Archive for the ‘Money/Finance Talk’ Category

Wages grow at fastest in 3 years

WASHINGTON — American workers are beginning to
see long-awaited wage gains, though increases remain well below the
levels prior to the 2001 recession.

Average hourly wages for non-supervisory
workers, about 80% of the labor force, have been lagging behind
inflation during much of the recovery. Wage growth is starting to pick
up, with hourly earnings rising 5 cents in December to $16.34,
seasonally adjusted, the Labor Department said Friday.

Hourly wages rose 3.1% in the 12 months ended in
December, the fastest pace since spring 2003. While improving, wage
growth appears to remain below consumer inflation, which advanced 3.5%
in the 12 months ended in November.

The 3.1% gain in hourly wages compares with a
2.6% rise in the year ended in December 2004 and 1.7% in 2003. Still,
wage growth is lower than some economists expect in an economy with a
4.9% jobless rate.

"When you’re looking at wages, it’s clear that
they are moving upward. It may be from a low base, but the trend is
clearly up," says John Silvia of Wachovia.

Silvia emphasizes that broader measures of
compensation, including health care and other benefits, which have been
generally rising faster than wages, paint a better picture of employee
gains and business expenses.

Ken Mayland of ClearView Economics points out
that most of the job gains in December have occurred in industries with
above-average wages, such as manufacturing, mining and information
services. That’s part of a longer trend.

But Maury Harris of UBS argues that some of the
gains in high-wage jobs since August are a result of activities related
to reconstruction from Hurricane Katrina. The effect could fade this
year as the housing market and construction employment slow. Harris
predicts that energy-induced inflation increases have also peaked,
which could lead to better purchasing power for consumers.

The pace of wage gains has implications not just
for workers, but the broader economy. The Federal Reserve closely
monitors labor costs, a big driver of inflation.

Silvia says that while wage gains have been
somewhat muted, the movement is in a direction that could cause some
concern at the central bank.

The Fed doesn’t have a formal inflation target
but has been trying to hold core inflation, which doesn’t include food
and energy to about 1% to 2% a year. "If the Fed is truly serious about
a 2% inflation target … you don’t have a lot of room to play with,"
he says.

Mayland says the wage gain "is not a worrisome situation for the inflation situation."


Once More, With Feeling: Who Needs Insurance?

By Michelle Singletary
Thursday, October 13, 2005; D02

a doubt, life insurance should be an important part of many people’s
financial plan. Having said that, don’t be scared into buying insurance
you don’t need.

I wrote a column recently about who needs
life insurance. I said you don’t need to get insurance for a child. I
said if you’re single and you don’t have anybody depending on you for
support, you don’t need life insurance. I said that if you’re nearing
retirement or are retired and have adequate savings and retirement
investments to take care of a surviving spouse, you don’t need life

Well, letters from disagreeing insurance agents and
others filled my e-mail inbox faster than a river rising during a major

Here’s a sampling:

· "I see time and again
that life insurance is not suggested for children since no one relies
on their income. I find this advice a little shocking and short-sighted
since a child’s funeral is not free."

· "A minor child may develop physical ailments in his teens or early adulthood that could render him uninsurable."

· "Young and single people die and leave debt."

"Older people, who need their money to live on, can use life insurance
to help their grandkids compete in this unbalanced society."

· "The value of life insurance on senior citizens and empty nesters is to cover the cost of taxation on their estates."

I may, let me add a reality check to such emotionally charged sales
pitches from, I hope, well-meaning folks who are trying to make a
living selling a product most people don’t want to buy.

Yes, it’s
true that the average funeral costs about $6,500 not including the
burial plot, according to the National Funeral Directors Association.
Adding in burial expenses, a funeral can cost about $10,000.

sure, if you don’t have any savings to speak of and you worry about
paying for a funeral, then it may be prudent to get a small life
insurance policy on your child. However, according to government
statistics, the likelihood that your child will die prematurely is low.
The likelihood that your child will develop an illness that will
prevent him or her from getting life insurance as an adult is also low.

fact, based on the 2001 CSO Mortality Table (the mortality table most
recently adopted by the National Association of Insurance
Commissioners), an average of one child per 3,000 dies each year,
reports the American Council of Life Insurers. In 2003, about 83
percent of children were reported by their parents to be in very good
or excellent health, according to the latest figures from And in a 2003 survey of life insurance companies, the
ACLI found that approximately 98 percent of people who apply for
insurance are offered coverage.

As with most things in life,
there are exceptions. Children do die. They do get sick. So if your
family has a history of medical problems, if your child isn’t being
raised in a healthy environment, then it may be wise to buy a policy
while he or she is young and insurable.

Here’s the answer to an
industry line pitched to singles that just isn’t true: Your debts are
not inherited by family members. Unless someone co-signed on your loans
or signed paperwork to pay your bills if you couldn’t, a creditor
cannot legally make your parents, siblings or any other family members
pay your debts after you die. If you want to buy insurance to pay off
your debts, fine. But don’t do it because you’ve been told your debts
will be a burden to your loved ones.

If you’re single and you
think you’re going to die leaving your family without the means to bury
you, then okay, maybe you should get a small term life insurance policy
to cover funeral expenses.

As for seniors, the basic advice for
who needs life insurance applies. If you have a spouse or relative who
needs your income to survive after your death, get insurance. But if
that profile doesn’t fit you, if you’re retired with a limited income,
don’t buy an insurance policy if you could use that money for something
else. Yes, it would be nice to leave a financial legacy, but that’s
something you do when you’ve got spare cash.

What about the argument that people need insurance so that their heirs can pay estate taxes?

than one out of every 100 people who die owes any estate tax, according
to the Center on Budget and Policy Priorities. The first $1.5 million
of the value of any estate is exempt from taxation. In 2009 that
exemption is slated to rise to $3.5 million. At that level, only 3 of
every 1,000 people who die will have an estate large enough to owe any

Have you noticed I keep using the word "need" when it comes
to purchasing insurance? That’s because insurance is a game of chance.
With life insurance, companies take a chance that you or whoever is
covered won’t die prematurely. Many people wisely purchase insurance in
case that bet is wrong. However, you win at this game if you buy only
what you need based on a realistic examination of the facts, not on

Home Buying Help
3 tips for getting the best deal on a mortgage

It’s that time of year again. Along with warm

temperatures and watermelon, summer ushers in home buying season across the country. The following tips can help you save on your mortgage, whether you are planning on buying in the next few months or the next few years.

Tip 1: Improve your credit score

Mortgage lenders usually look for borrowers with a credit score above 650 in order to grant standard interest rates. Is your credit not quite making the grade?

It’s possible to improve your credit score quickly in certain situations. But be careful; some things that you think might help your credit could actually lower your score. Stick to a few key moves for giving your score a pre-mortgage boost:

  • Remove negative inaccuracies such as expired collection accounts, incorrect late payments and fraudulent public records from your credit report
  • Avoid drastic changes to your credit report, such as opening or closing accounts
  • Pay all your bills on time for at least 12 months before a loan application
  • Avoid applications for new credit
  • Reduce your credit card balances to below 35% of your credit limits

Tip 2: Reduce your debts
A lender will calculate your debt-to-income ratio (DTI) to see how much you could afford to pay back each month. You can calculate your DTI ratio by adding together your current monthly debt and credit card minimum payments with your estimated future loan payment, property tax and insurance costs. Divide this amount by your monthly income to see where you stand.

Many lenders use a 28/36 standard, meaning that no more than 28% of your income should go toward housing expenses and no more than 36% of your income should go toward your housing and other debts combined. If your debt to income ratio is too high, you can consider the following:

  • Pay off small loans before buying a home
  • Consolidate your student loans
  • Increase your income by cosigning
  • Find a less expensive home to purchase

Tip 3: Save for a down payment
Mortgage lenders will also calculate your loan-to-value ratio (LTV) to see how expensive a home you can afford. This is calculated by dividing the estimated loan amount by the property’s value. Lenders look for a LTV ratio below 80%. A low LTV ratio will help you get a good interest rate on a home. A high LTV ratio may require you to purchase mortgage insurance. If your LTV is too high, you may want to:

  • Increase your down payment
  • Negotiate a reduced price with the seller
  • Select a less expensive home to purchase
Improving your finances before you start to shop can help you save thousands on your mortgage.

May 2005
Fidelity Investments

Suze Orman:

What to Do If

You’re Young,

Fabulous, &


By Len Abram

Are you young, fabulous, and broke? According

to personal finance expert Suze Orman, if you’re

in your 20s or 30s with a student loans and

credit-card debt, you just might be. And she understands.

She was a college-educated $5,000-a-year

waitress before becoming an Emmy-winning

TV commentator and author of four bestsellers.

Here are tips from her latest title, The Money

Book for the Young, Fabulous & Broke.

Q: When you graduated college, you had your

own problems with debt and finances. Is the young,

fabulous, and broke, or as you say, YF&B,

generation, similar to Suze Orman of an earlier time?

Orman: Today’s young people have it tougher.

I get e-mails everyday from their parents, saying,

‘Suze, my kids watch your show. They will not

listen to us. Tell them how we had to plan and

sacrifice to get ahead at their age, just like you.

They can do it, too.’ Yes, they can. However,

times have changed, and what worked for

their parents may not work for them. That’s

why I wrote The Money Book for the Young,

Fabulous & Broke.

I graduated with credit-card debt, a low-paying

job, and a modest place to live. But, unlike

many YF&Bers, I never had crushing student

loan debt, sometimes $80,000 or more.

(I bought my first home for less.) Health care

and energy costs are several hundred percent

higher than when I graduated, and very few

jobs were being outsourced overseas.

Entry-level jobs don’t pay much more

than when I finished school.

Add to these, the threat of terrorism,

problems with Social Security and pension funding,

and you realize that this generation is

facing challenges unlike those of their parents.   

Q: Your main message is about

managing debt. What is FICO? How does it

determine our financial plans and dreams?

Orman: Your FICO score — and every one of

us has one — is the most important three-

digit number in your life. It’s a numeric score —

between 300 and 850, with 850 being the best —

that summarizes the information on your

credit report. Lenders look at the rating

to get a quick sense of how creditworthy

you are. It determines the interest rates you

will pay on car loans, credit cards, and

mortgages. FICO, named after the Fair Isaac

Company, also has a derivative known as an

insurance score, which establishes what you pay for premiums.

Do you know that many landlords check your

FICO score before renting an apartment?

And that employers are starting to check

your FICO score before they hire you?

By the way, when you get married,

your mortgage interest rate will be

based on the person with the lower FICO score.

If you don’t have a FICO score in the highest

range of 760 to 850 you are committing financial

suicide — especially in today’s real estate market.

Your monthly payment on a 30-year mortgage

for $300,000 will cost $700 more per month

if you have a FICO score in the low 500 range,

versus 760 or above. 

Q: How can a young person in debt get

control over his or her financial life and

improve their FICO score? How frugally

do YF&Bers have to live?

Orman: I don’t like the term the ‘latte factor,’

a concept that I actually introduced about

ten years ago. Rather than buying one latte

a day for $4 a day, you invest that money

instead and over 40 years could have a

million dollars. What is realistic is to offer the

tools to make more out of less, to make

money go further. If YF&Bers are late one day

in paying a credit card, that impacts their

FICO score meaning they may end up

paying 18%-23% interest, with no reduction

because their FICO score is so low. They can’t

even qualify for a 0% interest rate on a

credit-card promotion so they can

transfer their 18% balance.

Q: You suggest easier ways of saving money.

You call it ‘digging for dollars.’ 

Orman: Digging for dollars means how you

make more out of less money. Thousands

of interviews with YF&Bers taught me

that they are wasting money that would

be better put into reducing debt.

For instance, most of these kids are

getting a tax refund. Because they feel

incompetent about saving money, they’d much

rather have their employers save it for

them. The majority get a yearly tax refund of

around $3,000. At the same time, they have

$3,000 to $8,000 of credit card debt,

a low FICO score, and, therefore, an interest rate of 18%.

How much interest are they making

on their tax refund? None. If they increase

their exemptions to get more money

back every month — if they could get an

extra $250 — they might pay off their credit

cards and be out of debt in a year.

Q: You make a point that in marriage

‘I do’ often means ‘we pay.’ Does a

young couple require financial,

along with emotional, compatibility,

for a marriage to last? 

Orman: Absolutely. Closer to 40% of

marriages end up in divorce. The number-one

reason for divorce is arguments over money.

So while it’s wonderful to have romance and

intimacy with your potential lifelong partner,

the truth is that marriage is a financial and

legal obligation you take on, whether the

marriage works or not.

Will you split the house expenses 50/50,

even if one partner makes more? How much

debt does your partner have? How will you

handle supporting children from previous

marriages — or children from this marriage?

These are important questions that need

answers before the couple says ‘I do.’

It’s the difference between ‘Til death do you

part’ and ‘Til debt do you part.’ 

Q: What kind of mutual fund or asset

allocation do you suggest for a young person,

perhaps in his or her mid-twenties,

for a comfortable retirement? 

Orman: I advocate exchange-traded funds (ETFs).

In my book, I actually give an asset

allocation model — but only after debt is

reduced or paid off — and foreign markets

should be as much as 20% of your portfolio.

Q: You also favor Roth IRAs for young investors.

Orman: After matching whatever an employer

contributes to a 401(k), the YF&Ber (assuming

they have no high interest debt) should

start a Roth IRA. Once they’ve reached

the company’s maximum match,

usually 6% of base pay, then anything after

that should go into a Roth IRA. The money is

after tax, but withdrawals are tax free,

unlike those of a 401(k), which are taxed at

your income tax rate when the money is

withdrawn. Of course, you must meet the

eligibility requirements of a Roth IRA. Also,

early withdrawals of earnings may be subject

to taxes and penalties.

Q: You imply problems with money

are not always about money, but about

self-esteem. You tell your readers and

viewers that they should feel good about

themselves. How can this help them out of debt?

Orman: Why do you get into debt to begin

with? You usually spend more when you feel

bad or want to impress others, which is another

way of feeling good about yourself. People

spend money that they don’t have to

impress people that they don’t even

know or like. They think that the things

around them will define who they are.

Buying things you don’t need or cannot

afford puts you into debt. Eventually

that makes you feel even worse.

Q: So what moral compass does a YF&Ber use?

Orman: You can’t define yourself by your

things any more than by your job title and

money. I always say, ‘People first, then

money, then things. People first means you —

when you understand who you are —

you then understand what you really need,

not think that you need. When you only spend

money on needs, you tend not to get into debt. 

Q: You differentiate between good and bad debt:

How does a young person know one from the other?

Orman: Frankly, one of my other books

popularized the idea of good and bad debt,

that good debt is student loan debt or

mortgage debt, while bad debt is nearly

all credit card debt. Those terms are now

obsolete. Mortgage debt, especially when

it’s an interest-only loan, can be very bad debt.

Credit card debt at a 0% interest rate can be

very good debt. It’s the use that counts,

its purpose. Borrowing to lease a car is

bad debt; financing a used car — and keeping

it five years after paying it off — is very good debt.

Q: What’s the number-one positive reason

for going into debt?

Orman: Number one, even before a retirement

plan, is to save for a down payment and finance

a home. A home will provide not only a place

to live, but also great tax write-offs. Mortgage

interest is tax deductible, as well as property

tax. Live in the home two years and the first

$250,000 from the sale of a primary residency

is tax-free; $500,000 if you own it with someone else.

Q: From modest beginnings, you overcame

debt and adversity and reached great success.

What kind of a future does the YF&Ber face?

Orman: With effort and grace, I think anything

and everything is possible. I understand that

what’s happened to my life is quite extraordinary.

You may not go from waitress to best-selling

author. You can, however, have a home of

your own. You can have a comfortable

retirement. You won’t wake up at three

in the morning, wondering how to pay

your bills. You’ll always be fabulous, but

you do not have to be broke.

© Copyright 2005 FMR Corp.
All rights reserved.
Terms Of Use
Fidelity Investments

How to Dig Out of Debt

By Neil Rhein

Would you pay $1,500 for a high-definition TV that’s on sale for $1,000? That’s exactly what you may be doing when you charge purchases with a credit card and take months or even years to pay off your balance in full.

While borrowing money to pay for your college education or a home usually pays off in the form of a higher income or a valuable real estate asset, credit card debt rarely pays such dividends. In fact, for some consumers the temptation to buy whatever they want whenever they want can lead to financial disaster. Here are some pointers on managing your credit card debt.

The average card balance rose 14.5% last year to $2,627, according to And Americans are now carrying more credit cards than ever, with an average of 2.9 credit cards per consumer.

"When people are pulling out the plastic to make everyday purchases such as hamburgers and groceries, it’s no surprise that the average amount of debt has gone up," says Jim Tehan, a spokesperson for

Over the past few years, millions of Americans have refinanced their mortgages, often repeatedly, to take advantage of falling interest rates and to lower their monthly mortgage payments. Yet at the same time, millions are still carrying credit card balances with annual percentage rates (APR) of 18% and higher.

When you don’t pay off your credit card balances in full at the end of each month, you’re robbing your ability to save and invest for your future. In a recent report on the credit card industry for PBS, Elizabeth Warren, the Leo Gotlieb Professor of Law at Harvard Law School, argued that credit card debt makes it difficult for anyone to build a solid financial foundation.

"When someone is carrying credit card debt, it means they are falling behind instead of getting ahead," says Warren. "When people ask how much credit card debt is OK, it’s a little like asking how much dynamite can you keep in the basement. You probably could keep some and get along OK. But the smartest move is not to keep any."

Warning Signs
There is a severe lack of understanding about debt and personal finances today, according to New York Law School Professor Karen Gross, who also serves as president of the Coalition for Consumer Bankruptcy Debtor Education. "We have equal opportunity ignorance — it cuts across all levels of society," she says.

For a quick assessment of your situation, ask yourself these questions:

  • Am I making only the minimum payments on my credit cards?
  • Do I live from paycheck to paycheck with no savings?
  • Do I sometimes skip payments on one credit card in order to pay off others?
  • Have I reached the credit limit on one or more credit cards?

If you answered yes to any of these questions, you may need to take action to get back on track.

Stepping in the Right Direction
"It’s essential to pause, take a deep breath, and look carefully at possible solutions," explains Gross. "The last thing you want to do is to try to relieve your financial headache with a solution that will be worse than the hangover itself." Like a New Year’s diet resolution, quick fixes rarely work. What does work, according to Gross, is a simple four-step formula for financial H.E.L.P.:

  • Hold your horses, stay calm, and don’t rush into any impulsive arrangements. "Don’t panic," advises Gross.
  • Examine your situation. While your debt problems may be serious and appear urgent, first get an accurate sense of the extent of your problem. "Lots of organizations offer help, but don’t take the first solution that comes along. Take time to assess, compare, and contrast multiple solutions," she says.
  • List your options and the pros and cons of each. For example, while a home equity loan may seem like an appropriate solution, it’s not always the best course of action because it can put your home at risk.
  • Pay at least the minimum amounts due on all of your credit cards. This last step is critical due to a new clause that has worked its way into the fine print of many credit card agreements. It’s called the "universal default" clause and it permits a credit card company to raise your interest rate if you’re late on another company’s credit card or any other outstanding loan. Banks argue that it’s logical to raise rates for a consumer who has shown evidence of becoming a higher risk.

Don’t Make Matters Worse
Virtually every American with a functioning mailbox has received an offer to consolidate his or her debt onto a new credit card with a low introductory interest rate. While switching to a card with a lower interest rate makes sense in many cases, consolidating your loans onto a single card can adversely affect your credit score.

Credit service agencies such as Experian and Transamerica use your credit score to assess the risk of loaning you money. The lower your score, the higher your interest rate. One factor that they consider is your credit utilization rate. According to Gross, you should avoid using more than 30% of the available credit line on a single card, because doing so can lower your credit score. When you consolidate all your debts onto a single card, it’s likely that you’ll exceed a 30% utilization rate.

As a last resort, some consumers turn to one of the many organizations offering help to the overextended. But be careful who you look to for help, warns Gross. "Different debt relief options have varying degrees of legitimacy," she says. "Learn the differences between these approaches and whether the people helping you are reputable."

Many credit-counseling organizations are organized as nonprofits, which helps create an image of altruism and benevolence. In practice, however, many of these firms pay their principal officers hefty salaries, and some do more harm than good. According to the Better Business Bureau, complaints against credit-counseling agencies have risen 467% over the past four years.1 "If they promise you the moon, they probably can’t deliver," says Gross.

Action Step: Visit the National Foundation for Credit Counseling to investigate credit-counseling agencies.

One common arrangement that some firms offer is a debt management plan (DMP). These plans allow the credit-counseling agency to intervene with creditors on your behalf. You send a single payment each month to the credit agency; it negotiates with and pays off your creditors, and attempts to obtain lower interest rates on your credit lines and eliminate late fees.

Most DMPs charge a setup fee and a monthly fee in exchange for these services. If you decide to enroll in one of these plans, be sure to ask for a detailed breakout of the fees and confirmation that the firm is licensed to operate in your state. You may also want to confirm that it is a member of the National Foundation for Credit Counseling and see if it is accredited by the Council on Accreditation for Children and Family Services (COA), an international, not-for-profit, independent accrediting body.

Some credit-counseling agencies may also ask for a lien on your house as a condition of the DMP. But it’s a risky proposition. "While turning to home equity can provide temporary relief, eventually the equity will dry up and the debts will need to be paid off. If you find yourself charging everyday purchases and relying on debt to make ends meet, act quickly before the situation gets out of control," says’s Tehan. Most lenders are willing to work out a payment plan, so using your home as collateral should only be a last resort.

1 Source: CBS MarketWatch, Feb. 1, 2005, Discrediting Credit Counseling

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