Friday, October 31, 2008

There’s a Fair Hope

This past spring break, completely by chance, I spent the night in Fairhope, Alabama. Fairhope was established as a city in 1908, after having been settled in 1894 by a group of, mostly, Iowans seeking their special utopia. They were followers of Henry George, an advocate of no taxes other than a single land tax (property tax). These Single-Tax colonists, according to legend, chose the name for their town after one member said the new colony had a fair hope of success. Besides a unique take on taxes, the early settlers were a band of cooperative individualists, who attracted notice and attention from around the country, drawing an eclectic assemblage of people to Fairhope. I will admit that I found this utopia, located on the shore of Mobile Bay, to be a great place to visit and absolutely charming in its character and beauty. (

This is not a travel blog, however. This is a personal finance blog and there has been much political talk in recent weeks. Some of this talk has centered around taxes. As such, I believe we all should consider and understand our personal beliefs about taxes and understand the strengths and weaknesses of our arguments, prior to our selection of candidates on Tuesday. I do not intend to advocate for any candidate and, if you think I am advocating for a candidate, let it be known that this is my opinion and not that of the University of Missouri, the Department of Personal Financial Planning, or my dog, Liberty.

There are five philosophical bases for judging the appropriateness of a tax and each has a range of defining variables. There is no right or wrong criteria; at least as long as we live in a free country. Educated citizens, however, have a responsibility to understand the perspectives of taxation, prior to electing representatives, senators, and presidents as they are the creators of our tax system. To say it another way, we create our own tax system by our participation, or lack thereof, in elections.

Criteria 1: Equity

A common concern is to ask the question of who bears the burden of any tax. Companies, for example, are often assumed to shift any tax they pay to the consumers of their good. Obviously, their ability to do this rests on more factors than the existence of a tax, as competition with other firms can prevent the shifting or the demand for their product may be highly responsive to any change in price. It is safe to say that a business can shift the burden of a tax to consumers or to workers, via lower wages. Clearly, this concern is valid but it will not be universal nor will all of the taxes ever be passed on to others, as market factors will not allow such a transfer to exist. It is true, however, that all taxes are ultimately paid by all of us whether we’re a wage earner or owner of a company.

Criteria 2: Ability to pay

The second criterion that has been used to create taxes in the United States asserts that citizens with differing amounts of income (or wealth) should pay different amounts of taxes. Typically, the discussion will center on whether a tax is progressive, proportional, or regressive. A progressive tax has tax rates that increase as taxable income increases. The current federal income tax system and some state tax systems are good examples, where marginal tax rates increase with increasing levels of taxable income. The philosophical basis is that higher income households have a greater ability to pay and that higher income households have greater stakes in some of the functions of government, such as national defense, the transportation system, or regulatory bodies that ensure a competitive marketplace. On the other hand, some of our government expenditures support the social welfare system, so there is a transfer of income from the higher income to the lower. A proportional tax has a constant rate applied to all levels of tax base. An example of this would be the "flat-tax" proposals where everyone pays the same proportion of their taxable income in taxes or, perhaps, the “fair tax” proposals where everyone pays the same percentage sales tax on all their purchases. The difficulty in implementing the first is deciding what to do with those whose income is low, relative to a societal determined minimal level of living, as a portion of income would typically be free of taxes to allow a minimal level of consumption. The fair tax sounds appealing as you only pay taxes if you buy something, it is easy to administer, is transparent, and has few compliance issues. It is philosophically attractive on many grounds. The detractors, however, argue that a fair tax is not fair at all because it is regressive, defined as a greater rate of taxation being experienced by low income households than higher income households. This results from poorer households spending most, if not all, of their income, while those in the highest income brackets save a larger proportion of their income. This saved income would escape taxation – perhaps encouraging more savings – with the amount of tax paid as a percent of total income decreasing, as income increases. Current examples of regressive taxes are sales taxes and payroll taxes (Social Security taxes are not collected after income exceeds the annual limit).

Criteria 3: Benefits received

This criterion states that people should pay taxes in proportion to the benefits that they receive. Those who receive the greatest benefit should pay the greatest tax. As an example, think about quantity taxes, such as fuel taxes, where those who use the roads, primarily funded by fuel taxes, pay the most in fuel taxes. Those who shop downtown pay for the parking garage through the fees they pay to park. All homeowners, in property tax states, pay property taxes which often fund local schools, believing that an educated population benefits all, as well as the one receiving the education.

Criteria 4: Economic Efficiency

Efficiency speaks to the fact that some taxes will have unexpected consequences that are not efficient. For example, if a greater tax on income results in workers working fewer hours or lowering their production, we are potentially less well off than without the tax. On the other hand, taxes that discourage behavior can provide resources to the government, while perhaps reducing the behavior that the tax is levied against. A good example might be a tax on cigarettes designed to reduce the consumption of cigarettes, thus enhancing the health of the taxpayer, while adding to the resources of government.

Criteria 5: Transparency and Simplicity

Simplicity is a measure of how much time and money taxpayers must spend to ensure they comply with the tax law. Anyone that has completed a 1040 form knows that simplicity has been lost. (If you don’t believe me, ask one of the students taking the exam in their tax course next door, as I type this!) Moreover, a simple tax system is less expensive to administer and reduces the cost of enforcement. A related criteria is transparency. Transparency is hindered by greater complexity. When taxes are transparent, we trust that everyone is paying their share of the burden. As taxes become more complicated, there is a genuine distrust borne from a belief that others are able to legally take advantage of tax policy which others might not know exist. If citizens believe that others have an unfair advantage, the distrust and lack of understanding can cause additional societal ills, as trust in each other and our institutions is a necessary ingredient for commerce.

I did not provide much advice this week. It was not my intention. Certainly, paying taxes reduces the income we have for our personal financial success. Yet, at the same time, without the services provided by the government: education, roads, public safety, defense, parks, libraries, social welfare, health care, transportation, and, don’t forget, interest on the public debt, we would be limited in our ability to have financial success. The main point I want to leave you with is to ask you to accept the fact that it is our tax system and our government. We elected those that created it and we can elect those to change it. The electoral process is key to making our local, state, and national governments reflect of our true values. To not vote is an admission of indifference and a lack of caring about the future of our nation and, to some extent, our world. Voting is our right, as citizens of a democracy. Voting is our responsibility, as stewards of the future.

- Robert O. Weagley, Ph.D., CFP(r)

Chair, Personal Financial Planning

University of Missouri

Columbia, MO 65211

Friday, October 24, 2008

It’s about the money, not the death

During these days, it is hard to focus on things other than what is going on in the larger economy. One day, stocks are up. The next, stocks are down. One day, we wonder if the banks are failing. The next, several appear to have been anointed as survivors in our experiment in quasi-socialism. Regardless, let me venture into a more mundane topic: Life Insurance.

When you are considering life insurance you have to answer four questions:

1) Do you need life insurance? This one is simple. If no one will be worse off financially after you die, you do not need life insurance. Let me write that again, If no one will be worse off financially after you die, you do not need life insurance. Life insurance is designed to provide income to your financial dependents, if you experience an untimely demise. OK, so your funeral is an expense and you don’t want that to burden your parents, or others. Well, a funeral is a great time to use your emergency fund and, from a financial point of view, if your parents support you, they might be better off financially – even after paying for your funeral – if you’re dead. Don’t think of this as harsh and NEVER think that they would choose to have you dead, as opposed to having you with them. The point is that your parents will be emotionally, not financially, devastated if you should die. Life insurance is about the money needed by dependents. It is not about the tears they must shed. It is a financial decision, not an emotional one.

2) If you need life insurance, how much? This is conceptually simple, yet complex to calculate. You want to provide enough financial resources to provide for the desired level of living for your surviving dependents. Typically, this is less than what it would cost if you were still eating and going to movies with them. A simple way to think of this is to take a level of income for the time of dependency, perhaps add college costs, loan repayments, or other known expenses and provide life insurance proceeds that are equal to the present value of these needs, less any resources that you already have like savings and Social Security benefits for the survivors. You say, “HUH?” Maybe you should try a calculator like: which is from LIFE, a non-profit organization.

3) What kind do you buy, if you need life insurance? Often the answer to question #2 dictates the answer to question #3. If you have a large life insurance need, often term insurance is the only type a family can afford. Term insurance is pure insurance and the protection is provided for a term of time; one-, two-, five, or twenty-years. At the end of the term, the policy can be renewed if it is guaranteed renewable. (Always buy guaranteed renewable term, in case some dread disease strikes prohibiting you from purchasing insurance.) Other kinds of insurance policies have a savings element that is a part of the policy and can typically be owned throughout one’s life….if one needs life insurance for their whole life. If you have a large estate at death that is subject to estate taxation or if you have a large lumpy asset that you want to preserve, like a farm or business, a permanent, “life-long” life insurance policy might very well be what you need. (We’ll write more about types of policies in a future “Tip”.)

4) How do you want the proceeds paid out, upon death? This is easy. Most people take the money as a lump sum and invest it in other assets, as they spend it as it was intended. On the other hand, it is possible to leave the money with the insurance company and purchase an annuity contract to provide income over time. This choice can be made by the policy owner, if alive, or by the beneficiaries at the death of the insured.

There is much more that can be said about life insurance. It is, however, much easier to make life insurance decisions if you follow a set of questions and do a complete, objective analysis. One thing I often recommend to those that answer the first question in the affirmative is to visit several life insurance sales persons, or web-sites, and see if you receive a similar answer to “How Much?” from several, if not all, sources. If so, I’d recommend you begin to believe the answer and to then chose the vendor that has financial strength, A or A+ rated, and that has a record of customer service. Check with your state Division of Insurance for more information on agents and companies, as well as to read their printed information to increase your chance for Financial Success.

NOTE: If you’ve questions or suggestions for future Financial Tips, do not hesitate to send an email to my gmail account . I do not plan to answer individual questions, as we’re not a chat room, but I will try to work an answer into a future financial tip. Please put Financial Tip in the subject line, so I know it is not spam. Thanks.

- Robert O. Weagley, Ph.D., CFP(r)

Chair, Personal Financial Planning

University of Missouri

Columbia, MO 65211

Friday, October 17, 2008

Little things Add Up

Brenda Procter, MS; Sandra McKinnon, MS[i], and Robert O. Weagley, Ph.D., CFP®

People have different priorities, and no one can make decisions for you and your family better than you. In today’s economic environment, working hard to maintain your income is extremely important. At the same time, the significance of a liquid emergency fund and increased savings are also rising in the consciousness of the American public. So, if you are trying to save money, there is a very good chance that you can find a way – if you start by little steps each day, often from changing your habits.

Every time you spend money on one thing, you make a choice to not spend it on some other service/good or, worse yet, to not save it. Only you can decide whether what you desire to buy is worth what you are giving up. The trick is to make sure you ask yourself the question, “Is there anything else that I need/want more than name of your desired item.” Then, if there is something you want/need more, do not buy that consumer good. Make sure you consider the tradeoffs before you spend.

Changes in spending can free up money for things you need, money for paying bills or saving for your future. Small changes may make more difference than you think. Below are some small purchases that many people make that add up over time. Think about the small purchases you make. Be certain that they are worth it to you! (Remember last week’s Financial Tip and how we have to make ourselves “walk a new path” in order for “grass to grow over the old path”. Only by making a conscious decision to change paths can we lead ourselves to our goals for Financial Success.)

Movie & Video Game Rentals: Savings Over One Year
Rent 3 movies each week @ $4.00 each = $624
Rent 1 movie each week @ $4.00 each = $208
Rent 1 video game each week @ 5.00 each = $260
Video game late fee each week @ $5.00 each = $260

Soda, Cigarettes, & Candy:
One can soda per day from vending machine @ $1.25 each = $456
One can 1-liter soda or water per day @ $1.50 each = $548
One large candy bar per day @ $.95 each = $347
One large candy bar & soda/water per day @ $2.20 for both = $803
Cigarettes @ $2.60 per pack, 3 packs a week = $406
One Grande Coffee at Starbuck $1.88 / cup, 5 days a week = $489

Eating Out:
One meal per day @ $5.00 each = $1,825

Lottery Tickets:
One Instant per day @ $1.00 each = $365
One Instant per day @ $2.00 each = $730
One Instant per day @ $5.00 each = $1,825

Reading Material:
2 paperback books per month @ $7.00 each = $168
1 magazine per week @ $4.00 each = $208
One tabloid per week @ $1.60 each = $83

Cable Television Extras:
One Premium Movie Channel per month @ $10.00 each = $120
One Pay-Per-View per week @ $4.00 each = $208

Personal Care Extras:
One tanning bed visit per month @ $10.00 each = $120
One manicure 2 times per month @ $15.00 each = $360

- Robert O. Weagley, Ph.D., CFP(r)
Chair, Personal Financial Planning
University of Missouri
Columbia, MO 65211

Friday, October 10, 2008


A widely accepted fact of financial planning, as a profession, is that it is two-thirds moral and ethical skills; from fields such as psychology, sociology, and philosophy; and one-third technical and analytical skills; stemming from finance, economics, and mathematics. If this is true for financial planning professionals, shouldn’t it be equally true for each of us as we work through our financial lives?

On Monday, I was again privileged to hear Douglas Lennick, CFP® address the Annual Meeting of the Financial Planners’ Association in Boston, MA. I believe his insights into how our cognitive, neurological, and emotional “parts” work together is very relevant to our decisions stemming from the current financial malaise (i.e., mess!). First, he asked us to draw the diagram to the right on our notepads. Then, he indicated that every time we are stimulated to act; the cognitive, neurological, and emotional facets of our mind work together to decide on our reaction to the stimulus. If we do not like our actions in response to certain stimuli, we must consciously try to change the paths our decisions take between and among the three spheres. (He used the analogy of the mind being a large grassy field, where trails have been worn by our repeated reactions to stimuli. If we consciously try to use a new path, eventually a new trail will be present, while grass grows over our old behavioral pathways.)

Then, he said the punchline, “ Everytime we receive a new stimulus, we first react emotionally” which, at times, can be quite distant from cognitive, rational thought. Certainly, the current stimulus of the credit collapse has had its share of emotional reactions. The question is, What do we do next? He gave us two rules and four skills to practice. First the rules, then the skills.

Rule #1: Always be prepared for the certainty of uncertainty.

Rule #2: Always make financial decisions based on personal values.

If you want to change your responses to stimuli, you must be guided by your personal values. He encouraged us to work with our “clients” to help them create new pathways in their response to stimuli.

To begin, one must recognize one’s own experiences of the relationship between one’s emotions and cognitive thought. Do you see the current situation as a threat or an opportunity? Are you running from it, sticking your head in the sand, or embracing it and trying to learn from the situation? What is your emotional response?

Second, reflect on the degree you are meeting your responsibility to prepare for periods of uncertainty. Reflect on the big picture. Consider your goals, your current financial plan, your portfolio’s diversification, your insurance coverages, your family, and get yourself ready for the long-term. Is your plan consistent with the values and the principles you wish to display to others?

Third, reframe your self-talk to look for possible biases that might exist. Ask youself if you’re being too emotional in your response and strive to create a construct for your future decisions that can exist without these biases.

Finally, respond with a decision that is consistent with your moral principles and implement a plan that is consistent in supporting your goals.

The best place to start revising your emotional, cognitive, and neurological makeup is to decide on the rules that will guide your journey. Have you listed your primary values? Have you written them down? Do you reflect on them daily? Take a moment and list your primary values and periodically ask yourself if you’re making decisions that are consistent with those values. Mr. Lennick listed his: family, happiness, wisdom, integrity, service, and health.

If our fellow citizens on Wall Street and in the mortgage security business would have done this exercise and lived by it, my guess is that the decisions rocking the world may never have been made. Think about it. If a lack of principles and values can create financial distress for millions, couldn’t it be the case that an abundance of principles and values has the possiblility to create Financial Success for one?

- Robert O. Weagley, Ph.D., CFP(r)

Chair, Personal Financial Planning

University of Missouri

Columbia, MO 65211

Friday, October 3, 2008

Dollar Cost Averaging – A Primer

Learning how to invest often seems like a daunting and frightening process, and all too frequently financial professionals use a language of their own to potentially confuse, rather than educate, their clients. Many financial professionals feel their livelihood may be threatened if the larger society understands the principles to building wealth. Other advisors might fear that their client will not find value in the relationship, if the investment professional is telling the client what the client already knows. Such beliefs have been a bane to individual investors and the industry as a whole for decades, but there is a way to combat the confusion that comes with being in unfamiliar territory. It is simple. You learn the language. For example, understanding the concept of dollar-cost averaging is one of many strategies that can help you make sense of investment advice and judge the quality of the recommendations received.

As most people know, investment markets tend to trend higher over extended periods of time. Many forget that picking the tops and bottoms is everything but it is impossible - even for the most seasoned of market timers. Let us say that again, Market timing is everything but it is not possible. Moreover, we may enter periods where investments decline for years at a time. While most know these facts, the fear associated with potential declines keeps many people from ever entering the realm of investing. There is, however, a solution and many of us use it each time we make a deposit to our 401k or 403b retirement plan.
Whether you call it that or not, dollar cost averaging is an investment discipline in which investors commit a specific amount of money to their portfolios at designated intervals, say monthly. This helps to mitigate volatility and ensures that investors purchase more of the underlying securities when the price is low, and less of the security when the price is high. Buying low and selling high is the key to investment success and this strategy helps take care of the buying half. Moreover, once you start, you don’t have to think about it other than to rebalance to keep your investments diversified.

As an example, let’s say you invest $50/month into a mutual fund. If the fund is trading at $50 a share in the first month, you will buy 1 share of the fund. If the share price takes a precipitous decline the second month and is now trading at $25/share, the same $50 will purchase 2 shares the second month. You now own 3 shares at an average price of $33.33/share and you have bought twice as many shares at $25 as you did at $50. In other words, you are ensuring the purchase of more shares at lower prices.

Let’s say in the third month the price is again $50. Had you put $150, as a lump-sum, in the market the first month and not dollar-cost averaged, you would have purchased 3 shares and they would be worth what you paid for them, $50, a 0% return. On the other hand, had you dollar cost averaged at $50 per month for the three months, you would own 4 shares, worth $200 for a 33% return on your invested assets or $150. You see, as long as a lower price exists prior to the final price, you will have more shares purchased at the lower price to enhance your return. There you have it, Financial Success in a nutshell called Dollar Cost Averaging.

Heath Lauseng[i] and
Robert O. Weagley, Ph.D. CFP®
Chair, Personal Financial Planning
University of Missouri
Columbia, MO 65211