security.  The credit rating agency then finds itself in a tight spot because they are in competition with other rating agencies to rate a particular financial institution’s securities favorably, or they might leave and get a rating they like better from a competing agency.  As you can see, companies seeking ratings are shopping around for the best possible rating and agencies are trying to please the customer in order to get repeat business.  This system is flawed and needs to be addressed.

Regulators- Lastly, I believe it’s worth looking at the role regulators played in the housing meltdown.  Because there are various regulators that have jurisdiction over various issues, some products go unregulated or lightly regulated.  For example, until the crisis, mortgage brokers did not have to register like broker dealers who sell securities.  The value of registering mortgage brokers is great to consumers because bad actors are in a database, easily accessible to consumers shopping for mortgages, not to mention potential employers looking to hire mortgage brokers.  I realize this is just a small piece of the pie, but this has been a positive that has come out of our mess.  Another problem with regulation is the constant turf war that goes on.

Each regulator is out fending for themselves and always trying to justify their existence.  Many times, this is a good thing because it forces regulators to take action.  But in this case, because the jurisdiction among investment banks and other major players involved in selling mortgage products was unclear, no regulator really wanted to step in, rather some backed away.  This is why you’ll hear me say regulators and regulation is needed, but they have to keep pace with the markets and at the same time cannot infringe on market innovation.  This is no small task, but it seems a new administration and Congress is sure to tackle the issue of assessing our current financial services regulatory framework.

Its also worth looking at other timelines to try and piece together this whole mess, here is a doc that does a really good job of breaking it all down, albeit somewhat exhaustively.

Who’s to blame?
There has been a fair share of finger pointing going on since the foreclosures first sprouted.  Regulators have been pointing their finger at other regulators.  Industry leaders have been pointing their fingers at regulations, credit rating agencies, and even Congress.  Congress has been pointing their fingers at virtually everyone but themselves.  As much as everyone wants to blame one party for the crisis we find ourselves in today, the reality seems to be that everyone deserves a little bit of the blame, including the consumers.

All of the roles I talked about above, in my opinion, helped us get to the point we are currently at.  There’s no one person or entity to blame, rather a system that was flawed and leaders including consumers that were greedy.  It’s easy for us as consumers and investors to look the other way when things are going really good, like they were during the housing boom.  It’s easy to not ask questions and jump on board like many homeowners, investors, and financial institutions did.  It’s embarrassing that we didn’t see what was coming sooner, because in the end, it seems like common sense.  Going forward, I hope we learn a lesson and get back to old school financials, where if it’s too good to be true than it is and if you can’t afford something, you can’t have it.  $

My day job, working in Government Affairs in Washington, DC, has given me an insider’s perspective on the makeup of the bailout package and the politics that have gone into the drafting of the legislation.  If you find yourself confused, don’t feel bad, I have found that many Congressman and Senators are equally as lost and are relying on party leadership and staff to help aide them in their votes.  Frankly, some questions asked by Congress during hearings that took place last week with our top financial leaders (U.S. Secretary Paulson, Federal Reserve Chairman Bernanke, and Chairman of the Securities and Exchange Committee Cox) were asked without any true understanding of the makeup of our financial markets in addition to an inexcusable knowledge of the subprime debacle (an issue we will cover on Friday).

As legislation continues to fight its way through Congress, we thought it would be helpful for us to put a real word spin on the issue as well as offer our opinions, formed mostly by observing firsthand the Congressional hearings of last week.  We will write a short series this week, covering a different topic each day that will hopefully help you better understand the crisis and feel more confident and secure about your financial holdings.  The order of writings for the week is:

•    Why Does Congress Need to Pass Bailout Legislation?
•    Understanding the Crisis: Timeline of Failure/Who’s at Fault?
•    What is Actually Included in the Bailout Legislation?
•    Insiders Perspective: Embarrassing Congressional Reaction to an Originally Dangerous Bailout Plan

MYM Series: Why Does Congress Need to Pass Bailout Legislation? 1 of 4

While it’s debatable, depending on your political views, if Congress should intervene in the markets at all—it’s not debatable to conclude that our markets are facing something so severe and so unprecedented that any valid comparison is only to the market crash during the Great Depression.

Lending
According to Secretary Paulson, one of the main threats our housing crisis has on the U.S. economy is the availability of credit.  When banks started realizing their bets on the housing markets were drastic mistakes and subsequently cost them money hand over fist, they found they no longer had any money or capital to continue with their everyday business—lending.  Although the concept of lending to get out of debt seems ridiculous, it’s important to remember that lending is a lifeblood to our economy.  If banks can no longer afford to lend money, consumers can no longer borrow for a house, car, or lines of credit.  Small businesses can no longer get the money they need to prosper or even begin.  Students could not take out loans to attend college.  As you can see, our economy truly relies on lending, which is one enormous reason Congress is desperately trying to pass legislation ASAP.

The reason lending is such a fruitful endeavor is because only about 10% of the money lent out needs to be backed up.  They can claim interest to be paid to them on the full amount while only having to give out a much smaller amount.  Its essentially the interest the banks are after.

Scared Investors = Panic Selling
Another very important and often overlooked reason Congress needs to pass bailout legislation is the affect these failures by our major financial institutions (“Super-Banks”) would have on the overall market.  Not only would credit begin to dry up, but investors would start thinking with their feet, and running out the door.  Major selloffs in our markets, like we experienced yesterday, could continue.  The reality of such a scenario would most likely put the U.S. markets in a deep recession, possibly taking years to overcome.  Most damaged by this would be senior investors currently living in retirement.  Although they thought they saved enough, the loss they would experience from selloffs would force them to start living off their principal savings rather than pull from interest earned.  We could have a wave of retirees simply running out of money.

We Need Financial Institutions to Succeed
Lastly, the overall health to our financial institutions is something we all benefit from.  Congress has taken numerous calls from constituents begging them to vote against any sort of Wall Street bailout because they feel taxpayers should not be on the hook for Wall Street’s failures.  While there is a lot of truth in these concerns, it’s important to realize the severe threats of doing nothing poses.  In addition, it’s likely many of these constituents calling their Congressional Representatives live in a house afforded only by the lending techniques that eventually buried our economy.  While I believe those that acted fraudulently in the housing crisis deserve to get punished, our Government must act quickly to first stabilize the markets or we will all be punished by their behavior.

Current Bailout Legislation Concerns
Just like you, I have many reservations about the latest bailout proposal.  I’m not thrilled with the Treasury Department receiving an unbelievable amount of power and money, especially at the same time.  I’m not happy that ultimately a new Administration and subsequently a new Treasury Secretary would be tasked with taking over Paulson’s expensive plan.  I hope that any passed legislation addresses the issue of CEO’s getting paid millions to walk away from jobs of which they sucked at.  While it may be necessary, I’m not thrilled that the proposal includes monies to bailout foreign banks that have business in the United States.

Hopefully, a decision is reached in the short-term that will give our markets a little stability and more importantly, some confidence.  In the long-term, the U.S. needs to take a step back and look at the regulatory structure that allowed our crisis to happen and legislate changes that will help our regulators keep pace with the innovation in our markets without infringing or discouraging the innovation that makes our markets so great. $

So where is the line that you have to cut yourself off at?  When you want something really bad, and not just a great house with amazing potential, but anything, you are amazingly able to figure out a way to make it work.  Its a given this might be what gets a lot of people in trouble, but at the same time, your limit seems to become arguable.  We boiled it down to our last couple of hundred dollars a month, after taxes, fees, mortgage, bills, car payments, credit card payments, just about everything.  We even played it conservative and ignored interest deductions.  It got right down to it and we took a hard look at what we were left with: it would be an amazing house with an outrageous amount of potential and resale value (feasibly hundreds of thousands) and very little money left over.  It would almost be like camping.

That’s where things get sticky.  Very house rich and very cash poor. Granted it would be temporary, and things would get easier as we altered deductions and got our regular raises, and my car was paid off, it just seems like so much.  Are we spoiled by living in a cheap apartment?  Is this normal, is it supposed to be a stretch?

We were discussing how difficult it would be and how we would have to cut out the TV bill and get an OTA (over the air tuner) and just watch local channels for free, and play a lot of video games (things we have already paid for) and read for entertainment.  No more going out, no more restaurants, no more drinking adventures with friends, everything would be completely pared down to bare essentials.  For a little while at least.  But is that reasonable? There has to be some element of fun in your life, right?

I have stated on this site before that it is possible to save money and use it wisely and not have to live like a monk.  I still believe that. I do have another side, albeit perhaps a more crazier side, that gets a look at the future and sees payoff for hard work and “zealous” discipline though.  It could be just a matter of me only doing things because they are difficult or challenging, because maybe if they are simple, then they’re not worth it, but I need to be reasonable and realistic here. If it were up to me I would rarely go out (driving range maybe) and eat rice at home every night.  Might change it up with oatmeal every once in a while.  (I sound REALLY boring but I promise I’m not.)

In the end it boils down to risk.  By really pushing the limits of our money now, there might very well be an incredible amount of money to be made.  But there is a price.  Risk can only be accompanied by reward.  By liquidating ourselves to the point where we are at zero and/or unhappy AND something comes up where we need money, we will be toast.  Its tough to say what any of that might be but the possibility is there and its such a difficult question to answer.  How far do you take it?  What if something happens?  What if something doesn’t and you have regrets for not taking the leap?  Would the feeling of security outweigh the disappointment for not landing a whale?

What sacrifices are you willing to make?  When is too much just too much?

While a bit of an exclusive club, it is with good reason.  The customer service is top notch and the rates are extremely competitive.  They currently allow only military, but have expanded to include the following:

• Military retirees who served honorably, regardless of when they retired
• Military personnel honorably discharged on or after January 1, 1996
• Widows and widowers of military members killed in action while eligible

I currently have my renters insurance ($6 a month), a credit card prime + 2.9%, and my vehicle insurance ($700/year, with full coverage) through them and have always been extremely pleased.

If you know of someone who might be able to take advantage of this, share this with them.

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New movie tries to raise awareness of what we owe
by Colin Lovett – PIC Current Producer

There are no chase scenes.  There is no romance.  And the hero is balding. With glasses.  But a new movie opening this month may be the scariest of the summer.  And it’s all about the national debt.

Courtesy I.O.U.S.A the movie

I.O.U.S.A is basically a call for Americans to understand how bad our budget problems have gotten and how much worse things could be if we don’t fix the problem. Watch the trailer here.

The movie is being promoted by Pete Peterson Foundation, who is using $1 billion of his own money to raise awareness of the budget deficit.

The current debt is about $9.5 trillion.  But Mr. Peterson’s group says it could  shoot up to $53 trillion if you count future debts such as paying out social security and medicare to 78 million baby boomers. At this price, every American man, woman and child would be on the hook for $175,000.  I don’t know about you, but that check would bounce if I wrote it.

They argue that all is not lost, but we must begin making tough choices now on spending, saving and taxes.

The federal debt is pretty simple to understand but can be very difficult to solve in practice.  We as a country take on debt when Congress and the President spend more than they take in in taxes.

Much of this debt is currently paid for from social security payroll taxes.  We now take in more social security payments than we send out.  But in a few years, that will change and we will need to find ways to make payments to millions of baby boomers as they leave the workforce.

If that’s still confusing, take a look at the way School House Rock explains it:

A lot our debt also comes from borrowing from foreign countries.  One day, we will need to pay them back.

There is little that any individual can do about the national debt.  But we should all be concerned about it because the hard decisions that will have to be made will affect all of us.  Higher taxes, lower spending and higher interest rates are just some of the possibilities. If we make this a concern, maybe they’ll make a movie sequel: Debt Crushers.  I hope the next one has some explosions.

Alternet, an alternative news site, has this take on I.O.U.S.A..

“Facing Up” is a great non-partisan site devoted to the federal budget.  If you have debt problems in your personal life, our sister site The Beehive, has great resources to help you manage your budget.

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We can learn a great deal about this issue and apply it to our own fiscal policies, one element you can take away is to not spend more than you make.  The other is to think about the future.  What else can a movie like this tell us?

This movie is going to be an eye opener as it is approachable and will explain how such a massive spending deficit has occured.  My only hope is that its not too late and that this doesn’t set an example for our future.  Or else we aren’t going to be able to go to the Olympics next time.

How much money do you guys have in an emergency fund or what is your target amount? – Mike

You’ll get varying answers as to how much you are “supposed” to have in your emergency fund.  Some financial experts recommend having 2-4 months of living expenses and some say 6 months.  Personally, I don’t pick a certain amount of months; rather, I pick a number that makes me comfortable.  My wife and I have a goal of having $10,000 in an emergency fund, while we’re not there yet, we are making solid progress.  To us, this number gives us a sense of stability and comfort, it’s more than enough to get us by for a few months, and that’s what is most important.  I would recommend picking a number that makes you feel comfortable and start stashing away a few dollars away paycheck to paycheck, until you reach your goal.

In response to your grocery post, do you think buying organic – especially fruits and vegetables – is worth the extra costs? – Josephine

My sister has been trying to get me to buy organic for some time now.  The price tag definitely holds me back, but I’m starting to buy into the idea.  For whatever its worth, my great grandma lived to be 104, she wasn’t exposed to the great amount of fast food, preservatives, and pesticides that we are today.  I think it’s safe to say her diet was mostly organic, and considering the advances in medicine since then, I think the idea of organic foods and our health is highly correlated.

Having said that, I have a hard time swallowing the added expenses of organic foods.  Because of this, my sister gave me a list of vegetables that are best to get organic for health reasons, and I mainly stick to the list.  If organic fruits and vegetables that are not on the list are on sale, I’ll pick them up.  Likewise, I’ll not buy organic if I see good deals on the “normal” food.  Overall, I think it’s worth buying the organic foods and at best keep try to keep an eye on them in order to snatch them up when they are on sale.

Here is my sisters short food shopping lists to live (longer) by:

12 Most Contaminated Fruits and Vegetables (worth buying organic): 1) peaches, 2) apples, 3) peppers, 4) celery, 5) nectarines, 6) strawberries, 7) cherries, 8)pears, 9) grapes, 10) spinach, 11) lettuce, 12) potatoes

12 Least Contaminated (not as important to buy organic): 1) onions, 2) avocados, 3) frozen sweet corn, 4) pineapple, 5) mangoes, 6) asparagus, 7) frozen sweet peas, 8)kiwi, 9) bananas, 10) cabbage, 11) broccoli, 12) papaya.

5 Most Important Ingredients to Avoid: 1) hydrogenated oils, 2) sugar (less than 4g. saturated fat/sugar) 3) high fructose corn syrup 4) enriched flour 5) bleached flour

I drive by a payday loan center everyday on my way to work, at times there seems to be quite a line inside.  What exactly are these loans, what are the benefits?  – KT

Payday loans are essentially a short-term loan for a small amount from a small institution, like the one you drive by every day.  They get the name “payday” because of their small amounts can get you buy until your next paycheck.  In my opinion, the benefits to these loans are nonexistent.  Frankly, in many instances they should be considered predatory loans.  Some states do not have caps as to what these lenders can charge you in interest and fees.  It is not unheard of for somebody to take out a payday loan for around $100 and face an annual interest rate nearing 400%.  No, that is not a typo.  If people are in desperate need of cash, they most likely are better off using their credit card to get by.  There are some circumstances where these help out, especially if you can pay them back on time, but for the most part I would recommend to keep on driving by.

I’m a mom that works more hours then I care to admit.  Because of this, I find that we are spending a majority of our budget eating out.  I’d rather spend time with my family than cooking after work, what advice would you have to help keep our food bill down? – Busy Mom

Busy Mom, although I don’t have kids, I’ll give this my best shot.  My wife and I try to save time by preparing more advanced/delicious (supposed to be anyways) meals on Fridays-Sundays.  During the week, we tend to eat quick meals and make good use of leftovers.  Our quick meals include foods such as salads, spaghetti, fajitas/tacos, and chip beef on toast or shit on shingles, whatever you prefer to call it.  I think you’d be surprised how fast these types of meals actually are to prepare – especially if you consider the amount of time it can take to go pickup food, not to mention the cost savings involved.  I guess the best advice I can give is try to buy groceries for the week that allow for quick supper options, don’t try to bit off more than you can chew.  $

For a copy of our letter sent to the Federal banking regulators, click here.  Or click on the image to the left.

Overall, we feel that the proposed rules are long overdue and in general are legitimate in their intentions. While we generally feel the proposals do not go far enough, we applaud the Agencies for taking the first and necessary steps to curb these abusive practices related specifically to credit cards.  MYM proposed amendments to the proposals in the following areas: Allocation of Payments, Applying Rate Increases to Existing Balances, and Firm Offers of Credit.

In addition to the suggested amendments, MYM also suggested that reform be addressed in the following areas that are not currently incorporated into the Fed’s proposal:

• The number of overlimit fees that may be applied in a single billing cycle should be fairly determined to properly put responsibility on the account holder to stay within their limit, but not overly punish them into unaffordable debt.

• Finance charges are often applied at the transaction date and not at the posting date when the money is actually financed. Finance charges should not be charged before the money is actually lent to the consumer.

• Fees charged to a consumers account for non-use of a card should be banned. Credit is something consumers earn and being charged for not using available credit is cruel and irresponsible.

• Penalty interest rates should be capped at a reasonable rate to both interested parties.

• A disclosure should be added to each monthly bill that clearly states the amount of time it will take and the cost to the consumer to completely pay off an account when only making the required minimum monthly payments. $

When you get a home loan, you have to pay interest.  That’s the deal from the start and there’s no way around it unless you have a rich uncle who just gives you a large sum of money, or you win the lottery.  Either way even that takes a hit; it gets taxed and believe me, statistically you won’t win the lottery.  Or even know someone who does.  If I am proven wrong on that one, you can send me $1,000 to prove it. 

So here is the question:

There seems to be a new system of making a mortgage payment out there and I am wondering if it is worth looking into.  I’ve heard a little about it here and there and have done a little reading about it, but I don’t have enough of a background to make a lot of sense of it or to be able to tell if it’s a legit concept.  Basically what I understand is that it uses the money you already have (sitting in a checking account – they call it idle money) to pay down the average daily balance of the principle which I guess then reduces interest.  They say it can help you pay off your mortgage in about 7-12 years without increasing your payments at all.  Apparently the idea is coming from some math geniuses in Australia.  They wrote a software package that does the stuff for you, but I’ve read that it’s possible without the software if you know what you’re doing.  Any thoughts?

Here is a link to one of the sites where I have read about it – http://www.amazines.com/article_detail.cfm/318683?articleid=318683

Thanks,
Ted

The system from Australia he is talking about is call Mortgage Interest Buster and I would like to recommend anyone reading this to try and find more information about this and send it in so that we can have a more clear idea about its legitimacy.

I would love to write back to Ted and tell him that it seems like an awesome idea and that he should go for it and he will end up making a killing just flipping houses.  But I really can’t.  On paper it seems like it could work but there are about a dozen alarm bells and their respective red flags going off left and right for me.  I made a list:

1. There is almost nothing out there on the internet about this system.  The systems website has a fair amount of information, albeit they state the obvious and have very little proven fact.
2. Why isn’t it being used absolutely every where?  If it were easy, wouldn’t it be called “The Way?”  MY friend Danielle says that from time to time.
3. Is it standard to use a home equity line of credit to make payments on your mortgage?  Or convert it into a mortgage checking account?
4. Where is the glowing testimony of this software that simulates the Australian banking system?
5. And how much is the system that does all this?  $3,500.  Seems like a lot of dough for payment software.
6. If this is so selective, why is it not an option?  And don’t say its because the banks will lose money.  There could be someone reputable that would benefit from this and they would push it.  But they aren’t.  Why?
7. You must have a second mortgage.  What if thats not an option?

A quick note, I would like to show everyone the website that houses two “instructional” videos for this, straight from their website: a short 12-13 minute video and a longer more in-depth 25 minute video.  Please, let me know your thoughts.

So lets say this works.  Is this something you should do?  My gut reaction is full of skepticism.  I don’t like the idea of taking out a HELOC in order to live.  There is way too much hocus and pocus here to illicit any kind of positive recommendation.  Sure you can pay bi-monthly or even daily I am sure, if you wanted to deal with the paper work.  It is possible but not like this.  Unless you are making headway against your principal, you are just making more frequent payments on smaller interest payments.  Lets look at some truths about home finance:

1. There are no good mortgages below 3.5% for 5 years.  If there are then they are called ARMs and you will end up paying even more when the ARM resets.  This a big factor as to why this country is in such trouble to begin with.  It used to be that money was cheap to get a hold of from one bank to the next and they could make those offers.  Policy will and has been passed so that requirements are stricter.  Check this link out for more information.
2. The only way to safely diminish the life of any loan, be it house car or other, is to increase your payment towards your principle.
3. There is a way to take advantage of a pre-payment plan for your mortgage in order to pay it off sooner, but there is no way you should have to pay $3,500 for it.  They have you take a second mortgage (the first mortgage is conveniently a prerequisite to joining in the program), and you leverage that to make payments.  What they don’t tell you is that the little amount you do end up reducing your interest through this forced increased payment system does not really come from any elaborate system.

In conclusion, I don’t believe there are any short cuts.  If there is a way to make this work, and if you did successfully take a second mortgage that had a lower rate than your first, you should not need a $3,500 piece of software to manage it for you by mucking around in your accounts like a rabid kangaroo.  (It is from Australia after all.)  My recommedation to anyone who wants to decrease the life of a loan is to dedicate an extra 10% of your income to the principal.  It is possible but don’t waste a mortgage payment, or two, of $3,500 to do it.  Do your homework and incorporate due diligence into your research.  Let us know what your experiences are as well!

Both Freddie Mac and Fannie Mae have gotten quite a bit of media attention on their recent bailout, a la Bear Stearns.  While the consequences for this hasn’t been felt yet (and I am pretty sure that we as tax payers are going to be integral in footing the bill) the ramifications of them going under would have been drastic. They still have something to offer, read on to find out what…

Having said that, I think its important to still take a look at what these mortgage companies have to offer.  I am in the long process of doing research on becoming a home owner: looking at the comps in every feasible neighborhood, seeing what it would cost to heat or cool different amounts of square footages, as well as the very process that you need to go through in order to secure the right loan and deal with a real estate agent.  I would like to pass some of this on to you, dear reader.

To begin, we need to look at credit.  Starting about a year ago, I was told by a mortgage broker that my credit needed to be shaped up if I was ever to even think about approaching a lender.  In order to hand over a large chunk of money, a bank needs to know that not only will you be able to pay them back, but that you will be able to pay the interest that invariably comes along with it.  The better the credit score you have, the lower the interest you have to pay due to the fact that you are less of a risk.  Vice-versa, if you have bad credit, you are more of a risk and therefore will need to pay a higher interest rate since to offset the whole risk reward equation.  Credit really bad?  You might not get a loan at all.

TIP:  Be prepared to pay about 30% of your net monthly income on a mortgage payment.  Some might say a different percentage, but either way, err on the side of caution.  Leave room for living.

So I began by paying down credit debt (with first attempting to reach 49% paid off), not being late on a single bill, socking money away, and keeping my checking account in the black.  Mortgage companies look at everything and I mean everything.  They might question why you make X amount and still managed to overdraw your account even for a day.  Now that the economic woes of this country are at full tilt, its getting harder and harder to secure money and lenders are scrutinizing your finances more and more.  Be ready with bank statements sent from your bank, not just printouts off your online access.

There are more little ins-and-outs with respect to just getting the money in the first place, and hopefully we will be able to cover them soon.  Another detail is simply finding the right home in the first place.  Find out what the final amount might be and extrapolate to see what your monthly payment might be.  ZipRealty.com does a great job of integrating a calculator into the bottom of each house listing to show what payments can look like

TIP:  Be cautious of going talking to a real estate agent before you are ready.  Some are very “tenacious” and might not understand if you are just shopping.  ZipRealty will email you quite a bit, but these are automated and are just fishing for customers.  If one gets through, simply tell them you are under contract with another agent and that you are getting comps.

Once you start looking at homes, the best advice I can give is to stay organized.  With the power of the interwebz, it is very easy to accumulate more houses you like than you can deal with.  Create a spreadsheet, and keep files on all the houses you go through.  Even if they are just printouts of home listings, it can come in handy down the road.  Don’t be afraid to include houses that you are not fond of, its just as important to keep track and note what you don’t like about a house as much as you what you do like.  This is a big decision and you need to be as informed and self educated as possible.

One of Freddie Macs tools is a worksheet that does a great job of allowing a buyer to keep track of comparable features of all the homes he or she might come across.  Print this out and use it. We are also going to include it in our list of tools on the right.  Their other tools can be found here.  For both buyers and sellers, ZipRealty.com’s blog might also be worth a look through.

Debit card 401(k) withdrawals were actually created thinking people would be more willing to open a retirement account if they knew there was an easier way to access the money.  At least, this is the reason the industry offering such transactions says.  The truth may be a little less consumer friendly considering fees, taxes, interest and lost savings. 

401(k) accounts allow participants to borrow up to 50 percent of their savings with no penalty, only if the loan is paid back within five years.  But, if your money is out of the account, it is not earning a return.  In addition, the money taken out of the tax sheltered account is now taxable and if not paid back within 5 years faces a 10 percent penalty.  After all of this, once you retire and take the money back out of the 401(k) account for retirement, you will once again pay taxes on the amount you borrowed.  So if you don’t pay back your loan in time, you face a 10 percent penalty; taxes within your tax bracket; loss of investment interest; and once again taxes when the money is used for it’s actual purpose – retirement.  It’s estimated that a 401(k) loan can reduce your retirement savings by more than 20 percent.

Borrowing from your 401(k) is something that should be treated as a last resort and that’s it.  We are not the only ones who think this way.  Senator Kohl (D-WI) and Sen. Schumer (D-NY) have introduced legislation that would ban the borrowing from ones 401(k) account with the ease of a debit card.  While I’m happy the Senators recognize the detrimental effects borrowing from your retirement account brings, I’m not so optimistic the legislation will pass, at least not in the short-term. 

Although Kohl will most likely be able to pass the bill out of the committee he chairs, the chances of passing the entire Senate is unlikely.  The 60 votes needed to even bring the bill to a vote will be difficult to achieve – especially during an election year when many campaign funds are coming from financial services companies allowing such 401(k) loans.  In addition, the idea that the money is yours and why shouldn’t you be able to access it, will bog down the Democrats attempt to take away this debit card temptation.  I hope I’m proved wrong.  $