-
Are Lower Prices Encouraging People to Spend?
It is time for savers to pay more attention to prices. That assumes savers are still interested in saving, but frustrated with ever lower interest rates.
In a depressed economy like we have in the United States, low interest rates should increase borrowing, spending and then jobs.
It should, but it may not. For example, low interest rates may encourage existing home owners to refinance at lower interest rates rather than encouraging those who are renting to buy a new house. In the case of refinancing, there will be few jobs created; in the case of a new house there will be construction jobs.
Those who refinance and save with lower monthly payments have more money to spend which might add to new spending. I say might because lower interest rates mean lower earnings for savers, which will cut their income and discourage spending as well as saving.
Right now, lower interest rates are not generating much spending, just lots of talking and proposing.
Low interest rates need to finance borrowing where something actually happens like building a new factory or a new house. Lending transactions that generates more schemes to buy low and sell high will not generate jobs.
Low interest rates are only one potential change that can help revive spending. Lower prices on goods and services can do that as well.
Just as lower interest rates can put people to work, lower prices get people to buy more, which means more work, more production of goods and services, followed by more jobs and more income.
Lower prices also translate into personal savings. Low gas prices help us save as individuals, but also generate mass savings that supports spending in other sectors.
There is other regular and discretionary buying that has potential for savings. Try the grocery store where savings on week-in and week-out buying can easily translate into four figure savings over a year. I never buy cereal, chips, crackers, or most prepared food unless it's on sale.
Yesterday, the local grocery had an end of aisle display announcing chips at 2 for $7. Chips on sale are supposed to be 2 for $5, but worse I took a bag down to check the size and found 10.5 ounces instead of 11.5.
I walked away, which we all realize is a tiny gesture in a mass market, but I still have my $7 bucks. In a computer age, the wholesalers back at the warehouse know exactly what the larger market thinks of their new price.
If others pay more attention to pricing and show more resistance, it will translate into price cuts and personal savings. We can also realistically hope it will work to revive our declining economy.
Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com
-
Is Tracking Your Spending as Good as Budgeting?
Can you hit your financial goals without budgeting your spending each month? What about if you're tracking every penny you spend, but not setting aside certain amounts for each category?
For the past year or so, we've been tracking all of our purchases to find how much we are totalling at the end of the month, but not planning out how much we will spend for groceries, entertainment, and other expenses that fluctuate month-by-month.
Since we're automatically setting aside money for our retirement and short-term goals, we know we're saving — and pretty aggressively, too.
But would it be better to establish budgets for the expenses that change every month?
This month, we're trying it. (We used to do this when we first started saving money, but stopped after a while).
The past few months have been a bit expensive — our out-gos have been higher than our incomes. But since we treat savings as expenses, we're basically moving money from our cushion into savings.
Our paycheck to paycheck mentality makes our checking account levels relatively low, but this forces us to really watch what we spend.
What do you think: If you're automatically set to save money, is tracking your spending as good as budgeting?
-
Instead of Spending, Sock That Cyber Money Away
One of the first things you should do after you get a raise at work or pay off a recurring debt is to continue to live at your existing levels.
Don't take that 'extra' money you now have and start to live larger. Instead, automatically transfer it to a savings account and watch your net worth grow.
Rather than accumulating extra stuff, you're increasing your savings without cutting back on your lifestyle. It's a win-win situation.
Today, on Cyber Monday, do the same thing. Instead of buying something you see online, take the price of the product and transfer that amount to your online savings account.
Spending money isn't bad. But wouldn't you rather spend money on yourself than on having more stuff?
The best gift you can give yourself is financial comfort. Today, make it happen.
-
The Violent Demise of the U.S. Dollar
"Your premium brand had better be delivering something special, or it's not going to get the business." — Warren Buffett
The U.S. Dollar is the premium brand of currency in the world. It's the standard against which all other currencies are measured and it's where the money goes when people want rock-solid security.
This has been true for decades, but in the last 35 years, the U.S. has gone from the largest creditor nation to the largest debtor. Our twin deficits combined with artificially low interest rates have left us with a $10 trillion national debt — $50 trillion if entitlement programs are included, as they should be.
We haven't been spending the money on factories or production. Instead we've been buying houses, cars, HDTV's, playing world cop, and dramatically overpaying for health care.
To put it bluntly, we are broke, both as a nation and as a set of individuals. The dirty secret is that our lifestyle of the last 20 years is unsustainable.
Why Saving, Not Spending is the Key
To fix this mess we've made, we need to tighten our belts and start saving money rather than borrowing to spend. That goes both for individuals and the government. In addition, we need to focus on producing goods that can be exported to other nations so that we can get money flowing back into this country rather than out of it.
Unfortunately, the government is determined to sustain consumption epidemic. Certainly consumption brings short-term pain relief, but it just makes the long-term imbalance worse, similar to giving a crack addict more crack to avoid withdrawal.
People keep saying the the bailouts will be paid for by our children, but the truth is that we'll have to pay the price ourselves. If the government continues its spending spree, which is even more likely now that we'll have a unified government of Democrats, inflation risk is very real.
Standard & Poor has already stated that the U.S. is at risk of losing its AAA bond rating.
If the dollar devaluation prediction comes true, the new financial capital of the world will be Asia. Asian countries have been effectively taxing themselves to subsidize U.S. consumption by buying and holding our bonds and thereby keeping our currency valuable.
If the U.S. economy collapses, Asia will decouple and begin to flourish on its own. They will be in excellent position with industrialized production, steady growth, and plenty of reserve savings.
What Happens if the Dollar Falls Apart?
If the U.S. dollar declined to 1/2, 1/4 or even 1/10th of its current value, chaos would ensue and a great number of people would be in deep trouble, especially retirees.
Are you prepared for such a contingency? Any bonds you hold would decline in value significantly, as would any cash.
According to the government numbers, inflation was around 4% this year, which means that any cash you had in a high-interest savings account has actually been declining in value at 1% rather than increasing by 3%.
If we're headed for dollar deflation, as some say, then it's a good idea to keep your cash. If you believe the inflation scenario, then you should buy some commodities such as gold. Or of course you could hedge your position and buy some gold while also keeping some cash on hand.
If you do decide to buy gold, it's a good idea to avoid futures and stick with real, physical gold or a fund that holds physical gold to avoid counterparty risk of the futures not being delivered.
If you want to take more risk and attempt to profit off the possibility of a falling dollar rather than simply maintaining your wealth, buy mining companies rather than physical gold, but still don't buy futures.
As for equities, Asia is a solid long-term investment but it will suffer in the short term along with the rest of the world.
-
How Many Funds Do You Have?
An open question to everyone to start off the week: how many funds do you have?
In funds, we're talking about savings, not mutual funds. Examples:
- car
- emergency
- college
- retirement
- house
- vacation
- PlayStation
I'll start off. In our savings onion, we currently have 5 funds:
- Emergency
- Housing
- Roth IRA (2)
- 401(k)
We used to have a car fund, but we got rid of that when we bought a car! (More on that soon.)
How many funds do you have? Tell us in a comment below.
-
Guess What? The Bailout's a Bad Deal For You
I have talked with many people about last week's bailout and they are all angry.
Some that I have talked with were complete strangers who started ranting and raving at the newsstand and several at my neighborhood library. In my unscientific poll it is unanimous: everyone regards the bailout plan as a payoff to politically connected cronies who caused the defaults.
Many recognize there are better alternative plans.
Where Abuse is Likely…
For the federal government to buy the current defaulted mortgage-backed securities has enormous potential for abuse. Salomon Brothers got the idea to bundle home mortgages together and re-sell them as bonds back in the 1980's.
They call these bonds various things like collateralized debt obligations or mortgage backed securities, but they are not the same as bonds at all.
For example, if I buy a $10,000 municipal bond at 5 percent for a term of 10 years, I get $250 every six months and after 10 years I get my $10,000 back.
If I need money before the 10-year term is up, I can sell my bond. If the interest rate is up I will have to accept less than $10,000 because potential buyers know they can earn 6 percent instead of 5.
To sell my bond, I will have to discount the price so that $250 twice a year will earn a 6 percent yield. If I sell after 5 years with a 6 percent interest rate, then $250 twice a year and a $10,000 final payout will sell at $9,573.*
… Don't Be Surprised When It Happens
A home mortgage all by itself is like a bond because it has known payment and maturity dates, which make it possible to determine the yield at any time. Mortgage-backed securities are many mortgages all bundled together as a lump sum and then divided into smaller but different parts to be resold to investors.
Trouble is the underlying mortgage holders can prepay at anytime and for investors who have mortgage-backed securities that contain many mortgages there is no way to know when prepayments will come.
Mortgage-backed securities were marketed by selling them at a discount over the total of their final payout. It is just that the date of the final payout could not be specified. Without a known maturity date or a known number of payments, a yield cannot be determined, but only guessed at as a gamble.
Any transaction of these securities will be a negotiation between sellers who do not know for sure what they are selling and a government that does not know for sure what it is buying. It is a situation ripe for cronyism and abuse.
Congress has the authority to ban the use of securities without a known yield, instead they did nothing but decide to buy them. It looks like a bad deal for savers and taxpayers.
*[Computations are Excel functions YIELD("1/1/2004","1/1/2009",0.05,95.735,100,2,1) also FV(0.06/2,10,250,-9573.5,0)]
Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com
-
Price Fixing is Legal: Why It Matters
Savers should beware that the U.S. Supreme Court recently reversed earlier Anti-Trust rulings preventing price fixing.
Under new rules established a year ago, manufacturers are now allowed to fix minimum prices for resale of their products and coerce retailers to stop discounts by cutting off supplies and refusing to sell to them. The practice is called Resale Price Maintenance and can be expensive for savers.
A recent Wall Street Journal article, Price-Fixing Makes Comeback After Supreme Court Ruling, quotes from the Court's ruling that Resale Price Maintenance "could foster competition by giving retailers enough profit to promote a brand or offer better service." In the ruling the phrase "giving retailers enough profit" suggests that retailers should be happy with the decision.
The article quotes many retailers and all of them detest resale price maintenance because it hurts their business. Higher prices definitely hurt consumers.
A discount retailer of baby products was quoted as saying that it "prices a baby car seat made by Britax, the Boulevard Convertible, at $309.99, the manufacturer's minimum. If he didn't, Britax would cut off the supply of a popular product." The retailer is also quoted as saying he could sell the seat of $229 and still make a $50 profit.
However, there is previous experience with Retail Price Maintenance because Congress passed a Fair Trade Act in the 1930s that permitted states to craft their own Resale Price Maintenance. Experience shows it goes with branded products, especially apparel, shoes, consumer electronics and home furnishings and it will raise prices for brand name products.
Savers can save by avoiding brand loyalty and concentrating on price and finding store brands or generic labels.
If the practice catches on, experience shows that retail outlets that go along with resale price maintenance for branded products have a drop in sales at the higher price. Their drop in sales gives them incentive to resell their surplus supplies in the wholesale market to other retailers, especially discount retailers.
Some years back, reselling took place in the designer jeans market where designers were trying to maintain their image with a high price. Jeans were resold as "bootlegged" products to discount retailers. Since the only way for manufacturers to enforce their restrictions is to cut off supplies, it was hard for them to know where the "bootlegged" supplies were coming from and therefore who to cut off.
The courts' ruling is anti-competitive despite the suggestion it could "foster competition." Free enterprise includes the freedom to set price at all levels of the marketing chain. Competition includes price cutting and allows for new entrants who attract customers with a lower price. We suspect that the court has underestimated the power of competition.
In the meantime, take care before you buy and ask yourself if a brand name is really worth it.
Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com
-
A Book for Savers: High Wire
Savers might be interested in a new book by Peter Gosselin titled High Wire: The Precarious Financial Lives of American Families, which is a journalistic collection of essays with a common theme: America has growing economic risk and personal insecurity to go with its economic growth.
Chapters cover a selection of the new risks by using individual interviews and case studies as examples of the growing threats to personal finance.
Topics feature private sector issues that have slowly evolved through changes in practices and attitudes, especially the attitude that Americans should fend for themselves. As Gosselin notes, changes tend to take place without notice or public debate. Instead, changes come as a surprise to people who think they have something — career, pension, insurance — when they do not.
Chapters on insurance use material from interviews to illustrate the new methods and practices insurers are using to limit coverage and shift losses and risks to individuals. A chapter titled "Benefits" covers employee pension issues. A chapter titled "Housing" is about the new limits on home owners insurance. The chapter titled "Health" is about private health insurance.
Insurance is supposed to pool the random risks of many to reduce personal risk. Trouble is people who lose their jobs apply for health insurance in mid life, or later, when they are more likely to get sick, or be sick with pre-existing conditions like diabetes and heart disease.
As Gosselin explains, the circumstance of private insurance gives the companies every incentive to insure the young and healthy, and lower their risk of big payouts by avoiding the others. Gosselin does an admirable job documenting the practices and shortcomings of private health insurance and the need for a national risk pool.
The chapters on employee benefits, insurance and retirement accounts have self help and buyer beware information that makes them useful as part of personal finance. Other chapters on jobs and education have less self help information, but interviews illustrate a variety of risks of layoffs, displacement and unemployment for people from a variety of educational backgrounds and managerial, skilled and unskilled occupations.
The book is not just about politics and current events it covers personal finance issues that provide useful ideas to act on. It is quite flexible because chapters can be read in any order, or read some and skip others depending on interest. Careful readers will want to look over the insurance policies, health benefits and retirement accounts. It is a book for savers.
Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com
-
3 Steps to Determining Your Financial Goals
ING Direct has a great feature on their site about establishing your financial goals and how to get there.
Their three steps:
- Get it down on paper
- The long, medium, and short of it
- How much are my dreams likely to cost?
If you don't have access to an ING Direct account (get started with $25 free), here's the extended version of the plan.
Step 1 — Get it down on paper
The first step in planning a trip is to know exactly where you’re going. The same is true for your financial plans. With a specific plan, you can stop drifting along and start driving.Step 2 — The long, medium, and short of it
As you make your list of goals, you need to think about when you will want to achieve them:* Short-term goals (1-3 years), such as paying off debt or renovating your house
* Medium-term goals (4-10 years), such as saving enough for a down payment on a house, or building your IRA, 529 college savings plans, and other tax-deferred accounts
* Long-term goals (10+ years), such as paying for your toddler’s college education or retiring comfortably
Remember: No goal is short-, medium-, or long-term by definition. Retirement might be a long-term goal if you’re 30, but a short-term goal if you’re 65. A college education might be a long-term goal for a toddler, but a short-term one for a teenager. The more specific your time frame, the more you’ll want to make sure you have money available when you need it.
Step 3 — How much are my dreams likely to cost?
If you don’t know what each of your goals will cost, you’ll need to do a little research. Ballpark numbers are fine. For goals that are more than a few years away, inflation is worth thinking about. Historically, inflation has averaged about 3% per year. At that rate, a home renovation that costs $30,000 today will cost about $35,000 in five years and about $40,000 in ten. Getting the best rate you can for your savings can help you keep the value of your money where it should be.Never too soon
Of all the goals you set for yourself, preparing for a comfortable and satisfying retirement should be a priority. Studies show that average US households are saving enough to replace less than 60% of their pre-retirement income during retirement. But most experts agree that you’ll need about 85% of your pre-retirement income for a comfortable retirement. Saving now (rather than putting it off till later) can make the difference between just dreaming about retirement and having the retirement of your dreams. -
12 Ways to Save for a Down Payment on a House
We've been saving pretty aggresively to build up a down payment for a house, as hard as it may be.
Thankfully, our automated finances force us to put the money away, so we don't have to wait until the end of the month to see what we have left over to contribute.
MSN Money has a new article up, "How to come up with a down payment," that offers 12 ways to save money for house purchase.
- Set up an automatic saving plan.
- Get a gift from your parents, grandparents, other relatives or friends.
- Sell a car, boat, motorcycle, collectibles or other assets.
- Liquidate stocks, mutual funds, savings bonds or other investments.
- Allocate your income tax refund.
- Take a loan from your 401(k) retirement plan and repay yourself with interest.
- Withdraw funds from your 401(k) plan, subject to taxes and penalties.
- Collect on a loan that you made to someone else.
- Get a bonus from your employer.
- Explore homebuyer programs for public servants if you qualify.
- Apply for a state or local government down-payment program.
- Use a private down-payment assistance program.
While some of these make great sense — an automatic savings plan, setting aside a bonus and allocating your income tax refund — do they really expect someone looking for a downpayment to have a boat to sell?
I'd also warn against taking money from your 401(k); not only will you have to pay taxes or interest on what you take out, but you'll be losing out on any compound interest you'd otherwise be making.
What tips do you have for saving for a down payment?
Online Savings Blog
search
latest posts
- Moving On
- What Are Your 2009 Personal Finance Goals?
- Should We Have Been Investing in the Country, Instead?
- E-Trade Complete Savings Account Falls to 3.01% APY
- ING Electric Orange Drops to 0.5% APY
- With Fed Rate Cuts, Prepare for Savings Dips
- Where Do You Manage Your Money Online?
latest comments
- doctor S commented on 10 Ways to Immediately Start Saving Money
- Bobbi commented on What Are Your 2009 Personal Finance Goals?
- complete savings commented on Should We Have Been Investing in the Country, Instead?
- Shak commented on Where Do You Manage Your Money Online?
- Marcus commented on Are Your Parents Worried About Your Online Banking?
tags
apy carnival carnival of personal finance Consumerism economy finances hsbc direct ing direct investing links Money Money Management money saving links Online Banking online savings account saving savings spending Taxes WorkMarketplace
social
Copyright
Copyright © 2008 by Online Savings Blog. All rights reserved.Designed by Upstart Blogger.
