Friday, November 28, 2008

Giving Thanks

There is nothing like the start of my favorite time of year, the Holiday Season, to make me hungry! I love “The Eating Season”, from Thursday’s kickoff until the closing bell rings on New Year’s Day. We are certainly blessed to live in a country where we have such abundance and the freedom to celebrate life as we wish.

Recently, I received an email from Horsesmouth, a service aimed at financial service professionals, containing an article written by Nicole O. Coulter. While everyone has had a pretty dismal investment year and many are distracted by life’s daily chores, her article was about how to increase our gratitude for the bounty of our lives. Call me a helpless romantic but I believe that we can use this period in economic history to restore our values to their lead-role in creating a life that is true to our inner-self, as well as improving our choices. In the process, we will increase the financial success of all. Being positive is essential to our productivity, our growth as individuals, and it provides the social capital necessary to help groups bond as families, employees, and friends for the betterment of all. My take on her suggestions follows.

· Look for the good in each person or situation we encounter. We should keep our days from being negative and when life throws us lemons, we make lemonade to share with others. We can’t control the markets – stock or job – but we can control how we react. During times like these, being optimistic puts us light years ahead of those that react as if they are being threatened. Control what we can control. Stop trying to change what we cannot change. Learn to recognize the difference.

· Stop thinking of our occupation as a job. Begin to think of it as how we are spending our life in the service of others. What aspects of our life’s work bring us the most satisfaction? Focus on those aspects and share that happiness with others.

· Take a sincere interest in other people. Stop asking them, “How are you?” Start asking them, “You seem happy, what’s up?” or “What excitement do you have planned for this weekend?” If a friend, child, or associate asks you if you have a minute to talk, give them as much time as they need – and take time to listen!

· Stop rushing through life. Use part of each day to organize our selves. Daily, we need to exercise, nap, and meditate or pray. We have to make time to allow our thoughts to find the unique, positive features of the things and people in our lives. The gains in productivity will quickly outweigh the time we invest in our inner self.

· Imagine our ideal selves; reflect on what we’ve gained from our mentors, and work to instill similar reflections in those that look to us for guidance. Think back on our favorite childhood memories and consider how these pleasant memories repeatedly play themselves out in the choices we make on a day-to-day basis.

Well, my daughter is home from college (University of South Carolina), my eldest son is coming home this evening from graduate school (University of Michigan), and my youngest just walked in the house following wrestling practice. I’d rather spend time with them than write. She, however, just gave me an inspirational quote that was given to her by one of her roommates. It seems fitting.

Live your life so when you wake up in the morning the Devil says, “Damn it…she’s awake!”

May you awake each day motivated to create success, financial and otherwise, in the lives of all. While you’re at it, I hope you had a Blessed and Happy Thanksgiving!

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

Chair, Personal Financial Planning

University of Missouri

Columbia, MO 65211

Friday, November 21, 2008

College Savings Basics

Jian Fang Gu, MS
MU Graduate Student
Robert O. Weagley, PhD, CFP®

Many people look at a college degree as an investment. And, it is! The average college graduate earned 75% more than the average high school graduate, according to the U.S. Census Bureau (2006). Do you know, however, that a child born today will need approximately $100,000 for a four-year college education? WOW! How do you finance this investment in yourself or your children?

One option is to save. (Surprised?) Suppose one can earn 6% on one’s saving. If so, it would require a deposit of about $245 a month from birth until the child entered school to be able to pay for college. Of course, another option is to borrow money to pay for college and to repay the debt with higher earnings after graduation. Finally, you might find someone to help pay tuition. That is, seek student financial aid. In fact, 63% of all college undergraduates received some type of financial aid during the 2003-04 school year. This trend is increasing.

Most financial aid is provided by our federal and state governments. Colleges, scholarship organizations, civic organizations, and employers are also important sources for financial aid. Do not leave any stone unturned when you are looking for money to help you pay for your education.

From a student’s perspective, scholarship and grant aid are the ideal financial aid. Since they are pure subsidies, not requiring repayment, they are also known as “gift aid”. Education tax credits and deductions are also pure subsidies, although it often takes time for the savings to materialize, making them less effective in paying college expenses.

Financial aid also includes “self-help” aid in the form of interest-subsidized loans or work-study provided as a source of government assistance. A small amount of student aid comes from the Federal Work-Study Program (FWS) under which the Federal government provides funds to institutions to subsidize the wages paid to financially needy student workers. From the students’ perspective, however, they are simply receiving wages for services performed. Similarly, teaching and research assistantships, from which many graduate students benefit, are also a form of compensation. With respect to interest-subsidies, Stafford Loans and Perkins Loans provide the greatest benefits for students, since the government pays the interest while the student is in school but they do require the student to pay interest following school. Unsubsidized Stafford Loans and PLUS Loans, for parents of undergraduates and graduate students, carry a federal guarantee and a ceiling is legislatively placed on interest rates. In contrast to the above, private loans from lending institutions used to pay educational expenses, by contrast, do not carry any subsidy.

In the 2007-08 academic year, undergraduates received 17% of their financial aid from federal grants, 1% from work-study and 41% from federal loans. State, employer, and private grants combined to provide 14% of undergraduate aid.

The amount and type of financial aid offered to students is based on two factors: the student’s merit (academic, athletic, musical, etc.) and/or the student’s financial need. For undergraduates who are considered dependents, their eligibility for need-based aid is determined by their own and their parents’ financial circumstances.

There is another side to the coin: however. While many programs are seen as aiding college attendance, most programs convert from “aid” to student debt after graduation. Between the 2000-01 and 2006-07 academic years, an estimated 60% of bachelor’s degree recipients borrowed to fund their education. The average debt, in constant dollars, per borrower rose 18%, from $19,300 in 2000-01 to $22,700 in 20006-07 over this time period. Average debt per bachelor’s degree recipient, including those that did not borrow, increased from $10,600 to $12,400.

Saving for College

College is expensive. Given the large and increasing cost of a four-year college education, a child’s college tuition could be one of the largest expenditures a household ever makes. This is the financial challenge being faced by millions of families.

Although families may seek financial aid to finance their children’s college education and with most aid being in the form of debt, children could start out with substantial debt when they graduate. Saving now, therefore, for this future expenditure seems to be the best way to ensure children get the best education, while maintaining the greatest number of degrees of freedom to choose, following graduation.

Fortunately, American families with a desire to save for future college expenses have more options than before. Traditional investment options—savings accounts, taxable investment accounts, annuities, and U.S. Savings Bonds—are now joined by powerful new investment instruments including Section 529 college savings programs and Coverdell education savings accounts. Families saving and paying for college can take advantage of federal tax incentives that are offered by the federal government, as a subsidy to college expenses. The most popular types of college saving plans include the following:
· Qualified Tuition Programs (529 plans)
Educational savings plans known as 529 Plans are operated by states and some educational institutions. These plans are designed to help families set aside funds for future college costs. Within a 529 plan, earnings grow without being taxed and distributions are tax-free when used for qualified post-secondary education costs. 529 plans can be used to meet the costs of qualified colleges nationwide, although some restrictions apply. (For example, room and board is not a qualified educational expense.) More than 270 private colleges and universities have joined together in prepaid tuition plans that carry the same tax benefits as the state-sponsored 529 plans. These plans have grown in popularity in recent years and they held $110 billion in assets by the end of the second quarter in 2008. (Comment: We know this is quite a bit less today, than then.)
· Coverdell Education Savings Accounts
With a Coverdell Education Savings Account, earnings grow tax-free and distributions are tax-free when used for qualified post-secondary education costs. It may also be withdrawn tax-free for primary and secondary school expenses, if these expenses are prior to 2011.
· U.S. Savings Bonds
EE and I bonds purchased after 1989 by an individual who is age 24 or older may be redeemed tax-free when the bond owner or the bond owner’s spouse or dependent pays for college tuition and fees. In 2008, the tax exclusion is phased out for single income filers with income between $67,100 and $82,100 (between $100,650 and $130,650 for married couples, filing jointly). These income limits are indexed to increase each year.
· Individual Retirement Accounts
Early withdrawal penalties are waived when Roth IRAs and traditional IRAs are used to pay the qualified post-secondary education costs of the account holder, his/her spouse, children, or grandchildren. Regular income taxes are still payable on these withdrawals, however.
Clearly, higher education is a key to financial success and how we decide to pay for that education can greatly affect the economic value of that decision. Not everyone is the same, so no one method of saving for college is right for everyone. Our advice to you, however, is to not employ the ostrich method of sticking your head in the sand and pretending these costs are not there or that you’ll find a way to pay for them when you do pull your head out. On the other hand, we are often biased in our approach by our own personal experiences in life – we did it “one-way” and they can, too! We encourage you to think about how you will pay for college when it is your time to send a child to college or, most likely, when it is time for you to attend college. Make a well-informed, deliberate decision. Consider all the sources of funding for college and what you can do to have the most control over these decisions. Seek out more information, as tax policies and investments can change over time, and put together your plan for your, or a loved one’s, college education. Going to college is expensive….just not as expensive as not going to college….

References (check out these websites):
College Board. (2008). Trends in Student Aid 2008. Trends in Higher Education Series. Retrieved on November 17, 2008 from www.collegeboard.come/trends.
Kim, J. J. (2008). College Savers Stuck in Stocks as Market Falls. The Wall Street Journal, October 17, 2008. Retrieved on November 17, 2008 from

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

Friday, November 14, 2008

Take Control of Your Finances in Difficult Times

Barbara O'Neill, Ph.D., CFP® 1

(Note: Yesterday, I had minor surgery to repair a torn meniscus in my right knee. Due to a little pain, I have chosen to send you a Financial Tip that is the work of Barbara O’Neill of Rutgers University. I have known Dr. O’Neill for more years than I can remember. I consider her to be one of the greatest leaders in adult education in America and I would like to share her with you. She has granted me permission to send the following. – Rob Weagley)

In addition to real or paper losses on investments, many people have experienced another negative side effect of the current economic downturn and stock market volatility. This side effect is emotional distress due to a perceived loss of control. When the financial news is grim and market indices fluctuate hundreds of points daily, it's real easy to feel that you are helplessly at the mercy of external forces. Research has found that people are especially unhappy in situations where they perceive themselves to have a lack control. It's therefore no surprise that commuting ranks high on the list of things that make people most unhappy. Commuters never know from day to day what traffic gridlock, accidents, and the weather they'll encounter.

Dealing with a loss of control as investors was the topic of a recent article in the Wall Street Journal, which described how investors react to market volatility. It summarized several studies that found that, when our sense of control is threatened, people tend to latch on to whatever small fragments of information are available and to believe that they are reliable. The article also stated "You cannot control whether or not the market will continue to trash stocks, but you can control how you respond." Much of life is like that.

What should you do? The good news is that there are ways to maintain control in times of economic uncertainty. While no one individual, not even the Federal Reserve chairman, can control the economy and the stock market, let alone predict the direction that they are moving, we can control the ways we think and act. Below are eight ways to maintain control over your finances when things are seemingly "out of control":

1. Watch Your Spending- In times of economic uncertainty, it's wise to "live below your means" and practice what economists call "precautionary savings." There is some recent evidence that Americans are already doing this on a large scale. Consumer spending figures are down and, according to the Bureau of Economic Analysis, the U.S. savings rate increased to almost 3% of disposable income in the second quarter of 2008, up from 1% or less during the past three years.

2. Prepare a Spending Plan- Also known as a budget, a spending plan is a written "best estimate" of the cost of future spending and saving. Ideally, a spending plan should balance income and expenses, including regular savings for future financial goals. Worksheets for creating a spending plan can be downloaded from the Rutgers Cooperative Extension Web site. To download a "paper and pencil" worksheet, visit . To download a spending plan spreadsheet, visit .

3. Tune Out Market "Noise"- As noted above, people who are experiencing a lack of control put a lot of stock in any information that they hear. Daily financial reports that, by design, report moment by moment market fluctuations, with commentary, feed on market jitters and can cause some people to panic. Consider limiting your exposure to detailed stock market reports (e.g., CNN and CNBC) or, at the very least, keep reminding yourself that you are investing for the long term.

4. Minimize Investment Expenses- Pay attention to the expense ratio (i.e., expenses as a percentage of assets) charged by mutual funds. This information is found in the mutual fund's prospectus, which can often be downloaded from the Internet. Especially at times when mutual funds are experiencing paper losses, there is no reason to be earning anything less. Expenses, along with historical performance, are a key factor in the selection of a mutual fund. Look for stock funds with an expense ratio below 1.4%. Many index funds are much lower than that. One thought might be to sell your current funds, realize the losses on your investments to reduce your taxes, and reposition your assets in lower cost funds or a diversified set of index funds for your future. This is one way you can reposition, IF YOU NEED TO, while capturing something positive from this negative environment.

5. Save Money, Be Happy- The insurance company Northwestern Mutual recently conducted a study that found that people who do things that constitute good planning tend to feel happier than those who don't. Specific practices that made "planners" feel better about life included setting financial goals, taking steps (read: saving) to achieve goals, and spending within a budget. If you don’t have a plan, you’re adrift in this sea of uncertainty. If you need help with your plan, hire a quality, client-centered advisor to help you with your plan.

6. Study Investment History- Financial markets often seem less scary when someone has previously experienced a grueling bear market and/or has learned about the characteristics and historical performance of investments. (We old goats have been through times in history that are similar to this time in history. Listen to those that are older and more experienced. It may provide some insights that are new to you.) We know from history, for example, that stocks can be very volatile day to day but, over periods of 10 years or longer, volatility is greatly reduced. A good source of information about investing is Rutgers Cooperative Extension's Investing For Your Future home study course at <> . In times of turbulence and change, knowledge is power! (This is a GREAT home study course!!! – rw)

7. Consider Getting Professional Advice- Professional financial advisors can provide perspective to nervous investors during uncertain economic times. They also have many helpful tools, such as software to run retirement income withdrawal scenarios that can estimate how long someone's money will last. To locate a financial advisor, start by asking for referrals from other trusted advisors such as a CPA or attorney. Friends and co-workers may also have suggestions. "Find a planner" links by state are also available online at <> and <> .

8. Take Care of Yourself- The last thing that someone needs in an uncertain economy is health problems, especially if your job (and access to health insurance) is shaky. Major health "issues" such as diabetes and cancer, are expensive to treat and a drain on household wealth. Put the odds in your favor by taking charge of your health. Specific actions such as losing weight, exercising regularly, and quitting smoking provide many associated financial benefits. Health is, indeed, our greatest wealth.

Yes, the economy and the financial markets can seem out of control today, but the best remedy for economic uncertainty is controlling things that we can. Numerous studies have confirmed that people who maintain some measure of control over their lives in times of crisis and uncertainty generally cope better and feel less powerless than those who don't. Making plans, and revising them when needed, is also a characteristic of financially savvy people. Abraham Lincoln once said "The best way to predict the future is to create it."

Rutgers Cooperative Extension has personal finance information available online including downloadable worksheets, self-assessment quizzes, and pre-programmed Microsoft ExcelR templates for personal financial calculations. Visit <> to learn more. The University of Missouri has many publications as well located at . Importantly, the Cooperative Extension system's online eXtension (pronounced ee-extension) information delivery system has personal finance experts who can answer your questions and provide additional resources. (The system of land-grant colleges and universities, across the United States, feed into this system.) To access the eXtension personal finance Web site, visit .

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

Chair, Personal Financial Planning

University of Missouri

Columbia, MO 65211

Thursday, November 6, 2008

Credit Reports and Credit Scores

Cynthia Crawford, Ph.D.[i]
Robert O. Weagley, Ph.D., CFP®

There’s a lot of talk about credit reports and credit scores. Are they the same thing?

A credit report is the most important document in your life. Many people really do consider it to be that important to you in your financial life. If you’re astute at managing your money and have a very good record with regard to credit use, you may not even know your score. On the other hand, if you’re ever been turned down for credit – for a good purpose – you know very well that this little number can be huge.

One of our University of Missouri Extension colleagues, Janet LaFon, explains there are four pieces of information reported in your credit report:

  1. Identification. Basically, this information relates to who you are. Your current name and any other names you have used, as well as your current address and other residential addresses you’ve had in recent years, will be included. You’ll also see your Social Security number, date of birth and you may also find your employment history.
  2. Public information. If you have had any court judgments - if you’ve been evicted from rental property and/or gone through bankruptcy proceedings these will be included in this section.
  3. Credit information. Information about who your creditors are and whether you are paying them as agreed (or not). Paying bills on time is key to a positive credit report.
  4. Inquiries. Who’s looking at your credit report (you may be surprised)? A small number of inquiries is fine, dozens make potential creditors concerned.

Let’s switch gears from credit reports to credit scores. The Fair Isaac Corporation has developed a scoring system (called FICO Scores) that is currently the most used method of calculating credit scores. A person is assigned a score between 300 and 850, based on information in his or her credit report. This is not golf – the higher the score, the better.

Think of your FICO score as your financial grade. Instead of receiving an A, B, C, D or F, though, your grade is in the form of a number. A score of 723 is a C. That’s the median value for FICO scores in the US. A grade of B would be somewhere in the range of 760. An A+ would be 800 or more. Only about 2% of people have a score of 800 or more. Think of a 650 score as a D and anything below 500 as an F in paying bills on time.

You are entitled to a credit report, without charge, from each of the three major credit bureaus each year. Make sure you are going to the correct website to access your free credit reports! There are more than 100 rip-off sites. The correct site is, or you can call 1-877-322-8228.

Many people think that consumers are eligible for a free credit score each year. Not so! Expect to pay around $10 for your credit score. About every four years, I get curious enough about what my FICO score is to pay the fee. It isn’t something I pay for each year.

Finally, which is more important to monitor, the credit report or credit score? That’s easy – the credit report is most important. A strong credit report results in a strong credit score. “Also,” mentions Janet LaFon, “it’s one of the best ways to find out if you are a victim of identity theft.”

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

Chair, Personal Financial Planning

University of Missouri

Columbia, MO 65211