OK, so Tough Money Love wrote a post today about a “Can I Afford It” quiz, an idea he got from The Strump, who did the same.

Since I don’t particularly want to be too “serious” this holiday week, I thought it sounded fun to add on to this theme instead of talking about the bailout (bah) or how crappy the economy is (humbug).

So, keeping in mind that I’m focusing on “discretionary” spending, which is what you purchase beyond your actual survival needs, here we go …

1. If you’re trying to figure out how much more you’d have to earn on your investments if you don’t contribute to your retirement fund this year, you can’t afford it.

2. If your kids have to eat ramen while watching  your 60″ HD television set … you couldn’t afford that TV.

3. If your primary college fund for your children is “get a scholarship,” you can’t afford it.

4. If you have to sell your hair or your dad’s watch to buy a Christmas gift, you can’t afford it.

5. If you’re deciding whether or not you can afford it based on how much you can knock down your monthly payments, you can’t afford it.

6. If a mortgage broker says you can afford it, you can’t afford it. (heehee…)

7. If you’re swiping your credit card while praying that you are going to get a year end bonus, you can’t afford it.

8. If you’re thinking that there’s no way the gas company would cut your heat just because you’re a few days late, you can’t afford it.

9. If increased financial stress has you going to the doctor for anti-depressants or anxiety medication, you can’t afford it!

10. If you’re unwilling to take on a part time job to keep yourself from going into credit card debt because you’re just too good for that, you can’t afford it.

Have any of your own? Share!

If you’ve been visiting the Fools and Sages community for a while, you already know that one of my favorite websites is The Grocery Game. I’ve written about it here, here, here and most recently, here. I hope you have been able to carve out some time and check it out.

If you haven’t, I humbly implore you to go to the site right now (well, after you finish reading this post), see if there is a program in your area and at least sign up for the $1 five week trial. I’m begging, because I saw the video version of this story tonight on the news:

With just a few weeks until Christmas, the Salvation Army says they’re worried about the lack of food donations, which are down about 30 percent in just the last year. Last month, the charity was forced to turn away 300 families who showed up to their food pantry looking for help.

This is in the Denver area, but I’m sure the same story is playing out all across the country.

You can make a difference, and The Grocery Game can help.

For example, quite often you’ll find that turkeys and hams are on sale, but there are limits of one per shopper’s club member. If you are planning on having turkey for your holiday dinner but there are hams at a great price, see if a local soup kitchen could use a fresh donation and pick one up … or pick up a super cheap turkey if you’re planning on having ham.

Look through the list for inexpensive non-perishable goods that you can pick up with coupons while they’re on “super sale” and take them to your local food bank. Even if you can’t get some of the great sales the first couple of weeks because you haven’t built up your stock of coupons, these organizations are still going to be in great need after the holidays when people pressed for cash are going to have to decide between paying for heat or paying for food. And if there are toiletries on sale, pick those up too. Most food banks welcome non-food items for their patrons.

Some examples of great prices from this past week’s sales from King Soopers/City Market/Kroger:

• Cook’s Spiral Sliced Ham - regularly $3.79 per pound, on sale for $1.49 per pound. … 61% savings.
• Olay Quench Therapy Hand and Body Lotion - regularly $7.69, on sale for $3.84, plus a coupon for $2. …. 76% savings.
• Arm & Hammer Antiperspirant and Deoderant - regularly $3.99, on sale for $1. … 71% savings.
• Kroger Anti-Plaque Dental Rinse - regularly $3.49, on sale for $1. … 72% savings.
• Goody Stay-Put Headbands - regularly $5.99, on sale for 50% off.
• Betty Crocker Brownie Mix - regularly $2.99, on sale for $1. … 67% off.
• Manischwitz Potato Pancake Mix - regularly $3.99, on sale for $1. … 75% off.
• American Beauty Pasta - regularly $2.49, on sale for $1. … 60% off.
• Mrs. Cubbison’s Stuffing Mix - regularly $2.39, on sale for $2, plus a coupon for $.55 (doubled up to $1). … 58% off.

That’s just a small sampling of this week’s specials, most of which are 50% off or more. And, as you’ll notice, most of the sales don’t even require a coupon, so you can make a difference THIS WEEK.

Just imagine, though .. if you got one each of the items above, assuming a five pound ham, you would spend $18.29 for merchandise regularly priced at $51.97, including some items that could be real food treats for a family, plus some that could help with hygiene, and even a couple of items that could be a small gift or stocking stuffer for a family that has fallen on hard times.

If you use the Grocery game for your own shopping, that $18.29 would probably VERY easily be covered by the savings you can glean from your own needs.

This weekend before you do your grocery shopping, I urge you to sign up for The Grocery Game and print out some items that you can pick up for those in need.

Please pass this post to friends as well, and let them know that if they use your e-mail address as a referral, you can earn free months with The Grocery Game. They can too, if they recommend this simple and inexpensive program to friends.

I am grateful to you in advance, and so are those who are in need of these wonderful charitable organizations this season.

When the next election cycle comes around, I would like to suggest that everyone just disregard all statements made by their legislator that implies any surprise or disapproval of the mortgage industry’s shenanigans, because seriously - it’s all a farce.

I’ve read quite a bit of political and economic news and over the last few months, I’ve found that any kind of article involving indignant legislators is all of a sudden very easy to skim. Being able to substitute “blah blah blah yada yada yada” for entire paragraphs can seriously condense an article, you see.

Take, for example, this article in the Voice of America news about mortgage lenders defending themselves in front of Congress:

“Their own risk managers raised warning after warning about the dangers of investing heavily in the sub prime and alternative mortgage market,” said Henry Waxman. “But these warnings were ignored”

Blah blah blah.

“Your whole excuse for going to risky and unreasonable loans that are defaulting at an incredibly high rate is that everyone is doing it,” said Daryl Issa. “If we don’t do it, we’ll be left out.”

Yada yada yada.

And this whole bit with Kucinich:

KUCINICH: “Do you take responsibility for the risks that your company took when you ignored the advice of your credit risk officer and when you cut the budget, do you take that responsibility?”

MUDD: “I followed the process to listen to all of my staff, not just the chief risk officer.”

KUCINICH: “But what did you do though. What did you do. Did you cut the budget of your credit risk officer?”

MUDD: “Just liked all budgets, as long as I have been involved in business we negotiated the right number for the people that he could hire.”

KUCINICH: “Is the answer yes or no, did you cut your credit risk officer’s budget?”

Whatever, Yoda.

I’m not going to defend mortgage lenders but frankly, if I was in charge of Freddie or Fannie, I’d be pretty mad at the way these folks were talking to me. It’s not that Fannie and Freddie were unaware of the dangers of the sub-prime market or the inevitable collapse that would occur, it’s that they were stuck between a political rock and a hard place.

Taking Fannie Mae into account particularly, remember that although they are a public company, they were created by Congress. Their whole existence is about buying and securitizing mortgages from other lenders so that money is constantly available to lend to folks wanting to buy a home. THAT IS WHAT THEY DO. Freddie Mac was created, also by the government, to compete with Fannie Mae in 1970  … which is really odd when you think about it … but their job is the same.

The “blame Clinton for this entire mess” crowd likes to point to how he encouraged Fannie and Freddie to reach out to lower and middle income families, and that’s a fair accusation. But in Fannie and Freddie’s defense, when the President of the United States tells a government created organization to do something, I would imagine it is difficult to say no - and frankly, the sentiment was good. Owning a home is the American Dream, after all.

Still, even in 1999, there was plenty of warning about the possible pitfalls. From the New York Times on September 30, 1999:

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980’s.

”From the perspective of many people, including me, this is another thrift industry growing up around us,” said Peter Wallison a resident fellow at the American Enterprise Institute. ”If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”

Imagine that.

And remember that at the same time this was happening, the “blame the Republicans for this entire mess” crowd can point to the Gramm-Leach-Blilely  (I like to point to it a lot, actually), which overturned Glass Steagall and allowed conservative banks to hook up with investment companies. That gave investment companies access to more conservative bank money.

Can you imagine the conversations in the halls of Washington DC back in the day? “If you guys want to loan to everyone and their uncle, you’re going to have to convince the banks to lower their lending standards. They can’t do that because they can’t take the risk, but if you pass this bill and let investment companies get in on the action, those geniuses should be able to invest well enough to make up for the possible increase in default risk.”

Without doing a bunch of research to verify, I am 100% confident that a statement very close to that was made at some point, because it actually makes sense.

But the one thing that politicians in the late 90’s would not have wanted to say in public if they wanted to get re-elected is, “no, we can’t support reaching out to lower and middle income people to increase home ownership” because what that really meant was “no, we can’t support reaching out more to minorities.”  Again from the New York Times in 1999:

… at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.

So. All of that is one big long coffee driven rant that comes back to this: Take all of the Congressional finger waving and tongue wagging for what it is - a photo op. The housing and mortgage meltdown wasn’t a surprise. Maybe Fannie Mae and Freddie Mac could have fought harder to warn the government and the public about the inevitable failure of what was going on, but their voices would probably have been drowned out by the politicians who needed a strong looking economy in order to get re-elected.

The same politicians who need to blame someone now.

Now that the days of 0% balance transfers and no balance transfer fees are likely a thing of the past, I thought it might be interesting to actually price out the true cost of a rate reducing balance transfer. I’m going to use a hypothetical, of course, so let’s lay out this story …

Mr. Oscar Grouch has been challenged in the past with his spending habits. Slimey, his pet worm, isn’t all that expensive to care for, but Fluffy, his pet elephant, is pricey. He also has a longtime girlfriend, Grundgetta, and we know how expensive girlfriends can be. Last but not least, Oscar invested in some kind of superfly technology that allowed him to open up some new dimension so that while he looks like he just lives in a regular old trash can, in actuality he has quite the luxurious pad, complete with an Olympic sized pool, a skating rink, and a bowling alley.

A few decades of these spendthrift habits has resulted in not a little bit of debt for Mr. Grouch, but he has recently committed to a goal of eliminating it entirely. Good for him!

In order to reduce his debt as quickly as possible, Oscar has decided to first look around in gratitude at what he already has and then curtail his spending dramatically when it comes to new purchases.

He has also organized all of his bills and put together a cash flow calendar so that he can match up his incoming and outgoing money efficiently and will not be surprised by a dip in his account or overspend when his balance looks good.

Finally, after pondering whether to knock out his lowest balances first in order to get a thrill of accomplishment, as recommended by some financial personal finance advisors, or to knock out the ones with the highest interest rates first in order to lower the actual interest paid over time, as recommended by others, Oscar decides to go with getting rid of the high rates first.

By the way, I’m going to use calendars at Bankrate.com for this illustration - they have a lot of tools that anyone can use at no charge.

Beyond just focusing the bulk of his extra payments to the highest rate card (while paying the minimums to lower rate cards), Oscar figures he can get more bang for his buck by doing a balance transfer. He takes the $5,000 he has on a card charging him 13.99% interest and moves it to another company offering him 1.9% for the first six months. He is planning on being able to pay $500 per month towards that card, which means that he’ll pay it off in eleven months if he leaves the account with his current bank:

With this balance transfer, he figures that right off the bat, he’s saving $50 a month in interest, and that’s true. Changing his rate to 1.9%, his payment schedule looks like this instead:

By switching to a card with a lower rate, Oscar saves $303. 79, which is great! Except that …

1. Oscar didn’t include balance transfer fees in his original payoff amount, and
2. The low rate only applies for six months.

In the good old days, balance transfer fees used to either not apply or would be something like 3% of the amount being transferred, up to a max of $75 or something like that. Now, it would be very unusual to receive a no-fee balance transfer offer, and there is no maximum. Taking that into account, Oscar’s real starting balance is $5,150 and his payment schedule looks like this:

Oscar is still ahead by about $151 by transferring his balance, but we still have to take into account the change in his interest rate after six months. If Oscar is a customer at Chase, he might get an offer with verbiage kind of like the rate increase notice I recently received, which said:

Default APR - The Prime Rate* plus up to 26.99%, with a maximum of 29.9% (0.08216% daily periodic rate). This rate is currently the maximum rate.

*Estimate variable APRs above are based on the 5.00% Prime Rate on August 15, 2008. The “Prime Rate” is the highest (U.S.) Prime Rate published in the Money Rates section of The Wall Street Journal as described in your agreement. These changes to your APRs do not affect any higher APRs currently in effect on your account.

That means nothing, really, except to let Oscar know that his minimum rate will be somewhere between 5% and 31.99%. Just for the sake of argument, let’s go with an almost-worst case scenario and assume that in month 7, his rate jumps to 29.99% (the max Bankrate.com will take is 30%). There isn’t a Bankrate calculator that can do this switch up that I know of, so I’m going to mash a couple together for you because I’m just that nice. Flipping his rate from 1.9% to 31.99% midstream makes his payment schedule do this:

Interesting, hmm?

Even with a flip to 29.99% starting in month 7 and a 3% balance transfer fee, Oscar’s payoff time and amount didn’t really change much - within one dollar or so.

This illustration is not meant to show that balance transfers are useless - I could have chosen different starting interest rates for Oscar’s initial debt and come up with more pronounced differences in the outcomes between sticking with the rate he had versus going with a balance transfer, fee and all.

Without going into more tables, had Oscars original rate been 8.99%, it would have cost him an extra $130.74 to take the balance transfer offer. He’d be better off sticking with his current rate.

If, on the other hand, his credit card company recently bumped his rate up to, say, 26.99% as a business decision, then moving his money, fee and all, to take advantage of this balance transfer offer would save him $382.64.

You can do your own analysis of the differences in payoffs with online calculators and a handheld calculator, and if you need help, please feel free to ask me. I can walk you through it and I promise it’s not difficult. Remember too that there are other issues that arise with balance transfer offers, such as whether low interest balance transfer balances will be paid off at all if you are carrying other debt on the same card, so please see this post for more information.

Two recent stories regarding consumer debt caught my eye because I read them practically right after each other …

From the Associated Press on December 2, 2008:

… the average debt per borrower for the second quarter stood at $1,742, up 7.7 percent from $1,617 in the third quarter of 2007. Debt per borrower increased 1.4 percent from the second quarter, when it stood at $1,717.

And then from MarketWatch on December 5, 2008:

Total seasonally adjusted consumer debt decreased by $3.54 billion, or a 1.6% annual rate, in October to $2.58 trillion, the Federal Reserve reported Friday. Consumer credit rose at a 3.1 % pace in September after dropping a record 3.0% in August. Non-revolving credit - such as auto loans, personal loans and student loans - had the biggest drop in October, falling by $3.3 billion, or 2.5%, to $1.60 trillion. Credit-card debt fell by a slim $181 million, or 0.2%, in October to $976 million.

So, total debt is down, but for every person who has credit card debt, the average amount has gone up. The timing is a little off here, since the first story is talking about the second quarter (July through September) and the second is talking about October, but I think the general message is probably still valid.

That isn’t particularly good news for the economy, is it? Spending on goods and services like cars and education is dropping, but an increase in the average amount of revolving debt means that people are using credit cards to pay bills and that’s not sustainable over the long term.

What’s going to end this cycle, I wonder - and how bad is it, really? Although the delinquency rate on credit cards is rising, it’s still very low - just over 1%. Overwhelmingly, people are still paying their bills. Certainly spending is tightening up, which impacts corporate revenues and of course jobs, but the only solution to that can’t be for everyone to spend more and put themselves more in debt.

I don’t want to blame the rich, but a part of me wonders why every crazily compensated CEO out there hasn’t taken a voluntary paycut to help save some jobs.  According to the AFL-CIO, average total compensation of S&P 500 companies in 2007 was a little over $14 million. That figure includes perks like stock options and a cut in those doesn’t really translate to a saved job here or there, but that’s not the point. Also according to the AFL-CIO, the average CEO to worker pay ratio (how much the CEO makes compared to the average wages of all other employees) was about 42 in 1980, meaning that the CEO made forty two times as much as the average pay of everyone else. In 2005, that ratio had jumped to 525, and then dropped to 364 in 2006.

Again, considering that these ratios depend on a rather arbitrary valuation of stock options, I’m not sure how accurate they are, but the change is pretty stunning. Sure, these guys are required to turn a profit in huge companies, but are they really worth that much more now than they were in the 80’s? Comparing a CEO to a worker making $50,000 a year, is a CEO making $18,200,000 in 2006 really going to be able to do that much better than a CEO making $2,100,000 in 1980? I think that would be difficult to justify - do you as well?

Sorry for the tangent, this was going to be a very short post about debt but I got to pondering …

In your quest to teach your children about personal finance, you can spend all of the time you want on savings, shopping wisely and investing and it won’t do you a bit of good if you don’t model smart money behaviors yourself. “Do as I say, not as I do” just doesn’t work.

But you know what? Life is a constant journey of course corrections, and if you screw up, be confident enough in yourself and in the lessons you want to teach your kids to be able to say, “oops, I made a mistake” or “strike that, reverse it” if necessary.

I had one of those moments this weekend when I was talking to my oldest son about holiday gift ideas. He asked me what I thought he should get for his stepfather and I gave him the standard answer - Cholula. My husband has a thing about Cholula, much like I have a thing about Tabasco Garlic Marinade and Basting Sauce (which is TOTALLY better), so every Christmas, the boys get him a couple of bottles to get him through the year. They run three or four dollars for a 12 ounce bottle, which is doable for a kid on a budget.

With that out of the way, we talked about what he might want to get for his little brother. I asked him how much he wanted to spend and he said, “I don’t know, maybe $25-30.”

Here’s where I had my money oops, as I immediately and unconsciously responded with, “$25?! You’re going to get your stepdad a $4 bottle of Cholula and you’re going to spend $30 on your brother?”

Oops.

What exactly does it matter if one present is significantly more expensive than another? If my husband wants Cholula and loves Cholula, then it’s a perfect gift for him and the cost shouldn’t really be an issue. What I was really reacting to was the amount of money my son was thinking about spending on his brother, which was really more than I wanted him to spend, but that wasn’t what I said.

I did backtrack, but couldn’t entirely take back my words - the seed was planted in my son’s mind that he needs to be equitable in the amount of money he spends, which is silly. It will take me much longer to retrain the idea than it would have if I’d just said, “that’s very generous of you, but I’d like for you to be creative and think of something less expensive that your brother would really like.”

So, follow along with me for a moment.

Let’s say Bert and Ernie, long time roommates and friends, decided in 2005 to buy a brownstone on Sesame Street instead of paying rent for a basement apartment. They go to their friendly not-in-their-neighborhood mortgage broker to get qualified for a loan. Bert and Earnie have to do apply for the loan with stated income since neither of them has a regular day job, but this isn’t a problem in 2005.

Since the real estate market in New York City, and especially the always popular Sesame Street area, is outrageous. they also ask for low teaser rate ARM with an interest only feature. Their intention is to still live in the basement but to rent out the rest of the place in order to pay the mortgage, which will be a great cash cow after a few renovation expenses out of the way. Once they get going, they’ll refinance to a fixed rate, principal and interest loan.

The mortgage broker’s firm takes their mortgage, along with all of the other ones they’ve originated that month, and sells them to an investment firm that bundles them up into a different packages, and sells them to investors. Some packages are comprised of loans given to people with perfect credit and who makes lots of money and are therefore considered at very low risk to default. Others include mortgages like Bert & Ernie’s stated income interest only variable rate loans. The low risk ones pay slightly lower rates to investors, and the high risk ones pay higher rates. Both, however, somehow end up with excellent credit ratings from debt rating firms.

Fast forward three years.

Bert and Ernie have done their renovations and have been looking for tenants, but the economy has hit the skids. Monsters are leaving Sesame Street left and right, or moving back in with their parents. The only person with a stable job is Oscar (there will always be trash) and he’s content in his can. Bert and Ernie can’t find anyone to move in, and the rate on their mortgage just flipped up 2% and will go up another 2% next year.

Thank goodness for the bailout!

By choosing from one of several programs, Bert and Ernie were able to modify the terms of their loan in order to bring their payments to a reasonable level and avoid foreclosure.

The story doesn’t end there, though. Now that their loan payments have been modified downward, the cash flow that comes from that loan ultimately to the investor that purchased the package it’s in has also declined. To add insult to injury, since the returns on the investment have gone down, the current investor can’t even sell to another party without taking a hit on the principal amount either.

Multiply that by the 400,000 real loans that may be modified by Bank of America and you end up with one very ticked off investor who is suing the bank. From Business Week:

The battle over the mass modifications of troubled mortgages has begun in earnest. On Dec. 1, William Frey, a private investor in mortgage-backed securities, filed a lawsuit in New York State Supreme Court alleging that the proposed modification of some 400,000 home loans originally underwritten by the defunct lender Countrywide Financial is illegal.

The lawsuit , which seeks class-action status, was filed against Bank of America (BAC), which bought Countrywide in late 2007. It argues that most of the Countrywide loans are not Countrywide’s or Bank of America’s to modify, but rather are owned by trusts that bought them through securitization—the process of financing home loans through the public markets by parceling them out to investors.

Now, Mr. Frey isn’t just any old investor. He owns a broker dealer that specializes in mortgage backed securities and would therefore be particularly impacted by widespread loan modifications. His personal net worth would likely be affected as well as that of any clients who had invested with his company.

Mr. Frey says that he has not put together any securities using subprime mortgages in years because he believed them to be too risky, which was a good move, but the current economic downturn and bailout efforts are impacting more than just the subprime market.

His feeling is that the loan servicers are going to  modify loans instead of foreclosing and that these modifications are a breach of the contract that mortgage backed securities companies essentially set up with investors. In other words, when investors bought these highly rated securities, they were counting on a “business as usual” economy where people who couldn’t pay their bills would be foreclosed and even that wouldn’t happen very often, but they could generally count on the return on their investment staying consistent.

He also believes that changing the game half way through when it comes to mortgaged backed securities will hurt the secondary market for these products and therefore reduce the lending pool for Americans to purchase homes.

He’s not wrong and as the manager of a firm that makes its living on these products, it’s almost required that he step and try to defend the interests of his investors, but he’s no saint either. Essentially, he’s asking for a bailout for his investors - at taxpayer expense, of course:

Frey says a more reasonable, albeit unpopular, solution would be for the government—that is, taxpayers—to ante up another $500 billion to buy all of the troubled loans from mortgage-backed securities pools in order to keep the public market for financing mortgages viable.

Buy out ALL of the troubled loans in order to shift the risk from private investors to taxpayers. Nice thought, Mr. Frey. And yet, to be fair, I kind of see his point. It’s enough to give a girl a headache.

But for the record? I still think my plan is better.

Is the economy stressing you out? Are you worried about whether or not you’re job is safe, if your home value is declining so fast that you’ll be underwater on your mortgage, if your company is going to cut back on medical benefits? Are you concerned about where you will cut corners if necessary, and is the nightly news a constant stream of scary economic data?

If you answered yes to any or all of the above and have kids at home, consider how that might be impacting them.

Kids may be ignorant of the details of your financial situation or about personal finance basics in general, but they’re not stupid. They know when their parents are on edge about something even at a very young age. Empathy is instinctual, as anyone who has made smile at a baby in order to elicit a smile in response knows.

I can’t tell you how to convey your situation to your child - you know your kid’s personality better than I do - but I can give some general suggestions, and being the buttinsky that I am, here they are …

Keep your discussions age appropriate. An elementary school aged child and a junior in high school are worlds apart in regards to how much they need to know. A younger child may only need to know that sometimes parents have less money than others and this is one of those times. An older child, especially one who may be looking forward to a car or college in the next year or two, can handle a few more facts about the situation and deserves to know if there are plan changes on the horizon.

Be prudently positive. Fear engenders fear, and much of your fear and pessimism may be unnecessary. Stick to the facts of your situation, keeping in mind that “the economy sucks” is not really a helpful fact.

Enlist their help. Children want to help, they really do. If you are open with your kids, you will probably find that they are willing to join your team to do whatever they can to make things better. If your conversation is about how your income has gone down but your bills haven’t, ask your children if they have any ideas about how to save money. Depending on their age, you may have to guide the conversation a bit. For example, for younger children, you might need to mentally go through each bill and ask them for suggestions - “Electricity costs money every  month, and everything that is plugged into an outlet uses electricity, sometimes even when it’s turned off. What could we do to save money on those?” Don’t forget about the vampires!

Stay as positive as possible. The most important lesson you can impart to children in most times of trouble is that much of their reality is in their control. Teaching them that your family has been victimized is not helpful.

Come together. Going to movies, staring face forward, and munching on your popcorn in silence is less of a “quality time” family event than a board game, and much more expensive. Going out to eat in a loud crowded restaurant where everyone has to mind their manners** is less a family event than everyone hanging out in the kitchen making dinner together. Popping the kids in the gym’s on-site daycare while you go do an hour on the treadmill is less a family event than taking a free walk.

Be grateful - and give. Although it can be difficult to think about giving things away when times are tight, do it anyway. If you have clothes that children have outgrown, donate them to a charity or turn to your local Freecycle group. The lessons here are plenty - gratitude that you have enough to give away, sharing with others who are not as fortunate as you are, learning how to acquire items for yourself that are less expensive than buying new, and community coming together.

Turn off the TV. Watching economic news is pointless, really and truly. It will just depress you. Other programming may be more entertaining, but when it comes interrupted with commercials trying to convince you to spend and take on more debt, what’s the point? It can be confusing for kids as well. They see toys they want to get and those families on TV look so happy and obviously able to afford all of the goodies. By inference, if your family can’t afford to buy them, something must be wrong with you. Try the library instead for your video watching needs.

Although every day should be an chance to teach your children about personal finance, times of economic hardship are, let’s say, a more poignant opportunity. Handled correctly, tough times can be a blessing as families turn to each other for strength, support and love - all of which are free.

**This is not meant to imply that children should not mind their manners at the dinner table at home, it’s just not quite the same!!

As we move through this newly admitted recession that everyone already knew about, news about mortgage bailouts and auto bailouts and who-knows-who’s-next bailouts comes fast and furious.

For example, credit card companies have asked to be allowed to write down principal, a request which was denied by regulators in November because it also included a request to allow borrowers to defer paying income tax and lenders to defer including those losses in their financials. The government has decided that it is imprudent and misleading for credit card companies to not post the losses they would experience immediately, and that makes sense.

In the mortgage industry, however, the standards are a little different. If a homeowner loses a home to foreclosure or has a modification to a loan that includes reducing the principal owed, income taxes on the forgiven amount are waived. This law was originally enacted to cover debt forgiven in 2007, 2008 and 2009 but has since been extended to 2013. From the IRS website:

Homeowners whose mortgage debt was partly or entirely forgiven during 2007 may be able to claim special tax relief by filling out newly-revised Form 982 and attaching it to their 2007 federal income tax return, according to the Internal Revenue Service.

Normally, debt forgiveness results in taxable income. But under the Mortgage Forgiveness Debt Relief Act of 2007, enacted Dec. 20, taxpayers may exclude debt forgiven on their principal residence if the balance of their loan was less than $2 million. The limit is $1 million for a married person filing a separate return. Details are on Form 982 and its instructions, available now on this Web site.

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The debt must have been used to buy, build or substantially improve the taxpayer’s principal residence and must have been secured by that residence. Debt used to refinance qualifying debt is also eligible for the exclusion, but only up to the amount of the old mortgage principal, just before the refinancing.

Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the new tax-relief provision. In some cases, however, other kinds of tax relief, based on insolvency, for example, may be available. See Form 982 for details.

Combined with the tax relief, mortgage holders should be aware that there are several options available if house payments are a burden. FHASecure and HOPE for Homeowners are available now, and the newly announced Streamlined Modification Program will go into effect December 15th.

Under the Streamlined Modification Program and similar in some ways to FHA Secure and HOPE for Homeowners, borrowers with loans from certain providers (some of which can be found within the same list as lenders who are working with HOPE for Homemakers, but not all - contact your lender to see if they are participating) may be able to renegotiate the terms of their mortgage to avoid foreclosure or bankruptcy.

In order to qualify, homeowners must be delinquent 90 days already, owe at least 90% of the current value of your home, live in the home as a primary residence, not have filed for bankruptcy, and be paying more than 38% of their gross monthly income towards their mortgage.

The adjustments to mortgages may not necessarily include debt forgiveness, though. Participating lenders are going to resist debt forgiveness as a first alternative, opting instead to either lower interest rates or extend the terms of a loan. In other words, a thirty year mortgage may turn into a forty year mortgage, which means on a $150,000 mortgage at 5%, the interest actually paid over the life of the loan would go from about $140,000 to nearly $200,000, assuming the borrower actually stayed in the house that long.

Even with that rather hefty “penalty,” the new program may be a lifesaver to many families who just need to bridge this economic downturn - but only if used prudently and honestly. Interest-only loans and variable rate loans were also ways for families with faltering cash flow for one reason or another to be able to bridge a tough gap, but over the course of the last several years, those same loans were also a much too easy way for borrowers to buy more house than they could afford or to use the money they “saved” to spend lavishly elsewhere. This new program could be gamed to do the same thing, and it could be quite expensive for the economy as a whole. No, check that - it WILL be quite expensive.

How could someone work the system to take advantage of this program? Simply, really. All a homeowner needs to do is not pay the mortgage for three months and show that their gross income is not enough to support their loan payment. How could the income number be accomplished?

• Max out a home equity loan, if it hasn’t been slashed already, by drawing on the entire amount. It doesn’t need to be spent, it can just sit in a bank account. Remember, it’s INCOME, not assets that count in this equation.
• Go from a two income family to a one income family, especially if one spouse is in a field where jobs are easy to replace such as healthcare or education. The goal is to reduce income just long enough to qualify for the program.
• For self-employed people with unverifiable present income, be pessimistic! The same people who may have fudged on the high side to qualify for a loan in the first place can now feel comfortable with the “glass half empty” approach.

Of course, anyone who tries to get a loan modification through this program has to certify that they’re not being shady, but really, it’s getting to the point where it’s difficult to define “shady” when you see the auto execs rolling into DC to beg for money in their corporate jets, AIG doubling salaries and paying out hefty cash awards, and credit card companies doubling rates virtually risk free to themselves. The tradeoff for people with otherwise stellar credit reports between taking a hit for missing a few payments in order to reduce a monthly payment (or ideally, the entire principal amount of the loan) versus racking up more credit card debt or raiding a 401k plan may be worth the effort.

For a quick overview of the program, go here - Consumer Affairs Streamlined Modification Program Fact Sheet.

Several months ago, I wrote a post about Freecycle, a grass roots organization formed to keep items out of landfills and money in your bank.  As the owner/operator of our local Freecycle group, I see all of the posts that go through the group - offers, requests, some heartbreaking, some amusing. It’s a great group and I hope you’ve at least looked into your area’s Freecycle group, especially as we come up on the holidays. If you haven’t, you can find the national information here - Freecycle.org - and drill down to find a group in your area.

In the last few months, we’ve seen a dramatic increase in requests for items, reflecting the economy in a couple of ways. First of all, there are more people who are truly struggling to make ends meet, but there also seems to be a very real shift in the general mindset from “if I need/want something, I’ll go buy it” to “if I need/want something, I’ll see if I can get it for free before I spend money on it.” This is GREAT, in my opinion, and in a twisted way, I hope that the economy stays tough for long enough for it to stick.

One thing I’ve encouraged in our local group is for people to use Freecycle as a way to clean out toy chests and game closets before the holidays, and to look at Freecycle offers as regifting opportunities. It’s been a great success, as far as I can tell, and we still have a few weeks to go. In the last couple of weeks, we’ve had a flood of offers come through the group - at least a dozen Christmas trees (those things aren’t cheap!!), gobs of holiday decorations, furniture, appliances, clothes, toys and games, puzzles, craft supplies for people making gifts, various home accessories and lots of other stuff.

Clearly, people are using Freecycle to regift and save holiday money in other ways, and I’m joining in. Over the weekend, I picked up an Oscar the Grouch plush toy and a t-ball set for my toddler. They’re wrapped and under the tree already, although I may have made a mistake when I decided to wrap the plush toy in Elmo wrapping paper, thereby rendering it completely irresistable. I also picked up a 2,000 piece puzzle for something to do while my parents are here, and some Christmas holiday wrapping paper that a Jewish friend said she didn’t need anymore.

In return, I’ve given away several boxes of holiday cards, an exercise machine that I received via Freecycle in the first place but never quite got the hang of, and will be posting a few very gently used home accessories and board games that could be given to someone in “like new” condition.

Do you have anything that you could post to your local Freecycle group? Doing so could relieve some of your clutter and really make a difference to a family in your area.