Thursday, January 28, 2010

Are You Middle-Class?

The other day, while driving, I listened to one of America’s more talked about radio talk-show host claim that our President is stirring up a “class-war”.  He wanted the listeners to count the number of times President Obama used the phrase “working-class”, as it is, in his words, the “code word for class warfare”.  I was going to watch the State of the Union Address, by President Obama, on Wednesday night, regardless, so I decided to do what I was asked and “count”.  (My first conclusion is that, regardless of which political party you belong to or believe in, there is no denying that President Obama can speak to an audience.)  By my count, he mentioned the phrase “working families” three times, the phrase “middle-class” five times, “working” eight times, and “job” either twenty-two or twenty-three times.  Clearly, the emphasis was on jobs, not class warfare.  


This morning, while watching CNBC, I saw an interview with Indra Nooyi, Chairman and CEO of Pepsico, where she discussed what Pepsico’s research is telling them about the US consumer.  It is clear to Pepsico that those that work in labor-oriented jobs, those with less education, are those that are being hit the hardest by unemployment.  Moreover, she indicates that consumers are spending less, regardless of the unemployment rates in their communities.  That is, they are being more cautious, regardless of their personal situation.  It is an insightful interview that concludes that we need more jobs and a well-educated workforce. 


This all led me to wonder, do people know what “class” they are in?   Do they care?  So, here are the statistics from the US Department of Labor’s Consumer Expenditure Survey from 2008 (the most recent on their website).  What the table below shows is, simply, how each quintile (five equal size groups), defined by income, makes and spends their money as a percentage of their income.  If we define “class” by income then these would be lower-, lower-middle-, middle-, upper-middle, and upper-class.  I will put a column for the national average, as well.  So, are you middle class – the quintile in the third 20 percent (quintile)?



All Consumer Units

Lowest 20%

Second 20%

Middle 20%

Fourth 20%

Highest 20%








After-tax Income







Average Annual Expenditures







Sources of Income














Social Security, Unemployment and Public Assistance













Interest, Dividends, & Property Income




















Average Age





















White Race%







College Educated%







Expenditure Category%














Alcoholic Beverages%










































Personal Care%



































Personal Taxes%








Clearly, this can create a lot of questions, as well as provide a few answers.  I contend that your financial success has little to do with your income and more to do with how you save your income, spend your income, and act about your income.  Economists often define the “classes” based on an economic resource definition, such as income.  Sociologist and political philosophers define “class” based on who is “powerful” and who is “powerless”.  Seems to me that a person, particularly a young person, has control over their income, through educational attainment and hard work, and, thus, they have power.  Moreover, we can always save our money in order to create, over time, a greater resource base.  What I’m saying is that your class has more to do with your “power” over your attitude and aspirations than it does about your money.


So, are you middle-class? 


Thursday, January 21, 2010

RAL Season

RAL Season[i]


Once, when Albert Einstein was asked about his US taxes, he replied, “This is too difficult for a mathematician. It takes a philosopher.”  Many people would agree, and should, as the US Tax Code is not only mathematical, it is full of code which, by design, favors certain behaviors, subsidizes some expenditures, and attempts to employ a progressive tax system - where those that receive the most income are supposed to pay a greater percentage of their income in tax.  These rules, the widely-held belief that others get “tax-breaks” that the taxpayer covets, coupled with the fact that many citizens should have paid more attention in math class, leads tax filers to utilize paid tax services.  This is particularly true of America's most financially vulnerable taxpayers - those from low- and moderate-income families.  In 2008, it is estimated that these consumer lost (paid) about $800 million of their refunds to tax-preparers offering fast (and tempting) tax refund anticipation loans (RALs), an often unnecessary and costly product.  We have entered RAL season.


Consumer advocates at the National Consumer Law Center (NCLC), the Consumer Federation of America (CFA), as well as our University of Missouri Office for Financial Success and the University of Missouri Extension Service are warning taxpayers to stay away from refund anticipation loans (RALs).  RALs are an avoidable tax-season expense, as long as the taxpayer is armed with this knowledge and has the patience to wait a few days for their tax refund. As mentioned above, data from 2008 found that RALs decreased the refunds of about 8.4 million American taxpayers, through charging $738 million in loan fees, $68 million in other fees, while another 12 million taxpayers spent $360 million on related financial products, as a means to receive their refunds.


In several instances, federal regulator actions have been taken against RAL lenders, putting them out of business.  Some tax preparation services have lost their source of RAL funding, as a result.  Other RAL lenders have lowered the price of RALs to levels more similar to “mainstream” tax-preparers but, even with lower prices, RALs remain on the “Avoid” list of products. How do you avoid them?  It is easy, just say, “NO!”


You might wonder what makes RALs so bad for consumers, especially when the consumer might think they need the money now, as opposed to later.  First, RALs are loans where the taxpayer's expected refund is to repay the debt.  Typically, the wait for a refund from an electronically filed tax return is under three weeks and it is estimated that most taxpayers receive their refund in two weeks, without the costly loan.  Yet, quick money is always a temptation and those that are the most tempted are usually the same people that could use the full amount of their refund – not their refund less the cost of the RAL.


So, what are the costs of a RAL?  First, taxpayers (really “borrowers” in this case) must pay a loan fee ranging from $34 to $130.  Tax preparers may, also, charge one or more separate add-on fees, ranging from $25 to several hundred dollars.  The price of RALs has dropped significantly for loans in the $1,000 to $4,000 range, as the price of an average RAL of $3,300 has decreased from over $100 in 2007 to about $65 in 2010.  The biggest cost to the consumer, however, is the effective annual percentage rate (APR).  The APR for a RAL ranges from about 50% (for a larger RAL) to nearly 500% (for a smaller RAL).  It is estimated that, when all fees are appropriately included, the APRs range from about 85% to nearly 1,300%. For example, the average RAL of $3,300 carries an average APR of 72%.  If you want an instant RAL (for an additional fee), the effective APR for $1,500 RALs were found to range from 185% to 211%.  (Would ever agree to pay this great of a rate of interest for a credit card, car loan, or home mortgage?  I hope not.)


So, what do you do, if you need help with preparing your taxes?  First, look for Volunteer Income Tax Assistance (VITA) sites, like our MoTax program from Missouri Cooperative Extension.  Remember, VITA volunteers are certified by the IRS to be qualified in preparing taxes and they do so without cost (i.e., it is free).  They do not offer RALs but they might offer some advice on how you can lower your taxes or use your refund to help your quest toward financial success.  Click on the following, to see a list of all the VITA sites in the United States, in order to find one near you.  If you know that your parents use a “store-front” tax preparer, ask mom or dad if they typically get a Refund Anticipation Loan or if they pay extra to get their refund sooner.  If they do, ask them to read this Financial Tip and show them the list of VITA sites in your community.  


Finally, while the IRS and the Office of Comptroller of Currency (OCC) have increased the regulatory requirement for tax preparers, they cannot police the tax-filing marketplace as well as we, the US consumer.  If everyone would stop using these overpriced, abusive products, the products would soon cease to exist and more people would be able to use their money in pursuit of their financial success.  This solution begins with you, ends with you, and doesn’t cost the US Government a dime of our tax dollars.  You have to love the price of an informed, responsible citizenry.


POSTCRIPT:  For more information:  NCLC and CFA will be publishing their annual comprehensive report on the RAL industry, regulation, and litigation later in February 2010. The report will be available on NCLC's website at or on CFA's website at .


A coalition of state and local consumer groups will be releasing reports on RALs for their regions, including the Community Reinvestment Association of North Carolina ( ), NEDAP ( ), Woodstock Institute ( and the California Reinvestment Coalition ( ).

[i] Much of this week’s Financial Tip was motivated from an emailed newsletter from the National Consumer Law Center.  It was authored by Chi Chi Wu.

Wednesday, January 13, 2010

Is the Good News Bad?

I know last week’s financial tip indicated that people are worried about their credit, instead of their savings.  My strong belief in saving and my personal preference toward the future might have gotten me out-on-a-limb.  This month, the Federal Reserve Bank reported that in November the total borrowing dropped by $17.5 billion, a much larger decline than the $5 billion that had been predicted by my economic brethren.  This is the biggest drop in credit, since 1943, the year they began to keep records.  The largest drop was in credit cards which fell by $3.7 billion.  This was an 18.5% decrease, compared to November, the largest decline since a 29.6% decrease recorded in December of 1974.


The indications are that people are borrowing less, as a result of fear of (or actual) job losses.  In December, employment did decrease in our country with a decline in 85,000 jobs, although the unemployment rate remained constant at 10%.  Employment was seen to particularly fall in the industries of construction, manufacturing, and wholesale trade, while increases were recorded in temporary help services and health care.  More can be read at the Bureau of Labor Statistics. (Click here for more information.)


To make matters worse, there is mounting evidence that banks are increasingly reluctant to lend money, as many banks have tightened lending standards.  Fannie Mae and Freddie Mac have tightened their rules, by limiting lending solely to consumers, as opposed to developers.


At the same time many are recognizing the need to save more, in order to replenish their portfolios.  Remember a few months ago we mentioned the Paradox of Thrift by Lord Keynes, where people tend to save at the precise times when the economy needs them to spend more.  The American consumer accounts for 70 percent of all economic activity (and is the reason for all economic activity) and when the consumer cuts back, the economic shrinks.  I also pointed out that, while others are spending, those that save can make a personal difference in their futures.  Hence, there truly is a paradox of savings.  So, what is my tip, in the context of this information?


The main thing is to stick with your savings plan, if you have one.  If you don’t have one, start one.  The fact that credit is being reduced may slow the economy but the fact that there is cash on the sidelines or in the banks, indicates that money will continue to be inexpensive for a while (i.e., low interest rates) and that eventually money will come off the sidelines and be employed in productive investments.  Knowing this, if you continue a well diversified investment program, such as through index mutual funds across various investment classes, you should be fine and will eventually reap rewards.  Use dollar cost averaging to reduce risks further, if you are just beginning to get in the market. For those that are risk averse and afraid that the government’s borrowing will lead to inflation, consider TIPS, otherwise known as Treasury Inflation Protection Securities. TIPS pay a relatively low rate of interest, yet Treasury Inflation-Protected Securities are marketable (meaning you can sell them to others) securities whose principal is adjusted every six-months by changes in the Consumer Price Index. When inflation occurs, as measured by the CPI, the principal amount of the TIP increases by the same percent as the rate of change in inflation. In the event of deflation, where the CPI falls, the principal decreases.  The point is that they are guaranteed by the US Government and they are “inflation-proof”, while fixed-payment and fixed-principal bonds are not.


So, is the Good News Bad?  I’d say the answer is “No” - not if your focus is on your disciplined plan toward your financial success, rather than today’s latest fear - or greed - news.


GOOD NEWS ITEM:  Ryan Law is now employed as our Director of the Office for Financial Success.  He comes to us by way of Texas Tech University.  I expect you’ll have a chance to learn more about him, as he joins us in our mission of helping others find success in their financial lives. If you have ideas for him, send him an email: .

Wednesday, January 6, 2010

Your Financial New Year

An article by Karen Blumenthal appeared in the 30 December 2008 edition of The Wall Street Journal. It caught my eye and engaged my brain.  She is a favorite author of mine.  Her down-to-earth approach to personal finance provides fertile ground for my Midwestern roots.  In that article, she took the holidays of the year and focused on an action households could take to fix their finances in 2010 that “fit” that day.  In a similar vein, the National Foundation for Credit Counseling released their survey of the financial New Year’s resolutions of 6,100 households.  The results of the survey reveal that NFCC’s respondents might find Blumenthal’s prescriptions to be distasteful – as are many good “medicines”.


The NFCC found that the number one New Year’s resolution for households ranked as follows, each with the percentage that chose that action as their number one resolution.  (The press release is attached.)


                Decrease debt                                                                  76%

                Improve my credit score                                               11%

                Decrease dependence on credit cards                     7%

                Increase savings                                                                 6%


This is disheartening.  While decreasing debt is certainly admirable and some would say reducing debt is a form of savings, as it improves one’s net-worth, the fact that only 6 of 100 households ranked increasing savings as their number one priority for 2010 is much less than I would have imagined.  This is particularly true, given the events of 2008 and 2009.  Moreover, the fact that fully 94% implied that they had issues with their credit behavior is frightening.  While it is challenging to accomplish, most financial planners suggest that we should save, at least, 10% of our income for retirement, emergency planning, college savings, and other goals.  So, since most of us don’t, what can we do to celebrate the holidays of 2010?  (My gratitude goes to Ms. Blumenthal for providing the idea.)


New Year’s – Vow to increase your rate of savings.  Have money automatically deducted from your paycheck and put in your retirement plan, your savings account, your money market fund, or other accounts dedicated to your goals.  Do this today, if you haven’t already.


Martin Luther King’s Birthday – To celebrate the diversity of our country, review your investment plan to make sure it is diversified – across sectors, industries, market-capitalization, countries, etc..


Presidents’ Day – Reduce your borrowing.  (Since politicians have trouble with this one, why not use their day as the day to take actions that are the opposite of theirs?)


Religious Holidays – Whether you celebrate Easter, Mawlid-al-Nabi, Shavuot, the Equinox, or other religious holiday, take some time to celebrate your birth and heritage.  Consider the financial lessons, good and bad, that you have learned from your family, friends, and religious affiliations.  Do your best to practice the “good” and to cease practicing the “bad”.   It will build human capital in you, your most precious asset.


Memorial Day – First, be grateful for the sacrifices of others that have allowed us to have our freedom and, then, talk to your family about estate planning. Make a plan for your own death – it will happen – that incorporates your goals for giving to others.  Make sure you know the plan of your parents and, if they don’t have one, suggest they get one.


Fourth of July – Ask yourself if you are financially free.  The American Revolution occurred because we did not want to pay taxes, without representation.  Many have chosen to be servants to those to whom they owe money.  In a sense, they have voluntarily sacrificed their freedom, in exchange for working to pay interest.  Choose freedom.


Labor Day – Remember what Ben Franklin said, “At the working man’s house, hunger looks in, but dares not enter.”  Good work is a blessing and protects us from recessions and economic change.  Our gift to our economy is our labor and creative contributions working together to increase the well-being of all.  Moreover, those that work hard with specialized training and unique personal skills will always be valued.  Hunger will not knock on your door, if your house is built on productivity.


Thanksgiving – While Thanksgiving is my favorite holiday, giving thanks for what we have is a key to making financial progress.  Make a list of what you think you need, as well as what you want.  Focus on your goals and your needs will become clearer and will be satisfied.  Focus on your wants and you’ll always want more.


Christmas, Bodhi Day, Hannukah, the Winter Solstice, Id al-Adha, or Yule – First, look up which group celebrates each of these holidays.  Then, every day before the next Holiday season, remember the gift of giving and what truly matters.  The best day I ever had with my father was a late-fall day spent duck hunting and we did not kill a single bird.  Or, was it one of the days we spent together working with his business? My children remember trout fishing, while not remembering that very expensive meal at the restaurant on Broadway in New York.  Remember, happiness and satisfaction are not “pricemore”, they are priceless.


Happy New Year.  May yours be a financial success.