Real World Finance$

Something has been bugging me for a while in all this credit crisis we’ve been having.  The government keeps doing what they can to stimulate the economy and get us out of the credit crunch.  They keep trying to get more money into the hand of the banks to free up the credit market and more money into the hands of consumers to encourage us to spend.

Isn’t it the spending that got us into trouble in the first place?  It was too much credit that lead to the defaults that worked it’s way up to banks not wanting to lend money to each other.  If Americans had been saving more of their income and spending  less, then the banks wouldn’t have reached this crisis in the first place.

Of course, if that had happened, our economy wouldn’t have had the great boom we have experienced the last decade or so.  If avoiding the bust means avoiding the boom, I think we should consider that option.  But, let me run through the scenario to make sure I’ve got this right:

1. Economy is booming and people are spending more money than they make, borrowing the rest from the bank.
2. The banks lend out lots more money to people than the people are putting into the bank to save.
3. Banks run out of money to lend because the lent it all out already.
4. Banks go under.
5. The government gives the bank more money to try and stimulate the economy back into a boom (see #1)

Maybe it’s  just me, but I’m thinking we need to consider how to get out  of this little cycle.

There have been a rash of financial bailouts over the past several weeks.

• Bear Stearns
• Fannie Mae & Freddie Mac
  
• AIG

Add to that the restructuring of the last 2 large investment banks

• Goldman Sachs & Morgan Stanley

And don’t forget the other bailouts in the works by congress

• $700 Billion for the financial industry
• $25 Billion for the auto industry to re-tool for more efficient vehicles

Wow, that’s a lot of money going to help out companies who made bad decisions and I’m sure I’m forgetting some.  Should we really be helping out these companies?  Shouldn’t they be forced to face the consequences?  Yes…. and No.  It’s a difficult question to answer.  Yes, they should face the consequences of their actions, but those consequences if they were left to rot would have ripple effects to more Americans than those that will be felt by the bailouts.

Consider just the housing market for instance.  If all of these large banks were forced to make do at the same time, then the cost of mortgages would skyrocket in the very near future as no one would have money to lend (supply would be next to nothing).  With the difficulty of getting a mortgage, the construction market would turn even worse than it is today, forcing even more people into unemployment.  These workers had nothing to do with how the banks made their decisions, but they will feel the after effects.  Fewer construction workers means there will be fewer pick-ups sold, fewer hammers sold and so on and so forth.

As my wife and I listened to NPR over the weekend and heard about all these deals going on, part of me wanted to be a real fiscal conservative and say “tough luck.”  But as much as higher taxes and lower income will probably hurt me, it’s still for the greater good of me to be able to help out.  As I finally said to my wife, “Now is not the time to point fingers.  Now is the time to fix things.”  It’s not fun doing what this country is doing right now, but it needs to be done to keep things from going from worse to terrible.

Of course, there SHOULD come a time for finger pointing.  We must keep in mind what happened and work diligently over the next few years to avoid the type of scenario we have witnessed from reoccurring.   Failure happens, but it can also be a valuable learning experience.  As long as we use this massive failure as a way to learn from our mistakes, we will be a stronger country in the future.

So, what about me?  Where’s my bailout?  Well, either you will indirectly be bailed out by keeping your job and/or your home when you otherwise might have lost it, or you are part of the unfortunate bunch that will only pay the bill to help everyone else.  So sorry, thanks for the help, we promise to do better next time.

Our current line of credit that is the bulk of our unsecured debt is at a 10.99% interest rate.  Not the best, but it’s also a line of credit with a fixed rate and fixed payment schedule which helps to avoid the “minimum payment” trap.  My wife, the homemaker, just got a solicitation in the mail from the same bank advertising the same program at as low as 7.99% (when we got ours, the ad was for as low as 9.99%). 

So, me being the industrious person I am, I called them up and asked for a lower rate.  After all, the Fed has lowered their rates by 3 points over the last 6 months or so.  Here’s my recollection of the phone conversation:

• Me - I wanted to inquire about getting the interest rate lowered on my account.
• Bank - I’m sorry, but that account has a fixed rate, only variable rates adjust down.
• Me  - I realize that, and I’m asking for a review of the account to get a lower fixed rate.
• Bank - I’m sorry but we’re not able to do that.
• Me - You realize the Fed has lowered rates 3% in the last several months right?
• Bank - Yes, but they lowered the Prime rate and only variable rates tied to prime adjust down.
• Me - Actually, the Fed doesn’t deal with prime, that’s set by the bank.  The Fed lowers the Fed funds rate.
• Bank - No, the Fed sets the prime rate and only variable rates tied to prime are able to adjust down.
• Me - You see, the Fed has lowered both the Fed Funds rate which is what banks charge each other for overnight loans as well as the discount rate which is the rate the Fed charges banks like you to borrow money directly from them.  So,  you are borrowing your money cheaper and I was wondering if I could get mine reviewed for a cheaper rate as well.
• Bank - I’m sorry, we’re not able to do that.
• Me - My account is up to date and in good standing, correct?
• Bank - Yes.
• Me - So, the only way for me to get my rate changed is to either open a new account under my wife for the amount you offered her, or to move my up to date, always on time payments to another bank.
• Bank - Yes.
• Me - Okay, thank you.

So, it appears that even the bank customer service people aren’t taught about how banking actually works, and they are supposed to help the customers.  I think the lady was a little taken aback when I explained in detail what exactly the different Federal Reserve rates were.  She sort of shut down and gave as little response as possible after that point.  I wasn’t trying to be rude, just trying to make an argument that I should be able to get a reduction. 

Yes, there is an occasional bank that ties their prime rate to LIBOR (London Interbank Offered Rate), but most strictly advertise prime and want you to assume there some big board someplace that says Prime Rate that is set by the market.  It just ain’t so.  There may be some “accepted” norms for what constitutes prime in general, each bank still has the final say in what their prime is.  Oh, and for the record, my view of prime rate was given to me by a graduate finance instructor of mine who was a retired bank president.

What does it say about the state of our economy that even the people who are supposed to help us with our banking don’t understand the basics of how banks operate?  At least, I hope the lady really just didn’t know.  If the bank had taught her what she told me, then the bank really is out to get you with misleading information.  Either way, the bank needs to revisit their training program.  A script and phone manners just isn’t enough.

If heard this comment a number of times from friends, co-workers and students of mine.  I heard it most 6 months or so ago when there was talk about how much US Currency China has in its reserves.  A couple of my students said that China could just put those billions of US currency back in the market and our economy would be toast.  To some extent that is true, but we often forget to look at the full consequences.  What happens to China if the US economy goes in the tank?

According to the CIA Factbook for China, their estimated GDP (the value of all goods and services produced in a country in a given year) based on exchange rate is about $3.249 Trillion US Dollars.  Of that, $1.221 Trillion is exported to one country or another.  The US makes up 21% of all exports (which equates to $256.41 Billion).  So, the value of our exports make up 7.89% of the total production in China. 

First, it puts things in perspective a bit to see that we are importing less than 8% of the goods and services that China produces in a year (and our store shelves are full of stuff made in China).  As a matter of fact, only 37.6% of the Chinese GDP is made for export.  There is still a LOT of products staying in country for their own consumption.

Second, suppose a country like China were to flood the market with US Currency and devalue our dollar.  What next?  Well, with a weaker dollar our purchasing power goes down.  That $700 Chinese TV would now cost $1000.  That means we will buy fewer and import fewer of those TVs from China.  So, by devaluing our currency, China cuts demand for it’s own products.  They don’t want a weak dollar because they need us to keep buying their products. 

You can go around the world and find many countries who are in this same situation with the US.  Without the US consumer economy going strong, much of the world will hit tough economic times as well.  That is why you see foreign investors and government entities willing to put forth money to help shore up our lending institutions at the moment.  They know that a drop in our economy will hurt them as well.

Most kids I grew up with and knew had a savings account from a very early age, I was no exception.  My parents started a savings account for me at like 2 or 3.  Of course, I never really knew much about it, and definitely didn’t understand how it worked until much later.  Plus, the savings account was a custodial account with my parents actually controlling the money and my name was basically on there for fun.

But when did you get your first bank account that was all yours?  I was thinking back the other day and realized I got mine when I was about 16.  Growing up I had always had some sort of job.  I sold greeting cards door to door before I was 10 and made extra money to buy myself a radio and one of the very first Nintendos to come out (yep, got one with R.O.B. if you remember those).  Then at 13 or so I took over my brother’s lawn mowing business cause he could drive and got a “good paying” job at a fast food restaurant.

Those summers of mowing I was meticulous with my bookkeeping.  I kept a ledger book and recorded every dollar I made from mowing (eventually raking leaves and snow shoveling as well) and subtracted off all my expenses in gas and oil for the mower.  I even bought a weed-eater the next year and upped my prices to add that to the service.  For being 13-14 in a small town of $600 and make a couple thousand dollars in a summer without having to walk more than 4 blocks from home, I think I did pretty well. 

That experience convinced my parents it was okay for me to get a my own checking account when I was 16.  The went with me down to the local bank and talked with them about it being okay for me to open an account without them as co-signers.  Doubt you can really do that nowadays, but back then at a small town bank it was okay.  Most of my other friends had their own checking accounts before they got out of high school as well. 

What about you?  When did you get your first “all on your own” bank account and what experience did you have with your personal finances prior to that?

So, as I’ve mentioned from past posts on my budget, we are giving ourselves a fixed amount to spend every 2 weeks between paychecks.  We’ve done this by splitting the direct deposit from my paychecks between our “spending” account and our “bill-pay” accounts at different banks. 

Currently, we are giving ourselves $600 to spend during the 2 week period.  The hope has been that we won’t typically use all of that and will move some of it to savings when the 2 weeks is up so we can save for larger expenses (such as summer clothes shopping) that don’t occur regularly.

Our first 2 weeks we spent nearly all of the funds.  However, that did include our first trip of the year to Sam’s Club to stock up on paper products and included the membership fees.  We also had a vet visit for the dog with shots involved.  Those 2 things drained it a bit, but we still made it by. 

I just got paid again this morning and looked at the account.  With expenses that had been transacted, but not cleared yet, we still had $150 left!  I was very excited.  We had also gotten our escrow account refund and deposited it in that same account a couple days ago, so both those amounts got moved over to the new savings account for now.  It’s a good feeling when a plan starts to come together!

If you want to know more about how we budget and manage our money, just check out the banking and budgeting categories of the archives!

I read an article this morning on Kiplinger titled Financial Milestones for Kids.  The author, Janet Bodnar, list some financial awareness that kids should have at different ages.  I tend to agree with her on most points and thought I would share her thoughts with you.

• Preschool:  Basic awareness, know that money can be used to trade for things and the difference between the different types of money (pennies, nickels, etc.)
• Ages 6-7:  Great time to start a basic allowance.  Kids are also learning basic math by this age and should learn that 2 nickels make a dime and 4 quarters make a dollar.  At this point they will also start to notice how much things cost and make some of their own buying decisions.
• Ages 8-9:  Here she suggest opening a savings account.  We’ve had one for our son for much longer than this, but he’s just now starting to understand how it works (he’s 8).  We’ve also been training him to bargain shop at the grocery store and compare prices.  He loves popcorn, so his goal is to always find the best deal on that when we need to get more. 
• Ages 11-12:  She suggests expanding allowance to include extra for chores around the house to learn the effort involved with earning money and to consider learning about investing in stocks.  We’ll likely start the stock investing with our son a little before this age, but probably not much.
• Ages 14-15:  Start thinking about your kid getting a summer or part-time job.  Since we homeschool, it doesn’t have to be limited to the summers.  She also suggests an ATM card at this age.  I’m not so sure I’ll agree with that at this age yet.  That depends a lot more on their responsibility with money than just their age.  The point of giving them easy access to their own money in the bank is not a matter to take lightly I think.
• Ages 16-17:  Here she suggests they definitely have a summer job as well as a checking account with a debit/ATM card.  I can see this much more at this age as they are getting closer to college and will need some experience managing and handling their own money.  She also suggest giving them full access to their clothing allowance for school and letting them make the decisions of what/how much to buy.
• Age 21:  Now she says they are finally ready to apply for a credit card.  In today’s world, good luck getting them to wait that long.  Expect them to have one when they come home from their Freshman year if not by Christmas that year.  I know I had one well before now, and was very responsible with it during college.  I never carried a balance on it during school.  It was after graduation that I started down my path of debt.

While much of this might seem to be sound advice, again, it’s more about your own child and their awareness and responsibility.  If they are interested in learning about money and eager to take on those responsibilities, give them a chance and see how they do.  Set up some safety nets to make sure they can’t spend more than they have.  That way you can make sure they learn a lesson should they go “hog wild” once they have control. 

Have you started educating your child on finances?  Ours is involved in the family finances when we review our budget and goal status from the month and understands what we are trying to do with getting out of debt.  He also has a checkbook register he uses to keep track of his spending money we have set aside in an E*Trade account for him.  He doesn’t have direct access to his money there, but we will spend for him when he picks out something, then balance his register.  At the end of the month we “re-balance” the online account to match what he has left to spend.  We even let him keep the interest!

I heard a really interesting discussion the other night on the NPR program On Point.  The piece was titled “American Banks, Foreign Bailout“.   While I only heard about 20 minutes of the hour long program, what I did hear was quite interesting.

 There seems to be some people who are upset that large corporations like Citibank (C) are being bailed out by foreign dollars.  These are “US” banks and we shouldn’t have to look outside the country they say.  I even heard my brother-in-law mention something about it this weekend.  People are especially concerned about the Chinese and Middle Eastern Countries. 

What really gets me is how much some people think we are still an independent country.  Have you looked at your store shelves lately?  Do you see where the stuff you are buying is coming from? 

To start with, large banks like Citi are not just in the US anymore.  They have hundreds of branches around the world and do a lot of business outside our borders.  Other countries SHOULD be interested in their health for their own systems as well.

As for China and middle eastern countries like Saudi Arabia, what interest would they have in destroying our economy?  Who would China make all their toys and cell phones for if our economy shrank and we stopped buying?  Who would buy all the extra oil produced by OPEC if the US suddenly had an economic shut down and people cut back by even 20%? 

As one of the guests on On Point mentioned, this is just one more step in the globalization of the banking industry.  We’ve come a long way from the days of small, local banks in every town along  the country road.  Today’s world of banking is much more consolidated and global.  There’s no reason to fear some foreign investment in US based banks.  They are just as concerned about our banks and our economy’s health as we are.  There are too many economies in this world that are tightly interwoven with our own for others to let our economy slip and fall. 

It’s time we really start our budgeting with our new financial structure.  Today we should be getting the check from the refinancing of the house and Thursday I will get my next paycheck.  This pay day will be a real check instead of direct deposit as this is when they will test the direct deposit to our new banks.

So, I’m going to be doing some math here to figure out how much money we need between now and my next paycheck and move some money around.  I had decided that, based on what expenses we typically pay for out of pocket, that we need about $600 of cash available every 2 weeks.  That much will be hitting our new spending checking account and the rest will go into our E*Trade checking account for paying bills. 

Also, every 2 weeks when I get another paycheck, I’m going to move anything out of our spending account to our E*Trade savings and then review our bill-pay checking to see if we have enough in it to pay the bill due the next 2 weeks.  Any extra will also be moved over to the savings account.

That all being said, I looked at what bills will be coming out of our current account the rest of the month.  There is still about a thousand dollars to come out.  That almost made me mad, but I also realized it is all debt payments.  There are 2 credit card payments, 1 payment to the personal line of credit and my wife’s student loan.  At least that will go towards reducing my debt.

On top of those bills, I will also need our $600 for spending.  That would leave us in pretty good position except that we also have some plumbing repairs to have done soon.  There was some real home made plumbing work done by the previous owners of our house that we’ve lived with the last year and a half.  However, the drain lines have started to leak recently and need to be fixed.  I got an estimate for $550 from a plumber the other night.  Not as bad as we had expected, but that’s because he thinks he can make the repair without breaking up the concrete floor like we had expected. 

When all is said and done, we’ll still be able to move all the cash back we got from our refinance plus a few hundred from my paycheck into savings.  Since we won’t have a mortgage payment next month, I’ll go ahead and make the payment, but to my savings instead.  We should also get a few hundred from our old escrow account as well.  Things are looking up!

I mentioned a while back that I had opened new savings and checking accounts with E*Trade.  I thought I would give a bit of review on what I think so far. 

First, I totally agree with Jim over at Blueprint for Financial Prosperity on his current review of setting up an account (Opened an E*Trade Complete Savings Banking Account).  I too had difficulty getting the online services set up and connected and had to call customer support.  They were quite easy to deal with, but it was a pain to have to go through the extra steps. 

That said, since I opened up my first Savings account there (the 5.05% APY is wonderful by the way), I have also opened a second savings account, a checking account and a Rollover IRA (to move my old 401(k)).  Adding these subsequent accounts were much simpler than the first, though I wish they would save all of my joint account information so I wouldn’t have to continually ask the wife for her SSN & Driver’s License information.  But, I understand the need as well.

The transfers to and from external accounts is a nice feature to have.  You have to verify the account in to E*Trade, and then verify your contact information again before you can set the account to transfer out of E*Trade.  These are relatively minor hassles, and I suppose worth the security should your account be compromised and someone try to transfer out to an unknown account. 

I’ve just written my first check from the checking account, so it has yet to clear.  I’ve also got my rollover in process, so it hasn’t made it to E*Trade yet either.  Soon I’ll also have my paychecks direct deposited to the checking and start using the bill pay services.  So, before long I’ll have a more in depth review of their other services. 

So far, so good.  Some small hassles in getting this established, but nothing major.  Well worth the interest rate at this point.