A-Train Finance

The St. Louis Fed has created this presentation to help people understand just what exactly it is that the Fed does.  It was linked to from a case study in one of my CFP prep units and I thought I would share it with all of you.  It explains ‘In Plain English’ what the Fed consists of and what exactly it is that it does.  Definitely worth a read if you are interested.

Check it out for yourselves here: St. Louis Fed

First of all, I have to say congratulations to Barack Obama, the next President of The United States of America.  He ran a great campaign and he has allowed our country to show the world that at least 52.3% of us are looking for something different than what has been happening over the last eight years with our C+ average president.

Great.  Now we have a respectable leader, a fresh start, and a chance to really make a difference and create this ‘change’ that we’ve all elected Mr. Obama for.  We elected him, so now it’s his responsibility to get everything done, right?

No.  Fial.  Also, Fail.

Warren Buffett once said, “when a management team with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”

So in other words, it doesn’t matter how amazing Obama is, whether he’s Superman or not.  The framework is in place and it is our job to build from that framework a beautiful… skyscraper or something.  So let’s get out there and make it happen.  What exactly do we need to do?  I’m not sure yet.  We’ll have to wait and see what this guy does in his first year in office and let’s follow his lead to see if we really can bring positive change to The United States.

Wondering where you should put your money?  I’d take a look at PowerShares Wilderhill Clean Energy ETF (PBW: 6.19 +0.81%).  This definitely isn’t a recommendation to buy, just want you to know that it exists.  The description provided by PowerShares is this:

“The PowerShares WilderHill Clean Energy Portfolio (Fund) seeks to replicate, before fees and expenses, the WilderHill Clean Energy Index, which is designed to deliver capital appreciation through the selection of companies that focus on greener and generally renewable sources of energy and technologies that facilitate cleaner energy.”

With Obama in office, I’d really like to see more people investing in companies like the ones in this index.  Green energy is the only option if we plan to be on this planet for more than 150 more years.  Let’s see what kind of change we can create! Good luck.

Saving money is tough.  Especially in a time when people are losing their jobs, inflation is at record highs, and things like gas and food are costing more than ever.   When I first started working full time, all I had was a checking account.  My money would be deposited electronically every week and I would spend it as needed on expenses.  The only problem was that I found it very difficult to consistently save money.  I was keeping track of my cash flow but basically always ended up with about the same amount of money in my account every month.  Then I opened a savings account…

From there it was really quite simple.  At the time I was being paid every week via direct deposit, so I created a savings plan.  Using my budget, I figured out exactly how much money per week out of my check I could put directly into savings without worrying about not having enough cash that week.  From there, I setup an automatic transfer from my checking account to my savings account every week, the day after I got paid.  I started out transferring $20 dollars per week into my savings account and as I got more comfortable and saved up more money, I increased it to $30, $45, then finally $50 dollars per week.  By then time I was done paying off my debt a year later, I had about $2,000 dollars in an online savings account making 5.05% interest.

Some people might have preferred to just put all of the money towards paying off their debt, but I had a set monthly payment that I decided on that would allow me to have a cash buffer in case of any emergencies because I was set on not using any credit cards for anything.

If you would like to setup a similar savings system as I did, try out E*Trade’s Online Savings account.  It’s pretty easy to use and you can setup regular account transfers.

Sean Sez: A new segment on A-Train Finance written by none other than Mr. Sean Sullivan. Enjoy.

‘Bailout Bill Defeat Could Cause Painful Recession’, ‘Bush Says Congress Must Act on Bank Rescue or Face `Painful’ Consequences’, ‘Congress Bailout Vote Causes 780 point freefall.’

These are the headlines that I am greeted with when I open up various financial news sites. These headlines seem to be trying to instill fear into me, fear that if we as a nation don’t act now by bailing out large multinational corporations that we will be entering into a new Great Depression.

This couldn’t be farther from the truth. The truth of the matter is that what you are seeing today is simply capitalism at work. If you read the texts of those that first wrote of how a successful capitalist society should work they never claimed that it would allow for the everybody to be comfortable and safe all the time. In fact it promised quite the opposite, much like Darwin it promised that the strong would prevail and the weak would fail. Lehman was weak, Wamu was weak, Bear was weak, these institutions failed because they chose not to follow advice that is given in any investing 101 course, diversify, which in turn made them weak institutions prone to failure. In the long run we will be much better off without these institutions which had poor leadership and weak business models.

Now that Congress has finally done a sensible thing and rejected a bill that would simply hand over 700 billion dollars to corporations it should continue down this path of sensibility and undo the mistakes of the past. Close down Freddie and Fannie, or at least restructure them to only allow for lending to above average credit risks, yes it is the American dream for everybody to own their own home, but it simply shouldn’t be that easy. If you haven’t proven yourself to be worthy of a loan you shouldn’t get one, especially not one that is partially back by the government. Americans may not end up owning their own home at the age of 24 and they won’t be able to afford the latest and greatest consumables but they will be better off financially in the long run as they really couldn’t afford these things in the first place. We were simply financing ourselves into a future of financial burden and worry. Who knows we may actually end up happier without all the “stuff”.

This isn’t just about restricting loans to those who actually qualify. The financial system right now is broken and needs to be fixed by government action, just not a government bailout. What the government must do now is to make a bold statement by saying that there will be absolutely no bailout what so ever of these corporations. Yes, this will cause a temporary decline in the stock market, maybe even another one day loss of 500 or 600 points, but as a savvy investor you should know that would be the day to buy in and that it will recover.

Once the government finally puts an end to talks of a bailout the healing can begin, financial corporations can unload the toxic assets they have for .20 or .30 cents on the dollar as opposed to holding on to them in the hopes that the government will pay .80 cents on the dollar for them. Right now nobody will sell their assets if there is a chance they can get more for them from the government, hence we have a credit freeze.

To further open the door to responsible leading the fed should then lower the interest rates by a full percentage point. Simply put once financial institutes can get rid of their toxic assets instead of holding on to them waiting for a bailout and then these banks can borrow money at 1% from the fed. The strong, well managed banks will see the giant profits that can be made and credit markets will open back up, in capitalism the driving force is always that if a buck is there to be made somebody will be there to make it. If the fed does a good job of controlling the interest rates on the way back up we should see recovery, not right away of course, but in due time we will all be laughing at how we almost gave a blank check to financial corporations.

The other option is to bail these corporations out and add to our already ridiculous deficient while showing corporations that it is OK to make mistakes because Uncle Sam will come to your rescue if you mess up your risk evaluation. This will only encourage risky behavior keeping weak corporations alive while further eroding America’s image as a democratic capitalist society. We simply cannot go down this path of socialism, this mindset is what got us to where we are today and that will only prolong the problem as and it will pop back up several years down the line possibly even worse than it is this time.

The fact is that the government made mistakes in promoting sub prime lending through legislation, Freddie Mac and Fannie Mae. Some corporations made mistakes in following the governments lead, mistakes that for a while made giant profits for these companies, mistakes that were destined to bring these corporations to their demise. These corporations, stocked with the best Harvard MBAs, should have known better. Now somebody has to pay for the mess, and true to the capitalist system our government is based on, that somebody should be the corporations and not the tax payer.

Unless you’ve been living under a rock, you know that America is in a credit crunch.  The estimated debt for the United States government for 2008 is approximately $9.5 Trillion dollars.  Add to that the Wall Street bailouts that will cost upwards of $700 Billion dollars and we’re looking nearly a $10.5 trillion dollar debt.  Let me write that out for you.

$10,500,000,000,000.00

There are less 0’s in a bag of Oreos.  Everybody knows that when you have debt, you have to pay interest on it.  So let’s use a nominal amount of interest.  Say, 3%.  All of this debt is borrowed, chiefly from other countries and corporations.  So at our current deficit Americans are paying out $315 billion dollars, or:

$315,000,000,000.00

in interest each and every year, not to mention any new additions to the debt through purchases.

But how does it all affect you?  ‘It’s not my debt to pay’, you say.  Think again.  Do you use United States Dollars?  AKA the currency of the United States of America?  If you do, then you are directly paying for the debts of our government.  How you ask?  Every time our deficit goes up, the value of our dollar goes down.  The government is literally voluntarily making the things you spend your money on more expensive by making the money that you have less valuable.

The question is, how can you fight against this?  Unless you have a spare $10.5 trillion dollars laying around to help our government out, you need to be making a return on your money in order to prevent it from becoming less and less valuable.  Every day that cash lies under a mattress somewhere it is literally burning money.  Here’s some useful links that I’ve found:

A great way to get started is to manage your own debt in the best way possible.  A great resource that I found is www.credit-land.com. I’ve used it to compare different current credit offers and rates and finding the best rewards programs that fit my spending habits.

By using an online savings bank that gives a higher than average rate of return like E*Trade Financial’s Savings Bank,  you can make sure your money stays ahead of the current inflation rate and doesn’t lose value,  I use E*Trade myself.

Check the current American National Debt to the penny at TreasuryDirect.com.  Updated every single day with the exact amount of National Debt and who holds it.