October 2008 - Posts - The Dollar Stretcher
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The Dollar Stretcher blog will explore people and money.

October 2008 - Posts

  • Missing 401k Contributions

    I just read the article "Can my employer steal my 401K". I have a similar situation that I need you expert advice on. I was laid off on May 15. My contribution to my 401k was $930.00 twice a month or $1860.00/month. My employer is suppose to contribute 3% of my salary or $124.00 twice a month. Since Jan. 1 2008, he has only put $2790 of my money into my 401k and $744.00 of matching into my 401k account. This leaves my account $5384.45 short, $5079.22 of mine and $305.23 of the matching. My 401k account is 100% guaranteed interest, which means I'm loosing money everyday my account is short.
    The company has financial problems, but they have not gone bankrupt. They are still in business and shipping product to customers with a few employees.
    In your article you said that this is stealing and "Call the Sheriff". Were you serious? If I do that, all the employees still there will be out of work and the business will fold! Is there some scare tactic I can throw at him showing him a reference to a law or federal ruling and what could happen if he doesn't put my money in my account and what would happen if I take drastic action?
    In addition to all that. In May I went to get a prescription at CVS. They told me I had no insurance. I showed them my insurance card and they said sorry, it's been canceled. I find out that I've been paying $320 a month for medical and $28 for dental and he's never paid the insurance premium since March. So any bills I rang up since March 1st were not covered even though money was deducted from my pay check. Talk about getting smacked in the face twice!
    Any help would be greatly appreciated.
    Name Withheld (for obvious reasons)

    Sorry to hear about your layoff and benefit challenges. It would seem that you have an employer who is using your money (401k contributions and insurance deductions) to pay the company bills. That is illegal. If you don't contact the district attorney it's likely that someone else will. In any case, the employer should be challenged. You don't need scare tactics. It's a simple fact that they're making deductions that are meant for your account. To divert them to any other purpose is fraud and/or theft.

    I understand that you don't want to force them into bankruptcy and want to protect your friends' jobs. But the longer this goes on the more money that they'll potentially lose. So shining some light onto the subject is really helping your friends. 

    It's important for the business owners to make the contributions BEFORE they go out of business. You'll probably get what you contributed in a bankruptcy situation, but it might not be pretty. You might have to wait for the court system to get your money.

    Hope that it works out well for you.

    note: much more on 401k plans here

  • Lessons from an Economic Crisis - part 3

    They say that the difference between mankind and animals is that people can pass their accumulated wisdom from generation to generation. If that's so, then it's important that we all learn from the current economic situation. So far we've looked at the bad mortgages in part 1 and what those of us who didn't get a bad mortgage can learn in part 2. In this final part we'll consider some of the public policy lessons we can learn.

    Lesson #1 - Government doesn't do well in 'panic mode'. Their first inclination is to throw money at the problem. Whatever it is. Sometimes that helps. But sometimes it doesn't. And, in many cases, it's actually damaging in the long term. 

    Lesson #2 - Anything that the government gives to one person it has to take from another. The $700 billion for the bailout isn't money that the government just found in a broom closet. They'll have to borrow the money and eventually repay it with your tax dollars. So what's the point? Let's put it into perspective in the current situation. No one likes to see someone lose their home or to find out that their bank has closed. So it's natural to want to bail them out. But, the bailout does have a cost. That's the higher interest rates caused by the additional government borrowing (i.e. you'll pay more for your auto or home loan) and the extra taxes someone will have to pay. 

    Lesson #3 - The government shouldn't play 'make believe'. Fannie and Freddie let people think that they had full government backing (when they really didn't). It was a game of make believe. Everyone was expected to act as if those mortgages were insured. And, they did. Including not paying much attention to how good the mortgages were. So no one was penalized for writing bad mortgages. At least until now when you and I are picking up the tab.

    Lesson #4 - The government has very limited ability to put people into affordable housing. Not that they haven't tried. Rent controls, subsidized housing, encouraging lenders to loosen their lending rules, offering mortgages through FHA. Quite often the result is far different from what was promised by our politicians. Take the current housing problem. The government and greedy mortgage lenders were willing to encourage people to take out mortgages they couldn't afford. The result didn't help people buy homes, it was to put them through a terrible ordeal and leave them with broken credit. So much for 'government help'.

    Lesson #5 - The best short-term answer is often not the best long-term answer. Turn back the clock 3 or 4 years. You're shopping for a mortgage and one is offered with zero down payment and low rates for a few years before the rate adjusts. Seems like a good deal. At least for now. But if you made that decision you're probably in trouble today. And even the government bailout isn't going to erase all the damage that's been done. You'll never get those sleepless nights back. Or the arguments with your significant other about money. You will get a chance to raise your credit score, but it'll take years and until then you'll pay higher rates on your credit cards, auto loans or any other borrowing you do (assuming that you can get a loan at any rate). 

    Lesson #6 - Follow the money. That's how you'll find out who benefitted from the mess that we have today. And (no surprise) some people benefitted from this mess. Some made plenty of money. Let's start with Fannie Mae boss Franklin Raines. Here's how the Seattle Times reported it:

    Raines' total compensation from 1998 through 2004 was $91.1 million, including some $52.6 million in bonuses, according to OFHEO.

    BTW, the article wasn't about his high compensation. The headline reads: "Franklin Raines to pay $24.7 million to settle Fannie Mae lawsuit"  Wonder what your performance report looks like when you're convicted of fraud?

    Mr. Raines wasn't alone. Many members of Congress got on the Fannie and Freddie bandwagon. They liked to get in front of the cameras and say that they were pushing for 'affordable housing' (even though the housing they were pushing wasn't really affordable). I'm not saying that they sold their votes, but if you'd like to see how much the politicians got from Fannie and Freddie you'll find the list at OpenSecrets.org .  Beyond that some of them even received sweetheart mortgages on their own homes (see Conde Nast Portfolio article) Seems to me that we haven't learned our lesson if we don't vote them out of office.

    And, there's corporate greed, too! Countrywide Mortgage founder Angelo Mozilo led his company in writing the so-called 'sub-prime' mortgages. And from 2001 to 2006 he made nearly $200 million! (USA Today 4/9/2008) Guess he won't be worrying about his mortgage payment if this mess throws the economy into a recession! 

    Lesson #7. Greed is ugly. Whether it's greed for money or greed for power. People who sell themselves for greed should not be trusted. They should be treated as outcasts from reputable society. Let's start with those who created this mess.

    Lesson #8. Many people are willing to be fooled. The people who took out these sub-prime mortgages are not all victims. Many of them are not well educated and didn't understand the mortgages they signed. But your financial IQ doesn't have to be too high to question why you're suddenly able to afford much more expensive housing. If all you've ever driven is used Chevy's and suddenly someone offers you a new Caddy for the same money, you know that something isn't right. Especially if they wear a smile and an expensive suit or make their living as a politician! 

    Lesson #9. The government will avoid responsibility. Congress will hold hearings. But I'd be willing to bet that they don't get to the truth. Not that the truth is hard to find.  It's right there for anyone who wants to find it. But those in political power don't want you to know that they were a major contributor to the problem.

    Lesson #10. Accountability is important. There's plenty of blame to go around in this mess. And the greed for money and power demonstrated by Raines, Mozilo, members of Congress and others shouldn't be dropped. It is important to hold people accountable. If the CEO's of companies like Countrywide and Fannie Mae did things that were illegal they should be prosecuted. And, if what they did wasn't illegal, then maybe Congress has some work to do. The politicians that set this up should be held accountable, too. Losing their jobs and reputations would certainly be in order. If we don't hold them accountable the next batch of theives will get the message that it's OK to do it again.

    You and I have been left with a real mess. And, there's no telling how far the damage will spread. Right now we're wondering whether the world economy is sliding into a recession or worse. It's possible that millions of jobs could be lost before everything returns to something that looks like normal. I don't know about you, but I pray that it isn't too bad and that we learn from the experience so that we don't have to live through it again.

    Keep on Stretching those Dollars!


  • Lessons from an Economic Crisis - part 2

    Last time, in part 1  we looked at 9 lessons we could learn from sub-prime mortgages. Those lessons centered around the bad mortgages. Fortunately the overwhelming majority of us didn't take out one of the now toxic sub-prime mortgages. But, that doesn't mean that we won't be affected by the economic fallout from those mortgages. And, there are lessons that all of us can learn from this experience.

    Lesson #1. You don't need to borrow lots of money just because everyone else does. This seems like the kind of advice that you'd get from your mother ("Just because Billy's mom let's him play in traffic..."). Typically mom's advice was pretty good. It's not so long ago that you and I were listening to people brag about how they bought a house with no down payment. About how they were able to find a lender who could get them the home of their dreams. At times I even wondered if I was so smart to not borrow as much as I could. Thankfully, I chose not to. Even better, most of you chose not to either.

    Lesson #2. No job is ever completely secure. There was a time that you could go to work for a big company and pretty much be guaranteed a lifetime of work and paychecks. Not true anymore. Even if your union contract says that they can't fire you. In today's worldwide economy innovation and competitiveness are key to success. So bigger isn't safer. And, a company can look like it's doing well just before it crumbles. Don't get fooled by the fake front. And, union contracts that make it hard to fire employees may just means that it's more likely that the entire business will go bankrupt (study the domestic automakers for more details). Bottom line? You can be a great employee and still find yourself suddenly unemployed (especially if you ignore Lesson #3 below).

    Lesson #3. What your employer believes in matters. Your CEO takes a multi-million dollar salary and a bonus besides. Should that concern you? Yes. It points to the fact that the CEO (and presumably their main subordinates) believe that it's ok to take as much as they can from the company. That's the same mindset that approves shenanigans in accounting and treats customers poorly. To put it simply you can't trust people who are that greedy. Especially with something valuable like your future. You may be making a good buck today, but you better have a plan in place in case the roof caves in on the business. (just in case you were wondering I have no use for people like those that lead Fannie, Freddie, Countrywide, or a host of other companies)

    Lesson #4. Check your assumptions before borrowing. Any time you borrow money you are assuming that you'll have the future income to pay it back. And, typically that means that you expect to be able to work to earn those payments. So unless you have an emergency fund, you're assuming that you won't lose your job before the debt is repaid. You can choose to live debt free. Or you can recognize how important it is to have an emergency fund. (an FYI: if you say that you can't afford to save an emergency fund that just points out that you're exact the type of person who's most likely to need it in a crisis)

    Lesson #5. Debt makes any economic situation harder. In good economic times debt can be managed. Debt is never good, but at least you can keep up with the payments. But, in bad times debt can become a very cruel master. Losing a job if you have credit card debts is especially tough. In just one month things can go from bad to critical. The answer for someone who isn't in trouble today? Pay off any debts (especially credit cards) as quickly as possible. Even if it means working overtime or taking a second job to do it.

    Lesson #6. It takes two to tango. You don't have to be a dance partner. A few years ago mortgage companies were climbing all over each other to offer you a mortgage. Even if your credit wasn't so good, or you didn't have a job, or the loan was too big for your income. This won't be the last time that people are willing to lend money foolishly. It will happen again. That doesn't mean that you have to join the dance. Many smart people said "no" to mortgages and other loans that they knew they couldn't afford. Those are the folks who are not losing their homes or counting on a government bailout now. 

    Lesson #7. We'll all pay for the economic bailout. To avoid panic the government is flooding the market with dollars. That's probably something that they have to do now to keep the panic from spreading. But, all of those new dollars are still subject to the law of supply and demand. We're going to have more dollars chasing the same amount of goods and services. That means that you'll see prices go up. Actually we've already started down that path. The Federal Reserve has been pumping money into the economy for awhile now. Expect inflation to become a problem in the next few years.

    Lesson #8. We'll see more bailouts. Bailing out the banks and homeowners is not the end. We'll see more. And why not? We didn't want to let people with a too-big mortgage go under. Couldn't handle letting banks go down. Will we be more willing to get the automakers and autoworkers fail? Or perhaps the airline industry and it's employees? Or maybe whole states (can you say California)? The key point for you and I to recognize is that this isn't over. Not by a long-shot. There is more economic uncertainty to come. Hopefully not as bad as this latest round, but instability none-the-less. It's time to imitate the boy scouts and be prepared! (btw, you'll notice that those who need to be bailed out typically spent money they didn't have or made promises that they couldn't keep)

    Lesson #9. It seems foolish to play by the rules. Let's be honest. Some good, hardworking folks who chose to buy a house they could afford are going to be helping pay for someone who bought and financed a house that they could not afford. Your tax dollars are going to be paying part off part of their mortgage. Bottom line? People who chose to live beyond their means are not paying for their mistakes. 

    Lesson #10. It really is not foolish to play by the rules. Those folks who are getting mortgage help are not out of the woods yet. Their credit score will still be hurt. In trying to keep up with an unaffordable mortgage they were probably late in making credit card payments. That means penalty rates up to 30%. And, most importantly, they didn't learn that it was wise to live within your means. So, they'll probably continue to try to spend money that they don't have. They'll get out of this crisis. But, not the one after that...or the one after that. Sooner or later they'll end up in trouble again. And sometime it won't be politically expedient to save them.

    Lesson #11. There are no economic islands. We're all affected by those around us. As the world becomes more complex, it becomes more interdependent. I may not have co-signed on your mortgage, but if you fall behind a number of people will be hurt. It might not be fair, but it is true. And, it means that I need to be even more prepared for the unexpected. 

    Lesson #12. Smart investors don't panic. It's likely that your 401k has taken a hit (OK, a clobbering) this year. But it was a generation ago that the Dow Jones was at 1,000. Today we're complaining because it dropped below 10,000. So owning shares in American companies is (at least on average) a good thing. If you'll need your money in the next few years you might have to sell now. But, if you won't need it for awhile now is not the time to sell your stocks (unless the company is being run by one of the greedy CEOs - see Lesson #3).

    Life is full of lessons. Some are inexpensive and not too painful. That's not the case this time. So hopefully all of us (borrowers, lenders, CEOs, regulators, politicians) will learn a lot from this one. Because if we don't we sure have wasted an awful lot of money and the price next time will be even higher.

    Keep on Stretching those Dollars!



  • Scary!!!

    The other day I got my first scare of the Halloween season. And, it happened in the strangest place - the grocery store. Right up front where you walk in were pumpkins with painted faces on them. Not for display, but for you and I to buy. Wow! Has it really come to this? Are we too lazy or too busy to carve our own jack-o-lanterns? I'm all for progress, but somehow I don't think that this qualifies as progress. Carving a pumpkin was always a good time in a kids' life. When the child was small parent and youngster shared the planning and carving. Then as Junior or Missy grew old enough they could do it without a parent's help. A great time of bonding and training...not to mention that it was a lot of fun, too! Wonder if this is just one more reason why parents and kids are so disconnected now. At any rate, I sure hope that those pumpkins go unsold in favor of the ones that require a little personal attention to become the perfect jack-o-lantern!

    Keep on Stretching those Dollars!



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Gary is a former financial planner and purchasing manager who edits The Dollar Stretcher website <www.stretcher.com> and newsletters. You can follow Gary on Twitter.com/gary_foreman
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