Posted on Tue, Apr 28, 2009
Financial advisor
Darrell J. Canby is not alone when he insists that today’s children need a financial education.
The fact is we all do.
A lack of financial common sense led to the current financial crisis, Canby observes. “People bought homes they couldn’t afford, banks abandoned sound lending standards, politicians passed laws that encouraged financial recklessness and regulators failed to regulate,” he says.
A billion dollars used to seem like a lot of money. Now a trillion is the new billion, and our children will be left with a mountain of debt and all of the problems we haven’t solved. The least we can do is to provide them with the financial knowledge to do better.
What are the most valuable lessons to be learned?
Stay out of debt
“If Americans learn nothing else from the current financial crisis, it should be this: Don’t spend money you don’t have. This is priority number one.”
But will we learn this lesson? As of this month, the national debt is approaching $11.2 trillion, according to the National Debt Clock, and Congress has committed to trillions in new spending. Consumer debt, meanwhile, is approaching $2.6 trillion, according to the Federal Reserve.
Know what you owe
“To address your debt, begin by assessing how much you owe. Once you have a good reading of your outstanding debt, look at what you earn and compare the two. If what you earn doesn’t cover what you owe on your debt, plus the other living expenses, drastic changes may be necessary.”
Pay yourself an allowance
Just as children learn to control spending and save if they have an allowance, adults should consider restricting themselves to spending a set amount each week , says Canby.
To determine an appropriate allowance, figure out what you earn and subtract your fixed living expenses, such as your mortgage, your car, your utility bills and your grocery bills. Also, of course, calculate an amount to save each week and subtract that, too. Once you’ve also deducted your children’s allowances, feel free to spend what’s left.
Keep in mind, of course, that it’s perfectly acceptable to spend less than that amount. You can always save it for a week when you want to spend a little extra – or you may decide you don’t need to spend it at all and you can add it to your savings.
Invest now, but consider risk
When the economy is in a recession, investors often take refuge in defensive stocks, such as stocks for consumer staples. Demand for goods such as toilet paper and healthcare is “inelastic,” meaning that consumers will continue to purchase these goods even in the worst of times.
During an economic recovery, cyclical stocks, such as manufacturing and technology stocks, historically perform best, but only a true optimist would suggest that the economic recovery has begun. The recent market surge is a hopeful sign, but we’re likely to experience more market volatility in the coming months.
Some are also suggesting that investors invest defensively by keeping a greater percentage of investments in cash and bonds than usual, while acting aggressively with their stock holdings.
Which of these strategies will yield the biggest gains in coming months – or at least prevent deeper losses? No one knows. However, keep in mind that relying on any one type of investment to perform well is always risky. Diversification continues to be an important way to manage risk.
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Posted on Sun, Apr 26, 2009
In a showdown between the federal government and credit card issuers, president Barack Obama meets with executives from 14 credit card issuers today, including
American Express,
Bank of America,
Capital One Financial,
Citigroup,
Discover Financial Services, and
JPMorgan Chase, to discuss concerns over practices such as raising interest rates on existing credit card balances.
A congressional panel was expected to approve a bill mid-week that would curb high credit card fees and penalties imposed by many banks that have benefited from the federal government’s financial bail-out program. The proposals are similar to sweeping rules adopted by US federal regulators in December. These rules take effect in July 2010, but the bill’s approval would accelerate their implementation, forcing the country’s banking industry to forgo billions of dollars of annual interest payments sooner. The pro-consumer bill is an important test of the political will of Democrats who are pushing for US financial regulation reform.
What’s your view on credit card policies? Should there be strict new disclosure standards for credit card lenders? Should pricing practices that expose borrowers to unforeseen costs be prohibited?
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Posted on Sun, Apr 19, 2009
A new batch of numbers, released at the top of the year and stating that people are living longer than ever before, has prompted Life Insurance companies to lower their rates in many cases. If you have a life insurance policy purchased prior to 1/1/2009 you may be paying too much. Some of the largest savings are being seen in Term Life Insurance policies between $500,000 and $1 million.
Compared to 20 years ago, term insurance rates remain extremely low. Increased competition between carriers on the Web, improved mortality rates and better underwriting has driven the cost down by 75% since 1990. For instance, a 20-year term policy providing $500,000 in coverage would have cost a 40-year-old, non-smoking male in 1990 about $1,400 a year. Now, the same policy may cost around $400.
Term insurance is particularly attractive now, when the tough economy is forcing consumers to look for ways to cut costs. These policies are renowned as being smart for younger individuals or families who need insurance for a certain time period, say while they have dependent children.
The industry may be facing a reversal of term insurance rates with increases to come. Before companies raise rates, consumers can take advantage of the market opportunity…if they act quickly. When was the last time you compared the cost of your life insurance policy or shopped for a better price?
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Posted on Tue, Apr 14, 2009
The tax refund splurges of years past are not a reality for most Americans in 2009. Many people are likely wringing their hands over what to do with the money they receive back from Uncle Sam. Their concerns are well-founded: It’s more important than ever to consider the right options for your refund.
It’s also the right time for refund recipients to consider meeting with a financial professional who can help establish financial priorities and goals.
If you have outstanding bills or debts, take care of those matters first. But if you find you have money left over from your tax refund or have the full amount, don’t be scared of your options — be smart in your decisions.
Consider these options to put your tax refund to work for you…
- Set up an emergency savings fund. Simply essential. The old conventional wisdom advised saving enough money to cover three to six months of unemployment. Many financial professionals now recommend keeping enough money stashed away to cover six months to one year of unemployment.
- Buy life insurance. Many people have only the life insurance plans offered by their employer. But your family needs protection whether you’re working or between jobs. There are two basic types of life insurance: term and permanent. A financial professional can help you determine the type and amount of protection you may need.
- Contribute to or open an IRA. Yes, the market is unstable. But pulling out of a retirement plan altogether is not the answer. Both the traditional and Roth IRAs are great ways to save for retirement, although each offers different advantages. If you’re employed and have an IRA, continue contributing. If you’ve become unemployed, you might want to do a rollover from your retirement plan to a qualified IRA.
- Purchase a CD. If you don’t need immediate access to your funds, you may benefit from the fixed interest rates available with a Certificate of Deposit. You can buy a CD with a maturity or holding period as short as 30 days or as long as five years.
- Start or add to a college fund. Pay for the present, or save for your child’s education? That’s the agonizing decision faced by many parents considering a 529 College Savings Plan. But what many parents may not know is that the plan portfolio has different investment allocations based on the age of your child.
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Posted on Thu, Apr 09, 2009
Financial investments in art are not always a pretty picture. A portrait of Mick Jagger painted by Andy Warhol sold for $1.1m this quarter. The seller bought it in 2006 for $1.5m.
Old masterpieces are less vulnerable. A painting by J.M.W. Turner, “The Temple of Jupiter”, sold for $12.9m last quarter, and brought a solid return of 10 per cent a year for the seller, who bought it in 1982 for $1.1m, an exception to the rule.
The Mei Moses Art Index, co-founded by Michael Moses, tracks art values over time. The overall index declined 4.8 per cent last year. But this year, art prices have fallen 35 per cent in the first quarter alone.
That’s bad news for collectors and some universities, such as Brandeis University in Waltham, MA. Many universities own valuable art collections and some are inclined to offset losses in other areas by liquidating those assets. Brandeis decided to convert its on-campus Rose Museum into a student art center and divest some of its high priced paintings. Only with values down, now is not a very favorable time to sell.
The worst year on record for art investors was 1991, when prices dropped 41 per cent, said Mr Moses, who has collected data going back to the 1800s. Since that time the art market has tended to reflect the state of the overall economy.
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Posted on Sat, Apr 04, 2009
At the site of the G20 Summit, the Financial Times of London reports that “Scattered signs of green shoots in the global economy are raising hopes that the recession could bottom out later this year, paving the way for economic recovery in 2010.”
However, the signs remain tentative. Economists warn that recessions rarely proceed in straight lines and false dawns are common before recovery finally takes hold.
Surveys of business sentiment round the world, particularly in the manufacturing sector, suggest conditions are less bad than they were a few months ago although still bad by historical standards.
In the US, economists point to surprisingly solid retail sales, which suggest consumer spending grew by more than 1 per cent in the first quarter. US home sales look to be bottoming, although house prices remain in rapid decline at least on some measures.
Gordon Brown, UK prime minister, host of the summit, said the meeting marked the emergence of a “new world order”, as he unveiled what leaders claimed was a $1,100bn package of measures to tackle the global downturn, including support for lower income countries and a $250bn plan to boost the international money supply.
The G20 agreed to allow the IMF to create $250bn of Special Drawing Rights, its own currency, comprising dollars, euros, yen and sterling, boosting the foreign exchange reserves of every country. Most of this will go to the big economies, but poorer countries facing budgetary strains will gain new cash.
World leaders also agreed to boost trade finance in a package that Mr Brown said over two years could facilitate an additional $250bn of trade.
In China, the official purchasing manager’s index moved back into positive territory in March, provoking lavish celebrations among officials under instructions to be optimistic.
A million German consumers have taken up the offer of a €2,500 incentive to trade in old cars for new, more fuel efficient vehicles, providing a strong, if short-lived, boost to output.
Even in Japan, where the latest Tankan survey showed a big decline in sentiment to a record low, there are some hopes the world economy may be some way through an inventory correction that began in the fourth quarter of 2008.
“I am seeing green shoots,” says Jan Hatzius, chief US economist at Goldman Sachs. “Not in terms of the current quarter but in terms of the prospects for a quarter or two down the road.”
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