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Yes, You Should Be Worried About The Economy. No, You Should Not Panic.

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It has been a wild few weeks for the stock market. On Dec. 4 the Dow Jones Industrial Average plummeted nearly 800 points. On Dec. 7 it rallied nearly 800 points. On Monday it fell 500 points, then recovered, ending the day in positive territory.

Analysts and journalists have cited trade, Trump’s China deal, Brexit uncertainty, fears of an economic slowdowna rudderless Fed and much else as the causes of this volatility, which isn’t confined to the stock market. Corporate bonds have been jittery for much of this autumn amid a rash of downgrades from credit rating agencies. Recently, commentators have been issuing ominous warnings about a dreaded inverted yield curve among U.S. Treasury bonds.

“Are You Ready for the Financial Crisis of 2019?” asks one New York Times headline. Will you survive the “$9 trillion corporate debt bomb identified by CNBC?

Everybody needs to calm down. There are legitimate reasons to worry about the course of the economy, but most of the fevered analysis pouring out of the financial press is about as valuable as a trip to your local palm reader. Stock and bond analysts might know a lot about corporate profits and competitive pressures, but they can’t predict the future any better than you can.

The experts don’t know what a final Brexit deal will look like or how long a government shutdown might last, and they can’t calculate the eventual economic ramifications of things that might never exist. They don’t know what unpleasant secrets are currently being papered over in corporate balance sheets, and they can’t predict which supply chains will be disrupted by wars or natural disasters or what new inventions will vault their inventors to glory. The world is an uncertain place.

Uncertain but not random. Here’s what the investment world does know that is spooking markets.

For years now, the Federal Reserve has been signaling that it believes things are going a little too well for American businesses, and it plans to make life a little harder for them.

As a central bank, the Fed’s job is to ensure both maximum employment and price stability. And while there are a lot of different ways of affecting either one, the Fed functions chiefly by managing interest rates ― the price and availability of credit. If there is too much credit in the economy, then businesses can borrow too freely, leading to asset bubbles and inflation. If there is too little credit in the economy, then businesses can’t get the money they need to operate, and people can’t get jobs. Top officials at the Fed generally try to hit a sweet spot where the economy is operating with the maximum number of jobs possible without increasing prices.

There are a lot of problems with this economic management model. For one, the Fed doesn’t really know how inflation works. For another, the Fed insists on operating with an undemocratic independence from the American political process. It’s not really clear why one agency should control interest rates without recourse to taxation and government spending decisions that affect growth, jobs and prices.

But for all its oddities, this is still the way the Fed works. By raising interest rates, the Fed is intentionally putting pressure on businesses ― forcing many to lay off workers or, in some cases, shut down operations entirely. The Fed doesn’t do this for fun. Its top officials believe they have to cause a little unemployment in order to keep inflation from getting out of hand, although there is very little data right now indicating that consumer prices are increasing meaningfully. Inflation has been below the Fed’s target rate of 2 percent for most of the year.

So we know that if the Fed achieves what it hopes to achieve with higher interest rates, then companies will go bankrupt. The firms that are most at risk are generally smaller operations and those already carrying a lot of debt, which can’t draw on cash reserves to meet expenses.

And there are a lot of companies carrying a lot of debt right now. There is currently more than $9.1 trillion in corporate debt outstanding ― nearly double the $4.7 trillion level in 2007. Much of this debt has been blown on some pretty irresponsible purchases, stuff like stock buybacks and mergers that did little to change a company’s business prospects but offered a quick jolt to share prices.

This strain of recklessness infected some very large corporations. GE, for instance, spent $24 billion in 2016 and 2017 buying up its own stock ― even though the company is also loaded to the gills with debt. In effect, the company was borrowing money and giving it away to shareholders and executives instead of investing in new equipment or research. The result is a pretty unstable company. GE’s existing bonds have been plummeting in value as investors worry about the firm’s ability to pay them off. The company’s management is selling off assets to raise cash quickly ― never a good sign.

Which companies eventually go bust and how many of them bite the dust depends largely on how bad the Fed thinks things need to get in order to keep inflation at bay. With the unemployment rate at 3.7 percent, it’s possible to throw millions of people out of work and still have an economy with an unemployment rate below what the Fed has considered normal for much of the past 30 years.

But there’s a wild card in this financial deck: the banking system. Any bank holding too much souring debt could find itself in serious trouble: When companies go bankrupt, banks don’t get paid. After the 2008 financial crisis, the federal government implemented a lot of reforms intended to make American banks safer, and in many ways, they are. They fund their operations with more capital and less debt than they did a decade ago and keep more of their money in safer, readily tradable assets, like Treasury bonds. But top banks are still gigantic and very opaque; it’s very difficult to tell what’s going on inside them, even for bankers themselves. At Wells Fargo, for instance, top managers “discover” new forms of misconduct every few months.

So it’s possible that the Fed could screw up. In the process of trying to cause just a little unemployment, the central bank might push interest rates too far, forcing a major corporate debt sell-off that puts the stability of the financial system itself in jeopardy.

Most economists currently think that’s unlikely. Former Fed Chair Janet Yellen, for instance, said Monday that corporate debt levels are “very high” and compared the quality of a lot of that debt to the toxic subprime mortgage securities from the housing bubble. If a recession hits, “high levels of corporate leverage could prolong the downturn and lead to lots of bankruptcies,” Yellen said. But she emphasized that she doesn’t expect bankruptcies at banks. Even though banks have been approving a lot of bad corporate loans, she thinks the banks themselves are protected against severe losses.

But the truth is that nobody really knows. And if you believe the Fed, things will probably get worse before they get better.  

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4 things kids need to know about money

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(NC) Responsible spending includes knowing the difference between wants and needs. Back-to-school season, with added expenses and expectations around spending, is the perfect time to not only build your own budget for the year ahead, but also to introduce your own children to the concept of budgeting.

The experts at Capital One break down four basic things that every child should know about money, along with tips for bringing real-life examples into the conversation.

What money is. There’s no need for a full economic lesson,but knowing that money can be exchanged for goods and services, and that the government backs its value, is a great start.
How to earn money. Once your child understands what money is, use this foundational knowledge to connect the concepts of money and work. Start with the simple concept that people go to work in exchange for an income, and explain how it may take time (and work) to save for that new pair of sneakers or backpack. This can help kids develop patience and alleviate the pressure to purchase new items right away that might not be in your budget.
The many ways to pay. While there is a myriad of methods to pay for something in today’s digital age, you can start by explaining the difference between cash, debit and credit. When teaching your kids about credit, real examples help. For instance, if your child insists on a grocery store treat, offer to buy it for them as long as they pay you back from their allowance in a timely manner. If you need a refresher, tools like Capital One’s Credit Keeper can help you better understand your own credit score and the importance of that score to overall financial health.
How to build and follow a budget. This is where earning, spending, saving and sharing all come together. Build a budget that is realistic based on your income and spending needs and take advantage of banking apps to keep tabs on your spending in real-time. Have your kids think about how they might split their allowance into saving, spending and giving back to help them better understand money management.

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20 Percent Of Americans In Relationships Are Committing Financial Infidelity

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Nearly 30 million Americans are hiding a checking, savings, or credit card account from their spouse or live in partner, according to a new survey from CreditCards.com. That’s roughly 1 in 5 that currently have a live in partner or a spouse.

Around 5 million people — or 3 percent — used to commit “financial infidelity,” but no longer do.

Of all the respondents, millennials were more likely than other age groups to hide financial information from their partner. While 15 percent of older generations hid accounts from their partner, 28 percent of millennials were financially dishonest.

Regionally, Americans living in the South and the West were more likely to financially “cheat” than those living in the Northeast and Midwest.

Insecurity about earning and spending could drive some of this infidelity, according to CreditCards.com industry analyst Ted Rossman.

When it comes to millennials, witnessing divorce could have caused those aged 18-37 to try and squirrel away from Rossman calls a “freedom fund”.

“They’ve got this safety net,” Rossman said. They’re asking: “What if this relationship doesn’t work out?”

As bad as physical infidelity

More than half (55 percent) of those surveyed believed that financial infidelity was just as bad as physically cheating. That’s including some 20 percent who believed that financially cheating was worse.

But despite this, most didn’t find this to be a deal breaker.

Over 80 percent surveyed said they would be upset, but wouldn’t end the relationship. Only 2 percent of those asked would end the relationship if they discovered their spouse or partner was hiding $5,000 or more in credit card debt. That number however is highest among those lower middle class households ($30,000-$49,999 income bracket): Nearly 10 percent would break things off as a result.

Roughly 15 percent said they wouldn’t care at all. Studies do show however that money troubles is the leading cause of stress in a relationship.

That’s why, Rossman says, it’s important to share that information with your partner.

“Talking about money with your spouse isn’t always easy, but it has to be done,” he said. “You can still maintain some privacy over your finances, and even keep separate accounts if you and your spouse agree, but you need to get on the same page regarding your general direction, otherwise your financial union is doomed to fail.”

With credit card rates hovering at an average of 19.24 percent APR, hiding financial information from a partner could be financially devastating.

But, Rossman adds, it’s not just about the economic impact but also the erosion of trust.

“More than the dollars and cents is that trust factor,” he said. “I think losing that trust is so hard to regain. That could be a long lasting wedge.”

Kristin Myers is a reporter at Yahoo Finance. Follow her on Twitter.

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7 Examples Of Terrible Financial Advice We’ve Heard

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Between television, radio, the internet and well-meaning but presumptuous friends and family, we’re inundated with unsolicited advice on a daily basis. And when it comes to money, there’s a ton of terrible advice out there. Even so-called experts can lead us astray sometimes.

Have you been duped? Here are a few examples of the worst money advice advisers, bloggers and other personal finance pros have heard.

1. Carry a balance to increase your credit score.

Ben Luthi, a money and travel writer, said that a friend once told him that his mortgage loan officer advised him to carry a balance on his credit card in order to improve his credit score. In fact, the loan officer recommended keeping the balance at around 50 percent of his credit limit.

“This is the absolute worst financial advice I’ve ever heard for several reasons,” Luthi said. For one, carrying a credit card balance doesn’t have any effect on your credit at all. “What it does do is ensure that you pay a high interest rate on your balance every month, neutralizing any other benefits you might get from the card,” Luthi explained. “Also, keeping a 50 percent credit utilization is a surefire way to hurt your credit score, not help it.”

Some credit experts recommend keeping your balance below 30 percent of the card limit, but even that’s not a hard-and-fast rule. Keeping your balance as low as possible and paying the bill on time each month is how you improve your score.

2. Avoid credit cards ― period.

Credit cards can be a slippery slope for some people; overspending can lead to a cycle of debt that’s tough to escape.

But avoiding credit cards on principle, something personal finance gurus like Dave Ramsey push hard, robs you of all their potential benefits.

“Credit cards are a good tool for building credit and earning rewards,” explained personal finance writer Kim Porter. “Plus, there are lots of ways to avoid debt, like using the card only for monthly bills, paying off the card every month and tracking your spending.”

If you struggle with debt, a credit card is probably not for you. At least not right now. But if you are on top of your finances and want to leverage debt in a strategic way, a credit card can help you do just that.

3. The mortgage you’re approved for is what you can afford.

“The worst financial advice I hear is to buy as much house as you can afford,” said R.J. Weiss, a certified financial planner who founded the blog The Ways to Wealth. He explained that most lenders use the 28/36 rule to determine how much you can afford to borrow: Up to 28 percent of your monthly gross income can go toward your home, as long as the payments don’t exceed 36 percent of your total monthly debt payments. For example, if you had a credit card, student loan and car loan payment that together totaled $640 a month, your mortgage payment should be no more than $360 (36 percent of $1,000 in total debt payments).

“What homeowners don’t realize is this rule was invented by banks to maximize their bottom line ― not the homeowner’s financial well-being,” Weiss said. “Banks have figured out that this is the largest amount of debt one can take on with a reasonable chance of paying it back, even if that means you have to forego saving for retirement, college or short-term goals.”

4. An expensive house is worth it because of the tax write-off.

Scott Vance, owner of taxvanta.com, said a real estate agent told him when he was younger that it made sense to buy a more expensive house because he had the advantage of writing off the mortgage interest on his taxes.

But let’s stop and think about that for a moment. A deduction simply decreases your taxable income ― it’s not a dollar-for-dollar reduction of your tax bill. So committing to a larger mortgage payment to take a bigger tax deduction still means paying more in the long run. And if that high mortgage payment compromises your ability to keep up on other bills or save money, it’s definitely not worth it.

“Now, as a financial planner focusing on taxes, I see the folly in such advice,” he said, noting that he always advises his client to consider the source of advice before following it. ”Taking tax advice from a Realtor is … like taking medical procedure advice from your hairdresser.”

5. You need a six-month emergency fund.

One thing is true: You need an emergency fund. But when it comes to how much you should save in that fund, it’s different for each person. There’s no cookie-cutter answer that applies to everyone. And yet many experts claim that six months’ worth of expenses is exactly how much you should have socked away in a savings account.

“I work with a lot of Hollywood actors, and six months won’t cut it for these folks,” said Eric D. Matthews, CEO and wealth adviser at EDM Capital. “I also work with executives in the same industry where six months is overkill. You need to strike a balance for your work, industry and craft.”

If you have too little saved, a major financial blow can leave you in debt regardless. And if you set aside too much, you lose returns by leaving the money in a liquid, low-interest savings account. “The generic six months is a nice catch-all, but nowhere near the specific need of the individual’s unique situation… and aren’t we all unique?”

6. You should accept your entire student loan package.

Aside from a house, a college education is often one of the biggest purchases people make in their lifetimes. Often loans are needed to bridge the gap between college savings and that final tuition bill. But just because you’re offered a certain amount doesn’t mean you need to take it all.

“The worst financial advice I received was that I had to accept my entire student loan package and that I had no other options,” said Gina Zakaria, founder of The Frugal Convert. “It cost me a lot in student loan debt. Now I tell everyone that you never have to accept any part of a college financial package that you don’t want to accept.” There are always other options, she said.

7. Only invest in what you know.

Even the great Warren Buffett, considered by many to be the best investor of all time, gets it wrong sometimes. One of his most famous pieces of advice is to only invest in what you know, but that might not be the right guidance for the average investor.

In theory, it makes sense. After all, you don’t want to tie up your money in overly complicated investments you don’t understand. The problem is, most of us are not business experts, and it’s nearly impossible to have deep knowledge of hundreds of securities. “Diversification is key to a good portfolio, and investing in what you know leads to a very un-diversified portfolio,” said Britton Gregory, a certified financial planner and principal of Seaborn Financial. “Instead, invest in a well-diversified portfolio that includes many companies, even ones you’ve never heard of.”

That might mean enlisting the help of a professional, so make sure it’s one who has your best interests at heart.

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