Patience Is Key During The Current Unsettling Times

As the economy falters, prices are falling on just about everything. A house that you couldn’t buy for $250,000 two years ago may sell for less than $175,000 today. New vehicles that were selling rapidly a year ago are now sitting unsold in spite of huge discounts, cash back offers and low or no interest financing.

We are in a recessionary period unlike any we’ve experienced since the Great Depression. In April 2000 we entered a recession that was due to the bursting of the dot.com bubble, which lasted about 18 months. In the early 1990s we experienced a brief recession that saw industrial production and manufacturing-trade decreases, but it lasted less than a year. The longest downturn since the Great Depression occurred during the early 1980s, and lasted for two and a half years. Its primary cause was the uncertainty of the cost and supply of oil following the Iranian Revolution; especially since it came so soon after the oil crisis of 1973 when OPEC quadrupled the price of oil.

I could go back even earlier and discuss the recessions of 1957, 1953 and 1947, which all followed the Great Depression, but none of these impacted all segments of the economy like what we are now experiencing. Of the 14 airline bankruptcy filings since 2002, five of them occurred this year. FDIC insured banks are failing left and right. In addition, some of the country’s largest banks and brokerage firms are teetering on the brink of failure and only being kept on life support with trillions of taxpayer dollars.

Oh! Let’s not forget the housing industry, which is blamed for starting it all and the Wall Street gurus who manipulated financing markets to create the huge real estate bubble that burst with devastating effects. Everyone from builders to lenders, Realtors, suppliers and millions of homeowners has been devastated by the collapse. Foreclosures and price declines are both at their highest levels since the Great Depression and are only getting worse. Speculative home building has virtually stopped. Carpenters, plumbers, electricians, and other trades people are out of work.

The cumulative effect of this recession/depression on the US economy is still not known. Conventional wisdom says that increasing the money supply will pull the economic wagon out of the ditch; however there is only so much that monetary policy can do to correct poor fiscal policy. As I’ve said many times, you can’t borrow your way to prosperity, but as a nation, that’s exactly what we’ve been trying to do. We’ve been living on borrowed money for decades and now the federal government is compounding the problem with $ trillions more in additional debt as it tries to prop up the faltering economy. As Pete Seeger wrote in the 1960s song Where Have All The Flowers Gone, “When will they ever learn?”

Can you imagine what would happen to a family if they tried to use debt to keep living above their means? The growing interest expense would gradually choke their ability to maintain their standard of living. In order to avoid bankruptcy, they would have to stop spending so much, reduce their standard of living and start paying down their debts. Sure it would be painful, but when you’re trying to get out of a hole, the first thing you need to do is stop digging. It doesn’t take a rocket scientist to figure this out. Why can’t elected officials understand this? Anyone with an ounce of common sense knows that you can’t continue borrowing forever. Eventually, the debt has to be repaid and the longer you wait and the larger it grows the more bitter the pill you will have to swallow to do it.

Here’s a tip! During these unsettling times, the best course of action is to tighten your belt, reduce debt, increase savings and get your financial house in order if you expect to weather the economic storm. Falling prices may sound good, but rising unemployment is also occurring and this could lead to falling wages and more economic panic.

Almost everyone agrees this major economic downturn isn’t nearly over. If that’s the case, the more cash you have, and the less you owe, the better you will be able to survive it. The worst thing you could do during these times is to go out and spend money you don’t have, buying things you don’t need, just because prices have fallen. Don’t be sucked in by the sales hype that merchants use to get people to overspend. You’ll be much better off if you have the patience to wait until the economy stabilizes. In the mean time, commit yourself to buying only those things that are necessities.

We are navigating uncharted waters. The US debt stands at unprecedented levels and is rising. No one knows what impact this debt might have on efforts to stimulate the economy. If there was ever a time to err on the side of caution, it is now. Force yourself to live on a balanced budget, start saving; and hope your income is not interrupted by layoff or outright job loss. While unemployment may not reach 25% as it did in the Great Depression, there’s no doubt it will continue to rise for the foreseeable future. It’s time to let patience prevail!

Adapted from original text for article for Asheville Citizen-Times, 50th week of 2008.

Current Conditions Dictate Lifestyle Changes For Many

According to a recent study by Ernst & Young LLP, nearly three out of five middle class retirees will outlive their financial assets. The report, conducted on behalf of Americans for Secure Retirement, found that of those who have only Social Security as a guaranteed retirement income, over 90 percent will outlive their financial assets. That’s a frightening statistic for Baby Boomers who are now beginning to retire.

In the 1970s and early 1980s, on average, American saved about 10 percent of their income. Beginning in the mid 1980s the saving rate began a slow decline that dipped into the negative by 2005. The 2006 savings rate continued the negative trend and produced back-to-back years of negative savings for the first time since the Great Depression. During this period, our standard of living has been soaring, but at what cost? Has this better lifestyle been the result of a growing economy or because we are spending money we used to save?

Spending more than one earns is like a farmer eating his seed corn. When planting season comes back around and he has nothing to plant, he has to turn to others for help. Today, more and more people and industries are turning to the government for help. The problem is, the only way government can help one person is to take from another. The more government takes from people who produce the less incentive they have to keep producing. It’s a vicious cycle where the more government helps, the more they have to take in order to do so.

This may sound a bit crass, but getting from birth to death has a cost to it. That’s a fact of life. What we spend today pays for the days from birth up until the present. It’s what we save and invest today that pays for the days from death back toward the present. When investments are sufficient to provide for the rest of your life, you can retire and not have to work and earn anymore. That doesn’t mean you can’t work if you want to, it just means that when you get up each morning, you get to choose what you will do and not be forced to do what someone else wants so you can earn a living. It’s called financial independence.

A recent story that was broadcast on ABC’s Good Morning America pointed out that on average; retiring Boomers are going to have to reduce their standard of living by at least 25 percent in order to keep from outliving their assets. When I heard that story, I couldn’t help but think about the impact the Baby Boom Generation has had on politics for the past thirty years. It brought back memories of President Gerald Ford saying, “A government big enough to do everything for you is big enough to take everything from you.” When Boomers start having to reduce their standard of living and workers begin feeling the bite the growing number of retirees will put on government, it may produce some significant and hard fought political changes.

As a nation, we have grown fat and lazy. An economy propped up with trillions of dollars of debt can only expand so much before it becomes top heavy and topples. Many factors are in play that could change the way we live forever. Real estate sales are in the tank, oil prices are soaring and the economy is growing increasingly sluggish. T. Boone Pickens is absolutely correct when he says we are seeing the greatest transfer of wealth in the history of mankind.

We send hard earned dollars to other countries to buy oil to make our lives more comfortable. The countries that sell us the oil get our hard earned dollars, but once we consume the oil, we are left with nothing but a craving for more. It’s a disaster looking for a place to happen. We have become a nation addicted to a standard of living we can’t support and we currently lack the will make changes unless they are forced upon us.

President Ford’s focus on long term economic growth was to put more resources toward saving and investments, the crux of long term growth, and less toward consumption. Congress didn’t allow that to happen. Consumption spending ballooned in both the private sector and government programs and gave us a false sense of economic prosperity. Now we are about to get a dose of reality. Unless we are willing to rein in consumption, become more frugal with our money and start planning for the future, we’re going to be in big trouble. As I said earlier, what we spend today pays for today. What we save and invest pays for tomorrow.

All signs point to tougher times ahead for the economy. The real estate crisis is far from over, government economic stimulus checks have done little other than add to the public debt and inflation is beginning to rear its ugly head. About the only good news, is bad news for many consumers, credit is becoming harder to obtain.

Here’s a tip! Unless you’re independently wealthy, you may want to start making some lifestyle adjustments. Look for little ways you trim expenses; eat out less, car pool, keep the house or apartment cooler, stay out of the stores unless you actually need something and then buy only what you need when you do go. Little cuts here and there can add up to a big saving. Whatever you do, don’t add to your credit card balances.

Current economic conditions will eventually improve, but until they do, don’t keep living like things are still booming. They aren’t! We are entering times when a little common sense and frugality can go a long way.

Original text from article for Asheville Citizen-Times, 31st week of 2008

Debt Settlement Can Be A Blessing Or A Curse

An unfortunate outcome of the current economic downturn is the growing number of people facing debts they can’t pay. This has spawned a wave of advertising from companies who claim they can negotiate debt settlements for pennies on the dollar and help you avoid bankruptcy. Of course, it comes with a fee for their services. What the ads don’t disclose are the negative consequences of entering into debt settlement agreements. Your credit will be affected, but not as severely as it would be if you are forced to file bankruptcy. Think of it as the lesser of two evils.

If you are buried in debt and thinking of contacting one of the debt settlement companies, the first thing you should do is analyze how you got in financial trouble. If you got there by simply overspending until you exhausted your ability to borrow, you are not going to be a good candidate for debt settlement unless you can change the way you live. Debt settlement is for people who want to pay their bills, but have experienced unexpected hardships that have negatively impacted their ability to pay.

These are people who, prior to some unfortunate situation such as an accident, illness, job loss, divorce or other unforeseen event, were in good standing with their creditors. They want to get back to that position. They are people who are unable, not unwilling, to meet their financial obligations. Unfortunately, debt settlement is a largely unregulated industry that has attracted some unscrupulous players who prey on vulnerable individuals. It does little good to sign on with a debt settlement company if undisclosed fees and charges end up costing you more than they save.

With consumer debt approaching $3 trillion, coupled with a sagging economy, the number of people in trouble is growing exponentially. The failure of our educational system to teach basic financial literacy leaves millions of people facing financial hardship with little or no knowledge of how to overcome the problem. Unfortunately, these are frequently people who fall into the lower to middle income bracket and have few assets to draw against when faced with unexpected financial adversity. It is this combination of circumstances that make them vulnerable to unscrupulous practices.

For those experiencing severe financial hardship, debt settlement can provide a better alternative than debt consolidation loans, bankruptcy, or trying to hide from creditors. For people willing to make the needed sacrifices, legitimate debt settlement companies provide the financial advice and advocacy needed to negotiate plans to reconcile debt, improve income to debt ratios and help you gain control over the process of getting out of debt.

If you are facing mounting debts and are considering calling a debt settlement company, here are some things to consider:

1. You must be committed to reducing your spending so you can save money to fund a settlement agreement.
2. You must understand that the results of a debt settlement can’t be guaranteed.
3. You should never allow a debt settlement company to escrow your money on the pretense that they will pay your bills.
4. You should know that the IRS classifies any amount of settled debt in excess of $600 as taxable income.
5. Your creditors, especially if they are lending institutions, may exercise their right of offset and seize any deposits you have with them to apply to your debt.
6. Creditors may continue to call you even after you have entered into a debt settlement agreement.
7. A debt settlement agreement will probably have a negative impact on your credit score and credit bureaus may still report “Settled for less than full amount” even after paying settlements in full.
8. You should always make sure the debt settlement company is working solely for you and not any third parties, and is fully disclosing all fees and charges up front.
9. Before even considering a debt settlement company, you should review your finances and determine if you can afford to fund a program based on your expected income and expenses.
10. Finally, if you feel you are a candidate for debt settlement, be sure the company you chose has written policies and procedures about their debt settlement program, are members of the Better Business Bureau, have a customer dispute resolution and review policy and in-house legal counsel that has experience with credit industry compliance.

Here’s a tip! If you follow these guidelines, you may be able to resolve your credit problems and get yourself back in good graces with your creditors and start improving your credit rating. Once you are back on your feet, let the experience be a lesson and start planning for the next unexpected financial setback which will surly come. It won’t hurt nearly as much if you are prepared.

Original text from article for Asheville Citizen-Times, 45th week of 2008