Uncommon Cents

Welcome to your link payday for June 5, 2008. This week was a great pay week for me because I actually got paid three times (and I’m hoping for a fourth, though likely in vain): once from this blog, once from my part time job, and once from my full time job. The fourth would be my still MIA stimulus payment!

Anyway, some of the better posts of the last few weeks that I’ve read in the blogosphere:

JD over at Get Rich Slowly covers (and advises against) a practice that kills your tax advantages and might indicate you’re in serious financial trouble when he says Don’t Raid Your 401(k) to Make Mortgage Payments.

Mrs. Micah tickles my funny bone when she discusses The Lingerie ROI. Suffice it to say I won’t be investing in Victoria’s Secret anytime soon (I honestly don’t even know if they’re publicly traded!).

Do others judge the frugal? I’m sure there is a lot of that going on; in this intriguing post, SavingAdvice.com discusses The Benefits of Savings Habits that Make You Look Poor. I have a different problem–the benefits of looking old! I really don’t qualify for that senior discount at Jack in the Box (but I’ll take it if they give it)!

Sqawkfox runs a five part series on ways to kick start your job hunt; I particularly like part one on How to Choose a New Career, which addresses something that’s been on my mind a lot recently–pondering your passion.

While it has a rather long title, it has some great points–Trent over at The Simple Dollar discusses Money Magazine’s ‘7 Investments You Need Now’, Portfolio Theory, and My Own Plans for the Future. This discusses some very basic theory on portfolios and covers one of the books I really like, Paul Farrell’s The Lazy Person’s Guide to Investing.

And there’s your link payday for June 5, 2008!

…there’s still no recession.

The released numbers about the first quarter 2008 Gross Domestic Product say that the U.S. economy grew at 0.6%. That’s not great, but it’s positive. Recall that the definition of a recession is two consecutive quarters of negative Gross Domestic Product. So, fourth quarter 2007–positive GDP. First quarter 2008–positive GDP.

No recession.

Now, that said, I’m not by any means saying things are fantastic and the economy is going gangbusters. It’s simply not true. The U.S. economy is struggling, inflation is a concern although outside of energy and food, there’s not a lot that is seen statistically. There’s problems all around, but, technically, there’s no recession, not at this time.

Much has been made of the economic stimulus package and the expected $600 per person (with a lot of catches dependent on income) tax rebate coming from the federal government this year. The idea behind this part of the stimulus package is, well, to stimulate the economy. For the most part, that means the government wants you to do one thing with it: spend it.

While spending that money may be the best thing to do for the nation’s economy, it may not be the best thing to do for your personal economy. Here’s a few other things to consider doing with $600.

1) Pay off debt. This good old fashioned personal finance staple is never out of style. If you’ve got debt, particularly high interest revolving unsecured debt (this mostly exists in the form of credit card debt), consider paying it down or outright eliminating it.

2) Save it. Maybe your emergency fund is a little low (or non-existent). Maybe you found a great deal on a CD somewhere (in these tough times, if you have, let all of us know where!) and want to put a bit of money away for a few months or a year. Maybe you’ve paid off all of your debt (congratulations!) and aren’t sure what to do with the stimulus rebate yet, so you’re considering parking it in a money market account. Nothing wrong with any of these either.

3) Invest it. If you’re following a pre-established plan for investing, keep following it with this “extra” $600, or maybe buy a fund, ETF, or stock you’ve had your eye on. If you’re not following a pre-established plan for investing, maybe it’s time to start! If you’re somewhat risk averse, consider going with a high quality bond fund rather than something in the stock market. It’ll be too late for the 2007 IRA contribution, but 2008 is front and center. Keep it socked away for the long term.

4) Diversify. Not in the typical sense; just do a little of each of these, or split the difference between just a couple.

For myself, I’ll be saving my rebate, because my personal savings account tends to take a bit of a hit with tax time for a month or two, so this will help to replenish those.

What are you planning for your tax rebate?

The term subprime refers to borrowers who have issues with their credit history. The credit rating and history of the borrower is what is subprime (meaning poor or non-existent), rather than the interest rate of the loans given to subprime borrowers, which are higher than typical. Subprime loans also carry more risk for both the borrower and the lender. The lender is lending money to a borrower who has not demonstrated through a healthy, verified credit history the ability and willingness to repay the loan, justifying the higher interest rates–just as a higher return is expected in investing for taking more risk, a higher rate on the loan is expected for the lender taking more risk. The borrower takes a higher risk of defaulting as the payments are higher and they have not demonstrated a history of being a good credit risk. While subprime lenders offer loans to those who would otherwise not be able to borrow enough money to, for example, purchase a house, the unfortunate downside of subprime is that many borrowers are unable to repay the loans.

In regards to the current subprime mortgage crisis, a subprime borrower would often take on an adjustable rate mortgage that usually starts with a low “teaser” interest rate for a few years then resets; combine this with a rise in interest rates over the past few years (prior to the last six months) and the subprime mortgage borrower often ended up unable to pay their mortgage, leading to defaults and foreclosures.

The subprime crisis is not yet over–it led to the fall of Bear Sterns last week and it is not yet known what effect it will have going forward. The lesson to learn from subprime is this: in terms of dealing with bonds, buy quality; build a healthy credit history so you do not have to engage in a subprime loan; and only borrow what you can afford. The next few months will tell us just how extensive the damage due to subprime has been.

It’s been a long two weeks since our last link payday. My mom is sick, my niece is on spring break, I’m on a nine day work stretch, I went to the dentist this evening, and this post is a few hours late. Still, it’s time to get this one on the road and out the door!

JD over at Get Rich Slowly makes a great post about the negative savings rate and the age of easy credit. Yes, right now, as a country, we have a negative savings rate–we spend more than we earn! The sad part is that it’s not a joke that debt is the American Way–it’s reality.

Lynnae over at BeingFrugal.net points out that there’s no shame in renting, which in these days of subprime mortgage disasters is a great piece of wisdom. If you can’t afford it, you can’t afford it, just like anything else–getting into debt you can’t handle, even “good” debt, is still a recipe for disaster.

Ron over at The Wisdom Journal points out even more issues with credit card companies and yet another way they might stab you in the back. Personally I’ve had much better experiences with Discover than he has, but my situation has also been much different.

Mrs. Micah points out how a surprisingly large number of things can be lived through–the current turmoil in the financial markets is nothing compared to the Great Depression, and many people who live in countries outside the U.S. are facing far greater challenges than we ever will. Perspective is always useful.

And finally, JLP over at All Financial Matters talks about an exercise in futility–estimating the future of the Dow Jones Industrial Average. We all would like to be able to time the market and figure out when it will rise and fall–and we all fail.

And that’s your Link Payday for March 20, 2008!

Inflation is a rise in prices of goods and services over a period of time. Due to inflation, purchasing power of a set unit of money declines. If the current rate of inflation is 3 percent, what a dollar can buy today will require $1.03 to buy next year at this time.

Inflation is measured in many ways. The Federal Open Market Committee (also known as “the Fed”) looks at the Consumer Price Index (CPI) as a gauge of inflation, both the “headline” CPI which attempts to measure total inflation, and the “core” CPI which eliminates the volatile energy and food areas. This is important because the Federal Open Market Committee sets policies which directly and indirectly affect interest rates.

As you can see, inflation influences interest rates (and vice versa). When inflation appears to be rising, the Fed tends to raise interest rates; when inflation appears to be at bay, the Fed either will keep interest rates as they are or lower them. As interest rates rise, people and businesses are less likely to spend or borrow money and more likely to save money; as interest rates fall, the opposite happens. When people and businesses spend more, the economy tends to expand; when they spend less, the economy tends to contract.

Inflation is also influenced by supply and demand. If goods are scarce and in high demand, their price tends to increase; if goods are in abundant supply or in low demand, their price tends to decrease.

Understanding inflation can help consumers and investors understand fiscal policy and what their effects are on the economy, which may help them make better decisions about what to do with their money. If inflation is high, it is likely that interest rates will be raised higher, which would behoove the financially savvy to pay down their debt and pour money into savings; if inflation is low, it’s likely interest rates will become lower, which might indicate a time to refinance debt and try to lock in higher interest rates (perhaps in certificates of deposit). If inflation is high, it becomes even more important to seek out frugal ways to make your dollars stretch farther; when inflation is lower, this is not as much an issue. In any case, trying to understand what inflation is and its effects on your dollars can help you deal with your financial situation.

As I said earlier, the definition of a recession is two consecutive quarters of negative gross domestic product. Fourth quarter 2007 data indicated an anemic–yet positive–growth rate of 0.6 percent, which means if there is going to be a recession, it would start with the first quarter of 2008. Signs seem to point to a negative GDP during the first quarter (which is still going on), so the question would largely be whether or not the second quarter of 2008 will have growth or not.

It’s very difficult to say if the second quarter will be positive or not. It’s not likely to have a large deal of growth, so if it’s positive, it’ll be barely positive; on the other hand, the economic stimulus package which is delivering $600 into the hands of many (but not all) taxpayers will be taking effect in that second quarter. If the working/middle class recipients of those rebates do what congress is hoping with that money–spend it–it’s possible that the second quarter will indeed squeeze out positive growth and we’ll avoid the recession that many have predicted.

I would put odds of that recession happening at about one out of two.

But right now, still, no recession–yet.

Okay, yes, there is a credit crunch going on out there, related to something called “subprime mortgages”, basically, mortgages given to people who had no business getting them, by brokers who had no business giving them out. But in reality, as long as you do one very smart, essential thing, the bond portion of your portfolio will be fine.

That one thing: buy quality!

Bond funds like the Vanguard GNMA and the Vanguard Total Bond Market Index–those that invest in quality bonds–are doing fantastic. Looking up what the average quality is of bonds that are in these funds tells you why.

Bond ratings by Moody’s (one of the recognized authorities in rating bonds) start at Aaa (highest), then to Aa1, Aa2, Aa3, A1, A2, A3, then into the B category. Bonds that are rated with a Baa or less are considered less than investment grade (”junk bonds”). If the bonds are of lower quality, the interest rate must be higher to attract investors who may be willing to risk the higher chance of losing their principle due to the higher yield of the low quality bond.

On the other hand, high quality bond funds–the Vanguard GNMA has an average quality of Aaa, and the Vanguard Total Bond Market Index has an average quality of Aa1/Aa2–are paying very decent yields with virtually no risk of default. Government National Mortgage Association issues, also known as “Ginnie Maes”–those that make up the Vanguard GNMA Fund–are direct obligations of the United States government. You can’t get a better quality rating than that! Given how they’ve performed–VFIIX yielding over 5% right now, and VBMFX yielding 4.87%–why take the risk of lower credit ratings? It takes a lot of interest payments to make up for losing your principle, so don’t take the chance of losing it! Go with quality and your bond portfolio will be more than fine.

A bull market is a market (typically the stock market) in which prices are increasing and/or are expected to increase. While the term is most frequently used in regards to the stock market, it can also be used in other markets, such as the bond market or real estate markets.

When a bull market is occurring, investors have overwhelming optimism and confidence. They expect that the markets will do well for an indefinite period, which has never proven true.

While a bull market runs its course, nearly all investors do well. Positive results are the norm, as the entire market tends to have gains. The rising tide of a bull market tends to float all boats; if an investor is not doing well in a bull market, it’s likely they are poorly diversified.

The term “bull market” refers to the way a bull attacks its prey. A bull thrusts its pray upwards with its horns; a bull market moves upwards to higher and higher gains.

I’ve been on a short vacation from work (three days around a weekend, so five days in total) because I’ve just been so burnt out this past month or two. I’ve spent that time trying to get some work done both at my part time job and on this blog (as well as one of my other projects, the A2Unplugged podcast) as well as training for the Great Aloha Run and starting to get a little bicycling time in again. Hopefully I’ve recovered well enough to get back to doing social work at the same place where I’ve done it for more than 12 years (and I just got past the point where I need to work there less than 11 more years to hit early retirement).

Some of my favorites from the last couple weeks all over the personal finance blogosphere:

Being burnt out at my day job, I’ve considered looking for other work, and of course, a personal finance blogger brought to light some information on leaving your job without burning bridges; that would be J.D. over at Get Rich Slowly with How to Quit Your Job Gracefully. I hope I don’t need it soon, but I’ll keep it in hand for when that time does come.

Mrs. Micah gives her thoughts on comparing retirement savings options with her current job. In her situation, putting money into a Roth IRA first seems to make the most sense given that her 403(b) option doesn’t include any matching. I agree with her; I just hope her Roth custodian offers her low costs and low trading fees.

My Two Dollars features a piece on the mortgage crisis, and why he doesn’t feel all that bad about it. While I don’t agree with all of his points, I definitely understand living somewhere it’s close to impossible to afford a house, and that many (if not most) who are in this boat borrowed more money (and were allowed to borrow more) than they ever ought to have.

BluePrint for Financial Prosperity brings up a point that to me sounds incredibly obvious but probably isn’t for others: Don’t Get a Refund Anticipation Loan! This goes along the same lines as not spending a bonus or raise before you get it; until the money’s in hand, don’t do it!

NCN at No Credit Needed lists all of his many different accounts: various business and personal accounts, retirement accounts, educational savings accounts for each child–there’s thirteen in all! In the end he challenges the reader to determine how many different accounts they have. While I think thirteen is a lot (although he’s dealing with an entire family, not just a single person), I bet I have more. Maybe I’ll try counting them the next time I’m on vacation…