Dec 25
I wish all my readers a safe and happy holiday week. This is likely my last post of the year as I am taking some vacation time and still working to polish my January main site article.
JOE
Dec 21
Did you know that money deposited to a Roth Ira, while not deductible, may be withdrawn with no penalty? Here’s what this means for you: If you are struggling between the need for an emergency account and saving for retirement, consider opening a Roth IRA, and within the account just buy a CD. As you are able to save more than the Roth limits ($4000 this year or $5000 if you are 50 or older this year) you will have built up an emergency account outside the Roth and can begin to invest the Roth more aggressively. No, you can’t have you cake and eat it, too, but your Roth can perform double duty helping you jump start your retirement savings while acting as an emergency fund. A no-lose proposition.
JOE
Dec 19
Indeed, the use, and more to the point, the misuse of debt can lead to a snowball effect. The new charges and the interest piling up and getting out of control, like a snowball about to trigger an avalanche. But author Dave Ramsey using the expression debt snowball to refer to his methodology to eliminate debt. He suggests lining up your credit cards by balance and making the minimum payment on all but the last one, the one with the lowest balance. That would pay off the lowest balance cards first, freeing up their entire payment for the next card in line. I like the advice to eliminate one’s debt, but I’d suggest lining those cards up by rate. An extra $1000 against the highest rate card may save you $240 per year in interest or more. But against that last teaser rate card you got, 4% for 18 months, just $40 the first year. Any argument I see in favor of Dave’s priority suggests that there’s a good feeling to knock off the debt from one card and count down the cards. Me, I’d rather keep a spreadsheet, or notebook, showing each balance along with the interest charged each year. The half of the money at the highest rates can easily have total interest of twice the bottom half. Pay those cards and see the real snowball effect. And see this example, let me know if you disagree.
JOE
Dec 17
On my main site, I recently posted an article “Getting Started” and led off with a Dickens quote:
| “Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.” -Wilkins Micawber in Charles Dickens’ novel David Copperfield | |||
I came across this clip which was too good to ignore, sorry if you’ve seen it, it just struck me as appropriate for this time of year. (Disclaimer - neither my wife nor 9 year old found this funny at all, I’ll let you decide for yourself.)
No, I don’t plan to make these clips a habit, not many are this good.
JOE
Dec 13
A few years back, my wife received a letter from her doctor. The doctor was giving up her practice to open a clinic that served women who are homeless or marginally housed in the Greater Boston area. We’ve made annual donations, but this year we were made aware that donations in general are down and the clinic is struggling. Please visit Women of Means, and consider adding this charity to your year end donation plans. I had the thought that someone with a huge heart and a wallet to match might make a substantial donation. I’ll keep that hope alive. Thanks for reading today!
JOE
Dec 10
As the New York Times reported on Thursday, President Bush is endorsing “an industry-lead plan, not a government bailout.”
I’m less concerned about what we call it, and more interested in what the results will be. If less than 20% of subprime borrowers can qualify, I don’t think that will slow the crisis too much. I agree that helping 360,000 people is likely ‘good’, but it won’t solve the problem (the other 1.4 million that will foreclose), and it does allow for reckless behavior. How this props up the value of the CMDs those mortgages comprise remains to be seen. In the end, doesn’t this 5 year delay just take part of today’s problem and push it out to 2013? At this point, I don’t have any answers, just more questions on how this will all get played out.
For those who take the stand that the borrowers are to blame, well, there’s blame to go around as I’ve discussed in the past. Now, this plan may at least help more than 300,000 homeowners and salvage some portion of the debt obligations created from the packaging of these loans. Time will tell, and I’m sure more details will follow.
JOE
Dec 04
Henry Paulson spoke today about the mortgage crisis and how the government was going to encourage a rescue. I suppose the cynic in me can ask what makes anyone believe that it’s going to be done right this time. The origins of the subprime meltdown are based in a remarkable combination of greed and ignorance, and I’m sure some fraud thrown in. Paulson’s plan, while well intended, may come with its own unintended consequences.
To start, I must say I appreciated his logic in categorizing the four types of subprime mortgage holders:
- Those who can afford their adjusted interest rate [and] need no assistance.
- Homeowners who haven’t been making payments at the starter rate on their subprime loan and may not have the financial wherewithal to sustain home ownership.
- Homeowners [who] might choose to refinance their mortgage - putting them in a sustainable mortgage while keeping investors whole.
- Those with steady incomes and relatively clean payment histories who could afford the lower introductory mortgage rate but cannot afford the higher adjusted rate.
Well, (1) and (2) are not the issue. The first group seems to have gotten through just fine, and the second are clearly in the group that never should have been given a mortgage. The third and forth groups he proposes to help with a combination of state sponsored tax-exempt bonds and streamlined refinancing. The risk is this; every change in taxation has an effect. Raise the tax on a good or service and you reduce the demand for it, and perhaps raise the demand for an alternate should one exist. The tax exempt bonds, whatever their total market value, will compete for money in the bond market, raising the cost of capital elsewhere. The category (3) refinancing will make the original mortgage holders whole, when perhaps their CMO tranche didn’t deserve to be valued at 100%, perhaps it’s changed hands so many times that the current owner paid pennies on the dollar. For that investor to now collect face value does not pass the common sense test. In the end, Paulson’s plan may very well work, and we may survive this crisis without greater damage to the economy, but even so, I’ll leave with the question, “What have we learned and how do we keep history from repeating, yet again?”
JOE
