According to an AP News report issued earlier this afternoon…

“Economic activity is stabilizing or improving in the vast majority of the country, according to a new government survey, adding to evidence that the worst recession since the 1930s is over.”

Apparently eleven of the Fed’s twelve regions have shown signs of economic stabilization. The lone outlier is the St. Louis region, in which the rate of decline in economic activity has decreased, but things are still in negative territory.

So, dear readers, what do you think? Are we on the road to recovery?

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Recessions suck. The stock market is down, unemployment is up, and good news is sparse. But a tough economy doesn’t mean that you can’t improve your lot in life.

We’ve decided to use the recession as a time to simplify our lives and build a better financial system for our family. What follows are some of the steps we’ve been taking to shore up our finances.

Seek additional income sources

If your emergency fund is small (or non-existent), or you simply feel a need to improve your safety net to protect against possible job loss, look for ways to generate extra income. You might be skeptical due to the high unemployment rate, but that doesn’t mean it can’t be done.

In order to succeed, you’ll need to think creatively and be willing to try something new. Consider the following…

• Get a part-time/temporary job, or do odd jobs. This option can be time-consuming, so be sure any opportunity that you pursue fits your existing work schedule.
• Sell used stuff on eBay. You can reduce clutter and raise some cash for yourself and your family.
• Look at your skills and freelance. I’ve personally found this to be a practical way of generating some income and beefing up my resume.

At a loss for specific ideas? Check out this list of ways to earn extra money.

Organize your finances

Now is the time to reduce your unnecessary expenses. Your goal should be to increase the difference between your income and expenses, thereby giving you the leeway to build a financial cushion. One great way to start is to simply create an automatic transfer that puts a bit of extra money into savings every pay period.

• Review your recurring expenses. If you’re paying a monthly fee for something that you’re not using, or not using enough, then get rid of it.
• See if you can reduce your bills. Start looking at your expenses to see if you can reduce any of them. You can often save money by negotiating your bills, even without reducing your service.
• Pay your bills on time. Having a good credit history can help you in a variety of areas, such as finding a job, saving money on insurance, reducing your interest rates, etc.
• Automate your bills. We automated our bill payments to save time and reduce late fees. Many banks and credit unions now have free online bill pay, so it’s cheap and easy.

Be careful with your credit cards

As convenient as they are, credit cards can be a dangerous thing. Don’t fall into the credit card trap when times are tight.

• Don’t use credit cards to make ends meet. You might be tempted to use your credit cards to get through tough times. Don’t do it. If you can’t afford something, then wait and save before spending.
• Get a better rate. If you carry a balance, call your credit card companies and ask them to reduce your interest rates and/or work on a doable payment plan.
• Review your monthly statements. Identity theft and other types of fraud are becoming more common, so be sure to look closely at your statements every month. You might also want to check your credit report.
• Keep your credit payments in check. If you’re unable to pay the minimum amount due, call your credit card company and talk to them about setting up an affordable plan.

Don’t rush to use government programs

With the Cash for Clunkers program and the First Time Homebuyers Tax Credit all over the news, you might be tempted to jump on the bandwagon. Don’t do it.

Instead of making a rash decision, carefully weigh the costs and ask yourself if this is something that you really need (and can afford). These programs can be a great deal for those who were already looking to buy, but they shouldn’t be used as a justification to buy.

Your thoughts?

What steps have you taken to solidify your finances in the face of the recession? Do you have any tips you can share?

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Big news out of Washington today… Apparently the Cash for Clunkers program has been a bit too popular, and is reportedly being suspended out of fear of running out of money. This program was set to run through November 1st, or until the $1B allotment was used up, and it appears that the money might already be gone.

According to AP reports, nearly 23k vehicles had been sold under the program by late Wednesday, using up nearly $96M of the budget. However, many dealers have reported that large numbers of claims had yet to be processed by the government, thereby prompting the suspension.

According to Bailey Wood, spokesman for the National Automobile Dealers Association, “There’s a significant backlog of ‘cash for clunkers’ deals that make us question how much funding is still available in the program.”

For those that have taken advantage of this program, White House spokesman Robert Gibbs has gone on record that “all valid CARS transactions that have taken place to-date will be honored.”

Assuming that the money truly is exhausted, Congress is looking for ways to extend the program. Thus, it’s quite possible that it will be revived in the coming days. What do you think? Should it be brought back to life? Or should it stay dead?

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This is a guest post form Carson Brackney of Personal Finance Analyst. If you like what you see here, please consider subscribing to their RSS feed.

There’s always someone trying to find a silver lining when the skies are gloomy and gray. So it is with home foreclosures. Amidst all of the hand-wringing and sad tales of people who have lost their homes, there are those who see half-full glasses sitting on the counters of empty houses.

Some say that it’s time to buy these foreclosures. After all, properties that have been foreclosed upon are often sold by banks for a fraction of their full value. With the real estate market somewhere near its probable bottom, this is a good time to stock up on investment properties at a cut rate.

It’s enough to get a would-be real estate tycoon excited. And it does. Encouraged by those who advocating foreclosure purchases (and who are often selling guides or putting on seminars to teach you how), many novice players in the real estate field are gambling on bank-owned homes.

Is buying a foreclosure a good idea?

In some cases, it probably is a good idea to buy foreclosed properties. There are amazing bargains during a market downturn like the one we’re currently experiencing and there’s a strong probability that some of these cheap buys will turn into high-margin moneymakers for their owners within a year or two.

Those success stories, however, will be tempered with some very disturbing tales of woe. Buying a foreclosed home comes with a special set of risks and may not be an appropriate investment for those with little or no experience in the field.

Maintenance nightmares

There’s the question of upkeep, of course. This is a serious issue with foreclosure properties on multiple levels. First, by the very nature of the situation, you’re dealing with a property that was maintained by someone who was unable to make mortgage payments. It’s not a stretch to imagine that maintenance concerns weren’t addressed when the owner wasn’t able to make his or her payments.

Second, the banks who hold foreclosed property don’t have that old “pride in ownership” thing working for them. Banks are property managers and they often allow foreclosure properties to slip in terms of care and maintenance. By the time a home is “up to snuff” it may no longer be a bargain.

The ugly economy that has contributed to the rash of foreclosures we’ve seen adds another risk to the purchase process. Many homes are partially or completely gutted by owners during the foreclosure process in order to raise money.

There are homes in which floors have been completely removed, cabinets have been torn from the walls, and even kitchen sinks have been yanked out and sold. These owner-gutted properties often don’t turn out to be a great bargain after the new owners handle necessary renovation and repair.

Foreclosed homes are generally sold “as is”, meaning that the buyer assumes a great deal of risk in the transaction. An example of this is the story of a couple who bought a foreclosure only to discover that it had a serious mold problem. A lawsuit ensued, and this foray into foreclosure-land failed to turn into a profitable investment.

Look before you leap

If you’re a newcomer to the world of foreclosures, you might want to think twice before jumping in. If you’re convinced that you can find that perfect investment property, however, enter the arena with the right plan. Be careful, demand a full inspection prior to escrow, and consult with realty professionals who’ll help you to mitigate your risks.

It’s wonderful that some people will find that half-full glass on the kitchen counter of a foreclosure property. Unfortunately, too many buyers will learn that the kitchen counters, and maybe even the pipes beneath them, have been ripped out.

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States across the country are hurting. High unemployment numbers and reduced corporate profits have gutted tax revenue. At the same time, every state besides Vermont has a law requiring a balanced budget. As such, state governments are getting desperate to make ends meet.

A recent article in Forbes highlighted the lengths to which some states are going. They’ve been slashing budgets to the bone, but you can only cut so deep without compromising basic services. Thus, they’ve gotten creative when it comes to generating revenue.

Here are some of my favorites:

• California has proposed changing the date on state paychecks from June 30th to July 1st to “save” $1.2B (on paper) during the current fiscal year. It’s unclear what would happen next next fiscal year, when that $1.2B hits the balance sheets.
• Georgia lawmakers have proposed a “pole tax” — a $5 fee levied on strip club patrons. It didn’t pass.
• New York has proposed to put ads on garbage trucks and to institute an 18% tax on “sugary” drinks. The governor has approved a 46% increased in tobacco taxes and a 58% increase in wine taxes.
• An Oregon lawmaker proposed a $98 per ounce tax on medical marijuana, and even pushed to have the state do the growing. These measures never made it out of committee.
• A Michigan Senator introduced a bill to levy a $250 fee on strippers. The state might also agree to house California prisoners to make extra money, though it’s unclear to me how California would be able to pay.
• Nevada increased hotel taxes from 9% to 12%, and a Senator from Las Vegas has proposed a $5 tax on prostitute tricks. The latter measure didn’t pass. Even if it had, I’d think it would pretty tough to enforce.

Now… Just imagine what this list would look like if the Federal government wasn’t allowed to run a deficit!

Source: Forbes.com

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This is a guest post from Kevin Mercadante of Out of Your Rut. Kevin is also author of Lighten Your Load, an e-book focused on reducing living expenses while still maintaining a comfortable lifestyle.

If you lose your job, hear rumors of layoffs at your company, or pick up just about any other indication that you job may be in jeopardy, you’re gut reaction may be to launch a job search. While doing so makes sense, you should direct some of your efforts to other areas, as well. In fact, you may even want to do this if your job is “secure” (whatever that means nowadays).

The nature of employment is changing, and you need to adjust with those changes. Three areas which should be at the center of your efforts going forward are skills development, networking, and pursuing opportunities.

Skills development

One disadvantage to having the same job for a long period of time is that your skill set can get rusty. The longer you’re with one employer, the more likely you are to have skills that are of value to just that one company. If you lose your job, that custom skill set can become excess baggage.

Start by inventorying the skills you have, including those that have gotten a bit stale from lack of use, and work on getting yourself back up to speed with them. At a minimum, make sure that you know what you know.

It’s also important to add in new skills whenever possible. While we should all be doing this all the time, life sometimes gets in the way. In an economy such as the one we’re now in, however, you need to make learning new skills a top priority.

If you’re currently employed, try to arrange your schedule to create regular blocks of time for this sort of learning. If you’re already unemployed (or under-employed), this effort is worthy of equal time alongside your job search efforts.

What kind of skills you need to develop will depend largely on what field you work in, or would like to enter in the near future. Some common skills include public speaking, HTML/web design, accounting, customer relations, general business software (Excel, PowerPoint, etc.), industry specific software, foreign languages, repairs, web marketing, and interviewing skills. Start by picking one or two, work to master them, and then add more over time.

Fortunately there are all kinds of how-to programs available on the web as well as at the bookstore. You can engage in self-study with a book, software system, or web download. All of these are relatively inexpensive, and you can do them on your own time. For more challenging skills, consider taking a class as a local community college. An alternative approach would be to work a part-time job that will allow you to hone your skills while you’re getting paid.

Remember… You don’t necessarily have to be an expert — just having working knowledge in a particular area can shift the job selection process in your favor.

Networking

Most of us are pretty good at networking within our own field, but it pays to get outside your usual network. Being active in networks that aren’t directly related to your own field can give you access to new opportunities, especially since your skill set will be somewhat unique amongst your peers.

Fortunately, the internet has made networking in virtually any career or business area easier than ever. There are thousands of blogs and forums covering just about any industry, and a large number of these are very welcoming to outsiders. You should also consider joining local network groups and/or general business networks, as face-to-face networking can be even more effective than joining web groups.

When interacting with others, be prepared to share your story and let other know what you’re looking for; in sales, this is called “asking for the order.” Just remember that networking works both ways. Be sure to offer support and relevant leads to others. After all, the more value you can offer, the more value you’ll receive.

Pursuing opportunities

Consider dropping the word “job” from your vocabulary, and replacing it with “opportunity.” After all, that’s what you’re really looking for.

What’s the difference? A job is typically a full-time, fully-benefited source of permanent employment that represents a clearly defined place on a company organizational chart. This version of employment is gradually disappearing, a trend that was developing even before the recession.

Nowadays, many employers are scaling back their employee benefits, including 401(k) plans and company paid health insurance. Many other employers have switched to the heavy use of contract employees. With traditional jobs disappearing, it’s to your advantage to seek opportunities whenever and wherever you might find them.

Be open to contract work, even if you’ve never done it before. Likewise, consider part-time work, partnerships, affiliate arrangements, and temporary situations. None of those are jobs per se, but all provide you with an opportunity to earn income, learn new skills, and develop valuable new contacts.

You might also consider the possibility of balancing two or more opportunities. For example, a contract arrangement combined with a credible business venture might get you back to the level of pay you’ve had in the past, even though you haven’t been able to find an equivalent job in your field.

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Economists have a term for how quickly money cycles through the economy. They call it “velocity,” and it’s defined as the average frequency with which a unit of money is spent in a specific period of time. As spending increases, or the money supply tightens, velocity increases, and vice versa. In practice, velocity is often calculated as the Gross Domestic Product (GDP) divided by the money supply.

In simple terms, higher values reflect a relatively more free-spending society, with each dollar cycling through the economy more quickly. Lower values, on the other hand, indicate a relatively stingier society, in which each dollar circulates through the economy more slowly.

Wikipedia has a nice example of this… Consider the case of a very small economy consisting of a farmer and a mechanic, with just $50 between them. Further assume that, over the course of a year, they buy goods and services from each other as follows:

• Mechanic buys $40 of corn from farmer
• Farmer spends $50 on tractor repair
• Mechanic spends $10 on barn cats from farmer

Even though there is just $50 in play, $100 exchanged hands over the course of the year. This is because each dollar was spent twice, such that the velocity of money in this economy was two.

With that as a backdrop, I wanted to highlight a graph of the veolcity of money over the past 30 years that I ran across in a recent article in Forbes.

Notice anything unique about the very recent past? Of course you do. In late 2008, the velocity of money in the United States dropped by roughly 50%. In other words, due to a slowdown in lending, a decrease in consumer spending, and increase in the money supply, and so on, the typical dollar was spent just half as often as normal.

So… The answer to our economic problems is clear. Get out there and start spending! Take your money out of the bank, and go buy something. Anything. Just spend.

(I kid, I kid.)

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This is a guest post from Peter Dunn of Green Candy. If you like what you see here, please check out his weblog and consider subscribing to his RSS feed.

It’s no secret that our economy is cyclical. Whether you like it or not, there will be good times and times that couldn’t be possibly described as good. But it’s what happens in the not-so-good times that dictates how and when the economy recovers. Many mega-corporations have been at the epicenter of this meltdown, but it will be small business that brings us back.

Millions of people have been laid-off, and the fear of unemployment continues to be real. But if you dig a little deeper and try to understand the basics of business, then you will see some forgotten truths once again show their face. More importantly, though, you will see how the unemployed will actually drag us out of this financial quagmire.

Any time that you choose to have a conversation about money and/or commerce, then the discussion must begin with risk. Risk is the forgotten element. I’m not talking about market risk, which is where most people’s mind goes to. I’m talking about risk in its purest form. The essence of risk is that there is a possibility that something unwanted or unpleasant will happen. Yet it’s those people that take and manage risk that actually help create commerce. And when you have lost your job and you are unemployed, then your tolerance for risk is reset, and you are in a great position to take a calculated risk and start a new business.

The truth is that there aren’t a great deal of surplus jobs out there. In fact, there is a job shortage. Therefore, many people are forced into finding a way to make a living. Thousands of laid-off workers are starting their own businesses. If you think about it, almost all big businesses started out as small businesses. They began with an idea, and a person that was willing to take a risk. And when you are unemployed, and you don’t have much to risk, then you are in a great position to build something great. Our entire capitalistic system was built on ingenuity and risk-taking. Over time, however, the risks being taken have shifted primarily to big business.

There is a lot of upside for those people that have nothing to lose, and it will be their ability to look at risk a little differently that will pull us out of this recession. Competition is alive again. Price and service finally matter again. These factors all contribute to the inevitable success of small business. Remember, those that take the risk get the reward. And when you don’t have a lot to risk, then the reward is that much sweeter.

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This is a guest post by Jeff Rose, who is an Illinois Certified Financial Planner(TM) and co-founder of Alliance Investment Planning Group. Jeff is also the author of Good Financial Cents, a financial planning and investment blog. If you like what you see here, please consider subscribing to his RSS feed.

Does anybody feel like the 2008 stock market crash has been one of the worst ever? Unfortunately, the crash in 2008 was the first collision and now 2009 just rear ended you when you thought the wreck was over. If you feel that the the market turmoils are like a severe car wreck, it leads us to wonder how to rehab our way back from such a serious injury.

As you may know, effective rehab is simple and repetitious. The improvements are almost imperceptible, and the real benefit is only recognizable in hindsight. It may take six, twelve, or even more months, but eventually that limp you had will be just a memory.

For those that feel like the recent market crash has left you with more than just a simple limp, here are some pointers that can keep you going as the market attempts to figure itself out.

Continue Funding Your IRA and 401(k)

Yes, I know that sounds insane considering how ugly the market is right now, but you have to have some faith in the U.S. economy. Just because I’m suggesting that you fund your retirement accounts doesn’t mean you have to put in all in the market. You will want to at least fund your retirement accounts to either get the 401(k) match or the tax free savings of the Roth. Even if it’s invested in bonds right now, you’ll be able to transition to stocks later on when you feel more comfortable.

Make Roth Conversions Now or in 2010

If you’ve been wanting to get money into a Roth IRA, now might the opportunity. If your AGI is below $100,000, you are able to convert traditional IRA’s and old 401k’s this year. If not, you’ll have to wait until the 2010 conversion event. Why is this time to do it? You’ll pay less tax on the conversion because most likely your account balances are down (whose isn’t, right?) and you’ll have less of a tax liability on the amount to convert. If you have to wait until 2010, the one upside is that you’ll be able to spread the tax over a two year period.

Diversify Asset Classes

Is diversifying really dead? There’s no question that even a well-diversified portfolio took a substantial hit over the past 6 months. But what about alternative asset classes? Managed futures returned double digit gains last year, showing that only do we need to diversify with stock and bonds, but we also need to consider non-correlated assets. One thing that you must consider is that although alternative assets classes can reduce risk in a portfolio, that doesn’t mean they decreases volatility (ups and downs of the market). That’s a common misconception with most investors that needs to be known.

Review Your Retirement Plan

Face it, things change and you have to adapt and overcome. If you had a well thought out retirement plan last year, it needs to be revisited. A lot has changed in a short amount of time and you need to act accordingly. It’s not time to panic, but you need to be proactive in what is going on around you. Don’t let an opportunity pass you by that could make a serious impact to your retirement plan.

Put Money to Work

I know that this seems almost impossible nowadays. The stock market loses a hundred points every other day it seems and savings account interest rates are dropping just as fast. But even still, there are opportunities to take advantage of.

If your 401(k) has a match, keep contributing and get your free money. If you have a credit card with a 8.9% APR (just as an example), pay it off and you just made 8.9% on your money. Maybe you have a significant amount in your checking or savings accounts and you’re only earning 0.25% (yes, I’ve seen it that low). If so, consider moving your money to an online savings account (just make sure that they are FDIC insured). It may only pay you 2%, but you’ve still increased your payout by 8 times.

It all sounds simple, but these are the kinds of simple things that we can do to get ourselves back on the road to financial health. What about you? What are you doing to recover from the crash?

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In early 2009, the Bureau of Labor Statistics noted that over 40 states recorded an increase over last year in the number of layoffs. In February alone over 600,000 workers were caught up in layoffs. If you and your family have found yourself in this position, here are some steps to help you cope with this painful change.

1. Don’t panic — assess where you stand

When you lose your job, you should try to remain as calm as you can and see exactly what the situation is. Ask yourself:

• How much money do we have in the bank?
• How much are our monthly bills?
• How much am I receiving for severance?
• What do we need to modify in the budget?

2. Update your friends and family about the situation

You may feel embarrassed or ashamed by what happened. Do not let that negative thinking stop you from getting emotional support. Ask your network to please keep their eyes and ears open for any employment opportunities that they might hear about.

You should also ask your family to help you come up with ideas to earn extra money and/or decrease your expenses. Having everyone on the same page will allow you to work through this challenge together as a family.

3. Open your mind to different jobs

You need to cast a wide net, so don’t just look for jobs exactly like your last one. Being too focused on one particular job may decrease your chances of finding work. You might also consider taking on part-time work to keep you from hemorrhaging financially. Until you find a suitable job, working part time can generate income and provide you with a schedule that allows you to go on job interviews.

4. Update your budget

At this point you should try to focus on cutting any nonessential expense from your budget. Living within your means is going to be tougher as you make this transition. Update your budget with the new income amount and see where you can adjust accordingly.

If you can’t pay all your bills, then prioritize where your money goes. First and foremost, your money should go to housing and food. Utilities such as electricity are also important so focus on those next. You should also give priority to medical bills and expenses when updating your budget.

5. Stay away from credit cards

You might be tempted to put your expenses on a credit card until you can find a job. Don’t do it. Credit cards should be a last resort. Instead, see if you qualify for any sort of government assistance to help make ends meet.

This could mean filing for unemployment or applying for state insurance. Remember, this is only temporary — you’ll eventually get out of this predicament. Relying on credit cards can put you in an even deeper hold given the high interest rates and fees associated with them.

Now it’s your turn…

Losing a job can be a very painful experience, especially if you have a family. Remember, you can’t do this alone. Rather, you should seek the help of others when getting back on your feet.

Do you have any tips for dealing with job loss? What’s the most important step?

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Remember when I talked about how the foreclosure crisis is much more localized than the mainstream media would have you believe? Well, check this out… According to a recent report in USA Today, 35 counties accounted for 50% of the foreclosures that occurred in 2008. Amazing how such a small cross-section of the county could drag us down, isn’t it?

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If you listen to media reports, you might think that there’s an astronomical foreclosure crisis affecting every neighborhood in America. But guess what? A recent study by University of Virginia researchers has revealed that 87% of the dollar losses stemming from foreclosure activity were concentrated in just four states: California, Florida, Nevada, and Arizona.

Sure, you could argue that these states (or at least California and Florida) are quite large, and thus account for a disproportionate number of housing units, rendering these numbers meaningless, but consider this… California accounts for just 10% of the nation’s housing units, but it had 34% of the foreclosures in 2008.

You might also argue that expressing this in terms of dollar losses as opposed to actual foreclosures tends to skew things a bit. For example, the median home value in California in 2007 was 8.3x the median income, whereas the median home value nationally was just 3.2x the median income. In other words, prices had farther to fall in California than elsewhere, so perhaps the dollar amounts are inflated.

Looking at the raw numbers, however, reveals that these four states still account for a disproportionate number of actual foreclosures. In fact, there were just over 2.3M properties foreclosed on nationwide during 2008, with nearly half of these (just over 1.1M) happening in these four states alone.

This kind of puts things in perspective, doesn’t it? Sure, there are still other locales that are really hurting, and the housing market sucks in general, but the foreclosure crisis doesn’t appear to be nearly as widespread as the media would have us believe.

Hat tip: Reason.com

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In response to my previous post about when the recession will end, a reader named Neal wondered aloud if we’re entering a new paradigm — one in which the old economic rules no longer hold.

“We could always say that the market will do this or that based on history. But based on what is going on now and the conditions we are in, is that history valuable?”

While I understand where Neal is coming from, I’m always hesitant to jump on board when people claim that the rules have changed. Remember the late 1990s, when stock prices just keep going up, up, up as we approached the pinnacle of the dot com boom?

The pundits told us that the rules had changed, that the old view of stock valuations no longer held, but… We all know what happened next. The bubble burst and things came crashing back down to Earth. The old rules held.

So, dear readers, what do you think? Given recent events, have the rules changed? Are we witnessing a paradigm shift, or is this just another blip?

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Consumer confidence is stumbling, the stock market is tumbling, and unemployemnt is soaring. We’re now 14+ months into a severe recession, and the news just seems to keep getting worse. When will it all end? It’s hard to say for certain, but economic experts have made their share of predictions. But before we talk about that, let’s talk a bit about what constitutes a recession.

What is a Recession?

According to Wikipedia, a recession is “a decline in a country’s gross domestic product (GDP), or negative real economic growth, for two or more successive quarters of a year. Some economists prefer a more robust definition of a 1.5% rise in unemployment within 12 months.” Whichever definition you prefer, we’re living it.

Since 1854, we’ve had 32 cycles of economic expansion and contraction, with an average of 38 months per expansion and 17 months per contraction. Since 1980, however, there have only been eight period of negative economic growth that have lasted for one fiscal quarter or longer, and just four of those have been recessions. In the early 1980s, we had a 17 month recession, in the early 1990s we had an nine month recession, in 2001 we had another nine month recession, and now this.

When Will the Recession End?

While there are no concrete answers as to when the current recession will end, a recent survey of leading economists has provided some insight into what we might expect. According to the survey, which was conducted by the National Association of Business Economics, the recession is expected to worsen during the first half of 2009. However, things will start to look up in the second half of 2009, and we should see a solid recovery in 2010.

Are they right? Only time will tell. But it’s worth noting that data from the New York Fed are likewise pointing to an end of the recession sometime during the middle of this year. Keep your fingers crossed.

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» $15,000 Homebuyer’s Tax Credit is Back on the Table

Are you eligible for the new $8,000 first-time homebuyer tax credit? Wondering how to claim it? Well, you’ve come to the right place. Earlier today, a sharp-eyed reader named Sonny pointed out that the IRS just issued a revision to Form 5405 yesterday. This form, title “First-Time Homebuyer Credit” walks you through the process of claiming your credit.

In hopes of answering a few FAQs, here are some tidbits from the instructions:

Who Can Claim the Credit

In general, you can claim this credit if you purchased you main home located in the United States after April 8, 2008, and before December 1, 2009 and you (and/or your spouse if you are married) did not own any other main home during the 3-year period ending on the date of purchase. If you build a home, you are assumed to have purchased it on the first day that you occupied it.

Who Cannot Claim the Credit

You cannot claim the credit if your modified adjusted gross income (MAGI) is $95k or more ($170k or more for married filing jointly). You are also excluded if you are a non-resident alien, your home is located outside the United States, you acquired the home gift or inheritance, or you purchased it from a related person. There are also a few other somewhat esoteric exclusion, so be sure to read the form carefully.

Details of the Credit

For homes purchased in 2008… The credit will still be little more than an interest-free loan which will have to be paid back in 15 equal installments starting in 2010. If your home ceases to be your main home before the 15 years is up, you’ll have to pay back the balance in the year in which you move.

For homes purchased in 2009… The repayment requirement is waived as long as it’s your main home for the 36 month period beginning on the purchase date. If your home ceases to be your main home within that 36 month period, you’ll have to pay back the credit in the year in which that happens. There are some exceptions, so be sure to read the instructions carefully.

The amount of the credit is the smaller of $7500 ($8000 for homes purchased in 2009) or 10% of the purchase price of the home. You get the full amount if your MAGI is less than $75k ($150k for married filing jointly). The credit is gradually phased out from $75k-$95k ($150k-$170k for married filing jointly).

What This Means for You

If you’re using a tax pro, make sure they’re up to speed on these changes. They should be, but you can never be too careful. If you’re using tax prep software such as TurboTax or TaxCut, be sure to download any updates (the online versions should be automatically updated). If you do your taxes by hand, be sure to download and use the latest version of IRS Form 5405.

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» $15,000 Homebuyer Tax Credit Dropped from Stimulus Package

Yesterday afternoon, the economic stimulus package was signed into law. After weeks of wrangling and lots of speculation, the final bill included $212B in tax cuts along with $575B in spending. So what’s in it for you? What follows is a rundown of some of the major taxpayer benefits.

“Making Work Pay” Credit

While you won’t be getting a stimulus check, individuals earning less than $75k/year (and couples earning less than $150k per year) qualify for a $400 per individual ($800 per couple) tax credit. This credit will be doled out in the form of reduced withholding increasing your take home pay by an estimated $8-$13 per week. Social Security recipients who don’t qualify because they don’t work will receive a one-time $250 payment.

First-Time Homebuyer Credit

I’ve written about this extensively over the past few weeks, so it should come as no surprise that the stimulus package includes an $8,000 tax credit for first-time homebuyers. This credit is available to first-time homebuyers that purchase a home between January 1st 2009 and November 30th, 2009. This is a refundable tax credit that is phased out for individuals with AGI of $75k or higher and couples with AGI of $150k or higher.

Alternative Minimum Tax Relief

This is a bit of a red herring, as the Alternative Minimum Tax (AMT) would’ve undoubtedly been patched sometime this year whether or not it was included in the the stimulus package. Nonetheless, the fix is in, and a number of “middle income” taxpayers that otherwise might have been snagged will instead escape the evil clutches of the AMT.

Education Tax Credits

The “American Opportunity” education tax credit will take the place of the Hope Credit in 2009/2010. This credit, which is available for the first four years following high school graduation, covers up to $2,500 in tuition and related costs per year (including school-related book and computer purchases). This credit phases out for single taxpayers with AGI of $80k-$90k and married taxpayers with AGI of $160k-$180k.

Earned Income and Child Tax Credits

The Earned Income Credit (EIC) will be temporarily expanded for families with three or more children. The $1,000 Child Tax Credit will also be extended to additional low-income families.

Unemployment Tax Break

Individuals receiving unemployment benefits in 2009 won’t have to pay federal income tax on the first $2400 that they receive. Moreover, unemployment benefits will increase by $25/week and will also last longer. There will also be a 65% subsidy of health insurance premiums for the unemployed under the COBRA program.

Sales Tax Deduction for Vehicle Purchases

Individual tax payers with an AGI of less than $125k ($250k for joint filers) will be able to deduct state, local, and excise taxes on the purchase of a new car or truck in 2009 even if they don’t itemize. This deduction applies to the taxes paid on the first $49,500 of the vehicle’s purchase price.

Energy Incentives

Purchasers of plug-in hybrid vehicles can qualify for a tax credit of as much as $9,100. In addition, there will be a number of incentives for individuals who make energy-efficient home improvements.

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Update: I’ve posted additional details surrounding this credit and how to claim it. Please click through to read: How to Claim the First-Time Homebuyer Tax Credit.

Okay, details regarding the House/Senate compromise on the economic stimulus package are starting to come out. As I noted yesterday, the Senate’s $15,000 homebuyer tax credit has been stripped from the final version. In it’s place is an $8,000 tax credit for first-time homebuyers. Note that this credit does not need to be paid back, unlike the original $7,500 first-time homebuyer tax credit. To qualify, the purchase has to be made between January 1st, 2009 and before November 30th, 2009 and you have to stay in your home for three years. This is a refundable tax credit, and it’s phased out for individuals with AGI of $75k or higher or couples with AGI of $150k or higher.

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Breaking news out of Congress… After the Senate inserted a $15,000 tax credit for homebuyers into the economic stimulus package, it appears to have been removed while the House and Senate were reconciling their two versions. From an AP News report:

Working to accommodate the new, lower overall limit of the bill, negotiators effectively wiped out a Senate-passed provision for a new $15,000 tax credit to defray the cost of buying a home…

There aren’t a lot of details yet, but it looks like they’ll be falling back to the $7,500 house version of this credit (presumably with no repayment requirement, but only available to first-time homebuyers).

Update: Looks like it will be an $8,000 tax credit for first-time homebuyers.

Source: Yahoo! News

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» Second Stimulus Check?

If you didn’t receive a stimulus check last year (or if received less than the full amount) and your circumstances have changed such that you now qualify (or qualify for more), then listen up…

The “Recovery Rebate Credit” is a one-time tax credit that’s intended to make up for the unpaid portion of your stimulus payment if (and only if) you received less than you were due. Viewed another way, the stimulus checks that were sent out last year were simply a prepayment of this credit, such that you may not qualify for any additional payment at this time. Confused? Read on.

Eligibility for the Recovery Rebate Credit

If you fall into one of the following categories, you may be eligible for the credit:

• Individuals who did not receive a stimulus check
• Individuals who received less than the maximum amount
• Families that gained a qualifying child during 2008
• Individuals that were claimed as a dependent on someone else’s return in 2007, but not in 2008
• Individuals who did not have a valid Social Security number in 2007, but received on in 2008

Note that membership in one of these groups does not necessarily qualify you for this tax credit. Keep reading to learn how you can determine the amount of your Recovery Rebate Credit (if any).

Claiming the Recovery Rebate Credit

The Recovery Rebate Credit can be claimed IRS Form 1040, 1040A, or 1040EZ. Note that the instructions for all three forms include a worksheet to help you calculate the total credit that you are due for tax year 2008. Once you have this number in hand, simply subtract from it the amount of your stimulus check (if you received one). If you can’t recall how much you received, you can look it up on the IRS website.

Still with me? Good. If you do this and you wind up with a positive number, then you can claim a credit for this amount. The instructions for your particular tax form will tell you where to enter this amount. If you wind up with zero or a negative number, you won’t be receiving an additional credit. The good news here is that you won’t have to pay back any overage if you received too much in the first place.

If you don’t wish to run these calculations yourself, you can simply enter “RRC” on the appropriate line on your tax form and the IRS will figure the credit for you. Alternatively, if you’re using tax prep software, the necessary values should be automatically figured for you.

Avoiding Errors

The IRS has reported that upwards of 15% of returns that have been filed thus far have errors when it comes to the Recovery Rebate Credit. Thus, they have published some tips for avoiding problems. In general, they say that:

Some tax returns erroneously claim the credit, do not claim the proper amount of recovery rebate credit or mistakenly enter the amount of the stimulus payment they received on the recovery rebate credit line.

To avoid delays in tax refunds, it is critical that taxpayers know the correct amount of the stimulus payment they received last year, if any, to help determine whether they qualify for the recovery rebate credit now.

The amount of the stimulus payment will not be entered directly on the tax return. For people using a paper tax return, the stimulus payment amount will be required when completing a related worksheet. For people using tax software, the stimulus payment amount will be needed as part of the return preparation process.

The amount of your stimulus payment will be noted on Notice 1378, which the IRS mailed to everyone that received a stimulus payment last year. Alternatively, as noted above, you can lookup the amount of your stimulus check on the IRS website. If neither of these work for you, then you can call the IRS at 1-866-234-2942 and ask them how much you got.

Note that, for most filers, the correct value for this credit will be zero, as most taxpayers received what they were due in the form of their stimulus payment. Once again, if you are unsure how to proceed, you can always let the IRS calculate the amount of the credit for you.

More details: IRS.gov

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Big news tonight… The Senate just voted to give a tax credit of up to $15,000 to homebuyers. While I haven’t found details of the proposed implementation, I know that Senator Johnny Isakson of Georgia was pushing for a larger credit that would be available to all buyers of a primary residence, not just first-time homebuyers. He also wanted to extend the eligibility period to December 31, 2009 and waive the repayment requirement. I’ll update when I know more.

Update: From Isakson’s press release:

Specifically, Isakson’s amendment to the pending economic stimulus bill would provide a direct tax credit to any homebuyer who purchases any home. The amount of the tax credit would be $15,000 or 10 percent of the purchase price, whichever is less. Purchases must be made within one year of the legislation’s enactment, and the tax credit would not have to be repaid.

The amendment would allow taxpayers to claim the credit on their 2008 income tax return. It also seeks to prevent misuse by only allowing purchases of a principle residence and by recapturing the credit if the home is sold within two years of purchase. The amendment would sunset the current $7,500 housing tax credit on the date of enactment.

So… It sounds like that people who already bought might be out of luck. This reads like they’ll be subject to the rules that were in place when they bought. It’s still possible, of course, that the repayment requirement on the $7500 tax credit will be waived. Of course, none of this means anything until it’s actually signed into law.

Update: The Senate version of the $15,000 homebuyer credit has been removed from the stimulus package.

Update: Looks like it will be an $8,000 tax credit for first-time homebuyers.

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In recent weeks, I’ve gotten a number of e-mail inquiries about the possibility of a second stimulus check. Instead of answering these inquiries individually, I thought I’d take a moment to answer them all here. But first…

Why the Sudden Interest?

I’m guessing that recent interest in this topic has been driven by publicity surrounding the forthcoming economic stimulus package. Prior to that, President Obama (at the time, Candidate Obama) mentioned the possibility of a second round of checks while campaigning back in July, and Fed Chairman Bernanke lent his support to another stimulus check (among other things) back in October.

Will There be a Second Stimulus Check?

As it turns out, there’s no mention of stimulus checks of any sort in the “American Recovery and Reinvestment Plan” (that’s the official name of the forthcoming stimulus bill). Beyond that, I asked my Magic 8 Ball if there will be a second check, and the response that I got was “OUTLOOK NOT SO GOOD.”

Okay, okay… I’m lying about the Magic 8 Ball, but it seems that the underlying message is on point. As of right now, there’s no evidence to suggest that a second stimulus check is on the way.

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I had every intention of writing up a detailed summary of the so-called “American Recovery and Reinvestment Bill of 2009” this morning, but when I took a look at the House Appropriations press release, I was overwhelmed.

According to the press release, the package contains $275 billion in economic recovery tax cuts and $550 billion in “thoughtful and carefully targeted priority investments with unprecedented accountability measures built in.” The efforts are targeted to areas such as:

• Clean, efficient, American energy
• Transforming our economy with science & technology
• Modernizing roads, bridges, transit, and waterways
• Education for the 21st Century
• Tax cuts to make work pay and create jobs
• Lowering healthcare costs
• Helping workers hurt by the economy
• Saving public sector jobs and protecting vital services

While I realize that $825,000,000,000 is a lot of money, I was still taken aback when I saw that the “Executive Summary” of this plan spans 12 jam-packed, typewritten pages. Given the number of zeroes involved, I probably shouldn’t have been surprised, but I was. It’s also worth noting that there’s no mention of a second stimulus check.

Anyway, I encourage you to at least skim over the summary and to share your thoughts. I’m guessing that I’m not the only one having trouble getting my head around the implications of all of this. I’ll say this much… At least it looks like they have a plan, which is more than I can say for the original bailout package.

Update: A visual representation of the proposed spending. Thanks Brack!

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As I noted on Friday, changes are afoot when it comes to the $7500 first time homebuyer tax credit. More specifically, there has been talk of converting this from a pseudo-credit that actually has to be paid back into a true credit. I just wanted to follow up on that article with a bit more information from this summary of the “American Economic Recovery and Reinvestment Plan” from the House Ways and Means Committee:

“Refundable first-time home buyer credit. Last year, Congress provided taxpayers with a refundable tax credit that was equivalent to an interest-free loan equal to 10 percent of the purchase of a home (up to $7,500) by first-time home buyers. The provision applies to homes purchased on or after April 9, 2008 and before July 1, 2009. Taxpayers receiving this tax credit are currently required to repay any amount received under this provision back to the government over 15 years in equal installments, or, if earlier, when the home is sold. The credit phases out for taxpayers with adjusted gross income in excess of $75,000 ($150,000 in the case of a joint return). The bill would eliminate the repayment obligation for taxpayers that purchase homes after January 1, 2009. The provision would retain the credit recapture if the house is sold within three years of purchase. This proposal is estimated to cost $2.562 billion over 10 years.”

As frustrating and unfair as this change will seem to people that took advantage of the credit in 2008, the limitation of this change to 2009 actually makes sense. After all, the goal is to get people to go out and buy houses, which means that people that have already taken the plunge aren’t the target audience.

Thanks to Ross for digging this up!

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Last night, a reader named Heather asked the following question:

We are debating about whether or not to take the $7500 from the government for being first time home owners. In 2 years, we will have to start paying “them” back $500 for the next 15 years. If we were to sell our house in that time and not make a profit, the debt would be forgiven. I’m not sure I want to owe anyone anything, but hubby thinks of it as an interest free loan… What’s your take on this?

Oddly enough, I was in the process of writing about the first time homebuyer credit when her question rolled in. Weird. Anyway…

The First Time Homebuyer Tax Credit

When it was first proposed in the “Housing Rescue Bill,” the first time homebuyer tax credit was, as Heather noted, little more than an interest free loan (more on this below).

According to IRS guidance, the credit:

• Applies to homes purchased after April 8, 2008 and before July 1, 2009
• Reduced a taxpayer’s tax bill or increases their refund dollar-for-dollar
• Is fully refundable, meaning that you can get it even if you owe not taxes

The amount of the credit is 10% of the purchase price of the home in question, up to a maximum of $7,500 for single taxpayers, or married couples filing jointly. There are, however, a couple of catches…

For starters, the credit is phased out based on your modified adjusted gross income (MAGI). For married couples filing jointly, the credit phases out between $150k-$170k. For all others, the phase out range is $75k-$95k.

The other problem is that it’s not really a credit. Rather, this “credit” has to be paid back in equal installments over the next 15 years along with your taxes. Not such a great credit anymore, huh?

That’s the bad news. The good news is that changes may be afoot…

Conversion to a True Credit?

House Democrats recently outlined their $835 billion economic stimulus package, and one of the things that they’re hoping to do is make the homebuyer tax credit a true credit — with no repayment necessary. Of course, this is still subject to negotiations between the House and Senate, and to passage of the economic stimulus package itself, but…

If it happens, buyers who qualified for the credit in 2008, or those who do so in 2009, will be relieved of the repayment requirement. Is this enough to make you go out and buy a house? Probably not. But if you’re buying one anyway, be sure to take advantage.

Update: The Senate just passed an amendment to the stimulus bill that would create a $15,000 tax credit with no repayment requirement. Moreover, it would be available to all purchasers, not just first-time homebuyers.

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Over the weekend, President-Elect Obama outlined the economic challenges that our country faces, and how he plans to take them on. Here’s what he had to say, in his own words:

“…we need an American Recovery and Reinvestment Plan that not only creates jobs in the short-term but spurs economic growth and competitiveness in the long-term. And this plan must be designed in a new way—we can’t just fall into the old Washington habit of throwing money at the problem. We must make strategic investments that will serve as a down payment on our long-term economic future. We must demand vigorous oversight and strict accountability for achieving results. And we must restore fiscal responsibility and make the tough choices so that as the economy recovers, the deficit starts to come down. That is how we will achieve the number one goal of my plan—which is to create three million new jobs, more than eighty percent of them in the private sector.”

So… It appears that the primary focus will be on job creation. Another major focus (not mentioned in the above snippet) is reducing dependence on foreign oil. Both of these are laudable goals, but how will we achieve them?

Here’s a list of initiatives that he’s proposing:

• Doubling of renewable energy production
• Renovation of public buildings to make them more energy efficient
• Rebuilding of American infrastructure (roads, bridges, and schools)
• Updating and computerizing our healthcare system
• Modernizing classrooms, labs, and libraries
• Providing “direct tax relief” to 95% of American workers

Taken together, the components of this plan are estimated (by Obama’s advisors) to cost somewhere between $675 billion and $775 billion, though other expect the costs to be closer to $1 trillion. It’ll be interesting to see how much pork gets piled on top while these things are making their way through Congress. Note that there’s no mention of a second stimulus check.

If you’re interested in seeing his address firsthand, here’s the video:

Source: Change.gov

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In need of some Holiday cheer? How about a bit of bailout humor?

If you don’t laugh, you’ll cry. Enjoy!

Source: Buffalo Beast

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In case you missed the news, the Federal Reserve has cut rates to what it calls a “target range” of 0-0.25% and further indicated that they won’t be increasing anytime soon. This is the ninth rate cut in the past 14 months, and leaves the Fed with virtually no room for additional cuts. In other news, the dollar fell and gold prices increased.

It’ll be interesting to see what this does to interest rates for online savings accounts. Once again, now might be a good time to consider buying CDs before banks drop their rates.

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Wow. November’s (un)employment numbers are now out, and they’re considerably worse than expected. Employers cut 533k jobs during the month, compared to the expectation of 320k. This is the largest monthly decrease in 34 years. Apparently the numbers would have been even worse, but 422k people left the workforce. Jobs losses were the worst in factories, construction, finance, retailers, and the leisure/hospitality industry. Sprinkled amongst the bad news were job gains in a handful of apparently recession-proof careers, including positions in the government, education, and health services.

Source: Yahoo! News

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Given that the economy is now officially in a recession (whoulda thunk it?), I though it would be worth talking a bit about recession-proof careers. I’ve written in the past about this topic, but I actually just ran across another article on the topic, and decided to highlight it here.

Health Care

The health care industry is expanding rapidly as our population ages. Jobs with particularly stable prospects include doctors, nurses, pharmacists, physical therapists, and physician’s assistants. For those without a 4-year degree,

Education

Teachers in high-demand fields such as math, science, or bilingual education should have a relatively easy time finding and keeping a job, especially in high-growth areas of the country. College enrollment is also on the rise, which is good news for college instructors.

Security

Layoffs in this industry are rare, meaning that police officers, detectives, private security guards, and other types of security workers have very stable job prospects. And even if you do lose your job in one of these areas, it will be relatively easy to find a new position regardless of the economic climate.

Environmental Sciences

The Bureau of Labor Statistics expects opportunities in environmental careers, including positions for ecologists, hydrologists, and environmental chemists, to grow 25% over the next decade, well ahead of the average for other fields.

Government

Firings and layoffs are much rarer in the federal government that in other sectors of the job market. Even when the economy hits the skids, the government doesn’t typically downsize.

Other Options

For those without a four-year degree, look for jobs that can’t easily be outsourced. In the health care industry, jobs as a health aid, or medical or dental assistant are solid bets. Becoming an electrician or mechanic are also solid choices.

Source: Kiplinger.com

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It’s official. The United States economy has been in a recession for roughly one year. According to a statement from the National Bureau of Economic Research:

…a peak in economic activity occurred in the U.S. economy in December 2007. The peak marks the end of the expansion that began in November 2001 and the beginning of a recession. The expansion lasted 73 months; the previous expansion of the 1990s lasted 120 months… A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough. Between trough and peak, the economy is in an expansion.

The Wall Street Journal notes that, if the recession lasts beyond April 2009, it will be the longest recession since the Great Depression. The 1990-1991 and 2000-2001 economic downturns lasted 8 months apiece, and the major downturns in the 1970s and 1980s lasted 16 months apiece. The good news is that we’re already 12 months in, so hopefully things will start looking up soon. Until then, I hope you have a recession-proof job.

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Given all of the economic doom and gloom that’s been dished out over the past several months, I fully expected Black Friday to be a bust. But guess what? According to data from ShopperTrak, Black Friday retail sales increased 3% over last year’s levels. While this was the smallest year-over-year gain since 2005, it was still a gain.

This increase seems particularly significant given that a recent Gallup poll indicated that shoppers expected to spend 29% less this year. Of course, there are no guarantees that a better than expected Black Friday will translate into a strong holiday shopping season overall. All of this begs the question…

Is the economy really doing better than we’ve been led to believe? Or are people simply blowing their cash early in search of the hottest deals, only to tighten their belts as Christmas draws nearer. Another factor to consider is that there are only 27 shopping days between Black Friday and Christmas this year compared to 32 in 2007. Perhaps the shorter shopping season has kicked shoppers into high gear.

What about you?

Are you cutting back this year? Or is it business as usual?

Hat Tip: NoCreditNeeded

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Late last week, Congressional Democrats put their plans for another economic stimulus package on hold until after President-elect Obama is sworn into office in January. In the near term, they’ll focus instead on a $6B expansion of unemployment benefits as well as a possible $25B bailout of the auto industry.

According to Senate Majority Leader Harry Reid, the larger plan was slated to include unemployment benefits, auto industry help, aid to states and a large increase in infrastructure spending. The total package would have cost $61B to $150B. There was no mention of a second stimulus check.

Source: Mercury News

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The latest issue of Time Magazine had an interview with Ted Turner, who’s been popping up all over the place thanks to his new book “Call Me Ted.” In it, Turner shared some interesting economic insights. Here are the most relevant parts:

On whether or not the US can maintain its position as a global economic leader…

Yes. There’ll probably be an evening out of the wealth somewhat. But I still think that the United States has so much momentum going for it. If we do the right things, there’s no reason we shoudln’t still be the global leader economically. You know, we had a great run on borrowed money for 30 or 40 years, but you can only go so long living beyond your means. And that’s what we’ve been doing.

On the $700 billion bailout plan…

When I was running CNN we never had any money and I never asked for a bailout. Where does it end? AIG, you know, they need $40 billion more and we only have them $100 billion last week, didn’t we? It’s just ridiculous. And now General Motors. They said we’re goin to give them $25 billion to retool. Retool what? They’ll run through that money so fast they’ll be back wanting more. We can’t keep every loser alive.

On whether or not “immense” wealth brings peace of mind…

When I did have it, I gave over half of it away. I lost 85%. And I’ve lost 12% of what was left in the last couple of months. But I never worshipped money. I started middle class. I didn’t finish college because I couldn’t afford to. I didn’t really have it for very long, because I made it real fast when CNN turned the corner, and that’s when I gave much of it away. Then right after that we did the AOL merger and it went down the toilet.

As far as our current economic woes go, I think he nailed it on the head. We’ve been living well beyond our means, and we’re just now starting pay the piper. As for the bailout, I likewise share his sentiment. It’s incredibly maddening to be put in the position off having to bailout bad businesses simply because their collapse would have catastrophic effects. What good will a bailout of GM do? While it would be nice if they turned the corner, it’s more likely that this will amount to little more than an expensive stay of execution.

In case you’re interested, Time.com has a full transcript of the interview, and AOL has the video.

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As if the recent stock market turmoil hasn’t been enough, here’s a disturbing trend for retirement savers… According to a recent article, General Motors and Frontier Airlines have both stopped matching employee contributions to their 401(k) retirement accounts.

While these companies happen to be in particularly downtrodden industries, and thus might not be a harbinger of trouble on the retirement front in general, you know what they say… Past is prologue.

Looking back to the 2001-2003 recession, the Vanguard Group estimates that 5% of the company retirement plans that they manage suspended their matching retirement contributions, though most reinstated them within 2-3 years. Apparently these contributions represent an average of 11% of a companies profits, so they’re an attractive cost-cutting target.

The ability to freely reduce these sorts of benefits is one of the things that makes 401(k)-type plans more attractive to employers than traditional pensions. Unfortunately, the suspension of these sorts of benefits is akin to a pay cut for affected employees. Sure, they can’t touch that money until retirement, but it’s still their money.

Imagine how you’d respond if you received a memo saying that you’ve been targeted for a salary reduction. A cut in retirement benefits should be interpreted in exactly the same way.

Source: IndyStar.com

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While a great many Americans have been focusing on the possibility of another stimulus check, the $1000 Emergency Energy Rebate has been flying a bit under the radar. In case you’re not aware, President-Elect Obama has floated the idea of enacting a windfall profits tax on “excessive oil company profits” in order to fund an immediate $1,000 emergency energy rebate for American families.

While it remains to be seen whether or not such an idea would gain traction given the recent (and dramatic) drop in energy prices, it’s still listed on Obama’s website. It was also listed as one of the energy-related agenda items on Change.gov as recently as last Friday, though all of the agenda items (not just energy-related) have since been removed.

What do you think of this idea?

I have to admit that it’s not entirely clear to me how this is an energy issue. Sure, it would be done in the name of high energy costs, but it really wouldn’t be any different than a second stimulus check. And besides, wouldn’t you expect the oil companies to simply pass the added cost of the windfall tax on to the consumers?

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I’ve written in the past about the possibility of the feds sending out another stimulus check, and I just saw on the news that House Democrats are pushing for a new round of economic stimulus, so… Perhaps it will happen.

That begs the question…

What would you do with a second stimulus check?

According to a recent consumer poll, just 39% of respondents say that they would spend it, with 38% saying they’ll save it, and 18% saying they’ll use it to pay down debt. Of those who envision spending it, 21% said they would spend it on holiday gifts, whereas the other 18% would spend it on themselves and their families, but not on holiday gifts.

What about the first stimulus check?

Well… 33.5% of respondents reported spending it, whereas 29.3% said they saved it, and 37.1% said they used it to pay down debt.

Source: Dallas News

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Earlier this week, I wrote about the fate of gas-related surcharges given that fuel prices have dropped so steeply. Shortly thereafter, I spotted an article in Smart Money talking about this very topic. They argued that, while some businesses actually have reduced or eliminated their fees, others are sticking to their guns.

What follows is a list of eight industries where fuel savings haven’t thus far been passed onto consumers (at least not entirely):

1. Airlines
2. Cruise lines
3. Shipping companies
4. Waste management companies
5. Taxis
6. Water delivery
7. Independent contractors
8. Florists

While some companies have adjusted their surcharges downward, these changes haven’t kept pace with decreases in fuel costs. For example, FedEx and UPS have decreased their ground surcharge by just 1%, and they’ve actually increased their express shipping surcharge by 1.5%. To be fair, it’s possible that some of these industries are still dealing with fuel prices that they locked in at a higher level in an attempt to combat further increases.

Source: SmartMoney.com

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The other day while driving home from work, I was struck by how far the price of gas has fallen. Around here, it’s down into the mid-$2 range, well below the $4+ prices that we were dealing with just a month ago.

This sudden drop in fuel prices got me to wondering about what will happen to all of those pesky additional fees popped up when fuel prices skyrocketed. You know, things like additional delivery fees, fuel surcharges, excess baggage fees for air travel, etc. These things were all introduced in the name of high fuel prices, but I haven’t seen anyone rushing to do away with them as fuel prices have slipped.

Call me a cynic, but I suspect fees of this sort are a one-way street. They get added when times are tough, and they never go away. Of course, it’s possible that fuel prices just haven’t fallen far enough for long enough… I hope I’m wrong.

What do you think? Are these nickel and dime surcharges here to stay? Or will they disappear if/when fuel prices drop further?

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It seems that economic stimulus checks are once again a hot topic… Back in June, I wrote about Barack Obama’s economic plan and the fact that he was floating the idea of a second round of economic stimulus checks. While talk of another stimulus package cooled for awhile, it’s heating back up…

Apparently Deomcratic lawmakers are now considering another stimulus package, which some economists are saying should total as much as $300B, and happen as soon as November. Fed Chairman Ben Bernanke recently weighed in, saying that a fiscal stimulus package “seems appropriate.”

Bernanke went on to argue that an “ideal package” would not only boost spending, but would also include measures to combat the tight credit situation. Among the measures that have been batted around are an extension of unemployment benefits, loan guarantees, additional support for Fannie Mae and Freddie Mac, tax credits, and another round of stimulus (i.e., tax rebate) checks.

I recognize that this might not be a popular opinion, but I’m not a big fan another round of stimulus checks. In fact, I didn’t really like the first ones. The main reason for this is that the government doesn’t actually have the money to give away. Borrowing from the future to prop up the economy in the short term just doesn’t seem like a sound long-term economic policy.

Note: Details of the economic stimulus package have been circulating, and there’s no mention of a second stimulus check.

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As many of you know, there’s a big difference between money market savings accounts and money market mutual funds. The former is held at a bank, and subject to FDIC insurance coverage. In contrast, the latter is typically held at an investment company or brokerage and, while money market funds are designed to maintain a price of $1/share, they’re still technically mutual funds. Thus, despite being functionally equivalent (more or less) to their bank-based counterparts, there’s always a chance that money market funds will “break the buck” (i.e., allow share values to fall below $1) such that you’ll wind up losing principal.

With that as a backdrop, I wanted to spend a bit of time talking about the U.S. Treasury’s recently announced money market mutual fund insurance program. In case you weren’t aware, the Treasury recently introduced this plan in an attempt to increase confidence in money market funds and combat a recent run by panic-stricken investors who were pulling their money out at an alarming rate. Unfortunately, while this plan guarantees that participating funds won’t “break the buck,” it’s still nowhere near as good as FDIC insurance coverage.

Here’s why:

1. The guarantee is limited only to funds that voluntarily participate. The good news here is that most major fund companies have thrown their hats into the ring, meaning that the vast majority of these sorts of funds are now covered.
2. The guarantee only applies to money invested prior to September 19th. Because this was intended to stop people from liquidating their holdings, new contributions aren’t covered.
3. Your investment returns may suffer as a result of this plan.While the funds companies are responsible for paying the costs of this insurance, it’s likely that they’ll ultimately pass it along to investors in the form of slightly higher expense ratios.
4. The coverage is only temporary. As of right now, the coverage is slated to last only three months. While it’s possible that the Treasury will extend the plan, there are no guarantees.

So… Unless you already had money in place in a covered fund, the Treasury’s guarantee is a complete non-issue for you. In fact, it could be viewed as somewhat of a negative in light of the fact that participating companies will have to pay a bit extra for the coverage, and those costs will ultimately come out of your pocket. This is exactly why Fidelity and Vanguard both dragged their feet before agreeing to participate. Both companies are extremely well capitalized, and neither one saw this as a necessary step to protect their funds.

If you’re concerned about the preservation of capital, you would be well advised to stick to bank accounts that are covered by FDIC insurance (note that FDIC coverage was recently increased to $250k), or credit union accounts that are protected by NCUA insurance.

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In case you haven’t heard, the recent economic bailout bill included a provision for increasing FDIC insurance limits to $250,000 per depositor per insured bank. This move is intended to shore up confidence in struggling banks and improve liquidity in banks across the country.

What increased FDIC coverage means for you

The new limits mean that a married couple such as my wife and I could conceivably keep up to $1M at a single bank — individual accounts for each of us ($250k/each) plus a joint account ($500k). Not that it matters too much for us, but the increased coverage is currently slated to end in December 2009, though it’s conceivable that additional legislation could extend this deadline, or make the change permanent.

Who’s paying for the increased FDIC coverage?

Interestingly, FDIC premiums (paid by banks) are increasing, with the average premium going up to roughly double the current rate (from 6.3 to 13.5 cents per $100). This change has actually been in the works since July, and will apply only to the first $100k of deposits per depositor, as the FDIC isn’t being allowed to increase their rates to offset the additional coverage. Rather, they’ll have to borrow from the Treasury to cover losses due to the higher limits.

The future of FDIC insurance

On a related note, Congress actually approved new limits that would peg FDIC coverage to inflation back in 2005. However, that measure wasn’t scheduled to go into effect until 2011. Stay tuned — I’m sure this isn’t the last we’ll be hearing more about FDIC coverage in the coming months…

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In an attempt to make the $700B economic bailout more palatable, lawmakers have apparently stuffed it with $110B of earmark (porkbarrel) spending. While some of these earmarks are arguable useful, like an tax credit for research and development and an increase in FDIC insurance, others are much less attractive (at least to me).

Here’s a sampling:

• Creation of a seven-year cost recovery period for construction of a racetrack
• A refund of excise taxes to Puerto Rico and the Virgin Islands for rum
• Income averaging for money received from the Exxon Valdez litigation
• Provisions related to film and television productions
• Extension/modification of duty suspension on wool products, and duty refunds
• Exemption of a specific arrow for child archers from an excise tax

So tell me… Exactly how do these projects relate to saving our economy?

Source: CNN.com

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Another day, another bank takeover… This time it’s Citigroup, Inc. (C) acquiring the banking assets of Wachovia Corp. (WB) for $2.1 billion in stock. They are also assuming $53 billion in Wachovia debt.

Once again, the FDIC orchestrated this takeover (with help from the Treasury Department and the Federal Reserve). In this case, however, the FDIC may wind up on the hook for losses in connection with Wachovia’s mortgage portfolio. As was the case with the WaMu takeover, the transition should be seamless for bank customers.

Source: WSJ.com

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Update1: From USA Today…

JPMorgan Chase (JPM) acquired the banking operations of Washington Mutual, (WM) the nation’s largest savings and loan, for $1.9 billion Thursday night in a deal brokered by the Federal Deposit Insurance Corp.

“For all depositors and other customers of Washington Mutual Bank, this is simply a combination of two banks,” said FDIC Chairwoman Sheila Bair. “For bank customers, it will be a seamless transition. There will be no interruption in services, and bank customers should expect business as usual come Friday morning,” Bair said.

Original: Apparently JPMorgan Chase & Co. (JPM) is close to a deal to acquire Washington Mutual (WM). Federal regulators have apparently been heavily involved in the negotiations.

While the exact structure of the deal isn’t know, the FDIC apparently won’t be on the hook for any of the costs. That being said, the Wall Street Journal is reporting that it’s likely that “another arm of government” will bear at least a portion of the costs. This makes me wonder if the government might not be picking up some of WaMu’s bad debt to sweeten the pot for Chase. Details should be forthcoming, as Chase has a conference call scheduled for 9:15 PM EST (about 5 minutes from now).

See also: Is WaMy on the Cusp of Failure?

Source: WSJ.com

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Over the past several weeks, I’ve received a number of comments and e-mails from readers wondering what would happen to their mortgage if their banks fails. Is the loan terminated? Do they have to pay it back immediately? Or do they get to walk away free and clear? In short, the answer to all three questions is an emphatic “no.”

From the bank’s perspective, your mortgage is an income-producing asset, and it can be sold to another institution at any time. In fact, this is quite commonplace. For example, all of our mortgages (four total, including two related to refinancing) have been sold off by the originating institution within a few months. The good news is that the terms of the mortgage do not change when this happens.

Returning to the issue of bank failures, if the bank that holds your mortgage were to fail, the FDIC would step in and oversee the sale of their assets to another institution. Your mortgage would thus be transferred to a different lender, but the terms would remain the same. Shortly after the transfer, the new lender should contact with you instructions as to how and where to make your payments. Mortgage transfers are accompanied by a 60 day grace period during which you cannot be charged a late fee.

As an aside, the current financial turmoil seems like a great opportunity for scammers. Given all the news about banks on the edge of failure, I’m sure it wouldn’t take much to convince unsuspecting homeowners to send their mortgage payment elsewhere. So… If you receive a letter directing you to change where you’re sending your payments, be sure to double-check before acting on it.

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As much of a roller coaster ride as we had this past week, here are some things to consider:

• This week, Dow experienced drops of nearly 450 and over 500 points, but…
• The Dow finished the week down just 34 points
• In the past month, the Dow is up 40 points
• Over the past 5 years, the Dow is up 18%
• Over the past 10 years, the Dow is up 44%

So… Keep things in perspective. It’s not all doom and gloom. Then again, the end-of-week rallies are likely to cost us taxpayers hundreds of billions of dollars. Hmmm…

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The big news today was that the White House is pushing for a so-called “Rescue Package” for the economy. While details are still being fleshed out, the Treasury Department will apparently seek authority to spend “hundreds of billions” of taxpayer dollars to purchase illiquid assets from U.S. financial institutions.

These buybacks will be managed by a new entity that will run “reverse auctions” in which the federal government will buy securities from those that offer them up at the lowest price. As costly as this sounds, Treasury Secretary Henry Paulson is convinced that:

“…this bold approach will cost American families far less than the alternative — a continuing series of financial-institution failures and frozen credit markets unable to fund economic expansion.”

It won’t be simple, though. The Wall Street Journal asks:

Does [the government] pay more than fair-market value for hard-to-assess distressed assets, putting taxpayers on the hook for any losses? Or does it drive a hard bargain, buying for pennies on the dollar? The latter approach would further hurt financial institutions, since they would have to write down the losses and take additional hits to their balance sheets.

This line of thinking has led former Treasury official Douglas Elmendorf to argue that “This approach saddles taxpayers with significant downside risk but limited potential upside gain.”

In other news, the Treasury is temporarily insuring money market mutual funds to (hopefully) head off a stampede of withdrawals. Meanwhile, the SEC banned short-selling on 799 financial stocks for at least the next ten days. The Treasury, along with Fannie Mae and Freddie Mac, will apparently also step up efforts to buy mortgage-back securities to keep the housing market afloat.

Source: Wall Street Journal

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On the heels of news that Lehman Brothers is fighting for their survival, a Morningstar analyst commented that:

“[Washington Mutual] is the next most likely candidate to have major issues… They got into subprime lending, they got into ARMs. Their home equity book is quite large, and these losses are building and building and building… and they simply do not have the capital to absorb these easily.”

Wow, tell us what you really think. Apparently WaMu’s biggest mortgage bets are in areas with the weakest housing markets, making them especially vulnerable. Oh, and did I mention that WaMu recently entered into a “Memorandum of Understanding” with the Office of Thrift Supervision? No wonder they’ve been offering high-yield online CDs — they need capital.

The scariest part of this is that, according to Douglas McIntyre, editor of 24/7 Wall Street, a WaMu failure may be too big for the FDIC to handle alone, meaning that the U.S. Treasury Department would have to step in.

Source: ABC News

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According to recent reports, mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE) are on the cusp of failure, and may be taken over by the federal government as soon as this weekend. The two companies, which together account for nearly half of the nation’s $10+ trillion in mortgage debt, have piled up $14 billion in debt over the past year and are facing additional losses going forward.

The news of the looming takeover broke following a report by the Mortgage Bankers Association that more than 4 million American homeowners were either behind on their payments or in foreclosure at the end of June. That’s a record 9% of all mortgagees.

The takeover, which is expected to cost taxpayers in the neighborhood of $25 billion, was made possible in part by the so-called Housing Rescue Bill, which was signed into law in late July.

Since this news first broke (after the financial markets closed on Friday), shares of both companies have tumbled over 20% in after-hours trading. It’ll be interesting to see how the markets react when they re-open on Monday.

Source: Business Week

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Related Articles at fivecentnickel.com:

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A reader named Brian recently wrote in with the following quandary:

We own a condo in Las Vegas. It was purchased 5 years ago at a value of $200K. It currently is valued at $125K. The loan we have is for $163K and it is interest only with a 4 point margin on top of the current Fed* interest rate. We cannot re-finance because of this and feel handcuffed as a result. Can you offer any advice to me?

If you read through the comments, you’ll see that Brian and his wife are currently renting out the condo. Unfortunately, they’re paying substantially more on their mortgage than they can get in rent, and they have no prospect of moving into it to save money because they currently live in another state.

This is definitely a tough spot to be in, and I’m afraid that I don’t have any magical words of advice that would fix this situation. It’s a slow market and, even if they were able to sell for the current value of $125k, they’d have to come up with an $38k in cash to pay off the mortgage ($45.5k after factoring in a 6% realtor commission).

If they were living in the condo and hadn’t owned it for so long, I’d suggest they try getting into a more affordable FHA mortgage under the terms of the so-called Housing Rescue Bill. Unfortunately, Brian and his wife don’t qualify.

So, dear readers… Do you have any suggestions for Brian?

*It appears that the “Fed” rate in question is the prime rate (currently 5%).

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