Thursday, November 29, 2012

Is the Fiscal Cliff a Double-Black Diamond?

In my younger years, I did not ski.  In my mid-forties, I finally learned to ski and loved it - before my knees began to whine.  When you ski, you begin on the easiest slopes; those marked with a green circle, progress to blue squared, intermediate slopes and then to those marked with a black diamond.  Only the very accomplished skiers, however, ski the double-black diamond trails.  I recall looking down these trails and thinking that they looked like a cliff, going straight down.   I marveled, however, at how exceptionally talented skiers could traverse the mountain on these trails and succeed in making it to the bottom.  The United States, I believe, is like the experienced skier, when dealing with fiscal challenges.


We face what the media is calling a “fiscal cliff”.  While the “cliff” is a formidable challenge with a FY 2012 federal budget deficit of $1.1 trillion (7.3% of gross domestic product (GDP)) and total public debt of 72.8% of GDP.  Projected growth in costs, under current benefits, in Medicare, Social Security, and Medicaid is projected by the Congressional Budget Office to create a federal budget deficit that grows from 7.3% to 12% of gross domestic product by 2022 – adding to total federal public debt*.  Does this mean we will soon be thrust off the fiscal cliff or will we learn to traverse the steep and dangerous trail in front of us?  I believe we will do the latter.  Why?


If last year’s Budget Control Act takes effect, federal discretionary spending will drop from 8.3% in 2012 to a post World War II low of 5.6% in 2022.  Regardless, total federal outlays will continue to grow, as a result of entitlements, and reach 21.3% of GDP in 2018-19.  If this is addressed with tax increases, the entitlement squeeze will be deferred but not eliminated.  Moreover, total federal revenue will approach 20% of GDP, compared to 15.5%, currently.  Budget deficits will shrink and federal debt will fall, until the growth in Medicare and Medicaid expenditures overtakes the tax increases.  Thus, we have not averted disaster.  We have simply passed it on to our children.  We turn our skis….


Alternatively, we defer all spending cuts, let discretionary spending grow with GDP, and watch total federal outlays approach 25% of GDP by 2022.  If this is coupled with no tax increases for those making less than $250,000 with upper-income and investment income tax rates rising, as is currently scheduled to occur in 2013, we would see federal revenues rise.  Under this scenario, total federal debt will continue to grow at a rate faster than the economy, although the annual budget deficit would decrease due to the growth in revenues.  As we’ve seen in our European cousins, the rising overall debt burden will cripple the economy, especially if interest rates begin to increase with a strengthening economy.  Thus, we must turn our skis….


The way before us is steep, if we accept the inference that our federal budget is on a dangerous path.  There are wide differences of opinion with respect to answers.  The population voted with President Obama to increase taxes on the high income but revenues need to increase to over 20% of GDP in the early 2020s to avert disaster.  The population will likely not accept this scenario, if they think others are benefiting at their expense.  Thus, compromise must follow.


Taxes will be increased and the growth in entitlement spending will be slowed.  Benefits for expenditures such as Medicare, Medicaid, and Social Security, will be slowed.  This will be done, regardless of the effect on the electability of our representatives.  Eventually, leadership will arise in our “leaders” and hard decisions made.  Areas of discretionary expenditures, such as the military, education, basic research, agriculture, among others will be forced to experience slower levels of growth, while some entitlement spending is reduced or, perhaps eliminated – such as increasing the age for Medicare and Social Security eligibility.  This approach – to combine the “left” leg (tax increases) with a parallel move by the “right” leg (spending decreases) will allow our nation to safely negotiate this slippery slope.  We will safely descend the mountain and avert financial and political disaster.


We have no choice.


* Much of these data came from Alan Levenson, Chief Economist at T. Rowe Price.  It is contained in the T. Rowe Price Report Number 117, from fall 2012.

"Coming together is a beginning. Keeping together is progress.
Working together is success." — Henry Ford

Tuesday, November 13, 2012

Buying a home? Consider homebuyer assistance programs

Graham McCaulley, Extension Associate, MU Personal Financial Planning Extension

You’ve examined your monthly budget and determined how much home you can afford. You’ve been house hunting and have an idea of what you’re looking for. You’ve even begun to shop mortgages. All these are necessary steps that most people take before buying a home, but not everyone checks into homebuyer assistance programs. For certain people, such as first-time homebuyers, those with low- to moderate incomes, veterans, or those living in rural areas, these programs can make getting into a home a little less costly.

Overall, the main benefit most homebuyer assistance programs provide for homebuyers are lower down payments, lower interest rates, and lower mortgage insurance costs than some may encounter with traditional mortgages. For example, with traditional financing (e.g., bank or credit union not participating in a homebuyer assistance program) you will usually have to come up with a minimum of 3% of a home’s value for a down payment as well as various closing costs ranging from about 1-4% of a home’s price. Also, if your down payment is less than 20%, you will have to pay for private mortgage insurance (PMI). The PMI premium is paid monthly as part of your mortgage payment and will be more expensive the smaller your down payment is.

The chart below outlines some homebuyer assistance programs that help cut down on the costs associated with buying a home:


Backed By


Who’s Eligible?

Down Payment Requirement



Good Neighbor Next Door Program

US Department of Housing and Urban Development (HUD)

HUD owned homes in revitalization areas may be purchased for only 50% of their appraised value.

Law enforcement officers, teachers (pre-Kindergarten through 12th grade) firefighters/emergency medical technicians.

If you qualify for any FHA-insured mortgage program, your down payment is only $100 and you may finance closing costs.

You must commit to living in the home as your sole residence for 3 years. During this time, you must have a second mortgage and note for the discount (i.e., 50% of the home’s value), although no interest or payments are required.  After 36 months the second mortgage is released.

First Place Homebuyer Program (Missouri)

Missouri Housing Development Commission


Two types of loans offered:

1) Cash Assistance: 3% of house price to use towards down payment or closing costs

2)  Non-Cash Assistance: no cash assistance, but loan offers a lower interest rate (currently 3% on 30-yr fixed loan).

First-time homebuyers and qualifying veterans who meet household income limits and have qualifying credit.

None for cash assistance loan.

Must live in home for 5 years. Cash assistance will be in the form of a 0% interest second mortgage that requires no payments and will be forgiven after 5 years of occupancy.


Rural Development Loans

US Department of Agriculture (USDA)

Low- and moderate-income individuals purchasing homes in rural areas.

100% financing, lower interest rates, and low cost PMI. The USDA offers guaranteed loans (for more moderate-income borrowers) as well as direct loans (for lower-income borrowers).


No down payment requirement. Loan amount can include 100% of purchase price as well as closing costs

Home must be in an eligible rural area, as determined by the USDA. It’s important to note that many areas just outside major metropolitan areas will still qualify as rural. You will have to pay a one-time USDA fee of 3.5% of the loan amount, which can be added to the loan.


Fannie Mae

Available to those who will live in the homes as well as investors (occupiers have the chance to purchase homes before investors).

HomePath mortgages are available on homes owned by Fannie Mae (usually foreclosed homes). These loans offer a low down payment, no lender-requested appraisal and no mortgage insurance


If buying the home as an owner-occupier (i.e., buying before investors are allowed to), you must live in the home as your primary residence for 1 year.

VA Home Loan Program

US Department of Veterans Affairs (VA)

Veterans, active duty personnel, certain reservists and National Guard members, surviving spouses of persons who die on active duty or die as a result of service-connected disabilities, and certain spouses of active duty personnel

100% financing and no PMI required. VA rules also limit the amount you can be charged for closing costs.

No down payment requirement.

You will be charged a VA funding fee that will range from .5 to 3.3%. This fee can be included in your loan amount. If you receive service-connected disability payments each month, you're exempt from the fee. You must live in the home as your primary residence.

FHA 203(b) Mortgage Insurance

Federal Housing Administration (FHA)

Provides mortgage insurance for those purchasing or refinancing a principal residence. The mortgage loan is funded by a lending institution, and the mortgage is insured by the FHA (which is part of HUD) so your lender can offer you a better deal.

Wide availability- You don't have to have a perfect credit score to get an FHA mortgage. In fact, even if you have had credit problems, such as a bankruptcy, it's easier for you to qualify for an FHA loan than a conventional loan.

3.5% of purchase price.

FHA does not provide direct financing nor does it set the interest rates on the mortgages it insures. For more information find an FHA approved lender in your area by going to:



The above chart is not an exhaustive list of homebuyer assistance programs. Home loan and down payment assistance programs vary by state, as many are sponsored by state/local governments or other organizations. For a list of specific programs by state, visit

No matter where you are in the home buying process, it’s a good idea to familiarize yourself with common buying and financing procedures as well as to think critically about how much home you can afford. You can find articles on these issues in the housing section of MU HES Extension’s Money Matters website (

For more information on the assistance programs outlined above, including how to apply for the programs, visit the following links:

HUD “Good Neighbor Next Door” Program:

MHDC “First Place Homebuyer Program:

Federal Housing Administration (FHA) Mortgage Insurance:

USDA Rural Development Loans:

VA Loans:

Fannie Mae HomePath Mortgage:


Thursday, November 8, 2012

The Fiscal Cliff

by Ryan Law


With President Obama’s re-election a number of news articles are saying one of his first challenges is to deal with the upcoming “fiscal cliff”. Today’s article will attempt to explain what that means in simple terms and what it can mean in your life.


The “Fiscal Cliff” will begin on January 1, 2012 and means $7 trillion in tax increases and spending cuts over the next ten years. On the front-end that may not sound like a bad thing, but it could be crippling to the economy the way it is set up.


Spending Cuts


In 2011 the Budget Control Act was passed that increased the debt ceiling and called for a bipartisan debt-reduction deal or there would be automatic spending cuts. No deal was reached, so the following spending cuts begin in 2013:


·         Defense - $50 billion is cut from discretionary defense spending each year for the next ten years. Some military officials have said these cuts would be “devastating”[i]

·         Non-defense – a similar amount would be cut each year from non-defense spending. Some programs, like Medicaid, Social Security, civil and military employee pay and veterans benefits, are protected, but everything else, including education and air traffic safety, will be affected.

Tax Increases


The Bush Tax cuts would be eliminated, which means specifically:


·         Marginal tax rates will increase – they will go from current levels of 10, 15, 28, 33 and 35% to 15, 28, 31, 36 and 39.6%, respectively.

·         Capital gains rates will increase from 15% to 20%

·         Child tax credit will decrease from $1000 per child down to $500

·         The marriage penalty relief will expire

·         The estate tax exemption will go from $5 million to $1 million

In addition, the payroll tax holiday will expire, taking your payroll taxes from 4.2% to 6.2%, which means someone earning $30,000 will pay an extra $50 per month in payroll taxes


The Challenges


Experts have commented that there are two big challenges Congress and the President face:


1. If all tax cuts stay where they are and no cuts are made in federal spending we will continue to face a mounting deficit of $1 trillion per year, which is unsustainable.


2. If all the cuts go into effect the economy could be thrown back into a recession (cuts often mean job elimination or pay cuts and those with jobs will pay higher taxes).

Neither option is a good one – obviously Congress and the President need to work together to figure out the best path. Both parties have expressed that they plan to work together to come up with a solution.


While the country faces difficult economic challenges and has a long road ahead to get on solid financial ground, you can take steps to stabilize your own financial situation. As we always preach, learn to live on a budget, get out of debt and set up an emergency fund. These three steps can lead to financial peace of mind.



Ryan H. Law, M.S., CFP®, AFC®


Personal Financial Planning Department

Office for Financial Success Director

University of Missouri Center on Economic Education Director


162 Stanley Hall

University of Missouri

Columbia, MO 65211


573.882.9211 (office)

573.884.8389 (fax)


Thursday, November 1, 2012

Be Prepared

NOTE: This article was originally written by Dr. Weagley and published as a Financial Tip in May 2011 after the tornado in Joplin, Missouri. With the recent devastation in the Eastern United States with Superstorm Sandy and the tragic loss of life and destruction of property we felt it was appropriate to re-emphasize it this week.


Our thoughts and prayers continue to go out to those affected by the storm and those who are working to continue to search for survivors and beginning clean-up. If you feel so inclined a lot of help is needed and can best be achieved through financial donations made directly to the Red Cross:


With that – here is this week’s Tip:


The Boy Scouts' motto is "Be Prepared". Once, Baden Powell, the founder of Boy Scouts, was asked the question, "Be prepared for what?"


He answered, "Be prepared for any old thing".


With a focus on financial success, how do we financially prepare for cataclysmic events? With all due respect to the author of an educational guide sheet on the subject (which can be found here<>), a summary of ideas follows.


1) Household inventory – For insurance claims you must have proof of your loss. It is easy to take a digital recording of the contents of your house, while narrating descriptions about the contents. (Try to stay focused on the contents and not the life history of the items, though that might be interesting to your grandchildren.) Keep a list of what you own and keep it in a safety deposit box. If you have antiques, jewelry, or artwork, it is a good idea to have an appraisal of their actual value. Useful tools may be found at  


2) Insurance - Make sure you have the right amount of insurance on your home and your personal possessions. (Step 1 will help with determining the value of your possessions.) Make sure you understand the difference between standard coverage and replacement coverage. The former values your items at their current, used value, while the latter values your items at what it would cost to replace the possession. When you remodel, review your insurance coverage. Consider earthquake and flood insurance if you find these to be necessary and cost effective. Flood insurance must be purchased from the Federal Emergency Management Administration, although your insurance agent can provide access to FEMA coverage.


3) Emergency fund - I don't want to be too redundant but make sure you have three to six months living expenses in your emergency fund. Cash is king during a disaster and electronic access to sources cash may not be available. Some people keep an open line of credit on a credit card, just in case of an emergency – if they cannot learn to save money!


4) Documents – If something is not able to be replaced, keep it in your safety deposit box – with your household inventory. All stocks, bonds, birth certificates, discharge papers, wills, deeds of trust, trusts documents, special photos, passports, marriage certificates, and whatever you deem to be irreplaceable should be kept secure.


5) Of course, keep your smoke and carbon monoxide detectors in good working order. Keep dead limbs trimmed from your trees. Keep dried grasses from your home. Know where you are going to meet your family outside, in case of a fire, and where you need to take shelter, in case of a storm or earthquake. Practice these steps with your children. Do NOT just talk about it – do it with them. Then, when the siren blows or the earth shakes, you will all know what to do. Make sure your family knows how to turn off the gas line, water line, and electrical service.


6) Disaster Kit – At a minimum, your disaster kit should contain:

a. A supply of water that is less than six months old. Old, clean unbreakable containers can be recycled for this purpose.

b. Non-perishable food, such as canned goods or freeze-dried backcountry foods. If you use canned goods, please keep a non-electric can opener in your pantry.

c. Clothing, particularly rain gear and layers to keep warm.

d. Sleeping bags and blankets. If you camp, your tent could be quite handy, as well as cozy and warm.

e. A first aid kit with essential first aid items, mostly to prevent infections and treat mild sprains – including prescription medicines. Know enough first aid (e.g., Boy Scout training!) to be a resource to others.

f. A battery powered radio, flashlight with plenty of extra batteries.

g. Cash and credit cards.

h. Keys to your cars, house, garage, sheds, or other structures or vehicles.

i. Special items that might exist in your family for special people, such as mobility aids, feeding aids, and other items.


Finally, nothing can prepare us for the aftermath of a disaster the caliber of Superstorm Sandy, the tornado that hit Joplin, New Orleans and Katrina, or Japan's recent earthquake and tsunami. I, however, do know something about the human spirit. If we are faced with disaster, we will be challenged but we will prevail. It is what we do. We survive to grow and to love, yet again. Being prepared just makes it easier for that human spirit to blossom anew.