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November 2008

When the doors opened early for Black Friday sales at a Wal-Mart store on Long Island, the frenzied shoppers stormed in, determined to be the first to grab the bargains before they were depleted. The maniacs trampled the unfortunate Wal-Mart worker whose job was to open the door. The shoppers continued to run in, ignoring the man on the ground. The New York Times described the scene:

The throng of Wal-Mart shoppers had been building all night, filling sidewalks and stretching across a vast parking lot at the Green Acres Mall in Valley Stream, N.Y. At 3:30 a.m., the Nassau County police had to be called in for crowd control, and an officer with a bullhorn pleaded for order…

By 4:55, with no police officers in sight, the crowd of more than 2,000 had become a rabble, and could be held back no longer. Fists banged and shoulders pressed on the sliding-glass double doors, which bowed in with the weight of the assault. Six to 10 workers inside tried to push back, but it was hopeless. Suddenly, witnesses and the police said, the doors shattered, and the shrieking mob surged through in a blind rush for holiday bargains.

At this point, Jdimytai Damour was trampled in the stampede and died, without shoppers stopping to help. When the police shut down the store, shoppers refused to leave.

Is shopping, while possibly saving a few dollars on a highly-publicized sale day, so important that it forces otherwise normal people to act like savages, literally killing each other to be first in line for the bargains? It sounds like this Wal-Mart location was inadequately protected with security appropriate for a mob scene, but it’s just a sale. This was not an angry mob, marching for a cause, ready to defend their movement to the death. Those who trampled this poor individual without any thought to his well-being should be arrested and charges with second degree manslaughter.


About the author: This is a guest post by Carson Brackney, writer for Personal Finance Analyst. Personal Finance Analyst is an online community of bloggers dedicated to taking the mystery out of money and helping you to live a happier, more successful life with the money you have.

In the wake of 9/11, President Bush encouraged Americans to keep shopping. He was worried that fears associated with the attack would slow the economic engine as concerned citizens might opt to “sit on” their money instead of spending it in a way that would keep the economy chugging along.

Apparently, Americans responded. We spent. We shopped. We felt that changing our behavior in response the tragedy would represent a victory for the enemy. In some weird way, we seemed to have felt a patriotic duty to maintain our spending habits.

Those of us who embrace sound personal financial management concepts never really bought into the “shop until the terrorists drop” line of thinking. Others, however did. And many of those others are actively encouraging the same kind of behavior in the face of current economic problems.

A recent piece of proposed legislation is a perfect example. In a rare show of bipartisanship, Republican Senator Kit Bond and Democratic Senator Barbara Mikulski are proposing a tax rebate to encourage the purchase of new automobiles. Their goal? To get some cash headed in Detroit’s direction.

Those of us who recognize the poor quality (in financial terms) of the decision to buy new cars know that the tax rebate won’t make things any different. We won’t buy that new car, even if it would give Detroit a boost.

Sometimes, it really seems like those of us interested in better personal finance decisions are doing our best to strangle an already-choking larger economy by reducing our own spending and consumption. Although that really isn’t the case (we’ll see why smart money management is a net plus for the economy as we work through this), there is a certain face-value irony in economizing during a time of wider economic turmoil.

As I write this, the heads of America’s three automotive giants are huddling together in Washington, trying to perfect a sales pitch for a multi-billion dollar bridge loan/bailout. Detroit is in trouble. People aren’t buying new cars and Big Auto claims that we’re only months away from an industry collapse that’s going to destroy hundreds of thousands of jobs and lives…

Meanwhile, Mint is telling us that cars are one of the eight things we should never buy new. Dave Ramsey is chastising someone for financing a new car. People are opting to stick with their old beaters in an effort to save money.

The stock market isn’t treading water. It’s sinking. One of the reasons? Consumer spending is in the tank. Browsers outnumber buyers and those who are willing to open a wallet are spending less. Based on those scary consumer confidence numbers, we can expect more of the same and that’s scaring money away from Wall Street. Our 401(k) numbers are bleak and the entire economy is grinding to a halt as we watch the Dow dip.

Meanwhile, personal finance experts are advising everyone to save more. Frugal living is “in” while conspicuous spending seems like a vestige from the days when women wore shoulder pads and guys wanted to be Gordon Gecko.

New housing starts are down and property values are in a freefall. Homes are no longer the safe buy they once were. People are waking up to discover that they’re upside-down on their largest single investment. Contractors are struggling, workers are standing in unemployment lines, vendors are suffering and development projects are suspended.

Meanwhile, advisers are telling people not to try to catch a falling knife. They’re recommending against the purchase of existing properties and are laughing outright at the idea of building a new home. This isn’t the time to spend, this is the time to sit on your money.

Are you seeing a trend here?

We’re actively engaging in the very behavior that encourages a larger financial crisis in order to protect ourselves from that very same financial crisis.

If you don’t buy that car, that makes it harder for GM or Ford to stay afloat. If they flop, your neighbor loses his job on the assembly line. He falls behind on house payments. The home enters foreclosure. Your property value takes a hit in the process.

You’re studying the Economides family’s every move, trying to cut your spending down to the bare minimum. You aren’t dropping big money at the grocery store anymore. That means the store isn’t ordering as much. The company selling those green beans has to let someone go. The cannery employee can’t find another job in her neck of the woods. She has to go on unemployment and then welfare. What’s paying for the food stamps and Section 8 housing? Your tax dollars.

As the economic crisis has advanced, we’ve heard more and more about businesses and industries that are now on the very brink of collapse. We all know that the only way many of these outfits can stay open is if they continue to sell their products. Yet we’re still preaching the gospel of recession-proofing your life.

Is this the irony of economizing? By protecting our own interests with conservative money management are we actually encouraging the economic slowdown? Do our efforts at self-defense empower our enemy?

Don’t worry. You can be a good personal money manager and good for the economy. The apparent tension isn’t quite as significant as it looks at first glance.

First, it’s almost certain that those who look after their money carefully will remain in the minority. Yes, everyone seems to be cutting back these days, but I doubt that a significant percentage of that decreased consumer spending stems from intentional, voluntary “austerity measures.” The economizers and those who are smart about personal finances are the exception to the larger rule. Thus, those efforts to manage money correctly will be swamped on a macro-level by those who will continue to act without much consideration for the protection of their financial interests. That’s just an “accidental” situation, though. What’s more important is that smart money handling actually benefits the economy.

That brings us to the second reason you shouldn’t feel guilty for exercising good decision making. Smart personal financial management and decreased spending has an economic upside. Those who are in control of their money and debt are able to invest their resources while “the rest” stay on an ugly barely-making-it treadmill. Those investments provide needed capital to the most deserving and potentially valuable institutions and businesses. While we might be taking our money out of the loop on one side of the equation, we’re feeding the economy on the other.

Third, “you gotta have it to spend it.” If we’ve learned anything over the years, it’s that wild spending and bad financial management eventually come back to haunt us. Those who do economize and invest wisely are later positioned to contribute to consumer spending in a way that those who are constantly on the brink of personal financial collapse can’t. The current economic crisis is PSA for responsible spending. We’re living through the nasty hangover that comes after a weekend of binge drinking. Foolish credit purchases are the stand-in for the keg.

We didn’t really have a patriotic duty to maintain spending habits in late 2001 and we certainly don’t have a national economic obligation to go out and buy new cars and other unneeded consumer goods today.

Sometimes it seems as if we’re working at cross-purposes with our best interests. We’re watching a struggle born of reduced economic activity while intentionally reducing our own spending. If you look at it on that level, it appears as if we’re intentionally punching ourselves in the gut. If you view it from a broader perspective, however, it’s clear that there is no tension between economization and a stronger economy. If anything, more responsible personal money management is exactly what our economy needs.

If you enjoyed this article, please visit Personal Finance Analyst and subscribe to the RSS feed. We would appreciate your comments and reactions, so if you would like to contribute to the discussion, leave a comment below.


About the author: This guest post comes to you from Mr. ToughMoneyLove, a baby boomer who dishes the hard truth about money and personal finance at his Tough Money Love blog.

I cannot count the number of times I have seen or heard statements proclaiming with great certainty that Social Security will “disappear” or that “it will not be there for me.” The frequency and intensity of these dogmatic statements seem to be inversely proportional to the ages of the people making them.

Social Security disappearing? It’s a myth.

Social Security may evolve and change but it’s not disappearing.

Believing in the mythical demise of Social Security is bad policy for anyone planning their financial future. Such a belief is also unfair to those generations ahead of you.

Before I explain, let me distinguish rash predictions of the end of Social Security from more level-headed proclamations that “I am not counting on Social Security.” Statements that fall in the latter category are actually beneficial because they create personal incentives to save and invest for retirement.

Why Social Security is not Going Anywhere

Baby Boomers won’t let Social Security fail. There are approximately 77 million baby boomers preparing to retire. A few have just now reached retirement age. According to numerous research studies, millions of middle class baby boomers are woefully unprepared for retirement. These millions will clearly need Social Security to have any chance at a decent standard of living in retirement. Does anyone honestly believe that Congress will stand idly by while Social Security crashes and burns, undermining the financial stability of millions of middle class baby boomers?

Even if Congress was inclined to let Social Security unravel, boomers would vote them out and replace them with AARP-friendly politicians. We boomers vote in big numbers. The AARP is a strong Social Security advocate. It has 35 million members, which is ten times the size of the National Rifle Association. The AARP has an $800 million budget, five times that of the U.S. Chamber of Commerce, the country’s largest business association. The AARP is surpassed in membership only by the Roman Catholic Church. As boomers continue to age, AARP membership and voting clout will only increase. Do you know who killed Bush’s plan to privatize part of Social Security? It wasn’t the whining Democrats. It was the AARP. Can you feel the power?

Simply put, Social Security is going to be rock solid necessary for at least the next 30-40 years, until the last of the boomers moves on to the next life.

Younger generations will need Social Security. The younger readers are still skeptical. I’m not a boomer, you say, so why should I think Social Security will be there for me? The answer is that post-baby boomers – the younger generations – are also going to need Social Security.

Let me explain with some numbers, using my wife and me as an example. If I wait until age 70 to claim Social Security retirement benefits, and when my wife reaches retirement age, we will be entitled to receive a combined monthly retirement benefit (in today’s dollars, using current calculations) of $4600. Now let’s assume that Social Security is not there and I needed to replace that $4600 with income from investments. Using a 4% rule of thumb annual retirement withdrawal rate, I would need a retirement nest egg of $1,380,000 just to replace our Social Security benefits.

How many of you are counting on having well north of $1 million (in today’s dollars) in place, just to replace the Social Security benefit that you think won’t be there? Maybe you had confidence a year ago that you would, but how about after the 40% market drop that we’ve all experienced? There has been a paradigm shift in investment confidence levels at all age groups. We are recognizing that 10%-12% annual market returns are gone indefinitely and perhaps for our collective lifetimes. We actually need to do better than that to recover from the damage of the past four months. With that recognition in place, all but the wealthiest working adults in all age groups must embrace the continued existence of a Social Security retirement system. When it comes to building multimillion dollar retirement portfolios, many are called but few are chosen.

Social Security Fixes are Doable. If I have persuaded some of you that maybe this Social Security thing isn’t so bad after all, you may still doubt whether it can be fiscally sustained even with good intentions. The reality is that although the Social Security system needs work, many experts believe that the funding crisis has been grossly overstated. (Medicare is a separate problem.) The misconceptions about the financial stability of the Social Security Trust Fund are many and are nicely summarized by the Center for Economic and Policy Research as a solution in search of a problem.

I am not going to detail all of the different options that are available to improve the actuarial health of the Social Security system. They include bumping the retirement age by a year or two or slightly increasing the limit on the Social Security wage base. Heck, even immigration reform could solve the problem by adding millions of younger workers paying into the system. The key point is that there are fixes.

What does all of this mean to you? Probably the most important take-away from what I have written is that you should not automatically write-off Social Security when formulating your retirement plan. If you do, you may end up taking excessive investing risks as you attempt to compensate for having no income stream outside of your retirement investments. That could backfire on you in a big way.

And by the way, if you younger folks decide you don’t want Social Security at all, please keep quiet about it. Otherwise, the AARP may use its clout to get some new laws passed that you won’t like one bit.

Photo credit: Fabricator of Useless Articles

If you enjoyed this article, please visit Tough Money Love and subscribe to his RSS feed. We would appreciate your comments and reactions, so if you would like to contribute to the discussion, add your comment below.


About the author: Karney Hatch is a filmmaker whose new documentary, Overdrawn!, explores the predatory lending practices of major national banks with Ralph Nader, Joel Bakan, a loan shark, and many others.

In all the number crunching and legalese surrounding predatory fees of various sorts, it’s easy to forget the visceral reaction that they cause in people. Ask any “telephone banker” who works a call center for any of the big banks, and they’ll tell you the first reaction that these fees cause in customers: rage.

Or, sometimes, shame. Which is the way the banks want it. For the most part, only people with low balances in their accounts get overdrawn, and so one of the most common emotional reactions when the fees hit is shame, and people who are ashamed don’t tell their friends they got overdrawn, they don’t call their member of Congress and tell them something needs to be done, they don’t switch to a smaller local bank or a credit union -– they just pay the fees and go back to their lives. Until the next time they get overdrawn, and then the process repeats.

I have two things that I want to encourage people to do.

Don’t feel ashamed. Shame just makes us feel isolated and powerless. Rage is healthier and leads to actions, like those mentioned above.

I’d like to encourage people to consider an option that hasn’t quite hit the mainstream yet, at least here in the US: microlending. A relative of credit unions, sites like Lending Club and Kiva work by facilitating loans between individuals, but without any kind of bureaucracy that can lead even a well-meaning credit union in the wrong direction. No middle man, no managers, no shareholders watching the bottom line. Just people lending to people.

For now the micro- prefix fits, but there’s no reason that this framework can’t expand into home mortgages, business loans, and so on; in short, every form of lending that banks currently dominate and exploit. As Jessica Anderson, a banking consultant with over three decades in the industry, says in Overdrawn!, “Once that model gets the bugs worked out, then why do we need banks?” And how would that make me feel? Pretty damn good, I have to say.

If you enjoyed this article, please take a look at Overdrawn! The Documentary by Karney Hatch.


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