Archive for Dec, 2012
This is a non-partisan article about what the fiscal cliff fight is really about. It is a philosophical battle, but if you read the newspapers, and watch TV news, you will not get this story. Believe you me, I have watched and read many commentaries and opinions about this, but no one has yet to boil it down to one article- so I will take a shot at it. In addition, since this is a financial blog, I will try to render a non-political opinion about what this means to your personal finances. Since readers from both sides of the political spectrum’s read this, I will try not to take sides.
First of all, we have an economic crisis in the United States of America. Real unemployment is about 15%, not the less than 10% that you read about. Secondly, government spending both today and into the future exceeds income or revenue (mainly taxes). The budget deficit exceeds $1 trillion per year, and the total federal deficit is almost $16.5 trillion. Manufacturing is down, growth of our gross domestic product is lack-luster, and we are headed to long term double and who knows, maybe triple dip recession. Yes housing is gaining strength, the some industries are doing quite well, and there are other reasons to be optimistic, but a strong argument can be made that we are headed to economic disaster because our federal balance sheet is a disaster.
Coming through a recession, we have a lot of people with their hands out wanting financial help. With high unemployment we have people on unemployment benefits. With an aging population we have a large increasing number of people on Social Security, Medicare, and Medicaid. With low incomes coming out of the recession we have a large percentage of people not paying Federal income tax. We have have a large number of people without health insurance, or under-insured (who should be provided for). We have a large percentage of people on food assistance, income assistance either in the form of weekly benefit or an annual bonus check called the Earned Income Tax Credit. These are a lot of open hands, some very well justified that need help- I agree, but none-the-less, at the end of the day a lot of open hands- but no long term plan to pay for it.
Even if we aren’t paying Federal income tax, we pay a lot of our income out to sales tax, payroll tax (Social Security, Unemployment Insurance, Medicare and Medicaid), gas tax, real estate tax, toll roads, corporate tax that we pay in increased cost of goods- to mention a few. So the poor and low income do pay tax, the point here is the government- federal, state, city and local have high revenues.
The Left’s Viewpoint: To meet the financial needs of our country, such as entitlement programs the tax plan that President Obama wants congress to pass, wants to increase income or revenue through increase in taxes on the rich, and modest cutbacks in spending but not on entitlement programs, and in some instances a desire to increase them, for example extending unemployment benefits. Class warfare seems to be used as a motivator: “The rich and big business caused the economic crisis, therefore we want to take from them, to help everyone out and fix our economy.” A few of them definitely did contribute to the recession, but really can we tax our way of this mess?
The Right’s Viewpoint: To meet the financial needs of the country, reduce spending (including entitlements) and move towards a balanced budget. Keep taxes low for everyone, and leave more wealth in the hands of wealthy and business, who create jobs and expand the economy. Really, can we not increase taxes some with spending so high. Okay they say, but reduce spending first.
The 113th Congress of 201 Democrats and 234 Republicans in the House of Representatives, don’t want to budge on these issues, because it comes down to these philosophical differences. If the House can pass something agreeable, then the Senate’s 54 Democrats and 45 Republicans will approve it, and sent it to Obama for his signature.
The philosophy on the left says, we want to be more like a European style social democracy, of high taxes, and a high level of social programs. It puts faith in the government to care for the people in a fair and just way. Society welds power from 3 entities: government, people, and business. Therefore this style of government, seeks a shift to have more power, than people and business. The hope here seems to be government will maintain the freedom and welfare of the majority of people. Government is self seeking, so those in power don’t always care for people well though. I am not saying if you are on the left you totally believe all of this, but this is what seems to be they are saying.
The philosophy on the right says, we want to maintain more freedom for business and people, and the answer to economic problems is better financial management and business growth (which will in turn generate more taxes). The hope is that business and capitalism, hard work and self determinism, good personal financial management (spending saving and investing) will, in the long run, pay for entitlement needs, not taxes and government programs- it doesn’t always do that well, but that’s its hope. The right believes in entitlement programs, but seeks a balance. The people on the right are not heartless, since well researched analysis validates that conservatives give much more money to non-profit entities benefiting the poor than those on the left. I am not saying if you are on the right you totally believe all of this, but this is what seems to be they are saying.
1. Compromise: Neither side exclusively has the only answer, both can actually be right and wrong -in part. Compromise doesn’t mean giving up one’s philosophy but, agreeing to work together on a balanced approach- some give and take. A balanced approach takes care of needy, preserves freedom by not shifting too much power to government and business, has modest taxes, AND something that neither party seems to be mentioning much- encourages new business start-ups and growth. A rising economy alleviates many of the financial problems struggling economies face.
2. A good president, majority and minority leaders are ones that supports compromise, works together, and brings both sides together: This battle is frustrating, but actually makes good political theater. Will one philosophy win out here, or will will end up with a good compromise and the best part of both parts will help everyone, not just those on the right and left?
3. The longer we take to answer questions of budgets, taxes and deficits, the longer our economy will languish. The more it languishes the greater the toll to average people’s personal finances. A government that manages money well, taxes fairly, takes care of the poor, secures freedom and encourages business growth – by working together, will be one that lead us to prosperity.
Unemployment statistics are an important indicator of how our economy is doing; more people employed points to stronger business growth and to fewer people receiving government entitlements. However, this is a little difficult to track, since the government doesn’t really publish a combined statistic that truly indicates what is happening. Most people who study this issue follow these three indicators: 1- percentage of people unemployed, 2- monthly change in non-farm payrolls, and 3- jobless claims for unemployment insurance. The most discussed statistic is the unemployment rate; reading the explanation above illustrates how this number falls short.
Gross Domestic Product, GDP tracks the size of our economy by calculating the total dollar value of all goods and services produced over a specific time period in comparison with the previous quarter. For 2012 GDP slumped to 2% in the first quarter, and 1.3% for the second, so the announcement of 2.7% for the third quarter is good news. Is this a great indication? Well any increase is good, however this would only add up to 2.1% for 2012. Looking back at the most recent recessions, from a presidential term perspective, provides some challenging information. Economic recovery under Ronald Reagan, GDP averaged 4.4% from 1995 – 2000, assuming you take out his first two years in office, where there was negative GDP, as it took some time for his policies to take affect. Bill Clinton took office in weak economic times, but not nearly as bad as Reagan. Under Clinton, GDP averaged a decent rate of 3.1% from 1994 – 2000. This assumes you don’t take into consideration his 1st year in office, when there was negative GDP. Under President Barack Obama it has averaged 2.1% if you don’t include his first year with negative GDP. How does this compare to those other Administration’s first few years in office? In Reagan’s first 3 good years GDP averaged 5.3%, and for Clinton it averaged 3.4% for his first 3 good years in office.
Technically a recession occurs when business cycles retract, evidenced by down consecutive quarters of GDP, or a 12 month 1.5% or more rise in unemployment.
Average quality, 100% cotton underwear seems to have really gotten expensive the last few years. While shopping for just basic plain white T-shirts we were amazed that a packet of 5 costs $34 at Sears and Kohls. Sometimes you can find where they are throwing in a extra shirt or briefs so you get 6 for the price of 5. Is that supposed to help you get over the shock of having very little change left over after tax, after laying down a couple of $20′s on the merchant’s counter?
Sears and Kohls often run these items on sale, as they were recently. The deal that was being advertised was “Buy One, Get One 50% Off,” what coupon masters refer to as BOGO. So now you are tempted to buy a couple of packages. If both items cost $34, then after tax you will spend about $55. I hate the feeling of having $100 bucks in my pocket- 5 $20 dollar bills, and then be down to only having 2 of them left, plus change. I feel like I have been taken to the cleaners.
My son went to the Internet to check prices, he found the same items being sold for $18.99 at Amazon, so after buying a couple of packages that normally sell for $34, they can be had for around $40, plus free shipping for Prime members. The same items were on sale at Hanes.com too for $14 per package, but some other items were a little more expensive, plus they didn’t offer free shipping. So after comparing both websites, we saved a couple of bucks at Amazon.
Later, I wanted to buy some for myself and I only found them on sale at the Hanes website, and searched for discount promo codes and saved another 10% off the entire order, so I ordered them directly from Hanes. My order was just under $60, so I was going to have to pay 10.99 shipping, so I was able to add another low cost item ($6.99) to get free shipping.
You can buy decent quality 100% cotton name brand underwear online right now, without having to give your shirt off your back to buy them.
Radio and Television is awash with silly advertisements aimed at anyone in their 40′s or older, to get you to buy supplements to counter the affect of lower hormones as we age. The ads ask if you are fatigued, depressed, low sex drive, gaining weight or generally have a feeling of malaise. These ads appeal to everyone really, since everyone experiences some of the symptoms as they age.
Amberen is the product that I hear advertised the most on AM radio for women, and Andro 400 for men. Looking at Amberen’s website, they list the ingredients as basic vitamins that a lot of people need and some may fall short on. Listed is calcium and magnesium, zinc and vitamin E. My wife has been taking calcium magnesium for years, and it helps her a lot with her monthly hormone fluctuations. You can buy these supplements a lot cheaper than Amberen’s regular price of $149.
Also Amberen has MSG, an additive used in many food products like snacks and Asian food, to enhance flavors. MSG gives me migraine headaches, and I have read a lot of side affects of taking MSG on various websites. I’m puzzled why this ingredient is added, although Amberen website says it is added for energy.
The other ingredient listed is an amino acid, they indicate that when coupled with magnesium helps with emotions.
I would avoid these pills, since the advertising is misleading and their product is expensive. At the very least talk to your doctor first. If you feel you need these vitamins and proteins, first eat more nutritious food, and if you feel you fall short on some items, buy high quality but much lower cost supplements.
Contrary to the ads, most people will notice very little change to their fatigue, depression, sex drive, or weight loss. Just like the snake oil sold centuries before, avoid big claims and big price tags. Save your money, the best way to treat these things, is through better life management, like good personal finances, diet, exercise, adequate sleep, professional medical care, and habits to promote positive mental health.
The Internal Revenue Service (IRS) recently published the new rules for contributions into retirement plans and IRAs for 2013. Some of these numbers have increased, and are good for you to know if you participate in IRAs (individual retirement accounts) or retirement plans like 401(k)s, sponsored by employers.
The most an individual can contribute to any kind of IRA, whether it be deductible, non-deductible or a Roth IRA is $5,500 or $6,500 if you are age 50 or older. The amount that you can deduct, or contribute to Roth depends upon if you are eligible to participate in a retirement plan through your employer, and your income. For the current income tables, for IRAs go to http://www.irs.gov/Retirement-Plans/IRA-Deduction-Limits and for Roths go to http://www.irs.gov/Retirement-Plans/Roth-IRAs. This does not cover contributions to spousal IRAs.
- 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan, employees contribution increased from $17,000 to $17,500. The catch-up contribution limit for employees aged 50 remains unchanged at $5,500
- Defined benefit plans commonly referred to as pension plans, maximum benefit increased from $200,000 to $205,000
- SEP IRA annual contributions the employer makes to an employee’s account can’t exceed the lesser of 25% of compensation, or $51,000 for 2013, up $1,000 from 2012
- Simple 401k limit is 12,000, up from $11,500 in 2012
- Total contributions (employer and employee) for 401k and Profit Sharing plans, can’t exceed lessor of participants income or $51,000 (or $56,500 including catch-up contributions), up from $50,000 in 2012
- There are many other types of retirement plans, the ones listed here are probably the most common types but the information provided doesn’t compare exactly to those other plans, go to the IRS.gov document for other plan limits
Some of these limitations are subject to IRS updates, changes and interpretation and actual plan type and design. Refer to IRS.gov and your plan description for complete information.
The most commonly asked question I get is, should I buy gold or some other precious metal like silver or platinum? The main reasons for driving interest in gold, are advertisements, the increased price of gold, and fear.
There are a lot of commercials on TV and the radio, from companies that want to sell you gold. The main reason is, they are guaranteed to make a profit when they sell it to you, regardless whether the price goes up or down. They are not selling it to you at the pure spot price, because they have to mark it up to make a profit or they charge you various fees. Their commercials prey on your fear that the economy is going to collapse, and that money will be worthless. The secondary motivation they use is that they build the expectation that the price of gold will go up, benefiting you the buyer of it. If you want to sell your gold, you can sell it back to the company you bought it from, or some other entity, but they won’t give you the full market value of it- that is because they have to make a profit when they subsequently sell it.
Is gold or other precious metals good investments? They are if you buy low and sell high. However most people buy when the excitement is the greatest, when prices are at their highest, and then sell when it slumps. This is perhaps the riskiest time to buy gold and some other metals. The highest price gold ever reached was in September of 2011, when it hit $1,895 per ounce. This year the price per ounce has been bouncing pretty much between $1,600 – $1,800. 10 years ago it was only $400.
People that bought gold at $400, and sold it when it peaked at $1,895, earned about a 475% return on their money. That is really exciting, however now that it has been fluctuating within a couple hundred dollars of the peak, now is a nervous time to get into gold. Some might play it like a commodity, buy when it trickles down a little and sell when it pops up, or sell it short when prices get high, but even trained gold professionals don’t know when the best time to speculate like that is. Others may tell you to wait until it drops a lot, then buy in, but how do you know it might not drop more after you buy it. Or what if you bought gold 10 years ago, and watched it do nothing for a few years, and impatiently sold it before it started climbing when the recession hit.
I watch some of the recession indicators, and post them every Friday here, on at Weekending Financial Scorecard. Some feel there are clear signs that we could go through another recession next year, and that would make gold prices go up, since recessions and inflation fears often are indicators. However, as we look back at many financial indicators over the last 10 years- some of the things financial experts always rely on haven’t always held true.
Some people remember when silver hit almost $50 an ounce in 1980 going from around $5 an ounce just a couple of years prior. It quickly dropped back to about $5 an ounce in a short time, and held there for about 15 years. Those that invested in silver late, and got out after it tumbled lost a lot of money. Now part of that run up was due to market manipulation, when the Hunt brothers tried to corner the market. I’m no expert, or conspiracy guy, but various forces unknown to the average investor like you and me could cause the price of metals to fluctuate these days, making it more difficult to know when to buy and sell. If you have gold and are considering selling it, you may want to read an article I previously wrote How to Sell Your Scrap Gold.
If you own various mutual funds, check out their statement of additional information for lists of the underlying stocks and bonds they hold. You may find that they are investing in the precious metal industry. Already you may be investing in gold and silver or other metals and not even know it. If you direct more of your money into precious metals, you could be increasing your exposure and your risk.
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Big Box retailers like Sam’s Club and Costco can sometimes save you a lot of money, but if you aren’t careful you can end up spending more money than you planned to. I suspect most people do go over budget at these places.
We are avid coupon clippers and deal shoppers, and often our receipt from the regular grocery store shows we saved 25 % – 45%, so I think we can tell when something is a good deal or not.
What I like about Costco: Take for example batteries. It is easy to buy an average size package of batteries at most places for $8; even if they are the smallest AAA you often get fewer than 10. Last time we bought double and triple A batteries at Costco we paid less than $15 for a huge package–I think it had about 40. The savings is not unusual. We find good deals on hummus, some frozen and produce items, jeans, prescriptions and some health and beauty items, such as an unbelievable price on a Claritin generic. I also like the fact that some food products are organic and don’t have MSG added, and many of their deli meats don’t have nitrates. Don’t get me wrong, they are not anything close to an organic grocer. However, if you are like us and can’t afford to shop organic exclusively, you might like the fact that they make some effort, at a price you can manage, to avoid some of the things organic shoppers don’t want in their food. It is probably not good enough to satisfy those that shop organic exclusively, but it is good for those on a budget that like to be able to get some products that are more healthful.
A few other Costco savings examples: Last month they had top-brand windshield wipers, buy-one get-one free for $7.99. That was about 1/3 of the normal price. A friend of mine recently bought a new Honda Accord through Costco, and, after negotiating with several local dealers in the area, was still able to save money through Costco.
What I don’t like about Costco: I have noticed that almost every item in the store starts out at nearly $10, so it is easy for the things in your cart to add up to $100. Of course there are a lot of exceptions, but Costco is a masterful marketer, so you may be drawn impulsively to buy things you don’t need. I don’t like the fact that some of the containers are so big, such as canned goods. Americans throw away a lot of food, so you have to be careful to buy only what you will realistically consume. Emotionally our brains tell us that if the package is big, it must be cheaper. However, we find that some things, such as laundry detergent and some dry goods, are cheaper elsewhere, especially when we use our coupons and our organized system of using sales and grocery cycles. Don’t be drawn to buy something that seems cheaper without doing some price checking.
Do people save money there? Sure they do, but I would venture to guess that most people end up spending more money. Generally observing what people are pulling off the shelf, we can see quickly the things people are overspending on. My wife teaches a class on couponing, which is actually more like home economics. She finds that most people lack proper knowledge about pricing and sales, buy out of habit, and don’t plan because they feel they are too busy. However, she estimates that for every hour she spends planning and cutting coupons she saves $50. For us this adds up to $200 in savings each month. Try asking your boss for a $200 monthly raise.
In summary, groceries are one of the biggest parts of monthly budgets; however, if we plan and shop smartly, we can prevent big box retailers from breaking our budgets.
Most people buy life insurance and seldom review it later. Here are 7 compelling reasons why a life insurance review is a great idea.
- Price: If you own term insurance, you may want to check to see if you can buy a new policy for a lower overall cost.
- Length: If you purchased a level premium term life insurance policy, it may expire before you are willing to go without the coverage. Let’s say you purchased a 15 level premium term policy 10 years ago, and you still will need the protection when it expires or the premium increases substantially in 5 years. You might want to buy a new policy now, with a longer term than 5 years–one the matches the time period of your need. Also a new one will cost more in 5 years because you will be older and your insurability may change. If your insurablity changes because you develop some kind of health problem, you may be rated up or declined.
- Benefits: Some policies have riders that cover their dependents, or they may offer some disability insurance–to mention a couple. However many people forget they have riders and you might be eligible for some cash benefits.
- Need: If you have taken on more debt or your family size has increased, you might need more coverage. Conversely, if you have saved more money, eliminated debt and have fewer dependents, you might need less. Talk to a financial planner or insurance professional for a needs analysis. A good rule of thumb for the family’s breadwinner is 10 times income. Do you have that much now? If not, it is a good idea to review your needs.
- Company. Are you sure your present life insurance company is financially strong? Most are, but as a consequence of the global economy your company might not be as strong today. A good agent can check that out for you, or you can research it online through AM Best, Duff and Phelps, Moody’s and others.
- Universal Life: If you have one of these life insurance policies, it has a cash value that earns interest. With interest rates at the lowest in decades your policy may be under-performing. If this is the case, it may lapse or require a substantial increase in premium to keep it from lapsing. It is a good idea to examine it now, and to explore your alternatives before it is too late.
- Beneficiaries: Your life insurance policy pays a benefit to the beneficiaries indicated in your policy. There are primary, secondary and tertiary beneficiaries; meaning primary’s get the money if they are still alive or, if they are deceased, the money goes to the secondary, and so on. Beneficiary arrangements can be quite complicated, and they may not be up-to-date as to how you want your death benefit to flow. Also, if you have written or changed your will or trust, it is usually good to change beneficiary arrangements to be consistent with all of your plans.
In summary, there are a lot of other reasons, just as important as these. It is always wise to review your coverage every year to two.
Previously I wrote on reviewing your life insurance policies, today I describe a way to layer term life insurance to provide affordable life insurance protection for longer periods of time.
As a review the most common forms of term life insurance are level term, and annually renewable term, both offer level death benefits:
- Level term life insurance’s premium remains level for the ‘term.’ These policies are issued usually in 5 year increments: 5, 10, 15, 20, 25, 30 and longer years. During those years the premium remains the same, and is guaranteed to not increase. The longer the term, the higher the premium, so most people don’t opt for the longest term. However the premium does increase when the term is up. For example, lets say you bought a 15 level term policy for $500 per year. In the 16th year you can keep the coverage but the premium will dramatically increase to several thousand dollars per year. Sometimes these policies allow you to apply for a lower premium, but the rate is dependent upon your health. The new premium will be much higher because you will be 15 years older even if you are in excellent health. However if you have some health history that precludes you from buying life insurance at standard rates, you may be rated and pay a higher premium. Many people will need life insurance after the term is up, so this big increase is a challenge.
- Annually increasing premium term life insurance, sometimes is called AYT for annual renewable term. The premium goes up every year. In the earlier years while you are young, the premium increase is very slight. In the later years it is like a hockey stick. The cost becomes several thousand dollars per year, and by the time you are in your 90′s, the premium almost equals the death benefit.
Will you need life insurance when you are older? Some advisers recommend that you purchase term insurance for the length of time you plan to need it. For example if you are 40 and in 20 years your house will be paid off, children would have completed college and the retirement fund is well on the way to being fully funded, then you won’t need the insurance anymore- so 20 year term would be great here.
What if life changes? For many people life doesn’t go according to plan. There could be job changes, divorces, unexpected children, or your investments might not have performed well. You might need life insurance into your 60′s and 70′s, but if you just bought 20 year level or AYT term, you could be facing very high premiums at those ages.
Layering life insurance is a way to have life insurance when you are older, while keeping the premium down somewhat. Let’s assume the life insurance buyer is 40 year old named Tom, and he needs $500,000 of life insurance in addition to his group life his employer provides. He would like to buy 30 year level term to cover him until he is 70, but the cost is a little more than he wants to pay. Tom thinks he will probably only need insurance for 20 years, by then his kids will be out of college and his house will be paid for. However he is unsure about his career, since a lot of people in his industry have been laid off and have gone into other lines of work, sometimes for much less pay. If this happened to Tom, he might not have the house paid off in 20 years, and not saved as much money for retirement. If he died at age 60, his wife wouldn’t have enough money to pay off the house and help fund retirement without his income.
Tom decides to buy both a 20 year and 30 year level term, each for $250,000. If he doesn’t need the 30 year term in 20 years, he can drop it, however if he continues to need it, he can keep it, and he doesn’t have to worry about being older and maybe not in as good of health- and have to pay a much higher premium then. Tom likes diversifying his life insurance too, in case one of the insurance companies has financial difficulty. Also, say 10 years from now, when Tom reviews his insurance he decides he need more longer, he might decide to replace his 20 year term that only has 10 years left, with a new 20 year term, giving him full coverage until he is 70. Having two policies like this gives him some nice options as he ages.