The thought of saving for college generates the same response for most people as going to the dentist. But it doesn’t have to be that painful nor that difficult, if you understand how money works. For me, I have a painful experience to share that, ten years later, still galls me. Even at the time, I knew what we were doing was wrong. It was a bad decision and now years later I continue to suffer from it.
Ten years ago when my daughter was nine years old, she like many children of the time were swept up in the beanie baby craze. There were thousands of different beanie babies all having different value. A select few were worth hundreds of dollars such as queenie baby, spice baby, Garcia Bear baby, etc. My wife enjoyed the frenzy as well and participated in this collection madness. She has a zeal for collecting, seeking out garage sales, looking for special sales at Wal-Mart and such. They were so good at gathering that their collection was valued at approximately $2,500.
This is where I tried to step in and bring some economic reality to the situation. I gave my daughter a proposition, if she sold her entire collection on Ebay (they were operating then) for $2500, I would match that and give her $2500. Clearly, beanie babies were a craze and it was only a matter of time before the bubble burst and silly money went elsewhere (like the NASDAQ). She would have had $5,000 at the youthful age of nine and a good start for college spending money.
And as day follows night, the beanie craze ended and the $2500 worth of beanies became worthless. Well, flash forward ten years and my daughter is now in college and the costs are truly staggering. If we had sold those beanies for $2500 and with the $2500 match, she wouldn’t have just $5000 today. Assuming I would have earned 7 percent return each year for ten years, this nest egg would be worth $10,000 today.
Saving money — everybody has their own spin; Stop going to Starbucks, quit smoking, pack a lunch, go out to dinner less. While there is nothing wrong with those suggestions and the like, I have a different approach.
Your pay check is deposited, pay yourself first — before the rent or mortgage, before the car and insurance, you take the first check. Move at least ten percent of it into a money market account, I don’t care how much or little you make this a necessary payment. This money is to go toward big purchases and/or retirement money, items that hopefully will appreciate in value such as a house. I know real estate isn’t so hot now, but prices will be higher at some point. A car is not an investment in case you were wondering. The moment you acquire it, its value declines and if your child should drive it like my nineteen year old daughter, it will decline a lot faster. Another option, of course, to invest your money is the stock market.
The purpose of this money is, it is to be used ONLY for the future (more than seven days). The thinking behind this simple technique is that when one sees money in a spending (checking) account, that money will be spent. By removing money from your checking account, it is gone and what’s left is what you have to spend. Then you can chose how to alter your lifestyle habits such as cutting back on dining out or going to sports events based on what you have left in the kitty.
That is the magic of saving money. When money is saved and left to grow it gets bigger. That is how the rich get richer. They allow their money to be salted away, left untouched. Conversely, when you spend a thousand dollar today it is not just a thousand dollars that is gone. It is $2,000 you won’t have in ten years or $4,000 you’ll be without in 20 years.
Therefore, whatever you’re able to save today can only benefit you tomorrow.
To summarize current government policy in health care and housing in a sentence: the house is on fire and we’re repairing the car.Remember the ’60s (if you can — I know for many folks who lived then it is a blur): in response to growing poverty in the cities, the Johnson Administration commenced a “War on Poverty”. Our nation was going to fix it once and for all. Affordable, quality housing was made a priority. The government began building high rises in the most impoverished areas so our poor people could have decent shelter. These high rises quickly developed an affectionate nickname “The Projects,” which translates to housing hell.
With quiet capitulation, these projects have been returned to rubble… a failed policy costing in the hundreds of billions. Unfortunately, we lost the “War” years ago, but that hasn’t stopped the government from interfering in the marketplace to the point of creating the largest bubble in history — rather like England in World War I, which continually sent its young men into the breach, resulting not only in a lost generation but in the death knell of its empire.
Why was the War on Poverty lost? The government ignored Bill Clinton’s axiom “It’s the Economy Stupid”. Lacking the basic common sense that it is a good, adequately-paying job that drives affordable housing, the government invested tax dollars on the result — adequate housing. One could get into a McMansion, but if he didn’t have a job, he couldn’t stay.
The government ignored the outflow of manufacturing in our cities and the jobs that went with them, failing to provide incentives for businesses to stay and prosper. So after transferring the poor to the projects, there were no jobs to pursue. The blue collar jobs had long dried up.
Now, continuing its policy of history be damned and there is nothing to learn from it, we have the government’s response to the popped housing bubble. Again, ignoring basic economics that someone who makes $50k a year cannot afford to live in a $400k home, the government stubbornly puts out incentives in the hopes of sustaining and even increasing the price of housing when it clearly is priced beyond what people can afford.
Not only is it a failure, but it continues to take savings from the people who could have invested in creating a better job growth environment. And that is the real cost of all these horrendous government programs.
And so with that introduction, I bring you the new and NOT improved Housing Credits program that now applies to existing home buyers as well as first time buyers. If you plan to buy a home in the next few months, I hope you enjoy the bailout. At least you’re getting something for the trillions that have been squandered and wasted.
(Worker, Homeownership, and Business Assistance Act of 2009)
Highlights
- Extension of $8,000 homeowners credit
- New rules on properties that qualify
- Now, current home owners are eligible if the house sold is less than $800K.
- Fraud crackdown — the IRS wants proof: demands HUD form, must be at least age 18 to qualify
- Price Tag and Impact
I. Extension of $8,000 homeowners’ credit
- First-time home buyers’ credit deadline was set to expire on Nov. 30, now extended to May 1, 2010
- The legislation defines “first-time home buyers” as anyone who has not owned a principal residence in the three years prior to making the purchase.
II. New rules on properties that qualify
- Home buyers must have a signed sales contract before May 1, 2010, but they have until the end of June to actually close the transaction.
- New law raises the annual income limits from $75,000 to $125,000 for singles and from $150,000 to $225,000 for married couples.
III. Current home owners eligible, if
- Primary residence purchased for less than $800,000
- They lived in their home for five consecutive years over the previous eight
- Home was purchased between November 7 and the end of April 2010
- They signed the sales contract on a home before May 1, 2010, although they have until the end of June to close the sale
- Income limits for current homeowners are the same as those for first-time home buyers
- If they use the property as their primary residence for three or more years after the purchase, buyers don’t have to pay the tax credit back
- Tax credit allowed of up to $6,500 when they purchase their next primary residence.
IV. Fraud crackdown
- Current Fraud — Treasury Department has identified hundreds of millions of dollars in questionable claims
- Taxpayers who claimed the first-time home buyer credit even though they had previously owned residential property within the past three years
- Taxpayers who claimed the credit before actually purchasing the home
- Hundreds of taxpayers younger than 18 years old — and at least one who was just four — also claimed the credit.
- New IRS cracks down
- Proof of Sale required: copy of HUD-1 Settlement Statement must be submitted to prove that the sale has closed.
- No one younger than 18 years can claim the credit.
V. Price Tag and Impact
- Priceless [?] The cost of the current program is something like $10 billion as of August 22 and the new program is expected to cost another $10 billion.
- Eligible homeowners include more than two-thirds of current homeowners and nearly all first-time buyers, or 70 percent of current homeowners.
- Is it the best use of the money? The financial blog Calculated Risk estimates that the February first-time home buyer tax credit cost the government roughly $43,000 for every additional home sale it generated.
1) Don’t buy just because the Prez says so — It’s nice to have $8k if you qualify, but be careful about taking on new debt.
2) First Time home buyers new purchase rules — Signed sales contract on a home before May 1, 2010, but have until the end of June to close the sale.
3) Current home owners can play too, get Tax credit up to $6,500 if — residence purchased for less than $800,000 , lived in their home for five consecutive years over the previous eight, used the property as their primary residence for three or more years after the purchase.