The Financial Roller Coaster Continues For Lynch, Lehman, And AIG

Threatening

Crazy news this Monday morning! So here’s the scorecard:

Merrill Lynch will be bought by Bank of America. According to Bloomberg.com, BofA will buy Merrill for $29 a share a 70% premium on it’s 9/12 price but considerably lower than it’s 2007 high of $97.53.  What caused this buyout to happen?  Bad mortgages! According to the NY Times Merrill Lynch has lost over $45 Billion in mortgage investments.  The iconic bull from their logo will now be running through the halls of Bank of America!  Is Bank of America slowly becoming the Google of banking?

Not so good news for Lehman Brothers which is filing for chapter 11 bankruptcy protection.  The firm was unable to find a buyer and as a result needs to protect itself until a sale can happen.  Lehman almost worked out a deal with Bank of America but BofA bailed someone else out instead.  Lehman Brothers’ problems stem from $60 Billion in “soured real estate holdings” according to the Associated Press.

And since two isn’t enough, AIG is seeking a $40 Billion loan from the Fed in hopes to prevent a downgrade of it’s credit rating.  AIG recently reported a quarterly loss of $5 Billion as a result of mortgage-related investments (see a pattern here?).  According to MarketWatch if AIG’s credit rating goes down it will be difficult for them to sell new products which would prevent them from raising new capital.

What does all of this mean? 

Well it’s going to be an interesting day in the stock market.  And by interesting I’m thinking not so good.  The International Herald Tribune is already reporting drops in the World markets.

As more financial firms reach critical mass it will become more difficult for other firms to get loans.  This could potentially be the straw that breaks the camel’s back on the whole recession question.  When firms can’t get more capital they can’t invest more in their businesses which slows their production.  If productions slows enough to become negative then we’re in a recession.

For us, the little people, I think it’s going to become more difficult to get a mortgage, at least in the short run.  Banks are going to be more skittish about giving away cheap loans.  I’m sure this isn’t the end of the situation either.  Hopefully though, the end result will be new policies at banks to prevent a housing crisis like this from happening again.  Banks aren’t the only ones to blame though.  The Fed has a hand in this as well as low Fed rates have made cheap money available for some time now.  And of course some blame has to go out to realtors and housing consumers for bad mortgages as well.  (Check out the take on the Freddie Mac and Fannie Mae bailout at My Two Dollars).

Buckle yourself in, it’s gonna be a bumpy ride!

Creative Commons License photo credit: Sister72

Goals Are Great Motivators

Marathon de New York : Verrazano Bridge

Goals can be great motivators to help you achieve! I find that when I have a specific goal it’s much easier to focus on what I want to accomplish.  For example: For me to save money is one thing but when I have something specific to save for I find that I can save up much quicker.  When I was younger I wanted a new stereo (the hand-me-down I was given still had an 8-track in it).  I made a goal of saving up for a new stereo.  When I sacrificed some expense for savings I knew i was to help me get that stereo.  When I worked extra hours in the supermarket I knew it was for the stereo.  In no time I had enough to go out and buy a new stereo, equipped with not one but two tape decks! (Have I dated myself or what?)

Let me give you some other goals I’ve set for myself and accomplished:

Ran the NYC Marathon – In 2005 I decided I wanted to run the NYC Marathon.  I knew I needed time to train and run enough races (you have to run 9 NYC RoadRunner races for guaranteed entree).  In 2006 I mapped out what races I would run to qualify for the next year’s race.  It was tough to keep up but I ran and finished all nine races for entry.  In 2007 I started a training program to get me in shape for the marathon.  In June I started my longs runs every weekend to get me ready for the distance.  The first Sunday last November I woke up at the crack of dawn and hopped on the Staten Island ferry to get to the start of the marathon.  Later that afternoon I would be able to call myself a marathon runner.  I don’t think I ever would have run the distance without a specific goal of running the marathon.

Paid off my credit cards – Some years ago I finally got fed up with how much I was paying monthly in interest for my credit cards.  I resolved to pay them off.  It started slowly but bit by bit I started to gain ground.  After an incident that led me to move back with the ‘rents I was able to turbo charge my payments and finish off my credit card debt.  I haven’t had more than a month’s charges since then (I pay my cards off in full every month).  Without resolving to pay off my credit cards once and for all I would still be idling along with minimum payments and a ton of debt piling up.

Started a personal finance blog/site – In October of 2007 I had discovered blogging via Zen Habits then Get Rich Slowly.  I was already itching to find something productive to do with my time and had healthy interest in personal finance.  I set a goal of starting up my own blog and making it successful.  I’m still in the middle of this goal but I feel like what I’ve done so far has been a success, especially when I look back at my first month of original posts on my Blogger site.  Without my goal I might be surfing fantasy baseball sites instead of writing this article.

Build up our savings – My wife and I wanted to make sure we had enough in savings for any emergency and then some.  Rather than hope to put some money away with what was left over at the end of every month we calculated a specific amount we could afford to do without and set up our ING savings to automatically withdraw money from our checking every week.  We have since achieved our emergency savings goal and exceeded it.  If we didn’t create a specific plan our savings would be considerably less and we’d be scratching our heads wondering where our money went.

The lesson here is that I was motivated to accomplish different things because I set a goal to achieve!  Having a goal in mind keeps my mind focused.  Without a goal set I would have just floated along in many cases.  My savings would be lower, my credit card debt still existing, my running much less, this site just a thought…

One way to accomplish a goal is to make it SMARTSpecific, Measurable, Attainable, Realistic, and Timely. (Thanks to Cash Money Life for turning me onto that concept.)

I also like to think in terms of short and long term goals. For example – The goal of saving up for a down payment on a home, while an admirable goal, may seem a bit too big to ever accomplish.  That could be a long-term goal.  To make it more achievable you can create a short-term goal of saving X dollars a month towards a down payment.  This way you see your small goals achieved which helps build up the confidence to achieve your bigger goal.

Check out this article on the science of setting goals.  When you set a goal you are actively engaging your brain to help you with your goal!

What goals have you accomplished?  What are your current goals and how will you achieve them?

Sign up with ING Direct and get a $25 bonus –  Free From Broke.

photo credit: Martineric

Dealing With Financial Problems With A Loved One

Purity

There may come a time when a financial problem comes up between you and a loved one. Maybe it’s a late payment that runs up some fees.  It could be an old debt that rears it’s ugly head again.  Perhaps someone did a little too much damage with credit card spending?  Whatever it is the issue will have to be addressed so a solution can be figured out.

Here are some things to consider when confronting your loved one about their financial management problems:

Don’t blame or accuse the other person for the problem.  Arguing and blaming doesn’t help.  When you lay blame and argue it’s like telling the other person that you’re right and they are wrong.  It may be that’s the case but nobody likes to hear that.  Start off a discussion like this and you immediately turn your loved one off to what you are saying.  Remember the situation has already happened.  The point now is to figure out how to solve it.

State the facts.  Talk about what has actually happened.  Try not to get your emotions involved.  This means no name calling.  It also means talking about the situation at hand and not bringing up any past discretion.  The facts will help you find a resolution.

Talk to your loved one about how the problem arose.  How did it get to this point?  Ask what they think can be done to solve the problem.  Offer your help.  Suggest some ideas of your own as a solution.  Assure your loved one that you are their for them and that you are in this together.  This leads us to…

Take accountability for the problem with your loved one. “But it wasn’t my fault” you might say.  Maybe not directly but by sharing in the responsibility you let your loved one know that you are there to help them.  The fact that this person is a loved one makes their pain yours as well to some extent.  Take that extra step with the olive branch and assure them that together you’ll figure out a solution.

Remember you want to open the person up to discussion. Getting into a financial mess is embarrassing for most.  Your loved one probably knows they screwed up somehow so they don’t want to be reminded of how bad a blunder it was.  Listen to them.  Work on finding a way to both fix the problem at hand and prevent it from happening in the future.

Hopefully you don’t have many financial problems with loved ones in your life.  If you come across any, these ideas should help you work things out.

photo credit: timsamoff

Will The Economic Stimulus Payments Have To Be Paid Back

Will you have to pay the Economic Stimulus back?

Now that many have already received their economic stimulus payments, and have figured out what to do with it, I’m seeing a lot of questions asking “Will the stimulus payment need to be paid back?”

The quick answer is no. According to the IRS the economic stimulus payment is not taxable and will not reduce what you may be owed in a tax refund for 2008 (filed in 2009). In fact it’s possible that you get more back next year, if you didn’t already get the maximum, based on next year’s return. See the amount was based on your 2007 return so if you didn’t qualify for the full amount you may still qualify for the difference based on your 2008 return. Don’t worry if you received the full amount already. No matter what your 2008 return says you won’t have to pay anything back.

Now the the longer answer – You are going to have to pay back the economic stimulus payment! In some way, shape, or form we will pay that back. The money has to come from somewhere.

Let’s look at the ways in which the gov’t receives income:

  • Taxes (from income and corporate taxes).
  • Loans (in the forms of government backed securities such as bonds, bills, and notes).
  • Printing more money in the treasury.

Which do you think the money will come from? Printing money sounds like an easy way to find the dough but it’s not a policy the US uses due to the fact that more money creates inflation (Inflation is always and everywhere a monetary phenomenon – thank you Milton Friedman). And who wants even higher prices?!? We can issue more loans. Did you know that in 2006 we paid $406 Billion in interest payments on loans made to cover the national debt? Where does that money come from? See above. So that leaves us with taxes.

Yes, I believe we will be paying back the economic stimulus payments in the form of taxes. It may not be as one lump sum like we received it but it will be paid out. It’s just lumped together with the rest of the national debt.

Could this be avoided? Maybe. But only if the national debt, which is over $9 Trillion, is reduced to zero in our lifetimes. This would mean that government would have to cut back it’s size and spending. Most likely many programs that help people would fall victim to the cuts. I’m not saying it’s impossible for this to happen, just improbable. I hope I’m wrong.

Of course another way to look at it is it won’t be us but our kid’s generation that will pay it back. I’m not too sure that’s a positive spin on it though.

So there you have it! Do we have to pay the economic stimulus payments back?

No, but yes.

What do you think?

Update: There has been a lot of confusion over paying the Economic Stimulus Payment back.  Please read Paying Back the Economic Stimulus – Lots of Tax Confusion for more information and clarification!

photo by Refracted Moments

Buy That Fun Stuff Without Going Into Debt

Cash Register

You want to buy that new something.

Maybe it’s the Nintendo Wii and the Wii Fit?  Maybe it’s a new digital camera?  Perhaps it’s a new flat-screen TV or a GPS?  You can’t afford to buy it out-right.  If you charge it to a credit card you will be paying interest on top of the price of the item.

What if there was a way to buy the item and earn interest?  What if we can help make sure you buy it at a great price?

Sounds interesting right?

I’ll tell you what we’re going to do.  First off I have to tell we’re going to wait to buy this item.  Bummer I know.  You want it now.  But you don’t have the cash and paying interest on it, as well as being in debt, isn’t a great option.  Deal with it.

We’re trying to be responsible here and still get our new thingamajig.

Do you have an online savings account that allows you to create sub-accounts?  Good.  Now go into your account and create a sub-account titled Thingamajig (or whatever it is that you want to buy).  This is where you are going to save your money.

Now what amount of money can you put away into this account monthly without hurting your budget?  Can you cut back on Starbucks or something similar every week?  What would you expect to pay on your credit card if you charged it?  That’s a good amount to start with too.

Figure out how much a week this comes out to.  Go back to that sub-account.  We’re going to set up an automatic, weekly withdrawal into this account.  Why weekly?  This way you can see the money building up quicker.  I don’t want you getting impatient waiting for a monthly addition to the account.

Now we wait until the account fills up with the cost of your thingamajig!  This can be tough as you’ll test your patience but it will pay off.  Resist cashing out until you have the full amount to cover the purchase (you calculated taxes, accessories, possible warranty, delivery, etc…into your cost already, right?).

Here’s where this plan is great:

  • You earn interest while you save! – Every month you save you’re helping yourself with the interest you are earning rather than paying a credit card company interest for the privilege of using their money!
  • You now have time to do research - Go check out the thingamajig in a few different stores and ask the salespeople about the item. Go online and read consumer reactions. Check everyone’s price and see what locations give you the most bang for your buck (do some throw in accessories or have better return policies should something not work?).
  • A new improved model may come out – In the time you’re saving you may find that a better version has come out. Maybe the first was discontinued. Technology changes rapidly. today’s top of the line cell phone could be a clunker after a little while. It could be another company now has a better product.
  • The price could drop – Look at that. Now the thingamajig isn’t even as expensive as it was. You’ve earned interest and saved on the cost!
  • You may find you don’t want it anymore – This may sound crazy but in giving yourself some time to save and watching your savings grow you may not feel the thingamajig is worth the money anymore. Maybe it was just a fad that’s already faded? Either way, you now have a little extra to add to your savings. Sweet!
  • You became more responsible with your money - You didn’t go into debt buying your thingamajig. You set up a savings plan and stuck to it. You might have even looked at your expenses and found some things you didn’t really need in order to save quicker. What you were saving is now extra savings for you if you choose after you buy your thingamajig!

There you go!  You got your thingamjig, you didn’t go into debt, you earned interest to help pay for it, and you got the best possible price for it.

I bet it’ll feel good when you get home and open it up!

photo by skippy13

Family – Can’t Live With ‘Em…Unless It Helps Debt

I was in the hole for thousands over a few credit cards.

I was getting better at paying on time and I was managing to pay more than the minimum due. I was also transferring balances to lower and zero interest rate cards (which had it’s ups and downs). The totals were chipping away but it still felt like it would take forever to pay my credit debt off. At the time I was living on my own supporting myself with a full-time job. What I could save I did.

Then something interesting happened – I lost my apartment.

Seems my landlord wasn’t really supposed to be renting his basement out to tenants. Some funny NYC law that said he wasn’t zoned for it. Great. I had a few dollars saved but really I was still living paycheck to paycheck. If I went and found a new apartment, which would be more expensive and involve moving costs, real estate fees, etc…, I would be completely tapped out and would have to add more to my credit cards to get by.

Fortunately my parents came to the rescue.

They still had an extra room and they were ok with me moving back in with them. Now understand, I love my parents and they were great in helping me out but the last thing I wanted to do was move back into my parents’ place. But I didn’t really have many better options either. So I managed to cram all of my stuff back at their place. My original idea was to stay as long as needed to save up enough to move to a new apartment (I wasn’t paying rent now so I should have enough in a few months or so). It was not fun being back at the ‘rents. All the freedom I had grown accustomed to were gone. But I needed time to save.

After the first month I realized something – by not paying rent or electricity I was able to save a lot more than I had been. By the end of the second month, seeing how my bank account had grown, I decided to put a new apartment on the back burner. I was gonna suck it up and stay at my folks until my debt was gone!

What was the point of moving back out and being in the same debt situation?

With my new resolution I started to pay much more than the minimum on my credit cards.

Soon one card was paid off. Then another. One day I was finally able to get rid of all of my credit card debt! I felt like a slave that had just been freed!! No more of that debt monkey on my back. I was able to look at all of my bills and accounts and finally say that I had a positive net worth! This was not just a financial victory but a huge psychological victory!

I started to save for real. Not saving to pay debt but saving for me. As tough as it was living with my parents I realized what freedom really was. Sure I couldn’t live the same way under my parents’ roof as I did on my own, but freedom meant being free from debt (or free from broke)! It took me being thrown out of my apartment and moving back with my parents to realize that.

Do you have a debt story? Let me know in the comments