Financial Fresh Start: Your Five-Step Plan for Adapting and Prospering in the New Economyby Shari Olefson
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Financial Fresh Start explains it all—simplifying the complicated reforms and motivating readers to shake off their malaise and radically improve their long-term financial prospects. Written by a dynamic author with a unique blend of legal, financial, and real estate expertise, the book’s big-picture lens spans the spectrum of money matters, and delivers clear, actionable answers to questions such as: • How can you repair your credit quickly and avoid high finance costs? • What are the safest places for saving and investing? • Can you legally avoid repaying what you owe? • Will your home ever be worth what you paid for it? • Is there life after foreclosure? • Are you missing out on programs that can put money in your pockets? • Is it possible to make up for recent losses and still retire on time? • And more Big corporations and the mega-wealthy have professionals to keep them abreast of the latest regulations. Now, everyday people can learn what the new rules really mean to them with the expert guidance and practical solutions in Financial Fresh Start.
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FINANCIAL FRESH STARTYour Five-Step Plan for Adapting and Prospering in the New Economy
By SHARI OLEFSON
AMACOMCopyright © 2013 Shari Olefson
All right reserved.
Chapter OneGetting a Handle on Your Big Picture
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What Will You Learn from This Chapter? This chapter connects the dots for you by explaining what the heck happened in America and around the world in financial markets and how the meltdown has impacted your own financial situation. You'll also be introduced to the new rules and reforms created in the wake of America's Great Recession. You'll learn what they are, what they really mean, why they matter, and what you can expect next.
How Will This Knowledge Help You? Being uninformed translates to disadvantage, missed opportunity, and a higher likelihood of facing more financial obstacles. After reading this chapter, you will have the basic "need to know" background and broad-stroke understanding of the new rules and reforms that impact every facet of your fresh start plan toward financial prosperity.
First, a Look Back
A fresh start is all about moving forward. But the path you decide to take and, more important, where that path will take you depend on where you are starting from and what is going on all around you as you journey forward. This chapter sets the stage for your own personal fresh start by explaining what the heck's been happening around you, undetected, right before your eyes—economically, politically, culturally—that has ultimately climaxed in the financial challenges confronting you today.
In many ways, these worries are the very things you are feeling (but perhaps can't quite put your finger on) that keep you awake at night. What's been happening to your income, expenses, assets, and debts? What about the country's finances? What does what happens in other parts of the world have to do with your finances? How do the reforms and new rules from Washington in reaction to the Great Recession impact you? How can these rules and reforms help you rebuild your prosperity? This knowledge will allow you to understand the big-picture backdrop behind your current financial situation (and the nation's) and also understand the broad strokes of the rules and reforms that emerged from America's financial challenges.
And this chapter will more easily identify elements you need to incorporate into your own fresh start action plan, so you'll be better able to adapt to inevitable changes to rules and reforms and prosper in the new economy.
Why America's Economic Evolution Matters to You
If you're like some folks today, you find yourself "checking out" when discussions turn to the economy. Partially because—let's be honest—it sounds a tad boring, or maybe things just seem to have gotten too complicated. But it's also because it feels as if there's not much you can do about the economy anyway. The general assumption today is that rich people, big companies, and politicians control the economy. Average folks like you have no say in these things, right?
Wrong! Knowing the basics about what's going on, the buzzwords you should be listening for, and what you can safely ignore are all imperative to making the right choices in your own plans for achieving your own financial goals. In fact, perhaps most ironically (as you will soon see more clearly), it is oftentimes the everyday American whose behavior actually determines the course of the economy. Take, for example, the way banks and Wall Street panicked in 2008 and America's government and politicians woke up and sprang into gear when average Americans on "Main Street," just like you, stopped paying their home mortgage loans.
America's economy matters to you because, in many ways, the country is like a company and you are one of "The America Company's" shareholders. When The America Company is in good financial shape, the benefits of its success flow to you as a shareholder in countless ways. For example, you may wind up paying less for your own healthcare because The America Company can afford to provide you with some of those services. Or maybe you get a break by not having to pay income taxes on the money you spend on childcare, again because The America Company can afford to run its business without needing that extra cash from you. The financial health of The America Company sets the pace for pretty much the entire business climate, which translates to your own financial situation. When the country is doing well, there are direct and indirect and immediate and long-term ways you wind up with more money in your own pocket and a better shot at improving your own financial situation.
But the opposite also holds true. When The America Company faces financial struggles, you get less from it, and the country's struggles, one way or another, wind up costing you hard-earned cash in more ways than you may know.
The connections between America's economy, your own financial situation, and some of the ways you can protect yourself and your money will become clearer for you very shortly. For now, suffice it to say that even if conversations about the economy feel alien, overly complicated, redundant, or boring, there is no denying that America's economy has a very direct and very big impact on your personal financial situation and your own life, plans, and goals. Fortunately, the few things you really do need to know about America's economic evolution in order to protect yourself and prosper are simple. And you can rest assured that this discussion will focus only on basic, "must know" aspects of America's economy that are easily accessible and immediately useful to you and your personal financial situation, and we'll do that together in under ten pages.
America's Financial Goals Are Just Like Yours
If you're like most folks, your top financial priority is ensuring that your income exceeds your expenses so that you can pay your bills and make ends meet. In the bigger, longer-term picture, your goal is ensuring that the amount by which your income exceeds your expenses continues to grow so that you can enjoy an increasingly robust lifestyle, build up your savings and investments, and pay down any debt you might have accrued, so eventually you won't have to worry about money and can retire on time, all without feeling like you're sacrificing. Is that really too much to ask for? The term upward mobility is commonly used to describe this shared vision. And, over time, it has become an expectation that Americans often simply assume will come to fruition.
This same big-picture goal holds true from one generation to the next. You no doubt want your children's financial situation to be even better than your own, just as your parents and grandparents wanted the same for you. After all, isn't that the essence of the American Dream?
The same broad-stroke financial goals apply to America's economy. Like most Americans, notwithstanding the fact that your own financial situation takes precedence, you presumably want your country's economy to continually improve over time. No one doubts that America will face occasional temporary setbacks, but in that big picture, over the long term, your preference would presumably be that America's economy continually improves, if for no other reason than the fact that when The America Company's financial situation is good, you know that more of your own cash stays in your own pocket and achieving your own personal financial goals tends to be a smoother sail.
Like most folks, you gauge your own financial situation by how much you earn (your income), the bills you pay (your expenses), how much you have in savings or investments (your assets), and how much you owe to lenders or creditors (your debt or liabilities). You can easily gauge America's financial condition the same way. Terms like gross domestic product (GDP) and standard of living help describe these measures of America's economy (see sidebar). Standard of living tends to go up or down when a country's gross domestic product goes up or down. When GDP goes up, America's businesses tend to earn more and expand, which means more jobs and more folks being able to spend more money. This translates into more taxes being paid to The America Company (taxes are income to America, see Figure 1-1) and further growth and opportunity for you to earn more income as well. In fact, this all translates to your own financial situation, including your own job security, savings, and investments. Stock prices, for example, tend to go up over time as the GDP goes up. If, like most folks, your retirement savings or pension fund is invested in the stock market, positive GPD puts more money in your pocket! So while productivity, which measures how much a country produces by the manpower it took to produce it, and GDP do not measure America's income per se, they do provide an indication of how healthy America's income—including taxes from companies, workers, and folks like you—will be.
Conversely, when GDP numbers go down, that's a red flag for you to listen up and pull out some of the strategies you'll learn in this book to protect yourself. As you will see, even drops in GDP can create opportunities if you pay attention and you know where to look.
What Went Wrong?
So here's the puzzling question for you: If, as you will see shortly, America's gross domestic product has continually gone up, then what happened that caused your own financial situation, the financial situation of millions like you, and America's entire economy to take a turn for the worse with the Great Recession?
Like all aspects of economics, there are endless theories, opinions, and debates on the topic of what caused the challenges you're facing in the new economy. My book Foreclosure Nation: Mortgaging the American Dream explores this subject in detail. While discussing all of them exceeds the scope of this book, quickly recovering those you can control is relevant and will benefit you tremendously in the coming years.
No doubt, you know about the "housing bubble" and so many of the money troubles that began when that bubble burst. But some experts believe many of your own (and the country's) money troubles may have actually begun long before the housing bubble ever inflated.
The Income Piece of the Puzzle
After the Great Depression of the 1930s and all the way up until the 1970s, America's workers were rewarded for growing GDP and productivity with increased income in the form of wages. True to the country's shared vision of upward mobility, hard work paid off for the country's workers. And since two-thirds of America's economy depends on average folks spending their money, a behavior referred to as consumer spending, a large portion of these wages wound up being recirculated into the economy, to the benefit of all Americans and the country itself.
During the last three decades of the twentieth century, GDP and productivity continued an upward climb. But something different began happening to the wages of America's workers. Instead of increasing at a healthy pace along with productivity and gross domestic product, as had long been the case, wages paid to America's workers increased very little. There are a multitude of theories for why this shift occurred. What's important for you to know is simply that it happened and that in the years since, contrary to income increasing over time, as would be needed in order to achieve the upward mobility everyone wants, America's workers have instead actually been earning effectively less and less over the past few decades.
The Expense Piece of the Puzzle
Your financial situation includes both income and expenses—what you make and what you spend. I just explained what's been happening on the income side: Average Americans actually earn less today than a decade ago. The other part of this particular puzzle involves how much money Americans have been spending. Many measures are available to illustrate the expense piece of this puzzle, including:
Consumer Price Index (CPI), which measures movement in the price of goods and services purchased by a typical consumer like you.
Inflation, which is a rise in the price of the goods and services that you buy. With inflation, your money buys fewer things than before. The groceries that previously cost you $100 a week, for example, now cost you $150 a week. Of course, if you're not earning more money, that can be a problem. Phrased conversely, inflation erodes the buying power of your money.
Deflation, which is a decrease in the price of goods and services. With deflation, the value of your money—in other words, what your money can buy—increases. Deflation sounds like a great thing, right? But it can actually be worse for the economy than inflation. Think about what happened in America's housing market beginning in 2006. Home prices "deflated" by as much as 50 percent in some areas. Homebuyers were afraid to buy because they thought that home prices might continue dropping, and as a result, many sellers could not sell their homes. In other words, deflation may reduce the value of things you want to buy, but it can also decrease the value of all things you already own to below the amount you invested. When that happens to everybody at once, the result is not pretty.
For more information on these terms, see the video clip at www. askshario.com/terms.
The bottom line is that since the 1970s, the income of average American workers has not kept pace with their expenses. As a result, more and more Americans found it difficult to make ends meet. But as it turns out, they were sitting on a treasure chest from which they could continually borrow money to cover this silent shortfall: their homes. Unfortunately, the "solution" quickly became the problem.
Turning Assets into Debt
During the decades leading up to the housing bubble, around 65 percent of Americans were homeowners, and all this happened while the value of American homes continued to grow, eventually accounting for the majority of the average American homeowner's personal wealth. As such, home equity has long been the leading financial safety net and nest egg for Americans. Economic pressures, however, began to take their toll. Whether it was the need for extra cash to make ends meet or desperation to accumulate enough money to retire, Americans began to rely on borrowing, siphoning off their precious home equity to pay for things that used to be paid for with their wages—and draining their personal financial safety nets and nest eggs in the process.
If you're one of the folks who began to rely on borrowing, you know how addictive it can be. Once you start, your spending habits adjust to having that additional money and it becomes increasingly difficult to cut back your spending again. Borrowing of this magnitude occurred in millions of homes across America. And, knowing this, banks of all shapes and sizes leveraged the opportunity to increase their own company profits by keeping the lending spigots flowing. Folks took on car loans, student loans, and credit cards; they borrowed in a variety of other ways until, eventually, the average American household was spending 120 percent of its income. All the while, The America Company's debt was also on the rise.
You know what happened next: With mortgage loan money readily available, home prices escalated through the roof, creating a housing bubble that eventually burst at a cumulative loss in home value and personal wealth to Americans of more than $13 trillion.
Why the Mess Spread
The housing bubble provides a great example of how the impact of an economic bubble bursting can quickly take on a life of its own, spreading deep and wide into other areas of the economy. What first began as a default and foreclosure problem for folks with subprime home mortgage loans (riskier loans generally made to less qualified borrowers and lower-end or speculative homes), eventually spread to all home mortgage loans, borrowers, and homes. America's government tried to intervene, but nothing seemed to work. Eventually everyone's home values began dropping and an economic cycle referred to as adverse feedback began.
Adverse feedback is a cycle that, in the case of America's housing, began with home mortgage loan defaults and foreclosures. Those foreclosed homes eventually sold for lower prices, dragging down the value of surrounding homes. As surrounding home values dropped, the owners of many of those surrounding homes, likewise, began defaulting on their own home mortgage loans, causing further foreclosures and home price drops, and so on and so forth. Over time, this cycle gained momentum, becoming increasingly difficult to stop.
Excerpted from FINANCIAL FRESH START by SHARI OLEFSON Copyright © 2013 by Shari Olefson. Excerpted by permission of AMACOM. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Meet the Author
SHARI OLEFSON is an Attorney-Mediator with degrees in real estate, finance, and psychology. A trusted journalist, news commentator, and speaker, she is frequently quoted in such publications as the Wall Street Journal, Forbes, and USA Today, and appears weekly on CNN, CNBC, Fox, PBS, MSNBC, and CBS.
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