Start the NEW YEAR with Savings!

Time for those New Year Resolutions! Take time to resolve to manage your personal finances better in 2008.

So I mentioned earlier that the first step for most people is to save money - most planners recommend anywhere from 2 to 6 months of your salary stashed away in a liquid savings account. This would be for emergencies (like losing a job or medical) or for your savings goals (like a new car or vacation).

Now most people don't have 6 months of salary sitting in their checking account, especially those starting off right from college so here's the easiest way to go about saving money:

Open a savings account with an online bank (I use ING Direct) with as little as $100. Online banks pay much higher rates than normal banks because of their lower overhead. This also allows you to "link" your checking account to your online savings account and establish an automatic transfer. ING lets you do any amount daily, weekly, monthly, or quarterly. You can also do 1-time transfers.

If your goal is to have 6 months of salary saved up by the end of 1 year, then set your automatic transfer to be 1/24th of your salary every month (when you get paid).

I recommend setting up the transfer on whatever day you get paid - so if you're paid weekly, you would have weekly transfers; monthly - monthly, etc. This way you're PAYING YOURSELF FIRST before you spend it!

Of course, if your budget doesn't allow this, then you should take a good look at your spending habits, your earning potential, and then transfer whatever you can with a goal to increase it. The point is to START!

Economic Outlook 2008

Nationally, interest rates were up, now down; stocks are flat, real estate values dropped on a year-over-year basis for the first time since the Great Depression! If you’re like me, your crystal ball is awfully cloudy when trying to discern the financial future right now. Let's take a look at some of the things we do know:

1. The sub-prime mortgage mess has wrecked the financial services industry, and it probably won't recover for a couple years. Bright side: increased transparency and controls going forward (at least until enough time passes that no one remembers this), and nice bargains in stocks from large, solid companies that pay dividends. I won't make any specific recommendations here, but begin your search for blue chip stocks that are paying > 4% dividends and you'll find some bargains. Also try funds or ETFs that focus on this.
2. The areas that are getting hit the worst in declining values are the same ones that had the most ridiculous run-ups over the last 2 decades (Florida, California, etc). Nationwide, there are still markets that have increasing value, even as new construction levels off. Here in Greene County, MO, average home prices continue to increase despite the high inventory. New construction has leveled off dramatically and the average day-on-market for all homes is 56 days. In the surrounding rural counties, listing times are a lot higher and it is a buyers' market. The biggest thing that sellers need to know is that buyers are having a harder time obtaining credit, therefore, your house may either need a price reduction or concession for a quick sale, otherwise it may sit a while. Thinking about "add-ons" or remodeling to increase your price? It may not be a good idea as buyers are able to afford less.
   
3. Real Estate Investing still makes sense: a recent report by the NAR shows that investors nationwide are up $54,000 over the last 5 years (taking into account the recent pull back). Only investors who bought very recent would be facing a crunch - and again it's probably more so in those markets that have felt the biggest crunch. Here in Springfield, as I suspect there are in many other places, there are major bargains to be had for the serious buy-and-hold investor. Flipping properties like on TV may net the most gains in a positive market, but it comes with the most risk. In a flat or declining market, you have a very small margin of error to make money flipping houses. Alternatively, an investor who can afford to put some money in a rental that produces nice cash flow will ride out the downturn and see a nice appreciation (to go along with his cash flow) in the future.
4. Something that really annoys me is how little the media actually understand investing - unless they're just really good at hiding it - they usually always overlook the fact that real estate investors are leveraged when they compare returns to the stock market. Remember to compare Cash-on-Cash return when investing.

OUTLOOK:

With interest rates back under control and most industries still humming along, things are actually pretty positive. Employment is good, as is job creation. The subprime mess will mean that low to average income earners will go back to FHA loans rather than the adjustable rate loans - which is a good thing. With the elevated levels of inventory, it may take a while for the market to soar again (if at all). The economy as a whole is said to be on pace for modest increases in 2008. With the election coming up, there will be a lot of jitters in the market as many wait to see who will be elected and what new policies they will bring. The NAR forecasts that the housing market overall will continue to decline between .5 and 2% per quarter until around Q2 or Q3 of 2008 at which time the trend will begin to reverse and the nation will see modest gains.