An Unplanned Expense of $1,000 Would Be Tough for Most Americans to Handle

Posted on August 13, 2011 by ajkeown

What would happen to you if you needed to come up with $1,000 for an emergency?  If you’re like most Americans, you’d be in trouble.  This is a question that CNN.Money looks at in an August 10th article titled “Most Americans can’t afford a $1,000 emergency expense.”  According to a July 2011 poll recently released by the National Foundation for Credit Counseling, 64 percent of Americans said they would have to have to turn to a source other than their savings account to take care of the emergency.  While 36 percent of the respondents said they would turn to their saving account, 17% said they would borrow from friends or family, 17% said they would disregard another monthly expense to pay for the emergency, 12% would sell or pawn assets, 9% would take out a loan, and the remaining 9% would get a cash advance on their credit card.  What would you do?  Let’s face it, none of these options really sounds that good other than pulling the $1,000 from your emergency fund or saving account.

What does all this say about Americans?  It simply says we don’t have a large enough emergency fund, something we looked at in Ch. 5.  The problem is that saving isn’t natural, and spending, with its immediate gratification, comes easily for most of us.  So how do we come up with an emergency fund?  Putting together a personal financial budget, something examined in Ch. 2, is the key, and making sure that you save automatically – in effect, putting savings on autopilot.  For example, you could open an account with a mutual fund and have money automatically deposited into one of its money market accounts, which work just like a bank savings account.  Of course, that’s easier said than done, but there are some easy to use tools out there to help out.  One of them is Mint.com, which is a free online money management service.

Discussion questions:

  1. Do you have an emergency fund?  Do you think your parents do?
  2. If you needed to come up with $500 by the end of the week, how would you do that?
  3. Have you ever had an emergency that required more money than you had on hand?
  4. If your car or computer died today, where would the money to replace it come from?
Posted in Ch. 2, Measuring Financial Health and Making a Plan, Ch. 5, Cash Management | Tagged , | Leave a comment

Jean Chatzky on Surviving the Downturn

Posted on August 12, 2011 by ajkeown

Jean Chatzky, one of the best personal finance writers around, just wrote her first column for Newsweek.  This column is titled “How to Protect your Portfolio from Politics” and also appears with a slightly different title, “Jean Chatzky: Surviving the Debt Deal” in thedailybeast.com.  It is a classic Jean Chatzky article, focusing on what you can control, and hitting a topic that’s on the mind of many – how to protect your assets given the economic turmoil we face.  After all, you can’t control Washington, but you can do some things to protect yourself from what they do.

To say the least the August has been a wild ride for stocks.  In fact, in just four days in early August, Carlos Slim, the richest man in the world, lost $8 billion!  Certainly, the losses to the average American haven’t been that high, but all losses are tough, and the strain that comes from financial uncertainty has climbed as the market whipsaws up and down.

What advice does Jean give in her first Newsweek column?  It is very basic, and very good advice.

  • Have a solid emergency fund – “maintain enough liquidity,” something we cover in Ch. 5;
  • Reduce risk through diversifying – “increase your diversity,” which we talk about in Ch. 11;
  • Save – “make sure you’re saving enough,” saving enough is tough, it’s just not natural for many people to live below their means, but with the help of a budget, which is covered in Ch. 2, it can be done;
  • Rebalance your investments – “don’t let your myopia get the better of you,” which we talk about in Ch. 11.

Without question, these four acts will pay off if you follow them.

Discussion question:

  1. The final point that Jean Chatzky makes is not to let your myopia get the better of you, which involves both staying the course and not falling prey to bubbles.  Where do you think the economy and stock market are going?  Where do you think the DJIA will be in one year?
  2. Why do mutual funds provide diversification?  And what types of mutual funds might give you the maximum diversification?
Posted in Ch. 2, Measuring Financial Health and Making a Plan, Ch. 5, Cash Management, Ch.11, Investment Basics, Personal Finance In The News | Tagged , , , , | Leave a comment

Avoiding Credit Card Late Fees

Posted on August 11, 2011 by ajkeown

At some point in your life you’re probably going to be hit with a credit card late fee – things just seem to happen.  Fortunately, as you learn in Ch. 6, the new credit card rules that went into effect on August 22, 2010 put a limit on how much that late fee can be.  Under the new rules from the Federal Reserve, there is a maximum late fee of $25 that you can be charged unless one of your last 6 payments was late – in that case the maximum goes up to $35, unless your credit card company can show that its cost justify a higher rate.

Worse than the late fee is the fact that that late payment may impact your credit rating.  And as your credit rating drops, the cost of borrowing goes up.  So how should you deal with credit card late fees?  The first thing to do is to avoid them.  A recent article in Kiplinger.com titled “11 Credit Card Mistakes to Avoid” pointed out 11 costly mistakes to avoid which included things like using up all available credit, ignoring your monthly statement, and racking up foreign transaction fees.

But what do you do when you when you’ve screwed up and are hit with late fees?  The answer is to try to negotiate them down.  If you don’t give it a try, you’ll have no idea whether you can actually do it.  Unfortunately, most people just don’t know how to approach a credit card company – or at least how to approach them successfully.  The best plan is to have a script in mind before you make the call – and there’s a great one on the Mint.com website in an article titled “Use this Script to Negotiate Credit Card Late Fees.”  Next time you get hit with a let fee, give it a try.  It may be the easiest money you’ve made in a long time.

Discussion questions:

  1. Have you ever been hit with a credit card late fee?  If so, which one of the reasons listed in the article “11 Credit Card Mistakes to Avoid” caused the late fee?
  2. Have you ever tried to get a late fee dropped?  If so, were you successful?
  3. Have you ever used your credit card for a cash advance?  If so, how much did it end up costing you – or do you even know the answer to that?
Posted in Ch. 6, Credit Cards, Personal Finance In The News | Tagged , , | Leave a comment

Ponzi Schemes and Heisman Trophy Winners

Posted on August 10, 2011 by ajkeown

Ponzi schemes have been around for a long time, and there just doesn’t seem to be any end in sight to them.  The scheme is named after Charles Ponzi who became rich and famous in 1920, making, at his peak, close to a quarter of a million dollars a day.  What Charles Ponzi did was promise investors an amazing return – 50% in a month and a half – and he did it by taking the money from his later investors, and giving it to his early investors.  In effect, there were no profits ever made, he simply gave investors back some of their own money or some of the money he acquired from subsequent investors.  You’d think that investors would catch on and that in today’s sophisticated world Ponzi schemes wouldn’t take place – unfortunately, that’s not the case.  In December of 2008, Bernie Madoff admitted that his investments were “all one big lie” with investor losses of around $50 to 65 billion.  Where’s Bernie today?  He’s in jail serving a 150-year sentence.

Just this week Ponzi schemes again made the news.  This time the headline was “Ex Heisman Trophy Winner Ty Detmer Loses Life Savings in Alleged Ponzi Scheme.”  The scheme targeted ex-athletes and Heisman winners Ty Detmer, Earl Campbell, and Chris Weinke among others.  Detmer’s losses totaled about $2 million – which accounted for most of his life savings – with the total lost to all investors amounting to about $50 million.  To make matters worse, Kurt Barton, the accused schemer, was one of Detmer’s friends who he met through his church.   Detmer even worked for him and his company, Triton Financial, earning an estimated $30,000 to $40,000 as a finder’s fee for referring clients  – and two of his referred clients were his brother and brother-in-law.

Looking back at Ch. 1, the first of the ten principles of personal finance is The Best Protection is Knowledge – and in this case, that certainly is true.  You should never invest in something you don’t understand.  Moreover, knowledge allows you to protect yourself from the danger of an incompetent investment advisor or worse.  We also take another look at this principle in Ch. 11 when we look at Ki-Jana Carter in the chapter opening – for him – knowledge – the solid grounding in investing went a long way toward securing his financial future.

Discussion questions:

  1. Why do you think Triton Financial had such an easy job convincing investors to give them their money?
  2. Have you ever received something that may look like a Ponzi scheme over the Internet?  If so, describe it.
Posted in Ch. 1, Financial Planning Process, Ch.11, Investment Basics | Tagged , , , , | Leave a comment

The Market Drops – Is It Time For Panic?

Posted on August 9, 2011 by ajkeown

August 9th was a tough day for common stocks as the three major indexes – the S&P 500, the DJIA, and NASDAQ all fell between 5% and 7%, making August 9th the worst day on Wall Street since 2008.  In fact, over the two-week period ending on the 9th of August, U.S. stocks dropped by about 15% – to say the least, that was a cause for panic by many investors.  What do most financial advisors say?  Most (but not all) suggest that you take a deep breath and avoid panic.  Burton Malkiel, the author of A Random Walk Down Wall Street and professor emeritus at Princeton University wrote an opinion piece “Don’t Panic About the Stock Market” for The Wall Street Journal advising investors to stay the course and look to the long run.

This opinion is shared by Larry Swedroe, the director of research for the Buckingham Family of Financial Services, in his article “Don’t Panic: Stock Market Crises Are Normal” which he wrote for his Wise Investing column for MarketWatch.com.  Again, his message is to stay the course and keep your long-term plan in mind.  This has been one of his major talking points for some time.  In fact, in June 2011, his Wise Investing column was titled “Stay Focused on Your Plan During the Good Times as Well“.  In this article he stresses the need to stay rebalanced – that is, to make sure you stick with your long-term asset allocation goals.  After all, in Ch. 11 we discuss setting your investment goals, which go hand-in-hand with your long-term goals, and that’s how you should be thinking.  In Ch. 11 we also talk about asset allocation and the importance of diversification – to say the least, being diversified through the recent market turmoil has helped investors tremendously.

One last word about your asset allocation decision – as you learn in Ch. 11, when you invest you are really making two decisions.  The first one is your asset allocation – what percent of your investment goes into stocks, bonds, and cash?  The second decision involves which individual securities to buy.  Which of these decisions is the more important one?  The answer is the asset allocation decision.  Just look at what happened the week of August 8th, 2011 – stocks tanked while bonds hung in there.  So if you were only invested in stocks, it was a tough week for you – even if you picked the best stocks of the week.  But if you diversified your investments to include bonds, you’re probably feeling a bit better right now.

Discussion questions:

  1. What were some of the reasons Burton Malkiel gave for his optimism that in the long run stocks will do well?
  2. Do you agree with his reasoning?
  3. Where do you think the stock market will be heading in the next month? The next year? Why?
Posted in Ch.11, Investment Basics | Tagged , , | Leave a comment

What To Do With Your Cash

Posted on August 9, 2011 by ajkeown

Certainly, if you want to survive this, or any, economic storm you need something in the way of an emergency fund.  In fact, in Ch. 1, Principle 5: Stuff Happens, or the Importance of Liquidity speaks to this very issue, and Ch. 5 which is titled Cash or Liquid Asset Management, is devoted to cash management.  But today the problem you face with an emergency fund is: where do you invest your cash?  Unfortunately, with interest rates as low as they are, it has been very difficult to earn much on cash or liquid assets.  In fact, in response to this rush to safe and liquid assets, the Bank of New York Mellon just announced plans to charge large institutional investors with balances above $50 million – in effect; they will end up paying the Bank of New York Mellon to hold their cash.  This new rule probably won’t impact you, but it does go to show that making money on liquid investments is much tougher now than ever before.  However, as pointed out in “Where to Park Your Cash”, which you can find in Smartmoney.com, there are some alternatives that are better than others.

Recently a number of banks have eliminated early withdrawal penalties and have even allowed investors to have the interest rate they earn increase if rates rise.  For example, Bank of America allows for an early withdrawal on its CDs, while Ally Bank (which is a unit of Ally Financial, formerly GMAC) has a four-year CD that allows investors to have the rate it earns jump to the current rate twice during the four-year period.

Other alternatives include money market accounts, which don’t return too much, but are safe.  That said, if you look around, you may be able to find a money market account that provides a return over 1%. Where to look?  Probably the easiest place to find the best alternatives is Bankrate.com, a website that will let you find the best money market account either nationally or locally.

Discussion questions:

  1. What are liquid assets (look to your book for the answer to this)?
  2. The SmartMoney.com article “Where to Park Your Cash” discussed reward checking accounts – what did it say about them?
  3. What is the best money market account rate in your local area (use bankrate.com to find this out)?  What is the best national rate?
Posted in Ch. 5, Cash Management | Tagged , , , | Leave a comment

So You’re in College – Is it too early to start thinking about retirement?

Posted on August 8, 2011 by ajkeown

If you’re a college student, saving for your retirement probably doesn’t sound all that exciting – in fact, if you’re like most college students, the extent of most of your planning is focused only a week or two ahead.  After all, it’s hard to think about life 40 or 50 years from now, but assuming you’re going to be around then, it would be nice to be financially sound.

After reading Ch. 3 you know that the earlier you start to save, the more you will have when you retire – that’s owing to the time value of money and compounding – of course, it also assumes you make money on your investments – but over time, stocks have done quite well.  The Wall Street Journal article “Roth IRAs for Teens” suggests that you set up a Roth IRA, which we describe in Ch. 16, to help you start to save.  Under a Roth IRA, your money goes in after-tax, and then grows tax- free, and when it is withdrawn incurs no taxes at all.  One nice thing about paying taxes on your earnings today is that if you’re like most college students, you’re probably in as low a tax bracket as you will ever be in, so you might as well pay taxes on it now rather than later.  Also, you can invest as much as you earned (not including investment returns) up to $5,000.  One neat thing about the Roth IRA is that even if you spend all your summer earnings, if someone gifts you some money, you can put that money into your Roth IRA – in effect, it doesn’t matter where the money comes from (a gift from a grandmother, or your wages), as long as it is less than $5,000 and isn’t more than what you earned that year.

Right now you may be asking yourself “Why should I worry about retirement, after all, there is Social Security, right?”  Well, today, we do have a strong Social Security system, but what will it be like in 50 years?  Given the debt problems the U.S. is facing right now, that’s a good question.  The same day as the Roth IRA article in The Wall Street Journal, there was an article titled “Discounting Social Security” that focused on a financial planner in Michigan who doesn’t even include Social Security benefits in retirement planning for his clients in their 30s, and discounts Social Security benefits heavily for his older clients.

The bottom line here is that it is your responsibility to make sure that when you retire, your retirement lives up to your expectations, and that takes financial planning.

General Discussion Questions:

  1. Do you think Social Security will be around when you are ready to retire?
  2. What changes do you think there might be in Social Security when you retire?
  3. Why does a Roth IRA make more sense if you think your tax rate will go up in the future?

From Ch. 3:

  1. If you deposit $5,000 today into an account earning an 11% annual rate of return, what would your account be worth in 40 years (assuming no further deposits)? In 50 years?
  2. In the question above, what would happen if you only earned 7% per year?
Posted in Ch. 3, Time Value of Money, Ch.16, Retirement Planning | Tagged , , | Leave a comment

Debt Deal and Your Money

Posted on August 8, 2011 by ajkeown

In Ch. 1 we discuss the personal financial planning process.  In that process the fifth step is to review your progress, reevaluate, and revise your plan.  This becomes even more important when the rules to the game change, and that’s what happened when Congress passed, and the President signed, the debt deal that raised the nation’s debt ceiling.  While not all of the details have been worked out yet, there are some areas that you may want to keep an eye on.  An article in Smartmoney.com, How the Debt Deal May Affect You, examines some of these changes and some areas that may require a reevaluation and a revision of your plan

Let’s look at municipal bonds, which we discuss in Ch. 14.  How might they  be impacted by the federal spending cuts?   Just as the federal spending shrinks, so will aid to the states and local governments, which may in turn cause their debt to be downgraded.  How should investors react?  They should make sure their investments are diversified, because as we learn in Principle 8: Risk and Return Go Hand in Hand.   In Ch. 1, and discussed later in Ch. 11, diversification can reduce risk without affecting your expected return.  In this case, the diversification would mean turning some of your municipal bonds into bonds that are less dependent upon federal aid – that would mean less investment in state general obligation bonds and more investment in revenue bonds discussed in Ch 14.

Student loans, which we examine in Ch. 7, are another item impacted by the new law.  With respect to student loans, there is good news and not so good news.  The good news is that undergraduates enrolled at least half-time qualify for subsidized federal student loans.  The not so good news is that after July 1, 2012, subsidized federal student loans will no longer be available to grad students.

Discussion Questions:

  1. Other areas examined in this article are mortgages and housing, how might these areas be impacted by the debt deal?
  2. What changes in health care did the article say might take place?
Posted in Ch. 1, Financial Planning Process, Ch. 7, Consumer Loans, Ch.14, Investing in Bonds | Tagged , , , | Leave a comment