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Posts Tagged ‘budgeting’

Decoding the Debt Debate

If you’re following the current debate on raising the debt ceiling, you’re probably frustrated.  Your angst may be triggered by, the partisan bickering, the lack of great leadership or the uncertainty of what may happen and what it all means.

Politicians from all political persuasions and affiliations have become very adept at obfuscation.  Knowing whatever they say or do can and will be used against them in a future election, politicians have become very proficient in deflecting and dodging direct answers.  They speak in vague terms and try to boil everything down to a 30 second sound bite.

Politicians and political commentators often use terminology that is confusing and often misleading.  You almost need a secret decoder to decipher what they are saying.  I don’t all of the secret codes, but I have a few.

As you listen to the debate, the following are a few terms to keep in mind.

  • The National Debt – The cumulative amount of money owed by the U.S. government. These are actual bonds held by various investors (including the Chinese government and your friendly bank).  The total outstanding debt is approximately $14.5 trillion.
  • The Debt Ceiling – The total amount of bonds the U.S. Treasury is authorized to issue.  The debt ceiling is currently equal to the National Debt.  A law must be passed to increase the debt limit.
  • Deficit – This is the amount of money the government is spending in excess of revenues it collects in one fiscal year (October 1 – September 30).  The deficit for fiscal 2011 is projected to be $1.4 trillion.
  • Credit Rating – Every bond traded on a public market is rated by an independent credit rating agency, which assesses the financial strength of the issuer and the likelihood of default.  The lower the rating, the higher the interest rate required.  For bonds already issued, a change in credit rating will often influence the price at which the bond is traded on the market.

Aside from these terms bantered about, I believe there are a few important factors you need to pay close attention to in any deal that is reached.  These will be the types of issues our  political leaders will attempt to obfuscate.

  • Time Horizon – The time horizon for the spending cuts and additional revenues will be calculated over the next 10 years.   If Congress and the President agree to cut $1 trillion in spending, it won’t all come in fiscal 2012.  They may sound like everything is happening this year, but any plan will be adopted over the next decade.  Raising the debt ceiling is the only thing to take effect immediately.
  •  Timing – Look at the timing for when additional revenue is received and spending cuts are enacted.  If history repeats itself, the revenues will start to be received soon, and the  bulk of the spending cuts will happen in the latter years.  In the world of pork barrel politics, elected officials use government spending to buy votes, and the termination of programs will frequently cost votes.  Thus, politicians have a real incentive to defer spending cuts to another day.
  • Details –It won’t be easy, but do your best to understand the details of the plan.  Congress is trying to make major changes to the tax code, Social Security, Medicare and  Medicaid, and they’re rushing to get it done in the next few days.  I don’t think you want a repeat of Nancy Pelosi’s famous quote, “We have to pass the bill so you can find out what is in it.”

I believe this is a serious issue, and how it is resolved could have far-reaching implications for the future.  No one knows what will happen if the government defaults on its debt, since it has never happened.  As I previously wrote, I think Congress will and should raise the debt ceiling, but it also needs to curtail government spending.  Racking up over $1 trillion of debt each year is just as perilous as defaulting on the current obligations by not raising the debt ceiling.

I also have serious reservations about our leaders’ability and willingness to cut spending.  The 2011 budget compromise is a good illustration of this.  Although they supposedly agreed to $38 billion in spending cuts, most of it was accounting gimmicks and money that wasn’t going to be spent anyway.  One analyst calculated the reduction in spending on specific programs to be less than $1 billion in comparison to fiscal 2010.

As the debate continues forward, follow closely.  Here’s why.  Last week, President Obama was pushing a plan to cut spending by $3.7 trillion and add $1 trillion of new revenue, for a net decrease of $2.7 trillion over the next decade.  Sound like a reasonable compromise?  Before deciding, you may want to consider this.  When the Administration presented their 2012 budget to Congress, they also provided a 10-year budget estimate.  The Administration projected total deficits over the next 10 years to be in excess of $9 trillion.  If the current deal cuts it by $2.7 trillion, that still means we’ll add over $6 trillion to the national debt, pushing out total debt close to $21 trillion by the end of the decade.  Still think it’s a good deal?

To me this is a good example of why we must watch this closely.  Despite the political rancor, everyone in Washington is looking for a deal which will make them look good.  Let’s just make sure the American people get as good of a deal as our politicians.

U.S. Credit Rating Outlook – Is the Third Time a Charm?

You may have heard the cliché, “The third time is a charm.” When it comes to the future credit rating of the U.S. government, the cliché, “Three strikes and you’re out,” might be more applicable.

Presently, there is a lot of discussion concerning the U.S. debt limit.  After borrowing $14.3 trillion, the U.S. government has reached its limit on how much money it can borrow.  Accounting gimmicks and creative cash flow techniques are allowing the government to continue spending approximately $3 billion each day more than it receives in revenues.  However, the U.S. Treasury is expected to exhaust these measures by early August.  Unless Congress acts before then, the U.S. government will default on some of its obligations.   You can read this article for a discussion on why I doubt this will happen.

A few weeks ago, two major credit ratings agencies, Moody’s Investors Services and Standard & Poor’s provided a negative outlook on U.S. debt.   This doesn’t  mean that they have downgraded the credit rating, but it’s an indication to investors that this is a realistic possibility in the near future.

On Wednesday, Fitch Ratings said it was putting U.S. debt on watch for a credit downgrade later this summer.  This will be the third major credit ratings agency to state their concerns regarding the current debt and deficit situation of the U.S. government.

All three of the agencies have expressed doubt that the U.S. government will default on its debt. The negative outlooks reflect a general lack of confidence in the ability of Congress and the President to reach a meaningful agreement to significantly alter the current trajectory of the debt and deficit spending.

If you follow politics, you probably are not surprised by the current lack of progress and substantial political posturing.  Washington frequently reaches agreement right before a deadline expires, and often enacts a temporary postponement to give itself more time.  Consequently, I don’t think the ratings agencies are really surprised by the current delays.  Instead, I think the negative outlook is driven by their pessimism of our political leaders to make significant changes in fiscal policy.

They realize that raising the debt ceiling is easy.  It’s a simple vote Congress passed many times in recent years.  The real obstacle is reaching an agreement to dramatically reduce the annual deficit, which could come via spending cuts or increasing revenue.

It’s not a charm that a third credit rating agency has a negative outlook on U.S. debt.  It could be viewed positively if it motivates our political leaders to reach an agreement, but based on recent statements and reactions… don’t count on it.  Instead of being a charm, I suspect the recent ratings outlook is more like another strike.

Spending Cuts and Accounting Gimmicks

Three weeks ago, President Obama and Congress reached an agreement on the 2011 Federal budget.  Keep in mind that the government’s fiscal year started on October 1, 2010.  Thus, we were already more than six months into the year before they could reach an agreement of how to spend money for the current year.  How they are able to do that is a different discussion.

After they reached an agreement on the 2011 budget, members of both sides of the aisle trumpeted their success in reducing Federal spending and moving towards more fiscal restraint.  Even for those who wanted greater cuts, they conceded that it was a good start.  According to the budget agreement, federal spending is will be reduced by $38 billion.  This may seem like a lot of money, but keep it in perspective.  This amount is approximately 1% of the total $3.5 trillion of federal spending for 2011 and less than 3% of the projected $1.4 trillion budget deficit.  It’s a good start, but certainly not what you might consider draconian cuts.

The dirty little Washington secret is that a substantial portion of the $38 billion won’t actually reduce federal spending for programs or personnel. Check out this Washington Post article which reveals some of the maneuvers and gimmicks utilized to account for the cuts.   Granted, there will be real cuts and reductions, “But some of the worst-sounding trims are not quite what they seem, and officials said they would not necessarily result in lost jobs or service cutbacks.”  One example cited is the $4.9 billion for the Justice Department’s Crime Victims Fund.  The money was allocated to a reserve fund that wasn’t going to be spent anyway, yet Congress counted it as part of their “spending cuts.”

Although it may seem like a rather trivial matter, it’s a good indication of how Washington works and the way our political leaders think and act.  In  Washington World, money you wanted to spend, could have spent, or even thought of spending all count as “spending cuts.”

If this were true, then I have cut millions of dollars from my spending… but it’s not real.  It makes no difference to my bank account how much money I thought of spending or wanted to spend, but didn’t.  It only counts if I don’t spend it, and it stays in my account.  This is common sense to the rest of the world, but it seems elusive to Washington politicians.

Understanding Washington World and the political spin of politicians will be very important as Congress and the President wade into the battle over the 2012 budget, raising the debt ceiling and tackling the annual deficits and national debt.  It’s in vogue to talk about spending cuts and deficit reduction, but there is often more to the story than what is being said.

This is an issue you should care about whether you support the current spending by the U.S. government or believe it needs to be dramatically reduced.  To me, it’s an issue of honesty and integrity. Hopefully, this matters to you irrespective of your political affiliation or philosophy.

A Financial Resolution for 2011

Happy New Year!  New Year’s resolutions often accompany the celebrations and revelry.  A majority of resolutions are related to personal health and fitness, which is understandable following a season dominated by parties and indulgent eating.  Christmas is also the time of year when people spend more money than expected.  The stress of the bills coming due can also lead to financial resolutions. 

January 1 is a great time to lose weight, get in shape and stop smoking.  It’s also a fantastic time to get your financial affairs in order.  What is one financial objective that you would like to achieve for 2011?

I won’t be surprised if your answer involves reducing debt, saving more money or living by a budget.  While these are common financial goals, they are not an exclusive list.  You can also include things like giving more money away, drafting a will, reviewing your insurance policies or buying a new home.

Whatever your objective, here are a few principles that will help to ensure your success.

  • Be Reasonable: If the goal is unreasonable, you’ll quickly become frustrated and discouraged.  It may not be reasonable to get out of debt in one year.  Instead, set a goal to reduce your debt by $__ or pay off certain credit cards.
  • Be Specific:  Vague goals like eating healthier or being a better money manager are hard to evaluate.  Your goals should be quantifiable and measurable.
  • Develop a Plan: Whatever you want to achieve isn’t going to miraculously happen.  Think about the steps needed to accomplish your goal. Your plan should also include a timetable.  Identify the actions and the dates for completion.
  • Write it Down: It’s easy for the urgent things of the day to overtake the important. Writing down your goals and plan will help keep you on track.
  • Measure Progress:  Don’t wait until December 31 to determine success or failure.  Periodically evaluate your advancement.  You may need to adjust your plan in order to still achieve your goals.
  • Be Accountable: Behavioral changes are not easy, and being accountable to someone can be the difference between success and failure.  You must have enough of a relationship to trust the person, be honest with them, and listen to their feedback.  They must also be willing to ask you the tough questions.
  • Reward Yourself: Develop appropriate rewards as you accomplish your interim goals.  It doesn’t have to be big or lavish.  It just needs to be something that motivates you.

I know it’s kind of morbid, but by December 31, 2011 you’ll either be dead or one year older. Assuming that you expect to be alive, would you rather have accomplished your financial goal or not?  If so, then develop a plan and have the resolve to see it through to completion.

If you do… it will truly be a Happy New Year… for the entire year and not just one day.

Paying for Christmas

The most wonderful time of the year is quickly followed by the most miserable time of the year. Not because of the winter doldrums, but because of the credit card bills appearing in your mailbox.  If you’re like many Americans who used credit cards to purchase gifts for the holidays, financial stress quickly replaces the joy and happiness of Christmas.

You may have the unfortunate realization that it’s going to take you months to pay off your Christmas gifts.  Don’t feel alone.  According to Consumer Reports, 13 million Americans (nearly 6% of the population) are still paying off last Christmas.   If you’re only making minimum monthly payments on your credit cards, chances are you’ll be paying it off for several more years.

Do you know that there is another way to pay for Christmas?  I will even go so far as to say that it’s a better way.

The best time to start paying for Christmas 2011 is right now.  I’m not talking about taking advantage of all those after-Christmas sales to stock up on gifts.  Instead, you can start saving money now to pay for your Christmas shopping next year. 

The first step is deciding how much you want to spend for Christmas.  If you’re married, you need to discuss this with your spouse and come to some reasonable agreement.  You may have different families, traditions and expectations, so expect to compromise.

Let’s assume that you decide you want to spend $2,000 for Christmas gifts next year.  Starting in January, take $200 and save it (that’s $50 per week). Open a separate savings account if you need to, or find a bank that offers Christmas Club savings accounts just for this purpose.  With meager interest rates and bank fees, you might just stuff the cash under your mattress.  The key is that you save it the money and don’t touch it until Christmas.  It’s not an emergency fund or quick spending money; it’s for Christmas.  If you put $200 aside each month, you’ll have $2,000 in cash by the end of October just waiting to be spent on great Christmas bargains.

But wait… what about the debt from this year?  Wouldn’t I be better off using the $200 each month to pay off my credit cards? 

That may sound like a good idea, but I say don’t do it.  Reducing your existing debt and paying off your credit cards is a different discussion.  Chances are this is the cycle you’ve been operating under for years.  You charge it.  You work all year to pay it off.  When Christmas rolls around again, you haven’t saved any money for Christmas, so you charge it again.  If you want to break the cycle, you’ve got to do something different.

I’m all for paying off credit cards and getting out of debt. However, you probably won’t achieve either of these without learning how to live within a budget and saving money to pay for future purchases.   Even if you’re still paying for this Christmas next year, think of how great you’ll feel next year when Christmas is fully paid before Christmas.  The stress and agony of opening bills in January will be history.

When it comes to paying for Christmas, you can pay now or pay later.  If you start paying for next Christmas now, I think you’ll experience a lot more peace, joy and holiday cheer next year.

The Gift-Giving Season

Christmas is the gift-giving season.  There is a lot of emphasis to buy gifts for other people.  Not only are you expected to buy a gift, but there is a lot of pressure to buy the right gift.

If a gift is an expression of your love, adoration and appreciation, does it matter what gift you give?  Yes… and no.

A gift will communicate your feelings if it has special meaning to the recipient.  The best gifts are those that are unique to the person receiving them.  It doesn’t necessarily have to be expensive or extravagant.  Sometimes a simple or hand-made gift can communicate your feelings much more than something that costs a lot of money.  Therefore, the right gift is the one that has signficant meaning rather than a high price tag.

This is an important principle to remember when purchasing gifts, especially for Christmas.  Our culture places a tremendous value upon the type of gifts you give.  Love, appreciation, and status are often measured by the gifts you purchase.  Consequently, there is a lot of pressure to overspend at Christmas, especially by parents.  You may want your children to have a memorable Christmas; or you want them to have a better life than you did; or worse, you’re trying to buy their affection by lavishing them with gifts.

There is nothing wrong with giving your children many things or showering them with gifts, but there is a problem if you’re buying gifts you can’t afford.  Far better for you to find less expensive but more meaningful gifts, than try to create an extravagant Christmas that takes months or years to pay off.  

Gifts rarely make lasting impressions and memories.  Sure there may be one or two gifts you’ll remember forever, but most of them are quickly forgotten or replaced.  Also, the more someone has, the less likely that any one thing has much meaning.  Upon reflection, I can only think of very few gifts I received at Christmas that really helped define a great Christmas.  My best memories are family traditions and spending time with people.  I may be a little unique in this regard, but I doubt it.

Christmas is a season of giving.  It’s good to give presents and material items, if given with the right heart and for the right reason.  The appropriate gift can communicate your love, adoration, appreciation and respect for another person.  At the same time, make sure that you can afford what you’re buying.  Feelings of regret and animosity can easily replace love and affection when you buy things you can’t afford.  Besides… it’s a foolish financial decision.

Giving gifts is an important part of Christmas, but there are more important things than material gifts.  The gift of love, time and traditions will probably make much more of an impact on your family and friends than the things you buy.  You may find that the best gifts don’t cost much.

Christmas is the gift-giving season.  Bless others with your generosity and gifts… both those that cost money and those that money can’t buy.

Budget Basics #10 – Creating Margin

In business and financial terms, margin is typically defined as the difference between income and expenses.  For your personal finances, it can be thought of living below your means.

It’s easy to look at someone who is successful and wealthy and think that they are successful because they never have problems.  The reality is that sooner or later, every person and business will experience struggles and challenges.  Success is often the result of surviving problems, not the absence of problems.

There are cycles to the economy and to most businesses.  Success comes to those who can persevere through the downturns and hold on until things get better.  Margin helps to buy you time until things improve, and it gives you flexibility to make adjustments to handle your situation.

Like many people, I had a lot of margin a couple of years ago.  I was giving away nearly 30% of my income; taxes consumed another 25-30%; and I saved/invested another 10%.  As a result, I was living on about 30-40% of what I made.  Within a matter of months, things changed dramatically.

In addition to the economic recession, Lady M and I decided to relocate from Vermont to the great State of Texas.  Within a six-month period of time, we went from three sources of income to one.  Including employer-provided benefits, our income dropped by about 45% in a matter of months.  Having margin allowed us to make that move.

We had to make some adjustments in our giving, savings and spending to reflect the reduction in our income.  Too bad we couldn’t adjust our taxes as well.  Our margin shrunk, but thankfully, we have weathered the storm so far.  We are working towards increasing our income, expanding our margin and restoring our level of giving. It’s taking time, but we’ll get there.

How big of a margin should you have?  There is no universal formula.  It all depends upon your income, lifestyle and ability to make changes.  Margin is a lot like an emergency fund.  It won’t solve all problems or keep you from experiencing challenges, but it will increase the likelihood you will survive a challenge when it arises.

Want a few tips on how to create margin.  Here are a couple of articles you can read which may give you a few ideas.

18 Means for Living Below Your Means by Mark and Angel Hack Life.

10 Smartest Ways to Live Beneath Your Means by Dumb Little Man.