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Recent headlines notwithstanding, debt in and of itself is not all bad. There are things most Americans wouldn’t be able to do without borrowing: Buy a house, a car, get a college education. That’s how you can tell the difference between good debt and bad debt. Good debt is debt that actually gets you somewhere. It’s the mortgage that puts a roof (one you can actually afford, mind you) over your head, the car loan that gets you back and forth to work, the student loan that helps fund the college education that increases your lifetime earning potential by $1 million.
Read the newspapers these days and you’re seeing a lot of coverage indicating that there’s an economic recovery on the horizon:
I've got a load of questions in my mailbox from readers, and the best way I've found to get answers out is through this column. From my experience, I know that for every person who asks a question, there are more than a few others wondering the same thing.
Money is at the top of many minds these days, and that means questions are flooding my inbox. Here are a few answers that should help give a bit of clarity in this confusing and rocky economy. If you don't need the money for daily living, then no, don't pull it out of your 401(k), where it is protected and can grow, tax-deferred. What I think you're saying is that you want to move the money to a safe place. There's a lot of confusion over this because people think that a 401(k) or an IRA is synonymous with stocks. In reality, those accounts are just the basket for your contributions — you can invest the money any way you like. At your age, you should only have about 40 percent of that money in stocks. The rest can be in safer places, like the money market option within your 401(k).
This country's economic crisis has all of us wondering what the future holds. Will President-elect Barack Obama be able to reinvigorate the economy? When will the housing market rebound? How is the holiday season going to play out in terms of retail sales? For months, economists have been debating these issues. After all, that's a big part of their job. But for the average investor, it might be better to focus on the past. I'm not talking about the last couple of years; rather, I'm talking about the past couple hundred years. We can learn a lot from the historical ups and downs of the stock market.
There's no doubt that you've been hearing a lot about the credit crunch, but do you know what it actually means for you as a consumer? Judging from the questions I've been receiving, many people do not. That's because it's complicated, and if you're not in the market for a mortgage or a car loan, it's easy to dismiss this as something that doesn't apply to you.But that would be a mistake because sooner or later, you're likely to be affected. Credit card offers are already starting to slow (Synovate, a marketing research firm, found that offers in the second quarter of this year were down 17 percent when compared to 2007). The limits on existing cards are in danger of shrinking, and your credit history is being held to a much higher standard. What does that mean? Well, if you do happen to be in need of a mortgage, home equity or car loan, you might have a tough time finding a lender and a decent rate. These days, your credit score has to be in the 760 range — or better
In recent years the average family of four has spent more than $5,300 on food, nearly $3,000 on gifts, $2,100 on clothing and $3,000 on recreation. That's all well and good when you're spending money that you have, but what if you're watching your pennies because of a layoff or a plummeting 401(k) balance? In this economy, both are all too common, so, it's time to get creative. There are certain expenses in the family budget that are fixed — your rent or mortgage, utilities, car payment, gas to get you back and forth to work, and groceries to put food on the table. I'd put childcare costs and health insurance on that list as well. But most other things are variable expenses; you can decide where to cut back.One way people are doing this is by not buying the things they want — books, DVDs, toys — and instead, trading, renting, borrowing, or even taking someone else's unwanted belongings. These days, the Internet has made it easier than ever to find the stuff you're
For years, I've been preaching the mantra that boring is better when it comes to your investments. In fact, if you've been reading this column for any length of time, you know that my strategy is to come up with an asset allocation that you can live with and then dollar-cost average into the market on a regular, automatic basis.
If you don't need the money for daily living, then no, don't pull it out of your 401(k), where it is protected and can grow tax deferred. What I think you are saying is that you want to move the money to a safe place — there is a lot of confusion over this. People think that a 401(k) or an IRA is synonymous with stocks, but it's just the basket for your contributions — you can invest the money any way you like. At your age, you should only have about 40 percent of the money in stocks. The rest can be in safer places, and you can move it to the money market option within your 401(k).
With the words "crisis" and "disaster," being used to describe the current state of the country's financial system, it was no surprise that my inbox was clogged with readers' questions. Many folks are looking for ways to save money, while others want to know where to put the money they've already saved. Nearly everyone wants some reassurance that the decisions they're making —whether they're about credit, their homes, or investing — are the right ones.
It may be — housing inventories are soaring, which means that buyers are in the driver's seat. You have a lot to choose from and a substantial amount of bargaining power. That said, there are challenges as well. First, you have to sell that other house. I've heard too many horror stories from people who bought a second home before they sold the first. Don't worry about missing the opportunity to buy — this downturn is going to last a while. Second, you need a substantial down payment. Gone are the days when you could buy a house with nothing down. Now banks are routinely asking for 10 percent and, in parts of the country where real estate markets have been truly rocked, even more. Third, you need really good credit in order to qualify for a decent interest rate. If your credit score has been damaged by late payments, use the time you spend selling your first house working on it before you get that next mortgage.
What's the antidote to a retirement account balance that just isn't what it used to be? It may mean working a few more years, reducing the amount you plan on withdrawing every year, or even a reverse mortgage. But there's another alternative to consider: backtracking on Social Security.
Spend a little less. Look, this bailout may help stabilize the markets, but you and I can't do anything to control whether it passes or not. What we can do is protect ourselves and our families by saving a little more so that if we need cash we have it — which means we don't have to try to borrow (at a time when borrowing is more difficult), we don't have to raid our retirement plans, we don't have to sell stocks when they're down. Anything you don't need is a purchase you should reconsider.
I'd estimate that about 75 percent of the e-mails in my inbox are from people who are swamped with credit card debt. Many — particularly in this economy — have had to rely on plastic because they lost their job, or their gas and food bills are sky-high, but about a third can place the blame on clothes shopping.I can relate. I like fashion, and when the seasons start to change, I, like many of you, start to get the itch for a new pair of shoes or a new jacket. But when you're already feeling the squeeze in other areas of your finances, one of the first things that should take a spot on the back burner is the purchasing of new clothes.
The good news is that you're getting a pretty nice package, particularly in this economy. The bad news is that severance payments are treated as — and taxed as — income. And particularly, if you should find another job quickly (which of course I hope you do), the new salary on the top of the severance could push you toward a higher tax bracket. There are not a lot of ways to dodge the new taxes you'll owe, but there are a couple to know about.
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