It's a recession; should I stop contributing to my 401(k)

A question from a reader:

My company recently suspended its 401(k) match. They used to match up to 6 percent of employee contributions -- now they match none. I'd taken advantage of it (and built up a nice start to my retirement savings) in recent years, but after they announced the match suspension (a few weeks ago) I lowered my contribution back down to 3 percent.

So here's the thing: it's a recession. And my money is getting increasingly tight (we're not even going to TALK about the pay cut they want us to take here). I know I should be saving, but is it okay if I just eliminate my contributions all together and have that extra 3 percent stay in my paycheck? What should I be thinking about (beyond setting myself up for the future)? What do you suggest I do? I'm 25: I would like to buy a new pair of shoes or something, not just work so I can pay my bills.

I understand your concern. Most of the questions I get are about 401(k) plans and with the economy being what it is being worried makes a ton of sense.
But I can never advocate making a short-term decision when looking at a long-term problem. I'll use myself as an example: I started my first 401(k) maxing out but quickly figured out I had a cash flow problem. What I should have done is what you did: rolling back my contribution just enough to still get the company match, but no less. What I did was pull completely out for about a year or so. that was a mistake.

Why? Because when you're young, what matters is not how much money you're putting in, it's how many shares you accumulate. The principle of compound interest is at work, meaning you accumulate enough shares on a regular basis, and over the long term those shares increase in value and give you a better return on your investment.

Right now (and I've said this before), the market is on sale. Everything is cheap. And while that doesn't make every stock or mutual fund a good investment, it does mean that accumulating shares of good stocks or funds is easier to do. So even though you're worried about the economy, to an extent the turmoil in the markets works in your favor. But that's only if you keep accumulating shares by contributing to your 401(k).

There are a few questions you should ask yourself. How much money would really go back into your paycheck after taxes if you stop making your 3 percent contribution? I don't know how much you make, but it's entirely possible that the tax benefit you lose by not contributing would negate any after-tax cash you'd get back. Would it really be worth it if you'd have to pay an extra, say $75 in taxes if all you were getting back after tax was $125 each pay? Find a 401(k) calculator and do the math before you act.

Also, I know you want to live and enjoy your youth but are you sure the ONLY place you could cut back is your 401(k)? If you really want a few new pairs of shoes, why not try and shift some other discretionary spending. Cut back on cable, maybe? Fewer meals out? Not as much long-distance driving on weekends? Whatever it is, there's usually some discretionary money that you can shift around to make a difference.

Last, do you have any credit card debt? If you do, think of the money that's going to pay off whatever you bought as your discretionary spending right now. If you're still paying off some shoes you bought last year (with interest), does it really make sense to take money from your nascent nest egg to have fun with. Think of your credit card balance as the bill coming due for fun you've already had but didn't pay for.

Did Obama answer all your questions?

In case you missed it, above is the video from yesterday's Q&A session with President Obama on the economy. Did he answer the questions you have about how to fix the problem? If not, what would you have asked him and what answers would you have liked to hear?

What would you ask Barack Obama about the economy?

The White House is Open for Questions from White House on Vimeo.

Here's your chance to actually get your questions about bailouts, unemployment, President Obama's $3.55 trillion budget or anything else you want to know about how the administration is handling the economic crisis.

The administration is using its web site (www.whitehouse.gov) to take questions from ordinary citizens about the economy. You can post your own question and/or vote up or down on questions that others have answered. Tomorrow morning in an "online town hall" meeting about the economy, the president will answer some of those questions.

So what do you want to know from the president?

Another trillion for banks and Wall Street?

Here's the latest scheme out of Washington to get the economy moving again: the Treasury Department plans to use at least $100 billion and perhaps as much as $1 trillion to help private investors buy bad investments from banks. The hope is that with the government's money backing them, investors ranging from individuals to pension and hedge funds will feel confident enough to take the risk, and that banks will start lending again once they have risky investments like mortgage-backed securities off their balance sheets.

I know, I know: the requisite shock, awe and anger is coming right now. Who wants to see yet another dollar go toward helping banks and investors, right? It's an understandable reaction, but this plan is a perfect example of why and how the economy can't be fixed in the ways we've all gotten used to. That is to say, it won't be quick, it won't be painless and the solution won't come from a magic bullet; the government appears to be trying everything it can think of and thus far, nothing has restored confidence in the financial system enough to get lenders lending, consumers buying and employers hiring again.

Of course, that isn't to say that the anger isn't justified though. The money for this new program is supposed to come out of the Troubled Assets Relief Program, or TARP, which is the Wall Street bailout program passed last year that so many are criticizing today. That the new money is coming out of TARP, which was a fund that was supposed to be used to take bad assets away from banks to begin with, raises the question of why this plan or something like it wasn't tried first.

Hi. I'm unemployed. Please tell everyone you know that I'm looking for work.

You know things are bad when people start making public appeals for employment at business luncheons. That's exactly what happened at an event I went to yesterday here in Cleveland, and watching it made me incredibly grateful that I'm gainfully employed and mostly in control of my own destiny during a bad time.

The event was sponsored by a group called Society for Urban Professionals (SOUP for short) and it was pretty much your run-of-the-mill shake-hands-and-hand-out-cards type of deal. That is until the end of the program when they asked if anyone had any announcements. A woman walked from the back of the room, took the podium, stated her name and said "I'm in the job market."

The room went silent, and for the next three minutes she explained her skills and qualifications, her enthusiasm for work and without sounding like she was begging, made an appeal to pass on her email address to anyone who might need her services. It was ballsy, and it was telling about just how far we've dipped in this economy.

The $165 million question

So now the government wants to get back the more than $165 million in bonuses that AIG paid its executives. Hmm.

AIG, in case you've been dead since last year, is the insurance company that the government now owns 80 percent of due to more than $170 billion (yes, billion) in bailout money that taxpayers have put into the firm to keep it from collapsing.

Today's New York Times has an excellent piece written by George Washington University law professor Lawrence Cunningham that explains all the legal ways AIG or the government could use to justify getting the money back. My question, though, is what would the government do with the cash once it has it back?

By all indications, the more than $1 trillion in taxpayers dollars already spent or allocated for company bailouts or economic stimulus so far haven't fixed the fundamental problems in the economy: a housing market that completely tanked and lending by banks to companies and consumers to keep the economy moving. Why not take the cash from the bonuses AIG paid and put it toward fixing those problems directly? The FDIC, for example, has already shut down or taken over more banks in the last 15 months than it has in decades. $165 million sounds like it would go a long way toward recapitalizing at least a few of them, no? How many home mortgages could be made at affordable rates would that kind of cash? How many entrepreneurs could use $165 grand, let alone $165 million, to help make a payroll or get a new product into production?

Is Bernanke right about the economy turning around in 2009?

The chairman of the Federal Reserve Bank says he actually believes the recession could turn around this year. He's also pissed off about the more than $100 million in bonuses that bailed out insurer AIG is paying its top executives.

Is he too optimistic? Do you believe the economy will turn around in 2009? And is Bernanke, who has a Wall Street background, being disingenuous in his anger over the executive bonuses?

The end of FDIC insurance???

I was all set to post about the details of President Obama's housing rescue plan to help you figure out if you qualify for help, until I read this story by the Associated Press' Marcy Gordon:

"The head of the Federal Deposit Insurance Corp. has warned that the fund insuring Americans' bank deposits could be wiped out this year without the money the agency is seeking in new fees from U.S. banks and thrifts."

WTF??

If you're clueless about what that means, let's take it from the top. The FDIC is the government agency that insures bank deposits in the US. It's there to prevent you from losing all the money in your checking or savings accounts should your bank go under. Usually your bank will have a big, black sticker on its doors with the FDIC initials, which is supposed to let you know your money is safe.

In most times, people don't pay the FDIC any attention, which is as it should be: banks, operating as they're supposed to, will have more than enough capital to cover any deposits you make, making the insurance of like your car or home policy: something you carry but rarely, if ever, have to use. Problem is, these ain't most times: so many banks have come so close to failing that even the FDIC is in trouble:

"Without substantial amounts of additional assessment revenue...current projections are that the fund balance will approach zero or even become negative."

That's according to a letter from the FDIC's chairwoman, Sheila Bair, to the heads of the more than 8,300 banks that it insures. Gordon's story goes on that 41 banks have gone belly-up since the start of 2008 and the FDIC projects that over the next four years it'll spend $65 billion to protect consumers whose banks have or will fail.

Do I need to draw a map about why you should be at least a little nervous? You buy car insurance so that if you wreck, you can get the car fixed without going broke. But if your insurance company went under, you'd be out all the money you paid for insurance plus whatever it cost to fix your car or get a new one.

if banks are failing all over the place, and the insurer of all the money you put in the bank says it might not be able to cover you unless it raises more money from those same banks... you get where I'm going with this?

"We will rebuild, we will recover, and the United States of America will emerge stronger than before."

Those were the words of our president in his firs address to Congress, no doubt spoken to challenge the country to have confidence at a time of crisis. But the question remains: did President Obama's first address to Congress make you feel more confident about the economy?

If a $700 billion banking rescue plan and another $700 billion economic stimulus have yet to jolt the confidence of entrepreneurs, lenders, workers and consumers, will his speech?

After watching or reading about Obama's speech, do you feel any better about your financial prospects this year? Do you feel challenged to do something, and if so, what?

Keith Reed on the PBS's News Hour

That's a screen-grab from my appearance last night on the NewsHour with Jim Lehrer. (They haven't posted the video yet, but here's a transcript and here's the audio.)

I was on a panel of four business reporters and editor discussing the impact the stimulus bill would have on people in different parts of the country. Last week, I posted about my reservations about how much the bill would do for the average Joe, but after listening to my colleagues, I gained a new perspective. The goal of the Obama administration and the Democrats in Congress really is less about directly helping you and I (i.e., Bush's stimulus checks of a few years ago) than it is about jump-starting the economy by handing states money for projects, with the hope that the rising tide of public spending will lift all boats.

Call me Republican here (though I'm bewildered at the GOP accusing anyone of spending too much public money after the deficit the Bush administration left) but I personally would like to have seen much more aid to struggling workers and consumers than I would government spending. The $400 per person, $800 per couple tax break just won't be enough to make people spend more when they're worried about their jobs (hell, I don't even qualify). The $8,000 home buyer tax credit might encourage some buyers, but is almost half what the homebuilding industry wanted.

One thing is clear: the government will have to spend MORE money after TARP and this round of spending to get things going again. There will be no magic bullet.

Bailed out banks: I want my money back

Seriously, Wells Fargo?

In case you missed the news the past two days, the bank Wells Fargo Corp. was planning a lavish Las Vegas party for some of its employees. The problem is Wells just reported a $2.6 BILLION loss for the fourth quarter. And oh yeah, there's the matter of the $25 billion in bailout money that Wells got out of the $700 billion bank bailout program last year.

Wells called the party off after word hit the media but swears it wasn't using bailout money for the party. Either way, it brings up two important questions: why hasn't Congress forced banks to disclose where all that money went yet and as a friend said eloquently this this morning, what does the government need to do to be able to call the money it gave to banks?

By "call", she meant at what point can the government decide that the banks haven't met their obligations under the terms of the bailout plan and force them to pay all the money back to taxpayers immediately. Calls happen all the time: on Wall St., investment houses make margin calls, forcing investors whom they've lent money to to pay up to avoid steep losses. Lenders call back loans to businesses if management doesn't handle that cash consistent with the terms of their loan agreements.

Of course, there's a snowball's chance in hell that anyone in Congress will demand that banks tell us where the money went or force them to pay it all back. But wouldn't it be nice just to know under what circumstances they could?

Real economic changs is up to you, not this guy

While Barack Obama was being sworn in, the stock market was tumbling. The Dow had its biggest Inauguration Day loss ever, of more than 300 points.

When the stock market takes dips like it did yesterday it's a buying opportunity because shares are cheap. It's like shopping at the mall during a sale: you can buy twice as many pairs of shoes at half off as you could when they were full price. The difference with stocks is that when prices come back up, you can't resell the shoes and make money; with stocks you can.

But the big questions are why did the market fall so much and is that a bad sign for the economy under Obama? Reality check: no one has the answer to either question. I've heard commentators speculate everything from another round of bad news for banks to wealthy investors being worried that Obama will repeal the cozy tax cuts they got from Bush (another reality check: Obama's already said he won't immediately raise anyone's taxes and a tax cut could well be part of his stimulus package).

Either way, here's a few words from Obama's speech that everyone should take to heart if they're really interested in seeing the economy and their own finances improve:

Our economy is badly weakened, a consequence of greed and irresponsibility on the part of some, but also our collective failure to make hard choices and prepare the nation for a new age.

"Our collective failure to make hard choices". Collective, y'all. Sure there were a great many greedy folks on Wall Street and elsewhere who made bad loans and absconded with shareholders' money. But they're not the only reason the economy is where it is: If you're like me and still paying off purchases made months ago, plus interest; or if you're still spending way more than you save or invest; part of the problem rests with you, too.

Ultimately we can all wait for an Obama stimulus or the stock or housing or job markets to turn around, but if we all don't make the decision now to save more of our incomes when we get our jobs back, to only buy houses we can afford with down payments and under terms we can understand, and start saving for the retirement we know we'll have to foot (because with deficit spending, social security just won't be around), any recovery will only be shallow and temporary.

So, are you really ready for change?

A week's (unpaid) vacation

Yesterday's post showed how 2008s record layoffs, which are supposed to be saving weakened companies cash is also costing them in productivity and even sales. I had no idea when I wrote it that I'd be getting another example just hours later.

Gannett Co., the newspaper publisher that is also my former employer, is furloughing all -- that's right all -- its employees this spring. We're talking a week's mandatory, unpaid leave.

I haven't seen yet how much Gannett expects to save from the furlough but for a company its size tens of millions is a safe bet. But the reaction of some of my old buddies shows that in some respects the move is folly: in the words of one former Gannetter, another example of the newspaper business putting a band-aid on a gaping wound.

Last year, while I worked for Gannett in Cincinnati, there was a round of buyouts. Painful, employees were told, but necessary to avoiding layoffs. It worked, until the layoffs came. Still, this should be the end of the pain, management said. By then, I was moving on but those left are now figuing out how to replace a week's income and wondering how long this will stave off the next cut, the one that will see them on the unemployment rolls.

A few folks I talked to yesterday said they would spend their week off looking for a new gig; if any of them are lucky, the company loses good people who might have been valuable to a turnaround effort. Those who remain won't be all that excited to be there, what with being a week poorer and all. Quality and morale will suffer.

The economy notwithstanding, what company can truly afford that?

Layoffs are strangling those who still have jobs, too

In 2008, US companies laid off more people than they had since the 1940s, and the evidence is everywhere. I didn't have to look, for example to the latest layoff numbers to figure out it was happening, I just kept in touch with my friends.

Last year this time, no one I knew had lost their job; as of now, I know at least a dozen, including personal friends, former co-workers and mentees. I know at least one person who was given the reprieve of keeping a job but had to swallow a pay cut. In New York of all places.

But this post isn't about the unfortunate ones who lost their jobs, it's about the misfortune of those who have kept them -- and by extension why all the layoffs will ultimately come back to cost the companies who are looking for savings from the cuts.

I had the following gchat conversation yesterday with a friend (name withheld for obvious reasons), who works for a very large company that, like many others, laid off several hundred people at the end of last year:

Friend: i feel like my job is pushing me to my limit

me: cuz of the loss of people
Friend: it's just 13 days in to the new year...7 work days in to the new year and i want to jump off my balcony

that is how stressful my job is

i resigned from my part time hustle yesterday because the full time job has become bodily consuming

Friend: i worked sunday 5pm - 3am...got home and got a nap because i then worked for 8am-8pm straight...and i mean straight...i didn't leave my couch to even get a glass of water

i didn't even turn on the tv and i was at home

me: smh
that's bad
Friend: literally i was busting ass for 12 hours straight yesterday
me: that sucks
i hope it gets better for you
and soon
Friend: it wont

2009 is bound to get a lot worse b4 it gets better

That conversation (edited slightly and used with permission, of course) shows how when major layoffs happen, workloads don't lessen. By cutting workers, companies are trying to get the infamous "more with less" -- that is steady or rising productivity from a smaller, cheaper workforce. But there are limits -- to how much one person can do with eight hours and two hands and to an employee's body, psyche and motivation level. Cut too deep into the bone and you wind up with, at best, a demoralized workforce and at worst, an unhealthy one.

In the best case scenario, angry workers just aren't as given to producing as much or as good as their bosses would like. In the worst, stressed-out, fatigued workers are prone to health problems that could increase sick days and increase employers' insurance premiums. What's worse is that remember, companies laid off more people last time than they have in more than 60 years, leaving, potentially more angry, disaffected and overloaded workers than at any point in time since that period as well. Not a good thing.

Another important point: all the layoffs are hurting not just productivity, but the spending power of even those who still have jobs as well. Look at what my friend says: she quit her part-time job because of the workload she's gotten from her full-time one. Less income, less spending, again multiplied by the millions.

Help for homeowners not working out

I was on NPR's News & Notes on Monday, discussing for the umpteenth time the economic malaise: the highest number of jobs lost in a single year since 1945, little hope in sight for those still looking for jobs, and a deal by one of the country's largest banks to allow judges to modify home mortgages rather than see the homes fall into foreclosure.

For the most part I could have recited the same conversation from months ago: things went from bad to worse and there isn't much hope in sight for a quick turnaround. But the Citibank mortgage deal, and some other data about what happens to many homeowners who have gotten help with their mortgages in the past year, were striking and interesting. Here's why:

Citibank and most other banks had resisted judges having the authority to modify mortgages for the obvious reason: if a homeowner falls behind on payments and the bank forecloses, at least the bank has a chance to take the house back and resell it -- possibly (though not likely) recovering at least all the principal it lent. But if a judge can modify the terms of the loan, the bank might stand to lose some of what it put up without ever getting the chance to see what the house might fetch on the open market and it almost certainly loses some or all of the interest revenue it expected from that loan.

You can see why a bank would be loathe to leave the fate of its mortgage business in the hands of any court. By agreeing, it could be argued that Citi and probably many other banks to follow, are accepting the grim reality that they don't have a chance to break even on many of their mortgage loans anyway (big surprise there) and are resigned to leave it in the hands of judges who might not have viewed their lending practices with particular reverence.

But here's where it gets tricky: there's new evidence that whatever workarounds judges come up with might not help troubled homeowners anyway. Comptroller of the Currency John C. Dugan said last week that more than half the mortgages that had been modified in the first half of 2008 were delinquent again within six months.

Think about that: If you were in trouble on your mortgage in January and got help, it's more likely than not that by July you were behind again. Not a good sign for Citibank, the judges about to perform legal surgery on its mortgages or the homeowners looking for a helping hand.

There could be any number of reasons for this but I'll give you my favorite one: too many people just bought too much house, and too many banks approved those people for loans bigger than they ever should have gotten. If you only make $40 grand a year, no amount of loan modification will help you keep a $300,000 home.

The bad news continues...

In book promo, CNN gives helpful financial tips

Over the weekend, CNN ran a special called "Gimme My Money Back", which was half a "special report" on what consumers need to understand during the financial crisis and half promo for business correspondent Ali Velshi's new book, of the same name.

They managed to keep it pretty un-infomercial-ish, save for Velshi's plugs of the book, with the experts and reporters they had on offering some pretty helpful tips about the basics of investing. The unfortunate thing, though, is that basic concepts like portfolio diversification and making debt elimination a higher priority than spending are things that people should know about before they enter high school, not once they're grown and managing retirement accounts that have already taken a beating in a financial crisis. Actually, we're probably in as deep of a recession as we are precisely because so many people are uneducated about even the basics of handling money.

You can't have a successful economy in which people are equipped to make money, only to piss it away because of their financial ignorance.

Either way, watch the video. It's a pretty good primer with a lot of plain language addressing what's happening with the financial markets and what you should know now, and many of the topics are things we've discussed here.