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Happy New Year

01/01/09 by Chris Farrell

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Seeking yield offshore

Question: Millenium Bank, an offshore institution, is offering CD's at 5%. Is IFSA coverage comparable with FDIC? John, Los Gatos, CA

Answer: We've been getting more questions about Caribbean-based Millennium Bank and its ilk. The bank offers high interest rates on its certificates of deposit. For instance, it advertises a 6% interest rate for a 1 year CD with a $25,000 investment. Savers are hungry for yield in today's low interest rate environment. But there's nothing wrong with a low yield if your money is safe.

To be absolutely clear, I would not put any money into any offshore bank. Period.

I would not put any money into a bank that is not insured by the Federal Deposit Insurance Corporation (or its credit union equivalent.) Period.

The Millennium Bank is both offshore and its not insured by the FDIC. It's located in the tiny Caribbean country of St. Vincent and the Grenadines (SVG), with a population of 118,432 (July 2008 estimate), according to the CIA World Factbook. To be sure, the government has brought international regulatory standards to its small offshore finance sector, but the International Financial Services Authority (IFSA) isn't an FDIC or anything like it.

The bottom line: Caveat Emptor. Stick with the FDIC label.

01/05/09 by Chris Farrell

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Online savings

Question: I recently received a $25 check from ING DIRECT which I can deposit with them if I open an account in the "Orange Savings account." They claim to be members of the FDIC and they pay an interest rate of 2.75%. Re: deposits and withdrawals they say "you can move money automatically from your Orange Savings Account to your linked checking account and back." I'm nervous about doing this if this is not a legitimate company. I am 78 years old and cannot afford to make unwise financial decisions. Thanks for your help. Lois, Benzonia, MI

Answer: You're right to be cautious. Everybody should be with all the scams making the rounds.

But ING Direct is a legitimate company. (As I am writing this, the yield on the Orange Savings Account is down to 2.50% reflecting the overall decline in rates.) It's an FDIC insured online bank. ING and other online banks often offer slightly higher interest rates than their brick-and-mortar banking peers because they have less overhead. It's also a competitive strategy when many people are reluctant to do all their banking online. ING Direct is a subsidiary of ING, the Dutch multinational behemoth that is the world's 9th largest financial institution. You can learn more about the U.S. branch and its offering at its website, home.ingdirect.com.

You want to stay safe with your money, and take full advantage of the FDIC backing. . By the way, in today's low yield environment you can compare rates on other FDIC insured certificates of deposit and savings accounts (and the credit union equivalent) at a number of different places, such as www.bankrate.com.

01/06/09 by Chris Farrell

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When to pay off mortgage

Question: Given today's low returns on money market accounts and CDs, is now a good time to pay off one's mortgage? I am about 1/2 way through my 15-year, 4.875%, fixed-rate mortgage and plan to keep the house. The mortgage balance is $110,000. I have been "maxing out" my 401K for the last 18 years and am fortunate enough to work for a company that will provide a defined benefit pension. I have low expenses, no debt other than this mortgage and an income that allows me to save several thousand after-tax dollars each month. I have $250,000, after tax, in a money market account -- more than enough for emergencies.

I am thinking of using $110,000 of my after-tax cash to pay off my mortgage. Given the low returns on money market accounts and CDs, the argument for using extra cash to pay off debt, including mortgage debt, seems to warrant greater merit, right? Thank you very much, Carl (Currently working in Singapore), Alameda, CA

Answer: We've been getting a lot of questions about paying off the mortgage early and, while it isn't a financial mistake, I'm usually wary of the strategy. You'll see why in several previous postings. But I'm including your question as an example of when the strategy just might work.

You have a good-sized emergency fund, and after-tax savings. You're fully funding your retirement savings plan. You have a company pension to boot.You have no debt other than the mortgage. You are well-diversified with a great balance sheet. Wow.

I think there are only two issues to consider. First, are you going to stay in the home? Is this where you plan on living? It sounds like it, but if you were going to move shortly or desired a different house I'd probably just stick to the current mortgage payment schedule. Second, could you do better than 4.8% investing in the money in the market rather than paying off the mortgage? Of course, you don't know, but you might be able to. Still, in light of all the uncertainty in the economy and financial markets a 4.8% return on investment by getting rid of the mortgage and being debt-free seems really good to me.

01/07/09 by Chris Farrell

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Break the 401(k) piggy bank

Question: With the incredible deals in Michigan Real Estate and the loss that I've already taken in my 401K, what do you think about buying our dream home with the money left in our 401K? Patrick, Livonia, MI

Answer: Forecasting is a hazardous business. But for now it seems that the beleaguered Michigan economy will stay under downward economic pressure.

I think you're right that it's becoming increasingly affordable for many people to own their "dream home" with the sharp decline in home prices and the fall in mortgage interest rates. But I don't like the idea of raiding your 401(k) to buy that home.

You're far from alone with "paper losses" in your retirement savings account. Nevertheless, the money in this account is a pool of savings that will gain in value over the years. It's also a smart way to diversify savings outside the Michigan economy where you live and work. If you take the money out you will both lock in your losses and pay income taxes on the withdrawal and a 10% penalty. Taken altogether, it's a bad financial deal.

I want you to own your dream house. I don't see any reason to rush, however. The economy isn't going to turn around anytime soon, and even if you miss the bottom in home prices it's a good bet that prices will stay low for several years--at least. More important, one of the lessons of the past several years is to make sure you stay financially conservative when buying and owning a house. Another lesson is that a home is a long-term investment.

That's why I would start shopping for your dream house. Run the numbers, and figure out what you can afford while leaving the retirement savings plan alone (and continuing to save for retirement.). Add to and build up your savings so you can put down a good-sized down-payment. Make sure your credit score is high so you qualify for the best mortgage interest rate. You'll get that home, but with a healthier balance sheet than if you close out the 401(k). .

01/08/09 by Chris Farrell

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Convert an IRA?

Question: I am considering converting a Traditional IRA to a Roth IRA. My reasoning for this is: 1.The markets are depressed right now. If I convert now, the tax hit on conversion will be smaller, since my IRA has lost 25% of it's value. I have money outside the IRA which I will use to pay the taxes. Furthermore, I am expecting the market to rebound long term, and when it does, I will eventually get to withdraw the appreciation tax free.

2. I am self-employed, and so my income varies. This year my income is low, so I am in a low tax bracket, so I feel it would be advantage to convert at this time.

Is there any reason to not do this? Any other information I should be aware of?

At one point, McCain was talking about allowing people to withdraw from Traditional IRA's tax free. This would annul the main benefit of a Roth IRA. Do you think this could actually happen? Andy, San Francisco, CA

Answer: For many people, converting a traditional IRA into a Roth-IRA is a smart way to take advantage of the bear market. The gain is that the upfront tax hit on conversion is relatively small and should be dwarfed by the benefit of tax free withdrawals in retirement. Remember, a traditional IRA is funded with pre-tax dollars; you pay your federal income tax rate on withdrawals during retirement. The Roth is funded with after-tax dollars, but when you take the money out you don't owe Uncle Sam anything.

I think you've thought this through well. You're right, you will have to pay taxes on the conversion, but the tax hit will be minimal with the sharp drop in market values and your low income. The finances of a conversion get better if you have savings to tap outside the IRA money to pay the tax bill.

Your modified gross income has to be less than $100,000 to make the conversion, but that doesn't seem a problem in your case. (That rule will be scrapped starting in the 2010 tax year.) And added benefit of the conversion is that unlike the traditional IRA there is no mandatory withdrawal schedule beginning at age 70 ½ with the Roth.

Speaking of withdrawals, the two main law changes that I am aware of involving IRAs is first, allowing retirees to skip their mandatory withdrawals in 2009 and, second, extending the rule allowing each spouse to make a charitable distribution from his or her IRA account of up to $100,000.

To be sure, there are many tax cut proposals floating around fiscal-stimulus Washington at the moment. But it seems unlikely that Congress would let people withdraw money from Ira's tax free--at least not for any lengthy period of time.

01/09/09 by Chris Farrell

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More cell phone thoughts...

This weekend I answered a question from Nicolas in the Bronx, New York. He wrote: "I am done with Sprint!:" The gist of his question was wanted s to cancel his contract and pay their $200 early termination fee to be rid of them. He wondered if this would affect his credit score. Was it worth sticking with an unsatisfactory contract for another 2 years to prevent any penalty?

I said, no. If he paid the $200 early termination fee there would be no nick on his credit report or credit score. He lived up to the terms of the contract.

I'm at work today, and an alternative answer from a listener in Nederland, CO came in by email. It relays an intriguing experience, and a different approach. I thought I'd share:

An alternative answer to a broadcast question I heard on KCNC, Sat. 1/10/09, 12;30pm concerning Sprint cellular.

Someone asked you your thoughts regarding Sprint. They were fed up with the service, wanted to drop the contract, pay the $200.00 early termination fee, and were worried about their credit score. I agreed with your advice, but I have some other info that might be helpful.

I don't know how similar their situation is was to mine, but the first thing that almost anyone can do these days (I've heard this advertised by several cell companies, its probably available by all of them) is : they're offering to pay the $200.00 penalty/contract termination fee; if you switch to them. (Just like the regular landlines used to ). The next thing I found out, is, when I wanted to terminate my Sprint contract, it was because I was having all kinds of trouble with the service, fed up, sounds like the person who asked.

When I called Sprint for the umteenth time, technical (after failing to correct problem for 6 months) sent me to sales, sales credited me the 6 months of service I had paid for that didn't work. Upon further problems, talking with technical, I said I was gonna drop their service (as sales had told me I could with out termination fee, and since I was technically in their "roaming area" I had never been bound by contract in first place).

Technical said, "I shouldn't tell you this, but if you you tell sales you're going to drop service, they have authority to offer you all kinds of discounts, and will do whatever they can to make you stay. Just tell them "...all the problems you've had, you want to drop (but wish you didn't have to).. can't afford their monthly fee anymore, etc."

Initially, I had a package that included 200 anytime minutes, free unlimited nights and weekends from 7pm to 7am, free 7pm Friday to 7 am monday, free long distance and free roaming, for 29.99 + tax. (You can't get this package anywhere anymore, I don't think.) My monthly bill was around $34/month. (I don't text or use phone to do any Inet stuff, and I was given a free camera phone when I enrolled. After threatening to cancel & talking with tech (the discounts I was given were ongoing) the same service magically cost $23/month including tax.

Some time, maybe 8 months later, I noticed a few 25 cent roaming calls charged on my bill, and was told roaming was no longer free. Same with free nights & weekends. I never agreed to this plan change, and canceled immediately. (this change would have also negated contract).

Long story short, depending on why your so fed up with them, you may be able to get a refund of many months of bad service (and then in a subsequent call) there may be many ways to get out of contract without paying the $200.00. Talk to technical first (they know nothing about sales amounts) but sales knows nothing about tech (and tech keeps records of all complaints, every time you've called them. Tech told me about asking sales for refunds of bad months, sales told me about canceling w/out fees cause I was in roaming area...even when I was getting free roaming.

The company switch (like to ATT or Verizon...) that offers to buy out your contract, are ads I've seen lately....and there's a zillion services where you don't have to promise or sign any contract anymore. Please pass this along to your frustrated sprint questioner. (As far as credit, I have been unemployed since a disabling medical condition, get a whopping $500.00/month, have collections all over the place, medical billls I can't pay,(and I don't get any additional aid because my husband nets around 24K a year.) And I still get 0% credit cards offers in the mail. Go figure? (Please withhold my name and number)

01/10/09 by Chris Farrell

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Its not fair, right?

Question: Fortunately, our personal and self-employed business credit rating is very good, no late payments, etc. It would almost seem that with all the proposed "bailouts", people are being rewarded for mis-managing their finances and credit. What about us? What do we get for being financially responsible? What's in it for me? Bob, Deltona, FL

Answer: Congratulations on managing your money well. You're far from alone in feeling that the bailout isn't fair, that it isn't right that folks who didn't get caught up in the real estate frenzy and borrowing boom of the 2000s are now paying for the financial mistakes of those that did. Like you, they were prudent with their money. Now they're on the hook for bailing out Wall Street, bankers, and irresponsible borrowers. That's not fair, is it?

No, it isn't.

That said, none of this means the current bailout is a mistake. Would it be fair to put the economy into a deep recession or depression? I don't think so.

Here's the rub. If the monetary and fiscal authorities are right in their judgment that the risk of an economic plunge of frightening proportions is real--and I think they are--then the Herculean actions they're taking are fair to all of us. And it's striking how a majority of economists looking at what is going on in the financial markets, watching the ongoing national plunge in housing prices and accelerating unemployment take the risk of a depression seriously.

For instance, at the recent American Economics Association annual meeting there was a general agreement that the economy needed massive fiscal stimulus. As Michael Mandel, chief economist at Business Week reported from the convention, the highly respected Harvard University economist Kenneth Rogoff set the tome for the three day meeting: "His message was a gloomy one. We've got a lot further down to go," says Mandel. "He compared the U.S. crisis to other big financial cataclysms, among them the Nordic banking crises of the early 1990s and the Asian crisis of 1997-98, and suggested we are following much the same path. In each of these, the devastation was enormous, with home prices, adjusted for inflation, dropping by an average of 35% over the stretch of the downturn, and the unemployment rate rising by an average of 7 percentage points over the period."

The good news for you is that there is potentially a huge reward for your personal fiscal prudence. History shows that for anyone with money, downturns offer lots of opportunities to find terrific bargains. You get to buy good assets at a cheap price. Want to purchase a home at a substantial discount? You can. Good companies are selling at a discount in the market, too. I'd keep my eye open for bargains. After all, those that are strapped can't tale advantage of them.

That's fair, no?

01/12/09 by Chris Farrell

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An "enhanced yield"?--not

Question: Hi Chris - My husband was given a brochure regarding something called the Capital Protected Fixed Yield Enhancement. Apparently this type of investment was only available to large institutions in the past, but due to "technological advances" is now available to individual investors. I understand the basic principle but there are a lot of words in the brochure that concern me, like "hedged with offsetting positions", "no risk or market exposure" and "fixed swap rate arbitrage". I have never heard of this type of investment before and am wondering, if it is such a great thing why isn't everyone talking about it, including my financial advisor? What are your thoughts Chris? In what type of scenario might an individual investor consider this type of investment? Thanks, Leslie, North Branch, MN

Answer: I can't imagine any scenario where the average family would consider this kind of investment for their savings. The reason why many financial advisors aren't talking about it is they are wary--with good reason. These are "black box" investments with lots of moving parts that don't pass the "easy to understand" test. What's more, lots of supposedly "safe" hedging strategies involving derivatives have blown up over the past two years. They tend to be high fee products.

Briefly, there are a number of capital-preservation enhanced-yield type products on the market. Typically, it involves investing money in a fixed income security at home or abroad. You get your principal back at the end of the investment from the income generated by that fixed income investment. The interest income allows the financier to take a sliver of your money upfront and place it in a basket of equities, foreign exchange rates, commodities, or some other investment. The game is to goose your yield by using derivatives, such as options, futures, swaps, swaptions and the like to create the opportunity of earning a higher return. Confused? Wary? Good.

I'm concerned about a proliferation of savings vehicles with bells and whistles designed to take advantage of our desire to save and yet earn a better yield than we can in Treasury bills, FDIC insured savings accounts and certificates of deposit, Treasury Inflation Protected Securities, I-bonds, and other investments backed by the full faith and credit of the federal government. Well, I like the government's handshake. I like the simplicity of the investments. The trade-off of a lower return is just fine with me.

The bottom line: Let the institutuions play with investment startegies like this. But for those of us working hard with for our money and trying to save against a rainy day, I'd steer clear of all enhanced- products unless you have a clear understanding of how they work, the risks you're taking, the reason you're taking on that risk, and a good understanding of how it will affect you if the deal goes bad. Think I'm kidding? Just talk to someone who put their savings into supposedly super-safe auction rate preferred several years ago. With the credit crunch, many of those investors still don't have access to their money.

01/13/09 by Chris Farrell

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Savings vs debt repayment

Question: So my wife just graduated with a masters and started working, and i just got a 25,000 promotion. Combined we are making about 3-4 times as much as we were last year. Our expenses have grown cause we were living in upstate NY, but now live in the bay area. But my question is should we try and pay off some of the college loans sooner, or should we try and save all the excess money for a down payment for a house? In reality it could take us a few years to save the 20% we would need for a down payment because of the outrageous cost of housing here. howard, los gatos, CA

Answer: You aren't kidding when you say home prices in the Bay Area are outrageous. Home values are down sharply, but the median home price is still about $350,000. That means if you bought the median home you'd have to save $70,000 for a 20% down payment. (And really you'd need more than that considering closing costs, moving costs, and the annual costs of homeownership. You don't want to be house poor.)

It's wonderful you have the money and discipline to save. How about this for an approach? First, let's put the bulk of the extra money toward savings. The money may go toward a home in the future. But the savings will work double duty in the meantime. The amount of money available will grow in case of a financial setback, such as a layoff. Plus, an emergency savings fund is also an "opportunity fund." Savers eventually get to take advantage of good bargains during downturns. You build a strong financial safety net, have money to take advantage of deals and, create a nest egg for a home.

Second, I would then take some of the extra cash and accelerate your student loan payments.

The thought is not to treat this as an "either/or" question, something all too common in the world of personal finance. Instead, play with the percentages and decide how to divide the money pie. Because of the recession, I would lean toward putting more of the money into safe savings and only slightly accelerate the student loan payments. But you and your wife may be more comfortable dividing the money in half--half into savings and half into extra student loan payments. Or the two of you may decide to put the bulk of the savings toward student loans because you can't stand living with a loan. There is no right or wrong course. You're saving--and that is what's critical in good times and bad.

01/14/09 by Chris Farrell

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Gold and catastrophe

Question: My husband is a huge conspiracy theory fanatic. He is certain that the new presidential administration will enact martial law and believes that our financial markets will crash and the dollar will be worth nothing. He wants to put his IRA into a gold ira where there is the actual metal in it. He is certain this will keep our money safe and if gold goes up more we'll make some money. I am very scared to do this. I am torn because I work for an investment advisor and a firm that believes that the market will turn around and to keep our current conservative mutual funds. Can you give us some detailed advice on if it is a wise move to sell our mutual funds and move this money into gold? We have already lost about how much the market is down. What gold investment company might be safe to look at? I hope you can help me. I don't know where to turn. Thanks. Marita, spring hill, KS

Answer: We are living in an era when many "once-unthinkables" have actually happened. The end of the Wall Street investment bank. The U.S. government buying investment stakes in banks. The taxpayer bailout of GM and Chrysler. And that's just a partial list.

The risk that the current recession turns into a depression is real. That's why the Federal Reserve is taking extraordinary actions to shore up the financial system and the new Administration is planning a more than $800 billion stimulus package to resuscitate the economy. I think the government actions will prevent a depression. My best bet is that all this activity will stave off collapse, and that the economy will revive.

I don't know if your husband likes to read, but An Empire of Wealth by historian John Steele Gordon is a well told tale about the hair-raising economic and political crisis the nation has faced before--and how we weathered those trials.

It's no surprise, but I'd stick a well diversified portfolio. Here's one approach: If your husband wants to go more into gold maybe you should keep your retirement funds in stocks, bonds, and similar investments. That way, as a family you will own a very "European" portfolio with gold as a hedge against bad times, yet still exposed to stocks and bonds for good times.

As for owning gold, the most efficient way to do it through an exchange traded fund or a mutual fund. There are a number of well known gold and precious metal ETFs and mutual funds. If he wants to own the gold itself, he'll pay commissions, a premium for the gold, storage fees, insurance and the like. There are many scamsters in the gold market, so if he buys bullion or coins I'd research the dealers very carefully. By the way, the U.S. mint has a list of authorized dealers for its gold coin, the American Eagle.

01/15/09 by Chris Farrell

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Leverage up?

Question: I can tap my home equity line of credit at an interest rate of 4%. I'm thinking about using my HELOC to fund an investment in a no-load tax-free bond fund earning a dividend of 5%. The dividend income would be tax-free, and the interest expense would be tax-deductible. What are the downsides or risks to this idea? Andy, Ankeny, IA

Answer: I am consistently against individual investors borrowing to invest. Borrowing against your home to invest in the financial markets is a bad speculation. Remember, market returns aren't guaranteed. But you will have to meet those interest payments on your loan no matter what.

We've gotten variations of this question over the years. Several years ago, a typical question involved taking out home equity and invest in stocks. After all, stocks have an average annual long-term return of 10% or so. Problem is, on average Lake Eerie never freezes and the stock market doesn't plummet by more than 40%--as it did last year. The numbers always appear to work on paper, but the investment history says leveraging up (the jargon term for borrowing) is a recipe for financial trouble.

To be sure, muni yields are intriguing. Since Uncle Sam doesn't impose a levy on muni bond interest payments. Tax exempt securities typically yield between 75% and 90% of their taxable Treasury equivalent. Yet muni's now yield more--considerably more. For instance, the yield on a 30-year general obligation (GO) single-A+ rated muni bond is around 5.5%. (General obligation bonds or GOs are considered especially safe since they're backed by the state's taxing power.) For an investor in the 35% federal tax bracket that's the equivalent of an 8.46% yield--instead of the less than 3% taxable yield on the 30 year Treasury bond.

The catch: The worst financial crisis since the Great Depression is fanning fears of widespread municipal bond defaults. Credit risk is an anathema to investors.

You want to put some risk money into a muni mutual fund? That's fine, but tap into savings. Don't double down on your bet.

01/16/09 by Chris Farrell

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Martin Luther King, Jr.

A day off for the holiday.

There is so much to learn from King. In one of his last sermons, a month before he was assassinated, he gave a talk called "Unfulfilled Dreams." In it, he reminded people that we start out building temples, "temples of character, temples of justice, temples of peace," he said.

And so often we don't finish them. Because life is like Schubert's "Unfinished Symphony." At so many points we start, we try, we set out to build our various temples. And I guess one of the great agonies of life is that we are constantly trying to finish that which is unfinishable. We are commanded to do that. And so we, like David, find ourselves in so many instances having to face the fact that our dreams are not fulfilled.

The temple is a bit more complete with tomorrow's historic Presidential inaugeration.

In another speech not long afterwards, King wondered aloud what he would want said at his funeral. "The answer King gave was a catalog of the moral principles he held most dear, and by which he hoped to be judged," observe Stephen Smith and Kate Ellis in their radio documentary, 'King's Last March.' 'I'd like somebody to mention...that Martin Luther King Jr. tried to give his life serving others,' King said. Remember "that I tried to be right on the war question... that I did try to feed the hungry!" King continued:

If you want to say that I was a drum major, say that I was a drum major for justice. Say that I was a drum major for peace. I was a drum major for righteousness.

You can listen to King's speeches, and learn much more about his last year, by listening to "King's Last March," an American Radio Works documentary.

I'll be back answering your questions tomorrow.

01/19/09 by Chris Farrell

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A home dilemma

Question: In 2005 my son-in-law bought a house in Florida for $220,000. He financed this purchase with a 15-year prime-rate mortgage, which he has been prepaying ever since. This house is his residence and he owns no other real estate.

In 2008 he married my daughter, who has been accepted to a medical school in another state. They will need to sell the house and move this summer. The problem is that they will need to get $160,000 for this house, which is now worth only $140,000. What options are available to people who are current or even ahead in their mortgage payments, but whose homes have lost value and they need to sell? My daughter and son-in-law do not want to walk away from this house or do anything that will jeopardize their credit rating. Susan, Bethesda, MD

Answer: This is a classic real estate problem exacerbated by the historic downturn in home prices. It's not unusual even during goods times for homeowners to face a loss when they want to move for a job (or in their case professional schooling) and they've only owned the place for a few years.

The classic answer is to rent it out. They'll earn rental income until the market rebounds. Then they can sell off the property. To be sure, there are difficulties to renting. They'll have to figure out if it's a viable solution for them. They'll want to find a good tenant. Since they'll be living out of state they'll need to contract with a professional property manager to oversee their home rental (which cuts into rental income). They should research the rental market in the area to see how much they can realistically charge. Still, renting is a classic way to buy time. For instance, when the New York City real estate market declined in the late 1980s and early 1990s a number of my friends rented out their condos and co-ops until they could unload them several years later.

Another time-honored solution is to dip into savings and make up the $20,000 shortfall to pay off the mortgage. In essence, it's the cost of doing business, part of their "investment" in her medical career. Yes, this option is financially painful, but it also stops their exposure to the housing market in Florida, keeps their credit record sterling, and allows them to start a new life and a new career in another state with a clean financial slate.

01/20/09 by Chris Farrell

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Bailout banks

Question: I've done a bit of searching around and have had no luck finding a comprehensive list of organizations which have taken funds from the $700B bailout. This bailout is absolutely criminal and I really want to make sure I'm not doing business with thieves. Where can I go to find out who has stolen taxpayer money through this fund? Thanks for the show and any help with this issue! Mike, West Bend, WI

Answer: No one is happy with the bailout. It's very clear that the day-old Obama Administration is burning the midnight oil--after the inaugural parties I guess--devising a broader, bolder plan to stabilize the financial system. To be clear, I'm a supporter of the government committing more money, but this time around with a much clearer strategy and less concern about bank shareholders and management.

That said, a number of our listeners and readers have said they don't want to do business with bailout companies. The best resource I've found for looking at where the bailout money is going to is run by Propublica. It's a new independent, non-profit newsroom that focuses on investigative journalism. It has a comprehensive bank bailout page at www.propublica.org/special/show-me-the-tarp-money. It has a lot of detail and a bailout map at www.propublica.org/special/bailout-map. By their calculations nearly $302 billion of public bailout money has been disbursed to 3125 financial institutions.

01/21/09 by Chris Farrell

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homebuyer tax credit

Question: My husband and I just bought our first home in South Minneapolis this past fall. Since then, I have heard a lot of talk about the IRS Federal Tax Rebate for first time home buyers that is being offered this year. I know that we qualify for the full amount of the rebate ($7500) but I am concerned about the provision to pay it all back in the remaining lump sum in the event we sell in the future. Is there a way to take less than the full amount or is this interest free government loan just too good not to pass up in its entirety? Christine, Minneapolis, MN

Answer: Thanks for the question. I hadn't looked very closely at the $7500 tax credit for first-time homebuyers. You've forced me to look at it more closely and, as far as I can see, it's a better deal than I thought.

Like all tax law today, there are quite a few wrinkles. (The IRS has a lot of good information here.) Here are the highlights:

*It's really an interest free 15-year loan. You claim the credit on your federal income tax form. The tax credit is equal to 10% of the qualified home purchase price, and tops out at $7500.

*You don't have to start repaying the loan for the first two years of homeownership. After that, you send the government $500 a year. If you sell the house before you have repaid the loan you pay it from the gains. No gain? The loan is forgiven.

*To qualify you have to buy on or after April 9, 2008 and before July 1, 2009. (Keep those dates in mind!). The purchase date is defined as the closing day. A first-time homebuyer is defined as someone who hasn't owned a home for 3 years preceding the closing.

*The income limits on adjusted gross income is $75,000 and less for single filers and $150,000 for married joint filers. For income above that a partial credit is available. Anyone with an adjusted gross income of more then $95,000 for single filers and $170,000 for married filers doesn't qualify.

The standard rule of taxes applies here: If taking the credit improves your finances then take advantage of Uncle Sam's offer. And for most people I think the credit will be a good deal.

Additional thoughts, anyone?

Here is an update. It's from a look at President Barack Obama's economic recovery plan as it was reported out of the House Ways and Means Committee. The analysis is by CCH, a Wolters Kluwer business.

New Rules for First-time Homebuyer Credit

The proposed legislation modifies the first-time homebuyer credit that was signed into law last year, removing a requirement that the $7,500 credit be repaid over 15 years, but the waiver applies only to houses purchased in 2009 and before the expiration of the credit on July 1. On the other hand, those who take the credit will have to repay the entire amount if they sell their homes within three years of purchase.

Under current law, those who purchased homes between April 9 and December 31, 2008, can claim the credit on their 2008 return, but must repay it over 15 years, beginning with their tax return two years after purchase. If they sell the home, they must repay the entire credit, but only up to the amount of their gain on the sale.

"Frankly, the distinction between 2008 and 2009 purchases is puzzling," Luscombe said. "It seems strange for the people who bought a home in December 2008 to be treated so differently from those who do so in January, 2009, so I wouldn't be surprised if somewhere along the line someone will take a second look at this."

01/22/09 by Chris Farrell

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No match for 2008?

Question: My company just announced that they are canceling the 401K match for all of 2008. It is now middle of Jan 09. I understand that they are free to cancel matching at anytime, but to cancel the match for all of the past year's contributions? Is this legal? Christina, Los Angeles, CA

Answer: A growing number of companies are saving money by reducing or eliminating the company match, including General Motors, FedEx, Eastman Kodak and Frontier Airlines. The typical matching contribution in a 401(k) or comparable savings plan is 50 cents for every $1 the employee puts in, up to 6% of the employee's contribution. Of course, some companies do more and some do less. Companies are desperate to conserve cash and hold on to employees, which is why they get rid of the match. But from a public policy point of view it's a terrible move.

Now, most publically traded companies that have suspended their match have done it going forward. But what happened to you can be done. It all depends on the plan's details. (The law gives companies enormous flexibility when it comes to their retirement savings plan.) For instance, when your employer set up its retirement plan it had a choice between providing a "fixed" match or a "discretionary" match. The most common--the one we're familiar with--is a fixed match contribution. But with a discretionary match (or profit sharing match) the company doesn't have to do it if dismay sets in among management after tallying up the results for the year. Your employer realized the profit wasn't there, and it took advantage of its "discretion" not to fund the plan.

A sign of the times? According to a recent the Wall Street Journal story Starbucks switched starting Jan 1, 2009 to a "fully discretionary match" from a "fixed employer match." In other words, the company can decide whether or not to match contributions into the retirement plan.

01/23/09 by Chris Farrell

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A break with student loans?

Question: I was doing 'ok' paying down credit card debt until HSBC raised everyone's APR 10%, mine went from 14% to 24%, now I am really struggling. My Student Loan payments are $600.00 a month. Is there any word on the possibility of a hiatus on making Student Loan payments for a few months, or better yet, a year for those of us in trouble? It would really help! Patricia, Washington D.C.

Answer: Arrgghhh. The still all-too-common tactic by banks hiking their credit card interest rates in this environment burns me. It's a bad move at a time when the taxpayer is bailing out the financial system.

That said, at the moment I'm not aware of any new legislative initiatives (with credibility and momentum) that aims at giving financial breathing room to anyone paying back their student loans. That could change, of course, since much of the $825 billion fiscal stimulus package remains to be negotiated before the legislation ends up on the President's desk.

Still, according to a recent story in Inside Higher Ed, it appears tens of billions of dollars are heading toward colleges and universities.

The initiatives highlighted by Inside Higher Ed would help out a number of students and their families. For instance, there's a proposed nearly $16 billion increase in Pell Grant funding, boosting the maximum Pell Grant by $500 to $5,350; an additional $490 million for federal work study funds; almost $13 billion to replace the Hope tax credit with a new tax credit worth up to $2,500 a year; and a $2,000 increase in federal limits on unsubsidized loans.

Two quick thoughts: Make sure to take advantage of all the tax deductions and tax credits you qualify for. Hopefully, you'll get a refund that you can put toward reducing the credit card debt. Similarly, you might get additional tax payments depending on what becomes law over the next few weeks.

Secondly, if toughing it out isn't working and you really need to reduce your monthly debt payments you could look into changing your student loan repayment options. There is a financial flexibility built into federal student loans. (The same can't be said for private student loans.) However, all the different ways to lower your monthly bill today come with a price: You end up increasing the overall cost of the loan.That's why if you or anyone else goes this route I always recommend getting more aggressive about paying down the loan later on when times are better. There is no prepayment penalty with student loans.

The main options for lowering the monthly payment are the Graduated Repayment Plan (payments start out low and increase over time), the Extended Repayment Plan (stretch out the payments), an Income-Based Repayment Plan (your monthly payment rises and falls with your income), the Income Contingent repayment plan (the payment can't exceed 20% of discretionary income), and the Income Sensitive plan (monthly payments are a percent of gross monthly income).

You can learn more about these loan options at Finaid at www.finaid.org/loans/repayment.phtml. If you are in more dire straits you could also qualify for student loan forbearance or deferment. Finaid also offers up good information on those two options.

Good luck.

01/26/09 by Chris Farrell

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Credit card debt

Question: Recently I received, unsolicited, a new credit card from JC Penneys with a higher credit limit. The new card comes with "benefits"--more opportunity to spend at a time when I want nothing more than to reduce my debt. Is there a downside to refusing the increase? Is there a downside to accepting it? Should I use it as leverage to request a lower interest rate?

I am also concerned in general about the fast-and-loose way banks can change credit agreements, and in particular, Bank of America, which also made changes in the credit agreement on my account with them in the last few months. I'm sure you've gotten this question often, but one more time--what can consumers do to protect themselves against the lack of regulation, aside from not holding credit at all? The looseness is reminiscent of the airline industry where you might book a flight, but they are under no obligation to get you there. Mary Rose, Montpelier, VT

Answer: Continue to pay down your debt. Ignore the increase in your credit limit. You don't want to carry debt on your credit card. Period. If you use a credit card for convenience--which is the reason to have one and use it--pay off your bill in full every month, as soon as the tab comes in. This way, there's nothing the credit card companies can do to you. You have a high credit score. And a pristine balance sheet.

To your second point, many people are getting a harsh lesson in how the credit card industry stacks the deck in its own favor. Here's one of my pet peeves. You probably have a "fixed" rate credit card. Now, to you and me a fixed rate means it can't be changed, just like a 30-year fixed rate mortgage. Problem is, that's not what the credit card companies mean by "fixed" rate. They can change their "fixed" rate with as little as 15 days notice, depending on the state or the credit card's contract terms.

Here's even worse behavior: "Universal default.' A number of issuers impose what's called a "universal" default clause hidden in the fine print of a credit card agreement. If you're late on any payment to any creditor, be it the electric company or your mortgage, the rate on your card could automatically jump--even if you are current with your payments on the card.

I could go on with abuses. The Federal Reserve has approved new rules that ban or clean up a number of these practices. Problem is, the rules don't go into effect until 2010. I don't understand why. It looks like the new Congress doesn't, either. There's a chance that new legislation will accelerate the timetable.

01/27/09 by Chris Farrell

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File taxes now--or wait?

Question: For the first time in my life, I actually did my taxes earlier than usual. All this talk of stimulus packages, however, has me wondering: should I hold off on mailing my tax return? Are there any plans you know of in the house or senate that might affect typical 2008 tax returns? After not procrastinating on my taxes, I would hate to have to file an amendment at the last minute. Thanks. Ben, Madison, WI

Answer: Well, you're way ahead of me. Hopefully, you're getting a refund. If that's the case, file and get the money back fast from Uncle Sam.

The fiscal stimulus package is still being negotiated and much could change between now and the President signing legislation. Still, it looks like most of the individual tax changes kick in for 2009 and after. If you're interested in (a lot) more detail, check out this analysis by the tax specialists at CCH, http://tax.cchgroup.com/Legislation/2009-Recovery-Act.pdf.

By the way, filing an amended return to get even more money back? It's easy and well worth it.

01/28/09 by Chris Farrell

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Buy a home?

Question: With interest rates and real estate prices falling, I've begun looking around to buy a home. Some of my friends think this is a fine idea ("It's a buyer's market"); others think it's financially foolish ("Anything you buy now will lose value. It will be at least a year before the market bottoms out.") Where do you come down on this question? Lisa, Greenville, SC

Answer: I'm with you. It's a good time to look. But you have plenty of time. Of course, I have no idea how much lower home prices will go. In most parts of the country there's still downward momentum. I don't know how deep the recession will get and how high the unemployment rate will go. Still, the economic environment says there's no rush.

That said, why not start the process of figuring out the personal finances of homeownership for you? Run the numbers: Is it smarter for you to rent or own? Where is the breakeven point for homeownership? What's your credit score? Do you have 20% or more to put down? How long do you plan on staying in the home since the longer you live there the better the finances work out--and vice versa.

I'd also use this time to explore neighborhoods. What works bets for your lifestyle? A single family home? A condo? Townhouse? Research, plan, and then when the time is right act. It's a buyer's market.

01/29/09 by Chris Farrell

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What's a depression?

Question: You may have answered this already, but what is the difference between a recession and a depression? With daily news of layoffs, unemployment rates, home foreclosures, and the lack of jobs available, it seems like we're in a depression to me. How long will this last? And how are we going to get out of it. How can we jumpstart the economy? These are really scary times. Thanks. Joeth, Lincoln, NE

Answer: These are scary times. A recession is typically defined as at least two quarters of consecutive decline in gross domestic product. Recessions are dated by a group of scholars with the National Bureau of Economic Research, and this downturn is now more than a year old. What would turn it into a depression, besides the old quip a recession is when your neighbor loses her job and a depression is when you lose yours? There is no general agreement.

Richard Posner, the federal judge and University of Chicago scholar, recently said he believes we are in one: "I suspect that we have entered a depression. There is no widely agreed definition of the word, but I would define it as a steep reduction in output that causes or threatens to cause deflation and creates widespread public anxiety and a sense of crisis."

Of course, we're still far from breadlines snaking around city blocks or Hoovervilles set up outside city limits, visible, tragic signs that more than a quarter population unemployed and over a third if including those working only a few hours a week during the Great Depression. Louise Armstrong, a social worker in Chicago and later a relief administrator in a Michigan County during the New deal, recalls "One vivid, gruesome moment of those dark days we shall never forget. We saw a crowd of some fifty men fighting over a barrel of garbage that had been set outside the back door of a restaurant. American citizens fighting for scraps of food like animals!"

Several years ago, Nobel laureate Ed Prescott and economist Timothy Kehoe defined a great depression as a sustained drop of 20% or more in the economy. They were studying depressions in the latter part of the 20th century, including Mexico and New Zealand. We're still a long way from a depression by this metric.

The best definition I've come across was devised by University of California economist Brad DeLong. It's a chilling definition. A depression is when the unemployment rate breaches 12%, or stays above 10% for three years.

Here's a Marketplace Money interview from last year on the topic. And check out this video clip on the changing terminology of downturns.

01/30/09 by Chris Farrell

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