The Next Meltdown: Credit Card Debt
According to Businessweek , the amount of our national credit card debt is $950 billion… and a significant amount of it is going to go bad.
Innovest believes that credit-card issuers will take a $41 billion hit from bad debt this year and another $96 billion hit in 2009.
With a $365 billion dollar market for securities backed by credit cards, this means that the losses this year and next will have to be passed through the investment market. About 70% of all credit card debt is sold to big investors…making more losses for pension funds, hedge funds, and others. And people thought it was going to be over by next year: I don’t think so.
In fact, based off what I’ve read in the Wall Street Journal, there seems to be about a 20 year cycle between an up market and a down market. Another words, for 20 or so years, the market will go up, then it will go down and commodities and other investments will rise, with short ups and downs inbetween.
The credit card debt market collapse is just one more concussion for the U.S. economy. The bright spot is that this should make people pay more attention to the subject of money, and increase their financial awareness. And because the business market is cyclical, things will bounce back.
My Recommendations
- If you’re digging a hole, stop digging.
- Cut back where you can, and build a cash reserve if you have not done so.
- Run in the opposite direction of the herd.
In the future, if you have invested your time in gaining financial education , you will be able to act on great investment opportunities that will let you enjoy a greater peace of mind.
Happy learning!
Student Loans - The Silent Killer
If there is one thing that will kill your dreams of having even the same lifestyle that your parents had, it’s student loans.
If you look at the big picture, it shouldn’t be so bad…except for the fact that many young people are having trouble finding jobs or earning enough to live on their own and pay down their debt.
This problem is becoming increasingly wide spread, and I know it affects many of Gen Y. As the economy continues to decline, it is becoming harder for many to find jobs that pay enough to support often excessive levels of debt. Many students have debt that is well above the "averages" we hear about…one girl I’ve seen has a debt of $160,000! Think about what that has to be for a monthly payment, including compound interest…ouch!
We Have Options
The thing to realize is that we have options when it comes to dealing with your student loan debt.
We can move back in with our parents, room with our friends to cut down on rent, and/or start a part-time business. I believe starting a business is one way to get yourself out from underneath the rug of debt.
This article I read on CNN money - Student loans - a life sentence - talks about the issue and has a few interviews with recent college grads.
How can you avoid this problem?
First, you need to figure out where you want to go in life before you spend any more money. Do you need a degree? It would seem that every job requires it, but there are some that don’t. Explore your options.
Solutions:
1. Work a part-time job
- Try to work in an area that will help you grow toward learning something you can take with you for the rest of your life to get closer to your professional or personal goals.
2. Start a part-time business
- Look around and find out what is needed in your community and go provide it.
3. Invest in real estate
- Begin to build up cash flow that can support your student loan payments monthly so that you don’t stress about them.
I would begin by seeking help from an accountant, sharing with them your financial goals, and having them help you map out a plan based on where you want to be. Begin with the end in mind, and work your way back to today.
2 Financial Giants Go Down
This morning, Lehman Brothers (a 158 year old investment firm) filed for bankruptcy, and Merrill Lynch is selling itself to Bank of America. These two investment banks are number 2 and 3 out of the top 5 investment banks on Wall Street. The only two that remain are Goldman Sachs and Morgan Stanley.
It seems like the financial meltdown can’t get much worse.
While this may seem like financial Armageddon, there is a positive ray of light behind these events. First of all, it shows that the financial markets are finally dealing with bigger chunks of the bad debt that’s out there. Restructuring for the future is a necessary move and will lead to a stronger banking system on the other end.
To see an interview about the situation, watch this:
Fannie and Freddie: Tale of a Takeover
Fannie Mae and Freddie Mac, two of the nation’s largest companies that back mortgages, were taken over by the Fed as of Sunday 9/7/08. They provide funding for nearly three quarters of all new-home mortgages according to the Wall Street Journal . The government will provide nearly $200 billion dollars of capital to keep the two mortgage companies afloat.
What does this mean for your money?
Your dollar is going down in value…again. The more the government prints, the less yours is worth as they continue to add more supply to the market. Inflation will rise, and the those who are saving in low-yielding investments are having your wealth taken away. I hope the bailouts stop soon, we can’t afford this debt! For more on the story, see the Wall Street Journal article U.S. Seizes Morgage Giants. .
The Rules of Money for Gen Y
The rules of money have changed over time. It used to be that you could go to school, get good grades, get a safe, secure job (with benefits), and retire on Social Security, a pension, and personal savings.
As Gen Y, we realize this isn’t the reality for us. Safe, secure jobs are as ancient as the Romans and we know there is no golden parachute waiting for us in retirement.
So what exactly is the reality we face? In order to understand what’s to come, we must understand what’s happening in the global economy. We can look at the future of money by understanding the timeline of events that have led us to where we are today.
Bottom line: There are new rules of money for our generation.
In order to understand the new rules, we must first understand the 3 Types of Income :
- Earned
- Highest tax bracket. Federal, State, and FICA taxes erase about 50% of your total wages.
- Earned by trading time for money. There are only so many hours in a day, so there is a limit on how much you can earn.
- Portfolio
- Middle tax bracket. Long-term capital gains and dividends are 15%.
- Earned by buying stocks, bonds, mutual funds, CD’s, REITs, Notes, and other securities.
- Passive
- Lowest tax bracket. Taxes can be as low as 0%.
- Earned through wise investments in real estate and royalties.
In our generation, working hard and getting a high-paying job will make you broke. You’ll be working for earned income and pay more in taxes.
Your Goal: To turn your earned income into passive and portfolio income as fast as possible. In an age of rising inflation, the dollar will continue to fall and the only items of value left will be those true assets that you have.
The New Rules of Money…a Timeline
The rules of money have changed. But how did we get here?
Here is a brief timeline of events that have led the U.S. to be in the financial position that it’s in, and how it’s affecting you.
1913: Federal Reserve Bank Established Federal Reserve History
- This non-government, non-U.S., privately held bank would now control the monetary system.
August 14, 1935: Social Security Act signed into law
- This is the greatest pyramid scheme ever created. The idea was to provide workers with pay to help offset the expense of old age. The age to get full benefits was 65 when the law was first passed; in 1961, an Amendment lowered the age to 62 to get partial benefits.
1943: Automatic Payroll Tax
- The Federal Government needed money to fund WWII. In order to raise money, a law was passed that allowed taxes to be taken directly out of employees paychecks. This ensured the government got paid first before any wages could be taken home and spent on other things.
1971: Gold Standard Abandoned
- Under President Nixon, the U.S. is taken off the gold standard. No longer is our money backed by anything of real value. It is now a currency , subject to the ups and downs of the marketplace. The only reason it still holds "value" is because we all believe that it does. This will continue as we all play musical chairs…and the person left standing when the music stops will be the one holding a bag with worthless cash.
Watch an interview with Congressman Ron Paul about the monetary situation in the U.S. as a result of this decision: Ron Paul Interviewed by Mike Maroney
1974: Establishment of the 401(k)
- Workers longer life spans began to weigh heavily on the balance sheets of companies. They could not keep financing the lives of people for 15 or more years beyond their retirement. The Employee Retirement Income Security Act (ERISA) was passed to handle this challenge. Workers were now responsible for their own retirement planning: there were no more pensions to bank on. The problem? No financial education in school. This low financial intelligence has lingered through today, as our parents gave many of us old, outdated advice on the subject of money.
- The problem with 401(k)’s is that they are administered by financial institutions that diversify your investments in mutual funds as a "safe" long-term investing strategy. The problem is, not only are your investments not safe (they are only "diversified" amongst one type of asset class: paper assets), but they are taxed at the highest rate: earned income. So when you get to your retirement day and you think you have a big nest egg: wave goodbye, cause the government needs it’s share of your pie.
Stay up-to-date on here and listen to the financial news to know of what new law changes and other policies are put in place that can affect your money.
Two-Tiered Society: A New Era
Did you know that there are two tiers in our society?
Rich vs. Poor
There is the Rich and the Poor, and the gap is growing faster and faster. The middle class is being eliminated. How is this happening?
While there are several variables affecting the loss of the middle class, one chief problem is that the U.S. school system does not teach us enough about the subject of money. Due to this lack of education, we have a massive rising national deficit and in Q3 of 2005 - a negative savings rate.
What little financial education we do get typically comes from those we know such as friends and family, many of whom are poor managers of their money.
When I worked at a financial services firm, I would ask those my age "do you want to be in the same place your parents are financially?" Many of them would respond "no," but then would continue to take investing advice from dear old dad or someone else they believed in. While they do have your best interest at heart, be mindful of where they are coming from.
In the Information Age, what was once considered "smart" advice for money management is now "dumb."
Example: Let’s say that dear old dad tells you you should "save your money," "buy tax-free municipal bonds," or "buy a well-diversified portfolio of mutual funds" for your long-term financial security.
Here are the problems I see with those nuggets of supposed wisdom:
- He is not preparing you for the possibility of working without trading time for money. Maybe you aren’t interested in that, and if so, then this is good advice. If you want to cling to the false idea of job security, hope that the company 401(k) and other benefits will save you, or that the government will take care of you in old age then God bless you. What he is preparing you for is to continue trading time for money, while "saving" some of your earnings on the side in preparation for retirement…an old Industrial Age idea.
- Inflation is out of sight. The cost of food and fuel has sky-rocketed, and these two staples aren’t factored into the core inflation number you hear on the news. Oops.
- The reason inflation is out of control is because the Federal Reserve is printing more money and putting it into circulation. The "Economic Stimulus" we got was really a further tax on the American people, since we are deeply in debt as a nation already and will have to pay back those checks we got with interest at some point in the future.
- Over time America has to do something to pay down it’s debt. I’m thinking that will mean tax increases or government services being cut. I’m seeing signs of this already: local towns in my area, due to budget pressures, are banding together to try and buy materials in bulk to save money, such as sand to put on the roads after plowing this winter.
- If taxes increase, I would watch your exposure to earned income sources (savings in a savings account, bonds, CD’s, 401(k)’s, and Traditional IRA’s are all subject to earned income taxes) since those will be the easiest sources of income to tax. Secondly, I would keep an eye out for new law changes that will affect your other investments. I’m not trying to give you specific advice here, just trying to point illustrate that things will change over time and that’s why it is so important to have your Financial IQ so that you can correct course based off what you see happening in the world.
- Many people will see their retirement nest eggs depleted by somewhere between 20-30% when they begin withdrawing from their 401(k)’s and IRA’s, since they will be taxed on that earned income. Not good news. See a Bureau of Labor Statistics article here .
- On top of that, when there are millions of people selling shares of stock, as they must by law at age 70 1/2 from their IRA’s, there will be a flood of stocks entering the market with no buyers. The law of supply and demand seems to dictate a crash when this happens.
- This domino effect will hurt many people. As Gen Y finds it harder and harder to stay afloat with high student loan debts, the rising cost of living, and the need to consume left over from their college days, the option to "move in with mom and dad" and have them foot some of the bills just won’t be an option.
We as Gen Y will need a better strategy to achieve our long-term goals. Part of this is increasing our financial intelligence so that we can understand where our money is best invested. There are much higher-yielding investment vehicles out there, if you have a greater financial education.
Out of the 3 different types of income (earned, passive, and portfolio), passive and portfolio are the most tax-advantaged. While the above examples were for earned and portfolio income, passive income from real estate and other intellectual property assets provide the greatest tax shelter.
That sounds like a bold statement, so how does it work?
A 1031 tax-deferred exchange is a law within the tax code that allows real estate investors to move their capital gains in their properties to another roperty without having to incur taxes until a later date. If you continue to use this strategy, you can continue deferring taxes indefinitely. For more information, see the IRS rules here: 1031 Exchange .
Conclusion: There are going to be those that don’t worry about paying their bills, and those that do; those that are rich, and those that are poor. Choose which side you want to be on, and do everything you can to learn the information you need to get there. The best part is we live in the information age: information is plentiful.
Price History of Gold
When you look at the price of gold over the last several decades, you’ll notice it has ascended strongly. In 1971 gold was pegged at $35/ounce. Today, it’s over $800+/ounce.
What happened?
In 1971, the U.S. abandoned the Gold standard. This began the demise of the dollar.
As the credit crises and subsequent meltdown of the financial sector continues, there will be upward price pressure on gold, as investors go for more tangible investments. Perhaps in the future we will re-value our dollar and peg it to gold again?
For more information on the history of money in the U.S. see: History of U.S. Paper Money.
Worldwide Wipeout Ahead?
Think the U.S. economy is suffering? How about the rest of the world?
Find out in this article by columnist Jon Markman about the future of the investing world.
Make sure you’re sitting down for this one… Worldwide Wipeout Ahead
America’s Financial Future
Where is America heading financially?
Financial IQ is essential for Generation Y as we enter into a future that is full of uncertainty. The more we understand the current state of affairs, the better positioned we can be to have a prosperous future.
It would be wise for those of us who are aware of the challenges the nation faces to tell our friends and family who may not be. We are all in this together. To see the current budget and see the challenges we face beyond this video, download the 2009 Fiscal Budget .
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Welcome!
