Bankruptcy & Foreclosures

If you’re anything like me, you probably don’t need expert advice when it comes to ideas on how to spend your money. However, with the Economic Stimulus checks arriving to individuals and families all across the nation, maybe it’s not such a bad idea to take a look at some useful ways to part with your check.

Chop down the debt tree:

It’s no secret that out of control borrowing is what got us into this pinch in the first place so it’s also not a bad idea to use the government’s definition of resolve to dig ourselves out of the hole. Credit cards, home equity lines, late mortgage payments, car payments these may not be the most enjoyable means of parting with a little cash, but it does help lighten our own loads while chipping away at the bigger problem.

Invest:

As is the case with any bonus money (meaning not a part of your expected salary) the opportunity to invest never looks better. Mutual funds, CDs, retirement accounts, or even buying up precious metals, collectables, or antiques. The government wants you to spend your money and putting it toward a rainy day benefits the economy twice.

Retail Purchases:

Here’s the one I don’t need additional help with! Surveys indicate that a majority of Americans plan to purchase up goods that they otherwise couldn’t quite afford. Televisions, computers, cell phones, stereos, and video games: These are the fun things retailers are hoping you will consider purchasing with your stimulus dough. How much so? Well many national retail chains are offering bonuses to customers willing to sign over their rebate checks.

Vacations:

Despite the fact that oil (fuel) costs continue to break records by the day, many Americans still plan to use their money to travel. Sadly, a majority of our money will now be burned up (literally) in form of gasoline and jet fuel, which means less cash for lodging and entertainment once we actually reach our vacation destinations.

Just how much money are we talking about here? More than 100 billion dollars will be in the hands of Americans by the end of the month. I could stand on the soapbox and offer pointers on how to spend your money but the fact remains that government doesn’t care how you part with it, just so long as you do. I will confess that much of my own money has gone into the exciting world of car repairs and an inflatable raft for some early spring river trips. It may not be flashy but as far as the Fed’s concerned, I’m pleased to do my part.

We often talk about the economy and its current phase of inflated prices, a decreasing US dollar value, and oil prices that have Americans rethinking distances they travel but the world still turns meaning one way or another, individuals are forced to make ends meet. So how then are hundreds of thousands of people coming up with money they simply do not have? For some the idea of borrowing the money from themselves makes sense.

Enter the hardship withdrawal, a loan whereby a consumer takes a chunk of change out of their 401(k) or similar retirement plan. The idea of course being that perhaps the money would be of more use now than it would later as mortgages need to be paid, credit card bills continue to pile, groceries are getting more expensive by the minute and we don’t need to get into what oil’s been doing.

These withdrawals aren’t simply free money, however, and follow the rules of any other loan. This money is taxed as income as far as the government’s concerned and distribution penalties (as high as 10%) can be tacked on if the borrower is under 59 and ½ years of age.

That’s not all though, others chose to take out a single loan against their retirement, which could worth up to $50,000 (or 50% of the total amount invested in the account, whichever works out to be less). Here’s the catch with this one, if the borrower happens to default on the loan it is instantly considered a withdrawal and the taxes and penalties we talked about above come calling.

In the end, these loans can result in a retirement that is tens of thousands of dollars shy of where it would be had the account remained untouched. What’s worse is that according to experts, the retirement savings amounts here in the US are already dangerously low even without taking money out to solve short-term finances. Estimates have been calculated as high as nearly 50% of middle-aged Americans risk being unable to maintain the standard of living in retirement as in their working years as it is.

Keep in mind that many employers match contributions to your 401(k) account meaning that withdrawing money is actually costing the borrower twice in this situation. Once you account for the fact that the money is taxed as income, the benefits of borrowing from one’s self begin to lose their appeal.

Boy just as the economy starts to show signs of strengthening oil prices reach a record high as the US dollar plummets against global currency (particularly against the euro). While I would like to offer some explanation to these unfortunate trends, the truth of the matter is that even our government struggles to isolate the economic woes themselves. About the only positive spin to the ever-rising oil price situation comes in the form of new tax legislation, which would collect some $18 billion in new taxes on the world’s largest oil companies. These proceeds would then provide tax breaks for wind, solar and other alternative energy source research and for energy conservation. While the new tax would zap a healthy $1.8 billion annually from the top five oil companies, keep in mind that they earned $123 billion last year alone.

Interestingly, the bill would roll back two lucrative tax breaks for the five largest U.S. oil companies, which save the companies close to an estimated $20 billion over a ten-year period. Critics of the bill claim not only that it unfairly targets the oil industry but also additional taxes will only cause increases of the price per gallon we pay at the pumps.

Sadly, analysts are already predicting costs as high as $3.50 per gallon for most of the nation this spring with some areas hitting prices as ridiculous as $4.00/ gallon! Not only does this hurt each of us as we fill up our cars, trucks, and SUVs, it also pushes up the cost of food thanks to increases in transportation cost. The squeeze to the individual consumer is coming in from multiple angles. Aside from the costs mentioned, housing prices are tumbling (meaning less available equity for many) and banks are tightening up their lending practices. The icing on the cake is the diminishing value of the US dollar. All in all, efforts to stimulate the economy through interest rate cuts and tax rebates are viewed by many as band-aid fixes to deep-running wounds.

I really don’t enjoy posting bad economic news but feel like American consumers can benefit by realizing the severity of these tough times. My goal with this blog is to provide advice in the categories of debt management/ budgeting but often times the best advice is to simply step away in the hopes that the economy will rebound. In the mean time, about all we can do is keep these bleak forecasts on the backburner with our spending habits in daily life. We often discuss plans and strategies for a rainy day and this could very well be the start of the downpour.