A Primer on Government Debt and Deficits

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Debt vs Deficit

The federal debt is the total amount of money that the U.S. Government owes, and is a total of all of the deficits on a year-to-year basis. The deficit is simply the difference between what the government spends and receives on an annual basis. For example, if the U.S. Government spends $4 trillion in a fiscal year but only receives $3 trillion in revenue, the deficit for that year would be $1 trillion. Thus, the total government debt would be increased by $1 trillion.

Recent Context of Government Budgets and Debt

The debt balance for the U.S. Government currently stands around $21 trillion, while the 2018 fiscal year deficit is around $833 billion. From 2008 through 2016, government debt ballooned from about $10 trillion to almost $20 trillion and the 2008 Financial Crisis played a large role in this increase. With the U.S. economy in distress after 2008, the government spent the next several years stimulating the economy to get it back on track. This economic stimulus required much more spending and investment from the government than it was receiving in revenue.

According to the Peter G. Peterson Foundation, the U.S. Government has run a deficit in every year except for four (1998-2001). This is evidence that government spending is not as much of a Republican vs. Democrat issue as the media often makes it out to be.

Consumer Debt vs. Government Debt

Many people like to equate government deficit spending to using a credit card. While the government is using borrowed money similar to a credit card, this comparison does not hold up very well when you dive a little deeper. As mentioned earlier, government spending tends to spur economic growth during periods when the economy is not robust. In theory, a stronger economy means more people and businesses making more money, which in turn means more tax revenue for the government. Taking on personal credit card debt rarely produces more income for the individual spender.

Ultimately, both personal credit card debt and government debt must be re-paid to maintain healthy finances. To reduce debt, consumers and governments will generally employ some combination of increasing income/revenue and reducing expenses. When a consumer with outstanding debt passes away, their assets are liquidated to pay off their creditors. This results in fewer assets being passed down to heirs. Unlike humans, Governments exist into perpetuity. When the U.S. Government plans to spend more than what they receive in tax revenues, they issue new debt in the form of U.S. Treasury Securities. Governments, pension funds, mutual funds, and citizens rely on these securities as a substantial part of their investment portfolios. Yet, similar to credit cards, these Treasury Securities eventually need to be paid.

U.S. consumers should be conscious of their spending habits to make sure they are not over-leveraged. While the U.S. Government plays by different rules when it comes to deficit spending and debt, ultimately, the general goal remains reducing debt while stimulating the economy.

Inside the Economy: Trade Tariffs

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On this week’s Inside the Economy, we review the number of new jobs that have been created in the U.S. economy this year. In addition, there continues to be a number of headlines related to the trade tariffs that the Trump administration wants to impose. Listen in as we look at each state’s biggest export/import partner and discuss what implications these tariffs may have on the U.S. economy.

Five Financial Tips for Today’s Grads

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Graduation can be an exciting time for young adults as they embark into a whole new world. Yet, it can also be overwhelming for many to face new financial responsibilities in adulthood. Many people envision adulthood as a state of maturity, but often overlook the idea of fiscal maturity: the act of taking ownership of your financial affairs and making the best decisions possible to balance todays’ expenses with saving for future goals.

The world of personal finances can be unforgiving, so we’re offering five tips to help you achieve financial success. By following these tips, you can avoid some common financial difficulties that many new graduates encounter.

1. Budget and Spend Wisely

Graduation is an excellent time to reevaluate, or begin creating, one’s budget. You can start by opening up an Excel spreadsheet and tabulating your anticipated expenses, making it as in-depth and detailed as you’d like. The chances are that your financial status has changed since being a full-time student, whether you experience a gap in employment or must adjust for an increased income. Additionally, it’s likely that you are now responsible for more bills, which is something that comes with financial independence.

By seeing these numbers on a spreadsheet, organizing them, and figuring out exactly where you stand, you can have a better understanding of what alterations you might need to make in your lifestyle to make sure your bills are paid on time and you still achieve your goals. This might entail spending wisely rather than fluidly. There are several apps available to help with budgeting, such as Mint, You Need A Budget (YNAB), or Wally.

2. Put Your Bills on Autopay

Some companies, including many student loan providers, offer incentives for consumers who put their bills on autopay. By setting up autopay on your main bills, such as rent, utilities, credit cards, student loans, and other recurring expenses, you can take advantage of these incentives while also making sure everything is paid on time and you don’t get any late payment penalties.

3. Use Credit Sparingly

While it is true that one has to build credit in order to have credit, there are risks associated with credit cards, especially those with high interest rates. While it’s easy to make the minimum payment, it’s important to remember that you should only use credit cards if you can afford to pay the complete bill each month. You could spare yourself hundreds of dollars, or more, per year by avoiding interest charges, and you build your credit score at the same time.

4. Save for Retirement and Take Advantage of 401(k) Plans

Although it might seem too early to contribute to a 401(k) plan when you are beginning your career and just finished tossing your graduation cap into the air, the earlier you begin saving, the better you are preparing for your future. Even starting with small amounts, by investing early you will amass more money to support yourself in retirement. Furthermore, many employers encourage their employees to invest in 401(k) plans by “matching” the employee’s contributions. To see if you qualify for this win-win situation, check with your company’s HR staff as soon as possible.

5. Don’t Ignore Your Student Loans

Because of the rising cost of education, the typical college student graduates with $37,000 in debt and the biggest financial concern of many recent grads is their student loans. When you graduate, take charge of the situation and review the terms of your loan. You need to determine how much you owe and how your payments fit into your new budget.

The very first step to creating a solid financial base is to establish a cash reserve of at least 3-6 months of expenses. After this is established, and if your lender allows it, you may consider making extra payments and asking the company to put the additional amount towards the principal balance of the loan, rather than the interest. Paying more than the minimum can shave years off the length of the loan, save you money over the years, and help you qualify for a better mortgage or auto loan.

No matter your situation, reviewing your finances does not have to be an intimidating ordeal. Taking control of your finances early actually empowers you to set yourself up for a more stable and lucrative future.

Inside the Economy: Tariffs, Rate Hikes and More

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On this week’s Inside the Economy, we discuss the volatility that has crept back into the global equity markets. How does this stock market volatility compare to past market conditions? Last week the Federal Reserve raised rates by another .25%. How many more rate increases can we expect over the next 12 months? We also review the trade balances with the top four U.S. trade partners. What goods make up the largest portion of imports from China? Tune in to this week’s episode to find out!

Five Facts About Denver Real Estate

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It’s no secret that Denver real estate values have been on the rise, especially over the last five years. If structured correctly, your home could be sold in a matter of days. However, where are you going to move? Buying in Denver can be quite competitive as inventory stays historically low and median home prices continue to creep up.

In the last several years, many homeowners have seen their home values increase by $100,000+ within two years. Will this always be the case? We’ve compiled a few note-worthy facts about Denver real estate to lend perspective to Colorado’s real estate landscape.

  1. According to Colorado Home Realty, “The average single family resale home in metro Denver was $441,172 in 2016. Go back 40 years to 1976 and it was $39,740! A third of that increase has come in just the last five years.”
  2. Also according to Colorado Home Realty, “Homes are more affordable today than they’ve been for 34 out of the last 43 years”. This may seem counter-intuitive, but the calculation is based on mortgages as a percentage of average household income. The example used in the article explains that in 1979, the ratio of payment to income was 64%, versus in 2016, the ratio of payment to income was 38%. This is based on many averages, but creates an interesting point of view.
  1. A mid-2017 report from Your Castle Real Estate states “Our market inventory continues to be near record lows, with only 7,081 single family homes on the market as of June 30 2017 (16,000 – 18,000 is considered a balanced market).” When supply is low, prices increase. What would inspire an increase in supply to help create balance with demand? One option is building new homes. Colorado builders are expected to pull 23,700 single-family permits in 2017 and 26,000 in 2018, according to the University of Colorado’s Colorado Business Economic Outlook. While that looks robust compared with the sluggish pace of homebuilding seen after the recession, the CU forecast notes that builders pulled around 40,000 permits a year in 2004 and 2005, when there were 1 million fewer people living in the state.
  2. The Denver Post takes a more practical view of the difference in price point: “More than 60 percent of the homes on the market in Denver are in the top third of the price distribution, while just 15 percent are in the bottom third, according to Zillow.” This issue makes home buying under $500,000 especially difficult from a competition standpoint. 5280 magazine sums it up nicely with their Panic Meter:

Your budget: $1,000,000+
Your level of panic: Low. You could find your dream home—and actually buy it.

Your budget: $750,000 to $999,999
Your level of panic: Moderate. There are houses available, but you’ll still need to match list price.

Your budget: $500,000 to $749,999
Your level of panic: High. You’ll be competing against more buyers than usual due to people stretching their budgets to get into a less intense section of the market.

Your budget: $499,999 and below
Your level of panic: Very high. You might find the perfect house, but so will 20 other buyers.

  1. Contrary to popular media, millennials are “getting off the couch” and buying homes. A mortgage company reports “According to an industry-wide analysis, millennials accounted for 43% of all mortgage requests in Denver, between August 2016 and February 2017.” This statistic may help sellers understand the buying pool and how to structure a sale.

Buying a personal residence or an investment property is not a decision to take lightly and we suggest visiting with a CERTIFIED FINANCIAL PLANNER™ to see how the decision fits within your personal financial goals. Call Sharkey, Howes, & Javer at 303-639-5100 to schedule a complimentary consultation.