Tuesday, December 30, 2008

Brother, can you spare a dime?

I'm still trying to figure out who will be helped by GMAC's decision to make potentially shakier car loans with federal bailout money.

Not me, obviously. As a job hunter, I don't think I even qualify for one of those late night TV loans that offer to finance anyone with a $250 weekly income and a pulse. But my inability to blow my unemployment check on a Hummer never seemed a tragically missed opportunity, either.

GMAC's decision to expand lending to anyone with a 621 or higher credit score adds something fewer than 27 percent of the nation's potential borrowers to the roughly 48 percent who might have qualified when a minimum 700 score was required, the FICO gnomes at Fair Isaac Co. suggest.

Real life is trickier, according to some of the trends I've been watching. Various industry sources report that while fewer loan applications are approved -- about 64 percent currently compared to 83 percent a year ago -- applicants with lower scores get hit the hardest. Fewer than one in four applications are being accepted now from borrowers with scores below 620, compared to about two out of three last fall. That makes sense. No one wins when repos happen.

So how do you avoid a jam if you need a loan and unemployment is eroding your credit score?

Think preemptively.

An upcoming issue of Kiplinger's Personal Finance outlines some of the new lending changes to keep in mind. Lining up a home equity line of credit or some other line before you need it will help. But tap it only when you really, really need to, because without steady income, that money may be much harder to repay than you imagine.

Until then, talk with some lenders. Even in a tough economy, there are some who may be willing to take a chance if your repayment history is good, you can show you've got really good job prospects ahead, or if you have something to offer as collateral.

Sunday, December 28, 2008

Staying sane, slim (I wish) and solvent

Experts say - and those of us going through it, know - that it is important to get into and stay in shape while you job hunt.

You know why. A morning walk or run is a good time to clear your head for the day. You want to look as good as you can at your next job interview. And regular exercise is a proven stress cutter plus its cheaper than tapping COBRA benefits.

So how do you afford to stay healthy? Gym memberships, for which you can pay $50 to $200 up front plus $30 to $50 a month after that, will eat the heart out of an unemployment check. Kansas City area YMCAs were waiving $150 sign-up fees this weekend, but still run almost $90 a month for a couple. (They will consider scholarships if you are really strapped for cash.)

Rigging up your own home gym doesn't seem realistic either. Those TV ads hawking multi-thousand dollar gym sets can be pretty mum about how long those monthly payments really stretch.

We have choices, though. Experts at the Mayo Clinic calculate you can do just as well by shelling out less than one month of gym membership costs for a jump rope, some hand-held weights and some resistance tubing. Just use your imagination and look for ways to insert more physical activity into your daily routine. Blogger Jennifer G on Brighthub.com suggests getting your small children into the act too. They are going to keep you hopping anyway.

Looking around for exercise programs on TV or low cost programs in your community will help stretch your resources further, say posters on Ehow.com. Fitness guru and former Navy SEAL Stew Smith insists you can get really ripped for not a lot of money.

Maybe, maybe not. But for starters, I'm going to take another look at that $4 jump rope I saw in Target's sporting goods section.

Tuesday, December 23, 2008

Not even New Year's and one resolution is shot

I blinked. We bought a flat screen.

Retailers want so badly to get last minute Christmas shoppers into their stores that many have cut prices back to day-after-Thanksgiving levels. Our new TV cost about half of what we were expecting to pay before my job was eliminated in September.

We are not alone. Retailers across the country are reporting dismal traffic, cautious shoppers and really steep price cuts. They don't appear to know what, if anything will work.

But something is changing. I used to scratch my head during the dot-com bust and other recessions we've been through because the parking lots at Nordstrom's and similar upscale stores always seemed full, no matter what.

Now it's as if people are stretching money-saving shopping tips beyond the holidays. This emerging frugality isn't entirely about money. Former Kansas City resident Jennifer Maxwell wrote personally of other reasons for lightening up in a recent Baltimore Examiner op-ed piece.

Some personal finance bloggers I read, at My Open Wallet, My Two Dollars and Five Cent Nickel among others, recently are taking this a step further and talking of curbing Christmas shopping to increase charitable contributions instead. Selfishly, this is a potentially good idea for anyone strapped for cash, because the donations may mean bigger tax deductions too.

I don't know if these are trends yet or not. But when in 1890, Massachusetts department store owner James Edgar first put on a Santa suit to entertain customers and their children, no one knew if that would turn into anything either.

Happy holidays, everyone.

Monday, December 22, 2008

And you thought Christmas came quickly

Heads up, job hunters. We have one more thing we need to do very soon.

Make a quick dry run through next spring's tax return to see if we need to make any special tax moves before the year ends a week from Thursday. Yippee. I know.

But there are some new tax changes to consider that Congress made while we may have been distracted by challenges such as replacing lost income. Both the Internal Revenue Service and contributors to major newsletters such as Kiplinger.com can catch us up on the basics. Check for changes that may affect anyone who bought or sold a house, paid mortgage interest or went through a foreclosure this year.

Meantime, those of still between jobs have some additional issues to deal with. You know some of the ugly ones. Unemployment benefits and severance packages are both taxable. But if unemployment benefits were your only income this year, you may qualify for a bigger tax refund through the earned income tax credit program too.

Any work you did, say, as a consultant or freelancer during your job hunt is taxable too, as self employment income. And the bite may be bigger than you expect. If you made more than a few hundred dollars, you may owe Social Security, Medicare and some other payroll taxes too.

There is a bright side, though. Job hunters have more opportunities for potential tax deductions than the still-working. Itemizers can deduct most out-of-pocket job hunting expenses that exceed 2 percent of their adjusted gross incomes. And those pain-in-the-rear big COBRA payments to maintain health coverage become potentially deductible when they exceed 7.5 percent of adjusted gross income.

Finally, if you think you will want extra help with your taxes because of your job change this time around, start scouting now. Tax professionals will only get busier as April approaches.

Tuesday, December 16, 2008

You know the recession is serious when....

The Internal Revenue Service said Tuesday that it will speed up some of the paperwork distressed homeowners need to refinance or sell their homes. It’s the first of what may be several IRS changes made to help troubled taxpayers through the current recession, said Doug Shulman, the service’s commissioner.

Specifically, IRS is speeding up its currently 30-day process by which it removes tax liens against a home that normally would deter a potential buyer or cause a lender to decline a refinancing request. The service similarly is speeding up paperwork for subordinating a lien by giving the lender’s stake in a refinancing higher priority than any overdue taxes the lien is designed to catch.

How much faster the process will go hasn’t been determined, but Fred Schindler, IRS’ collections policy director, told a telephone press conference that some applications could be turned around in as little as two weeks.

Also, removing or relaxing the liens won’t help a cash strapped taxpayer reduce their tax debt, Schindler said. IRS simply will attach the lien to other property, cars, wages or other assets. IRS estimates there currently are about 1 million outstanding tax liens attached to real and personal property in the U.S.

Shulman said at the press conference that the IRS also is looking at its offers-in-compromise programs, installment payment plans and loan refinance options for ways to potentially help distressed taxpayers.

Those potential relief actions aren’t ready to be announced yet, “but we want to do what we can under the constraints of law and common sense,” Shulman said.

Monday, December 15, 2008

Finding cheap heats

Job hunting – and blogging – tend to leave you with lots of little chunks of spare time around the house.

I used some of mine a few weeks ago to tape insulation around the furnace ducts in my basement. That is every bit as interesting as it sounds and I hadn’t planned to write about it until I woke up this morning and discovered the Baja Minnesota wind chills of my boyhood had reached Kansas City. Duct tape works.

So how do you stay warm in weather like this? Bloggers on the My Two Dollars and Get Rich Slowly personal finance websites tell what works for them in even colder parts of the country than Kansas City.

Think sweaters, plugging drafts and space heaters in the short term. Hard-core upper Midwesterners at midwestweekends.com suggest thinking Fargo chic in your clothing selections. The U.S. Energy Dept., among others, offers longer range stuff you can do to save money or stay warmer for less if you are looking for longer-lasting answers. Energy even offers a handy online calculator to project your potential savings, right down to your own zip code.

And if nothing else works, volunteer to help out at a homeless shelter. Depending on how the bailout goes, it may be handy to know how to keep warm if you are sleeping in your car too.

Friday, December 12, 2008

No good deed goes unpunished?

U.S. households actually reduced debt, 0.8 percent, in the third quarter, which is the first time that has ever happened in more than 50 years the Federal Reserve has been clocking that figure.

Now maybe we find out if no good deeds really do go unpunished. The statistical Seismic tick is getting increasingly many analysts debating whether the economy is headed into a period of deflation. That’s when no one buys anything while waiting for prices to drop further in order to stretch thin resources further.

That’s really bad news in an economy that has counted on our borrowing and spending to drive two-thirds of the economy.

At the kitchen table level, we already know deflation, which basically is postponing buying anything we don’t absolutely need until the price comes down or we really have the money after we’ve covered more pressing needs.

At our house, for example, we’re still looking at ads for the new flat screen we once planned to buy for Christmas to replace our conked-out Zenith. But we probably won’t buy it unless prices drop even lower than on Black Friday sales after Thanksgiving. Even then, we might cut out more of our cable service instead, which would resolve the TV question and save even more money.

Economists know we all should have been living within our collective means long ago. Now some worry that too much newly found fiscal virtue may actually prolong the pain we are in now. We don’t buy. Merchants slash prices. Manufacturers cut payroll to lower costs. Competitors and suppliers cut too. And suddenly, our paychecks are lost or smaller too.

No one yet knows why we collectively swore off borrowing last quarter. There is some debate whether lenders forced us by clamping down hard or that most of us have decided en masse to not spend any more than absolutely necessary until we know how things work out. But what do we want the answer to be?

Thursday, December 11, 2008

Live on a budget or get your money back

Those whopping jumps in jobless claims reported this morning cause tremors on both sides of the unemployment line.

On my side, one of my first (selfish) thoughts was, Oh great, another 573,000 people are competing for the job I’m hunting for. But on the other side, I thought again how scary this must be for anyone still working but worried they won’t be soon.

Then I realized that no matter how shaky your job might feel right now, there are no-cost things you can do now to ease the financial pain of losing a job. And I have an idea that that even gives you money back if you miss the last swing of the axe.

The no-cost things basically involve budgeting. Contributors to Yahoo.com and other Web sites, along with some bloggers I ran across at MyDollarPlan.com and HarvestingDollars.com, generally recommend creating two unemployment budgets – one that allows you to live comfortably but thriftily until you work again, and another that plots bare-bones spending to stave off disaster.

Then theoretically, you divide your total emergency savings by whatever weekly or monthly budget amount you’ve calculated. That tells you how long your safety cushion should last.

My idea? Road test your budget before you need it. Do the budget calculations, plan the spending cuts you would make, and then actually try living on that budget for two or three months. Pop the money you don’t plan to spend into an interest-bearing savings or money account. That way, it will still be there if you discover you forgot something in your emergency budget or you will have extra money if you’ve budgeted well.

By the way, road testing your retirement plan this way to see if you really can live your retirement income works too.

Wednesday, December 10, 2008

Fueling around

Six-year-low gas prices sound good, but how much money are you really saving?

It’s less than I expected when I checked out a new calculator on the My Two Dollars personal finance blog that converts gas prices and my car’s mileage into miles per dollar.

Just for fun I compared how much it cost me to drive home from two different gas stations –one down the street that is charging $1.43 a gallon and one that I usually go to just across the Missouri line that charges $1.32. I burn 17 cents worth of the higher priced fuel driving home from the nearby station and 23 cents worth of the lower priced stuff from just one mile farther away.

That isn’t earthshaking, I know, but it really reinforces the notion that planning your trips, even very short ones, is critical to saving fuel costs. Running to the store just for a half gallon of milk gets pricey if, even at today’s welcome low fuel prices, you are getting maybe 15 miles to the dollar.

Separately, Philip Reed, a senior editor at Edmunds.com , also has taken a look at fuel costs and driving habits and concluded that a lot of things we assume we know about cutting fuel costs aren’t exactly true. Trading in your gas guzzling SUV for a hybrid, for example, isn’t a good deal if higher prices, property taxes, insurance and other costs gobble your fuel savings. And getting ultra-high mileage doesn’t always generate ultra-huge fuel savings. For every 100 miles you drive, Reed calculates, dropping from a 12.5 mpg SUV to a 25 mpg compact will save you four gallons of gas, but dropping from the compact to a 50 mpg hybrid only saves two gallons.

But there is one fuel saving tactic I’m sticking with regardless of what gas prices do. I’m staying out of drive-through lanes. It doesn’t make any more sense to burn $1.32 gas in a zero mpg drive through than it did to burn the $4 stuff.

Monday, December 8, 2008

(Not so much) money for life

Wall Street just knocked my 401(k) back to 2005.

One of the results is ironic. I never imagined how disappointed I would be to have saved a quarter million dollars, which is what’s left after the market meltdown. But it is scary too. I’m too close to retirement age to make up the difference with more aggressive investments. And my wife and I both come from long-lived families, which seems likely to stretch our savings thinner.

So, what to do? We’ve been looking into annuities to help make the stretch. On the plus side, they offer additional lifetime income to supplement Social Security and some pension benefits for which I will qualify. On the minus side, there will be more restrictions on withdrawing funds if I need them in the next few years and taxes on those withdrawals will be higher than the capital gains we’ll pay on some of our other investments. Plus, if we aren’t careful, the rules for minimum required distributions from our retirement plans that will kick in eight to 10 years from now could force us to pull out too much money to maintain the lifetime income guarantee.

One of the variable annuities I’m looking at promises a minimum 7 percent growth in my account, until I start withdrawing money, regardless of what the market does. A financial planner friend points out, correctly, that this is a relatively good deal when markets are high, but not so good when markets are down. I risk missing more of the rebound when things turn around. I agree in theory. But part of me also wonders what if this is ‘up’ right now? The recessions following the 1970s oil shock, the 1980s monetary crises and the 1990s dot-com bust all lasted two years. This one seems scarier, especially from the front row seats.

So are annuities a good deal? Maybe, maybe not, says the Securities and Exchange Commission. It depends on your circumstances. The Insurance Information Institute can walk you through some of the procedural basics. SmartMoney.com outlines some basic arguments for and against. And, more recently, bloggers on both fivecentnickel.com and Blueprint for Prosperity have talked about recent changes in the contracts you may want to check out.

Meantime, there is one highly speculative potential retirement income investment allocation we haven’t changed at our house. We still blow $1 a week on a Powerball ticket.

Friday, December 5, 2008

No tax relief here. Watch your wallet

It looks like a creaky old tax phishing scam is getting a new life.

More e-mail boxes around Kansas City and the rest of the country are filling up with fake Internal Revenue Service letters and forms advising recipients that as non-resident aliens, they are exempt from reporting and paying taxes on some money. The senders also send along an official looking, but totally fake, tax form and fax number to help you identify and your bank accounts.

The communication is a scam and it is not from the IRS, said Michael Devine, an IRS spokesman in St. Louis. It appears to be a revival of a 2004 identity theft scam that was loosely based on a real tax form that financial institutions, but not the IRS, use to make some specific withholding calculations for overseas investors.

But the phony form going around now asks for a lot more personal information that someone would need to access your bank account or worse, Devine said.

“It even asks for mother’s maiden name, since being able to give that name is often part of a financial institution’s security protocol, “ he said.

There are a couple easy ways to guard against being taken by these scams. First, remember that IRS never initiates correspondence with a taxpayer by e-mail. Second, even if you get e-mail that really looks official, read it carefully.

“If it’s too good to be true or it doesn’t seem to make sense, it’s probably a scam,” Devine said.

Techie Diva Gina Hughes outlines some more tax season scams to watch for on Yahoo. Posters on the MyTwoDollars.com blog list some they already found earlier this year. And the Dumb Little Man personal finance blog recently recapped things we can do generally to avoid identity theft.

Wednesday, December 3, 2008

When your 529 college plan becomes a $5.29

Saving college money for your kids or grandkids looks grim right now. But hang in there, experts say. You’ve got a sympathetic ear where you might not expect.

Consultants at Financial Research Corp. in Boston recently released some back-of-the-envelope calculations indicating savers who a year ago had more than $110 billion stashed in tax-friendly 529 college savings plans lost about 9 percent of their investment last quarter. The October-November market bloodbath whacked the funds even harder, but it isn’t clear who, if anyone, has dared to look.

Even Missouri’s MOST and Kansas’ Learning Quest plans – which both remain among the nation’s best performing 529 savings plans, according to SavingForCollege.com – have taken hits, said Rob Myers, manager of American Century Investments’ Leawood investors center. But not all have been hit the same.

Learning Quest’s mix of more than 17 investment choices, for example, currently are running between a 41 percent loss for the year in ultra-aggressive all-stock funds and a 2.5 percent gain in ultra-conservative money market funds, Myers said.

Most families put their money in age-adjusted plans that are regularly rebalanced with more conservative investments every few years to preserve profits as college approaches. Based on Learning Quest’s performance, a moderate to conservative fund for a 15-year-old might be down about 13 percent for the year, while an account for a three-year-old sibling might have dropped 39 percent, he said.

Losing that money now seems especially hard because college costs in the last decade have outpaced inflation by a more than 2.6 to 1 clip and student debt is up an inflation-adjusted 63 percent to an average $22,000, according to the Chronicle for Higher Education. College costs are red lining beyond the reach of increasing numbers of families and already out of reach in every state but California, according to new reports this week.
Parents investing for a 10-year-old or younger child probably will be able to plug much of that gap by continuing to put money into the same age-adjusted account they have already, say commentators such as Mara Strom at FinancialAidFinder.com in Seattle.

Investing for an 11- to 16-year-old is trickier. Switching from an age-based account to one with more stocks may be a reasonable choice, but so might staying the course if the risk that comes with switching seems to great.

Savings guru Joe Hurley at SavingforCollege.com reports two other reasons for betting on 529 plans. First, if taxes are increased sometime in the future to deal with growing federal deficits , tax-free growth in 529 plans will become even more critical for savers, he said.

And the second reason? President-elect Barak Obama’s recent financial disclosure statements show that the Obamas opened 529 accounts for their 7- and 10-year-old daughters. Hurley calculates are down about 34 percent and 26 percent respectively.

“It's nice to know that our new President has his personal interests aligned with other parents who are concerned about funding their children's future college education.” Hurley writes. “ Let's just hope our economy can recover quickly enough to make our use of 529 plans worthwhile.”

Monday, December 1, 2008

OMG They tax that too!

Heads up if you’ve recently begun collecting unemployment benefits for the first time.

That money is taxable, same as the paycheck you are no longer getting. But Missouri, Kansas and most other states won’t withhold tax money from your unemployment check, the way your former employer did , unless you specifically ask them to. So start planning now, while there is still time in 2008, to arrange any extra tax deductions or other changes you need to avoid a nasty surprise April 15.

“Most people don’t ask for the withholding, because their check isn’t big enough to pay the bills anyway,” said Ken Baylie, co-owner of the Tax Gallery in Kansas City.
You’ve got three ways to head off a filing time jolt, but none of them is perfect.

The simplest is to simply set aside between 15 percent and 20 percent of each check to cover the tax bite in April. Stashing the money in a money market account or some other short term account that pays interest may even earn you a few extra dollars. But stashing the money is not an option if you need it for rent, house payments or food.

Or you can ask the state to withhold the money for you. The fastest way to find out how is to follow a U.S. Labor Department link to the state issuing your check and then use the state instruction and forms to make the change. The problem here is that states withhold only the 10 percent of each check that covers your federal taxes, but not additional state taxes you may owe.

Your third choice, especially if you think you may be unemployed for some time, is to consider paying quarterly estimated taxes on your unemployment benefits. Those are due each January 15, April 15, July 15 and October 15. This Bankrate.com link or your regular tax professional can walk you through the extra paper work. Filing taxes four times a year instead of once isn’t fun, but this may be the most effective way to go, especially if you think you may collect unemployment for a full 26 weeks, or longer if you qualify for extended benefits.

Check out IRS's Tax Tips section start tracking down details as far as you want to go.