Behave Your Finance

As you can imagine, a lot of people are looking for new ways to cut back on their holiday spending this year. The projected average amount to be spent this season is down 50% from last year. If you're someone looking to decrease your spending this year while still having a great Christmas season, I have one great money saving idea for you: Remember what Christmas is all about.

The holidays are about being able to spend time with family and friends and enjoying each others' company. Christmas specifically is about celebrating the birth of Christ, not about giving or receiving presents. As it's finally now clear to see, consumers have had a spending problem for the past few years which has led up to the current financial crisis. People have been spending more than they make, financing big purchases with debt, and living far beyond their means. The irony of it all is that the more material possessions you have, the more you are distracted from the things that bring you true joy in life. While some may argue that their possessions do bring them true joy, nothing compares to a good time with family and friends. This can't be bought or replaced by anything else.

Now I'm not going to provide a list of the things that you can do with family and friends that are cheap or free over the holidays. Just think about some of the best times you've had with anyone during the holiday season and see what you can come up with. For me, I think of sledding, board games by the fire, snowball fights, and watching movies, just to name a few.

If you are looking for a good list of frugal Christmas ideas, you can find one here. Otherwise just be creative and make this Christmas about the people you care about. Of course you're still going to exchange presents with people, but try to think of how you can make someone's Christmas special and memorable. I guarantee anything that you can give to someone that will truly be remembered and appreciated for a lifetime will not be bought in a store.

Happy Thanksgiving and thanks for stopping by Behave Your Finance. Please come back and visit again soon.

I hear a lot of people asking about what the bailout actually is. This questions comes in various shapes and form, but it seems that many Americans do not understand what's actually going with it. We're going to attempt to shed some light on the subject by explaining it in terms that hopefully everyone can understand.

What is the Bailout?

Essentially, it is the government's plan to buy up the bad loans that many banks are likely not to collect on. These loans are often referred to as "toxic assets" and are not worth nearly their face value so the government is determining how much they are willing to pay, probably between 30 to 40 cents on the dollar, and buying these toxic assets from the banks to help relieve some of the pressure from loan delinquencies on their balance sheets.

Why is it necessary?

With all of the bad loans out on the market, most banks have no idea how much money they are going to be getting back on these loans, which means they can't lend out any more money because they don't know how badly they will need it in the near future. Without banks lending money, people can't get access to the capital they need to invest and expand their companies, buy a new home (which suppresses housing prices even furthe), or finance big-ticket items. This causes consumer expenditures to go down which hurts all large companies and leads to decreased production, and eventually recession. The government's plan to bail out these banks is a last ditch effort to put some money back into the banks so that they can continue to lend to individuals, businesses, and each other.

What if we just don't do anything?

If nothing was done to relieve the pressure on banks, things would certainly someday become stable again, but the problem is that it would probably take a very long time. The banks and the government screwed up in pushing subprime lending practices in an attempt to make bigger profits, and now everyone is paying for it and making an effort to pay upfront instead of letting things get out of hand will most likely keep things from getting much worse than they could if nothing was done.

If the bailout didn't go through, it would not just be individuals suffereing from not being able to get a loan, or the banks suffering and going bankrupt, it goes much further. You see, large companies and banks engage in short-term lending, often on just a daily or weekly basis, which allows these firms to pay of their bills consistently with their cyclical income streams. Say I'm Wal-Mart and it's time for me to pay my employees, but many times I don't have the cash on hand to pay everyone so I take out a short-term loan to pay the difference that I can't handle, and pay it back with money that I know will be coming in within the next few days, then I pay off the loan. Banks often do the same thing amongst themselves and lend money between each other all the time.

The problem that got us to where we are today, is that the money that banks were counting on to be coming in within the next few days, much of this income coming from mortgage payments, stopped coming in. This meant that banks were taking out short-term loans, and then not being able to pay them back to the bank where they got the money from which means another bank isn't going to be able to get the money that they need for a short-term loan. This tightening up of the credit markets has caused banks and businesses to be unable to get the money they need for their daily or weekly expenses which they were previously paying off with short-term debt, and hopefully, this injection of capital into these markets will loosen up some money for these firms to be able to borrow again.

What's going to happen?

As of right now, no one is sure, but it seems as if the government's plan has made an impact already. A good indicator of how tight credit markets are is something called the Ted Spread. Here is a link to this indicator.

What the Ted Spread tells us is the difference between treasury security rates, and the LIBOR, which stand for the London Interbank Offered Rate. This is the rate of interest that banks are willing to lend to each other, and the treasury security rate is the interest rate that the U.S. government is willing to pay on their scurities. These indicators are used because the lower the rate on treasury securities, the more people are putting their money into these securities rather than investing or loaning their money out, and the higher the LIBOR rate, the less willing banks are to lend to each other. During strong economic times the Ted Spread is typically below 1%, but recently has been at unprecedented levels to around 4%.

Of course there are other measures to look at, but this is one that we follow as a good indicator of what's happening in the short run.

Stay tuned for more information on what's going on with the bailout and the credit crisis and please feel free to ask questions in the comments area and we'll answer them as quickly as possible.