The Present Financial Situation-Update to 9/29 blog on the Background of the Situation

UPDATE TO BLOG POSTED ON 9/29/08 ON

THE PRESENT FINANCIAL SITUATION

If you have been reading or listening to the news concerning the present financial situation, you probably have heard the comment that we must "deleverage" before we can fix the situation. If you read the 9/29 blog, you probably have some understanding of what is being said.

I must apologize now for some of the upcoming comments. I have mentioned in some conversations with people that by the first of the year we would be reading about the significant rise in credit card default and car loan default. At present nearly $25 billion in auto loans are past due. In the second quarter of this year, that amount went up by 11%. We can only hope that the rate of increase does not continue. Credit card debt is experiencing the same issues. Neither car loans nor credit card problems have reached the level of home foreclosures-----------yet.

Living beyond our means has been popular-too popular. Now approximately one in five middle aged people have quit contributing to their retirement plans. Over 80% who stopped said they did not have enough money left over after expenses. You may have read about many people who are putting off retirement for financial reasons (not because they just want to work).

I would like to tell the story of a young couple that I know that is part of the solution rather than part of the problem. They met in college and upon graduating got married. Not an unusual situation, but then their decisions did start separating them from most. They decided to live on just one income and save and invest the other income. Rather than buy or rent a home like they wanted and buy new expensive cars and then say both incomes were necessary to pay the bills, they only rented and bought what one income would allow them to do. For a few years, they rented a very inexpensive place and saved the other income. Then they used those several years of savings to put a large down payment on a small, older home that needed work. They spent about 4 years doing all the remodeling themselves. They learned how to lay ceramic tile, wood floors, hang new kitchen cabinets, put up crown molding, paint, etc. themselves. They still continued to live on one income. At the end of about 4 years (and all the remodeling), they sold the house. With the money they made on the house and the 4 years of saved income from one of their jobs, they paid 50% down on a fairly new, very nice 4,000 sq ft home in a nice neighborhood. I forgot to tell you that they do not finance their cars-they save for them. They continued to live on one income and save the other income. How can they do that-they paid 50% down and have no car payments. After about 3 years in the new house and saving and investing one income, they came to me and said, "we have enough money in the stock market and we want to now invest in real estate....can you help". We talked, looked, etc. and I said let's wait because prices are going down and will continue to go down through this year and probably through 2009. So, we look and watch and keep track of what is happening.

I wonder what their reward will be for their discipline, living within their means and sacrifice. Probably starting in 2010, they will have to pay increased federal income taxes because someone will want to raise taxes for people for people who have money.

Did I mention that this couple just turned 31 and 32 years old this year? What an example of making sound financial and sound real estate decisions they are.