The Federal Reserve passed new regulations last week requiring banks that issue debit cards to let consumers choose whether they want to pay overdraft fees for debit card purchases and ATM withdrawals and have the charge,  purchase, or withdrawal  go through even if they don’t have sufficient funds, or have it declined. This effectively makes consumers  “opt-in” to pay overdraft fees. This move by the Fed comes at a time when Congress is considering even tighter restrictions on the amount and frequency that banks can charge consumers for overdraft fees. The new rules take effect on July 1, 2010 and will not effect payments made by check or “recurring” debit card charges.

Sounds great, doesn’t it? No one would actually “opt-in” and sign up to allow a bank to charge an outrageous overdraft fee, would they? (Fees banks charge from overdrawn accounts are expected to reach 38 billion dollars this year!)  This seems like an easy question, but I have a feeling more people will sign up for overdraft fees in exchange for letting their payment be made, than many, including the Fed and Congress, might think.

Why would someone “opt in” to pay fees if they overdraft their account at all?

Well, I can think of a couple of reasons:

1.) Embarrassment of having one’s debit card declined.  I can imagine someone in  a long line at Walmart or somewhere with several hundred dollars worth of groceries not wanting to have the cashier announce that their debit card has been declined in front of everyone after all of their groceries were scanned and bagged. And what would they do then? Start removing items one-by-one until they got under the amount they had left in their account? That could really slow things down!

2.) Having to pay certain bills (such as electricity, etc.) that you have to get paid-otherwise you lose power, etc.

Keep in mind, I am sure banks will phrase the opt-in as if they are performing a service for you (for a minor fee of $30 to $40 per overdraft!) if you should make a math mistake or “forget” you didn’t have enough money in your account.

It is kind of a Catch-22, in a way. If you overdraft your account once every 10 years, and it has only happened by some mistake of your own (forgetting to transfer money from another account, for example), you may want to have overdraft protection from your bank and be willing to pay the fee instead of getting something declined and setting off all kinds of other problems. If you do it more often out of a lack of attentiveness to your finances, you might be better off letting your card get declined once in a while.

According to this article, 30 percent of overdrafts stem from checks, so limiting the overdraft on debit card and ATM transactions may not wipe them out completely for some people. Also, Congress is looking in to setting even more stringent requirements for banks charging overdraft fees, so there may be more in the works.

Another big question is this- If banks are losing a large portion of 38 billion dollars in revenue, where are they going to make that up? It has to come from somewhere, and it may be all consumers, not just ones that pay overdraft fees, that make up that lost revenue stream for banks.

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The $8000 Homebuyer’s Tax Credit expires November 30th of this year, so for those planning on taking advantage of this by buying a home, time is running short. For those interested in taking advantage of the program, this means a house purchase must be completed by that date in order to receive the credit. Because many loans can take up to 60 days to process, many in the real estate and banking industry worry that the numbers will start tapering off in early October. At some point in the very near future, it is expected that mortgage lenders will stop taking applications on tax-credit loans unless it is extended.

There is movement towards extending the homebuyer’s tax credit through 2010, and increasing it to $15,000. Senator John Isakson of Georgia is leading the charge in Congress, backed by realtors, bankers, and homebuilders, who are also are promoting the tax credit extension with the tagline  “Don’t Let America’s Real Estate Recovery Expire.” The American Association of Realtors estimates that appx. 350,000 home sales were directly attributable to the tax credit.

Some wonder if the tax credit is artificially inflating home sales, and possibly inflating home prices as well.

The White House says President Obama’s economic team is evaluating the effect of the tax credit on home sales- to determine their position, I imagine. It may be difficult to get the tax credit through Congress in  short order though, with pressing issues such as health care reform looming over Congress and the Obama Administration.

Should the homebuyers tax credit be extended through 2010? Should it be increase to $15,000? Should it be available to anyone who purchases a home?

What are your thoughts?

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President Barack Obama announced a new initiative on Saturday, geared towards helping citizens increase their retirement savings and the overall savings rate, which had hovered around zero for several years preceding the recession .

“The fact is, even before this recession hit, the savings rate was essentially zero, while borrowing had risen and credit card debt had increased, half of America’s work force doesn’t have access to a retirement plan at work. And fewer than 10 percent of those without workplace retirement plans have one of their own,” President Obama said Saturday.

Obama’s proposal includes:

Encouraging small businesses to automatically enroll their employees into 401k plans, something many larger companies do already. Research has shown that if workers are automatically enrolled and have to specifically request to not take part in a 401k plan, they are more likely to participate.

Allow citizens to receive their tax refund in the form of a U.S. Savings Bond. This would be available via a box on tax return forms that a person could check if they wished to receive a savings bond as their tax refund.

Make it easier for employees to contribute unused vacation or overtime to their retirement plan. Most employers who pay for unused vacation time (as opposed to those that have a “use it or lose it” system) simple cut a check for the unused vacation time or overtime.

The Treasury department and the IRS will also publish easy to understand instructions regarding the rules regarding retirement plans when a person leaves their job.

These are all administration actions, which will not require approval by Congress, so they should essentially be a done deal.

I like the fact that the government is encouraging companies to auto-enroll workers, and I think the ability to contribute unused vacation to a 401k plan is a pretty good idea as well. Although I am a fan of I bonds in general, (which are currently paying a paltry 0% for this 6 month period), I am not sure if too many people would take advantage of that with their tax refunds.

I think more should be done however. For example, how about allowing people to put a tax refund directly in a 401k account? After all, the government got free use of that money for a better part of a year, so they probably don’t lose much if that money goes untaxed. At any rate, I think focusing on increasing savings is a better idea than all of the government spending of late. What do you think?

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A $300 million dollar rebate program for buying energy efficient appliances such as refrigerators, dishwashers, and washing machines, similar to the highly popular Cash for Clunkers Program, is coming soon, according to an article last Friday on BusinessWeek.

Starting later this fall, the program will offer rebates of $50 to $200 on energy efficient appliances. Participating buyers will not have to turn in their old appliances, as was required in the Cash for Clunkers Program with old cars. Program details will vary by states, and states must turn in their plans by October 15th. Only appliances with the Energy Star Seal will qualify, and approximately 55% of appliances manufactured last year met that criteria.

Apparently, the appliance industry could use the boost, as sales were down 10% during 2008, and 15% through July of this year.

I was not a really big fan of Cash for Clunkers, as I felt the program had some issues. Some used cars that may not have been in very bad condition, and could have been purchased used by someone who could not afford a new car even with the rebate, were destroyed. There were other issues with it as well that didn’t seem like the best use of tax-payer dollars.

Whatever it ends up being called, whether it is Cash for Refrigerators or Cash for Appliances, I imagine that the goal is to increase the number of energy efficient appliances, and to remove older, less efficient appliances from service.

This is not necessarily a bad thing, but I am not a big fan of these rebate programs with a short deadline-it seems as if the federal government is trying to stir up a “buying frenzy” to get people spending again.

What is your opinion of the Cash for Appliances program? Is the federal government going overboard with all of the rebates they are handing out?

photo credit: AlishaV

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Cash for Clunkers, the government sponsored trade-in rebate program, got an extension on Thursday when the U.S. Senate voted to add 2 billion dollars in additional funding, like the U.S. House of Representatives had done a week earlier. This will extend the program until Labor Day, according to estimates.

The Cash for Clunkers Program was quickly using up the initial 1 billion dollar appropriation, to the surprise of many, and to the delight of automobile dealers across the country. The program was actually stopped for a day or so, until the government said they intended to extend it with the additional funding.

While I personally will not be taking part in the program as I am happy to keep my “clunker” for a few more years, I don’t blame anyone for doing so.

It’s certainly a great deal for auto dealers, who are seeing stronger auto sales than they have seen in many, many months. But this will certainly decrease when the program ends, as many people who are taking advantage of the CARS Program now may have purchased a vehicle in the next few months if the program didn’t exist.

The problem, as I see it, is that many people are trading in a “paid for” car that still runs for a new car with a car note. While $4500 off the sticker price is a good deal, taking on a new car note for 3 years or so may not be for many people, especially in this economy.

And we all know where the money is coming from- that’s right, the taxpayers. Someone will eventually have to pay for it, if not now, sometime in the future. Just like the stimulus checks, most people don’t refuse free money when it is offered to them.

I just wish the government would let me keep more of my taxes and let me spend it if and how I want.

Do you think adding another 2 Billion to the Cash for Clunkers Program, is good or bad?

Photo by Infrogmation of New Orleans

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President Obama just signed the Car Allowance Rebate System (C.A.R.S.) or Cash for Clunkers Program, a rebate program intended to make the U.S. auto fleet more fuel efficient by giving a credit of up to $4500 (the credit is generally $3500 or $4500, depending on the type of vehicle you trade in and how much more fuel efficient the new vehicle is) to consumers for trading in older gas-guzzlers for new, more fuel efficient vehicles.

What qualifies as a clunker?

• Must be a drivable vehicle, produced in the last 25 years

• The car must get 18 miles a gallon or less.

• It must be a registered vehicle, and have been insured for the past year. (To eliminate people buying junk yard cards to trade in.)

How much is the rebate and what are the other rules?

• For passenger cars, the new vehicle must get 22 mpg to qualify, and the consumer would get $3500 in the new vehicle’s mileage is 4 miles more per gallon, and $4500 if it is 10 more miles per gallon than their old vehicle.
• For light trucks and SUV’s, the new vehicle must get 18 mpg, and the consumer would be $3500 for a 2 mpg gallon increase and $4500 for an increase of 4 mpg or more.
• Price of new vehicle cannot exceed $45,000
• It can be used for the purchase or lease of a new vehicle, provided the lease period is at least five years.


Additional details:
The new vehicle must also achieve minimum combined fuel economy levels. For passenger automobiles, the new vehicle must have a combined fuel economy value of at least 22 miles per gallon. For category 1 trucks, the new vehicle must have a combined fuel economy value of at least 18 miles per gallon. For category 2 trucks, the new vehicle must have a combined fuel economy value of at least 15 miles per gallon.( A category 1 truck is a nonpassenger automobile. This category includes sport utility vehicles (SUVs), small and medium pickup trucks and small and medium passenger and cargo vans. A category 2 truck is a large van or a large pickup truck, based upon the length of the wheelbase (more than 115 inches for pickup trucks and more than 124 inches for vans). Note: some pickup trucks and cargo vans exceeding these thresholds are treated as category 3 trucks instead of category 2 trucks. A category 3 truck is a work truck and is rated between 8,500 and 10,000 pounds gross vehicle weight. This category includes very large pickup trucks (those with cargo beds 72 inches or more in length) and very large cargo vans.)

The value of the credit for the purchase or lease of a new passenger car depends upon the difference between the combined fuel economy of the vehicle that is traded in and that of the new vehicle that is purchased or leased. If the new vehicle has a combined fuel economy that is at least 4, but less than 10, miles per gallon higher than the traded-in vehicle, the credit is $3,500. If the new vehicle has a combined fuel economy value that is at least 10 miles per gallon higher than the traded-in vehicle, the credit is $4,500.

Will it work?

The program is getting mixed reviews, to say the least. It is limited to $1 billion in total rebates, which sounds like a lot, but will have a limited impact. It also extends only to November 1, so it will be a limited time frame as well. Another popular criticism is based on the fact that consumers who are driving a car worth less than $4500 will likely not be able to afford the sticker price on a brand new car.

For more information visit the official government  C.A.R.S. site (It will be updated regularly as well.)

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Did you know the economic stimulus plan included the addition of computer technology and equipment, including internet access,  as a “qualified higher education expense” for 2009 and 2010. Now this may only help you if:

• Either you are in college, or have a child in college
• You have a 529 plan for yourself or your child
• and you have enough money in the 529 plan to pay for all of the other qualified education expenses (tuition, books, etc.) as well as a new computer.

What this would allow you to do is pay for a new computer, internet access, software, and other peripherals with money that has grown tax free from a 529 plan. With the state of the economy as it is, I am not sure if it will help too many people, but I am sure some will be able to take advantage of it.

I am sure there are other ways you could put this to use, but it all depends on your personal situation. For example, perhaps you could pay for a computer, internet, and other items with a 529 and then take a tax deduction for educational expenses, either the $4000 tax credit, the Hope Scholarship or Lifetime Learning tax credits.

From the text of the stimulus bill:

SEC. 1005. COMPUTER TECHNOLOGY AND EQUIPMENT
ALLOWED AS A QUALIFIED HIGHER EDUCATION
EXPENSE FOR SECTION 529 ACCOUNTS IN
2009 AND 2010.

(a) IN GENERAL.—Section 529(e)(3)(A) is amended by striking ‘‘and’’ at the end of clause (i), by striking the period at the end of clause (ii), and by adding at the end the following:
‘‘(iii) expenses paid or incurred in 2009 or 2010 for the purchase of any computer technology or equipment (as defined in section 170(e)(6)(F)(i)) or Internet access and related services, if such technology, equipment, or services are to be used by the beneficiary and the beneficiary’s family during any of the years the beneficiary is enrolled at an eligible educational institution.
Clause (iii) shall not include expenses for computer software designed for sports, games, or hobbies unless the software is predominantly educational in nature.’’
(b) EFFECTIVE DATE.—The amendments made by this section shall apply to expenses paid or incurred after
December 31, 2008.

Note-you can’t buy software that is considered a game!

And from the text of the tax code mentioned above-for definitions of what qualifies

(F) Definitions
For the purposes of this paragraph—
(i)Computer technology or equipment The term “computer technology or equipment” means computer software (as defined by section 197 (e)(3)(B)), computer or peripheral equipment (as defined by section 168 (i)(2)(B)), and fiber optic cable related to computer use.

(B) Computer software defined
For purposes of subparagraph (A), the term “computer software” means any program designed to cause a computer to perform a desired function. Such term shall not include any data base or similar item unless the data base or item is in the public domain and is incidental to the operation of otherwise qualifying computer software.

(B) Computer or peripheral equipment defined
For purposes of this paragraph—
(i) In general The term “computer or peripheral equipment” means—
(I) any computer, and
(II) any related peripheral equipment.
(ii) Computer -The term “computer” means a programmable electronically activated device which—
(I) is capable of accepting information, applying prescribed processes to the information, and supplying the results of these processes with or without human intervention, and
(II) consists of a central processing unit containing extensive storage, logic, arithmetic, and control capabilities.
(iii) Related peripheral equipment The term “related peripheral equipment” means any auxiliary machine (whether on-line or off-line) which is designed to be placed under the control of the central processing unit of a computer.
(iv) Exceptions The term “computer or peripheral equipment” shall not include—
(I) any equipment which is an integral part of other property which is not a computer,
(II) typewriters, calculators, adding and accounting machines, copiers, duplicating equipment, and similar equipment, and
(III) equipment of a kind used primarily for amusement or entertainment of the user.

I would take this to mean printers, scanners, and the like. It is important that if you are able to take advantage of this, you read all of the associated documentation, and consult with a 529 and/or tax expert to make sure you are following the rules.

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Have you noticed lately, that almost every news article or TV or radio interview piece regarding the state of the economy has some combination of the words “recession” and “depression” in them?

Especially interviews with financial experts or economists. One of the last questions the reporter will ask is “Do you think that a depression is coming?”, after which the “expert” or person being interviewed will usually go on about how this is totally different than the “Great Depression”, there are more controls in place, etc. But each one has his or her own opinion, and some think that a depression of some fashion is here or may be coming.

Obviously, the news media is trying to prey on everyone’s fears, because fear sells.

While I do not believe there will be a depression of the magnitude of the Great Depression, it is hard to determine what constitutes “an economic depression” for sake of comparison-even if it is of a lesser magnitude than the Great Depression.

Unlike an economic recession, which is defined as “2 or more consecutive quarters with negative GDP growth”, their is no real “official” definition of an economic depression.

Here is the definition from wikipedia:

In economics, a depression is a sustained, long downturn in one or more economies. It is more severe than a recession, which is seen as a normal downturn in the business cycle. Considered a rare but extreme form of recession, a depression is characterized by abnormal increases in unemployment, restriction of credit, shrinking output and investment, numerous bankruptcies, reduced amounts of trade and commerce, as well as highly volatile relative currency value fluctuations, mostly devaluations. Price deflation or hyperinflation are also common elements of a depression.

Sounds like it includes a lot of the things happening now, doesn’t it!

Also from the wikipedia article “there are two rules of thumb found widely on the internet. One is a decline in real GDP exceeding 10%, and the other is a recession lasting 3 or more years.”

It was announced friday that the GDP dropped 6.2%, so we are not quite there yet, but it was a lot higher than the estimate of a 3.8% drop.

Do you think we are in store for a depression, or just a recession? When do you think things will begin to turn around?

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With the passage of the stimulus bill, officially called the American Recovery and Reinvestment Act of 2009, by the U.S. Senate on Friday, the stimulus plan as approved by Congress now awaits President Obama’s signature before it takes effect. Totaling $787 billion, and coming in at a massive 1,071 pages, there are grumblings that the bill was “rushed” through congress, not giving enough time for the senators and representatives to actually read the entire bill in its final form.

Some of the highlights that might directly affect individuals include:

• A $400 payroll tax credit for individuals, $800 for couples. The full credit will be applied to individuals making less than $75,000, and couples less than $150,000. Partial credits will be applied to individuals making up to $100,000 and couples up to $200,000.
• AMT tax relief
• A $250 credit for those who do not pay taxes such as retirees and those on disability.
• An $8000 credit for 1st time home buyers, who purchase a house between Jan 1 and Dec 1, 2009. Unlike the previous $7500 home buyers credit, this does not have to be paid back.
• Sales tax deduction for those who purchase a new car in 2009

The bill also  provides billions of dollars in unemployment benefits, food stamps, medical care, job retraining and more to those hit hard by the recession. It also includes billions for a variety of other social programs, many of which are unlikely to create or preserve jobs. Do you think the stimulus bill will really stimulate the economy? I am not convinced at this point, but I would love it if I was wrong.

Want to read the full text of the stimulus bill and find out what is really in there?

Below are links to the 2 parts of the stimulus bill, in pdf format, if you are interested in finding out for yourself where all of that money is really going.

Recovery Bill-Part A

Recovery Bill-Part B

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There’s a whole lotta talk about GOLD these days. “Save yourself from the eroding value of the dollar” and “combat inflation” are two common refrains. As much talk as there is of a total global economic meltdown, and gold being a protection against a massive loss of wealth, it’s almost enough to to make a regular person, who might normally not even think about investing in gold,  wonder if gold is something they should consider. But before you run out and start buying gold ETF’s in your retirement portfolio or gold coins, you should think carefully about what is really going on.

A few things to consider:

Adjusted for inflation, the price of gold peaked around 1980, at about $2300 per ounce.

Even at $900+ multi-year highs over the last year or two, gold is still less than half of what it was worth in 1980, adjusted for inflation. As a long term investment, it is a money loser. I don’t know about you, but 1980 was a long time ago. Gold had a tremendous run between 1971 (when the US went off the gold standard) and 1980, but it hasn’t kept pace with inflation since then.

Gold will not be used as a means of trade should there be any type of financial or political collapse.

Do you really think that your neighborhood grocery store is capable of conducting transaction, should you have your hands on a few gold coins or a vial of gold dust? Do you think they would know how to value it or even tell if it was real?

If you are just trying to make a guess for the short term, good luck.

I mean, when is anyone really right? Can you or I predict the stock market or any other commodity price and where it is going to be in 6 months? Did anyone think, last summer, that a barrel of oil would plunge to the low to mid $30 range? I know I didn’t. Many talking heads were predicting $200 per barrel in the near future.

My point is, don’t take arguments for any investment, whether it be gold, the stock market, or other commodities at face value, especially due to fear or worry. If you think gold is going up, and invest in it, you are really betting that it will go up or stay the same (as a hedge against inflation). It’s entirely possible, but it may not be for the same reasons you might think now. I don’t think there is anything wrong with having a modest amount invested in gold or any other commodity, but I also don’t think investing in gold is going to save me from financial ruin, either.

photo credit: Velo Steve

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President Obama discussed some of the details of his proposed $825 billion stimulus plan on Saturday, promising efforts that would include 3000 miles of new electrical lines, increased security at 90 U.S. ports, and doubling the U.S.’s renewable energy capacity over the next 3 years. Some additional highlights include:

• Upgrade 10,000 schools and improve learning for about 5 million students.
• Save $2 billion a year by making federal buildings energy efficient.
• Triple the number of undergraduate and graduate fellowships in science.

According to the Obama team, it will save or create 3 to 4 million jobs over the next few years.

The proposed spending, as far as I can tell, is in addition to the appx. $300 billion in tax cuts (together they total the $825 billion), the last I heard would be $500 for individuals and $1000 for couples, reduced in paycheck withholdings (doesn’t look like there will be a second stimulus check at this time.)

Will it Work?

It is obviously too early to tell, but while creation of jobs is a good thing, as is saving energy, what happens to those hired to make houses and government offices more energy efficient when the government money is spent? I am not sure it is wise to assume in a case like this that the demand would still be there if the government wasn’t paying for it.

What do you think? Can we spend our way out of a recession? Will borrowing to invest in our future pay off?

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I ran across an interesting animated video called “Money as Debt” by Paul Grignon on the internet recently. It is an interesting look at money, the banking system and argues that money is created by the creation of debt. While some people may see this as an “evil banking system conspiracy” video, I do think there is some information here that you may not know, and it seems fitting in light of the current economic situation and banking and credit crisis.

Note: The entire video is about 47 minutes long, so you may not want/be able to watch it all in one sitting. Also, the 1st 10 seconds or so are blank, but the movie will start.

Money as Debt

How do you think money is created? Do you think an alternative system should be looked in to?

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