Free From Broke

A Personal Finance Blog for Regular Folks

Economy

The economy is a tricky thing that at times makes perfect sense and others...well not so much. Articles here help you understand what is going on in the economy and how it affects your wealth.

Use The First Time Home Buyer Tax Credit Now!

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Were you considering buying a home this year and claiming the first time home buyer’s tax credit? If you were, a recent change to the credit may allow you to use it now rather than waiting until next year’s tax return.

The American Recovery and Reinvestment Act of 2009 allowed for a first time home buyer’s tax credit of up to $8000.  This would be money that could be claimed on your tax return.  Recent changes now allow a first time home buyer to apply the tax credit toward their down payment or closing costs.

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What Is A Ponzi Scheme – In Simple Terms

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With all of the talk about Bernie Madoff heading off to jail for a few years (a century or so) the thought on a lot of people’s minds is How did he do it? and What is a Ponzi scheme?

I came across the post Explaining the Ponzi Scheme to a Fifth Grader recently.  I think the explanation pretty much nails it! Here it is:

Say you went to your sister and told her, if she gives you a dollar to invest today, you will give it back to her on Tuesday next week and she will get $1.25. Then you go to your other sister and tell her the same thing only you will give her $1.25 Wednesday. Then you go on to your dad and every person you know and tell them the same thing. As you’re going around asking for money from other people you know, you give your first sister her $1.25 and she’s happy to have twenty five cents extra just for letting you invest her $1. So she says, why don’t you keep my dollar and invest it some more? So you say, OK.

But the thing is, you weren’t really investing it were you? You were just using other people’s money to make it look like you are earning money for them. Do you see how you will eventually run out of money especially if they all ask for their money at the same time?

So she answers, Yeah, but can’t I just ask more money from more people? Yeah, you can do that but what if you ran out of people to ask and also ran out of time? That’s what happened to Bernie Maddox and that’s why he’s going to jail.

She then said, but they said he still has millions of dollars and he’s not really in jail. True.

About $68 billion lost summed up pretty nice!

The are a couple of lessons in this:

Know what you are investing in AND There’s no such thing as a free lunch!

You have to know where your money is going.  If not then you are asking for trouble.  From what I’ve been hearing people were throwing their money at Madoff so he could invest it.  They didn’t care how he did it so long as they got back huge returns.  I feel horrible for those people who lost their retirements and for all of the charitable organizations that were hurt.  But you have to ask the big questions and in this case the questions is Where is the money going to get those returns?!?

It may not be fun learning about personal finance and investing but a little knowledge goes a long way.  Sure it’s fun to say you’re getting 15% every year on your investment but you have to questions how!

Am I being too harsh?

I don’t mean to be.  These people were swindled and hurt!  The whole situation bothers me.  It seems there’s no real accountability with Wall Street any more.  There were warnings going back a decade about Madoff’s “investments” that went ignored.

Here’s a little lighter side that I also picked up from AMoores (where I saw the simple Ponzi explanation):

How do you feel about it all?

 

Is Saving 8 to 12 Months Expenses Even Possible Or Practical?

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savings bank

I recently brought up the question of whether we now need 8-12 months expenses saved rather than the old three to six months that used to be convention. I think in these economic times, where we are seeing unemployment hitting rates we haven’t seen in decades, that three to six months isn’t enough.

I received a lot of great comments on the article.  Many agreed that 8-12 months  expense savings is a good idea while others agreed that we need to re-evaluate how much we have saved but that 8-12 may be reaching.  Some questioned if it was even possible or practical.

A big question that comes up: How does a person save up 8-12 months of expenses?!?

Let me first say I know it’s tough saving even 3-6 months of expenses.  I wouldn’t be surprised if most families don’t have even 3 months expenses saved no less 8-12 (please prove me wrong!).  But with unemployment rising it’s something we all have to think about.

I think it can be done!

The sooner you can put together your expense savings the better.  But that doesn’t mean you have to do it right this minute.  Don’t stress out completely because you can’t cover a year’s worth of expenses right now.  But at the same time look at what you do have socked away and ask yourself if you could save more, even if it’s only a little bit.  Work your way up.  Do you have three months expenses saved up?  No?  Set that as your goal.  If you do have three months work your way to six months expenses.  Squirrel away until you reach your goal.  If you never need it then great but should you have to use it you will be happy for everything you could save.

But does it have to be 8-12 months saved?

You need to look at your own situation.  Here are some questions to ask yourself:

  • What will happen if I lose my job?
  • Realistically how long would it take to find a new job at the same salary?
  • How much more will I need if I have to take a pay-cut?
  • How long can I support myself while looking for work?
  • How has my industry been affected by the economy?  Are whole companies going out of business or is it growing?
  • How is your company doing?  Are they hiring or letting people go?
  • What is the likelihood that I could get laid off (tough one to answer but be honest with this one.  Most people think a company can’t do without them but in most cases they are probably wrong).
  • What savings do I already have?
  • What would I get in unemployment benefits?
  • Are there any other money sources you could tap if needed (Stocks, bonds)?
  • Would or could you work part-time until you find full-time work?

And here are some items to think about when figuring out your expenses:

  • What must get paid every month (mortgage, car payment, electricity, phone bill, water)?
  • What do you spend on food every month?
  • What will health care cost?
  • What costs will there be in finding a new job (transportation, resumes, dry cleaning, clothes, fax, phone calls).
  • What other expenses will you have (car maintenance, home maintenance)?
  • What do you actually spend every month?
  • What can you cut back should you lose your job (cable, eating out, vacations, etc…)?
  • How many mouths does your income support?

Be honest with yourself. You may find that you don’t need 8-12 expenses.  But you’ll be better served to save a bit more than a bit less.

What do you think?

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How The American Recovery And Reinvesment Act Of 2009 Can Help You

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Money Money

Last week President Obama signed into law the American Recovery And Reinvestment Bill, otherwise known as the 2009 Economic Stimulus. A big question in the minds of the average American is How can it help me?!?

Here are some ways the American Recovery and Reinvestment Act of 2009 can help you:

  • Unemployment – In 2009 you will not have to pay pay taxes on the first $2400 in benefits you receive.
  • Social Security – Some social security recipients will receive a $250 refundable tax credit mailed to them within 120 days of the bill’s signing.
  • Pell Grant – The maximum benefit for Pell Grants will rise to $5,350 in 2009 and $5,550 in 2010.
  • More Liberal 529 Plan – In 2009 and 2010 students can withdraw money or computers and related technology such as educational software or internet service for students living at home.
  • Transportation Accounts – Your employers are able to increase transportation spending accounts up to $230 a month.  This is money you can have set aside from your paycheck tax free. (Check with your employer to see if they participate and raised their limits.)
  • New Car Buyer Tax Deduction – In 2009 you, if you purchase a new car you can deduct the state, local, and excise taxes off of your federal return.
  • Higher Tax Credit For Education – A credit of up to $2500 of college tuition and related expenses in 2009 and 2010.  You need to spend at least $4000 in the year for the credit and 40% is refundable (which means you can qualify for 40% if you don’t have taxable income).
  • First Time Home Buyer Credit – A first-time home buyer credit of 10% of the purchase price of the home up to $8,000 for homes bought in 2009.
  • Health Insurance Help for Laid Off Workers – If you were laid off between September 1, 2008 and December 31, 2009 the government will subsidize 65% of your COBRA premiums.

The American Recovery and Reinvestment Act is going to be expensive for the country but at least people get to see some of it.

What do you think?  Is it enough for the average person?

Source: NY Times

Creative Commons License photo credit: pfala

Why Economic Stimulus Handouts Are Bad – It Kills Innovation

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Technology

The economic stimulus has been a hot topic in the news in recent months.  Banks and investment firms are getting bailed out.  Auto makers are getting bailed out.  Even the adult entertainment industry is asking for money.  But there’s a big problem with handing out money to try to help the economy – It Kills Innovation!

Here’s my take on why handing out stimulus money hurts innovation:

  • Companies ask for money rather than innovate – This is a bit of social Darwinism here.  Companies that can’t hack it should fail.  A company has to keep growing or it gets eaten up by competitors.  Look at Apple for instance – Imagine they only stuck to computers?  Without the iPod, iTunes, or the iPhone the company would be severely hurting.  But they moved beyond just making computers and now their computers are gaining a stronger market hold.  They innovated!  When a company gets a hand out it makes them lazy.
  • People follow the lead of companies – When companies get handouts individuals expect the same.  I’ve heard it many times already that the government should give people money because the economy is bad.  But that doesn’t really help.  Just like a company people have to grow and innovate.  They need to create new income streams, become better at their jobs, and increase their knowledge.  When they don’t others come up and pass them by.  Or new technology comes along to make their jobs obsolete.  Or they get their jobs outsourced.
  • It shifts blame – When a company sees that money is being handed out they have the temptation to blame the economy for their troubles in order to get a handout.  This shifts the blame to the “economy” rather than their own business model.  When blame is shifted a company is basically saying outside forces are causing their issues.  Instead a company needs to look at what they can do to improve their process and products to grow stronger and avoid economic problems.
  • Some companies would be bad anyway – If a company isn’t already looking to be ahead of the curve and succeeding in some way then what would throwing more money at them accomplish?  For example:  The auto makers have been in trouble for some time.  Rather than find a way to be ahead of the curve they have continued their old models with not much success.  When you think of a “green” car what do you think of?  Hummer?  No, you think of the Toyota Prius.  Toyota continues to innovate and re-define themselves and that’s why for the first time they are the largest auto maker in the world, taking over GM.  Throwing money at a bad company doesn’t help it; it just extends it’s expiration date and wastes money.

Yes, the economy is bad.  Yes, it hurts everyone.  But the economy is supposed to move in cycles of growth and contraction.  This is natural.  It’s like nature’s way of getting rid of the dead weight so hungrier companies have a shot.  But when we start handing money out it kills innovation and in turn ruins the whole idea of capitalism.

I hope Obama’s new plan will not keep the fat, fat.  Hopefully it’s used to encourage innovation.  Time will tell.

Creative Commons License photo credit: jared