Are You On the Road to Wealth?

Money, Money, Money….” Regular folks are singing the ABBA tune at record numbers these days.  And the lyrics are quite fitting for the times we are facing:

“I work all night, I work all day,
to pay the bills I have to pay
Ain’t it sad
And still there never seems to be
a single penny left for me
That’s too bad
In my dreams I have a plan
If I got me a wealthy man”

But forget the “wealthy man” part, ladies.  All of us, women and men alike, need a wealthy plan!  And we are never, never, too old to get started.

Working hard won’t get you there.  A get-rich-quick scheme won’t get you there.  Paying off all your debt won’t get you there.

So what exactly is a wealth plan?  It is a plan that creates financial stability and security as it is defined by you.  It is a plan that allows you to sleep at night knowing that your family is taken care of should something happen to you.

It’s rather simple if you chunk it down into bite size pieces:

  1. Establish an emergency fund. Did you know that only about 27% of American’s have $1,000 set aside?  And another 27% only have between $1,000 and $5,000?  Most people are living paycheck to paycheck and would be in a tough spot if they had a major car repair or their hot water heat broke.
  2. Pay off high interest and non-tax deductible debt such as credit cards, furniture loans, department store cards, personal loans, and the like).
  3. Max out your contributions to retirement plans, regardless of how much your company matches…and even if they don’t.
  4. With all of the above being accomplished, build your cash reserves – this is 12 months of your fixed expenses….non-discretionary items such as mortgage, insurance, utilities, etc.
  5. Invest in a highly diversified portfolio that aligns with your growth goals and tolerance for risk.

If you still have a need for college planning for your children, it should be woven in as well.  Start a 529 plan as soon as possible!

Knowing how much you will need in retirement is important in setting your retirement goals.  Many reports suggest you will need 60% – 80% of your last years salary. If you plan to be active and plan to travel, you may want to consider 100% – 125% as your target.

Paying off your mortgage is something you consider after you have completed all the objectives above.  In the meantime, your mortgage is a valuable financial tool – use it wisely.

Just like a cross country road trip, you can’t get to where you want to go, without a map and a plan. Bottom line – write out a plan and get started!

Remember, “wherever you go, there you are.” Bukaroo Bonzai

Facing Foreclosure? Banks Goof and 1 Million Homeowners Win…for Now

There is no shortage of drama from the banking industry these days.  Just last week, Bank of America joined the ranks of a growing number of mortgage companies announcing they are delaying foreclosures in 23 states.  GMAC Mortgage unit, Ally Financial Inc., and JP Morgan Chase have halted foreclosure processes as well.

If you live in the following states, this applies to you:  They are Connecticut, Delaware, Florida, Hawaii, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Nebraska, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Vermont and Wisconsin.

At least one Bank of America official signed off on 8,000 foreclosure applications without reading them!  Other lenders have stepped up and acknowledged that they too have automatically signed off on foreclosure actions without review.

Say what?  It seems that banking employees have executed documents in foreclosure cases without even verifying the information in them.   These problems could result in thousands of homeowners to contest foreclosures that are in process or have been completed.  Should this sloppy behavior turn up at other lenders, then it is likely the foreclosure crisis could drag on for several years.

Several state attorneys are asking their state courts to freeze home foreclosure processes to insure proper procedure and to review foreclosure cases.  California Attorney General Jerry Brown Demands JP Morgan Chase to show the Bank fully complied with State Foreclosure Law.  The Office of the U.S. Comptroller of the Currency has notified 7 banks to immediately check their processes.

Even Fannie and Freddie have had something to say.  They have directed 1,400 loan services to re-check all their foreclosure filing paper work.

“The general level of sloppiness is pervasive around the industry,”  Diane Thompson, counsel at the National Consumer Law Center, told the WSJ earlier.

So who does this affect?  Everyone actually.

An estimated 1 million homeowners have a little extra time to catch a breath and possibly catch up on delinquent mortgage payments, which could prove helpful.

The overall residential real estate market could benefit as well as the freeze means that fewer homes will be dumped at fire sale prices, and will hopefully give falling prices a chance to stabilize.

Wells Fargo has stated they will not delay foreclosures. They also will not extend short sale closing dates…in hopes of keeping properties out of foreclosure.  So if you have a closing date on a property that is a short sell, don’t delay or you could lose the opportunity.

Rick Sharga

Rick Sharga, RealtyTrac

Rick Sharga, RealtyTrac SVP and one of the most frequently quoted experts on foreclosure, mortgage, and real estate trends, warns, “don’t get too excited about the market getting better.”  Sharga believes that much of the paperwork will be found to be in order and these stalled foreclosures will spike early next year.  He also looks for a gradual reduction in 2012, and the unwinding to continue into 2013.

Sharga went on to predict the residential market will normalize again in 2014.

How Will Your Tax Bill Go Up In January?

The big debate is on. At the end of this year, the Bush tax cuts are scheduled to expire. The Bush tax cuts represent legislation which was enacted in 2001 and 2003. This could have a far reaching negative impact on the already sluggish economy…not to mention the impact in our homes and our personal checkbooks.
There is quite a bit of chatter about extending (some of) these cuts and the debate is gathering strength. While much of the media attention has focused on the high income earners…this concern affects everyone who pays taxes. The final outcome could still be a hard pill to swallow for many.

What can you expect?

  • Higher Income Taxes
  • Marriage Penalty Returns
  • Higher Capital Gains and Dividends
  • Phase Out Rule for Itemized Deductions Returns
  • Phase Out Rule for Personal Exemption Returns

Higher Tax Rates for all…
Yes, everyone will be subjected to higher tax rates. All you need to do is look at the tables below, for they tell the story. Rates will go up for all, not just the so-called “rich”. Currently we have six rate brackets, beginning at 10% and heading north to 35%. They will be replaced by five which start at 15% and top out at 39.6%.

Marriage Penalty returns
The Bush tax cuts eased the penalty to married individuals. The penalty caused married couples to pay more federal income tax than if they were single. While it still exists for some couples, it isn’t nearly as brutal as before the Bush tax cuts. Currently, the standard deduction for married folk (those filing a joint return) is double the amount for singles, which seems to make sense. Beginning in January 2011, the married-joint-filer will revert back to the pre-Bush era and amounts to about 167% of the singles tax bracket.

Here is the current tax structure:

Here is what it will look like come January 2011 unless Obama extends:

Higher Capital Gains and Dividends
Currently the maximum federal rate on long term capital gains and dividends is 15%. Capital Gains means any profits on shares or other assets held for more than a year. Next year, capital gains tax will increase to 20%, and 18% for assets held more than five years. Dividends will be taxed at ordinary income tax rates – which means the maximum would be a fat 39.6%.

Itemized Deductions Phase Out
If you are a high income earner, you may recall that the phase out rule could eliminate up to 80% of your itemized deductions for mortgage interest, state and local taxes, and charitable deductions. Over time the rule eased and was finally eliminated. Look for it to return with a vengeance next year. It will affect you if your income is above an estimated $170K (or $85K if you are filing separate).

Personal Exemptions Phase Out
Personal exemption will get hit next year. If your adjusted gross income exceed about $252K (filing jointly), $168K (single), $210K (head of household), or $126K (married filing separate) your personal exemptions will phase out or be eliminated.

Obama says he wants to renew some tax cuts, while Republicans and some Democrats want to renew across the board. Unless the current spending spree is curtailed, taxes will have to go up at some point to pay for all the entitlement programs.

Should the current Bush tax cuts be allowed to expire, the relief they have offered will impact anyone who pays taxes. This could be a good time to visit your budget and begin tweaking in preparation for lower take home pay next year.

How Will the New FHA Changes Affect You?

FHA has been putting on fresh makeup in the form of new guidelines.  The most recent moves take effect on October 4th, and can have a big impact on your wallet.

The first of these is H.R. 5981 and the resulting Public Law 111-229, which gives FHA the authority to change the amount charged to borrowers for the Up Front Mortgage Insurance Premium (UFMIP) and Monthly Mortgage Insurance Premium (MIP) as a means to help insure FHA.  FHA has said this is going to save you money, however it begs the question…if it is going to help FHA raise money, how will it save the borrower money?

These changes are outlined in Mortgagee Letter 2010-28.  Click here to read Mortgagee Letter 2010-28 in its entirety.

Up Front Mortgage Insurance Premium (UFMIP) is a lump sum that is added to the base loan amount and it is being reduced.  The monthly Mortgage Insurance Premium (MIP) is added to the monthly mortgage payment and it is being increased.  The folks in Washington would like you to believe that this is really a good thing…and on the surface, it does look pretty.

However, if you remove the blush and lipstick, you’ll discover that maybe looks are deceiving.

Here is a quick run down of the highlights:    

  • UFMIP will be reduced to 1.00% (down from 2.25%)
  • Monthly MIP will go up to .90% (from .55%) for 30-yr max LTV loans.
  • Up to 95% LTV, 30-yr will be .85% (up from .50%)
  • IMPORTANT: 15-year loans, monthly MIP remains the SAME

These premiums are effective for purchases, refinances, and streamlines.

On the surface, it seems that if the up-front portion (which is a bigger chunk of change) becomes a smaller percentage, and the smaller piece (the monthly premium) is going up…then perhaps FHA has done you a favor Mr. Borrower.  Before you get too excited, let’s do the math on this to find the real answer…

*Payment is principal and interest only and does not include taxes and homeowners insurance.

Let’s compare.  While the current structure results in a higher loan amount, the total mortgage payment and cash out of pocket is lower.  Under the new structure, it may seem counterintuitive, but the lower loan amount and higher monthly results in more out of pocket, now and forever more.  Raising the monthly premium has a similar effect as raising the interest rate by 0.33%!

If you are considering purchasing a home with FHA financing, you may want to consider taking action prior to October 4, 2010.

You Decide!

Business Still Sitting the Bench…

A friend shot me a note asking for my thoughts on the economy in relationship to his business. He is in equipment sales and sales are really tough right now.

You see, he deals in large equipment – industrial scale. Businesses that purchase his equipment have to design their building to accommodate this equipment. So it’s not your everyday, run of the mill, typical equipment purchase. Much planning goes into the decision of purchasing this mammoth stuff. You can probably imagine that the sales cycle is fairly long….from the time the need is discovered, researched, sent for bid, to the final decision – and ultimately, “check is in the mail.”

Remember the old commercial – “When EF Hutton speaks, everybody listens?” Everyone was hushed Friday morning waiting to hear what Bernanke would say, thinking just maybe big business would get some clarity to make internal decisions for expansion and growth. For the most part – it was the same ole rhetoric. The market had a little knee jerk, then stocks began to giggle liking the news and sucked some life out of the safe haven of bonds.

The Fed’s primary job is to implement monetary policy to keep a balance between steady economic growth and high levels of inflation.

Understanding the inflation is low and economic growth is sitting the bench, it makes sense that what Corporate America is looking for is really outside the Fed…and inside The White House and our Congress. Here is what keeps Corporate America sitting on the side lines:

  • Upcoming tax hikes
  • Time bomb in Social Security and Medicare
  • Cost burdens of new health care plan
  • Stimulus everywhere – what will it cost?

Small Business and Corporate America remains petrified of what is coming….like a deer caught in the headlights. Until there is some real clarity about what is coming and how their balance sheet will be impacted, they are probably going to be fairly reluctant to commit to growing inventories, equipment purchases and leases, expansion, increased production/manufacturing….and of course, hiring.

Until business gets the clarity they are looking for, they probably won’t be putting the check in the mail and sales orders will collect dust sitting on someone’s desk.

Bernanke – Clear As Mud!

Did Bernanke clear things up?  That is a good question!

This morning at the Jackson Hole Symposium, Bernanke said that the central bank would be “vigilant and proactive” on inflation and believes that deflation is not a big risk. But did he shed any light for investors?

Bernanke downplayed the concern of a double dip recession this morning, saying the economy will continue to expand…but at a slow pace for the remainder of 2010.  He went on to say that the pace of growth will pick up in 2011.

On inflation, Bernanke acknowledged it has dropped to a level slightly below what fellow FOMC members view as conducive to a healthy economy.

Some have suggested that the Fed is out of silver bullets to revive the economy.  Today, Bernanke spoke at length about the tools the Fed has to fight deflation and stated, “the issue is instead whether, at any given juncture, the benefits of each tool, in terms of additional stimulus, outweigh the associated costs or risk of using the tool.”

Those tools include more purchases of longer term Treasuries.  As Mortgage Backed Securities get repaid to the Fed, instead of cleaning up their balance sheet, they will purchase more longer term Treasuries.

Another tool in the kit he would consider is to modify the language to signal the Fed will keep rates close to zero for longer than what is currently priced in the markets.

There has been chatter that suggest the “extended period” language needs further clarification or definition.  Such as…triggers.  What criteria, what levels, what triggers would sound the bell for further action?  It is about as clear as mud.  Bernanke said the FOMC “has not agreed on specific criteria or triggers for further action.”

Did Bernanke provide clear insight? Still sounds a little cloudy to me and appears to be a disappointment to investors who were anticipating more clarity.

Federal Reserve Chairman Bernanke

Bottom Line:

  • Recovery is softer than expected.
  • Deflation not a big risk.
  • Inflation has declined to a level slightly lower than what the Fed sees as healthy.
  • The Fed still has bullets it can use.
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