Using credit for money
Just last week, the Senate approved legislation increasing the federal government’s borrowing limit by $1.9 trillion. When signed into law the federal government will be able to borrow more money than at any time in our country’s history, making our total national debt a mind numbing $14.3 trillion. And this will only allow us to pay our bills through 2010!
A real change over the next decade could be a massive reconsideration of tax deferred savings plans. Exemplifying this shift, the new 2010 Roth IRA conversion rules seem to be getting lots of press and stirring widespread investor interest. So what’s behind the buzz?
In our September 09’ blog, “Rethinking the 401(k) Pitch” , we underscored how the tax landscape had changed since IRA’s were introduced in the early 80’s. We recounted that federal income tax brackets reached as high as 70% when 401(k)’s and IRA’s were introduced and it made perfect sense to shield everything we could from the taxman and bank on taking the money out at lower tax rates in the future
The next few entries look at creating a positive financial future into the next decade by employing some common sense financial wellness principals.
First let’s consider using someone else’s money for to finance our stuff.
The financial wellness rule of thumb is that borrowing money to make a purchase only makes sense if the commodity to be purchased has a realistic chance of appreciating in value.
What motivates someone to change their financial behavior? For example, can someone who is prone to spend every dime really be turned into a saver?
Fear can certainly be a motivator. For some it takes a tangible, in your face type fear like “I will lose my car if I can’t make the balloon payment that’s due in three months”. The force behind saving to avoid losing your wheels can be powerful. But when the pain goes so away, often so does the temporary positive behavior. But still, something kicked in that worked. I call this phenomenon, “adrenaline induced” financial behavior change.
Several significant trends are signaling a reset of how families plan and think about college costs. The evidence suggests that creative solutions will be required as key economic factors are conspiring to make a college degree financially more elusive.
Let’s look at the new realities of saving for higher education:
For nearly 30 years, employees have been coached that the best way to save for retirement is to take advantage of tax deferred investing, most prominently through their 401(k) plans. This strategy has always been anchored in the hope that lower tax brackets await us during our retirement years. But current economic realities are causing many in the financial community to question whether tax deferred saving remains a healthy long term strategy for employees.
It’s been well documented that effective corporate health wellness programs have produced positive results for employees and employers over the past twenty years. Probably the most studied, extensive and longest running program is Johnson and Johnson’s “Live for Life”(now called the “J&J Health Wellness Program”) which was rolled out in 1979. Incredibly, due to both financial incentives and a corporate culture that actively promotes healthy behavior, 90% of J&J’s US employees have participated. And considering this includes a pool of 45,000+ employees, the statistics derived from the study are significant.
Recently after conducting a financial education workshop for a high tech company, a young lady in her early 20’s wanted to get together to discuss how she could retire early. She had seen an infomercial that described the beauty of passive income and decided it was her ticket to an early exit.
If my brother-in-law was lined up with 10 people and you were asked to pick out the economist, he would be easily identified. In the 35 years I’ve known Mitch, he has never cared a lick about the clothes he wears or the car he drives. There is no pretense or image thing going on whatsoever. He’s just a solid, albeit quirky guy who happens to be intellectually brilliant. And doing things his own way, he retired early, owns a free and clear home in beautiful La Jolla, CA (my sister’s influence) and accumulated a fair amount of wealth, while never wavering from his extreme aversion to risk.
There’s a difference between reading about the national housing crisis in the newspaper and actually seeing one of your neighbors lose their home. That’s just what occurred two doors down from us.
