REPOST: I.M.F. Shifts Its Approach to Bailouts

Investors, bankers, and financial analysts predict that the International Monetary Fund’s proposed tough approach on bond investors could adversely affect the still-volatile credit markets in Europe.

David Lipton, first deputy managing director of the I.M.F., which has met
resistance to its plan. | Image source: nytimes.com

The International Monetary Fund, convinced that Europe erred in forcing debtor countries like Greece and Portugal to bear nearly all the pain of recovery on their own, is pushing hard for a plan that would impose upfront losses on bondholders the next time a country in the euro area requests a bailout.

Scarred by its role in misjudging the depth of the Greek recession and rebuffed in its attempt to get European governments to write down their Greek loans, the I.M.F. is advocating a more aggressive approach to debt restructuring to try to ease the rigors of German-style austerity.

But the proposal — which is still being hashed out behind the scenes by top economists and lawyers at the fund — is encountering stiff resistance, not just from the powerful global banking lobby, but also from European policy makers, and more recently, the United States government, which is the I.M.F.’s largest financial contributor.

Indeed, despite tough talk on both sides of the Atlantic about making bond investors share the cost of bailouts with taxpayers, the world’s largest economies seem to have accepted the dire warnings advanced by investors and bankers that the I.M.F.’s proposed new approach would badly roil still-fragile credit markets in Europe.

“The fund has been bruised and abused,” said Susan Schadler, a former I.M.F. economist and the author of a recent paper that argues the fund broke its own rules in lending to near-bankrupt Greece. “But in the end there is no trade-off between austerity and debt restructuring — you have to do both,” she said.

Germany is leading the opposition. Policy makers in Berlin and Frankfurt see the Greek debt restructuring in 2012 as a one-off. And they regard any deviation from their core principle — that debilitating debt is to be reduced almost solely via the hard medicine of spending cuts and tax increases — as an escape from fiscal responsibility.

The I.M.F.’s debt plan has been endorsed by the body’s top leadership, including the first deputy managing director David Lipton, a widely respected former Treasury official. The initiative is seen by a number of outside sovereign-debt experts as the best of a range of admittedly tough choices in responding to future debt crises.

But the pushback against the proposal, which has caught I.M.F. officials off guard, has delayed a planned introduction early next year, with any blueprint now not expected to be presented to the fund’s executive board until June, at the earliest.

The fund declined to make any executives involved in the project available for comment.

At the root of the issue is the long-simmering dispute between Europe and the I.M.F. over who should pay the bill the next time a country in Europe needs a bailout: taxpayers and workers, or bankers and investors.

These tensions were on full display during the I.M.F. meetings in Washington this fall, when Jörg Asmussen, the powerful German representative on the European Central Bank’s executive committee, explained why Germany vetoed the fund’s idea that some of Greece’s debt, most of it now held by Europe, should be written down.

“The fund is talking about other people’s money,” Mr. Asmussen, cracking a thin smile, said at a German-sponsored policy forum.

In some ways, the clash is a function of whose money is at stake.

With Europe on the hook for around 340 billion euros ($460 billion) in loans to bailed-out countries in the euro area, compared to €79 billion for the I.M.F., it is not surprising that Mr. Asmussen and his sponsors in the German finance ministry have responded to the I.M.F.’s push for others to accept losses on existing debt by saying, in effect, you first.

That could never happen given that the I.M.F.’s status as a preferred creditor — meaning its loans get paid back before those of any other lender — is perhaps global finance’s most sacred writ.

The proposal recalls an earlier era when the fund was the dominant lender to flailing economies in Asia and Latin America, rather than the junior partner it is today in Europe. In that respect, the initiative is being seen by some I.M.F. watchers as a sly move by the fund to reposition itself as a leader and not a follower the next time there is a bailout in Europe.

“Countries at risk may simply reject even talking to the I.M.F., for fear of spooking investors,” said Douglas A. Rediker, a former investment banker and onetime member of the fund’s executive board now at the Peterson Institute in Washington. “In an effort to remain central, in Europe at least, the I.M.F. could find itself the odd man out.”

According to recent data from the European Central Bank, euro area countries have €6.4 trillion in government bonds outstanding, 70 percent of annual economic activity in the currency zone.

Matt Sapaula is a renowned financial coach lauded for his updated and innovative methods and instruments in educating consumers about wise financial decisions. Click here to learn how he empowers consumers through various financial strategies.

REPOST: New Tools for Nest Eggs

Work your way to a financially sound and comfortable retirement with the help of these financial tools listed by the Wall Street Journal.

Image Source: wsj.com

The right tools can make investing for retirement easier, by helping you manage the details of particular investments or by managing your entire portfolio. Here's a look at some services that do just that.

Annuity Review ( annuityreview.com )

Millions of new and would-be retirees find themselves holding—and trying to decipher—variable annuities. Annuity Review analyzes variable-annuity contracts (and any supplemental riders) and explains, in plain English, how your annuity works and how to get the most out of it.

The service does well at helping buyers understand the basics of their annuity contracts, such as investment restrictions and the impact of excess withdrawals. It was developed by Mark Cortazzo, a senior partner at Macro Consulting Group, a financial-advisory firm in Parsippany, N.J.

"They have been able to point out things about my clients' annuity contracts that I…would not have been able to figure out, even after scouring the prospectus for 10 hours," says Dana Anspach, the founder of Sensible Money LLC, a registered investment adviser in Scottsdale, Ariz.

Cost: $199 for an analysis of as many as three contracts. Each additional contract is $49.

Wealthfront (wealthfront.com)

Wealthfront Inc.'s software-driven investment management "basically replicates what the larger registered investment advisers do with their rebalancing/trading software," saysMichael Kitces, publisher of the Kitces Report and director of research at Pinnacle Advisory Group, a wealth-management firm in Columbia, Md.

Wealthfront, whose chief investment officer is Burton Malkiel, author of "A Random Walk Down Wall Street," will craft a diversified, low-cost portfolio for you and rebalance your investments automatically as necessary. If your account is $100,000 or more, the service also will help you harvest tax losses—that is, use your investment losses to offset taxes due on investment gains and income.

Wealthfront, in Palo Alto, Calif., uses only exchange-traded funds when managing your money, not individual securities or mutual funds.

Cost: None for the first $10,000 of assets under management. On amounts over $10,000, a monthly advisory fee is charged, based on an annual rate of 0.25% of your assets. There are also fees embedded in the ETFs the service buys for your portfolio.

Betterment (betterment.com)

Betterment LLC, like Wealthfront, offers low-cost portfolio-management services. And it can help transfer your retirement savings from a 401(k) or other accounts into an individual retirement account in as little as 60 seconds.

The New York-based registered investment adviser has a team of representatives who can help answer questions about IRA rollovers. And if need be, a rep will "join a call with [your] existing provider" to smooth the process, says Joe Ziemer, Betterment's communications manager.

There are no fees or minimum balances for the IRA rollover service, but the account that's created will be subject to Betterment's regular fees. Like Wealthfront, Betterment uses only exchange-traded funds when building your portfolio.

Cost: A management fee of 0.15% to 0.35% annually, depending on your balance, plus the ETFs' fees.

Matt Sapaula is a seasoned financial coach known in the industry as the Money Smart Guy. Go to this website to learn about his unique approach to entrepreneurship and financial literacy.

REPOST: Why Many Young People Need More Money Management Education

The article below discusses the significance of financial discipline in helping students resist financial pressures and get by with economic realities.

Image Source: livingmoneysmart.com

Financial education is something that can benefit everyone, no matter how young. Once a person enters the workforce, they may have to deal with difficult decisions that they would be better prepared for if they learned how to manage money early on.

Close to half of those in their teenage years are not well-educated about financial discipline, a report for TCF Bank conducted by the Opinion Research Corporation noted. Nearly 30 percent of those who were 17 years old explained that they didn’t think they would have the tools necessary to manage finances properly when they left high school.

This could be worrisome to many people, as it can be difficult to get finances right without the proper level of guidance and education on the matter.

“Every high school student, and every adult, should have a firm understanding of money management,” said Tom Jasper, vice chairman of TCF Bank. “This survey demonstrates the urgent need to give young people the tools to better manage their personal finances in order to set them up for a brighter, more successful future. We believe that the more informed people are about money management, the more it benefits them and the communities in which they live.”

Student loans an issue for many Americans

This lack of financial knowledge could put some young people at a disadvantage once they obtain a higher education degree, especially if they are trying to manage everyday bills with student loans. This could call for a revamped financial strategy from these people.

Approximately 17 percent of Americans are dealing with student loans they have yet to pay off, according to a report from FindLaw.com. The majority of the group who had loans still have to pay off less than $25,000, while more than 5 percent explained their debt was upwards of $50,000.

“As the cost of a college education has risen, so has the number of graduates carrying a substantial amount of student loan debt,” said Stephanie Rahlfs, attorney-editor at FindLaw.com. “Ideally, students use their degrees to land well-paying jobs and quickly pay off their loans. But job markets are cyclical and careers don’t always go according to plan. Student loans can be a big financial burden, but there are various options available to those who are unable to repay their loans.”

Less than half of those polled explained they were able to pay off their loans in full, the report added.

Matt Sapaula is a financial coach, author, and media personality. Visit this website to learn how he helps clients attain financial security through wealth-building strategies and tools.

Too many tax refunds: The signs and symptoms of intaxification

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As the saying goes, the only certainties in life are death and taxes, and paying one’s dues to the country is among the duties any citizen must make. Paying too many taxes is common, and many citizens have found that they can save a pretty penny by getting tax refunds. But while paying too much tax than is legally required is bad, looking forward to tax refunds is a misguided and unhelpful habit that does nothing to help bolster one’s finances.

Image Source: thegatewaypundit.com

The informal term for the euphoric feeling a person gets from receiving a tax refund is called intaxification, which is described by Investopedia as “somewhat misguided” because tax refunds are given due to an excess amount a taxpayer paid during the previous year. This is likened as an interest-free loan given to the government and paid back yearly.

Image Source: i.investopedia.com

Many agree that this practice is not a good way to save and earn money as it indicates that the person is still paying a higher amount of taxes than necessary. Instead, it is recommended that the taxes paid every paycheck should be reduced through tax breaks. Talking to an experienced tax advisor or HR Department representative on matters pertaining to gradual reduction of tax burden is a key step to improving one’s financial situation.

Waiting for tax refunds is a futile and unhealthy practice that does nothing to improve one’s financial standing. While taxes are inevitable, the burden they present to the taxpayer can be lightened gradually over time.

Financial expert, media personality, and keynote speaker Matt Sapaula is committed to helping the average person save up and generate wealth. Visit this website for more on personal financial planning.

Starting small: Making that money (and keeping it)

Image Source: gigbucks.com

What many people fail to realize in their attempt at wealth generation is that, by and large, it all depends on how much money they make after all expenses are subtracted from their income. Many are often under the impression that to make money, one must make a lot of money through income, usually through a higher-paying job.

Image Source: duxfinancial.co.nz

And while it is true that those with high amounts of cash tend to be catered to by mainstream financial institutions, the greatest aspect of successful personal financial planning for retirement and beyond can be done for rather miniscule amounts.

Image Source: weonlydothisonce.com

The key act in making personal finance work is not the amount of savings made but the act of saving itself. Having a mindset that emphasizes on saving money and having as much as one can spare saved up is the penultimate foundation of sustainable financial, investment, and retirement plans. Having any amount of income saved is just as important as making a lot of income.

There is no magic number one must reach to begin planning for one’s financial future. Financial planning rests not on how much money one starts with but how often and how much of that money is saved up. The important thing is to get started.

Matt Sapaula is a financial planning expert and media personality. Visit this website for more on him and his work.

REPOST: McDonald's Minimum Wage Budget Ignores Tax Credits, Food Stamps And Reality

Image Source: forbes.com

 

McDonald’s sample monthly budget drew the ire of its minimum wage earners who dismissed it as unrealistic and insulting. Janet Novack digs deeper on the issue in this article.

Does anyone seriously believe a worker earning around the $7.25 an hour federal minimum wage can discover the “key to…financial freedom” by keeping a budget journal and exercising a little spending discipline?

That’s the conceit of a web site and pamphlet produced for employees of McDonald’s—a rightly ridiculed attempt  to show that by tracking every purchase down to a $2 soda (and, oh yeah, working two jobs and paying just $20 a month for health insurance)  someone earning $1105 a month in a primary job can not only make ends meet, but save $100 a month to realize long term financial goals.  Turns out that the fast food giant has been offering this sort of happy meal “financial literacy” program in concert with Visa Inc. and  Wealth Watchers International since 2008.   Conveniently, the left leaning ThinkProgress.org web site brought the McBudget to the public’s attention last week—just in time to give a boost to a July 24th National Day of Action being held to mark four years since the last federal minimum wage increase and press for another.

Four years? That’s nothing.  In fact, Congress hadn’t raised the minimum wage for a decade before Democrats took over the house in 2007 and pushed through a three-step increase, paired with some small business cuts to win President George W. Bush’s signature. Moreover, as this Congressional Research Service fact sheet shows, the purchasing power of the minimum wage has been on a general downward path since 1968, when it stood at $1.60—the equivalent of $10.70 in May 2013 dollars.

Few people could make ends meet on a job paying today’s minimum wage and most minimum wage earners don’t have to do so. According to the Bureau of Labor Statistics, 24% of the 3.6 million workerspaid minimum wage or less in 2012 were  teens, meaning they likely are still supported by parents. (Another 26% were under 25.)  Moreover, as the conservative Heritage Foundation points out, “a sizeable number” of minimum wage workers over 25 are married and working part time for a second income.

Still, there really are grown-ups earning minimum wages and struggling to support families—folks like Carman Iverson, a 28-year-old McDonald’s worker and mother of four interviewed here by Forbes contributor Laura Shin. But for the most part, they aren’t living off minimum wage alone. That’s because the ground such workers have lost to inflation has been made up by growing federal income supplements in the form of refundable tax credits and food stamps (now called the Supplemental Nutrition Assistance Program, or SNAP.)

Let’s do the numbers for that bastion of minimum wage employment, Texas, home to 12.7% of all workers in the U.S. paid minimum wage or less in 2012. Since people who earn the minimum wage usually don’t get paid vacation, let alone paid sick days, paid lunch breaks or health insurance, we’ll assume this minimum wage employee soldiers on through every ache, pain and sniffle, never taking time off and putting in 40 hours a week, 52 weeks a year.  That works out to $15,080 a year, or $1256 a month, or $290 a week. On that, in 2012, a worker would have paid $633 in Social Security tax (rising to $935 for 2013 with the expiration of the temporary payroll tax cut) and $219 in Medicare taxes.  Let’s also assume she had no federal income taxes withheld and since this is Texas, there’s no state income. Here’s what Intuit’s Turbotax software shows the worker would have owed–or gotten back—from the Internal Revenue Service, based on her filing status and exemptions and assuming a standard deduction.

If she’s single and childless, she would owe $259 in federal income taxes, meaning, on just a minimum wage job, she has graduated out of the 47% who, as  Mitt Romney  famously observed, pay no federal income tax.

With one child, by contrast, she would get a $4,169 tax refund from the government, composed of a  a $3,169 earned income tax credit  and a $1,000 “additional child credit”—a refundable child credit for parents who owe no income tax which was created as part of  President Obama’s 2009 stimulus and was extended through 2017 as part of January’s fiscal cliff tax deal. With two children, there’s a $4,981 check from Uncle Sam—a $3,169 EITC and $1,812 in additional child credits,  which, like the EITC are computed on a unique formula that looks at both earnings and family size.

And with three or four children? The IRS should send a $7,703 check—the maximum $5,891 EITC for 2012 and $1,812 in additional child credits. That works out to a supplement of $3.70 an hour for someone with three or four kids—a better than 50% wage boost.  So a hardworking burger flipper, or cashier, or home health care aide  is making $10.95 an hour—it’s just that other taxpayers (including, ironically, that childless minimum wage worker) are paying $3.70 of it. She also should be getting  food stamps–about $400 worth a month for a minimum wage worker with two kids, and more for a larger family.

No, minimum wage workers still can’t easily make ends meet. But this government help puts the declining purchasing power of the minimum wage in a slightly different light. The key here is that the EITC (unlike minimum wage hikes) has traditionally had bipartisan support.  Moreover,  it’s regarded by many economists  (for example,  Chrisine Roemer, who chaired President Obama’s Council of Economic Advisers)  as  a better way to help the working poor than raising the minimum wage, which economists have traditionally believed reduces the number of jobs available to entry level, lower-skilled workers.  More recently, some research has suggested that small increases in the minimum wage have no effect on employment, which means the EITC might be subsidizing not only the working poor, but also low wage employers like McDonald’s and Wal-Mart who would otherwise have to pay more for the same labor.  As economist and liberal columnist Paul Krugman put it in February,“raising the minimum wage is a way to make the EITC work better, ensuring that its benefits go to workers rather than getting shared with employers.”

Of course even if all the pointy headed economists were to suddenly agree that the optimum national minimum wage was, say $9, an increase couldn’t clear today’s Republican controlled House. Yes, living wage activists may have some successes in Blue states and cities—just this month, the Washington D.C. City Council voted to require big box retailers to pay at least $12.50 an hour, up from the current $8.25 city minimum. (But if D.C. Mayor  Vincent Gray signs the hike, Wal-Mart has said it will cancel three planned stores in the city and review three others already under construction.)

Meanwhile, living wage activists would be wise to acknowledge the income supports that have grown up around a shrinking minimum wage and to spend more of their energy defending them.  After all, the same House Republicans who unanimously voted in March against raising the minimum wage  have also just passed a farm bill stripped of the traditional funding for food stamps and are likely to demand deep cuts in this program in a deal with the Senate. They’re also pushing a 24% cut in the IRS’ budget.   What’s IRS funding got to do with minimum wage workers? It could (among other things) harm the IRS’ ability to fight the ongoing epidemic of identity theft tax  fraud  and lead to further deterioration of  already poor taxpayer service.  Both developments are likely to have a disproportionate impact on EITC recipients, who already have to wait months for their checks if their identities are stolen and (as National Taxpayer Advocate Nina Olson has pointed out) are already, in too many cases, denied earned income tax credits they rightly deserve. In the real world, that’s a bigger threat to minimum wage worker’s finances than silly financial McPlanning advice.

 

Matt Sapaula is a financial coach who helps diverse clients determine ways to handle their money and achieve personal prosperity. Visit this website to learn about the strategies that will help you weather financial realities.