The article is definitely worth reading, read the “related items” also – The Poverty Business from Business Week:
Why? Mainly due to financial illiteracy. Except in the most extreme circumstance (and then for a short time only) it does not make sense to borrow (given the current interest rates) at an interest rate above 15% (and other than large purchases – car, house… borrowing is normally unhealthy for your financial well being). If you want a new computer, new TV… “rent to own” effective interest rates are horrendous. Just save the money needed and then buy what you want. Borrowing worsens your financial position and since most making such bad financial choices already have a very weak financial position the impact is even more negative. One goal of this blog is to help people become financially literate, so they can improve their economic position by making intelligent financial choices.
One very simple but powerful personal finance tip: save money to buy what you want, don’t borrow to buy what you want. And a related tip, save money to act as an emergency fund. If you don’t create an emergency fund it is far too easy to find yourself in need of emergency funds and then being forced to borrow and getting yourself trapped in a downward spiral.
Example 30 year mortgage rates (from myfico.com – see site for current rate estimates):
| FICO score | APR | Monthly payment* |
|---|---|---|
| 760-850 | 5.860% | $2,362 |
| 700-759 | 6.082% | $2,419 |
| 660-699 | 6.366% | $2,493 |
| 620-659 | 7.176% | $2,709 |
| 580-619 | 8.820% | $3,167 |
| 500-579 | 9.679% | $3,416 |
Amounts shown for borrowing $400,000 and rates as of May 7th. For scores above 620, the APRs above assume a mortgage with 1.0 points and 80% Loan-to-Value Ratio. For scores below 620, these APRs assume a mortgage with 0 points and 60 to 80% Loan-to-Value Ratio.
FICO scores are determined by your:
- Payment history – 35%
- Amounts owed – 30%
- Length of credit history – 15%
- New credit – 10%
- Types of credit used – 10%
Related: 30 Year Fixed Rate Mortgage Rates – Learning About Mortgages
Many of the Self-Employed Are Simply on Their Own:
But elsewhere, in dealing with insurance companies, the nation’s estimated 20 million self-employed are on their own. In Virginia, a state with relatively few controls on insurance rates, Clay Williams, a 59-year-old self-employed real estate agent in Falls Church, said the cost of health insurance for himself, his wife and two sons, had tripled in six years. After it ballooned last year to $1,956 a month, he angrily refused to renew.
Fixing the health care system is not easy. But it is broken and doing serious harm to the economy and individuals and needs to be fixed. Post on our management improvement blog on fixing the health care system. In addition to the obvious harms the broken system discourages many people from taking on the challenge of self employment. It also greatly increases the friction in the economy for moving between jobs.
Current vs. retirement income: How much do I need?:
After all, rules of thumb are shortcuts; they’re solutions that are supposed to work for the “average” person.
Good advice. The rules of thumb can help you get an idea of the ballpark for a fictional “average” person in general. But your particular situation is different.
Dragged Down by Debt by Jane Bryant Quinn (Newsweek broke the link so I removed it):
Of all the predatory loans, “exploding mortgages,” with interest rates that wing up after two or three years, are probably the most toxic and have made the most headlines. They’re typically granted to borrowers classed as “subprime”— those with credit scores under 620 (a 900 score is tops). But these are the very people least able to handle monthly payments that suddenly double or triple.
Related: Personal Loan information – Learning About Personal Loans – articles on loans
Personal Loans are either secured of unsecured loans to an individual. Secured loans have some form of collateral such as a car, stocks (margin loan) or a house (home equity loan). Unsecured loans are usually involve less paperwork (which is often an attraction to the borrower – though margin loans often take no paperwork). The interest rate on unsecured loans is normally higher since the lender does not have collateral.
Credit cards are a form of unsecured personal loan. They normally are the worst way to borrow money (though for a very short term loan – say a month or two – when you factor in the ease of use they can be the best option). The problem is many people treat their credit card as a normal source of loans. This is a bad personal finance strategy. See our credit card tips for more information.
Personal loans often have “teaser” rates – interest rates that are low (and quoted in big bold colors) while the real rate is hidden in small type. Don’t fall for the hype. The Annual Percentage Rate (APR) helps you look through the hype to the real cost, but is still not a perfect measure of the cost to the borrower.
A MSN money article discusses the horrendous terms of some “payday loans”: Loans with triple-digit interest. Read more about personal loan terms such as: payday loans, Annual Percentage Rate (APR), line of credit, etc..
Related: Payday Loans = Costly Cash, FTC Alert – Learning About Mortgages – How Not to Convert Equity – personal finance articles on loans
Maybe this will help people understand HDMI cables…:
I have an EE degree. I work as a broadcast engineer. I live and breath digital and analog signals every day. So yes, you could say I’m qualified to give the answer to this question…
That answer is, “No, an expensive HDMI cable will make NO difference in the quality of your picture OR sound”
This is one of the many problems with the existing health care system in the USA. That system now costs 16% of USA GDP – the highest cost anywhere.
The USA economy has strengths and weaknesses. The strengths have allowed the health care system to function poorly and still be tolerated. It has reached a point where it cannot be tolerated in its current form.
Related: Starbucks: Respect for Workers and Health Care – Health Care Crisis
Congressional Budget Office on the Alternative Minimum Tax (AMT):
The Looming Challenge of the Alternative Minimum Tax, Alan D. Viard, Federal Reserve Bank of Dallas:
Related: Families Face Alternative Minimum Tax, NPR – Brookings Institution article on the AMT – Preparation Softens Blow of Alternative Minimum Tax – IRS on the AMT
The Great Risk Shift by Jacob Hacker presents some interesting data. I don’t always agree with his conclusions but I think the information he presents is interesting.
The most interesting piece of data to me: The chance of a 50% drop in income in 1970 was 7% for any person. By 2002 it had grown to 16%. While this seems to include some questionable “data” such as divorces, retirees… Still the fairly steady climb (see chart page 31) from 1970 to 2002 shows this is one factor that should be a consideration in saving and spending plans. Don’t assume you will earn more and more every year. You will likely have some fairly large drops in income during your lifetime. Plan for it.
Some more interesting data in 1992 7.9% of 25-34 year olds in the USA had debt payments over 40% of their income. In 2001 that rose to 13.3%. In 1984 median wealth for families with a head of household 55-64 was 4 1/2 times as wealth as those of 25-34 year olds, in 2003 it was 13 1/2 times as great. (page 99)
While the average 401(k) balance is $47,000 the median balance is $13,000 (a relatively few large balances skew the average to make it much higher).
Overall I tend to look at the data he presents and think people better consider these realities and plan knowing them. Jacob Hacker seems to more often say that this is unreasonable and show the hardships faced by those that either could not plan better (it was out of there hands which I would agree is part of the problem and requires some public policy changes) or who choose not to (which I would find the case more often than he would). Well worth reading in my opinion.