Monthly Archives: June 2011

7 Ways to Sink in a Stagnant Economy

Hello,

They say that you cannot teach an old dog new tricks, and I’ve always wondered whether this is just an excuse to refuse to accept changes. Ok fine, the economy is growing but at a slower pace, but one thing is for sure that things will be different, and as a result, people will be forced to change their skills to match what employers are looking for, and everyone in general will look at their financial life differently. The economy may be growing, but some people feel like they are still in a recession, reason being they looking for the kind of job they had before the recession, and until the day they realize that they have to tailor their skills to match the new requirements, the chances of finding what you are looking for diminishes as things keep on changing. There are a number of reasons why people will always sink is a stagnant economy, and Rick Newman illustrates seven ways of how you can fail to improve your financial prospects.

A lot of Americans are wondering why the so-called economic recovery hasn’t paid a visit to their neighborhood.

The economy is growing and finally adding more jobs than it’s shedding. Corporate profits are strong, and workers in favored sectors seem to be buying cars, iPads, restaurant meals, and luxury items. But it’s a scattershot recovery. Nearly 14 million Americans remain unemployed. Many others can’t find the kinds of jobs they want, or are earning less than they were before the recession began at the end of 2007. Home values continue to fall, eating away at household wealth. Many families feel like they’re falling behind, with rising gas and food prices making the sting worse.

The recovery, unfortunately, doesn’t apply to everybody. Workers with up-to-date skills and the vigorous energy it takes to adapt constantly are poised for a return to prosperity. But many others are stuck flat-footed in a confusing, Darwinian economy, out of good options and unsure what to do. Some of that is due to the depth of the recent recession and the abrupt transformation of industries such as housing and construction. But people also make a lot of mistakes that limit their own opportunities. Here are seven of the most commonplace ways to fall behind in an uncertain economy:

Stick with what you know.

Technology is evolving faster than ever, and becoming a dominant factor inside many companies. That’s why people adept at Web development, data mining, social media, and mobile applications enjoy strong prospects for raises and promotions. Many such jobs didn’t even exist five years ago, and people who jumped into something new are now enjoying the benefits, like rising pay and job offers from fast-growing companies. High-end recruiters repeatedly say that the best offers go to people with multiple skill sets, especially if they can blend traditional expertise in marketing, law, manufacturing, or other disciplines with cutting-edge technological know-how. But if hot job offers don’t interest you, keep trying to earn a living using the same skills you developed 10 or 20 years ago. They’ll become obsolete sooner or later, and your prospects will slowly degrade along the way.

Demand the same pay you got five years ago.

It’s natural to think that if you used to earn $15 an hour, say, or a $50,000 salary, then you’re worth at least that much today. But that’s a fallacy. Your value as a worker at any point in time is what somebody is willing to pay you, nothing more. In the past, pay was good in many fields because the economy was strong and it was hard to find qualified workers. But now there’s a glut of workers in many industries, and companies can pay less for the same people. In construction, for example, about two million jobs have been lost since the start of the recession, with no rebound evident yet. With real-estate values down and contractors under severe pressure to slash costs, it’s not reasonable that they’ll offer the same pay they did during the real-estate boom–especially if there are five or 10 applicants for every job.

Nobody wants a pay cut, but without distinctive skills, the only way to snag a job is to be the low bidder–the one willing to work for the least pay. If you do that, at least you’ll be in the workforce, where you can learn more and perhaps get a raise if you take on more responsibility. Or you could hold out for more, but you’ll have to wait until everybody willing to work for less than you has been hired.

Gripe about globalization.

If you’re a complainer, these are the glory days. It’s definitely true that big, multinational companies are shipping jobs overseas, hiring cheap foreign workers instead of Americans who could do the job for more. If that’s starting to happen in your field, it’s a warning sign that your industry is declining or your skills are becoming dated and you need to invest more heavily in yourself to stay ahead. But you could ignore that warning and hope that your job never gets outsourced, and then, if it does, blame foreigners and greedy bosses for your obsolescence.

Globalization, by the way, benefits a lot of Americans, too. It’s one reason there’s so much cheap, foreign-made stuff at Wal-Mart. U.S exports have been a bright spot lately, with people in other countries buying an increasing amount of stuff made in America, by Americans. And strong profits at U.S. corporations–perhaps the biggest thing keeping the economy going at the moment–are due, in part, to demand coming from overseas. So globalization helps create some U.S. jobs, too, and that trend could intensify in coming years as foreign consumers become wealthier and buy more stuff made in America. But if that interferes with your complaining, never mind.

Stay where you are.

Jobs move around in a dynamic economy like ours, because companies and the investors who finance them deploy their money where it’s likely to earn the highest return. So workers who want the best opportunities need to move where the jobs are. Some people are lucky enough to live in regions where the economy stays vibrant for a long time. But in a lot of other places, fortune comes and goes. In nine states, for instance, the unemployment rate is still 10 percent or higher, including California, Nevada, Florida, and Michigan. In North Dakota, South Dakota, and Nebraska, it’s under 5 percent.

It’s obviously hard to move if you’re underwater on a house and would be forced to take a loss if you had to sell. But if you live in a depressed area where jobs are scarce, the cost of not moving is high, too: depressed pay, limited opportunity, and a better-than-average chance of prolonged joblessness. And some people refuse to move because it’s too inconvenient to uproot the family or leave friends behind. Those are valid issues, but it still doesn’t mean a good job will come to you. Instead, it will go to somebody else who went looking for it.

Work in a declining industry.

Industries rise and fall as the economy changes, and some fields, such as printing, insurance, state and local government, and what’s left of the textile industry, are likely to shrink for the foreseeable future. That means there will be fewer jobs, fewer promotions, downward pressure on pay, and less overall opportunity. Some people stay in declining industries anyway, because they know the business and it would be time-consuming to learn something else. But they’re also taking a pass on better opportunities they might find if they transferred into growing industries like healthcare or a variety of tech-based fields. Oh well, you can always work longer and retire later (as long as you don’t end up laid off yourself).

Milk your career until retirement.

A lot of baby boomers sense their own obsolescence–they don’t know what “the Twitter” is and they’re constantly asking twentysomething colleagues for computer help–but they’re hoping they can hit retirement age before the boss notices. Some will make it to the finish line. But many disenchanted boomers have been among the eight million people who have lost their jobs since 2008–and as they’ve found, it’s awful to end up out of work in your 50s or 60s with stale skills and high pay requirements. Hardly anybody’s inoculated against the turbulent economy these days, so smart employees will keep themselves fresh and relevant until the day they hang it up. Work is more fulfilling when you’re fully engaged anyway. But if that seems like too much effort, roll the dice and coast through the last few years of your career.

Wait for the government to fix it.

The government has come to the rescue before, so it probably will again, right? Um, no. In the past, Washington was able to cut taxes, extend unemployment insurance, stimulate the economy, and add generous new benefits like the prescription drug subsidy for seniors because it was more solvent and better able to borrow than it is now. In the future, however, it needs to reverse those unfunded giveaways and start paying down all the debt accumulated over the last 10 years. No matter what politicians say, that means fewer benefits and subsidies, and higher taxes, probably starting sometime after the 2012 elections. So if you don’t bail yourself out, there may be no rescue.


Why Baby Boomers Are Bummed Out

Hello,

The economy seems to be on the right track, and we are starting to see some impressive gains, but almost 45% of the American public think that the government is not doing enough to get the economy back to pre-recession era. It’s a fact, everyone was hit hard by the recession, but there are those of us who were hardest due to the fact that majority of the members were about to retire. This recession could not have happened at worse time for many baby boomers, majority of them were about to retire or were preparing for retirement, and now many have been forced to postpone or shelve that idea all together to a later date. Most of the baby boomers felt like there were the hardest hit by this recession for a number of reasons, as explained in the following article by Rick Newman.

The economy’s finally bouncing back, and many Americans are starting to feel a bit more optimistic. But the nation’s biggest population group remains in a recessionary funk.

The first of the baby boomers—the post-war Americans born between 1946 and 1965—start to hit retirement age in 2011. And they’re not coasting gracefully into the golden years. The entire nation, of course, lost its spunk during the recession that lasted from 2007 to 2009. But the once-upbeat baby boomers seem to be taking the longest to shake off the blues. According to surveys by the Pew Research Center, 80 percent of boomers say they’re dissatisfied with the way things are going in the country, a higher proportion than any other age group, younger or older. Part of that may be natural, since people in their 50s tend to deal with the highest amounts of stress and show the lowest satisfaction levels. But the boomer bummer may also reflect the changing fortunes of America itself, and widespread unease about the nation’s future.

The Great Recession clearly hit baby boomers at a vulnerable time, when they were close to retirement or at least should have been preparing for it. But it also seemed to shake their faith in their ability to get ahead and in the opportunity America provides for its people. Baby boomers account for more than one-fourth of the nation’s population, and they’re sure to have a loud voice in future decisions about taxes, government spending, the huge national debt, and many other matters that will determine if America as a whole prospers or declines. So their views will ultimately affect policies that most Americans will feel. Here’s why boomers are so dyspeptic, according to data from Pew and other sources:

They got hammered by the recession.

More than any other age group, baby boomers feel their long-term prospects were damaged by the recession. More baby boomers, for instance, say they’ve lost money on investments and endured damage to their household finances than any other group. The Federal Reserve has been working hard to fix some of that, through policies meant to goose the stock market and help investors regain some of the wealth they’ve lost since 2006. But household net worth is still down about $9 trillion from peak levels of 2007, thanks to huge losses in home equity and stock markets still down about 20 percent from the 2007 high.

Unemployment is lower among baby boomers than other groups, but it can be particularly grueling on the unlucky boomers who lost their jobs—especially those without a college education. Unemployment, on average, lasts about 45 weeks for those 55 and older, which is 12 weeks longer than for younger job seekers. And unemployed boomers in declining industries like manufacturing or construction may never find work again in the fields where they spent their careers. Younger workers in that kind of predicament have an easier time getting new training, moving if necessary, and convincing employers to hire them. Doing that when you’re 55 or 60 is daunting.

They’re poorly prepared for retirement.

Many baby boomers thought rising home values would anchor their retirement plans, one reason the savings rate plummeted over the last decade. The housing bust—which has driven home values down by more than 30 percent nationwide—wrecked that idea. And far fewer boomers have a guaranteed pension plan than in prior generations, which is likely to leave millions of Americans on the cusp of retirement in a huge hole.

The Center for Retirement Research at Boston College estimates that 51 percent of people between 55 and 64 will face lower living standards once they retire, mainly because they lack the financial resources to maintain their current habits. Many boomers will keep working well past retirement age, if they can find jobs. About 60 percent of Americans between 50 and 61 say they plan to retire later than they planned, according to Pew. And 35 percent of those 62 and older say they’ve already delayed retirement.

They sense national decline.

America was still on the rise when boomers came of age in the 1960s and ’70s. It doesn’t feel that way any more. Washington politicians mount loud arguments but seem incapable of solving big problems. The huge national debt looms like a black cloud over the nation’s economic future. China and India, meanwhile, are growing much faster and taking millions of jobs that used to reside in the United States. Headlines about America’s decline may be overblown, since the United States still produces much of the world’s innovation (think Facebook, Twitter, Groupon, and the iPad), and still has some of the highest living standards in the world. But boomers feel that progress has slowed, and they may be right about that.

With real incomes stagnant over the last decade, 21 percent of boomers say their standard of living is already lower than their parents’ was at the same age. That’s a much higher proportion than among younger or older Americans. Boomers are more pessimistic about the future, as well, with just 35 percent of those 50 and older feeling their children will enjoy a higher standard of living than they do. And only 59 percent of those between 50 and 64 feel that America remains a “land of opportunity.” Among 18- to 29-year-olds—who suffered far higher unemployment during the recession than baby boomers—70 percent still regard America as a land of opportunity.

They’re reluctant to sacrifice.

Boomers are well aware of the problems facing America, especially in Washington. But they’re nervous about doing anything different, perhaps because they’ve got so much invested in the system the way it is. One way to raise more government revenue and pay down the national debt is a federal sales tax, for instance, but 54 percent of boomers oppose that idea—a higher proportion than among those both younger and older. Boomers also oppose two other ideas to help balance the government’s books—eliminating the tax deduction for mortgage interest, and taxing company-provided healthcare benefits as if it were income—by much higher margins than other population groups.

Boomer opposition to higher taxes is no surprise, since boomers would probably face a bigger hit than other groups with less disposable income. But some of the nation’s biggest looming problems—like an underfunded Social Security system and a Medicare program that’s on track to run out of money—will also affect baby boomers directly if they’re not fixed. Something’s got to give. And the baby boomers know it.


Perfect Portfolios: Finding the Right Fit

Hello,

A few days ago, I mentioned that just because the market is not giving you the kind of returns you looking for, that does not necessarily mean you should not invest in stocks. Even though things are still low, the economy will eventually grow again and if you invested in the stock market when prices were down, you can count on earning some good returns on your stock. Right now, the first thing you need to do is identify your goal, because this will determine where you invest your excess cash. Assuming that most investors are looking for long-term strategy, different investors will have different approaches on how to go about investing, and the following article by Anna Prior and J. Alex Tarquinio shows various strategies for investors in different age bracket.  

With high jobless claims and various worries from abroad still staring investors in the face, it’s no surprise many are still skittish about jumping whole-heartedly into the markets. Gold and silver, as well as alternative assets, continue to lure investors. But many realize they can’t stay away from stocks for good. So what’s an investor to do?

Financial planners say it’s best to stick with a long-term strategy. But that doesn’t mean that investors should set their asset allocation and forget about it. Many financial advisers and market strategists favor large-cap, U.S. dividend-paying stocks in today’s market. Also, with continued worries about inflation, many pros are pointing to commodities and other hedges against inflation, such as Treasury inflation-protected securities (TIPS), which are bonds that make adjustments based on the Consumer Price Index. But bonds in general could suffer if interest rates rise, so some pros recommend putting only a small amount of your portfolio in a short-term bond fund.

The right mix of assets depends on lots of things, of course, including investors’ appetite for risk and the size of their savings. While no single approach is right for everyone, each month SmartMoney provides a suggested mix of assets for investors at various stages of life. Below, our latest thinking, along with a few recommended adjustments.

25-Year-Old Carefree Bachelor

Disasters and conflict overseas might make you pause before investing abroad, but don’t be swayed by short-term events: You’re still decades away from retirement. Sizzling economies like China’s and Brazil’s can offer a world of opportunity for young investors, which is why many pros suggest you put roughly a third of your portfolio abroad. Commodities, meanwhile, can be a good offset for inflation and provide more diversification.

40-Year-Old Couple With Kid Headed to College

Even if you might need to dip into your savings to cover Johnny’s tuition, you should still keep a big chunk of your assets in stocks. Many advisers say bond prices are high and a little rockier these days—reasons to put slightly less of your portfolio in fixed-income investments. Jason Jenkins, president of Causeworth Asset Management in San Diego, adds that inflation is his top concern now; he likes commodities as a hedge.

70-Year-Old Multimillionaire Couple With Lots of Potential Heirs

Thanks to smart decisions earlier in life, you aren’t fretting about outliving your savings. With your heirs in mind, you can stuff your portfolio with foreign stocks and alternative assets. And if you’re helping the grandkids with, say, a 529 plan, you can be aggressive with that portfolio, says planner Roger Wohlner, of Asset Strategy Consultants in Arlington Heights, Ill.

35-Year-Old Married Couple With a Young Child

You have many years before Junior heads off to college and even longer before you’re likely to retire, so you should emphasize stocks. Despite jitters in foreign markets because of political uprisings in the Middle East and debt woes in Europe, experts still recommend investing a portion of your portfolio overseas. Bonds could suffer if interest rates rise, so investment pros say you should only put a small amount of your portfolio in a short-term bond fund. You might want to invest some of your savings in alternative assets like commodity funds or so-called market-neutral funds, which can reduce portfolio volatility because they aren’t generally correlated with equity and fixed-income markets. Jason Jenkins, the president of Causeworth Asset Management in San Diego, says you should be just as aggressive with a college-savings fund while your children are young, but gradually shift those accounts to hold more bonds and cash as the kids near college age.

42-Year-Old Couple; Husband Is Unemployed

Hiring has been picking up recently, but until you land a new job consider being more conservative with your family’s portfolio. Doug Kinsey, a partner at Artifex Financial Group in Oakwood, Ohio, says that both stocks and bonds might be more volatile in the near future because the markets have had a huge run-up. You don’t want to be forced to tap your portfolio to make up for lost income right after the markets tank. Kinsey recommends alternative assets as a potentially more stable than traditional stocks and bonds this year. In addition to commodities, such as corn or timber, he says real estate investments can also balance out portfolio risk. Real estate might include real estate investment trusts (REITs), equity in a second home or rental properties.

75-Year-Old Widow

If you need to make up for the loss of your late husband’s pension and Social Security checks, you may consider putting about half of your savings into a guaranteed investment such as a fixed annuity—a type of insurance product. Since bond prices and interest rates move in the opposite direction—and rates are historically low now—many experts say large-cap, dividend-paying stocks might be a safer way to generate income than a bond portfolio. Doug Kinsey, a partner at Artifex Financial Group in Oakwood, Ohio, recommends owning a bond fund or a portfolio of individual bonds with an average duration of less than 10 years. As a hedge against the “increasing prospect of rising inflation,” he says, fixed-income investors should also put part of their portfolios in Treasury inflation-protected securities (TIPS), bonds that make adjustments based on the Consumer Price Index.


Buy Now, Pay Forever

Hello,

The number of citizens that have had their financial dreams destroyed by credit cards is enormous and it is growing by the day, it includes people of all walks of life, and the credit companies are targeting the most vulnerable group to sell their products. The number of graduates that are living university campuses with credit card debt is growing every year, and the credit card companies are getting more and more cunning every year. I totally support Congress in trying to tame the credit card companies, because giving a college student a credit card is going a little too far, considering most of them don’t understand the ramifications of their actions on future financial plans that they may plan to undertake. Credit cards can be a great tool if used properly, because of the convenience they bring especially in cases of emergencies, but on the other hand, they can destroy your life if they are misused, and as Anya Kamenetz explains in the following article, having a credit card debt is not the way to start off your financial life.

Pop quiz: What exactly is the problem with credit cards?

1. The aggressive, misleading marketing: “You are pre-approved” letters for your dog.

2. The fine print: Fees, penalties, and high interest rates.

3. It’s the debt, stupid!: Credit cards let you buy stuff you can’t afford with money you don’t have. They make you poorer in the long run, plain and simple.

Personally, I choose 4. All of the above.

Debt, Good and (Mostly) Bad

I have a massive distrust of my credit cards. One I barely touch and keep only for emergencies, and the other I pay off every month.

Yes, there are sane uses for credit: for convenience, to separate business and personal expenses, to get membership rewards, and to build a good credit rating by making on-time payments. However, you can get these benefits with none of the drawbacks by paying off the card in full each and every month, and I think most people should make it a goal to get as close to that mark as possible.

In very limited circumstances, people might reasonably use credit to invest in their own business. They’re obviously taking a risk, but at least it’s a risk with a possible reward. Getting into debt to buy depreciating consumer goods is a risk with no upside.

Let Us Prey

But the reality is, more and more members of Generation Debt have credit cards, and they’re getting into debt sooner. Over 90 percent of college seniors already have at least one card, and 71 percent of young adults carry a balance compared to 55 percent of older folks. One study in 2001 found that the 25- to 34-year-olds who did have credit card debt owed over $4,000.

Part of the reason so many people are getting into trouble has to do with deliberate industry attempts to make young people into long-term credit customers. Last week, the U.S. Public Interest Research Groups (PIRGs) announced a campaign to deal with problems No. 1 and 2 in my quiz: the misleading marketing and unfair consumer practices that they say credit card companies engage in on campuses. (Check out the campaign here.)

When our parents attended college, and even into the 1980s, a student needed a cosigner to get a credit card. Today, a 22-year-old college student with no credit history can get loads of credit easier than a 22-year-old with a steady job and no credit history. The 10 big credit card issuers want loyalty, and they’ve found that broke students make good customers. Campuses are swarmed with marketers who set up tables on campus and offer food, T-shirts, and other freebies in exchange for filling out an application.

A Captive Audience

Some colleges have banned these marketers, while others cooperate with them. As reported by the Des Moines Register, for example, the University of Iowa and Iowa State University alumni associations have long-term-affiliation contracts with Bank of America to market their credit cards. The agreement guarantees the company access to personal information about University of Iowa students and parents, as well as access to campus facilities.

These affiliation deals can cover everything from on-campus ATMs to bookstore tie-ins to membership rewards. Bank of America markets special Hawkeye credit cards and gives their best customers the chance to have lunch with the Iowa football team. Through these kinds of deals, colleges are basically selling out their students as captive audiences for a few million dollars.

The Student PIRGs have 40 chapters on campuses nationwide that are going to engage in counter-marketing to raise awareness of the dangers of easy credit. They’ll set up tables of their own on the quads and give away information and “don’t be a sucker” lollipops. They’ll also be pushing college administrators to accept a set of principles banning aggressive credit card marketing, including affiliation agreements like the one at Iowa, stunts like free pizza, and using the lacrosse team as their sales force.

Worst Practices

The PIRGs aren’t stopping there. Ed Mierzwinski, the Consumer Program Director of the U.S. PIRGs, says, “We think colleges can be catalysts and put pressure on the companies to change their practices more broadly.” They want to discourage the punitive terms and fees that are lurking in the fine print:

  • Credit card issuers can change your interest rates at any time for any reason, including if you underpay by $1 or pay late by one day. Your introductory 0 percent rate may morph into 29 percent overnight.
  • Sixty percent of users pay at least one late fee, penalty, or over-limit fee each year, averaging $35. To make sure you do foul up, some cards have rules that the payments must be delivered by 11 a.m. the day they’re due.
  • Universal default, aka “risk-based re-pricing.” Even if you do everything else right, your interest rate could skyrocket if you try to get more credit by making a credit inquiry or opening a new card.

(For more on these practices, see this hilarious Web cartoon produced by Americans for Fairness in Lending.)

No Way to Start a Financial Life

Speaking as part of the PIRGs’ campaign, Rachel Wikoff, a 2007 graduate from the University of California at Davis, told her story at a telephone news conference earlier this month.

She had a credit card for about a year, and had set up automatic payments through her bank account, paying a little over the $10 minimum. Then, one month, without her noticing, her payment was suddenly calculated differently, so the automatic transfer fell short. “The morning of my twenty-first birthday, I got a call that I had missed a payment. I had over-the-limit fees, late fees, my interest rate spiked from 11 percent to 29 percent, and my minimum payment went from $10 to $89. I couldn’t afford it — I had to take out another student loan. And it ruined my credit.”

Everyone has some degree of choice about whether to get into debt, of course. At the same time, most people are going to make a mistake sooner or later with bill paying, especially as rookies. “People consistently underestimate the probability that they’re going to get into financial trouble,” says professor Robert Lawless, a credit expert at the University of Illinois who contributes to the Credit Slips blog. “They tell themselves that they’re going to just build a credit history, but the card gets used in very inappropriate ways. The credit card industry knows this.” When you trip up, they’ll be there to profit from your fall.

Do you really want a financial relationship with a company that reserves the right to nearly triple your interest rate and piles on fees and penalties for the slightest infraction? Is that the way to start a solid financial life?

Admirable Efforts

I don’t know if the PIRGs campaign on its own will persuade credit card companies to change their ways and offer cards with fair terms and wide-open policies. Dr. Lawless says there’s hope: “The credit industry often responds to perceived regulatory threats.”

Like a bill currently in Congress, for instance. The Student Credit Card Protection Act would reinstate the requirement that parents or guardians must be cosigners on any student credit card with a limit over $500 for full-time college students under 21. It would also require that the creditor get proof of income and credit history before issuing a card.

In the meantime, I applaud the PIRGs’ work in trying to bring accountability to colleges, especially for raising financial literacy among their students. The word needs to be spread: Credit cards aren’t fair, they aren’t fun, and they aren’t your friend.


Make Your Money Work for You

Hello,

In these times of economic uncertainty, a lot of people are really skeptical about thinking long-term when the economy has not achieved a sustainable growth rate, a sign that we are on the path to recovery. Saving is good, but the problem is that we often have this money saved in a bank account, where the rate of return is lower than the inflation rate, so in reality your money is actually losing value. I know the stock market and all the other economic indicators are still gloomy, but actually this is the best time to invest considering that most good stocks are still going for a bargain. So as you contemplate what to do with your extra cash that is lying around, maybe it’s time to take risk, and let your money start working for you, as explained in the following article by Anya Kamenetz.

How much do you really know about what to do with your money?

Recently, a reader named Dave left this comment on my blog:

“I have tried asking for advice through other sites like Forbes and Vanguard, but it is all so confusing to me. I have money to invest; I just don’t know how to invest it. With all of the fees and gimmicks, it is very frustrating. I know I need to get into stocks to get the max return, but I just can’t make the distinction between mutual funds and that sort of thing. Any advice would be great.”

I decided to write this column on my own approach to investing as a primer for readers like Dave, and a refresher course for those who may have gotten started with their investment planning already.

Saving, Retirement Planning, and Speculation

Saving, retirement planning, and speculation are three very distinct categories that are often lumped together under the heading “investments,” which can be extremely confusing.

First, it’s important to understand that you can’t bury your money under your mattress; if you do this, inflation will destroy its value over time.

That leaves paying down debt; spending on necessary or elective depreciating assets such as food, clothing, and entertainment; and the three options above: saving, retirement planning, and speculation.

For the sake of this column, let’s say that you’ve managed to pay down your high-interest debt — such as credit cards — and you manage your expenses well enough to reserve 10 percent or 15 percent of your income each month. Now we can cover what you are going to do with that reserved money in order to live with financial security both now and in the future.

First, there’s saving. Saving means putting your money in a very safe vehicle such as a savings account, a money-market account, or a CD (certificate of deposit). With the majority of these ultra-safe vehicles, the rate of return is barely above inflation — currently an average of 3.08 percent for a six-month CD on Bankrate.com.

Everyone must save. If you’re just starting to put away money, you should aim to build up an emergency fund totaling three to six months’ expenses. On top of that, you should have a dream fund for planned expenses such as a house, car, vacation, wedding, or baby — whatever is in your one-year and five-year plans.

Next, there’s retirement planning. This is the investment activity I’m going to spend the most time on because it’s what people tend to need the most help with.

Everyone needs to plan for his or her own retirement, and most people don’t start soon enough or save enough. Here’s where members of Generation Debt can be savvy. If you start in your 20s, you can get away with saving just 5 percent of your income and be fairly well set when it’s time to retire. If you’re starting in your 40s, you’ll be shoveling in 30 to 40 percent of your income just to make it to the finish line in decent shape.

Retirement planning should start with the money set aside from your salary in a tax-deferred retirement account: a 401(k) or 403(b) if your employer provides them, or an IRA if they don’t. With those contributions, you will mostly want to buy a balanced portfolio of stocks. A good retirement plan is defined by reasonable, targeted long-term returns in the 7 percent range, similar to the rate of growth of the stock market as a whole.

You should try to diversify the funds in that account as much as possible while keeping your costs as low as you can (partly by keeping transactions to a minimum). And you need to take a long-term view.

To keep down your expenses, look for no-load, low-cost mutual funds. When you look up a fund, a number called the “expense ratio” tells you how expensive it is in terms of fees and commissions compared to other funds. The average expense ratio is over 1 percent, while an index fund can be as low as 0.02 percent. This article tells you more about fund expenses.

Speculating is the riskiest type of investment, and it has no place in retirement planning. You are speculating, not planning for retirement, if you’re taking advice from Jim Cramer’s “Mad Money”, trying to maximize your returns into the double digits by choosing particular stocks, and timing the market so that you can buy low and sell high. Another activity that falls under the category of speculation is buying a house in order to “flip” it.

Most individuals find it very difficult to beat the market by speculating. If you want to try it for fun, after you’ve maxed out your retirement contributions, that’s fine. But if you are really that good at doing research on individual companies or predicting what the economy is going to do, do what Cramer did: Go into finance for a living.

Get Good Sources of Information

Two-thirds to three-fourths of the information you will find on Yahoo! Finance, on CNBC, and similar resources about “investing” is really about speculating. That’s because it’s exciting for financial journalists to cover “stocks everyone is talking about” or the daily ups and downs of the market. But this won’t help your long-term retirement-planning strategy.

The big brokerage firms like Fidelity and Vanguard offer some great information on retirement planning, but remember that their income depends on fees and commissions, so you have to be vigilant in seeking out the lowest-cost investment options on their sites.

That leaves folks who specialize in personal finance, which is distinct from investing. We all have our own personal philosophies and agendas, so it’s good to read as widely as possible and compare to find an approach that sounds good. As a rule of thumb, don’t pay attention to anyone who promises to make you rich.

I like Henry Blodget’s “Wall Street Self Defense Manual” (you can read about his approach here in Slate). He was once on the dark side, disgraced and banned from the securities biz for playing a part in pumping the biggest stock bubble in history, but in his new, reformed life, Blodget gives solid advice.

This recent “New York Times” article about top Yale investor David Swensen’s book, “Unconventional Success: A Fundamental Approach to Personal Investment”, contains some good information as well.

Diversify

So, you have maxed out your contributions to a 401(k). Now what?

Buying and holding a low-cost index stock fund such as Fidelity’s Spartan 500 is the easiest way to capture returns close to the overall market return of 7 percent to 10 percent. The 500 refers to the 500-stock average; owning this fund is like owning the whole stock market.

If you want to diversify beyond owning a U.S. stock index, two good places to look are foreign stock markets and real estate. Most of the value of the world’s markets is outside the U.S., but most American investors keep the majority of their money inside the country. Right now I have about a third of my retirement money in foreign stock indexes.

You can also invest in real estate. Such investing could mean buying a home or other property, especially if you plan to live in it as well. But you can also invest in a REIT, or Real Estate Investment Trust. With a REIT, you are owning a piece of a bunch of properties, similar to a mutual fund of stocks. That way, you’re not gambling on the rise or fall of one particular real estate market. Check out the Vanguard REIT Index Fund.

Set It and Forget It

Every time you make a trade, you pay commissions and fees, and when you sell an investment, you pay capital gains taxes on any income from that sale. Over the long run, these costs can eat heavily into your returns. So save more money and add to your investment mix over time, but don’t make rash decisions based on short-term changes in the market. Remember — if you’re a young investor, time is on your side.


Welcome to Generation Debt

Hello,

It seems nowadays, the generation below 35 years are more indebted compared with the same generation a few decades back. The main reason being college education loans and credit card debts. Another reason that is leading to huge amounts of debt is the kind of lifestyle this generation is living, our father’s generation were not bombarded with adverts of the latest electronic gadget or the latest designer clothes. This generation also has it’s priorities upside down, previous generation were more concerned with buying a house, while this generation is more concerned with driving the latest car model. This has resulted in a generation that is bogged down with debt, which will eventually lead to its downfall, if not checked. As Anya Kamenetz explains in the following article, generation debt is really affecting the generation below 35 years, but one way of dealing with debt is living within your means, and making arrangement to ensure that you are saving enough for your retirement and college education, if you blessed with kids.

I’m a 30-year-old freelance writer. In April 2004, when I was 23, I was assigned an article for the Village Voice as part of a series titled “Generation Debt: The New Economics of Being Young.”

That summer, I sold a book on the same concept. So for the past three years, which happens to be my whole career, I’ve covered the economic challenges affecting Americans under 35. I blog about them, write articles about them, talk about them on TV and the radio, and visit college campuses to talk with students about them.

Just as important as diagnosing the problem, my job is figuring out how people our age can encounter and overcome these challenges. Maybe it’s just because I’m a journalist, but I often find that the solution boils down to having the right information. So I’ll need your help to make sure I’m asking and answering the right questions.

No Select Membership

First, I’ll discuss what it means to be part of Generation Debt. See if any of this sounds familiar: You worked 20 hours a week while attending a public college, did internships and worked full-time in the summer, and graduated after five or six years with five figures of student loans.

You have four figures of stubborn credit card debt, too, and your savings are miniscule. You moved to a big city with rents you could barely afford to find more job opportunities — and you did, but those jobs were often short-term, freelance, or contract positions, without benefits or a truly livable wage.

Sometimes you spend too much of your hard-earned cash on stuff like electronics, vacations, concert tickets, and eating out, because you’re only young once and you deserve to have fun. You may have changed careers a couple of times or headed back to graduate school (meaning more debt) to try to improve your prospects; you may have moved back in with your parents to save money. And a small but very important contingent of you even served (or are still serving) in Iraq and Afghanistan; these veterans often say they enlisted to pay for their education.

You’re putting off marriage, starting a family, and buying a house. You’re wondering when, exactly, you’re going to feel settled, like a grownup. I know I do.

The Big Picture

To turn to the big picture for a second: Generation Debt means larger-than-ever-before levels of student loan debt (two-thirds of undergraduates now borrow an average of $19,300) and credit card debt (91 percent of final-year students have a card with an average balance of $2,864).

About half of us don’t have any college experience, while less than a third end up with a four-year degree at a time when a B.A. seems like the minimum requirement for earning a middle-class income. (How to succeed without a degree is something I’ll discuss in a future column). On average, young people from 25 to 34 are spending an amazing 16 percent more than they’re earning.

Where the Money Goes

There’s no getting around it — we’re the first generation of Americans who have fallen short of what our parents achieved economically by the same age. In fact, at the end of May, a study by the Pew Charitable Trusts and other big think-tanks found men in their 30s earning 12 percent less on average than men of their fathers’ generation.

Wealth has also been redistributed from younger to older across generations. Recently, USA Today ran a front-page analysis of federal data showing that nearly all wealth created in the United States since 1989 has gone to households headed by people over 55, which have doubled in wealth. Meanwhile, households headed by younger folks have fallen behind or barely kept even with inflation.

Footing the Bill

I hate to say it, but being in Generation Debt isn’t necessarily something we’re going to grow out of. In just 10 years, this cohort (a fancy name for people who remember the same Top 40 songs as you) will be the bulk of the workforce. Meanwhile, the aging of the baby boom generation will change our nation’s demographics permanently, calling the survival of Social Security and Medicare into question.

Though I don’t know exactly how these federal budget dilemmas will be solved (does anyone?), the likely requirement that we pay higher taxes as workers to cover massive national retirement expenses constitutes a kind of generational debt as well, as economist Lawrence Kotlikoff has brilliantly discussed. Our current record national debt of over $14 trillion isn’t helping things much.

What We’re Not

I should also explain what Generation Debt isn’t.

It’s not about entitlement, or an unwillingness to pay our dues or struggle like young people always have when starting out. It’s not about spending too much money on PlayStation 3, Starbucks, or “This Is Why I’m Hot” ringtones.

It’s not about complaints like, “Oh, we have it worse than World War II or the Great Depression!” It’s not about whining or blaming our problems on anyone else. It’s not a situation that mainly affects rich people, white people, or college-educated people — in fact, the average young person is none of these.

Stepping Up, Staying Informed

So if we’re not whining, complaining, or blaming, what should we be doing? Stepping up. Making changes where we can in our own financial lives, and working for change where it’ll help in the public arena.

Individually, your first responsibility is to stay informed. You should know what you owe now on your student loans and other debt, and have a plan to get square. You need to plan for frequent transitions — from job to job, city to city, school to work and back — because the unexpected is a constant in our stage of life.

You should also have a savings account and an Individual Retirement Account (IRA). Both will get you in the habit of saving, even if the amount seems pathetic right now. And you should have some short-term and long-term financial goals. This column will discuss how to establish them.

My Personal Finances

Finally, let me put my money where my mouth is for a second. I opened an IRA at 24 and have fully funded it for the past three years. It’s in two no-load mutual funds. Aside from that annual contribution, I put 10 percent of each freelancing check I get into a savings account, plus I make four estimated income tax payments annually.

My short-term financial goal is to pay off my two credit cards and all bills in full each month, which I do electronically, and to try to repair my credit score, which got dinged from great to “fair” when I went out of the country last year and missed payments on one card for three months. (Dumb, I know.)

My long-term financial goals are to integrate my finances more fully with my new husband’s, track our expenses better, and purchase a home in the next couple of years. I’d also like to stop spending too much money on travel and fancy groceries.

In terms of public policy, I see changes on the horizon in the regulation of debt and creditors for student loans, credit cards, mortgages, and bankruptcy. I’m hoping for changes in our health care system and other workplace issues that affect young people, too. I’ll be covering all of these areas in this column as well. So bookmark me or put me in your RSS feed — you won’t regret it.


Why It Pays to Live Within Your Means

Hello,

I think this is a topic that has been repeated a thousand times, and I hope people are coming to appreciate the importance of living within your means. In these times we are living, accumulating debt is the way to go, even when the debt is used to purchase assets that will depreciate in value over the years. Living beyond your means is not a phenomenon of individuals alone, but also the government, consider all the projects that are being financed by debt that will eventually lead to benefiting only a few citizens and not a majority of the tax payers. Even though we are always bombarded with adverts encouraging you to get you into debt, not all debt is beneficial, and it always pays to live within your means as explained in the following article by Laura Rowley.

I received more than a few emails from outraged readers who scolded me for encouraging people to outsource household chores (“What’s Your Time Worth?“). As one reader wrote: “With most people already living beyond their means, they don’t need additional justification to get in deeper.”

Maybe they’re right. Perhaps I should have said that I felt justified in hiring help because I’m debt-free, except for my mortgage, and save regularly for college and retirement. I sometimes forget that living within your means isn’t a universal value.

If most people are not living within their means, as the letter writer suggests, I wondered: Am I a sucker? Have I been following the wrong rules? Am I the sad sack at Disney World waiting interminably in line, while everyone else sprints by with a Fastpass? The lone homeowner clinging to the archaic notion that a home equity loan is not a creative way to get the renovation of your dreams, but a gigantic debt you have to pay back with interest?

Why value living within your means at all? The primary source of that value — all money values for that matter — is your family. My parents were born during the Great Depression. Between 1929, the year the stock market crashed, and 1932, some 13 million people lost their jobs, and unemployment soared to nearly 24 percent. Forty percent of U.S. banks failed, and $2 billion in bank deposits disappeared. Industrial stocks lost 80 percent of their value. The GNP fell 31 percent. There was no government safety net to catch the millions who plunged into the abyss.

In this context, it’s easy to understand my parents’ colossal fear of debt. In their experience, debt was the first step on the slippery slope to financial annihilation. In their era, excessive debt signified moral failure as well — an inability to delay gratification, a failure to take responsibility for one’s life, a dereliction of familial duty.

I definitely inherited some of their caution, but I don’t think it’s unwarranted, even if we never again face the economic disaster of the 1930s. Consider two rational fears: Unemployment and illness. Between 2000 and 2003, nearly one in five workers was laid off from a job. For those with only a high school education, it was about one in four, according to research from Rutgers University. Meanwhile, a Harvard study released earlier this year found about half of all bankruptcies in 2001 resulted from expensive illnesses. Three-quarters of those who declared bankruptcy had health insurance at the onset of illness.

Or think about two other factors: College costs and retirement. Last year college tuition rose at double the rate of inflation, and the average student graduated with $15,500 in loans, according to the College Board. What’s that going to look like in 15 years, when my youngest starts college? Meanwhile, among women 35 to 55 years old, between one-third and two-thirds will be impoverished by age 70 due to inadequate retirement savings, according to research by the National Endowment for Financial Education and the AARP. Given the rise in longevity in the U.S., that could be a long stretch in the poor house.

But it’s not just fear that keeps me living within my means. It’s a profound respect for opportunity. Being debt-free is like going to college: It takes discipline and effort. You don’t know exactly where it will lead, but you trust it will open many doors. The decision I made at 20 to stay out of debt gave me the power to change my work life in my late 30s, to balance career and family in a way that made me happy. Debt is a dead-end road that narrows your options in life.

And unless you’re an expert in denial, living within your means is essential to your mental health. According to a survey by credit counseling firm Myvesta.org, about 40 percent of people with problem debt reported symptoms of severe depression. (By contrast, studies have shown that 9.5 percent of the general population is clinically depressed.)

I recognize that it’s counter-cultural to preach the virtues of living within one’s means. The rise of easy credit, cheap auto loans, interest-only mortgages, and the like have allowed Americans to improve their standards of living substantially over the last few decades by borrowing from the future.

And why expect average Americans to live within their means when their government won’t? In October, Senator Tom Coburn, a freshman Republican from Oklahoma, had the wisdom to suggest Congress eliminate some pork-barrel spending — including $450 million for two bridges in Alaska — and redirect some of the money to rebuild the damaged bridges on Interstate 10 outside New Orleans. This is what any sensible family would do. When the boiler explodes, you cancel the new windows and spend the money to fix the problem. Common sense being in short supply on Capitol Hill, the provision was defeated by a vote of 86-13. With role models like this, it’s no wonder some people think living within your means is for suckers.


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