Archive for January, 2009

There’s no doubt that 2008 presented a plethora of financial challenges to companies around the world in a way we haven’t seen in a very long time. The residual effects of those problems that could no longer be quietly and effectively dealt with in the corporate boardroom came crashing down into the living rooms of folks just like you and me. And sadly, many of us just weren’t prepared. It’s very difficult to find anyone unaffected by the economic downturn of 2008 — often affected in some very significant way. Whether it be loss of a job, increased healthcare expenses, foreclosure of their home or the slaughtering of the value of their home or retirement plans — most of us were hit and hit hard.

2008 was chock full of financial events that left almost all of us concerned about our financial future. Depending on the seat you hold, your view may be slightly different, but here are my top 5 financial events for 2008.

1. Retirement Accounts Slashed. I could talk about Bear Stearns, Lehman Brothers, the federal takeover of Fannie Mae and Freddie Mac or even the proposed auto bailout, but for people like you and me, the reality that hit us was that our retirement accounts were slashed in half or perhaps even worse. Wall Street closed out with the worst year since the Depression. No one can deny that 2008 was a dreadful year for the stock market and for consumer pocketbooks. Their retirement savings (401k) dwindled to an all-time low, with the DOW dropping 33.8 percent, the S & P 38.5 percent and Nasdaq 40.5 percent.
2. The Real Estate Crash. If you owned a home, chances are you were affected by this in one way or another. If you were lucky, you sat there watching the value of your home drop, but you continued to be able to make your payments and live in the place that you called home. For those not so lucky, they were upside-down on their mortgages, owing more money than their home was worth. They were making interest-only payments on an Adjustable Rate Mortgage (ARM) that they can no longer afford, and they either have lost their home or might be close to it. Real estate experts predict that it’s going to get worse before it gets better and that it will indeed take years for home values to recover.
3. Unemployment. If you haven’t lost your job, I’d bet that you know someone that has. 2008 was a terrible year not only to find a job but to keep the one that you’ve had for years.
4. Credit Crisis. Credit became scarce, with banks not even lending to other banks. Small businesses struggled to get the credit that they needed and normally were able to get without issue. Consumer credit lines were lowered, interest rates hiked, and unless your credit was perfect, lenders weren’t willing to lend.
5. Energy Crisis. I’ll admit that I am not a gas price watcher. Yet, it’s incredibly difficult to look at 2008 and not feel obliged to add the high cost of energy to the list of my top five financial events for 2008. While I don’t know exactly what you paid at the pump in your neck of the woods, I paid well over $4.00 per gallon. And it wasn’t just the cost of gasoline that skyrocketed — energy costs associated with home heating did too, leaving many in quite a tight spot that they won’t forget anytime soon.

Fair Isaac Corp., the company behind the FICO credit score, has launched a new product for banks and credit card companies that might make it easier (and cheaper) for you to get your credit score more regularly. It’s called FICO “Scores on Statements,” and it allows banks that pay for the service to offer monthly updated credit scores on their online bank statements — with some customers perhaps getting them for free (depending on the bank).

So far, Pennsylvania State Employees Credit Union, Washington Mutual (which is being acquired by J.P. Morgan Chase), and the Sears Solution MasterCard, issued by HSBC, are part of the program, and their customers can get their FICO score free. Also included with the score are the top reasons why the score is what it is, and how they may improve the scores (that’s Fair Isaac’s language, not ours).

This may be a service to look out for if you’re in the phase of life where you’ll be making a lot of major credit purchases, such as a home, auto, or large appliance. The higher your FICO credit score, the less you pay in interest. There is also plenty of information about credit scores online, if you want to learn more about credit.

It’s hard to believe where gas prices are right now, compared to where they were just six months ago. With the recession in full swing, though, you need to enjoy those lower prices while they last.

While prices in certain parts of the country have dropped as much as 60% since last summer, try drawing a parallel with your allegiance to a particular sports team: If you’re superstitious and your team has disappointed you before, logic dictates that they’ll let you down again. As with so many other aspects of the American economy struggling right now, being cautiously optimistic about fuel costs is probably your best bet. And if you want to feel even more fortunate about fuel costs, remember that they’re dealing with much higher prices over in Europe. (It’s easy to forget that this is a global recession we’re in.)

Even if you’ve been enjoying watching fuel prices drop, don’t get too used to it. The prices at the pump today or next week — or even next month — only tell part of the overall story. As oil prices dropped more than $100 per barrel in six months, remember that those low costs have a lot to do with a weak demand for oil and refinery products. While many experts feel that the low demand could last for at least half of 2009, the past year clearly showed us that predictions and expectations can’t always be trusted, no matter who makes them.

For now, try to find some comfort in paying less at the pump. And if you’re still driving a car that eats a lot of gas, start thinking about a more fuel-efficient alternative; you may just need it in the months to come.

As we hear reports of how the delivery of the second $350 billion installment to the American auto industry will actually have strings attached (will wonders ever cease?), I’m still left wondering when homeowners ⎯ those who were complicit with lenders about fudging their income or not savvy enough to recognize the risks of interest-rate resets on sub-prime adjustable rate mortgages (ARMs) ⎯ will get some relief. It was, after all, the abuse of traditional sub-prime lending standards that triggered a global credit crisis.

The Federal Reserve has driven down home mortgage rates to record lows (5.10% on a 30-year fixed mortgage at time of publication), and yes, it’s spurred some refinancing, but lower rates aren’t going to do much for those holding ARMs that reset to an index plus an extra three to five points. And for anyone who bought their home within the past five years, at the market’s peak, they can’t even qualify to refinance because plunging real estate values mean they owe more than their home is worth.

Low refinance rates are really just helping those homeowners who bought their homes well before the credit crisis of 2007 and face no imminent foreclosure threat.

Most sub-prime ARM-holders who bought their homes since 2004 won’t qualify for a refinance, based on these typical requirements:

• At least 20% equity in your home
• A credit score above 700
• A mortgage debt-to-income ratio of less than 36%

Low mortgage rates aside, the federal government has patched together a medley of programs that together are expected to help about a million homeowners:

• The Federal Housing Administration’s Hope for Homeowners program, which failed to ignite enthusiasm by lenders interested in participating
• The Hope Now program, created by the federal government, lenders and nonprofit groups to help borrowers who have already missed payments but haven’t yet filed for bankruptcy
• Individual programs created by major retail banks to help borrowers
• The FDIC’s program for IndyMac borrowers

Do you think our leadership has failed to adequately address the mortgage crisis?

Even as the auto industry experiences its worst overall sales figures in decades, there are still some of us out there who need and want to buy cars.

But with overall cash flow hard to come by (and the usual structure of auto loans hampered), it might be time to think about other buying options. As always, do your research, and keep your budget constraints in mind. But before you try purchasing a brand-new, fully-loaded “gas guzzler” (remember that summer 2008 saw gas prices soar over $5.00 per gallon in some areas) or consider springing for a sportier car that will only drop in value the moment you drive out of the lot, why not give a used car a try? One look around the auto industry suggests that many auto dealerships are already thinking in those terms.

As you begin your search, start by believing that today’s cars are built to last; the old joke about “driving a car until its wheels fall off” has never been more important than right now. Many car dealerships are just as desperate for business as the rest of us are to keep our overall budgets balanced. And one look around today’s auto showrooms and lots will tell you all you need to know about current supply and demand.

Sure, we’re all a little tired of listening about today’s troubled economy, but that’s why you’ve got to consider changing gears. If you need a car, try thinking out of the box. Right now, there are many online car shopping tools designed to help you find deals on cars no matter where you live.

So while we all wait to see what happens next with the auto industry, a little flexibility can increase your current buying options.

There’s an old brown winter coat I own. Nothing remarkable, just brown wool with brown collar and cuffs, slightly longer than waist length. I’ve owned it so long I’ve forgotten where I bought it or what I paid. It’s what I call my knock-around coat, the one I grab as I’m running out the door to shovel snow, walk the dog or meet up with a friend.

Most of us can think of times when we really got our money’s worth out of purchases we made. You know, squeezing out every last drop of possible use and then some. For me, besides my old brown coat, that would be my first 10-speed Schwinn bicycle, a 20-year-old Eureka canister vacuum cleaner (repaired countless times) and a few pilled, fuzzy sweaters that long ago stopped being presentable for wear anywhere but home.

And then, of course, there are buys we made that caused us to ask ourselves, barely after we cut off the price tag, “What was I thinking?”

Like many families struggling to survive new economic realities, you may be mostly focused on keeping a lid on expenses, holding onto your job and generally hunkering down until the immediate crisis eases up.

But how will you prepare for the other side of the recession? Have you given thought to positioning yourself so that you won’t be blindsided again by a credit crisis, job loss or credit card debt?

Recent news reports indicate that Americans’ sharp cutbacks in oil usage when prices at the pump spiked last year are still sticking, though oil prices have, until just the past few weeks, plummeted. It looks like consumers as a whole are not returning to their wasteful ways, at least when it comes to how much oil they consume.

I think this is a hopeful sign. Consider the recession a wake-up call telling us that our over-leveraged, consumer-driven lifestyle is not sustainable for the long term. By taking just an extra moment to consciously think about priorities before we plunk down the plastic, we can actually free up dollars to build up savings, pay down debt and improve our long-term outlook.

That old brown coat has a lot of life left in it.

What was your best purchase? What was the worst?

Hoping to move some inventory in 2009, Hyundai is offering to take back your new car if you lose your job or declare bankruptcy within one year of purchase. That’s right, you can return a new car the same way you’d return a sweater to the Gap, and without the fear of it negatively impacting your credit rating. The carmaker’s plan to forgive loans is the boldest move an automaker has come up with to combat guarded consumer-spending habits since the credit crunch and recession began.

Hyundai’s “Assurance” program is available on all new cars sold and leased through Hyundai financing, and is open to everyone, regardless of age, health or employment. In addition, the carmaker will accept new car returns in the case of physical disability, accidental death, loss of license for medical reasons or international job transfers. Hyundai will also cover up to $7,500 in negative equity. You’ll only owe what you did before the qualifying event occurred.

In an era that’s seeing hundreds of thousands of jobs slashed every month and the most jobs lost in the fourth quarter since World War II, people are afraid to saddle themselves with additional debt.1 But for many, owning a reliable vehicle is critical to earning a living at all.

The car conundrum is just another example of the recession’s grip on Americans. Economists agree the single-biggest recession trap is the lack of consumer spending. But spending money on a non-necessity is a scary prospect for people who don’t know if they can afford next month’s mortgage payment. It’s the ultimate “Catch-22″.

That’s why the Assurance program is such a breath of fresh air. Consumers can take the risk, spend money and hopefully spark auto sales, all with the security of a safety net should the bottom fall out.  Perhaps this initiative, coupled with current low gas prices, will crack the ice on consumer spending. And anything to spark spending is a move in the right direction to help America pull out of a recession that seems to have no end in sight.

Footnotes

1 “Carnage continues with 524,000 jobs lost in Dec. Unemployment rate rises to 7.2%, the highest in 16 years,” MarketWatch, Jan. 9, 2008

This kind of news was inevitable: Consumers with poor credit ratings are on the rise. With the mortgage crisis, it was bound to happen. But the mortgage crisis alone doesn’t account for the rise in poor credit ratings. Consumers have been struggling with credit card debt and automobile loans as well. This growing trend includes about 110 million Americans. That’s almost one-third of the nation’s population. And it encompasses mostly middle-income consumers.

If you find yourself in this number, don’t be afraid to face it and make changes to your lifestyle in order to reverse the trend. Here are a few tips for digging yourself out:

• First, stop taking on new debt. Adopt the outlook that you’ll begin to work your way out instead of running from the crisis.

• Next, make real, long-term changes that will help you. Begin to pare your lifestyle back by eliminating unnecessary expenses. Bring your expenses under control, and under the level of your income. And, yes, you’ll have to begin to live by the “b” word — budget.

• Third, look for ways to increase your income. Take on a part-time job to bring in extra cash. Sell some things in your house that you no longer need, then use the money to pay off debt.

• Finally, don’t hide from or avoid your creditors. The mere fact that more and more consumers are having problems has forced these organizations to face the facts and begin to try to help them deal with the issues. For example, one consumer recently found himself falling behind on an automobile loan and unsecured personal loan, and contacted the creditor about his problems. He found more than just a listening ear. The company gave him a sixty-day payment-free period to get caught up on both loans. These companies realize that they had better begin to offer these types of programs rather than have the customer default on the loan. The latter will cost the company much more money than just helping them get through it.

Take these tips, and take control of your credit. Slowly but surely, it will begin to improve.

In these wallet-tightening times, everyone could use a refresher course in frugality. Many Americans need to stretch every dollar further than ever before. Approached properly, you can reduce the harsh sting of a tightened budget to only a minor irritation. Simple adjustments to how you shop can end up saving you big without deviating too far from your standard of living.

Here are five ideas to help you shop successfully and save:

1. Coupons: Never leave home without them. Whether you’re shopping online or heading to the stores, be sure to check online for coupons first. Many stores offer discounts you can apply to online or in-store sales. Explore sites like MyCoupons.com that keep a running tally of what stores are offering which deals.
2. Don’t throw expired coupons away. Some stores honor coupons even after the published expiration date, so have one on hand to present at checkout. You have nothing to lose, and hopefully some money to save.
3. Take advantage of price adjustments. Few things are more frustrating than purchasing something you’ve been waiting for only to find out it’s on sale only a few days later. Don’t fret; many stores — like the Gap — will grant a price adjustment reflecting the lowered cost. Simply present your receipt to the store within the allotted timeframe.
4. Sign up for merchant emails. In-boxes are already crammed with enough junk mail to wade through without adding endless coupons and discount notifications into the mix. But skipping store mailing lists could cost you big. Instead, create a new email address dedicated to store newsletters. You’ll be the first to know when great discounts are in the pipeline.
5. Enjoy the return of layaway. A shopping staple of the 1950s, layaway had all but become extinct with the advent of credit cards. Shoppers feeling the credit crunch this year have returned to the old standby to avoid racking up expensive interest fees. For a long time, Kmart stood alone as a layaway provider, but stores like TJ Maxx, Marshall’s, and Burlington Coat Factory are getting in on the action too.

Much is made of making New Year’s resolutions, only to see them go by the wayside in just weeks into the year. Why make them, then? Because trying is better than not trying, and having a plan is better than not having one. If you aim for nothing, you’re sure to hit it, but you’re still left with nothing.

One key to remember is that even if you mess up and fall off the wagon, you can get back up and start again. Never allow failure to take you out of your plan. One way to do that is to make these resolutions yours. Print them out and hang them up on the fridge where you can see them — often. Print them in big letters so you can’t avoid them.

1. Live on a budget. DO NOT avoid this one. This is the most important thing you can do — live within your means, and avoid going deeper into debt.
2. Eliminate debt. Pay off your debts, smallest to largest, and get rid of them. Don’t take on any more debt unless absolutely necessary.
3. Get rid of all but essential credit cards. We all have too many credit cards anyway. Plus, with debit cards as easy to obtain as credit cards, it forces you to live more by what you have in your account rather than the amount of your credit limit.
4. Plan for the unexpected. Grow a small cash emergency fund of under $1,5000 for those unexpected emergencies. Begin to put part of your income into an account for longer-term emergency purposes, like medical bills, etc.
5. Save more money — and do it automatically. Make sure you save money by having part of your paycheck automatically deposited into a savings account or other financial account that’s more difficult to make withdrawals from.
6. Reduce expenses. Look for ways to live with less. Cut back on the amount of cable or satellite channels, drop unneeded cellphones from your plan, or eliminate your home phone if that makes sense for your family. Eat out less. Shop with coupons. Compare prices at least three sources before making larger purchases.
7. Make an effort to save for retirement. Increase your contribution to your 401(k) or IRA accounts.
8. Look for ways to increase your income. Take on a part-time job — even if it’s delivering pizzas or waiting tables. Money coming in is better than money going out, and it can add up quickly.
9. Review your insurance needs. Make sure you have what you need from an insurance standpoint. Look at term life insurance offerings, and make sure your family is covered in the event of a catastrophe.
10. Make a will. This is often ignored but critically important. Do not overlook this one. Remember, it’s not for you, it’s for those you love.