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10.2%? Would the Real Unemployment Rate Please Stand Up Print E-mail
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Personal Finance - Investing
Written by Omie Ismail   
Friday, 06 November 2009 14:00
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10.2%? Would the Real Unemployment Rate Please Stand Up
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Today, the federal government released statistics showing that the unemployment rate rose to 10.2%-- more than expected.  Unfortunately for the United States, that number, while grim for many, doesn’t remotely reflect the true unemployment.  The jump past 10% was attributed to changes in teen unemployment and the self-employed.  Although many economists were surprised by the leap, it shouldn’t have come to a shock to anyone who really understands the unemployment figures.  Anyone that delves into the Bureau of Labors Statistics (BLS) statistics, the organization that calculates official unemployment, would know that the true unemployment rate likely lies somewhere between 17% and 22%.

Both families and individuals need to make smart decisions about their spending as the government and the press paints a picture of a recovering economy.  The government has a vested interest in consumers opening up their pocketbooks to get the economy going again.  However, if such spending is done on credit, as was the case for the first seven years of this decade, households will only find themselves further behind in the future.  The recent stimulus programs including Cash for Clunkers and the recently extended Homebuyer tax credit take the two largest debt producing transactions and incentivize them with a relatively modest 3% to 18% contribution from the federal government.  It is smart for the government because the sales and income taxes generated at the state and local level make all governments as a whole even on the transaction.  Since the Federal government would likely have to bail out some of the states, particularly California, such programs allow the government to make a tax transfer indirectly instead of providing additional grant funds or emergency loans.  But if consumers were fully aware of the state of unemployment, would they be so eager to buy a house or an automobile?

 



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MGM  - What should be the investment mix for the unemploy |2009-11-07 04:30:52
I just had a conversation about this topic with a friend of mine. It made us think about if we were to lose our job, how much money would we need to live on and how should we be investing for that scenario. I agree that building up reserves for a rainy day makes sense. Exactly how and what the mix of reserves is-is the question.

I think in today's economy you need a good 6-9 months of reserve that will hold you over in case you ever find yourself unemployed. I know folks who have HELOCs and are counting on this to pay their bills should they become unemployed but yet another friend of mine recently received a notification from his bank that he could no longer access his LOC from his HELOC. This person had not lost his/her job, had made payments on time and has now lost that security blanket. It certainly has made me think about my investments and access to cash should I need it one day. Might be another topic for discussion here...

Omiewon  - HELOCS |2009-11-07 07:16:37
The HELOC issue is a very big problem with some of the banks. Starting in early 2008, they began to cut the credit lines due to the home equity reductions. One of the reasons that I suggest going with Credit Unions or a local bank is that they have rarely done this. The banks that made the worst loans are the one's that had to protect their capital and pull in their lines of credit. Although a few credit unions made bad loans and went bust, the vast majority of them are just fine. If you have the equity it is a great question to ask a credit union or local bank "How many credit lines have you cut". Cash is best but if you have enough equity a good HELOC from an institution that doesn't cut them is good too.

Investment mix: lots of cash at crappy interest rates until you get past your 6 month mark. Past that you can start putting some in liquid assets with longer maturities or some money in the market as long as its spread out through a mutual fund. Remember that you can make unemployment tax free on receipt (do have to pay later) and right now, unemployment benefits are being extended all the time. My golden rule is 1 month of liquid assets to cover expenses for every $10,000 of income with a minimum of 6 months for everyone. So if you make $80,000, 8 months expenses (whatever that amount is). Sounds like a ton at higher incomes but if you have that kind of income you should have been putting it away. The rationale is that higher income jobs take longer to get and you never know if you are going to have to take a lower income job. It will let you sleep at night.
For those of you that think this amount is a ton: talk to some recent immigrants or foreigners. Many of them talk about saving 25% to 40% of their salaries! Talk about living below their means.
 
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