The Government's Budget: The Debt Ceiling

What is a debt ceiling? The US debt ceiling is a cap that is set by Congress on the amount of debt the federal government can legally borrow. The cap applies to debt owed to the public or anyone who buys U.S. bonds in addition to debt owed to federal government trust funds such as those used for Social Security and Medicare.
Every day the federal government spends more money than it takes in and makes up the difference by borrowing money. As a result, every day, the government’s debt increases. This is why the government is considering raising the debt ceiling or the government will have to stop spending more than it takes in which requires balancing the budget. Balancing the budget will require reducing spending by approximately 40 – 44%, raising taxes or a combination of reducing spending and raising taxes.
If the debt ceiling is not increased the government has to pay more money to borrow money which adds up very quickly and could cost taxpayers hundreds of millions of dollars. This can cause taxpayers to lose confidence in the government. If lenders lose confidence in the government that it can’t repay its debts, interest rates will start to increase.

The government generates money by selling debt through Treasury bonds which is the government's IOU. A taxpayer, a foreigner or a hedge fund manager purchases a Treasury bond (bill) and the government promises to pay the bond at a later date, paying the buyer back with a small amount of interest. As of January 2011, foreigners owned $4.45 trillion of the U.S. debt.

As long as Treasury bond buyers are confident that the government will repay them, they accept the lower interest rate of return. However, if bond buyers feel that the government will not be able to repay them, the market will demand a higher interest rate on the bonds which decreases the number of buyers who want to buy them. Taxpayer money is used to pay the bond interest rate so higher interest rates will result in higher taxes. A lack of confidence has already been seen in the stock market decreases over the past week as we approach the current debt ceiling.

If the interest rates on Treasury bonds increases this will have a domino effect and cause the interest rates of other products such as cars, student and mortgage loans and credit cards, business loans or lines of credit to increase. There could also be an increase in personal products such as electronics, clothes, food, household goods and company products and services. This will cause the value of the dollar to decrease causing an increase in costs to purchase foreign imports as well as gasoline for cars.

The less money that is approved for loans or credit will cause taxpayers and business owners to spend less and save more which will hurt the economy.

If Congress doesn't raise the debt ceiling, the government will reach the debt ceiling and max out its borrowing power which will prevent the government from paying its debt. This would affect Social Security, Medicare, military salaries, tax refunds, and unemployment insurance, government grants, and other funding.

Save Money on This Summer's Vacation

Every loves to travel during the summer and many family vacations usually start during the Memorial Day holiday. Unfortunately, the economy has made it difficult for many families to take a summer vacation. We work 10-12 hour days. We rush to work, rush to get the kids, rush home, rush to eat dinner and then repeat the entire process all over again the next day. We never fully take the time to relax. It may seem there are never enough hours in the day to get everything done.

We all need to take time out to relax. Now is a great time to start looking for bargains on airfare, hotels and vacation spots. You work hard all year and deserve take at least a mini-vacation to a nearby beach or hotel. If you can afford to go on vacation without charging it on your credit card and only to still pay for 6 month later – then do it and pay for it with cash. Here are 8 tips to help save money when you are planning for your summer vacation.

1. Plan ahead. Plan in advance to save money. Buy toiletries and other necessities before traveling.
2. Talk to others. Talk to friends and neighbors to find out how they planned their vacation, i.e. ask about any discounts or sales, restaurants, shops, etc.
3. Act fast. When you see or hear about sales or discounts you have to move quickly to capitalize on the deal because they usually don't last long.
4. Shop around. Shop around to find the best deals. Visit websites like hotwire.com, priceline.com, kayak.com or hotels.com to find cheap rates for hotel, airfare and cruises. Purchase services together such as air and hotel or air, hotel and rental car to save money.
5. Safety. Buy traveler's checks which can quickly be replaced if lost. If your credit card is stolen you may not have another credit card available to purchase any necessities.
6. Buy traveler's insurance. Buy traveler's insurance. This will reduce the costs of medical bills that could accrue if you get sick on a cruise ship or flight and prevent you from going into debt.
7. Use restraint. Use restraint while on vacation. Don't buy everything you see . If you know you will be tempted don't even go into the store. Buy items or souvenir gifts at flea markets or only buy items that are on sale.
8. Snacks. Buy snacks and a few drinks and pack them in your suitcase before you leave. This will tide you over when you get hungry while on vacation until you are able to eat a full meal. This will also help you save you money that you would spend on midnight snacks.

If you want to take a vacation and cannot afford it, here are 5 simple things to do in the meantime:
1. Visit local caverns.
2. Camp out in your backyard.
3. Spend the day at a water park or amusement park.
4. Take a road trip and go camping a few hours or at a local camp park.
5. Go sightseeing in your local area.

The most important thing to do while on vacation is - have fun, but don't overextend yourself by splurging on unnecessary items. Create a small list of items you want to purchase and stick to it. The worst feeling is to return from vacation and get credit card statement in the mail for items charged while on vacation.

Financial Tips for 2011

Paying Down Debt

1. Future. The future is an unknown.
2. Tax Rates. Tax rates may be higher in 2011 which means you may bring home less money. Tax credits may be reduced, child tax credit will be reduced to $500 in 2011, the deduction for mortgage insurance premiums will be eliminated, and energy saving improvements will be reduced to 10%.
3. Minimum. Paying more than the monthly minimum pays your balance down faster so you will owe less next year (interest, finance charges, etc.).
4. Shopping. Cut back on shopping to reduce changes of going into more debt or having large credit card balances after the holiday shopping season.
5. Variable. Many credit cards have been converted from fixed to variable rates which means if the federal rate increases, so will your monthly payments
6. Finances. Can improve relationship with your spouse or partner related to arguments over finances
7. Retirement. You can't focus on retirement if you are in debt

Tips to Plan for the Future

1. Change your thinking. Eliminate negative thoughts about money and bad money habits. Follow those who have good spending habits and consult a professional.
2. Emergency Fund. Create an emergency fund to cover bills for 9-12 months.
3. Plan for retirement. Contribute the maximum to get matching contributions. You will need 60-80% of your current retirement salary for a minimum of 20 years to have enough money to cover living expenses during retirement. Save 10-20% each month towards retirement.
4. Pre-retirement. One year before retirement start reducing your expenses to retirement levels to get adjusted to living on a reduced income.
5. SS Income. Don't count on social security unless you are near retirement age.
6. Financial Goals. Sets financial goals, i.e. plan for retirement, children's college education, pay off mortgage, pay off car note, etc.
7. Contributions. Increase retirement contributions with each salary increase

Planning For Retirement

1. Sign up. If you don't have a retirement account, run to your employer and sign up. Setup an account even if you are self-employed (SEP) or stay-at-home mom (spousal IRA).
2. Diversify. Don't put all of your eggs in one basket. Ensure your retirement account is diversified. This helps to offset losses.
3. Live below your means. Reduce spending and create a budget.
4. Pay down debt. Pay off large debts and keep debt at no more than 10% of your monthly income after taxes (credit cards, medical expenses, other loans, etc.)
5. Estate planning. Perform estate planning (will, trust, health care directive, etc.). Hire a lawyer to prepare documentation.
6. Review. Review financial statements on a regular basis to check for errors and stay informed about your account.
7. Backup Plan. Create a backup plan if some financial crisis occurs and you need extra money. Have a plan A, B, C and D. Use what-if scenarios.

Saving Money

1. Budget. Create a spending plan or budget to see what areas you can reduce spending. Thirty-five percent of your budget after taxes should go towards housing (mortgage/rent, utilizes, repairs), fifteen percent towards debt (credit cards, student loans, personal loans), twenty-five percent towards transportation (maintenance and car payment), ten-percent towards savings, and fifteen-percent towards other expenses (groceries, prescriptions, medical expenses, etc.).
2. Bulk. Buy items in bulk by shopping at wholesale or discount stores such as Costco, Sam’s Club or BJ’s. Buy generic brands for food, canned goods, paper products, dry goods and prescriptions.
3. Comparison Shop. Look at prices of at least three different companies to see which has the best deal. Ask if the company will honor competitor prices. Look for coupons and specials at online websites such as bizrate.com or pricegrabber.com.
4. Utilities. Buy the cheapest landline plan available. Turn to the lowest settings when you are not at home and use the recommended settings provided by the utility companies to save money on your monthly bills.
5. Bundle. Bundle services to save money on insurances such as car, mortgage and homeowners.
6. Downgrade. Downgrade all your services such as cable, internet, and cell phone. Downgrade your car or home to a cheaper model. You can sell your car and catch public transportation. If you need a car you can rent a car or use a Zip car.
7. Sell Items. Sell new or used items on eBay or Craigslist for extra cash.

Tax Refunds - Use It or Lose It

Many Americans get excited when they find out they are getting a tax refund. However, for many Americans in this economy getting a tax refund means it will be spent as soon as you get it. If you are struggling to pay bills or need to get out of debt your tax refund can be a lifesaver. But, it is up to you to determine how to spend it. Many Americans spend money frivolously and don't really think about their future. Here are 7 smart ways to spend your tax refund and improve your financial life.


1. Get current. If you are behind on your mortgage payment, use the money to catch up. Make sure you get current on all utility bills and car payments.

2. Downsize. If you are in a house that is upside or have a luxury car, downsize. If you are unable to downsize your home consider renting out one or two rooms. You can make a lot of extra money renting out a room in your home. Consider selling your car and buying a used car with no car payment or that costs $5,000 or less.

3. Borrow. Ask family or friends if you can borrow money to help get caught on your mortgage and utility bills. Your main focus is to keep a roof over your head and food on your table. Once you get current on household bills, then you can use any extra money to pay down debt and other bills.

4. Extras. Cancel your internet, long distance, cable service and magazine and newspaper subscriptions. If you absolutely have to have internet and cable service get the cheapest plan possible and call continually to ask about specials.
5. Eating. Skip eating out and buying fast food because you don't feel like cooking. Cooking at home can save you lots on your grocery bill. Buy more fresh fruits and vegetables instead of starches and processed food to save money. Also, use coupons, buy items on sale, buy in bulk or shop at wholesale stores. You can also change your eating habits. Meats are the most expensive items at the grocery store so consider buying cheaper meats, instead of steak buy pork, instead of pork buy turkey, seafood or chicken.

6. Sell. Go through your entire home and if you find anything in your home that has not been used by you or any of your family members in the past 6-12 months, donate the items to charity. You can later write the donations off on your taxes. You can also have a yard sale to get extra money.

7. Buy used. Many people believe the hype from advertisers that you can only get good quality items if they are bought new. Now true. You can visit websites such as freecycle.org and find items that are used for free. That's right free. You can also buy used items on eBay and Amazon.

I hope these tips help you slash your budget and work towards improving your financial life.

Is Your Car a Clunker

The Cash for Clunkers, Clunkers or the official name Cash Allowance Rebate System (CARS) program was signed by President Obama in June and began on July 27, 2009. Vehicles purchased after July 1, 2009 are eligible for refund vouchers worth $3,500 to $4,500 on traded-in cars with a fuel economy rating of 18 miles per gallon or less (fuel-efficient). The program will expire on Nov. 1, 2009.

Details of the program were mapped out by the National Highway Traffic Safety Administration (NHTSA). Unfortunately, interest in the Clunkers program peaked on July 29, 2009, and demand has stalled according to a report from Edmunds.com. The report which discussed internet shopping data said if current trends continue auto purchases will fall back to pre-Cash for Clunker levels by August 20, 2009. The report also predicted auto sales will improve over the summer as customers shop for bargains before the new car models hit the showroom.

Many people are show interest in purchasing a new car but do not qualify for the rebates which are affecting car sales. The White House hopes the rebates will increase vehicle sales which are down 3-6 million from 2007 and 2008 sales.

Approximately 16,000 auto dealers signed up to participate in the program. A government hotline was setup and has handled over 45,000 calls from people seeking information. A website for the program http://www.cashforclunkers.com/index.htm has registered 1.5 million hits since August 7, 2009.

Some dealers said junkyards in their area are not prepared to handle the inventory of older cars expected to be scrapped. Other dealers said the 136-page instruction manual provided by the government is confusing. Some car buyers have been disappointed that their cars don't qualify for the program.

Should You Lease

Some businesses are losing sales and are considering filing for bankruptcy or dissolving their business due to the recession. However, many businesses are thriving with increased sales and taking advantage of consumers needs. One such example is companies that provide rent-to-own merchandise.

Many of these companies are doing more advertisements to attract customers. Aaron's has 1,575 stores and had 1st Quarter 2009 sales of 474 million. Rent-A-Center also known as Rentway had 1st Quarter 2009 sales of 728.2 million. Just think if half of those customers changed their lifestyle and their spending habits and paid down their debt which helps to increase your credit score, that money could be used to start a savings account, start a retirement account, purchase a home or more importantly buy items with cash. Instead of going to a rent-a-center store to buy a tv you could go to Best Buy, comparison shop online at Amazon.com or go to a thrift store to get a good deal.

Many rent-a-center stores know how to find their customers and customize advertisements to attract the customers they are looking for. Managers sometimes attend local events with customers to help them determine if a customer has lost their jobs. Some stores also ask for references to determine if the customer will make their monthly payments. Some managers attend their customer's churches, get to know their customer's backgrounds, talk to their employers or ask about their financial status. All of this information is used to help make a sale and ensure that customers can continue to make their monthly payments.

Purchasing items from rent-a-center store can cost you 2 to 3 times the original cost of the item and in some cases the items are used or could be damaged. You can prevent all of this by only buying items that you can afford. Here are 5 ways to help find the best deal without having to lease a purchase.

1. Research. Do research on the item you wish to purchase. If you are looking for a tv, look for customer reviews or ask family or friends what brand they purchased and if they are happy with their purchase. Use that information to help find a brand the meets your requirements so you are able to make a wise purchase based on quality not merely on price.

2. Compare. Do comparison shopping at different stores – thrift stores, outlet stores, discounts stores or online. Spend at least 20 minutes comparison shopping. For every 5-10 minutes spent comparison shopping you save $1-$9. You can also buy used items to save money.

3. Buy Later. If you see something you want to buy but don't have the cash or have bad credit, save your money and then go purchase the item. If you absolutely have to have the item when you see it wait a few days, then go back to the store. See if the item is marked down or ask a sales clerk when the item will go on sale. Then compare that price with other stores to get the best deal.

4. Use competitors. Go to a store and comparison shop. Then go to a competitor store and tell them you found a cheaper price at their competitors store and ask them to match that price or offer a lower price. Some stores do this such as the Room Store, Target, Wal-Mart, etc. See which store gives you the best deal.

5. Needs vs. wants. You should buy more needs instead of wants. There should be a balance, if you are buying more items that you want then reevaluate your spending habits. Only buy items that you can pay cash for or that are within your budget. That designer purse or designer pair of jeans is not a need. The only 3 basic needs are food, clothing and shelter, and I'm adding a 4th - one prescriptions.

Used is the new "new" and "new" is the new "old".

What Did You Buy Today - A Need or a Want

Advertisers make consumers believe anything can be bought instantly with the swipe of a credit card and lure consumers into store with false advertisements, sales and other gimmicks to buy things they can't afford or simply don't need. Most Americans buy more of things they want instead of more of things they need which leads to bad credit, late fees, bad spending habits, maxed out credit cards and filing for bankruptcy.

A need is something you have to have to survive – food, clothing (non-designer and shelter). A want is everything else, something you would like to have but don't really need. Create a list of things you buy and identify each item as a need or want. If you have more wants in your list then you need to change your spending habits and buy less of the items in the want column. Here are 5 tips to consider when shopping to help think in terms of needs vs. wants.

1. Do you convince yourself that the item you purchased is a need when it really is something you want?
2. Do you rationalize that you work hard everyday and deserve nice things and you should be able to buy whatever you want?
3. Do you buy an item with your credit card even though you know you don't have the money to pay the credit card bill when it arrives?
4. Do you go shopping with a credit card or with cash?
5. Do you buy more of things you want instead of things you need?

Buying more wants than needs can cause you to live above your means and leads to bad spending habits. Now is the time to develop good spending habits and reduce money spent on things you want. Buying wants should be done in moderation and only when you have the cash to buy the item. This will also help you to have a balanced budget. So, the next time you go into a store and pick up an item to buy ask yourself – is this a need or a want?

Your New Best Friend - A Budget

Many people don't know how to create a budget or spending plan and don’t know where to start. The first step to getting out of debt is by creating a budget. Creating a budget shows accountability for your spending and shows you how much you have coming in and how much you have going out. It identifies your SEO – what you spend, what you earn, and what you owe.

Make your budget flexible so you have "wiggle" room for unexpected expenses. If you don't have an emergency fund or savings to cover those unexpected expenses you can see right away what areas in your budget you need to reduce spending instead of using a credit card to pay for those unexpected expenses. Most people don't think about how much money they spend per week or per month but when you see all of your expenses written down it provides greater insight into your spending habits.

The first step is to determine if there are some areas where you are spending too much money, you want to have a balanced budget and make sure you don't spend too much money in any one area of your budget. Develop financial goals for yourself when creating your budget. Financial goals encourage you to work towards reaching that goal and provides a sense of accomplishment when the goal is met. Some examples of financial goals are: pay off a credit card, buy a home, take a vacation, etc.

Being debt free is hard work, requires discipline and reduces your anxiety and stress about your financial situation. Many things are possible when you are debt free and live on a budget. Determine if you want to live the rest of your life as a borrower or as a lender. It's up to you!