One of the most introductory ways to plan for the effects of income taxes is to recognize how the various marginal rates are applied to the corresponding tax brackets. Because the United States does not yet currently engage in a flat tax system, our taxable incomes are broken down into different taxation ranges with specific taxation percentages assessed depending on where they fall along the tax bracket spectrum. Although our 2010 tax returns won’t be filed until April 15, 2011, for planning purposes, it’s always good to find out the new changes to the tax code as early as possible. Let’s examine some of the upcoming tax rate changes that are being projected for 2010 and compare them to the previous year’s 2009 tax brackets.

Projections Of New IRS Tax Rates Have Historically Been Extremely Accurate

Year after year, even before the official IRS income tax brackets are released, a select number of tax experts have gotten together and crunched a determinative number of officially released statistics by governmental agencies – to project and extrapolate the upcoming year’s tax brackets. Year after year, the tax rate predictions released by these groups have yielded results in advance with near 100% accuracy. Such an income tax bracket projection ahead of time is possible because many of the major tax code numbers are pegged to officially released inflation statistics – including the standard deduction, the personal exemption, the actual income ranges of the tax brackets, and contributions limits for the investment retirement accounts (both the Traditional and Roth IRA account).

One of these tax prognosticating groups is the Tax Foundation, a Washington D.C. think tank which collects data and publishes research studies on federal and state tax policies. The other notable group operates under the auspices of the Wall Street Journal and is comprised of a merry band of private tax professionals and economists – namely William E. Massey, a senior tax analyst from the Tax and Accounting arm of Thomson Reuters; George Jones, a senior federal tax analyst from CCH; and James C. Young, an accounting professor from Northern Illinois University. For numerous years now, both the Tax Foundation and the Wall Street Journal group have consistently released to the public very accurate, albeit unofficial, early bird peaks at the following year’s projected income tax brackets based on available financial data – well in advance of the official IRS releases. If you’re eager to get a head start on tax year 2010, read on.

IRS Tax Rate Schedule Updates For Tax Year 2010

This year, citing a very sluggish economy and extraordinarily low inflation rates for 2009 to which upcoming 2010 tax rates shall be pegged to, the Tax Foundation and associated experts are predicting very little year to year change for the 2010 federal tax brackets. If there’s anything good that came out of this global economic recession that has been plaguing us for the entirety of 2009 – it’s that the combination of low gas prices, depressed consumer spending, and high jobless numbers with so many people filing for unemployment – have enabled inflation rates to stay quite low during the span of 2009 – at a mere 0.19%. Just compare that to the incredibly high inflation rate of 4.26% during the previous year of 2008 when gas prices were skyrocketing, and it’s clear the recent sudden and precipitous drop in inflation has been extremely unprecedented.

As a result of low inflation, for the most part the 2010 tax bracket ranges will likely stay relatively unchanged. As noted by the tax pundits, for the very first time since the IRS started to index the official federal income tax rates to inflation during the mid 1980’s, taxpayers will get virtually no significant benefit from inflation in 2010. As such – year 2010 tax brackets, standard deductions, personal exemptions, and even retirement account contribution limits will see very little (if any) alterations from prior year numbers.

I will update the table below to reflect the official IRS tax rates for 2010 if decidedly different numbers are ultimately released by the IRS. However, with tax bracket projections by the experts having enjoyed a near perfect accuracy rate for quite a few years now, I don’t have any reason to doubt that the displayed figures below will ultimately wind up as official.

Federal Income Tax Brackets For 2010 – Based On Taxable Income Ranges

Beyond some slight numerical shuffling of the taxable income ranges, there will not be too many significant tax changes from 2009 into 2010. Here is a breakdown of the projected changes (if any) for 2010 as they compare to the prior year:

• Personal Exemption: No change. For the very first time, the standard exemption for 2010 will not be going up and will stay unchanged at $3,650, the same as it was in 2009.
• Standard Deduction: No change, except for Head Of Household filers. The standard deduction for married couples filing jointly will remain unchanged at $11,400. For those filing as single, the standard deduction will remain at $5,700 as well. However, Head of Household filers will see a slight increase by $50 – from $8,350 (year 2009) to $8,400 (year 2010).
• Overall Tax Bracket Thresholds: Will increase across the board for all tax filing statuses, albeit at a significantly lower amount compared to past tax year increases.
• Annual Gift Tax Exclusion Amount: No change. For tax year 2010, the current gift tax exclusion limit of $13,000 will stay the same. Often overlooked by most taxpayers, the gift tax stipulates that gift givers must pay a special tax on gift amounts that exceed a certain amount per year.
• Traditional and Roth IRA Contribution Limits: No change. Despite the fact that IRA and Roth IRA contribution limits did not rise in 2009 in response to strong inflationary pressures in 2009, there will still be no corresponding change in the maximum contribution limits to individual retirement accounts for 2010. The standard IRA contribution limit for 2010 will remain unchanged at $5,000. The catch up contribution limit for those 50 or older will remain at $6,000 as well.

Source URL: 2010 Federal Income Tax Brackets (IRS Tax Rates)

Copyright Protected © 2009 Money Blue Book: Personal Finance Blog. All Rights Reserved.

After months of bank failures and gloomy economic news, we finally have some good tidings from our federal government. No, it’s not another round of stimulus checks for those of you who have been hoping and waiting with bated breath, but rather, it pertains to the FDIC insurance that guarantees the safety and security of bank deposits.

The current increased FDIC insurance limits of $250,000 were scheduled to be rolled back to the previous $100,000 limits on the last day of 2009. However just recently, Congress voted to extend the deadline for four more years – through December 31, 2013. Those of us who have significant amounts of money in the bank or sizable funds invested into long term certificates of deposit (CD rates) undoubtedly have been nervously eyeing the impending December 31 expiration date of the $250,000 threshold. Thus this news ought to come as a tremendous welcomed relief. Those of us who have been considering renewing our certificates of deposit can now consider maturities with a longer time horizon without fear of falling outside of federally protected limits.

Avoid Banks That Are Not FDIC Insured, Or Credit Unions That Are Not NCUA Protected

As many of you may know, if you have money in a bank account, your bank deposits are generally insured by the Federal Deposit Insurance Corporation (FDIC) up to the maximum current limit of $250,000. Similarly, if you have money saved in a credit union account, your deposits are insured by the National Credit Union Administration (NCUA) for the same amount as well. As federal government run entities, the two organizations jointly share in the responsibility of  insuring and regulating the stability & financial health of our nation’s banks and credit unions. All legitimate banks and credit unions operating in the United States are duly members of the relevant regulatory agency. If you are not banking at an FDIC insured institution, you’re taking a huge risk. Banks that are not FDIC insured are either international banks or scams (yes, bank Ponzi schemes do exist). While most reputable international banks offer some protection through their own governmental authorities, you will want to do everything you can to steer clear of the uninsured but high yield dealers calling themselves banks.

FDIC and NCUA deposit insurance offer the maximum peace of mind assurances available as they are backed by the full faith and credit of the United States government. In the event of a bank or credit union failure, insolvency, or bankruptcy, the FDIC and NCUA have an orderly and systematic system in place to ensure a seamless and disruption free resolution. When banks fail, the FDIC takes over. They may sell the failed bank to another more stable bank (purchase and assumption method), or they may liquidate its assets and issue full payouts to customers (pay off method), making up any shortfall of funds from its own coffers. During any bank failure proceedings managed by the FDIC and NCUA, all interest income accrued up to the date of bank failure are guaranteed and paid out as well. Contrary to popular opinion, the FDIC and NCUA resolution processes are almost always very orderly and expedient, with little lag time and disruptions to account access during the resolution transition phase. For most customers in such an occurrence, a bank failure is a non-event as they are almost always permitted to continue using their customary bank services including checks, debit cards, and electronic transfers as before. At some point however, customers may be issued new cards, checks, or online banking information.

Federal Deposit Insurance Corporation (FDIC)

Created by the Glass-Steagall Act of 1933 in response to the massive number of bank failures during the Great Depression era, the Federal Deposit Insurance Corporation (FDIC) now services as a safety net for bank deposits in the event of a catastrophic insolvency emergency or rare run on the bank. Currently, FDIC insurance provides up to $250,000 worth of protection per depositor, per insured bank for the following accounts:

• Checking account (negotiable order of withdrawals)
• Savings and money market accounts
• Certificates of deposit and other time deposit accounts
• Cashier’s checks and other checks drawn on the member bank’s accounts
• Certain investment retirement accounts (IRA’s) in deposit based accounts

Not everything is covered. As a general matter, financial investments and bank conveniences such as – stocks, bonds, money market funds, annuities, insurance policies, and even bank safe deposit boxes are not covered by the FDIC.

Because the general coverage limit that FDIC insurance provides is $250,000 per depositor per bank, there is no sense in opening multiple accounts of the same type at any one bank to circumvent this restriction. The only way to exceed this mark yet remain fully protected under permissible limits is to either spread your money among different banks, or if you wish to stick with a single bank – open multiple accounts with different deposit categories of legal ownership. The FDIC recognizes eight different ownership categories – single accounts, certain retirement accounts, joint accounts, revocable trust accounts, irrevocable trust accounts, employee benefit plan accounts, corporation/partnership/unincorporated association accounts, and government accounts. As each of these different account ownership categories qualify for its own $250,000 insurance limit,  it is possible to have total deposits of more than $250,000 at any one insured bank and still be fully insured. To demonstrate, here’s an example and run through of how a married couple could hypothetically insure up to $2 million at any one bank:

• Husband and wife each deposits $250,000 in separate individual accounts
• Together, they have $500,000 in a shared joint account
• Individually, each has $250,000 in separate IRA deposit accounts
• Each also sets up a $250,000 revocable trust account, payable on death, naming the other one as beneficiary

Avoid banking with institutions or organizations that are not covered by federal government insurance. Particularly if you are a high yield savings account or bank rate chaser like myself, more likely than not you’ll come into contact with online banking names like Dollar Savings Direct, EverBank, Ally Bank, or even E-trade – bank names that are either unfamiliar to you or names whose reputations or stability concerns you haven’t fully vetted yet. While most reputable banks will clearly display their FDIC insured member logos, it’s always important to confirm this fact for yourself. Verifying your bank’s FDIC insurance coverage is easy – simply call the FDIC’s telephone number at: 1-877-275-3342, or preferably, visit the online FDIC Bank Find page. To find an institution by FDIC certificate number (every FDIC member institution carries one) or to search via geographical or statistical criteria, simply click on “More Search Options” via FDIC Bank Find for more choices. As the Bank Find website notes, the service can also help you answer pressing questions such as – Is my bank insured? Where are my bank’s branches located? Where is my bank’s home (main) office located? What is my bank’s web site address? What happened to my bank (historical list of events)? Does my bank have a new name? And Is my bank still open?

National Credit Union Administration (NCUA)

All legitimate credit unions in the United States offer deposit insurance protection for their account holders via the NCUA. The National Credit Union Administration is the independent federal agency that supervises and regulates the operations & stability of all federal not-for-profit credit unions.

Like the FDIC, the NCUA’s insurance limits are guaranteed by a federal fund that’s backed by the full faith and credit of the United States government, and as such, are 100% safe from catastrophic loss or insolvency. Now that the $250,000 coverage limits provided by the National Credit Union Share Insurance Fund have been extended through December 31, 2013, credit union customers should be able to rest easier. Hopefully the higher protection limits will be extended into indefinite perpetuity or made legally permanent. Beats me why the FDIC and NCUA haven’t already done so.

If you have an account at a credit union, chances are your funds are protected by NCUA member insurance, with account protection rules and different account ownership categories that are similarly set up to run as that offered by FDIC insurance. However, to be sure, it’s always important to confirm that your credit union is a legitimate entity and fully insured before doing business with them. If you are unable to find a NCUA member placard logo displayed anywhere on the credit union’s website or store front, I’d recommend that you confirm its membership by calling the NCUA’s telephone number at 1-800-755-1030, or by preferably visiting the NCUA’s Is My Credit Union Federally Insured lookup page.

Source URL: Current FDIC and NCUA Insurance Limits For Banks and Credit Unions

Copyright Protected © 2009 Money Blue Book: Personal Finance Blog. All Rights Reserved.

The following represents the Internal Revenue Service (IRS)’s officially released 2009 federal income tax brackets. Read ‘em and weep – or perhaps rejoice, depending on where you stand on the whole federal income tax bracket sliding scale. Regardless, you’re going to be getting close and personal with the marginal rates when you file your 2009 tax return in early 2010. Let’s have a look at some of the tax changes shall we?

Official IRS Tax Rate Schedule Updates For Tax Year 2009

Via the Wall Street Journal, the following graphical table below gives you the official marginal tax brackets for married couples filing jointly as well as the marginal rates for single filers for 2009. The previous year’s numbers are also provided to give you an idea of some of the more noticeable changes since 2008. The income numbers listed in the chart below are taxable incomes, and thus they have taken into consideration all available personal exemptions as well as any of either the standard or itemized deductions, including all pre-tax above the line 401k and deductible IRA contributions.

As key portions of the marginal tax tables are pegged to inflation, quite a few numbers must be annually revised. Thus you will note that there are quite a few key changes for the 2009 tax year compared to the year prior. However, while overall tax numbers appear to have nominally increased on the whole, taking into consideration the effects of inflation, effective tax rates may actually have remained level or even dipped a bit.

Despite the text below that says “projected”, the official IRS numbers have been released and they now represent official federal income tax rate brackets, locked in for 2009.

To summarize, here is a run through of some of the more notable tax rate changes for 2009 and even a quick blurb about some of the key tax benefits that did not change based on official IRS releases thus far:

• Personal Exemption and Exemption For Dependents – Increased to $3,650 from $3,500 (up $150) from 2008, but is phased out at higher income levels.
• Standard Deduction – The great majority of American taxpayers take the standard deduction rather than itemizing deductions for expenditures such as mortgage interest, charitable contributions, and state & local taxes. The standard deduction increased to $11,400 from $10,900 (up $500) for married couples filing a joint tax return, increased to $5,700 from $5,450 (up $250) for singles and married individuals filing separately, and increased to $8,350 from $8,000 (up $350) for heads of household.
• Overall Tax Bracket Thresholds – Increased across the board for all tax filing statuses. This means that if your annual income did not increase since last year or if you did not receive an inflation based pay raise, you may likely pay a little less in taxes in 2009 than in 2008. As the IRS notes as an example on one of its press releases, in regards to a married couple filing a joint return, the taxable income threshold separating the 15 percent bracket from the 25 percent bracket is $67,900, up from $65,100 compared to tax year 2008.
• Earned Income Tax Credit – Increased to $5,028 from $4,824 (up $204) for low and moderate income workers and working families with two or more children. The income qualification limit to take the earned income tax credit (EITC) for joint return filers with two or more children also increased to $43,415 from $41,646 (up $1,769).
• Annual Gift Tax Exclusion Amount – Increased to $13,000 from $12,000 in 2008 (up $1,000). Often overlooked by people, the gift tax requires the gift giver to pay a special tax on the gift amount if it exceeds a certain amount per year. For 2009, that threshold will be bumped to $13,000.
• Social Security Contribution and Wage Benefit Base – Increased to $106,800 from $102,000 (up $4,800). This means that 2009 income sources over $106,8000 will not be subject to Social Security taxation. With the Social Security tax rate at 6.20%, this also means that the maximum a person will shoulder in Social Security taxes for 2009 is $6,622.
• Traditional and Roth IRA Contribution Limits – No change from 2008. Despite inflationary pressures that increased tax bracket rates across the boards, sadly, IRA and Roth IRA contribution limits will be staying the same – stuck at a crappy and paltry $5,000 per year for those under age 50, and $6,000 per year for those 50 or above.
• Roth IRA Contribution Limits (Income Threshold) – Increased to $166,000 from $159,000 (up $7,000) for married filing jointly couples, and increased to $105,000 from $101,000 (up $4,000) for singles and others.

Watch Out For Possible Upcoming 2010 Tax Bracket and Tax Rate Changes

While official IRS federal income tax brackets are not usually released for the following tax year until the late fall, it’s frankly never too soon to get your hands on the earliest reliable marginal tax bracket predictions. Year after year, a group of private tax experts and economists associated with the Wall Street Journal get together and crunch officially released inflationary data to provide news readers an early bird peak at the following year’s projected income tax brackets. This group, comprised of members from the Tax and Accounting arm of Thomson Reuters, tax analysts from CCH, and an accounting professor from Northern Illinois University – usually releases their annual tax bracket projections and estimations on tax deduction numbers for the following year during early fall (around September), well before the official IRS numbers are issued.

As marginal tax brackets track changes in inflation and other economic data fairly closely, the annual tax rate estimations by the Wall Street tax team members have yielded pretty reliable and on par results over the years. If you’re antsy to get a head start on tax year 2010, stayed tuned in very early Fall 2009 for the newest updates on the 2010 projected federal income tax brackets.

Because of the election of Barack Obama as the new President of the United States and the handover of the country to a new political party, there are bound to be substantial changes in the tax code and income tax rates in the coming years. Working on an economic stimulus plan and advocating aggressive social agendas, President Obama has already proposed numerous changes to the ordinary income tax rates, such as raising the top rate from 35% to 39.6% – potentially boosting the tax burdens of higher income earners to new heights. He has also suggested the need to reduce tax deductions for American households earning more than $250,000 annually, and has also made proposals to increase taxes on capital gains and stock dividends. With a political and taxation platform that is decidedly against those those in the higher upper echelons of the U.S. tax code, those who have done well for themselves over the years seemingly have a lot to fear in Mr. Obama. Personally, while I feel Obama is doing a commendable job on the social and foreign policy front, I hope he doesn’t get too carried away with his taxation ambitions. His remarks on taxes always make me nervous.

In the mean time, many of us regular taxpayers can only just ride along and hope for the best. Regardless of what Obama ultimately decides to do and no matter how federal income tax brackets eventually look like in 2010 and 2011, we should try to wisely structure our actions today to reduce our future tax burdens as much as possible, regardless of what happens. Such smart tax moves would include taking advantage of employer sponsored pre-tax perks like flexible spending accounts (FSA), and investing  in tax deferred retirement vehicles like 401(k)’s and Roth IRA accounts.

Source URL: 2009 Federal Income Tax Brackets (Official IRS Tax Rates)

Copyright Protected © 2009 Money Blue Book: Personal Finance Blog. All Rights Reserved.

A second economic stimulus package for 2009 is on the way and from the looks of things in the news, it appears newly minted President Barack H. Obama and his Democrat controlled House of Representatives and U.S. Senate are determined to ram the lucrative spending proposals through the legislative meat grinder no matter what, much to the chagrin of skeptical and deficit-weary Congressional Republicans.

As Congress debates the wisdom and intricate details of the current version of the 2009 economic stimulus package, it’s clear that something needs to be done very soon to jumpstart and save our suffering economy before we spiral into a full blown economic depression. The unemployment rate is rising fast and everywhere you turn, there seems to be a never ending stream of unemployment and layoff news being announced everyday. The stock market has already shed more than half of its value since its peak in 2007, and billions to trillions of dollars worth of wealth have already been eliminated from the economy. Major banks and financial giants like Citibank, Bank of America, and JP Morgan Chase, once the financial pillars of our economy and the lifeblood of our credit industry, are now clinging onto U.S. government bailout money for dear life – hoping to still be in business at the end of every quarter.

With its almost limitless resources, it’s clear the federal government must intervene somehow and put this broken economy and financial system back on track to prosperity. But the question is – what should be the government’s role in all of this? More specially, what method should the government take to effectively jump start the economy to life again and ease the suffering on Main Street and Wall Street? Should the 2nd economic stimulus package continue to focus directly on sparking consumer spending by featuring a second round of free stimulus checks to consumers – perhaps for amounts much higher than the previous 2008 economic stimulus checks? Or should the plan this time around focus more on longer term indirect measures like job creation, infrastructure investment, and tax credits?

Current 2009 Economic Stimulus Package Focuses Less On Stimulus Checks – And More On Job Creation, Infrastructure Projects, and Tax Cuts

Before Barack Obama was elected president and during his 2008 Presidential election campaign, he supported implementing additional economic stimulus measures in 2009 – and even whispered at the rumored possibility of a second round of stimulus checks for taxpaying consumers in 2009 before tax day.

Whether a second stimulus check was a real possibility or not, the mere mention of a second round of stimulus payments and the prospect of getting more free government money certainly made my greedy ears perk up, but much of my optimism and enthusiasm were quickly dashed when Obama finally came into power. Almost immediately, he signaled a different stimulus proposal shift that favored a more multi-pronged approach of using tax cuts, tax credits, and pet projects, rather than relying on the 2008 economic stimulus check tactics of his predecessor, George W. Bush. Instead of just distributing free bailout money to the masses and hoping the funds will naturally trigger a huge surge in consumer spending activity to put the economy back on its feet again, Obama’s stimulus package focuses more on middle class tax cuts and massive increases in government spending to fund various infrastructure investments, green energy projects, financial aid to states, and social education initiatives – designed to create jobs and put people back to work.

The current 2nd economic stimulus plan laid down by President Obama for 2009 is a whopping, super-sized $825 billion economic rescue package containing staggering spending initiatives and ambitious tax cuts, and sprinkled with dozens of pork-based proposals and suspect social initiatives within hundreds of pages of legislation. The current package contains $300 billion worth of aggressive construction projects designed to improve the country’s  infrastructure and create millions of new artificially generated jobs in areas like health care, renewable green energy, school upgrades and repairs, and transportation related improvements. The package also contains about $200 billion worth of state social assistance provisions designed to help keep state sponsored health and unemployment programs well funded – to offer a measure of cushion for those people who have been recently laid off due to the economic down turn. Along with the state assistance portion are other safety net type provisions to help fund and keep afloat local food stamp programs, food banks, state sponsored health care, and governmental health insurance plans for those suddenly unemployed.

The other primary feature of the current Obama economic stimulus plan is the series of tax cuts and tax credits offered to qualifying individuals and small businesses. Under the tax cut portion of the stimulus deal, small businesses suffering losses because of the economic downturn and recession would receive more favorable tax loss write off terms.

For individuals, the current 2009 economic stimulus package offers pretty generous tax cutting proposals. The plan highly favors low and middle-income working families since the idea is that these income groups are more likely to spend and invest their tax savings rather than save the money. In terms of stimulating the economy, increased consumer spending is good, and consumer saving is bad. Nicknamed the “Make Work Pay Credit” by President Obama, the proposed tax credit is supposed to reach close to 95% of workers, and benefit even working tax filers without any tax liability – typically very low income workers. Here is a basic overview of the stimulus plan’s Make Work Pay Credit:

• Middle Class Tax Credit: Under the plan, there would be a tax cut amounting to $500 a year for individuals, and $1,000 for couples. The economic stimulus would be issued in the form of a tax credit, and would be limited to those making $75,000 or less ($150,000 or less for married workers filing joint tax returns).
• Low Income Tax Credit: For low income taxpayers, there would be an increase and expansion of the Earned Income Tax Credit to provide a refundable tax credit for low income assistance. The expansion would affect even working tax filers without any actual net tax liability – typically very low-income workers – and allow them to potentially qualify for free stimulus tax refund credits.
• Child Tax Credit: For those who have children, a temporary increase in the child tax credit would result in larger tax refunds.

Should The 2009 Economic Stimulus Plan Be Re-Written Or Re-Packaged To Contain Major Provisions For A Second Economic Stimulus Check?

It’s too bad the eventual 2009 stimulus plan probably won’t contain another round of hefty stimulus check payments to ordinary consumers like the ones that were dished out last year. While the 2008 stimulus tax rebate wasn’t much (only a few hundred dollars in my case), some additional government handouts in higher dollar denominations would still have been greatly appreciated by individuals like myself and put to good use. Plus, as an American consumer who embraces the virtues of capitalism, I feel I would have made a better decision for myself as to how best spend my portion of the stimulus money pursuant to what’s in my own best capitalist self interest.

Overall, I think President Obama’s administration is probably right in its revised efforts to focus more on job creation, offering greater tax cuts, and enhancing safety net protections to help suffering Americans survive the economic downturn for the long term. Offering greater financial assistance to struggling state unemployment programs (many on them on the verge of running out of funds), and stimulating growth with more job building projects is a proven way to stabilize the markets and improve consumer sentiment. However, I’m still a bit disappointed that the President and Congress have not explored the prospect of an enhanced second stimulus check further.

At least for now, President Obama’s administration seems to have given up on the idea of using government stimulus checks en masse again to jump start the economy. Instead, Obama’s advisers have indicated that they would prefer searching for viable ways to get government stimulus money into the hands of American taxpayers quickly that would not require or duplicate the tax rebate checks of last year. Apparently the $150 billion spent in 2008 in the form of stimulus payments to consumers proved to be quite an economic failure and pointless exercise of futility in terms of actually stimulating the economy to any extended degree. But perhaps the reason it didn’t work properly the first time around was because too little money was given out to substantially change consumer spending habits to forcibly inject money back into the economy again (simply compare the $150 billion spent last year to the $800 billion-plus worth of spending being proposed for 2009).

Perhaps The Problem With The First Stimulus Checks In 2008 Was That They Were Too Little To Make Much Of An Impact

I have mixed feelings about the prospect of yet another around of direct stimulus checks to consumers. On one hand, I understand that there are many struggling American families getting hammered by higher living  costs, and suffering from the ills of unemployment and layoffs. However, I’m not entirely convinced that the idea of handing out free money to families will really solve all of our economic woes and jump start the economy at its core. But yet I still wonder if perhaps we gave up on the idea of stimulus checks too early and that maybe, the concept is still workable. Maybe the amounts issued in 2008 were simply to small to change anyone’s spending habits as initially intended – after all, only about $150 billion was spent in 2008, when the current 2009 economic stimulus proposal’s already ballooned to a whopping $850 billion.

I know when I received my tax rebate stimulus check in early 2008, the check only amounted to a few hundred paltry dollars – not really enough for me to go on a greedy spending spree. So instead of spending it and doing my part to stimulate the economy, I ended up doing what most people probably ended up doing with their tax rebate check – putting the money in a bank and depositing it into a high yield savings account. Of course, my plans for the money would likely have been very different if the amount wasn’t something low like $300, $600, or $1,200, but rather something as high as $10,000. If the stimulus check issued to me was indeed worth upwards of $10,000, I would very likely have saved a small portion of it but ended up plowing a sizable portion back into the economy by spending it on major expenditures like a new wide screen plasma TV set, new home appliances, or even a new car.

What If The Entire Economic Stimulus Bailout Package Went Towards 2nd Stimulus Check Payments? Would This Actually Stimulate The Economy?

Almost all polls among ordinary American consumers show overwhelming support for a second stimulus rebate check. After all, who would really oppose it? Who would be opposed to receiving free stimulus check money. Think the prospect of getting a second stimulus check worth as high as $10,000 as a consumer bailout is impossible? Well it’s probably unlikely, but it’s not out of the realm of financial or budgetary possibility, at least based on the fiscal numbers alone.

On CNN Money, a very interesting question was proposed in regards to the bank bailout and economic stimulus packages. If instead of bailing out these credit crisis-stricken banks (who probably deserve their fates due to the risky mortgage bets they greedily placed into subprime loans), we just gave all of the bailout money to taxpayers in the form of a massive consumer cash stimulus. How much would we each get if the entire current economic stimulus proposals were issued out to consumers as a second round of stimulus check payments? The second important question to ask is – would this actually stimulate the economy for the necessary extended period of time to get it going again?

To arrive at the figure, CNN Money took the total amount of the bank bailout package of $700 billion and added that to the proposed 2009 economic stimulus spending estimation at the time of $819 billion – resulting in a total bailout package of $1.519 trillion (that is quite a staggering figure). Dividing that number by 156.3 million, the total number of U.S. workers who filed federal income tax returns in 2008, that number equaled $9,718.49 per U.S. taxpayer, or roughly the equivalent of a juicy $10,000 cash bailout payment for each qualified tax payer. Now that’s stimulus with oomph! With $10,000 in our pockets in the form of instant windfall economic stimulus checks, it’s very likely that the tremendously high amount would be sufficient to incite a major change in spending activity than a measly $600 check ever could.  People would probably go out and actually start stimulating the economy by buying cars, purchasing TV’s, paying for college studies, and going on vacations.

As a dose of devil’s advocate inspired reality though, while it’s very possible that $10,000 checks in every working taxpayer’s hands would probably send the economy skyrocketing, it’s also possible the growth could be short lived and not actually get to the true root of our current economic problems. The massive surge in consumer spending probably won’t do much to solve the lingering fundamental issues surrounding our current credit crisis, which centers around a failed banking system and a failed home mortgage lending market. But then if repairing the banks and injecting confidence back into our home mortgage and credit lending markets are our primary objectives – I’m not sure the current economic stimulus proposals by President Obama, which are focused more on tax cuts and job creation and most prominently, aggressive social spending programs – will actually accomplish those goals. At least for stimulus checks, they could be able to help alleviate some of the immediate economic suffering being felt by ordinary consumers – many of whom are fighting to stay alive, with a great deal currently resorting to desperate emergency fund measures like 0% credit card offers, balance transfers, and risky high interest payday loans.

I’m curious as to everyone’s opinion on the wisdom of a second stimulus check (if it ever happened). What’s your take? Would substantially higher stimulus checks of $1,000, or possibly even as high as $10,000, actually encourage you to spend the money (thereby stimulating the economy) instead of merely saving the amount or using it to pay down debt? How would your decision compare to how you actually spent your previous 2008 tax rebate stimulus check?

Source URL: Second Stimulus Check For Obama 2009 Economic Stimulus Package?

Copyright Protected © 2009 Money Blue Book: Personal Finance Blog. All Rights Reserved.

Happy New Year everyone! As much as I’d like to be forward looking, sometimes it’s hard not to recap the past. I think 2008 will go down as one of the worst years in American history in terms of the economy and national morale. Since the start of last year, there has been this gloomy gray cloud of recession worries and depression fears that has persistently lingered over the heads of all Americans. Despite our attempts to shake its clutches by turning our attentions to more exciting events such as the media circus and hype surrounding the historic presidential election of  Barack Obama, the first African American to be voted into the White House, it appears the ominous clouds will follow us into 2009 and beyond for the foreseeable future.

Who To Blame and Where To Go From Here

Those who want to take the easy way out by blaming the credit crisis and current economic woes on the Bush administration, or on the Democratic Congress, or even on the ongoing wars in Iraq and Afghanistan – have their sights on the wrong culprits. The primary blame should be placed on ourselves – the credit and home hungry American consumer who pushed housing prices to astronomical and unsustainable levels. Weaned on easy credit and driven to consume to great excess over the last few years, our abandonment of the age-old practice of saving and living within our means put us on the road to financial disaster that finally came to fruition during 2008.

While the spigot of credit offers and home mortgage loans flowed freely and easily, the destructive cycle of revolving debt and high risk investing was triggered. When housing prices finally halted its irrational surge and began to plummet, so too did the fates of dependent investment banks and mortgage lenders. The precipitous downfall took with it – former pillars of American financial might – companies like Bear Stearns, AIG, and Fannie Mae. In 2008 we saw the fall of major savings banks like IndyMac and Washington Mutual, and witnessed the catastrophic destruction of shareholder equity in financial giants like Citibank, Bank of America, and JP Morgan Chase. The domino effect of the housing collapse has caused the entire U.S. economy to pull back, leading to a decrease in consumer spending activity, triggering further scale backs in worldwide economic growth. With the ongoing deterioration and lock up of the credit and banking institutions, we are now entering an unstoppable economic recession, as massive in scale as our nation’s ever experienced, with no end in sight.

Certainly the federal government with its regulatory oversight powers have some share of the blame as it was their responsibility to ensure home mortgages were being priced fairly and sold at levels warranted by the underlying risk. The federal government’s overzealous housing agenda and eagerness to ensure that all Americans became homeowners (when a vast segment had no business ever becoming one), resulted in billions to trillions of dollars worth of risky subprime mortgages being offered to individuals totally unqualified for such loans. The Fed (with its infinite number of financial experts) still managed to fall asleep at the wheel and wind up negligently steering the great American ship into an economic iceberg. If it’s one thing that we hopefully have learned from 2008, it’s that even the most savvy and professional of financial experts fail to get it right sometimes – just ask any one of the trusting and savvy investors who invested their life savings with hell-bound scam artist Bernie Madoff and his $50 billion Ponzi scheme.

Without a doubt, 2008 was a terrible year for the economy. Many of my friends, particularly those in the financial and accounting sectors, now find themselves laid off and unemployed for the first time in their lives during what will likely go down in history as the worst economic recession since the Great Depression of 1929. But amidst the financial anger and desperation, I have faith that better times are ahead of us. Unless financial Armageddon is truly looming (and I don’t think it is), there is hope for better days in the years ahead. Until blue skies reign again, we’ll simply have to buckle down and adopt a more defensive financial and savings strategy to weather this economic storm. After all, we are all in this together – each feeling the economic pain in some way or another. We’ll get through the tough times in due time.

One Thing I Learned in 2008 – It’s Impossible To Predict The Direction Of The Economy and World Events With Any Real Precision

At the beginning of 2008, I posted a blog entry about my stock market projections and financial predictions for 2008. The purpose was to compare my plans for the new year with actual reality 12 months after. Well, after examining my predictions for 2008 and comparing my projections with what actually happened, I’ve come to the conclusion that I’m the worst soothsayer in the world. The great majority of my predictions were way off base, but then again, who could have predicted the current events as they ultimately turned out? It just goes to show that despite our best efforts, financial predictions are simply educated guesses at best. Here is how my predictions fared against economic and political reality.

1. In January 2008, I predicted the U.S. economy would be able to stave off a full blown recession during 2008, not realizing just how bad the financial and housing markets were and how much wealth destruction they would ultimately wreck on the overall economy. I was completely way off on this particular prediction. The economy ultimately nose dived into a severe recession and currently we are teetering on the brink of another cataclysmic wave of unemployment increases, surge in credit induced bankruptcies, and further drops in consumer spending. The collapse of the American economic engine due to unsustainable subprime mortgages and plummeting home prices has also managed to bring down down the economies of the rest of the world, as evidenced by staggering stock price wipe outs across the board in most of the U.S. and world stock markets. During the 12 month span of 2008, the Dow Jones Index plummeted 34%, the S&P 500 Index went down 35%, and the NASDAQ dropped 40%. Asian stock markets fared even worse as the Korean KOSPI dropped 41%, Japan’s Nikkei dropped 42%, and China’s FTSE/Xinhua FXI 25 Index plummeted a staggering 50%.
2. Interestingly, I predicted Presidential candidate Hillary Clinton would ultimately win the Democratic nomination and go on to win the U.S. Presidential election as I did not believe the Republicans could produce a sufficiently viable candidate who could sufficiently distance him or herself from President Bush and his administration to compete with the Democrats. A Democratic candidate ultimately did win the national election, but instead of Clinton, it was young Barack Obama who captured the hearts and minds of the American people, inspiring them to vote in the name of change for the nation’s first non-Caucasian president.
3. I’m not sure what to make of my prediction about the direction of oil prices. For 2008, I predicted that crude oil prices would not exceed $100 a barrel and that average fuel pump prices would remain steady at around $3.00. However, after blowing past the $100 mark and reaching highs of $125 during spring 2008, crude oil prices ultimately plummeted in a span of only 9 months due to drastic pullbacks in world wide fuel demand triggered by slowing world economies, eventually causing crude oil prices to plunge below $50 a barrel. Fuel prices now stand at less than $1.50 a gallon at many gas stations across the United States -  absolutely stunning levels we haven’t seen in some time. I suppose that’s one thing we can be thankful for these days – the availability of cheap gas.

In Terms Of the Stock Market, Gas Prices, the Housing Market, and the Economy, Here Are My Financial Predictions For  2009:

1) Doomed U.S. Auto Industry – Despite the vehement protests from a vast majority of American taxpayers, the U.S. President and Congress ultimately chose to ignore the public will and bail out the beleaguered U.S. automobile industry with a series of quick loans and a plan to buy shares in the companies. Unfortunately, I don’t believe the American auto industry as it currently exists today can be saved. Ultimately, I believe the big three car makers of GM, Chrysler, and Ford will need further governmental intervention at the risk of taxpayer expense sometime during 2009 to stay afloat, and will be back for more urgent federal bailout money. As it currently stands, the collective business model of the entire American auto industry is extremely flawed and the biggest crippling factor of the car makers’ ability to become profitable is the United Auto Workers (UAW) union. Unless the U.S. automakers can be freed from the high cost of its union strong-armed pension packages, health plans, and high wages, the U.S. auto makers will never be able to compete with their more financially efficient foreigner competitors like Toyota or Honda.

2) Low Gas Prices – I predict fuel prices will stay low for the entire extent of 2009 due to diminishing fuel demand and persistent economic drag attributed to the current economic recession. The only event that may trigger a significant increase in fuel prices sufficient to counter the recession effects would be some type of significant geo-political event such as an act of significant terrorism similar to that which occurred on 9-11 (which I don’t believe will come to fruition).

3) Continued Bad Economy and Recession – I believe the U.S. economy will get worse before it gets better. The first two economic quarters of 2009 will be absolutely horrendous as unemployment rates will surge and businesses will continue to lay off employees and shut down due to deteriorating conditions. In the latter half of 2009, during 3Q and 4Q, the U.S. economy will continue to suffer, although to a lesser degree than the first half. However, I don’t expect any type of notable economic recovery during 2009. Even if Obama pushes through his rumored $1 trillion economic stimulus plan complete with another round of tax rebate checks, the economy will still need a significant amount of time to work itself out. The banking industry and credit markets have simply suffered too much damage, and a new way of doing business must emerge before the economy will improve. Get ready for tough times ahead – grumpy bears are here to stay, and beat up bulls have left the building. I’m not predicting an outright economic depression, but it’ll be close to one.

4) Worsening Real Estate Market – Housing prices will continue to plummet in 2009 with no stability in sight. Certainly housing prices are ultimately local and regionally based, but nationally, I project average home prices to drop about 15% in 2009 and another 5% in 2010.  The current national glut of homes for sale is simply tremendous and the available housing inventory exceeds a 12 month supply. Furthermore, the rate of home foreclosures continue to increase and the ongoing credit crisis continues to make home mortgage refinancing difficult for most home owners. While mortgage interest rates for prime borrowers have dropped to lows of nearly 4%, the vast majority of prospective home buyers seem content to wait it out, knowing that time is on their side in terms of finding their dream bargain home in the next few years. I would know – I’m one of them. As a prospective single family home buyer myself, I’m in no hurry to buy a home anytime soon. I’m currently waiting for home prices in my area to drop another 20-25% before I step in. Knowing that many home sellers are refusing to sell their homes at present day low prices and are hoping to wait out the housing recession as well, it’s my belief that their collective refusal to sell at today’s low levels are only contributing to the worsening condition of the real estate market. Eventually, sellers will have to face the grim reality that home prices will not be returning to the highly leveraged levels of 2006 or 2007 for decades to come.

5) Gloomy Stock Market – Financial pundits frequently cite the truisms that the stock market is a forward looking beast and that it usually responds about 6 months before the actual economy does. Those two traits certainly may be true, but I don’t think the U.S. or world stock markets will be pricing in any type of economic recovery during 2009. The earliest we will likely see a bounce back will be sometime during 2010, at that’s being optimistic in my opinion. The high stock market prices of years past will not return again for many years. Remember, stock prices from 2002-2007 were buttressed through the power of leverage and debt financing via the unsustainable mechanisms of fancy mortgage backed securities and free flowing loans. With the current housing market destroyed, financial markets ruined, and banking institutions clutching their federal bailout money for life support and afraid to lend it out, it will be some time before we can expect stock prices to recover. Because investment and consumer sentiments are so pessimistic, and leveraged plays have all but disappeared, a quick V-shaped recovery is almost unthinkable. Perhaps it’s time to buy gold or save money in high yield savings accounts with the best banks online. For the majority of 2009, I plan to adopt a defensive turtle strategy and seek out protective investments such as FDIC insured savings accounts or high yield CD’s.

6) End Of Lucrative Credit Card Offers – With the recent passage of the new credit card rules by the federal government that greatly favor credit card consumers, scheduled for effect on July 1, 2010, major credit card issuers like Citibank, Capital One, Bank of America, Discover Card, and American Express will be forced to restructure their existing credit card agreements to respond to the new regulatory demands. During 2009, the major credit card issuers are likely to increase credit card interest rates for all consumers across the board, for both good and bad credit card customers alike. To compensate for the less favorable profitability standards of the new credit card regulations, formerly lucrative 0% balance transfer offers will be gradually be fazed out, with FICO credit score standards increased substantially to weed out those applicants with questionable credit ratings. While the new credit card rules don’t officially take effect until the summer of 2010, the credit card companies are likely to start implementing significant changes over the span of 2009. The era of the App-O-Rama and 0% APR balance transfer credit card deals is coming to an end.

Source URL: My Stock Market and Real Estate Predictions For Year 2009

Copyright Protected © 2009 Money Blue Book: Personal Finance Blog. All Rights Reserved.

For those who don’t know, the FDIC stands for the U.S. Federal Deposit Insurance Corporation, a federally run government organization that protects bank customers from the loss of their deposits in the event of a catastrophic FDIC-insured bank failure. The protection afforded by FDIC insurance is near iron-clad as it is backed by the full faith and credit of the United States government. There is no need for bank depositors to apply for FDIC insurance or even to request it as coverage is automatic. Below are the new and current FDIC insurance coverage limits for deposits at FDIC insured member banks. The new FDIC limits are effective starting October 3, 2008 and tentatively scheduled to expire on December 31, 2009. While the FDIC does not directly cover deposits held in credit union institutions, in response to the new FDIC limits, the National Credit Union Share Insurance Fund, or NCUSIF, has raised credit union insurance limits up to $250,000 through Dec. 31, 2009 as well.

Although the newly enacted FDIC insurance limits are slated to end at the end of 2009, I predict that Congress will more likely than not make the new coverage limits permanent after that time. Frankly, in light of the current financial crisis and deteriorating consumer confidence sentiment regarding the safety and security of our nation’s banks and credit unions, there is no reason the U.S. government should not allow the new FDIC limits to stay permanent.

The New Increase In FDIC Insurance Coverage For All FDIC Insured Deposits Will Help Improve Consumer Confidence In The Banking System

With the passage of the Emergency Economic Stabilization Act of 2008, the U.S. Congress has agreed to increase the previous FDIC insured limit of $100,000 by 150% to $250,000 through the end of next year until the last day of 2009. For those who argue that the new boost in FDIC insurance coverage is unnecessary and too high, keep in mind that after factoring in the effects of inflation since it was last increased in 1980, the current FDIC insured increase is perfectly in line with inflationary reality. Besides, desperate financial times require desperate measures. The U.S. and world economies are faltering and the major banking institutions are struggling to stay afloat during this terrible credit crisis. While the FDIC insured limit increase probably won’t have a direct effect on the credit crunch (I hate this phrase but everyone uses it) as the main problem in the banking sector is that banks are refusing to lend to each other rather than suffering from a direct shortage of bank deposits, having a higher limit will probably go a long way in instilling consumer confidence in the U.S. banking system again. In the long run, this should have a positive and stabilizing ripple effect on the economy at large.

Personally, I’ve been rather active lately in my banking transactions, opening new high yield savings accounts with the top online banks and shifting money around to make sure every single cent of my cash deposits are fully protected under the FDIC limits. As many concerned consumers have been doing, I have been seeking the shelter and safety of bank deposits during this time of financial and economic turmoil. As a small business owner I tend to carry around significant amounts of cash for payroll, accounting, and business investment purposes – much more than the usual consumer account holder. To ensure full FDIC protection for my bank deposits in excess of $100,000, I’ve been spreading cash around among multiple banks to increase my FDIC coverage limits by setting up separate single and joint accounts to take advantage of the separate FDIC coverage for each account category.

The new FDIC limit increase will allow consumers to keep more of their money at the same banking institution without having to scramble around desperately looking for other FDIC insured banking options to spread their funds around. While bank failures remain extremely rare, with the recent collapse of major banking institutions like IndyMac and Washington Mutual, the occurrence and possibility of such a reality has become all too real. The recent decision by the U.S. Congress to raise the FDIC limit on an emergency basis was long overdue and necessary to calm the public’s worry and reduce the number of irrational actions taken by those fearful of losing their money or investments. Ultimately the decision will help put a stop to the massive waves of bank withdraws due to panicky customers pulling their money out of banks in response to irrational concerns. The new FDIC insured limit will help prevent such desperate monetary runs on the banks and allow the banking system to continue operating as normal.

However, The New FDIC Coverage Increase Will Not Result In Higher Interest Yields Or Financially Affect The Vast Majority Of Banking Customers

While the new FDIC limit increase should help boost consumer confidence in banks and credit unions, and help stem some of the panic and fear in the marketplace, most consumers are unlikely to experience much of a difference. It’s mostly the wealthier individuals or small businesses who carry around significant amounts of cash in their checking or savings accounts that are likely to directly appreciate the new FDIC insurance cap. The great majority of average everyday banking customers do not have more than $100,000 in a single bank account anyway.

Furthermore, those who are hoping to see higher interest rates or yields on their high interest savings accounts or certificate of deposits (CD’s) will be sorely disappointed. There is a very real likelihood that as the perceived confidence in our banks goes up, the interest rate expectations may go down. Because the FDIC is financed through premiums paid by FDIC member banks, participating banks are obligated to pay periodic premiums for FDIC insurance coverage. As such, there is a high inevitable possibility that they may eventually have to pay more in the way of FDIC premiums for the new higher insurance coverage limits. With higher FDIC premiums to contend with, banks may ultimately pass on the cost to consumers by offering lower interest rates for their deposits.

In a move that probably will benefit smaller local and community banks more than the mega “too big to fail” banking giants like Citibank, Bank of America, or JP Morgan Chase, the new financial bailout plan also provides for unlimited FDIC insurance coverage for certain accounts. Banking customers of FDIC insured banks will receive unlimited insurance for money deposited into non-interest bearing accounts, a protection that primarily benefits small and mid size businesses that have bank deposits exceeding the new insured maximum of $250,000. This temporary, but extendable unlimited protection was enacted to stabilize business risk, and prevent the type of loss faced by many businesses when a bank or thrift savings institution failed. Under this temporary unlimited FDIC insurance plan for non interest bearing bank accounts, a typical small business will be able to keep $250,000 worth of interest bearing funds in a regular checking, savings, or CD account, and put the remainder in zero interest accounts for unlimited FDIC insurance coverage. Under the bailout plan, for the first 30 days of the program, all FDIC insured banks will enjoy this unlimited FDIC protection for their non-interest bearing bank deposits. After that, member banks must opt-out of the program if they no longer wish to offer this unlimited protection.

Source URL: New FDIC Insured Limit Covers Bank Deposits Up To $250,000

Copyright Protected © 2008 Money Blue Book: Personal Finance Blog. All Rights Reserved.

With the FDIC shutdown of major thrifts and banks like IndyMac and Washington Mutual, as well as the shakeup at Wachovia, even historically secure commercial banks are starting to feel the credit crunch squeeze. With the recent bank safety scares hitting Wall Street and now Main Street, bank deposit customers have been sent reeling and scrambling to check FDIC insurance coverage limits – calling their banks to arrange their affairs for sufficient coverage. When FDIC insured bank consumers are feeling uncertain and fearful, you know the confidence of the American people in their banking and credit systems have been significantly shaken. Many people have been left unable to sleep soundly at night, as lingering concerns of bank safety and security have paralyzed the American economy and investment psyche. So what’s a savvy investor and account depositor to do in this brave new world of financial bailouts and bank closures?

To Survive The Credit Crunch, Financial Crisis, and Housing Market Collapse – Seek Out Security, Stay Optimistic, and Look For Opportunities

Without a doubt, the financial, stock, and housing markets remain volatile as the subprime mess has paralyzed lenders, halting the once liquid credit markets. However, whatever you do, it’s best to avoid the “irrational exuberance” (quoting former Federal Reserve Board Chairman Alan Greenspan’s catch phrase) and stay clear of the overly extreme sentiments of certain doom and gloom naysayers. Remember, the economy will survive and the financial system will be repaired in due time – have a little faith.

Take our current energy crisis and oil supply depletion situation for example. Yes, it’s true the world’s supply of crude oil is steadily dwindling and gas prices have skyrocketed recently – however this doesn’t mean the world is going to come to a screaming halt as supply of our beloved dinosaur juice runs low. Even now, the American and world governments are actively advocating and promoting the advancement of new alternative fuels and alternative power sources such as nuclear, clean coal technology, solar, wind, and all types of clean, green energy. Society is infinitely resilient in the long haul and will adapt to changing times and life will go on as usual. Whatever you do, don’t resort to taking up ridiculous survivalist activities such as building a bunker, withdrawing all of your money from banks, giving up credit card usage, or stocking up on food, guns, toilet paper, and supplies to ride out some silly apocalyptic fantasy future that you irrationally conjure up. Unless you are already doing so, there is no need to start making plans to live off the land, move onto homesteads, and start milking your own cows because you anticipate the need to defend your community from the hordes of starving crowds who did not prepare for the supposed eventuality. The world as we know it will not disappear, so discard those wacky conspiracy theories and economic Armageddon notions immediately. Don’t be a nut. Instead, starting planning for a brighter financial future today for yourself and your family by making smart banking and wealth investment decisions for the long haul. When this economic malaise blows over in a few years or even in a decade, your smart financial steps today will reap dividends in spades. It’s during tough economic times that counter-intuitive minded investors profit in the long run, and it’s how future millionaires get made.

Despite the current market sentiment, I strongly advocate long term investors to not overlook continued portfolio diversification opportunities in the stock market through mutual funds and indexes, and to not neglect true long term bargains in real estate and housing. The age old truism and expression in the world of investing is true – that the greater the risk, the greater the return. This mantra is also strongly tempered by another financial axiom of billionaire investor Warren Buffet and his views on the interplay between investment fear and greed – that the smart investor should seek to be fearful when others are greedy and greedy when others are fearful. It’s how savvy long term investors ultimately pay off in their steadfast investment decisions today. In fact, Warren Buffet, who has successfully made billions of dollars by taking advantage of opportunities during the worst of times, has been actively practicing what he preaches, buying up significant value minded investment positions in severely beat down companies like Wall Street investment giant Goldman Sachs for $5 billion and forking over $3 billion for positions in mega technology services provider General Electric. Of course, during these turbulent economic times and periods of extreme stock market volatility, it’s best not to be overly emotional or make hasty decisions based on short term swings. The world is filled with chicken littles and emotional lemmings so it’s all too easy too succumb to hysteria and Street panic. But those who want to survive this economic downturn and emerge from the recession and credit crisis in stronger financial positions than before must maintain their wits and stay focused for the long term, spreading their financial wealth around through diversified investments and continuing to seek out potential opportunities.

But there is a caveat for this long term sentiment. While I personally have 2-3 decades to go before I need to hatch my retirement nest egg, with plenty of time to build up long term investment positions, as well as continuous steady income coming in to continue dollar cost average investing and taking advantage of interest compounding, not everyone is in a similar position. For many millions of people, the money they have at this present time is all the significant amount of money they will ever have and at their age and current stage in life, they simply can’t afford to risk further loss. These types of individuals are focused on asset preservation rather than opportunistic investing and thus for these investors, they need investment security and deposit safety today. For some, it’s also the need to preserve their cash from loss due to the fact they are close to retirement, or saving up for a specific upcoming expense such as a down payment for a new home. Or perhaps they need to maintain a stash of cash to give them confidence and financial safety net courage to continue investing for the long term, while weathering financial emergencies.

For the asset preservation types who want to ensure their current deposits and investments are shielded from bank failures and investment loss, safety is the paramount concern when it comes to selecting the securest place to put their money. But for the conservative types, they also desire a certain degree of liquidity and convenient access to their money. But with the diminished risk of loss at safer places like bank savings and money market accounts comes substantially lower rates of return. Such deposit and investment sources as the ones listed below will offer you more security for your money, but they will not earn you a lot of interest, and oftentimes will just barely keep up with inflation. Keep that in mind as you evaluate your options and perform your due diligence. Furthermore, while being cautious and putting your money into safe and secure investments will preserve you from drops in the stock and financial markets, you run the very real risk of missing out on major market rebounds and valuable long term opportunities.

For those determined to ride out the volatile economic storm by seeking safety, the following options are the best choices when it comes to answering this question – “what is the safest investment for my money to avoid the risk of loss?”

List Of The Safest and Most Secure Places To Save and Invest Your Money During A Recession Or Economic Crisis:

1) Bank Savings and Checking Accounts – Of all the ideal places to store your money during the worst of times, other than in U.S. Treasuries, the best place is in a traditional bank account. While the rate of interest return on bank account deposits will never beat the long term rate of return on a properly diversified stock portfolio, depositing your cash in something like a high yield savings account is the easiest and most practical solution for those worried about the safety and security of their money. For those searching for the best high yield savings accounts offering the highest annual percentage yield (APY) interest rates, here are the best online savings banks out there (all of the following recommended high interest banks are fully FDIC insured, and all account deposits are protected under the FDIC insurance coverage limits):

1. FNBO Direct – 3.50% APY
2. WT Direct – 3.31% APY
   
3. E-Trade Savings – 3.30% APY
4. HSBC Direct – 3.25% APY
   
5. ING Direct – 3.00% APY

In terms of safety, reliability, and liquidity, putting your money in a bank account is the easiest and most straight forward savings option. Not only is your bank deposit earning interest, it’s FDIC insured and easily accessible. The Federal Deposit Insurance Corporation (FDIC) is a federal government run enterprise that provides insurance coverage and protection for the deposit accounts of participating member banks, guaranteeing their insured accounts from unexpected loss. While FDIC insurance coverage limits vary depending on the number and type of account ownership categories you have at each bank, the rule of thumb to remember is that for each individual, the FDIC protects up to $100,000 in deposits at each banking institution for each ownership category. This means that at each FDIC member banking institution such as Citibank or Bank of America for example, each individual may be insured up to $100,000 for a single account and get additional coverage – like a separate $100,000 coverage limit for a joint account with his or her spouse. Furthermore, for retirement accounts like IRA’s, Roth’s, SEP’s, and Keogh’s held in a member bank in the form of a bank deposit (as opposed to something like a mutual fund), there is also an extra but separate $250,000 FDIC insurance coverage limit.

While skeptical investors and chicken little depositors might cite the recent failures of major commercial banks and thrifts like IndyMac and Washington Mutual as reasons to be wary of the safety of commercial banks, the reality is that in all of the recent bank failure scenarios, all of the FDIC insured deposit accounts that fell within the coverage limits were fully protected from loss. Even amidst the current mortgage crisis and credit crunch, the great majority of commercial banks are considered well capitalized. The possibility of a bank failure and the probability of a sudden FDIC takeover is extremely remote. However, even in the event that a bank does happen to fail, consumers would continue to enjoy uninterrupted and easy access to their FDIC insured bank money.

It is also interesting to note that since the FDIC was established three quarters of a century ago after the Great Depression, no banking customer has ever lost a single penny of their FDIC insured deposit at any failed bank. Your commercial bank may go out of business or suddenly be unable to continue operating as a viable banking institution, but Uncle Sam, bolstered by the virtually unlimited financial resources of the federal government will back up your money in full, up to the guaranteed FDIC insurance coverage limit. Even in the event that allotted FDIC funds become tapped out, the federal government can always authorize itself and the U.S. Mint to print emergency money. It is almost inconceivable to me to even fathom the possibility of the FDIC failing or the FDIC funds to somehow go bankrupt. Such a dire failure would probably require that the United States federal government suddenly cease to exist or be in such horrible shape that losing your checking or savings account deposit would probably be the least of your concerns. At that point of Armageddon, you’d probably be better off investing your remaining money in guns, canned food, and a nuclear fallout bunker. There is a reason why the whole world turns to the U.S. for economic, political, and militarial stability and guidance – we have the most powerful, tried and true system in the world. It’s not perfect, but it’s extremely resilient and will ultimately overcome struggles in the long run.

2) Laddered Bank CD’s – While putting your money in a high interest savings account is your best bet in terms of account safety and liquidity, those who seek a slightly higher APY rate of return may want to consider dabbling in bank certificate of deposits (CD’s). CD’s can be found and purchased through commercial banks and certain deposit brokers (view my list of the best online brokers), and along with regular bank deposits, are both considered very safe investments. Like checking and savings accounts, certificate of deposits are also insured up to $100,000. However, do keep in mind that for each individual customer at each banking institution, checkings, savings, and CD’s are lumped into a single FDIC insurance category for coverage purposes.

While CD’s tend to offer fixed interest rates that exceed that offered by checking and savings accounts, the catch is that unlike the variable interest earning bank deposits, your CD deposit is locked into a fixed interest rate at the time of investment. When purchased, the CD account has a set maturity date such that if withdrawn too early, the CD funds will incur an expensive penalty. When you buy a CD via your bank, you invest a fixed sum of money for a fixed period of time – anywhere from six months, one year, five years, or longer. In exchange for your agreement to keep the money invested and locked for the pre-arranged period of time, the issuing bank pays you a high interest rate, typically at regular intervals throughout the year. When you cash in or redeem your CD, you receive the money you originally invested plus any accumulated interest. But if you withdraw prematurely, an early withdrawal penalty may cause you to forfeit a chunk of your original investment.

While CD’s enjoy higher interest rates than traditional savings accounts, the potential hassle with CD’s is that once locked in, their rates of return have a potential to lag behind and become surpassed by variable high yield savings accounts if those interest rates rise. The best way to get around this problem is to ladder your CD investments by purchasing CD’s with staggered maturity dates. For example, for those buying CD’s for a period of just a year, one could purchase multiple CD’s, maturing at dates of 1 month, 3 months, 5 months, 7 months, and so forth, thus ensuring that you will always have money coming in and cash on hand at set intervals. CD ladders are a good idea for those wary about locking up their money for long periods of time, but you have to choose the lengths and maturity dates you’re comfortable with, otherwise you’ll toss and turn at night and stress about your lack of liquidity in case of a financial emergency.

3) U.S. Treasury Bills and Bonds – U.S. Treasury Bills, or T-Bills as they are often called, are extremely secure debt instruments issued by the U.S. federal government. They are mostly notably used by large institutional investors and individuals with substantial assets during times of economic crisis and societal instability when there is an instinctual flight to quality. However, I tend to stay away from these bond instruments and rarely invest in them. Their fixed rates of return are terrible and simply too low for my liking. While they offer rock solid protection backed by the full faith and credit of the federal government, the interest rate yields for U.S. Treasuries are often low and based on auction driven demand. Because Treasury rates of return are based on bidding demand that’s heavily influenced by societal factors, during times of economic crisis or political instability, rates of return on U.S. Treasury Bills and Bonds can plummet. During major economic depressions and recessions, U.S. Treasury yields can sometimes even go negative, that is, investors are willing to accept a small destruction of their investment to guarantee no larger destruction.

While U.S. Treasuries generally provide almost laughingly low rates of return on investment, they provide near iron clad safety and protection for your money. Treasury Bills are essentially “IOU” debt instruments issued by the United States federal government to any consumer, business, or institutional investor willing to buy them, and they are used to pay off the U.S. government’s own maturing debt paper and to pay off its own bills. By issuing short term U.S. Treasury Bills, mid term Treasury Bonds, and long term Treasury Notes to consumers, buyers essentially lend the government money in exchange for a fixed rate of return and a solid promise by the U.S. government that the debt investment will be repaid back in full upon maturity due date. Along with FDIC protected banking assets, the world also regards U.S. Treasuries as credit risk proof – the perfect place to store money for the extremely risk adverse.

U.S. Treasuries range in maturation from a few weeks for the short term T-Bills to as long as 30 years for the Treasury Notes. Of course, the longer the maturation date, the higher the fixed interest rate the U.S. debt instrument pays out, same as the case with ordinary bank CD’s. Same as with CD’s, for those who want to inject greater liquidity into their Treasury investments, they may want to consider laddering their Treasuries as well, by purchasing multiple U.S. Treasuries simultaneously offering different maturity dates. The recommended way is to purchase multiple Treasury bills and notes that will expire at regular set intervals and have them automatically rolled over into newly issued Treasuries for continuous interest earning effect, but still maintain a semblance of liquidity.

The simplest way to purchase U.S. Treasuries is to go through the federal government’s Treasury Direct website. There you can follow the instructions to open a new account for individual investors by providing your personal and financial information such as name, mailing address, Social Security Number, bank deposit account, and bank routing number. You can purchase as little as $100 worth of U.S. Treasury “IOU’s” (the current minimum investment) or you can purchase millions of dollars worth. While there is a competitive bidding process of yield prices, most ordinary non-expert individual investors can opt for the non competitive process and simply agree to the current spot offering rate. As such, the service is probably more beneficial to extremely wealthy investors unable to find full protection under the FDIC limits and needing to preserve their millions of dollars in extremely safe lock box type of accounts. There is currently no limit to the amount of U.S. Treasuries that may be purchased and interest income derived are exempt from state and local taxes.

4) Money Market Funds – Money market funds are conservative mutual funds that invest in short term, stable debt instruments, high quality securities, and other forms of top rated short term commercial paper that can be easily sold, making the likelihood of any loss of principal extremely rare. Unlike traditional mutual funds and index funds, asset preservation minded money market mutual funds do not invest in stocks, which while lends itself to greater stability, also results in a much lower rate of return compared to their growth oriented counterparts. While most mutual funds, particularly those that invest in riskier stocks and investments are not all that safe and secure from investment loss as they ebb and flow with the economic cycle and the plight of underlying corporations, money market mutual funds tend to substantially more stable.

However, while money market mutual funds have been traditionally regarded as solid and reliable investments, they are not without a tinge of risk, depending on the composition of the money market fund’s portfolio. While the great majority of these funds have never lost money or failed, recent money market fund events in the news have sent a chill through the financial world. Recently, the Reserve Primary Fund, a giant money market mutual fund, announced its investors would lose money. Instead of each money market fund share being worth the customary $1, each would now be worth 97 cents, essentially “breaking the buck” in the process, forcing investors to eat a 3% loss. The loss was triggered by the fund’s purchase of debt securities issued by Lehman Brothers with a face value of $785 million that ultimately became worthless, as Lehman Brothers ultimately spiraled into bankruptcy and ended up on the chopping block for sale due to failed investments in subprime mortgages.

The moral of the story in terms of flight to quality is to seek out high yield bank accounts and U.S. Treasuries for safety first before seeking out money market funds. While money market funds are significantly more secure than stock based mutual funds and are generally still considered decently safe places to invest your money, in today’s dangerous and ever shifting credit markets, they simply do not offer the same 100% protection as that offered by savings accounts, CD’s, and U.S. Treasuries.

5) Gold Investments – This is most definitely not a recommendation but rather the raising of another interesting alternative way to hedge against economic risk, inflation, and the weakening dollar. I hesitated to even mention gold and such hedged investments against risk, but everytime the economic and credit markets head south, the subject of buying and investing in gold always comes up. Gold, silver, and other valuable commodities are tangible material investments that always skyrocket in value during difficult economic times. When there is political and social instability due to frozen credit markets or news of terrorist attacks that shake up the financial system, the housing market, or the stock market, the value of commodities not tied to a variable money system but that is instead linked to underlying rarity based on exchange driven supply and demand goes up.

But remember, buyers beware – one thing to keep in mind is that gold is just like any other investment – it’s still a bet against economic times and prices do fluctuate with great volatility. Like with any other educated bet, your gamble may pay off big or backfire significantly. While prices of gold are almost certain to remain high as the economy flirts with a full blown economic recession and the financial markets continue to flounder, prices of gold have the potential to decline significantly should there be signs of an economic recovery. Thus for the conservative investor who is seeking a flight to quality in his or her investments with pure asset preservation in mind during times of economic instability, I would recommend treading with great caution when it comes to investing in gold. Unless you have experience with gold investments, stick with Treasuries, high yield bank accounts, and CD’s instead.

Source URL: Where Is The Safest Place To Save Or Invest Your Money?

Copyright Protected © 2008 Money Blue Book: Personal Finance Blog. All Rights Reserved.

This preferential situation comes up whenever I call a live customer service help line. When I pick up the phone and make that affirmative decision to seek help via a toll free telephone number, my reasonable expectation is that I will reach someone who can communicate with me in an intelligible way, and help me resolve my consumer business problem quickly and efficiently, so that I can go along my merry way. It’s bad enough that I often have to spend 30 minutes or more waiting on hold before I can talk to a live technical support representative, but these days, it seems when I finally reach that live person, he or she turns out to be completely unable to communicate with me using comprehensible and discernible English.

I Can Deal With Difficult To Understand Accents In Real Life (By Using Hand Gestures), But When The Situations Happen Over The Phone, The Conversations Can Get Comically Tedious

I am terrible when it comes to understanding different accents. Even British English accents trip me up on occasion – but at least it is somewhat closer to American English in terms of speech and pronunciation, albeit a bit more deliberately pronounced I suppose. While I can understand the different types of American English accents such as a southern, Boston, and even accents that distinguish different races and ethnic groups prominent in this country, I still have frequent difficulty understanding the cultural nuances and accents that aren’t considered mainstream American English. This difficulty in understanding foreign accents is most pronounced and debilitating when it comes to conversations over the phone with someone from another land, especially when I find my phone call re-routed to some outsourced call center located overseas and wind up with a customer service rep who speaks with a thick accent that I simply cannot understand despite my best efforts.

While in a real life conversation and business work setting, heavy accents aren’t as significant a detriment as there are other methods of communication such as using writing and through natural hand gestures to punctuate one’s point, in the world of customer service telephone calls, this type of linguistic verbal diversity is a significant detriment and handicap. When it comes to customer and technical support help lines, communication and speed are two important elements to a quick and satisfactory resolution of the problem at hand. There are plenty of jobs where having a perfect American English accent is not crucial and one can get away with not having otherwise perfect American English, but a position as a customer service call representative that caters to Americans is not one of them. The job absolutely demands that the agent be able to communicate with the language of the target country. Is that really too much to ask? Oftentimes in such scenarios, time and patience are limited luxuries. In such situations, having a thick accent is a very undesired handicap to have, particularly when the issue needs to get resolved quickly over the phone in a short period of time without the benefit of time to get to know each other. This is the biggest problem many customers such as myself are having with companies that continue to outsource their customer service call center jobs overseas to English speaking, but heavily accented countries like India.

Facing An Indian Customer Service Representative With An Incredibly Thick Accent Is Like Talking To A Brick Wall – Nothing Gets Through, and Time Is Wasted

When American call center customer service jobs are outsourced to other countries, I think it’s reasonable to expect the call agents that will be handling the calls to be trained to speak in proper America English. However that is not always the case. Especially when it comes to Indian call centers, the accent is often an interesting mish mash of British English, local Indian dialect, and butchered American English. What often comes out is an unintelligible murmur, resulting in humorous and frequently embarrassing exchanges between the rep and the customer.

A few years ago, I bought a Linksys wireless Internet router, but had major trouble setting up my wireless connection. I kept losing my wireless internet signal and so I embarked on a customer service phone call quest to solve the problem. I dialed the company’s 1-800 number and was promptly connected to an agent. Little did I know, but my call from Maryland, USA was instantly routed thousands of miles across the planet to a different time zone to a call center in India. Immediately when I heard the agent’s accent, I knew it was going to be a long day. It started as soon as my phone rep introduced herself with a thick Indian accented “Hello”…followed by a …”my name is Mary”, a presumably English name moniker chosen by the Indian customer service rep for the convenience sake of their mostly American clientele instead of compelling them to remember a more difficult Indian name. For the next 60 minutes, I struggled valiantly to understand her words and sentences. I tried to remain polite and understanding, but I kept asking her to please repeat herself, much to my continued embarrassment. Every sentence on her part would be followed by a “What?” on my end, or would be followed by a momentary pause as I scratched my head and tried to figure out what she was trying to tell me.

After a while, I could tell she was getting fed up with having to repeat herself after every instruction, but then what was I supposed to do? I desperately tried to understand, and I really did try – but it was a constant guessing game on my end. I simply could not comprehend the Indian customer service representative’s thick Indian English accent. At the end, I got little accomplished because she and I were simply unable to communicate. I found myself spending more than an hour repeating her own words back in my vain attempt to make some linguistic sense. Eventually I had to give up and seek help from another customer service rep. The next rep’s Indian accent was just as thick and I ultimately had to call back several times before I finally found an agent who’s accent was more bearable. But the experience left me with a very negative view of the company and their irresponsible cost cutting efforts to send customer service jobs overseas when the work could be better handled here.

American Companies Who Cater To American Consumers Should Seriously Re-Consider Their Indian Outsourcing Strategy Or Face Consumer Backlash In The Long Run

This is a serious problem that many major American companies who choose to outsource their call center jobs to low cost foreign countries will ultimately have to face. Customers such as myself may eventually take our customer service frustration out on the company and defect to one of their competitors. Based on some news reports I’ve read, many companies that have attempted to outsource their customer service functions abroad have not realized the cost savings they expected, discovering that there are hidden costs that far outweighed the potential savings in labor expenses. Oftentimes, due to significant customer complaints about difficult to understand customer service representative accents and great differences in culture, companies have had to expend significant amounts of additional money to train the agents on proper American English and terminology. Ultimately some of these outsourcers have brought those type of jobs back in-house and back into the country.

Faced with backlash from customers like myself who have great difficulty understanding heavily accented Indian English, some companies are actually taking the next logical alternative step by shipping the work over to other moderately English speaking countries, like the Philippines. As a former U.S. controlled territory, the Philippines at least offers a more Americanized work force with a better understanding of American culture that can potentially offer employees with lighter accents. There will still be an annoying accent to deal with, but at least the twang, so to speak, will be significantly less painful to understand than that spoken in India.

There are currently also signs that the trend toward outsourcing call center jobs to low-wage countries like India or even the Philippines may be slowing down. Research shows that some call centers are most effective when staffed by Americans and there is at least some growing attempt to keep jobs here. I’ve noticed that many companies are now trying to keep the bulk of their daytime customer service call center jobs in the United States where the calls can be handled by American English speaking agents. For customer service lines that provide 24 hour coverage and take on evening calls however, some still get routed overseas to places like India, but many daytime calls are now being mercifully handled by call centers in the U.S. At least that’s what I noticed recently when I called my cable internet provider’s help line several times recently. When I called during normal daytime office hours, I got a service rep that spoke perfect English, but at night, I basically played the ole accent guessing game, doubling and even tripling the length of time spent trying to resolve my problem.

For those of you out there who are embarrassed to admit but also have difficulty understanding accents, I recommend making your 1-800 customer service and technical support phone calls during the day. Sure that means using up your precious anytime wireless phone minutes, but you stand a much better chance of reaching someone in this country than if you called after hours.

Source URL: Outsourcing Call Center Jobs To India Leads To Bad Customer Service

Copyright Protected © 2008 Money Blue Book: Personal Finance Blog. All Rights Reserved.

As the American and world economies endure a period of economic recession, the once stable and thriving marketplace can seem like a distant memory. Not only does it seem like unemployment warning flags and disappointing corporate earning reports lurk around every corner, it’s all too easy to succumb to the financial despair. When you combine the mortgage market meltdown with increasing housing foreclosures, and you mix that with high gas prices, fears of another major Islamic terrorist attack, and snowballed consumer pessimism, you have a spicy cocktail for widespread financial depression. While I’m not a financial fortune teller, nor am I a guru who can predict when the recession or lingering credit crisis will pass, all I can do is reassure you of areas in your life where you ought not to be overly distraught or paranoid about.

One segment in the economy that has spawned a huge surge of concern and irrational panic is the area of bank failures and bank bankruptcies. Because of the excessive subprime lending to consumers totally unqualified to receive home mortgages made by irresponsible mortgage lenders in the past few years, the economy is now reaping the terrible financial whirlwind result of defaulting loans and home foreclosures. This calamity is currently happening on a massive scale as huge banking giants like Citibank and Bank of America, as well as major thrift saving institutions like Washington Mutual are getting pummeled for their ties to bad mortgage loans. Unable to recoup their housing mortgage investments, many of these financial service providers are having to write off billions of dollars of unrecoverable bad loans, triggering serious questions by creditors, deposit account holders, and shareholders of their ability to continue as viable going concerns.

Bank Failures Have A Way Of Sparking Emotional Panic, Regardless Of The Government Effort’s To Alleviate Fears

While most major banks have healthier segments of their financial businesses to siphon assets and capital from, thereby allowing them to stay afloat, a few have not been so lucky. Netbank, an online banking institution that was one of the first early adopters during the initial Internet banking craze, ultimately keeled over due to the disintegration of its mortgage business segment. When its asset position could no longer meet depositor demand, federal regulators swooped in to shut it down, forcing Netbank to ultimately file for bankruptcy.

Banking and mortgage services giant Countrywide Financial recently faltered under the crushing weight of bad mortgages as well, and was ultimately acquired by Bank of America at an extremely huge discount, saving it from near collapse.

Most recently, IndyMac Bank fell flat on its face, triggering shock waves that signified the United States’ second largest banking collapse in history. Due to the sheer financial size of IndyMac bank, and the large scale and huge number of account customers the banking collapse affected, the news triggered panic attacks and resulted in reports of huge lines of desperate customers clamoring to get their deposit money out of the bank out of fear of the unknown. Despite the federal government’s announcement that the vast majority of deposit holders would not lose a single cent of their money, news of catastrophic bank failures have a way of making consumers go crazy and act in irrationally frenzied ways. As someone who considers himself relatively educated about the subject of finance, even I have to admit I was disturbed by the sheer magnitude of the Indy Mac bank collapse. After all, if IndyMac could fall, who else could potentially be next? I felt a slight tinge of emotional panic despite my otherwise logical and rational mental faculties – and I wasn’t even an IndyMac banking or home mortgage customer. But yet, I still felt the reactive emotional ripples that made me question my faith and trust in my bank and the economy at large. While bank failures are incredibly rare, they do happen – especially when there is a significant and pervasive trigger (the subprime mortgage meltdown) that is causing the financially destructive domino effect.

Thus, that is why it is extremely important for us, as cool headed consumers, to greatly educate ourselves on the types of financial and banking protections the system has in place to shield the money we save up in banks, savings and loans, and credit unions from loss. By learning more about how the federal government, the FDIC, and private bank risk sharing agreements protect our deposits, the more our fears will diminish, thus helping to solidify our faith in our banking institutions. We live in an efficient market where there are powerful protective systems in place, and proper financial education will help to reinforce that confidence. Thus sometimes, “the only thing we have to fear is fear itself – a nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance” (a powerful quote made by former U.S. President Franklin D. Roosevelt during the Great Depression).

How Does FDIC Insurance Keep Our Bank Accounts and Deposit Money Safe?

The Federal Deposit Insurance Corporation (FDIC) is a federal government run entity that provides deposit insurance protection for participating member banks – guaranteeing their deposit accounts from loss. The FDIC system was set up to instill consumer confidence in our nation’s banking system during a time of severe economic recession and financial turmoil. To prevent massive runs on banks triggered by irrational consumer panic to withdraw money during times of crisis, the United States government set up the FDIC to guarantee depositors at insured banks that their money would always be safe, even during the worst of times.

As a general rule of thumb, the current FDIC insured amount per depositor at each bank is $250,000 (with extra exceptions for different ownership categories). This blanket protection insures member bank accounts from bank failure loss, up to the maximum insured amount of $250,000. The FDIC protection covers a variety of bank deposits, including – checking accounts, savings accounts, money market accounts, certificate of deposits (CD’s), and even bank money orders and cashier’s checks. However, the FDIC protection does not cover non bank deposit type accounts and assets like – stocks, bonds, mutual fund investments, variable or fixed annuities, U.S. Treasury securities, or contents stored in safe deposit boxes. As FDIC insurance only covers bank failure loss, it also does not provide protection against bank fire, fraud, or theft, although in the overwhelming majority of cases, individual banks usually have their own private hazard and casualty insurance coverage against these other types of loss.

The FDIC also provides loss protection for retirement accounts held in member banks in the form of deposits. The FDIC limit for retirement accounts, which includes self directed plans like Roth IRA’s, Traditional IRA’s, SEP’s, and Keogh’s, currently stands at – $250,000. The higher FDIC limit for retirement accounts is a clear recognition by the FDIC of the importance of ensuring that consumers always have their retirement nest eggs to fall back on.

How Does The Federal Government and The FDIC Monitor The Banking Industry?

While by no means a perfect system, the banking industry is highly regulated by the federal government and watched by multiple federal agencies – including the Federal Reserve, the U.S. Treasury’s Office of the Comptroller of Currency, the FDIC, and the Office of Thrift Supervision. Along with state banking regulators, there are multiple sets of eyes at all time on the state of the banking market. While bank failures are incredibly rare, they do happen on occasion unfortunately.

In such an occurrence, as soon as the federal and state regulators determine that a bank no longer has the capacity to meet depositor demands and sustain sufficient capital due to insolvency problems, the FDIC barges in to take command. Once it takes control, the execution is usually fairly rapid as the FDIC is highly motivated to ensure a seamless transition. Until the FDIC can find a suitable buyer of the failing bank’s assets, the bank generally continues to run as usual without significant interruption. In the rare event the FDIC cannot find a suitable buyer, it closes down the ailing bank and sends out checks to all account holders within the FDIC insurance limits along with interest. Usually the FDIC payments are sent out in a matter of days.

For Those Banking Customers With $250,000 Or Less In Total Bank Deposits, Your Money Is Fully Covered By The FDIC

If you are a young student or a person with relatively low income with little in the way of financial or banking assets, you probably won’t have to worry too much about losing your money in the event of a bank failure. If your total bank deposits are less than $250,000, you can rest assured that the full faith and credit of the United States government has your back. The ones that have to be more vigilant in how they structure their checking and savings account deposits are those with more than $250,000 in total deposits. Those with more than $250,000 in deposits will need to pay greater attention to how they break up and consolidate their money among FDIC insured banks to ensure maximum FDIC protection against loss.

For Those With More Than $250,000, You’ll Need To Pay Attention To How The FDIC Provides Separate Coverage For Different Ownership Categories At Any One Bank

While I personally don’t have more than $250,000 in total bank deposits that require me to even worry about this problem (yet!), it’s something I want to know more about because I know one day I will reach that goal (why dream if you can’t dream big). It’s better to know how to structure your bank deposit portfolio now and plan for that occasion, than not know what to do when you reach that point someday in the not too distant future.

While the FDIC insurance program protects individual bank depositors up to a maximum of $250,000 per bank, there are clever ways and not-so-secret methods to get you around this protection limit. The primary way to accomplish this is through deposit account diversification. By splitting your total deposits into multiple ownership category accounts or splitting your assets among different FDIC insured banks, you can ensure full protection of your money. Remember, bank deposit accounts at different banks are insured separately (although all bank branches are considered part of the same bank). Thus, each bank has its own complete set of FDIC coverage limits.

At any one bank, the FDIC offers each category of ownership account its own individual coverage cap. There are different types of ownership categories, each with its own $250,000 FDIC insurance limit. You can go straight to the official source if you want to know more about the FDIC’s policy on ownership categories, but the more common ownership categories are listed here. Remember, each ownership category (single account, joint accounts, etc) gets its own $250,000 FDIC coverage limit:

• Single Accounts – Most consumer bank accounts fall into this category, which covers checking, savings, and CD’s. Basically, if your bank account is in your name only, its ownership category is probably that of a single account. Single accounts also include sole proprietorship business accounts you may own at the same bank (DBA, “Doing Business As” type businesses). All personal and sole proprietorship business deposit accounts at the same bank are added together as single accounts and insured up to the combined maximum FDIC limit of $250,000.
• Joint Accounts – Joint accounts are simply bank deposit accounts that are owned by two people or more at the same bank. While most joint accounts are held by married couples, joint account owners don’t necessarily need to be married. For example, while I have my own individual bank account at a local Chevy Chase Bank, my mom and I also jointly hold a separate shared deposit account at the same bank. Individuals can have multiple joint accounts at the same bank, each with joint ownership involving different people, but when it comes to calculating the total FDIC limit for the joint account category, all proportional shares that each individual owner owns in all joint bank accounts at any one bank are added together and insured up to $250,000 for each individual. Thus, while a joint deposit account for a married couple may appear to enjoy a higher $500,000 FDIC limit, it’s actually made up of two separately capped $250,000 limits – one for the wife, and one for the husband.
• Trust Accounts – Both revocable and irrevocable trusts get their own FDIC insurance limits of $250,000. By listing others as beneficiaries, one can strategically use trust deposit accounts to get around the usual FDIC individual caps. For example, both a husband and wife can set up 2 separate revocable trusts in each other’s names to get an extra total $500,000 FDIC limit on top of their other single and joint account limits.
• Business Accounts – I’m sure business owners feel the FDIC insurance deposit limit for business accounts are currently much too low, but as it currently stands, bank deposit account funds held by corporations, limited liability companies (LLC’s), and partnerships at any one bank are combined and insured up to a maximum FDIC limit of only $250,000 (much too low in my opinion). Keep in mind, sole proprietorship business accounts are lumped in with single accounts.
• Retirement Accounts – Self directed retirement accounts where the account holder gets to decide what to do with his or her money, are offered much higher insurance limits under the FDIC – at $250,000. This particular ownership category includes the following retirement plans – individual retirement accounts (IRA’s), Roth IRA’s, Simplified Employee Pension Accounts, and Keogh Plan accounts. All retirement account deposits held by an individual at a single bank are added together and insured up to a maximum FDIC limit of $250,000. However, keep in mind, retirement account assets invested in stocks, bonds, and mutual funds are not FDIC insured as you’re actually investing through a broker with a working relationship with your bank. The FDIC coverage only protects retirement bank deposits, not investments.

Those With More Than $250,000 In Bank Assets Should Shift Bank Deposit Money Into Joint Accounts To Maximize FDIC Coverage

Because the FDIC provides $250,000 total protection limits for each ownership category, including $250,000 for self directed retirement accounts at the same bank, consumers may be able to greatly increase their total overall financial protection by splitting their money among different types of ownership accounts at the same bank. For example, if you have an individual savings account with total deposits valued at $600,000, you need to be extra careful about bank failure. In the event your bank fails or is suddenly unable to meet depositor demands, you stand to potentially lose $350,000 because only $250,000 worth of assets in the single account category are covered. The solution is not to open up multiple bank accounts like checking accounts or CD’s as they are all of the same ownership category and doing so won’t increase your overall FDIC limit. The best way to diversity and boost your FDIC limit is to spread your deposit among different ownership categories or among different banks. In the case of the hypothetical individual $600,000 savings account, it would be advisable to take at least $350,000 from that savings account and shift it into a joint account with your spouse, thereby sheltering the $350,000 under the $500,000 ($250,000+$250,000) total joint account FDIC limit. You might even want to make sure you give each deposit account extra room under the FDIC cap to allow interest to accrue, but still remain fully protected.

To reiterate the point about ownership categories, let’s say you went to Wells Fargo and opened up a brick and mortar checking account, an online high interest savings account, and set up a few CD’s – your total coverage limit will still only be $250,000. However, if you opened a joint account with you and your wife or husband, while opening up your own individual checking account at the same time, you will be able to receive $250,000 coverage limit for the checking account, and another separate $500,000 total marital pool coverage limit for the joint account.

Business Accounts Are Covered By FDIC Insurance, But Depending On Type Of Business Entity, They May Or May Not Boost Your Overall Coverage

Depending on business type, a business bank deposit account may or may not enjoy its own separate $250,000 FDIC limit apart from the individual’s cap for single accounts. Because a sole proprietorship and the individual running it are regarded as one and the same for taxation and legal purposes, the FDIC treats sole proprietorships as single accounts for assessing the extent of FDIC coverage. Thus, opening a sole proprietorship business at the same bank as your consumer checking or savings account will not allow you to gain extra coverage.

Only partnerships, limited liability companies (LLC’s), and corporations are able to qualify as separate ownership categories for additional FDIC insurance coverage. Because the FDIC regards certain business entities as separate ownership categories for FDIC insurance purposes, it is not uncommon for clever but sneaky business types to express interest at creating phantom, dummy businesses for the sole purpose of inflating FDIC limits. However, FDIC regulations expressly forbid this practice and stipulate that business accounts for partnerships, corporations, and other unincorporated associations need to be engaged in an “independent activity” such that the business is not engaged primarily in boosting FDIC insurance coverage.

Further Bank Account Diversification Strategies Using Multiple Banks To Increase FDIC Coverage

Because FDIC insurance coverage is offered for not only different account ownership categories, but also for different banking institutions, the recommendation by some pundits for high networth individuals is to spread one’s assets among a multitude of banks. Because each bank offers its own set of bank failure protection limits by the FDIC, savvy account holders are often advised to sacrifice some of their deposits made at just a handful of high yielding banks for greater diversity by spreading it among a greater number of deposit institutions. Let’s say you have $750,000 in a high yield savings account at HSBC Direct that you want to fully protect under the FDIC. If setting up joint accounts to boost FDIC coverage is not available to you as a viable option, you could instead open up accounts at say, Bank of America and Wachovia, shifting $250,000 into each of those two new savings accounts. Thus, your total $750,000 portfolio would now enjoy separate $250,000 FDIC coverages at three different banks. As I mentioned above, in such an event, you may actually want to consider breaking up the $750,000 into four total banks instead of just three to give yourself room to grow in interest and stay fully protected.

One alternative way to shift your banking assets among different banks without actually having to run around the neighborhood or Internet looking for new banks is to participate in a Certificate of Deposit Account Registry Service (CDARS). Banks that are members of the CDARS network do the leg work for you by breaking up CD deposits into smaller size chunks that are separately held at different participating network banks. However, your funds continue to enjoy a single point of access at your primary bank with one statement and one interest rate. The practice is rapidly growing in popularity and I highly recommend it as a wonderful and hassle free way to diversify your banking holdings for maximum FDIC protection. Here’s a list of banks that participate in the CDARS network. One downside of using a CDARS bank is that they tend to be smaller, regional size community banks. Some people like smaller community banks, the type of place where everybody knows your name. However, I highly prefer mega-corporate size banks as they tend to resonate more stability and are better capitalized in my opinion. There are only a tiny handful of large institutional banks participating in the CDARS network at this time. Furthermore, because of the CDARS network fees that banks pay for each CDARS transaction (there is no fee to the customer), CDARS deposit account interest rates tend to be lower than that offered by more competitive non-CDARS banks.

However, if I had financial assets in the neighborhood of millions of dollars and account diversification was on my mind, it is unlikely I would be spending my time worrying about FDIC insurance limits. I would probably have the bulk of my money either invested in mutual funds, index funds, money market funds, or other broadly diversified investments that have never been known to actually fail. Frankly, I don’t even think broadly diversified investment assets could ever technically fail – in the worst case scenario, they would simply gradually lose their stock value over time. Buying super secure assets like U.S. Treasury Bills and Treasury Bonds would be viable alternatives for high net worth individuals as well. While U.S. Treasury products are not FDIC insured, they are fully backed by the full faith and credit of the United States government. The federal government could simply print more money if financial Armageddon necessitated that course of action.

Source URL: Is My FDIC Insured Checking Or Savings Account Safe If My Bank Fails?

Copyright Protected © 2008 Money Blue Book: Personal Finance Blog. All Rights Reserved.

Actually, about a week ago I had already been given written notice that the check was on its way. I received one of those pointless waste of paper junk mail letters from the Internal Revenue Service (IRS) letting me know that I was entitled to an economic stimulus payment check as provided by the Economic Stimulus Act of 2008, and to expect its arrival in a week or so. The letter also provided a simple breakdown of how the federal government calculated my small time stimulus payment.

But what was the point of sending this predecessor letter out to let me know this? Why is the IRS and federal government so oblivious and wasteful when it comes to wasting millions of dollars on paper and delivery costs to send out these pointless letters? Why not just combine the calculation breakdown letter with the actual stimulus rebate check that I received yesterday rather than sending them separately on different weeks? The financial savings for the federal government could easily have been several million dollars. Especially since we are now in an economic recession and the government keeps griping and raising issues about needing to balance the budget, and even some of the presidential candidates like Barack Obama keeps talking about raising taxes against those with higher incomes to pay for more federal government programs, why not practice some fiscal sense now by adopting real cost cutting techniques? The government’s habitual wasteful spending activities truly baffles me sometimes.

How My Economic Stimulus Tax Rebate Was Calculated

While I had hoped to receive my economic stimulus rebate via direct deposit, because I filed my 2007 tax return through TurboTax and actually owed a sizable amount of taxes, I was not able to provide my bank account routing numbers on my tax return for direct deposit purposes. Thus I was one of many who had to wait for my economic stimulus check to be mailed via the postal service.

Taking a look at my rebate, here is how my actual stimulus payment was broken down, in case you’re wondering. Because my adjusted gross income on my reported 2007 federal income tax return was above $75,000, the IRS reduced my stimulus payment by 5% of the amount of my adjusted gross income exceeding $75,000. As such, with my single filing status starting qualification amount of $600 increased by $0 for my lack of qualifying children, but reduced by $230.25 for the adjusted gross income limitation, my final calculated stimulus payment turned out to be only $369.75. It’s not a whole lot, especially since the cost of living in my D.C./Maryland suburban neighborhood is pretty high, but I suppose every little bit helps me pay the bills in the grand scheme of things.

How I Plan To Spend My Economic Stimulus Check, and Its Impact On My Future 2008 Tax Return

I’m obviously elated to receive my tax rebate check finally after all these months, but after looking at the relatively small amount, it sort of leaves me wondering, how is this small amount of money really supposed to stimulate the economy to any significant degree? While the check is certainly free windfall money in the sense that I wasn’t really expecting it or planning for it until recently, the amount isn’t really large enough for it to be good for much.

I considered several financially smart as well as a few fun but reckless ways to spend my tax rebate, now that I have it in my hand. Here are the choices and possible options I came up with:

1. Use the economic stimulus payment to help pay my rent – The downside is that with a pricey monthly rental obligation of $1,425.00, this small economic stimulus payment isn’t likely to make much of a dent in my case.
2. Deposit the small stimulus rebate into my high APY savings account to earn interest and help build up my backup emergency fund – I usually try to keep at least enough liquid cash in my savings account to last 6 months. I advocate more emergency fund savings than most, but I think this offers greater peace of mind. In this recession, you never know what unfortunate events may strike when you least expect it – everything from out of the blue vehicle repair charges to sudden unemployment necessitating the need to file for unemployment insurance benefits.
3. Save the stimulus rebate for retirement and contribute the amount towards my Roth IRA retirement fund. This is a good way to plan for the future. Great for you, but not so good for the economy (at least for the present time).
4. Pay off debt – While this sounds like a logical choice, other than my usual monthly revolving credit cards bills that I always pay off in full, my 0% APR balance transfer credit card arbitrage funds, and my very low interest student loans, I don’t have significant debt that demands my immediate attention to speak of. I think I’ve done a pretty good job of managing debt.
5. Spend the money and actually help directly stimulate the economy by injecting it back into the stream of commerce – Possibilities include using it for discretionary entertainment reasons like spending it on expensive movie tickets or even just using the amount to pay for necessary driving expenses brought about by spiraling high gas prices.

After much thought, I decided to deposit the amount into my high yield savings account like a good grasshopper (or was it the ant) and save for a rainy day. Why change my frugal savings minded personality just because I came upon some windfall money? I’m the type of person who would probably still drive around in a rain storm for a free car wash to save some money as a force of habit even after winning a lottery for millions.

As for the taxation aspects of the economic stimulus payment, due to the terms and nature of the Economic Stimulus Package, recipients of the tax rebate such as myself will not have to report the amount of our stimulus payments as taxable income on our 2008 federal income tax returns. The amount is indeed free money and not something we will have to pay back or pay taxes on. Furthermore, if any recipient also received any other federal benefits or federally financed benefits, those benefits generally will not be affected by any stimulus payment received as well.

Where’s My Economic Stimulus Payment? Ask The Almighty IRS

For those of you who are still waiting for your stimulus tax rebates with bated breath, you should utilize this handy IRS stimulus rebate tool to locate the status of your economic stimulus payment. It should be able to answer your most pressing tax rebate question. To use the online tool and verify your identity, you’ll need to provide your social security number, your filing status, and the total number of your exemptions.

If you still are not able to obtain a satisfactory answer, you may want to visit your local Taxpayer Assistance Center for help or call the IRS via the Rebate Hotline at 1-866-234-2942 for updates.

Source URL: My Not-So-Stimulating Economic Stimulus Payment Has Finally Arrived

Copyright Protected © 2008 Money Blue Book: Personal Finance Blog. All Rights Reserved.

Both Your Credit Report History and Credit Score Help Determine Your Credit Worthiness, But Credit Scores Are More Uniform Measures Of Comparison From Individual To Individual

While credit reports, like your high school transcript does a better overall job in revealing the compete performance history of the individual, oftentimes, it’s the credit score, like the mathematically calculated grade point average (GPA) that is given the greatest initial attention. Like the analogous school GPA’s, credit scores are frequently used by major lenders to serve as cut off points to determine who will enjoy speedy approval and those who will require further scrutiny. As such, a high credit score serves up the best first impression when it comes to getting quickly approved for credit cards, car loans, and mortgages. Your complete credit report transcript conveys the rest of your credit history, but it’s your credit score that provides that first impression to determine whether you instantly qualify or not. If you’ve ever wondered why some people can get online and get instantly approved for a credit card in seconds, that’s because their credit scores are likely so remarkably high, credit card issuers feel they have more than enough information right off the bat to grant application approval. The same can be said for pre-qualification terms for mortgage or auto loans for favorable rates.

For those of you who buy into the financial wisdom of some personal finance pundits who advocate a cash only lifestyle and preach against all forms of debt, I personally think that is an all too safe but foolish perspective to cling to. It’s not credit or debt that is so evil, it’s the lack of financial education and mismanagement that dooms one to failure. Unless you are a millionaire, come from a very wealthy family, or your last name is Gates, Buffett, or Walton (of Walmart fame), you will inevitably need to take on student loans, car loans, or a housing mortgage loan in some form or another sometime during your life span. A cash only lifestyle is appropriate for engaging in small time transactions, but for the pricier car and home buying process, you will inevitably need to call upon your built up credit history and credit score eventually.

So What Is The Purpose Of Having A Good Credit Score And How Is It Calculated?

Your credit score is basically a three digit number that is mathematically generated by credit reporting agencies based on information found on your individual credit report. The credit score is a numeral representation used to assess your past debt payment history and predict your ability to fulfill future debt obligations. Everytime you perform actions or transactions that relate to the extension of credit in the real world, that request for credit is submitted to the three major U.S. credit bureaus (Equifax, Experian, TransUnion) for recordation. By taking that continuously updated information and plugging it into a special mathematical formula, credit bureaus can generate an up to date credit score on demand to accurately predict your present and future ability to pay off incurred liabilities. Positive actions like on-time payment and low credit usage will boost your credit score, while negative events like bankruptcies, foreclosures, and failures to pay on time will hurt your score. Experience and trends have shown that those with higher credit scores are more responsible with credit and are less likely to default on loans. However, because credit transactions are not always equally sent to all big three consumer credit reporting agencies and not all information is processed by all three in the same mistake or error-free way, there are bound to be slight differences and discrepancies among different credit bureau scoring results, even if they all utilized the same credit scoring methodology. Keep in mind, Equifax, Experian, and TransUnion all individually generate their own credit score results on request.

But in general, one’s credit score is a fairly uniform mathematical measure of credit worthiness. Banks, credit card companies, and mortgage creditors are in the business of taking on risk, and thus utilize this invaluable scoring system to gauge prospects. In exchange for taking on risk, these institutions are willing to extend you money on loan, but in return they expect to be compensated for the financial risk they take on in the form of additional interest rate payments. Different degrees of risk and possibilities of default demand different levels of interest. If you’re a risky debtor with a shaky credit history, you will be required to pay higher interest payments to the creditor to offset the risk. If you are a more reliable debtor, chances are your interest obligations will be a lot less. That is why it is important to keep your credit score high – it’s one of the most important things that lenders look at when they evaluate your financial profile. You might be a nice guy or a nice gal, really deserving of credit approval, but if your credit score is lackluster, your chances may be shot.

What Is The FICO Credit Score Made Up Of, and How Are The Scoring Categories Weighted?

When most people speak about credit scores, more likely than not they are referring to the FICO credit score, the popular credit scoring system created by the Fair Isaac Corporation. There are currently several alternative credit scoring systems out there, most notably, the new VantageScore jointly developed by the big three credit reporting agencies, Equifax, Experian, and TransUnion, but the FICO is still the most widely used scoring method. I recommend avoiding the VantageScore for now and staying clear of credit vendors that attempt to hawk it. Because the VantageScore also uses a three digit scoring system but on a different numerical range from 501-990, obtaining it at this time will only serve to confuse you. Because most lenders have not broadly adopted the use of the VantageScore yet, you are better off focusing on the FICO exclusively for now. There really is no particular purpose for consumers or lenders to adopt the VantageScore at this point in time as its development was primarily business motivated rather than designed to benefit the consumer. The credit reporting agencies simply got tired of having to pay royalties to Fair Isaac for utilizing their proprietary scoring formula and wanted to create their own cheaper version. For now, stick with the genuine FICO – it’s the most widely used credit score and currently still the most relevant by far.

The FICO credit score is formulated on a scale from 300 to 850, however most people will have scores between 600 and 800. It’s unlikely to find many people with scores below or above this general scoring range. As a rule of thumb, any FICO score that is above 700 should be deemed good, although in this current market, a FICO of 750 will probably be needed to guarantee you the most favorable loan rates. Here is how the FICO credit score is generated and broken down into its composition categories according to pie chart percentages:

1) Your Credit and Debt Payment History – ( 35% of Your FICO)

This is the absolute most important factor in determining your FICO credit score. To have a high score, you’ll need to develop a history of timely and punctual bill payments. When lenders evaluate you as a prospective credit candidate, they want to see that you have a solid history of not only fulfilling debt obligations, but that you also have a track record of paying on time. Past late payments and unpaid debts sent to collections will significantly damage your FICO score. Negative factors like bankruptcy and defaulted payments will hurt your score as well. How badly a failure to pay or a late payment will affect your credit score is determined by the total number of past due items, how long they were past due, and the length of time since your last late payment. Because the payment history category is weighted to favor more recent transactions over older actions on your credit history, it’s never too late to start paying on time. Better late than never.

2) Amounts and Balances Owed – ( 30% Of Your FICO)

The second most important factor other than timely payment is the total amount of credit money that you owe and the proportional amount of your total available credit utilized. If you are already carrying a substantial amount of active debt in the form of existing home mortgages, home equity lines, car loans, student loans, or credit cards, you are less favorable as a candidate to take on additional debt. Because of your existing debt obligations, you are seen as a greater potential credit risk. However, your total amount of outstanding debt can be hugely tempered and your risk factor greatly minimized by having a lower debt usage ratio.

Under the FICO formula, someone with an outstanding credit card balance of $900, with a total available limit of $1000 (utilization ratio of 90%) is deemed to be riskier than someone who has an outstanding credit card balance of $2000, but with a total credit limit of $10,000 (utilization ratio of 20%). Being saddled with a lot of debt isn’t necessarily bad in terms of your credit score if you are well under your total available credit limit. Obviously the more zero balance revolving credit accounts you have on your credit report the better, but the amount of your credit usage in proportion to your total credit available goes a long way to boosting your score.

Example: As someone who regularly engages in credit card arbitrage, I frequently carrying large 0% APR balances on my 0% balance transfer credit cards. But despite my high credit balances, I maintain a stellar FICO score (FICO of 758), attributable to my low overall credit usage ratio. I might carry credit card balances in excess of $20,000 on multiple cards, but because I have over $80,000 of unused revolving credit available to me, my low proportional usage keeps my FICO high.

3) Length of Your Credit History – ( 15% Of Your FICO)

When it comes to the FICO credit score, the older the credit account, the better. That is why consumers are sometimes encouraged to initiate credit usage at an earlier age, if only for the sole purpose of building up credit. College students are sometimes advised to open at a least one student credit card for the purpose of building up a credit history file. Those who stick with cash only and wait till later in life to start opening credit accounts are ultimately short changed when it comes to their FICO scores. The same rationale is also why it is almost never advisable to cancel old credit cards. Unless you are obsessive and compulsive when it comes to credit card spending, you should keep those older cards around and let the accounts age like fine wine. You don’t necessarily have to use those cards – just put them away in a drawer if you have to. Because the length of your credit history is based on the average ages of your total active credit accounts, it’s in your best interest to keep old accounts open indefinitely. If you absolutely must cancel a credit card, cancel a newer card instead. Closing out an old account will have the unintended backfire effect of hurting your FICO credit score.

4) Types Of Existing Credit Owned – ( 10% Of Your FICO)

The FICO scoring system favors credit users who are diverse with their usage. The system likes to see users mix it up a little and not just focus on one type of installment usage – like credit cards alone. In general, older individuals with longer credit histories usually tend to have a greater mix of credit account types, thus higher scores. While revolving credit accounts like mortgages and car loans help to inject some diversity into your usage, one shouldn’t go out of one’s way to mix it up purposely. Focus more on paying all bills on time and limiting your credit usage instead (they comprise 65% of your FICO credit score). In my opinion, this category has the least relevance and the least impact on your overall credit score.

5) New Credit or Recent Credit Sought – ( 10% Of Your FICO )

This is where hard credit checks and soft credit checks come in. Everytime you affirmatively submit an application for a loan or additional credit, a hard credit pull is made against your credit report. The resulting credit pull will have a short term negative hit against your formulated FICO score (in time the score will recover). In general, new and recent requests for credit are seen as risky factors in the eyes of lenders. However, new requests for additional revolving credit that follows a recent late payment will likely cause a more significant drain against your score, as they are seen as ominous signs of financial desperation.

However, the way the FICO system is set up, frequent requests for credit within a relatively short 30 day period is discounted in terms of aggregate negative effects on your credit score. This is to compensate and alleviate the effects of those who are merely interest rate shopping for mortgages or car loans who are likely to submit numerous applications within a short period of time. This is the reason why balance transfer arbitrage seekers are often advised to submit their numerous credit card applications simultaneously within a short period of time to minimize the overall hit against their credit score. As always though, only hard credit checks negatively affect your FICO. Self credit checks initiated by you to examine your own credit report or credit score will never hurt your rating.

What Is Not Considered In Your Credit Score, And How To Boost Your FICO

While the FICO score is a very important factor to those seeking instant approval for credit or a quicker path to the best loan terms and conditions, it’s not the end all. Lenders also carefully scrutinize your credit report and other financial factors like income, job stability, education, and amount of money you have in your checking and savings accounts to determine your credit worthiness. That’s because many relevant personal risk factors are not appropriately reflected in the credit report or the credit score model compiled by the big three credit reporting bureaus. Such information include age, race, sex, income, savings, marital status, education, and your current type of housing.

The FICO score also struggles with formulating an accurate score representation for new entrants into the credit world. Those with short credit histories like recent immigrants or college students are unlikely to have much of a credit report transcript to work off of. As evidenced by the Fair Isaac Corporation’s efforts at formulating and developing its new FICO Expansion Score to gauge the credit worthiness prospects of those with incomplete or thin files, the existing FICO system as is probably still needs some improvement, and is far from perfect. However, until a better thing comes along, consumers need to find ways to improve and keep their credit ratings high. Unless you don’t have plans to seek new employment, apply for a new credit card, obtain a home mortgage loan, find a new apartment, or apply for insurance in the next few years, it’s in your self interest to improve your FICO credit score and keep it high in case you ever need to use it.

As it is relevant to your ultimate credit score, I’d recommend taking several minutes to download a free credit report at annualcreditreport.com. With this free federal government service, you get to request a single credit report from each of the three major credit bureaus every four months. Instead of requesting all three credit reports at once, you might want to stagger them out to three times a year for continuous monitoring. If you spot an error, notify the bureau (online, by phone or by mail) and the creditor (call and also send a letter) immediately. While your credit score isn’t free, there are ways to get get your free credit score from the big three credit reporting agencies. Remember, if you want consistency, stick with the FICO score exclusively for now.

Source URL: What Is My Credit Score and How Is My FICO Calculated?

Copyright Protected © 2008 Money Blue Book: Personal Finance Blog. All Rights Reserved.

In this fluctuating and unpredictable economy, you never quite know what is lurking around the corner. Life comes at us fast and sometimes job stability, occupational predictability, and all positive aspects of full time employment can disappear in a flash. Sometimes it can be due to our own fallibility and less than perfect work performance, and sometimes it can be due to slowdowns in the economy at large. Life is unpredictable and it’s hard to be certain whether there is such a field that’s a sure thing anymore. During the past few years, jobs and careers related to the real estate and housing market were hot and in great demand. However, years later, with the collapse of the housing bubble, many of the jobs previously fueled by the burgeoning real estate market have mostly disappeared. Even upper echelon MBA-type financial positions at top firms like Merrill Lynch have been down sized and trimmed back, resulting in many educated employees suddenly out of work.

If you find yourself one of many who have been laid off, I feel for you. I’ve been through a sudden job lay off before and it’s not an easy feeling or experience to go through. Not only does it put you in a sudden cash flow crunch, but it forces you to scramble around in desperation to find employment quickly. For those who have a wife, husband, or children depending on that income, the extra financial and familial pressures make the process even more urgent. However, it doesn’t have to be the end of the world. There are systems and governmental assistance programs in place to help guide and cushion you during those periodic times of unemployment – namely in the form of unemployment insurance benefits. Don’t let those invaluable financial benefits and entitlements pass you by during times of need – seize them immediately.

Do Not Let Petty Shame Or Guilt Prevent You From Filing For Unemployment Insurance Benefits – It’s Your Money and You Are Entitled To It

I’ve filed for unemployment benefits several times throughout my working career thus far. I will admit, the first time I filed, I felt a tinge of shame and guilt. I felt like it was a hit on my aura of financial independence and a stain on my own sense of masculine pride. As someone who was raised to believe that an important aspect of a man’s duty and responsibility was to provide for himself and his family, it was difficult for me to depend on governmental handouts for the first time. To me, receiving unemployment benefits meant I was now on welfare, and no better than some unmotivated or lazy 40 year old bum who lived in his parent’s basement like some financial leach on society.

However, now that I’ve had experience with being the recipient of unemployment benefits, I now understand what it truly is. To receive unemployment insurance benefits is by no means the same as receiving public welfare. It’s a genuine financial safety net that is subsidized by employers in a socialized manner to help decent working people get back on their feet quickly with as little financial destruction or burden as possible. While unemployment benefits provide free money for times when you’re not working, a fundamental and required tenant is that the recipient actively pursue employment leads while drawing on the temporary financial perks. Being a recipient has no effect on your existing credit score and the mere act of filing has no effect on your future employment prospects. The small amount of compensation provided isn’t sufficient to save or grow rich on, but is just enough to give one a semblance of financial continuity and feeling of self reliance until the person can get back on his or her feet. It helps those who want to help themselves.

Who Pays For The Funds Dispersed For Unemployment Benefits?

Unemployment benefits are provided by a special jointly run fund provided by federal and state payroll taxes called the Unemployment Insurance program. No part of an employee’s actual paycheck goes directly into this unemployment fund (unlike social security) but is instead indirectly funded by employers through a special unemployment insurance tax that they pay. Almost all employers are required to pay unemployment insurance tax to help fund this public service. Unlike worker’s compensation, the employer does not pay unemployment benefits to laid off employees directly, but payments are instead issued by the responsible state agency as needed. Even if an employer goes out of business, unemployment benefits can still be distributed out to the company’s now unemployed workers because funds are socially subsidized by other active employers who pay into this pool of shared funds. When you are out of work for whatever reason, it’s in your own interest to apply for unemployment benefits as soon as possible. Even if you refuse to file for it, you should know that you are still indirectly paying for this socialized governmental service.

Remember, there is no shame in taking on this temporary financial safety net as a short term stop gap measure – it was designed for you when you need it the most. The money is rightfully yours because your employer pays into the fund on a mandatory basis. Without its existence, you theoretically would have been given higher pay. If because of pride, you refuse to take this temporary governmental handout, ask yourself this question – will pride put food on the table for your family in the meantime until you can find your next job? Will pride pay for necessary groceries or pay for a roof over your held until you can secure that next job interview? Think about it. Desperate times require desperate measures. I personally view unemployment benefits as part of my emergency fund measures.

As Soon As You Become Unemployed, Apply For Unemployment Benefits Immediately

The most important thing to know about seeking unemployment benefit compensation is to file as soon as you become either partially or fully unemployed. Even if you suspect you will be able to file a new job relatively soon, it’s still in your best interest to still file for it sooner than later. There is almost always a 1-2 week lag time between filing and when you receive benefits. Frequently, there is also a mandatory one week waiting period during which the first week will not be compensated for. The benefit clock starts when you file so if you wait around to see if a new job is forthcoming, you may miss out on much deserved unemployment entitlements. If you wait several months after becoming unemployed to file, you won’t be able to claim for the non-working months that have already passed. You can only claim for the time that comes after the moment you file, so don’t delay – get credit for every single moment you remain unemployed.

Even if you are confident that you have sufficient pre-existing emergency funds to live off of, it’s better to file and not risk the chance that your emergency funds ultimately run out. You don’t want to look back later down the road only after draining your bank account completely and racking up unpaid credit card bills, and realized that you ought to have applied for unemployment benefits earlier.

Where Do You File For Unemployment Benefits?

Unemployment benefit applications should be filed in the state where the work was performed. Check out this official U.S. Department of Labor List Of State Unemployment Agencies to determine the correct filing location. Most states today allow unemployment benefit applications to be filed via telephone, in person, or through the Internet. If you want to avoid the stigma or emotional embarrassment of filing for this entitlement in person, filing via phone or through the Internet is a great way to circumvent this problem. Not only that, those methods are also quicker ways get your money more expeditiously.

As mentioned, unemployment filings are made with the state unemployment agency in the state jurisdiction where the work was performed. If you lived in New York and worked in New York, you need to file your claim with the state of New York. What about those who lived in one state, but worked in another? In my case when I filed way back when, I lived in the state of Maryland, but worked in Washington D.C. Since I performed my employment in D.C., my place of unemployment benefit filing would be in D.C. since that’s where my employers actively paid their unemployment taxes to. I could still file with the state of Maryland, but would ultimately be referred by the unemployment hotline and managing system to seek benefits from Washington D.C.

Who Is Entitled To File For Unemployment Benefits and How Much Money Can You Expect?

Generally (individual state laws vary), to qualify for unemployment benefits, an applicant must (1) meet state eligibility requirements regarding how long the employee has previously been working and how much money the employee has earned, (2) make continuing and regular application updates to the managing state agency, (3) be continuously available for work and actively seeking work, and (4) not be subject to any disqualifying employment factor.

To be entitled for unemployment benefits, employees must have become unemployed through no fault of their own (although definitions on fault vary by state). Generally those who voluntarily quit their jobs or were discharged from their positions due to willful misconduct can’t qualify. However, if you were laid off due to downsizing or were discharged due to simple lack of work, you will probably be entitled to benefits. Once approved, to continue to draw on your weekly unemployment checks or direct deposits, you will required to submit weekly updates of your employment and income status either by phone or over the Internet. During that time, you are expected to actively look for work. Obviously the benefits will stop as soon as you become gainfully employed again. While it’s somewhat unlikely the state agency will know if you go on vacation during that period of time instead of looking for work, you should also know that by doing so, you are committing fraud and may be required to pay the benefits back along with penalty fees if discovered. I know some people who did decide to take a brief vacation while still drawing on unemployment benefits, managing to stay under the radar, but not everyone will be that fortunate. Big brother government has sneaky ways to track you down.

To file for unemployment benefits with your state agency, you will need to provide your name, mailing address, phone number, social security number, working phone number, and may sometimes be asked to provide recent pay stubs. However, with computerized filings, oftentimes you will only need to provide your former employer’s name and address, without having to provide wage or salary paperwork. Your most recent employer will be automatically contacted by the state unemployment agency to verify the circumstances and reasons of your work discharge or layoff. Their response will help determine whether you exhibit any of the disqualifying factors to receiving unemployment benefits such as you quitting on your own, or getting fired because you were stealing from them.

The amount of your weekly unemployment benefit checks will vary depending on your past income and the maximum limits of your filing jurisdiction. For those who are higher income earners, your weekly checks will be worth more. The maximum payout amount also differs from state to state. Just to give you a very rough ballpark figure of how much you can expect, the maximum payout for the District of Columbia is currently $359 a week, before tax. At about $1,436 a month, this definitely goes a long way to help pay for basic living expenses like rent until you can get back on your employment feet.

Usually there is a total amount of benefits that each specific applicant can draw upon before the entire fund for that benefit year is tapped out. But until that happens, applicants can usually receive benefits for 6 months straight (26 weeks) before depleting their entire emergency unemployment benefit reserves. Keep in mind as well, all unemployment payouts are considered taxable income. There is usually no tax withholding associated with unemployment benefits so you may be required to pay estimated taxes to meet your tax obligations.

Source URL: How To File For Unemployment Insurance Benefits

Copyright Protected © 2008 Money Blue Book: Personal Finance Blog. All Rights Reserved.

I Always Use My Credit Card To Pay For Gas And Don’t Intend To Change This Payment Practice Anytime Soon

While I understand why some gas station owners and advocates are pushing for the move back to cash payment only for gas purchases, I hope this is not an emerging or widely adopted trend. Paying cash at the pump may work for some, but it’s not going to fly for me.

I take frequent road trips and one of the most appreciated benefits of fueling at the gas pump is the ability to easily slide into a gas station off the freeway, punch in my prepayment, fuel up, and get out quickly. With a gas credit card, I can do that easily. With just a quick swipe and the press of a few buttons on the automated gas pump, my car is instantly refueled without hassle. With cash payment, not only is the practice comparatively more time consuming, but it’s a major inconvenience for those of us who have grown dependent on using our credit cards to pay for everything. I rarely carry more than $50 worth of emergency cash in my wallet and dislike the annoyance of walking around with dollar bills and loose coins jiggling around in my pockets. My efficient credit card usage habit also stems from my view that handling paper money is inherently dirty and unsanitary. I’m by no means a germa-phobe, but I feel that money is one of those heavily transacted items that you never truly know where it’s been before. For all I know, the bills were last taken out and manhandled by some hairy, sweaty dude while he was sitting in a bathroom stall doing his business somewhere. Hey, you never know. With my personal credit cards, at least I know where they’ve been and while I’ve never actually cleaned them before, they are at least washable.

I don’t know what I would do if gas stations suddenly and uniformly stopped accepting credit card payments due to their displeasure at having to pay spiraling credit card interchange fees. While I sort of vaguely sympathize with their declining profit margin plight (not really), as an oil consumer, I’m bound to take my gas business elsewhere to a place that does accept credit cards. The convenience of using my trusty gas rebate credit card to pay for gas and earn cash back rewards at the same time is not something I’m willing to give up anytime soon. I’ve been known to stop at a low priced gas station only to drive off immediately after finding out the place only accepted cash payment.

In the Washington D.C. region, there is a chain of el-cheapo gas stations called Free State that is known for offering greatly discounted gas at prices that’s frequently much lower than that offered by more recognized competitors. However, the biggest downside is that they only accept cash payment. Obviously this is to keep prices low and avoid having to pay merchant fees to credit card companies for each credit card transaction. But for heavy credit card users like myself, this is a complete deal breaker. While I see them everywhere along my driving route, I always avoid Free State gas stations because of their cash only payment policy. I would rather drive across the street to a slightly more expensive gas pump than deal with the inconvenience and hassle of paying by cash. It’s just one of those expected perks in life that I’ve come to insist on and demand. Other local gas station chains sometimes offer discounts for cash payments, but I would still rather pay the slightly higher fuel rate just to have the benefit of paying by plastic. Besides, any potential cash payment discount offered by the pump owner will be unlikely to offset the nice gas credit card rewards that I earn using my usual method of payment. I don’t expect or intend to give that perk up anytime soon as long as they are around.

I Have Also Come To Rely On The Budget Tracking Benefits That Credit Card Usage Affords Me

It’s not just the convenience and speed at which credit card payment at the gas pump affords me, it’s also the record keeping benefits as well. I pay by credit card at gas stations, restaurants, and everywhere else because it affords me convenient and reliable expense tracking. Payment by cash requires me to retain all of my paper receipts to keep track of total monthly spending. Credit card payments on the other hand allow me to permanently record and retain transaction dates and pricing information on my credit card statement to access at a later time of my choosing. I can easily log onto my online account from home to review the frequency of gasoline fill ups and the amount of money spent per visit with a just few key strokes.

Change Might Be A Good Catch Phrase For Politics, But It’s Bad When It Comes To How I Pay For Gas

Knowing the pervasive and established nature of credit card payment at the pump, I think most major gas stations like Exxon Mobil, Shell, BP, and Sunoco are unlikely to go cash only no matter how high gas prices may go, and no matter how badly their financial bottom lines will be hurt by having to pay higher transaction fees. Such brand name gas stations are likely to find other ways to cut costs than deprive consumers of this important convenience. Besides, switching to cash only would probably hurt their revenue stream more detrimentally than any potential cost saving benefits from going all cash due to loss of business volume. They’d lose the patronage of gas guzzling, dinosaur liquid loving, weekend road warriors like myself.

Source URL: Paying By Credit Card At the Gas Pump and Refusing To Use Cash

Copyright Protected © 2008 Money Blue Book: Personal Finance Blog. All Rights Reserved.

When you think of Ed McMahon, you don’t exactly associate or lump him with big time wasteful spenders like MC Hammer and some of the other well known celebrities of the past who rose to fame and fortune quickly but ultimately frittered away their money into bankruptcy on trivial pursuits. No, when you think of Ed McMahon, you think of the aging but charismatic late night show announcer, the TV personality, and the face and voice of the American Family Publishing sweepstakes team (not to be confused with the more popular Publisher’s Clearing House sweepstakes) that arrives unannounced at the homes of winners to present them their grand prize. You certainly don’t see or hear about him throwing his money away on fast cars, fast women, or holding lavish sleaze parties to great excess.

So I was quite surprised when I learned that someone like the now 80 plus year old Ed McMahon has now found himself in difficult financial straits and faced with the prospect of mortgage foreclosure on his multi million dollar home. This housing bubble and credit crisis seems to be quite merciless and universally brutal, even to those who simply lived their lives with the best intentions, but still succumbed to hard times. With little regard to feelings or reason, the mortgage credit crisis and the powerful forces of housing supply and demand have devastated many good families.

Ed McMahon and His Wife Pam Speak Out About Home Foreclosure and The Possibility Of Losing Their House

Ed McMahon recently appeared on the CNN Larry King Live show (CNN video clip) with his wife to discuss their difficult foreclosure nightmare and explain how a former multi-millionaire such as himself could fall from financial grace after all these years and have his house foreclosed on. During the conversational interview with Larry King, many of Ed’s words about how it all happened rang true:

“If you spend more money than you make, you know what happens. A couple of divorces flown in – a few things happened. You want everything to be perfect, but that combination – the economy, a little injury, breaking my neck – you just can’t work with this thing around your neck.”

“In some sense, I want to speak for the million people who now have foreclosure signs on their houses. I just want to give them hope, give them optimism and some guidance. Get the best corrective people you need around you, keep working at it, don’t stop. There’s a lot of people who are hard workers, did everything right, didn’t do anything wrong, and all of a sudden they are in this boat, and I speak for all of them as far as I’m concerned.”

“For everyone out there who’s going through this, we really sympathize with you. Be optimistic. It can be done. All kinds of things can happen. Let it work out great for you.”

When asked by Larry King to comment on the public assumption that the McMahons are multi millionaires and asked how they could have fallen behind $644,000 on their house mortgage payments, McMahon’s current wife Pam chimed in (tearfully at times):

“People do assume that you have hundreds of millions of dollars, and I think over the years it’s a combination of Ed working so hard and not looking at proper management which happens a lot. Because you’re a celebrity, people think you have a lot more than you have. And you always want to take great care of all your friends and family in all you do. We didn’t keep our eye on the ball and we made mistakes.”

“But you have to not give up. Whether we keep our house or we don’t keep our house. The whole financial issue might be the thing that ruins marriages, ruins relationships – but our marriage is strong.”

“You have got to realize that you can get through it. You never know what good things can happen for you tomorrow. Keep the faith.”

My Thoughts On Upper Class Celebrities, Ordinary Middle-Class Americans, and How To Protect Oneself From The Realities Of The Recessive Economy and Housing Market

After listening to the interview, I have to say I really started to sympathize with the plight of those in foreclosure. I know Ed McMahon and his wife Pam aren’t exactly representative of the classic foreclosure case, but at least they can relate to the pains of someone who can no longer afford his or her home mortgage loan payment and compelled to face the reality of home foreclosure. It’s an embarrassing and even humiliating experience that no one wants to be forced into. Home ownership is the American dream and when you can’t afford your pride and joy any longer, it’s a tough pill to take.

As I am currently still a happy renter and have not yet become a home owner, it is in my own personal and financial interest to see that there is no housing bailout whatsoever instituted by the government. This would obviously be the most self centered and self motivated route to take as opposition to any housing foreclosure bailout or assistance would help to ensure a growth in the glut and oversupply of available homes on the market, thereby substantially driving down real estate prices for the next 2-3 years until I decide to finally enter the housing market as a buyer.

But I do sympathize with most of the owners of the more than 1 million American homes (CNN news article) that are now shockingly finding themselves in foreclosure jeopardy. Sometimes in life, you do everything right with good intentions and yet bad things still happen when you least expect it. In Ed McMahon’s case, he may have lived an early life of entertainment and celebrity success and held to great esteem in his work, earning millions of dollars through the process, but apparently he failed to adequately plan for the future and prepare himself for inevitable financial emergencies.

The reality of home ownership life is that even those with good Fico credit scores who are able to qualify for and obtain prime fixed rate loans on their houses, bad things still may happen. Sometimes through no intentional fault of their own, people lose jobs, divorces happen, child custody battles rage on, or injuries and illnesses come up making one unable to afford one’s house anymore. With a stagnating economy in recession and plummeting real estate market prices eliminating much of the home equity built up in homes, such drastic and hard financial times can hit the best of folks. Without a proper emergency fund or savings set aside to handle such occurrences, even millionaires and celebrities, let alone ordinary people like you and I, can get hit by troublesome cash flow crunches.

The solution I think is to know and realize early on that life is inherently unpredictable and fraught with financial peril. Like the stock market, no one can accurately predict the good and the bad that will happen in the future. We can only anticipate and plan for the worst but hope for the best. While there are basic financial planning steps to take, such as investing for retirement through tax deferred vehicles like a Roth IRA account, one of the most important decisions is to save and build up an emergency fund. The amount that you will need to set aside for emergencies will vary from person to person, but it’s important to plan for emergencies. For example, my car recently broke down and I had to face a sudden and emergency $1,200 auto service repair bill to replace my vehicle’s alternator and battery to get it working again. Fortunately, I had saved enough on the side to handle such an emergency occurrence and expense.

The other important thing that we should glean from the Larry King – Ed McMahon interview is to stay optimistic and keep fighting. Never give up in despair. For those who are mired in housing foreclosure, credit card debt, or even perpetual unemployment, there is light at the end of the tunnel. Don’t forget, there are many similarly situated people out there trying to stay financially afloat just like you. Just keep plugging through and maintain the faith.

Source URL: Even Celebrities Can Fall On Hard Times And Face Home Foreclosure

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Despite his tremendous wealth, Warren Buffett is also one of the most generous financial figures in the world in terms of how much he has contributed and donated back to society through charitable causes. A few years ago, he gathered up the bulk of his $40 something billion fortune (at the time), and made the decision to donate his money to the Bill Gates and Melinda Foundation as well as to a few other notable charities dedicated to the improvement of health and education in the United States and around the world. How’s that for enlightened and compassionate capitalism? Rather than spend his vast wealth on fancy cars, $2 billion dollar homes, or on over-the-top accessories that even hip-hop rappers would envy, Warren Buffett chose to live a relatively frugal life comprised of smart financial planning and wise long term investments that rely heavily on value choices. As a staunch supporter of wealth redistribution and progressive tax policies that favor the poor, he is also one of the most down to earth CEO business men out there – and yes, that’s him playing his quirky but famous ukulele in the picture.

So How Did Warren Buffett Become So Rich, And What Is His Single Most Valuable Piece Of Investment Advice For New Investors?

I’ve read Warren Buffett’s works and listened to him speak on Youtube, and I’ve come to greatly admire the man. For those that want to emulate his approach to investing and replicate the secret of his success to long term investment growth, his method can easily be summed up in a few short sentences. It is a concept all long term value investors have known all of their lives, but sometimes it takes a great role model to sum it up through a few inspiring words:

“Occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics is equally unpredictable, both as to duration and degree. Therefore we never try to anticipate the arrival or departure of either. We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

- Warren Buffett, 2001.

The Oracle of Omaha’s way of creating wealth has always been making value centered financial decisions based on principles of frugality and longevity. His ability to continue investing until his 70’s (and hopefully much longer into the future) have enabled him to practice his long term strategy to its full potential. But his tremendous financial success has always been his ability to channel and harness the eternal capitalistic concepts and emotions of human fear and greed. By playing on and understanding the counter correlation between fear and greed, Buffett has been able to shape his outlook to better determine when a presented opportunity represents one that’s worth taking and when it merely represents a potentially risky financial bait that must not be succumbed to. Thus when the stock, financial, and real estate markets are dropping and everyone is hastily running into the hills for their financial lives, Buffett sees an opportunity. But when prices are soaring and flying high – encouraged by euphoria and near unanimous over-optimism and exuberance about future prospects, Buffett clenches down and exercises extra caution.

Learn To Invest Like Warren Buffett By Understanding The Interplay Between Investment Fear and Greed

For capitalism and democratic concepts of wealth creation to thrive, there has to be an ultimate driving force – and that is greed. Greed is good, and as one well known movie put it – greed captures the essence of the evolutionary spirit and it works. There is nothing inherently wrong with greed as long as it can be properly channeled into a powerful motivating factor to achieve success. But greed has its place – and so does fear. There is a proper time and place when both greed and fear should be acted upon. Upsetting the proper dynamic between the two capitalistic emotions has the potential to lead to disastrous financial results.

Warren Buffett truly understood human nature and the inherent lemming pack mentality that curses most individual stock market investors. When we see a particular financial investment take off and expand two or threefold in a short period of time, we immediately become enraptured over the financial potential, and our greed induced instincts cause us to blindly pursue the investment bandwagon. It is in our very nature to do so. That is how stock market bubbles and even real estate bubbles are formed – through the unwavering lemming effect whereby greedy investors join the rapidly expanding investment pyramid until the base comprised of new entrants can no longer sustain the prices and valuations at the top.

So to succeed financially in the spirit of Buffett’s approach, one has to obtain a more prudent, long term, value-based opportunity outlook. When stock prices are low and dropping, fear causes the majority of people to want to escape and pull their money out of the market in instinctive response. When the markets are seeing red and valuations are dropping, the tendency is to pull your money out of fear. But Warren Buffett sees this moment of fear as the ultimate chance for greed to triumph in the long term. It is not about timing the market, but about looking for the potential upside. When the market has tanked or is tanking, there is much higher potential upside. For undervalued investments, Warren Buffet would see this as the perfect opportunity to take on new positions for the long haul – particularly when the stock or fund fundamentals are sound.

On the flip side, when the entire market is in consensus that a particular investment ought to keep soaring and continue on its upward trajectory, in Buffett’s eyes, that is when cooler heads must prevail and caution ought to be taken. When everyone is in near unanimous agreement that stock prices should keep going higher, the potential for a massive reversal of potential is much greater. When others are greedy, that is when you must exercise fear as a counter intuitive response to the masses. The potential downside at that point is much greater and it’s likely the time to exercise greater restraint. Steps to protect oneself could be to purchase options to hedge against downside risk or to limit one’s investments to less volatile positions.

Thus, if you want to invest like Warren Buffett, heed his most important advice – invest and seek out opportunities when there’s blood on the streets, but hold your cards closely and guard yourself when everyone else seems to be ebullient about financial prospects. It’s counter intuitive to human nature, but it’s the perfect balance and manipulation of fear and greed. Learn to invest in long term value sectors using low expense broad market Exchange Traded Funds (ETF) and low cost mutual funds. Pick out a general low cost online discount broker or open a Roth IRA, and buy and hold investment positions that you believe will grow in the long term, and finally, resist the urge to constantly check your stock prices and bail at the first bump or trouble. Think long term, not short term.

Invest In Value For The Long Term and Understand That Stock and Real Estate Markets Will Naturally Rise and Fall Over Time

Inevitably and invariably, markets ebb and flow, and stock prices never maintain their upward trajectory forever, but at the same time, they also never head downward forever. So long as one maintains a long term investment outlook based on the understanding of fear and greed, we can all learn to profit like Warren Buffett has over the years. Buffett was able to make smart value based investment decisions because he had a long term opportunistic approach to investing. When he acquired control of a simple textile company called Berkshire Hathaway in 1965, he used that company as his primary investment vehicle to acquire and invest in companies that he understood, and retained management services of those he trusted. The key was that he held on. He did not attempt to outplay the market or try to time the market, or guess when he should exit or enter the market. He simply remained patient and sought out opportunities when others were fearful and exercised extra caution when others were greedy.

When the entire world was enraptured with the dot com craze from 1999 to 2001, Warren Buffett was ridiculed for ignoring and failing to cash into the high flying technology stocks that seemed to triple in valuation overnight in leaps and bounds. During this high flying dot com era, Buffett continued to invest his company’s assets towards acquiring old fashioned but valuable investments such as carpet cleaning businesses, roofing enterprises, furniture rental stores, and boring paint making companies. When the stock market finally plummeted and self imploded due to gross over valuation, Buffett’s company was one of the ones that remained unscathed and has continued to prosper since then.

Source URL: Warren Buffett’s Single Most Important Piece Of Advice For Stock Market Investors

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