State of the Economy
Speaking of the Economy, Where Are We?
Thursday, August 26th
It’s late August and we’re almost nine months into the year. The stock market has hardly moved, but the scorecard puts the overall market in the red by about 2 percent. Housing? It seems like nobody is in the market to buy a house. There are simply too many houses for sale and not enough buyers who feel secure enough to take out a mortgage. Existing home sales in July were down by more than 27 percent. And how are your savings doing? Your bank is not willing to pay any interest on your savings and neither is the U.S. Government. The rate for holding onto a US Treasury Bill for two years is just one-half of one percent. Everything’s down, but so are gas prices, which is good news!
Let’s circle back to housing for just a minute because when economists and newscasters talk about the economy, we always hear them refer to the term, housing starts. Unlike unemployment, housing starts are considered leading indicators for where the economy is headed in the future, and even more importantly, where American consumers believe the economy is heading. Economists and market analysts pay close attention to these monthly reports that indicate the number of brand new residential construction projects that are underway or have been started during a specific time frame – usually over the past month. If the economy’s looking up, more people are generally going to feel confident about investing in a new house and confident they can keep making the mortgage payments.
We all know now that house prices can’t always go up, so where do we go from here? Lots of experts feel strongly that it was the government who kept the punchbowl filled with respect to the “house party” thrown over the past two decades. But now that the government has allowed the $8,000 tax credit to expire, it feels like all the alcohol’s been drained out of the punch, and in most parts of the country, house prices have already dropped more than 25 percent since the start of 2008. Mortgage rates are at their lowest rates in decades, and that’s a good thing for first-time homebuyers, but with unemployment rates so high, I’m wondering if private lenders are really motivated to make home loans? Well, not without the fortification of a hefty, healthy down payment of 20 percent or more and an impeccable credit history. If you’re already a homeowner and your house is truly worth less than the outstanding mortgage balance, what really matters now is how long you intend to live in your house. If you are looking to buy a house, it’s smart to think about ownership in terms of ten years – not the three or even five year time horizons like the good ‘ol days.
For more on the real estate markets effect on the U.S. economy, click here.
Back-to-School Budget
Part 2: Tips to keep your budget on track
Families with two kids in school will spend an average of $550 on back-to-school shopping!
When I was a kid, my back-to-school bare necessities consisted of a couple of spiral notebooks, a box of pencils (colored pencils too), magic markers, a ruler and a book bag. My how things have changed… Now, it’s all about laptops, cell phones and zip drives. It’s no wonder the back-to-school shopping list looks like my Christmas list to Santa!
Watch Pam Krueger discuss tips on ABC
Keep your school supplies budget on track with these five tips:
- Start Now: Don’t wait until the last minute to start shopping for necessities. According to the Chase Slate – US News Monitor, 55 percent of the parents polled are putting off shopping for back to school until the last minute and 62 percent say they haven’t even established a budget. If you’ve ever gone into the grocery store without a list you know what happens – - you buy on impulse and wind up overspending, only to realize that once you’re home that you forget to pick up the milk!
- Create a realistic list: Save money and reduce the stress of shopping by getting your kids involved in process of coming up with the items on the all-important school shopping list. After all it’s their stuff, so it has to be their list! Take a few minutes and together, come up with your list of items. This list gives you an excuse to point out the “need to have” items and “wish I could have” items – - the book bags they really need versus the Juicy Couture jeggings for $50 your daughter says she has to have for first day of school.
- Stick to the list: By getting your kids invested in creating the shopping list, you can make them more responsible for sticking only to the items on the list. (Again, it’s THEIR list!). Despite the hype, there’s no need to go over the top with supplies or clothes. If your kids want any special items, try to have them play an active role in looking for coupons or deals on these purchases. Did someone say… teaching moment?
- Make and maximize a budget: Parents can introduce their children to the concept of using a budget to ensure they don’t overspend. Show them how you intend to pay off some things while other bigger-ticket purchases, like lap tops, might require a plan over time. The idea is to walk them through the process and yeah, make sure you can pay off the school supplies before the holidays kick in! Once you’ve created their shopping list, just divide the list items into “must have” and “wish list” categories, then evaluate the best options to finance both big ticket and everyday items. In terms of planning, accounting is nothing more than making best guesses, assumptions and using estimates based on what you spent last year. Together with your kids, let them help you take your best guess at what items will really cost. Now you can start talking about how to shop for bargains and clue them into the fact that if you can save on the external hard-drive and the fancy jeans, you can get more.
- Shop creatively: Now you have their list in-hand so you have their full attention because they will want to make sure they actually get the goods so now you can get creative with the shopping: check out Shopkick, a phone app that can lead you discounts at stores like Best Buy and search for the goods you know you need at bulk stores like Costco, garage sales, and on eBay to find bargains on supplies. Just avoid the impulse to buy what’s on display at the retailers. And don’t forget to “shop” around the house to see what’s left from last year. For parents with extra time, you can even try selling gently used goods, and use any extra cash towards new supplies. Negotiate with your kids on which of their items they can re-use versus buying brand new. Also, work the calendar! You know the best discounts are going to happen after the kids are already in school so make your first shopping excursions about picking up those necessities and then once the big red clearance signs are up, head out and buy the wish list items at a deep discount.
By involving your kids in every step, you’re helping yourself to save money and teaching your kids some valuable real world lessons that can only help them over the rest of their lives.
Back-To-School Budget
If you have kids, your fiscal year kicks off now!
Parents: If you’ve got kids in school, your fiscal year kicks off in August!
I believe that kids can understand a lot more about managing money than we give them credit for. That’s why I’m always on the lookout for “teaching moments” to introduce personal finance to our kids. Right now, I see one of those moments coming… as kids head Back-To-School! This is one of those predictable, repeatable rituals that gets expensive but you can actually plan for it.
Since the economy is so S-L-O-W, school districts are having to do more with a lot less funding. Parents will be expected to take on even more school-related expenses, like fees for extra activities, budgeting for athletic gear, or your kids typical pencils, pens and glue sticks. If you’re a parent, you’ve got everything from ziplock bags for snacks to zip drives for data on your shopping list right about now.
I’ve been searching for very helpful online tools that can guide parents through the budget process with the hope that the kids can get involved with the budgeting process. After all, it’s their stuff you’re buying! Funny enough, about the same time I was researching tools, I was approached by Chase to help promote a brand new tool called Blueprint that comes with some of the Chase credit cards. I’ve seen a lot of advertising about how you can pay off some purchases, split up others and actually get some control over your debt and monitor your progress. Sounded a little too consumer-ish for a credit card company. I was skeptical, but decided to take it for a test drive.
Well, guess what? I decided to endorse this super-simple planning tool because quite frankly it truly can help you in two big, big ways. 1) This tool makes it really easy to plan ahead how you intend to pay for each purchase on your Back-To-School shopping list. 2) It’s so simple and visual that it becomes a perfect tool to use in teaching your own kids how you intend to pay for all the items on their list!
The bottom line is that most of us need a credit card to operate, and managing that debt is essential to maintaining a good credit score. If you have a Chase card or are comparing cards, I do recommend checking out the Chase Slate with Blueprint. CLICK HERE to find out more and get a feel for what a statement looks like when you use the budgeting tool.
I’ll be talking about this and other Back-To-School budgeting advice during the coming week on shows like Good Money on ABC. Follow me on twitter and Facebook for the latest appearances.
If you miss the segments and want to learn more about, stay tuned. Next week’s blog post will be tips to help parents save money on Back-To-School purchases.
Parents, You Matter
Teach your kids about money. Mine did!
“Parents have an enormous influence on how their kids behave (or misbehave) when it comes to managing money.”
You often hear me talk about the power of parent’s influence over their children’s views about money, and the research backs this up. Kids really do learn more about money from their own parents than what you might them to learn in the classroom. It’s the everyday dialogue they hear around the house about what the parents can and cannot “afford” and which bills still need to be paid. It’s hearing the stress in the parents voices when they discuss what they have versus what they don’t have. On some level, we know by the time we’re in grade school whether our parents have a healthy attitude about spending and investing or if they are intimidated, threatened or angry and resentful about their money issues.
Now, more than ever before, I know how much my parents’ attitudes about money have affected me. I am thinking of all this today because last Wednesday, July 28th, I lost my mom. If you watch MoneyTrack regularly, you have seen Lucille show up every now and again, and that’s because this woman’s approach to managing money had a profound effect on me. For some really odd reason, both my parents were acutely aware that they were training us for life in the real world.
My dad spent time with me starting back in middle school smoothing out the newspaper on the kitchen table and pointing to the impossible-to-read tiny fine print on that pages that went on and on listing ridicules details about stocks that were bought and sold that day. Believe me, in seventh grade, the only reason I focused on it for more than 30-seconds was because I could see this meant something to my dad. He did this often and made me think I was learning the secrets of what makes the world go round which, in a way, is true. Then, he started quizzing me and the whole thing became a game - a really fun game! I thought it was pretty darn cool that my dad knew so much about this subject and his intense interest inspired me to learn more. It became one of those conversations that did not have to involve my older sister or my mom.
When I got my first job scooping ice cream at Friendly’s on Cape Cod, my dad introduced the concept of paying taxes which was pretty shocking because I figured I’d made $135 in a one week but my paycheck said I was actually getting a check for $113. My dad taught me how to prepare a tax return which I hated but recognized as necessary if I was going to live in America. Meantime, my mom paid all the bills and pretty much managed the cash flow in our home. Let me tell you, there wasn’t much of an allowance going on in my house and the tooth fairy was a little on the tight side compared to what my friends got for their front teeth.
Lucille had a “system” for paying bills – she actually called it her system and it turns out to be a heck of a lot like Mint.com or any other modern day online tool we rely on today to organize our money. The only difference, of course, is Lucille’s system only involved a pencil (very sharp) and paper. Not even a calculator. I remember she would get really angry and worked up about bills coming due that she could not pay in full. She’d get on the phone and write her little notes and negotiate with everybody from the gas company to the telephone or the plumber. On those days, we couldn’t even talk to her.
Lucille really cared about her appearance and wanted to shop at nice (unaffordable) expensive stores so she had store credit cards for a handful of very upscale department stores. I remember many a shopping excursion where we didn’t even get all the way into the store because the sale rack was by the front door and that was going to be the only rack we’d look through. Yes, Lucille was a penny pincher – squarely in the “saver” camp. When I was about nine, it was my mom who marched me down to the savings bank to open my first passbook savings account with money I’d gotten in birthday cards from my generous relatives.
All of these memories have become the backdrop for how I deal with my own money. I thank my dad for grooming me so early so I could use that knowledge to beat the pants off all the older kids in Monopoly and then later begin a career in the financial world. And Lucille, I have you to thank for raising me with an awareness that money does not in fact grow on trees, and that spending more than you really have is not acceptable behavior. Reality check mom! I just want to say that I am grateful to both my parents because the only reason I have such an avid interest in the subject of money – especially investing and protecting it, is because my learning these practical life skills was so important to both of them.
Here’s to 94 years of Lucille! I love you mom!
Financial Reform Bill
President Obama signs financial reform bill… Out of this massive 2,400 page document comes only a handful of new rules that might positively impact consumers and the investing public. Pam Krueger spoke with NPR’s Mindy Todd to discuss several consumer-friendly changes to the financial system. The two biggest changes include:
- The creation of a new consumer watchdog agency called the Consumer Financial Protection Bureau. It’s purpose is to make sure all consumers have access to financial products and services and that banks and financial services companies play by the rules of the game.
- Tens of millions of everyday Americans rely on brokers or financial advisors for trusted advice and from now on, anyone who dispenses financial advice for a living must act in their client’s best interest versus just selling an investment that might be suitable. The new rules force brokers to follow the same fiduciary standards as investment advisers.
CLICK HERE TO LISTEN TO PODCAST
Opportunities abound if you look for the silver lining in real estate
No, the housing market isn’t likely to bounce back to it’s highs of 2006-2007 anytime soon. Zillow’s chief economist is saying the residential housing market will likely hit bottom around October 1st and Fannie Mae’s economic forecast is the same. Foreclosures are still alarmingly high and won’t start to normalize until 2011. Credit is still wicked tight (as they say on Cape Cod) and a mortgage loan approval will now take months instead of hours, assuming that is, you have the 20-percent down payment required. I think we can also appreciate that this economic recovery is fragile. So there are plenty of reasons to see the glass as half empty because it is. But I like to look for the silver lining whenever possible and in the case of residential real estate, I see some bright spots. First off, in my lifetime, I have never experienced mortgage interest rates at these low levels – under 5%. . In fact, most of us have never experienced such vast buying opportunities in our lifetimes. I have never seen as many houses on the market looking for buyers. It truly is a “shopportunity” for those who are financially well-positioned to become homeowners for the very first time so millions of people who were edged out of the housing market during the boom can finally afford to own. Investors can grab some smokin’ deals as long as they are willing to be patient and wait a few years for sellers to return. On MoneyTrack this season, we met three really very creative and upbeat people who for completely different reasons, decided that when it comes to real estate, the glass is truly half full! Each of them came from a different part of the country and each was determined to stop agonizing and complaining about what they could not do in this economy and instead, have taken matters into their own hands and daring to put their cash to work in one of the nation’s worst housing markets. Check out this story and keep this thought in mind: when life gives you lemons – just add vodka! Cheers!
Elder Fraud Alert!
Who is watching out for your parent’s money?
Pam Krueger appears on ABC Good Money to advise growing parents about issues affecting their aging parents.
Not so fast for the financial reform bill that was just finalized last Friday.
The bill’s been a work-in-progress for months and then last Friday congressional negotiators finally came to an agreement.The House passed it and the Senate was expected to sign so it as of last week, it was looking like the 2,319 page reform bill was on it’s way to passage before Independence day. But… the death of Sen.Byrd of West Virginia this week has created doubt that this Dodd-Frank version of overhaul will pass before mid July or even get the Senate vote at all.
The President believes the bill will pass the Senate but the Dems lost a key supporter when we lost Sen. Byrd. Byrd’s death left the Democrats one vote shy of the 60 needed to defeat a GOP filibuster of a bill reauthorizing extended unemployment benefits, (according to the Huffington Post).
I’m conflicted about whether this is good news or bad news for individual investors because I would like to believe in the fantasy that we could start all over again – that the sharpest minds in finance can weigh in and help create a much more simple bill but one that deals with so much of what has been left out of the Dodd-Frank bill. I’m talking about leverage – I’m talking about too big too fail, Fannie and Freddie and measures that will really prevent another similar crisis. Does this legislation truly get to the root of the financial system’s problems, or are the very same politicians who helped create the problems in the first place missing the true diagnosis of what caused the problems in the first place?
Can I just point out one little thing that really bothers me? This statement comes straight from the Chairman of the Senate Banking Committee and co-author of the bill. Sen. Christopher Dodd (D-CT), (From the Washington Post):
“No one will know until this is actually in place how it works. But we believe we’ve done something that has been needed for a long time. It took a crisis to bring us to the point where we could actually get this job done.”
Okay. Call me crazy but that’s not what I want to hear after 50+ hours of public debate. Look, no question that the lack of enforcement of existing regulations and the lack of the effective rules has put our financial system at risk with the loss of $17 trillion dollars of household wealth and 8 million jobs wiped out. And I want the system fixed! But Sen. Dodd’s comments make me wish I could just blink like Jeannie used to do on her I dream of Jeannie show when she wanted a “do-over.” Can’t we just get to something that would receive bipartisan support? And the final draft might be more like 50 pages? I realize it’s a dream because this piece of work already had more than 70 republican and bipartisan amendments and the whole thing argued publicly for over several months. The Declaration of Independence was written on one page because I think they ran out of ink. Guess that answers my question.
New Rules for Wall Street, Toughest Reform Since Glass-Stegall?
The final language for the financial reform bill has been approved. Big banks that were in deep into things they should not have been deep into during the mortgage boom, are now pretty much handcuffed. Or are they?
I’d love to do a winners + losers piece but it’s too much. No matter how disappointed I might sound, know that this legislation will be a big improvement over the status quo. So, let’s run through some of the main points in this legislation that we small investors care about most:
Derivatives: Banks will have to spin-off “some” of their derivatives business. They can still continue to hedge transactions using mostly financial derivatives. Transactions also now have to go through exchanges and clearinghouses. Sen. Blanche Lincoln’s wanted to bar banks from derivatives trading but clearly that was watered down.
Proprietary Trading: (Volker Rule) Banks can only use a small amount, 3%, of the bank’s money in risky hedge funds or private equity deals.
Consumer Protection Agency: Creates a new Consumer Financial Protection Bureau, housed within the Federal Reserve. The Fed is considered bank-friendly by the way. (Stay tuned, this could still change.) Auto dealers are exempted from oversight by this bureau. In general, this is about mortgages and credit cards. Good that the bill will protect people from predatory lending.
Brokers must now act as fiduciaries. Bill includes a new provision that gives the SEC authority to ensure that brokers act with “fiduciary responsibility” toward their clients. Hurrah! Finally!
Resolution Fund: Money to be used to unwind any big banks that get themselves into trouble.
Congress still has to vote on all of it, but that’s going to happen before you can say… “summer vacation!” When passed, the biggest impact will be the limits on proprietary trading, derivatives reform and the financial watchdog agency for consumers that may still be tweaked. So all together the new rules represent the big changes to our financial system since the Glass-Steagall Act, which was repealed in 1999. In a nutshell, Glass-Steagall was the glass wall that prevented traditional banks from becoming investment banks and investment banks from trying to become depositor based commercial banks. Nobody was confused.
The whole point was to separate the hens from the foxes with a meat cleaver and it worked really well for almost 70 years. Now we’re trying to put Humpty Dumpty back together again and some of the pieces just don’t fit. The thing is over a thousand pages long so you already know that this re-regulation is not going to be terribly effective in the ways we need it the most.
Most of the academics I talk to think the bill falls short and isn’t enough to prevent another banking crisis. Without getting crazy with technicalities, one reason is because big banks will still be able to take really stupid and dangerous risks using other people’s money, and this is what Volker was trying to prevent with his Volker Rule. Commercial banks can still speculate on certain types of high-risk derivatives. Bottom line, there are still plenty of ways for big banks to get into trouble and if history is any indicator – the banks will follow suit.
Oh yeah, then there’s that credit crunch… by restricting the use of derivatives it will get harder to borrow money from banks for the next year or so, but we’re sort of used to that now. My biggest problem with this legislation is that I don’t see it solving the real problem, which is too much alcohol in the punchbowl – meaning leverage. “Too big to fail” didn’t really seem to get addressed either since big banks that get into trouble can always go to the Fed and ask for money. And FANNIE who? Where are Fannie Mae and Freddie Mac in all those 2,000 pages? Looks like when this gets signed, Wall Street mega-firms will be crying all the way to the bank, but look closely because I doubt you’ll see any real tears.
Start talkin’ money with your family
A couple of surveys caught my eye this week – one having to do with high school graduates not really understanding much about money or feel confident about managing their own money. We know teens are really good at spending it though! So lots of work to be done by parents and teachers on the simple lessons about the simple things including how to create a budget,use a checking account and debit card and the all-important credit card talk. Even if parents don’t feel they have done the best job of handling their own personal finances, what they tell their own kids will have a bigger impact on how their kids handle their money than anyone else. That’s a fact. I’m the spokesperson for the California Jump$tart Coalition and that fact always surprises people.
Now, speaking of families…on the other end of the spectrum are us adult kids who have an aging parent. Well, the a brand new survey just released this week points out a pretty startling fact – that almost half of adult kids realize and are worried about our parent’s ability to make big financial decisions. Yet at the same time, just like parents don’t really like to bring up the money conversation, we grow up believing it is rude to talk to our own parents about their finances. But somebody else is talking to them! Remember back in season one, we had this story about a retired couple living in Pennsylvania. They’re over 70. He’s a retired architect. She was a homemaker. They got ripped off and scammed into some non-existent investment by their own CPA! And the CPA was a trusted friend! Well, what I didn’t tell you in the piece you saw on TV was that their own grown son who lived not far away, is a registered financial advisor! But Ruth didn’t want to “burden” her son with their personal financial questions so instead, they were systematically robbed of their entire life savings but the scumbag CPA. Tough lesson learned. What’s the moral of the story? Drop the old belief that you shouldn’t discuss money, bills, and investments with your own kids or your parents and start talking money!
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