Here is an article on Yahoo Finance that lists 21 items never to buy new. I pretty much agree with all of them, except I would add underwear to the list.

I especially agree with timeshares. My folks bought some timeshares on the secondary markets years ago for next to nothing. They got tired of paying the maintenance fees so they “gifted” them to my sister and me. We are at a point where we wonder if we are just better off getting rid of the timeshare or keeping it. They are nicer places than a hotel, but I don’t travel as much with my own business. Or, I am shuffling back and forth between Florida and Maryland to visit clients. Anyway, we rented a week out last year for friends of ours, and I specifically told them not to get caught up in the timeshare tours. They received a call each day offering free Disney tickets to take a tour. They succumbed to the tour for the tickets, but ended up buying a place from the salesman. I almost punched my friends in the face when they told me. Instead, I held back and merely asked if they were idiots. Probably not much subtler, I know. I then proceeded to show them how many timeshares are for sale on ebay. I probably shouldn’t have done that either as you could see the buyer’s remorse. So if you want a timeshare, especially after the dog and pony show for free ticket trick the salesmen offer, then hit ebay or craigslist. They are deeded properties so you get no benefit for paying full price, except the satisfaction of helping the salesperson pay for their sportscar.

Cars are another no brainer. Sure, you don’t get the new car smell, but you can buy that smell as an air freshner.

Anyway, a good list of items. What else do you think should be added to the list?

My wife loves Target (she and her friends use the French pronunciation). It appears the chain store is going to provide a flat 5% discount to customers using the Target Credit Card starting this fall.

Target tried the discount at some locations in Kansas City and found it increased sales. So the company will launch the program nationwide this autumn. This is a substantial discount, especially for savvy shoppers who couple this discount with coupons. If you do a large portion of your shopping at Target, you may want to look at getting the card.

The big question is how long will Target offer this sizable discount. During the economic downturn, Target saw credit card charge offs rise to 15%, which is extremely high. If this 5% discount encourages more consumption, it could lead to high charge offs and offset the increase in store sales. Since the credit card division hurt the company previously, why do the executives think it won’t in the future. This doesn’t pertain just to credit cards. The auto dealers are already back to the 0% financing, which was a large factor in the hardships of the auto manufacturers. It appears many of these parties haven’t learned their lesson.

Credit, in particular cheap credit, is not a problem during good times. People are able to handle the cheap credit payments. However, cheap credit induces higher spending (and lower savings) so when a downturn hits the default rates are substantially higher as consumers have way too much debt. Considering our debt levels have not receded much since 2008, any company expanding credit at this time is playing with fire.

That said, I will probably get a Target card since it is my wife’s second home.

Many folks look to build wealth by trying to “beat the market” substantially or working endless hours. These methods may help, but they may actually hurt. Most folks end up taking too much risk with investments while pursuing high returns, which usually ends up in subpar returns. Over-exertion at work often leads to stress, which leads to absenteeism or costly medical assistance. This can lower your wealth, but, more importantly, your quality of life.

Jeff Yeager, author of the The Ultimate Cheapskate’s Road Map to True Riches: A Practical (and Fun) Guide to Enjoying Life More by Spending Less, laid out some of his ideas to build wealth. He discussed some of the ideas in a Yahoo article, but I have summarized a few below.

1. Live a Smaller Lifestyle: Yeager talks about staying in your starter home, rather than buying a much bigger place. The additional costs to heat, furnish, maintain, and insure the home eats away at your wealth. Yeager tires of financial gurus telling people to make their own coffee, rather than buy it, since the amount saved is minute compared to the savings from a smaller home.

2. Need versus wants: Yeager recommends really looking at every purchase to see if you really need it. Buyers remorse is high for most purchases so wait a week before buying something. During this week, ask yourself if you really need it. Many times you will avoid wasting money by doing this simple trick.

3. Drive Less: When gas was $4 a gallon, most people drove less, and most claimed it didn’t really affect their lives. So why not drive less even with gas under $3 per gallon.

4. Be Green: A life long environmentalist, Yeager ridicules folks who pay extra for buying “green” items. If you really want to be green, then reducing consumption is the best way to achieve this. Spending more for green products is silly in his opinion, especially when a truly green product is cheaper than non-green. For instance, vinegar and baking powder is substantially cheaper (and better for the environment) than green and non-green cleaning supplies.

5. Eat healthy: Eating healthy is actually cheaper than the typical American diet. Beans, whole grains, and fruits/vegetables are cheaper than meats, processed foods, and sugars, and you will be healthier for eating this diet.

I think the key is to live a smaller lifestyle than your income would allow. I had a boss in the Coast Guard who lived one pay grade below his rank When he was a Lieutenant, he lived as a Lieutenant Junior Grade. When he was a Captain, he lived on the Commander’s salary. This ensured he lived a smaller lifestyle and saved a ton of money.

Competing with the Jones is futile and only makes everyone poor. Plus, giving your kids every toy they want teaches them nothing and makes them unappreciative of gifts. I always like the Buddhist maxim that “the things you own eventually end up owning you.”

Here is a brief clip from Elizabeth Warren, who has been tasked to overlook the TARP bailout by the government, is talking about how those individuals who file bankruptcy are just like us. They work hard and spend rationally. It is just the debt piles up too fast.

Certainly, there are folks who end up in bankruptcy due to medical expenses, divorce, or other personal issue. Her explanation doesn’t make sense. If you are spending rationally, then you shouldn’t be piling on debt. Warren receives all kinds of love from anti-establishment folks because she is pointing out the ineffectiveness and political shenanigans associated with the TARP. And, I am glad she is.

However, this populism needs a dose of reality. Sure, the banks are bad and should not have been bailed out like they were, but painting folks who mismanaged their finances as victims is wrong. Consumer debt is one of the reasons we are in this mess. You can argue the average Americans are too ignorant or the Madison Avenue marketers entice us to spend, but until all Americans acknowledge their fault (and correct them), we will never get better. Worse, we will experience this again.

I never got any financial education in school (we need to cut useless courses like geometry and add personal finance), and my parents weren’t financial wizards. They were school teachers who figured they just needed to bide their time to get their pensions. However, they imparted two simple rules on me that I have found practically guarantees success:

1. Never spend more than you make.
2. Always save 10% of your earnings.

That’s it. For rule number one, this meant if I wanted a new stereo or tv, I saved for it before I bought it. I never spent more than I brought it unless I had savings set aside. With the 10% rule, that provided me with lots of options.

If we could teach all Americans these simple rules, including our government, life would be much better across the board.

The Congressional Budget Office does a decent job of making projections on the budget…usually. What usually throws this organization off is the government ends up spending more than projected. This time I think CBO is too optimistic in its projections, and it isn’t just based on the inevitable spending overruns by our elected “leaders.”

Above is a chart showing the expected federal outlays and tax receipts through 2020. As you can see, the dark blue line, spending, is expected to remain high through 2010 to combat the recession, but it drops precipitously after that through 2018 when it starts to rise again due to Social Security and Medicare shortfalls.  The CBO bases this off current projections, but does anyone really believe that the government won’t continue its prolific spending? We know there will be more stimulus because this economic funk is not going to go away quietly. As I mentioned, the CBO does a nice job here usually. There errors tend to be due to new spending programs that are introduced as time progresses.

Where I see the CBO’s miscalculation is on the revenue side. The CBO is projecting a parabolic increase in tax receipts starting this year. In other words, the CBO is expecting a huge economic expansion. This is the only way we can get this kind of growth. Either that, or the CBO is basing its decision on new taxes, which haven’t been disclosed to Americans. As far as I see, there are no new taxes taking place this year unless the current health care bill is passed.

This increase in revenue is beyond any other recession. For the past recessions (1981, 1991, and 2001) the tax revenue returned quickly, but it looks like a 45 degree angle in growth. The current projection looks like an 80 degree increase. This is clearly too optimistic. I would expect revenues to be even lower than previous recessions since this is a balance sheet recession, not an inventory led downturn.

An interesting article by James Kostohryz over at Minyanville.com about a McKinsey report that shows America’s debt problem is very manageable. This view coincides with the author’s personal view. Kistohryz points to a few factors to base his belief. My comments follow his:

1. US public debt levels are quite moderate compared to other developed nations. Japan and various European counties were able to grow, albeit relatively modestly, for several decades while sustaining much higher debt levels. There’s no reason why the US can’t do the same in the years to come. It’s important to understand that because US public debt is at levels that have proven in the past to be easily manageable by other nations, there’s little reason to think that deleveraging by the US government is an absolute necessity nor much less to think that such a process must necessarily become a drag on US economic growth. To the contrary, based on precedents from Japan and Europe, the US government still has substantial room on the public balance sheet to enable it stimulate economic growth if it chooses to do so. (This is true when you compare to Japan who is nearing a government debt equal to two times its Gross Domestic Product (GDP). We are still at 85% government debt to GDP. But, we are catching up fast. Last year, we borrowed close to 40% of our government spending. That is set to happen again this year. What is being ignored by James and others is the unfunded liabilities that the U.S. has coming down the pike. We have $17 trillion in unfunded liabilities for Social Security, which begins negative cash flowing in 2016. Medicare is worse with about $40 Trillion in unfunded liabilities. I think it has negative cash flow in 2017. So we may be in a better position now, but it won’t last. We need to act now.)

2. US non-financial business sector debt is extraordinarily low by global standards. Thus, there’s no real debt constraint for US businesses to invest and grow. And this means that there’s no major endogenous constraint to productivity growth — the main component of overall economic growth. This is absolutely true, especially in the tech sector. This is probably why tech has done better than other industries recently.

3. US Household debt as a % of GDP is relatively high in the US relative to other developed countries, although not dramatically so. More importantly, on the aggregate and in absolute terms, the debt and debt service obligations of US consumers are quite modest and manageable relative to their incomes. The problem of unsustainably high debt-to-disposable income ratios are concentrated in a relatively narrow subset of the US population amounting for somewhere in the neighborhood of 25% of all consumers. This means that roughly 75% of US consumers have plenty of room on their balance sheets to employ leverage to supplement income for purposes of investment and/or consumption. At the very least, with respect to these 75% of consumers, deleveraging need not be a force that drags down economic growth. Putting these facts together leads to the conclusion that if the financial situation of the 25% of consumers that are overleveraged is merely stabilized, aggregate investment and consumption growth can proceed in a normal, albeit moderated, fashion driven by the 75% of consumers that are fine. (This is a stretch. The U.S. consumer is strapped with more debt than any other nation. It is 120% of GDP. This cannot last. We are in uncharted waters for personal debt. As far as 75% of the population being able to take more debt, I highly doubt it. This group may be able to, but if rates rise, the cost to service the debt would destroy them. Our savings rate is back to 3% after a spike to almost 5%. This means that Americans don’t have much wiggle room in the budget. We could increase spending by 3% and wipe out our savings. This shows that Americans future consumption is essentially confined to pay increases, which aren’t expected anytime soon. So I disagree here).

4. US financial sector leverage is moderate by global standards. After recent equity raises, US banks and financial institutions are substantially better capitalized, on the whole, than the global average. And US financial institutions are currently well capitalized relative to US historical standards. This means that there is plenty of room on the balance sheets of US financial institutions to provide the credit to businesses and consumers that the US economy requires to in order to grow at a healthy rate. Please note that the circle is complete: The US government, businesses, and most US consumers are in a sufficiently solid position to stimulate a healthy demand for credit, and US financial institutions are sufficiently capitalized to provide that credit. (This argument is similar to a 300lb man saying he is healthier than a 400lb man. It is true, but both need to alter their lifestyle. Also, the banks are not as well capitalized as they advertise. They are allowed to mark their assets to a model, rather than the market. This improves their balance sheet because they can price an asset at 90 cents on the dollar as opposed to the current selling price of 50 cents on the dollar. Also, banks are still levered at 17 to 1 – much too high. Of course, European banks are at 30 to 1 in some cases so we do look good in comparison).

5. US financial sector assets as a % of GDP are extraordinarily low by developed world standards. Thus, in relative terms, the US economy isn’t especially vulnerable to a financial sector crisis. (Really! How about the assets that are off the balance sheet like Credit Default Swaps. Estimates have those assets anywhere from $20 to $40 Trillion. That is as large as the entire worlds market capitalization. Really!)

6. US external debt as a % of GDP is quite modest by global standards. Americans mainly owe money to fellow Americans. Thus, the US economy is less vulnerable than many think to the vagaries of international politics and/or capital markets. (This is the old argument from the 90s that our debt is actually good cause it is providing savings to American citizens. We still require about 30% of our debt from foreigners. Another 50% is being bought by the Fed through money creation so that really doesn’t count, does it. If we just print dollars to give to ourselves, that isn’t really a good thing is it? The better case is to have little debt so the cost of debt for corporations drop and productivity improves along with corporate profitability.)

While we may not face an imminent threat from our debt levels, the day of reckoning is coming. Japan has avoided this day of reckoning because its debt was entirely funded by an aging population. However, the population is no longer saving and have started spending in retirement. So Japan’s date with the debt devil is probably closer than ours. However, we will dance with the debt devil someday if we don’t rectify our situation soon. This talk of deficits not mattering is bladerdash.

Interesting article about some Wall Street employees who have hit hard times due to this downturn. I feel really bad for anyone who loses a job. I lost a job once when my wife was six months pregnant with our first child. It was a scary time. But, in hindsight, it forced me to move forward with my financial planning career and dream of owning my own business. So, I guess it turned out to be the best thing for me…unless my business falls apart. But, we will hope that it doesn’t.

Even though I feel for these folks, I had to wonder if they could have done a better job of managing their money when they were making the big bucks. Each of the men profiled seemed to spend lavishly when they had their salaries. They may not be facing foreclosure and economic ruin if they had prepared for a rainy day and lived below their means. The one profiled man, Mr. Arroyo, claimed he and his wife built an emergency fund to last five years. But, he lost his job in 2007, and they are already out of money. I am not the best at math, but that doesn’t add up to five years.

What do you think they could have done to prepare better for this mess?

I am all for the credit card companies having to disclose their fees in an easy to read manner. I think full transparency is essential, and I believe they don’t do that now. Their contracts are harder to read than Beowulf.

But, the government is overstepping its bounds by mandating capped rates and disallowing card companies to raise its rates after the fact. This is creating unintended consequences as ALL government interaction into the markets do.

In this case, it will affect the 50 million credit card users who use their cards responsibly. To compensate for lost income on the negligent card holders, whom the government is now trying to assist, the credit card industry is going to start assessing annual fees, reduce airline miles/reward programs, and even begin charging interest immediately after a purchase (no grace period).

Much like the mortgage mess, the government is creating a situation where the responsible are subsidizing the fiscally incompetent. I really have a problem with this course of action. Those who cannot manage their money should have their credit limits reduced to the current balance, which would force these folks to pay down debt to access future debt. Those with poor credit scores should either get cards with an extremely low balance or not receive a card at all.

Having credit is not a constitutional right. It is not given to us by our Creator. It has to be earned and is a responsibility. I agree that the credit card companies have made billions by creating convoluted agreements and imposing tough penalties, but the credit card user is ultimately responsible. Being ignorant or unsophisticated is not an excuse and should not result in harming the responsible borrowers financial situation.