Wednesday, August 24, 2011

Financial Tips for Students

Welcome back to school! For today’s tip I would like to explore a few basic tips that will help you start the school year off on the right financial foot.

First, here are a few statistics you should know:

  • 91% of undergraduates have at least one credit card and the average senior graduates with $4100 in credit card debt[1]
  • The average undergraduate takes out $24,000 in federal student loans[2]
  • 7% of students drop out each year due to financial pressures[3], and 20% of student loan borrowers drop out of college each year[4]
  • 1 in 5 bankruptcies are filed by college students[5]
  • 84% of students say they need more education on financial matters[6]


Having worked as a financial counselor for several years on college campuses, I have seen the crushing burden students feel as they come to us after their credit has already been destroyed and they are facing large credit card bills and mounting student loan debts. I have seen seniors or recent graduates break down in tears when they receive their first student loan statement, as they wish they hadn’t used the money to take trips, buy expensive electronics or use for their day-to-day expenses.

Here are a few basic steps that will help you avoid some of these problems:

  1. Learn to budget. Budgeting is a simple process that will help you create a plan for how you want to spend your money. It will help free you from guilt as you buy items you know you can afford and are within your budget.
  2. Control the most common areas of high expenses for college students – eating out, entertainment, clothes and electronics. College should be a time when you have fun with your friends, but you need to make sure you are spending your money wisely and not spending money you don’t have. I recommend students use cash for these areas (except electronics). When the cash is gone, you stop spending.
  3. Use credit cards wisely. Credit cards can be a good way to start your credit history, but I have also seen students destroy their credit histories by the unwise use of credit cards. Don’t charge more than you can pay off each month, and don’t use your card for impulse purchases. Your credit score is like your GPA, the higher it is, the better. The best way to get a high score is to make payments on time and keep your balances low.
  4. Use student loans wisely. Experts suggest not taking out more in student loans than half to one-year’s expected salary after you graduate. If you expect to make $40,000, your student loans should be no more than $20,000-$40,000 total. Recognize that this is money you are going to have to repay eventually.

If you are a student at the University of Missouri, there are several resources available on campus for MU students and we encourage you to take advantage of these:

  • The Office for Financial Success (OFS) The OFS has trained financial counselors who will sit down with you one-on-one and help you develop a spending plan, manage your credit or debt, or help you with any other financial issue. This is a free service for all MU students, faculty and staff.
  • The Personal Financial Planning department offers several courses that your student can take:
    • Financial Planning 1183, Financial Survival, (1 hour online course) explores basic financial topics students need to survive the critical college years.
    • Financial Planning 2183, Personal & Family Finance (3 hour) is the complete guide for a successful financial future.
    • Financial Planning 4483, Financial Success (1 hour online course) covers the basics for those entering the workforce and adult life.



Ryan H. Law, M.S., AFC


Personal Financial Planning Department

Office for Financial Success Director

University of Missouri Center on Economic Education Director


239E Stanley Hall

University of Missouri

Columbia, MO 65211


573.882.9211 (office)

573.884.8389 (fax)


[1] Sallie Mae, “How Undergraduate Students Use Credit Cards: Sallie Mae’s National Study Of Usage Rates and Trends 2009”



3 Duck9


4 Gladieux L. & Perna L. (2005). Borrowers who drop out: A neglected aspect of the college student loan trend. The National Center for Public Policy and Higher Education




6 Sallie Mae. 2009. How Undergraduate Students Use Credit Cards.


[1] Sallie Mae, “How Undergraduate Students Use Credit Cards: Sallie Mae’s National Study Of Usage Rates and Trends 2009”


[4] Gladieux L. & Perna L. (2005). Borrowers who drop out: A neglected aspect of the college student loan trend. The National Center for Public Policy and Higher Education




Thursday, August 18, 2011

Business Simulation Games

Before we dive into this week’s tip, I want to thank everyone that shared a comment about last weeks tip, either on the blog or through email. Sometimes our readers are quiet, and we’re not sure what reaction/impact the tip had. We greatly appreciate receiving your feedback.


This week, I cover something entirely different: business simulation computer games. These are games that attempt to mimic aspects of a business, whether it is logistics, the stock market, or the entire economy. These games can be used in a classroom (within reason) or you can even try them out yourself to better understand something (and have some fun too!). Several of them are older and can be bought online for <$10.


The genre of economic computer simulations is actually pretty deep, but I am only reviewing simulations that I have played. If you have suggestions for games that I did not cover, please feel free to comment on the blog or send us an email. Depending on the feedback, we may consider hosting a training session for teachers that would be interested in incorporating a simulation into their classroom.


Full Economic Simulation: EVE Online

EVE Online is a Massively Multiplayer Online Roleplaying Game (MMPORG), which means that all or at least a large number of players are interacting with each other in one giant persistent world. The game is set as a space simulation with an open economy where almost all items are created by the playerbase (think really large sandbox). Players mine the game’s resources (asteroids) to find raw materials that can be used to create huge ships, modules for the ships, ammo for weapons, fuel for space stations, etc... Since all items are created by the players, markets develop where players can create sell or buy orders. While this may sound extremely chaotic, the markets are surprisingly efficient. It is easy to see spontaneous order develop as players line up on either side of the market in trading hubs that have developed over time. The game developers have hired an economist to study the market and offer thoughts on the overall economy.


EVE Online has a small upfront price of $19.99 and a monthly fee of $14.95 (cheaper per month if time is bought in larger increments). There is also a free two week trial option. While some college classes have used EVE Online in the classroom, the online experience can be disconcerting since the chats are unregulated.


City Building Simulator: Caesar III (1999), Emperor: Rise of the Middle Kingdom (2002)

Both of these games use a historical perspective, either ancient Rome or China, which places the player in the role of building a city that must meet the needs of the populace while still meeting specific tasks. Players advance through (somewhat accurate) history meeting the goals of various scenarios which can include building certain monuments, producing a fixed amount of goods, conquering the map, etc. Players must balance production, population, trade, tax rates, military buildup and other variables. The game rarely requires warfare and resembles the board game Risk when it does.


These games are fairly old, so their computer requirements are also low. They can usually be found online for below $10.


Industry Simulation: Railroad Tycoon III (2003)

RRT3 is primarily about connecting cities and resources together with railroads. However, RRT3 also includes the ability to build and own industries and create production chain monopolies. The game maps are fairly accurate featuring the US, Britain, China, Europe, Africa, etc. A game scenario usually starts with the player must starting a company with their own money and also selling shares to the public to raise capital. Players can also sell bonds, with an interest rate that depends on the economic climate and the player’s company’s credit rating, to raise more operating funds. Players then develop rail lines delivering goods from areas of abundance to areas of scarcity. Players can increase their profitability by building or buying industries to enhance their supply chains. Players can decide to buy back stock, issue dividends, or reinvest the funds.


Gameplay usually progresses through (historically accurate) campaigns that focus on meeting certain criteria (exceed a level of net worth, transport an amount of goods, defeat the computer players). An unexpected benefit of this game is the robust stock market. All railroad companies are represented in the market and shares may be bought or sold. Also, shares may be bought on margin or sold short, depending on what the player’s expectation for that company. The game calculates detailed balance statements and income & expense statements that can help students understand these difficult topics.


Personally, RRT3 (and RRT2) taught me a great deal of geography (from the game maps), how the stock market works, and the relationship between supply, demand, and price. Of all the games mentioned, I would recommend this game first for the classroom overall. RRT3 can be bought through Steam or found for <$10 online. The game seems to have a problem with Vista and Windows 7, but players have found the fix.


Trade Simulation: Patrician III (2003 in English, 2000 in German), Patrician IV (2010)

The Patrician series focuses on the Hanseatic League around the 14th century. The player is tasked to trade in ~20 cities that specialize in producing several different goods. The player generally starts with one ship, sailing between ports to buy cheaply and sell dear. As the game progresses, players need to build industries in towns and create complex production chains to serve the needs of citizenry. Players must literally build the economy required for the Hanseatic League to flourish. To make the game even more interesting, players compete against computer traders and players can also be attacked by pirates. Pirates can be defeated in naval battles that are not graphic; small ships fire cannonballs at each other.


While RRT3 strikes the right balance between game play and tediousness, Patrician III may be too complex for students to comprehend in short class periods. Patrician IV has improved and simplified game play, but it still may be too complicated, depending on age and attention to detail. Patrician III may be found online for <$10 (make sure you buy the English version!). Patrician IV is newer and can generally bought on Steam for $30.


Large-scale Government: Civilization series, SimCity series, Civ 4: Colonization

The Civ series and the SimCity series do not allow for production or large scale trade at the same micro level the other games provide. Instead, players are provided with a large macro level view of the world. Economics often takes a back seat to the policies of government and technology. The major exception is Civ 4: Colonization which looks at the historical colonization of North and South America by the European powers. Players must develop production chains for raw materials and finished goods which can be sold in the European marketplace. Ultimately, players will need to amass a large enough military to declare independence from their home country. The king will then send the royal army to bring the colony back in line; small encounters are fought similar to the rules of Risk.


Generally, the older Civ and SimCity games can be found online for low prices.


Real Estate Management: SimTower (1994)

SimTower allows the player to build a skyscraper and decide what businesses to build within. Early in the game, the player can only build offices and restaurants. As the player progresses through levels meeting certain goals, more building options are unlocked. Condos, movie theatres, three types of hotel rooms, retail space, and more can be built into the tower. The tower can also be built below ground to provide parking for hotel guests and office workers and recycling facilities for a large tower. Certain tenants have specific requirements that must be met, or they leave the tower, and the space lies vacant.


The hardest challenge is handling the flow of people through the tower. Players can build stairs, escalators, elevators, and express elevators to move occupants. However, if an individual spends too much time in transit, they may become unhappy, decide to leave the tower, and not renew their lease.


SimTower can be found online for $<10.


Other games that might be useful to you.

Capitalism (series), Tropico (series), Settlers (series), Stronghold (series). I have not tried the Capitalism or Tropico series, but they are also touted as useful economic simulators. Settlers and Stronghold have strong economic supply chains, but they are along the “Build to Destroy” model, where you’re ultimate goal is to usually use your economy to build a military force to vanquish the competitor.


I feel like I have written a large wall of text, but I hope that you found at least one game interesting enough to actually try it out. I chose mostly older games that are available cheaply online. Also, these games generally come without Digital Rights Management (DRM) so they should be easier to run in a classroom setting. Many of these games (RRT2, PIII, PIV, EVE Online, and Emperor: Rise of the Middle Kingdom) have a multiplayer option.


If you’re curious about how a game works, there is an Internet meme, “Let’s Play” where players will play through a game and record the output from their monitor. If you go to and search for “Let’s Play” and the game’s title, you can often find several videos that can help you make a decision about a game. Here is a Let’s Play video about Emperor: Rise of the Middle Kingdom; I haven’t watched the whole video, but it seems to be a better than average introduction for the part I viewed.


Please let us know what you think about out post, and let us know if we left an important economic simulator out!


Just like last week, if you read this long, here is a thank you.


Bonus Game: OpenTTD

OpenTTD is a free, open source transport game that is based on the work of Chris Sawyer’s Transport Tycoon Deluxe (1994). TTD was so successful and had such a loyal following that OpenTTD was built to enhance the original experience without losing what made the game special. Players are tasked to move goods around the map from where they are supplied to where they are demanded. Goods can be moved via rail, road, over sea, and through the air. Since the game is open source, the game is being continually improved by a dedicated community of programmers. The low price (free!), low computer requirements, and absence of Digital Rights Management (DRM) make this a very classroom friendly game as well.


You can freely download OpenTTD as well as the manual.


Andrew Zumwalt, M.S.

Director of the MoTax Education Initiative

162 Stanley Hall

University of Missouri

Columbia MO 65211

Google Voice #: 573-234-4268

Fax: 573-884-5768



Tuesday, August 9, 2011

Paying off your Mortgage

I hope to never pay off my mortgage, much to my wife’s chagrin.


That may shock some of you. Especially those of you who are familiar with this phrase:


“Debt is dumb, cash is king and the paid-off home mortgage has taken the place of the BMW as the status symbol of choice.”


That is from Dave Ramsey, radio host and author of The Total Money Makeover, and it is the battle cry of a growing movement away from debt. Indeed, debt is seen as a key cause of our current Great Stagnation. However, I think we may be moving too quickly to eliminate debt from our lives. Indeed, actions like paying off a mortgage may cause harm to your overall portfolio.


That harm comes from the extra money you put toward your mortgage. Deciding to put money toward the principal balance of your mortgage means you are not investing that extra money. Instead, the principal balance of your mortgage decreases. Note that this doesn’t necessarily increase the value of your home. Your home will appreciate or depreciate regardless of the balance of the mortgage.


Let me use an example to help illustrate this point. This example has two actors: Tabetha and Liam. Tabetha hates debt and will work her darnedest to pay it off. Liam takes a more wealth-maximizing approach. They are actually neighbors buying the same house for $200,000. Tabetha put 10 percent down and Liam put 5percent down. Tabetha chose a 15-year mortgage, so her payments are slightly higher than Liam’s, but she gets a lower interest rate. Liam chose the 30-year mortgage with a higher interest rate, but a lower monthly payment. The info is in the table below:






Loan balance



Interest rate










Tabetha really doesn’t like debt, so she decides to also send an extra $200 per month to help pay off the mortgage. Liam takes the difference between his payment and Tabetha’s and invests it. Liam also sends $200 a month to his investment account which earns about 8 percent annually on average. So how do they look seven years down the road?






Mortgage balance



Investment balance





Tabetha has made great progress in paying down her mortgage. She has more equity in her home compared to Liam. However, Liam’s investments have steadily grown as he invested the difference between Tabetha’s mortgage and his own, plus the extra $200 a month. If we net the investment balance against the mortgage, he owes about $341.05 less than Tabetha.


By pushing the scenario further, we can also test strategies for our current Great Stagnation. Assume that both Tabetha and Liam lose their jobs. Liam’s investment account also took a hit and lost about 30percent of its value. The investment account is now worth $53,951.89. Both Liam and Tabetha are having a hard time finding jobs and each has spent their 12-month emergency-fund money. It is now month 13 since the layoff and Tabetha can’t pay the mortgage. She has substantial equity in her home, but no one will lend her money without some proof that she can pay it back. The house she put so much equity into goes into foreclosure.


After 13 months, Liam has also emptied his emergency fund, but now he starts to spend the investment account that has decreased in value. Assuming he only uses the investment account to pay the mortgage, he has 47 months worth of mortgage payments—almost four years. This is probably too optimistic, but if we assume that it takes $2,000 a month to run his household, he has enough money for 26 months, more than two years.


This example also works for student loans and any other long-term loan where the interest rate is relatively low compared to possible investment returns. This doesn’t work compared to high cost credit cards, payday lending or other high-cost debt.


There are three important considerations with the Liam strategy.


1. Sleep. You have to be able to sleep at night, knowing that you are not paying off your mortgage as fast as you could be. Instead you are investing in riskier investments that are volatile in the short term, but over longer periods, they generally appreciate. If your personal preferences are such that you are the happiest paying off the mortgage fast, then Liam’s strategy may fail to win you over.


2. Peer pressure. In recent history, peer pressure tended to exert influence toward borrowing more, saving less and living well. Your house could be used as a piggy bank to finance purchases, since house values kept rising. This belief was proven false, but I fear that we are falling to the other extreme. The quote at the top is my best example: “the paid off home mortgage has taken the place of the BMW as the status symbol of choice.” We are now fearful of debt and want to expunge it from our lives. Although paying down debt is a much better choice than getting into large sums of debt, it is still suboptimal (see example above).


3. Discipline. Liam put the difference between Tabetha’s mortgage payment and his payment—$331.60, plus an extra $200—into his investment account. Additionally, Liam put $10,000 less into his down payment, opting instead to start his investment account with that lump sum. The discipline to put the lump sum and the monthly payments into the investment account was essential to his success.  If the money had been spent on anything else, Liam would be worse off financially compared to Tabetha.


My hope with this Financial Tip of the Week was to demonstrate that debt is a tool. It is neither good nor evil. Debt can be used to lengthen an unsustainable lifestyle or enhance wealth creation. The good or evil action depends on the user (like so many things in life!).


Notes: Liam and Tabetha are fictitious, and there are many assumptions in this example. Markets generally don’t steadily rise 8 percent a year, they fluctuate. We’ve ignored private mortgage insurance, taxes, inflation, emergency fund amounts, increase in house value, etc. This does not make the example useless, but you cannot apply it to your own life without tweaking all those factors to fit your scenario. A good financial planner dreams of spreadsheets and should be able to model the situation to give you a clear outlook.




You’ve read this far, you deserve something special. Some may ask the question: “Sure, Liam looks better, but once Tabetha gets her mortgage paid off, she can invest her whole payment!”


Well, let’s break out the spreadsheets.


Tabetha pays off her mortgage in the 149th month.  She actually has $201.44 left over that she immediately puts into her investment account. Every month thereafter, she invests the whole $1,670.75 into her investment account. By the time Liam’s mortgage is paid off, 30 years after the homes were bought and about 17.5 years after Tabetha paid off her mortgage, Tabetha has amassed $352,731.08 in her investment account and a paid-off house. At the same time, Liam has a paid-off house and has amassed $901,638.67, almost $1million.


The difference between Tabetha and Liam’s account balances is more than half a million dollars. Liam and Tabetha had the same amounts to either invest or pay off debt, as well as the same amount of money to put toward a down payment or invest. They both earned 8percent on their money. Tabetha had a lower interest rate and paid $68,740.35 in interest. Liam had a higher interest rate and paid $220,092.56 in interest. So what caused Liam’s investment balance to be so much higher than Tabetha’s?




Liam’s money was working for the full 30years. Tabetha only had 12.5years. Albert Einstein, when asked “what is the most powerful force in the universe?” supposedly replied “compound interest.” Whether the quote is urban legend or true, compound interest combined with time is extremely powerful. Tabetha’s extra payments still couldn’t keep up with Liam’s investment account. Truly, the power of compound interest over time is often described as the snowball effect.


More Reading:


The second book that spurred me into personal finance was Ric Edelman’s The Truth About Money. Now in its 4th edition, it first introduced me to the concept of never paying off your mortgage. He actually has an entire webpage devoted to this concept.


Here is the spreadsheet that outlines the above example.


Andrew Zumwalt, M.S.

Director of the MoTax Education Initiative

162 Stanley Hall

University of Missouri

Columbia MO 65211

Google Voice #: 573-234-4268

Fax: 573-884-5768



Monday, August 1, 2011

Is a College Cap and Gown a Financial Ball and Chain?

This week’s Financial Tip is a re-print of August’s Liber8 Economic Information Newsletter. The article is re-printed here with permission from The Research Library of the Federal Reserve Bank of St. Louis. You can sign up to receive their newsletter here:


“A college education is not a quantitative body of memorized knowledge salted away in a card file. It is a taste for knowledge, a taste for philosophy, if you will, a capacity to explore, to question, to perceive relationships, between fields of knowledge and experience.”

—A. Whitney Griswold, president of Yale University, 1951-63


The cost of a four-year college education has risen roughly 150 percent since 1980[i]. For this and other reasons, more and more students must take out student loans to finance their education. Upon graduation, many find they have accrued a sizable debt. Given the significant expense, some question the value of earning a college degree.


However, along with the rising cost, the lifetime earnings difference between college and high school graduates has widened. The increased earnings potential of a bachelor’s degree allows a college graduate to recover the cost of college over time and eventually surpass the earnings of those with only a high school diploma.


The College Board estimates that for the 2010-11 school year the average cost of a four-year college education is $37,000 per year at a private nonprofit university and $16,000 per year at a public university[ii]. Over the past decade, the real cost of attending a four-year university increased an average of 3.6 percent per year. In contrast, for the same period, real personal income increased an average of only 2.1 percent per year. Consequently, more families turn to student loans for college funding. The College Board estimates that the percentage of students with federal student loans increased from 27 percent in 2004-05 to 35 percent in 2009-10[iii].

While estimates vary, a typical 2009 college graduate accumulated $24,000 in student loan debt, up 6 percent from the previous year[iv].


For college to be a good investment, the benefits of a degree (e.g., higher pay) must outweigh the opportunity cost of attending. In this case, the opportunity cost is the sum of tuition and housing costs plus the wages that would have been earned from working directly after graduating from high school[v]. Recent data show that while the cost of college increased, the labor-market value of a bachelor’s degree climbed to an all-time high. In 2008, college graduates earned on average 77 percent more than high school graduates[vi]. Also, from 1998 to 2008 the difference between the median earnings of those with a bachelor’s degree and those with only a high school diploma increased by approximately 23 percent. This increased earnings potential allows college graduates to “catch up” relatively quickly in terms of net lifetime earnings.


According to the College Board, recent college graduates who completely financed their education with student loans will earn enough by age 33 to cover the cost of those loans and match the to-date lifetime earnings of those the same age with only a high school diploma[vii]. Thus, the opportunity cost of attending college is recovered over time. A college degree also lowers the probability of unemployment: From 1998 to 2011 the average unemployment rate for those with at least a bachelor’s degree was half that of those with only a high school diploma. Overall, a college degree still remains a wise investment.


—By Lowell R. Ricketts, Research Associate


You can find additional Liber8 newsletters here:


along with Classroom editions, which includes questions for students and an answer key for classroom use, here:


Ryan H. Law, M.S., AFC

Department of Personal Financial Planning

Office for Financial Success Director

University of Missouri Center on Economic Education Director


239E Stanley Hall

University of Missouri

Columbia, MO 65211


573.882.9211 (office)

573.884.8389 (fax)


[i] Figures are listed in inflation-adjusted (real) terms. Costs are defined as the sum of published tuition and fees plus room and board charges. Data are from the College Board Advocacy and Policy Center. “Trends in College Pricing 2010.” 2010.

[ii] College Board Advocacy and Policy Center. “Trends in College Pricing 2010.” 2010, p. 15.

[iii] College Board Advocacy and Policy Center. “Trends in Student Aid 2010.” 2010, p. 15.

[iv] The Project on Student Debt. “Student Debt and the Class of 2009.” October 2010, p. 1.

[v] The opportunity cost of money—the accrued return from the next best investment to paying tuition out of pocket—should also be considered.

[vi] Baum, Sandy; Ma, Jennifer and Payea, Kathleen. “Education Pays 2010: The Benefits of Higher Education for Individuals and Society.” College Board Advocacy and Policy Center, p. 16.

[vii] Baum, Sandy; Ma, Jennifer and Payea, Kathleen. “Education Pays 2010: The Benefits of Higher Education for Individuals and Society.”

College Board, p. 13. This estimate takes into account several factors such as years in school, total student loan debt, and time employed.

The actual “breakeven” point will vary depending on an individual’s specific circumstances.