Financial Tip of the Week

Education Expensive? Try Taxes!

2012-01-26T08:35:00.000-08:00

Education is expensive. Those of you paying, or planning to pay, tuition know that is a truism. It costs a lot to prepare for occupations that require higher levels of education, yet a quality education typically pays for itself with a lifetime of earnings that greatly exceed the costs.

To help with these costs the United States Government has extended several tax breaks to help qualifying individuals and families reduce the cost of education, by providing a subsidy through the tax system. For 2012, the American Opportunity Tax Credit and the Lifetime Learning Credit continue to exist, following being extended in 2010 for continuance through 2012. What are they?

The Lifetime Learning Credit provides a $2,000 tax credit per return, if one or more students are enrolled in one or more courses at a qualified educational institution. The tax credit is designed for those with incomes below statutory limits. Single filers begin to lose this tax credit when their Adjusted Gross Income (AGI) reaches $50,000 and it disappears completely at an AGI of $60,000. Married tax payers begin to have their Lifetime Learning Credit phased out at an AGI of $100,000, becoming completely exhausted at an AGI of $120,000.

The American Opportunity Tax Credit provides a maximum tax credit of $2,500 per student per tax year for the first four years of higher education expenses. It is fully available to single taxpayers with an AGI of under $80,000 and is phased out to zero when their AGI reaches $90,000. For married taxpayers, the credit begins to disappear at an AGI of $160,000, becoming zero at an AGI of $180,000. A nice characteristic of the American Opportunity Tax Credit is that tax filers that do not owe federal income taxes are still eligible to receive up to 40% of the credit, or $1,000, as a refundable tax credit.

If you claim either tax credit, you are unable to take an “above-the-line” tax deduction, also known as an adjustment to income used to calculate Adjusted Gross Income. The education deduction allows one to claim up to a $4,000 deduction, if the taxpayer’s Adjusted Gross Income is not greater than $65,000 for a single filer or $130,000 for joint filers. This allowable deduction reduces to $2,000 for single-filers with Adjusted Gross Income of $80,000, or $160,000 for joint filers.

Let’s assume you are single with an Adjusted Gross Income of $30,000 and, thus, in the 15% marginal tax bracket, implying you would pay $0.15 in taxes on the next dollar you earn. While a $4,000 deduction sounds larger than a $2,500 tax credit, it would only reduce your taxes by $600 (=$4,000 * .15). On the other hand, a tax credit reduces your taxes dollar for dollar. If you are single and claim the American Opportunity Tax Credit, the $4,000 in educational expenses would allow you to take a $2,500 tax credit. Thus you have reduced your taxes by $2,500, which is 4.17 times greater than if you had taken the “above-the-line”, $4,000 tax deduction. To repeat: A tax credit reduces your taxes dollar for dollar, while a tax deduction reduces your taxes by the amount of the deduction times your marginal tax rate.

Additional tax breaks for students do exist. Student loan interest up to $2,500 is tax deductible. Teacher classroom expenses are deductible up to $250 for teachers. Moreover, if your employer provides educational benefits, up to $5,250 in employer provided education assistance is not included in calculating your income.

If you have young children and you believe that education is correlated with financial success, Coverdell Educational Savings accounts and state 529 plans allow for tax-free contributions to college savings plans, assuming that the money is eventually used for higher education expenses. These can be a very efficient way to reduce taxes, while saving money for college and a great way to commit to your human capital or that of your descendants.

For more information on the Missouri 529 plan, see https://missourimost.s.upromise.com/ .

More information on taxes may be found at http://www.cch.com/wbot2012/017Education.asp .

If you live in central Missouri and qualify for free Volunteer Income Tax Assistance, consider having our trained preparers help you. Click for locations and hours.

Living on Less: 114 Ideas

2012-01-19T13:09:00.000-08:00

by Brenda Procter, M.S.

Learning how to spend less but still live well takes skill, determination and know-how - but it can be done! Before you buy, ask yourself, “Is there another way to get what we need or want? Can we recycle? Share someone else’s? Make rather than buy? Rent? Trade? Or use public services?” These are all ways to stretch resources when you have to.

This article includes more than 100 ideas to help you live on less. These ideas are designed to help you meet your needs after income has been reduced. Most of the ideas are practical, everyday things you can do to cut expenses.

You may already be using some of these ideas and not every idea will work for you. Choose the ones that will be the most helpful. As you hear of new ideas that you might consider trying, add them to the list. This is a handy reference when you plan your family budget.

Remember to keep your family’s needs in mind. Then use these ideas to help you think of ways to increase or extend your resources.

Food

· Plan your meals one week at a time. Take advantage of specials and seasonal foods. Plan meals around featured sale items to cut food costs.

· Make a shopping list. When you get to the store, stick to your list to cut down on impulse buying.

· Buy generic or store brands. The quality is usually acceptable, the nutritive value can be the same as brand-name products and the price difference can be considerable.

· Shop for food once each week to save gas, time and money.

· Shop at discount grocery stores - convenience store prices are higher.

· Avoid shopping when you’re hungry so you can resist impulses.

· Check out day-old bread stores. They offer significant savings on bread and some other items that are still of acceptable quality.

· Make a pound of hamburger go further by adding bread crumbs, oatmeal or tomato sauce. You are stretching a high-cost food item with low-cost products.

· Shop alone. Other family members may want items not on the list.

· Look for coupons before you go, but only for what you would buy anyway. Some stores double coupon amounts for additional savings.

· Check out when supermarkets discount meat, produce and bakery goods as day-old goods. The quality may still be acceptable.

· Use economy cuts of meat like chicken thighs and chuck roast. They provide good-quality protein at a lower cost.

· Use your oven efficiently and bake more than one dish at a time. The energy savings can be used to supplement other parts of your budget.

· Plan a meatless day each week. Meat is one of the more expensive foods in our diet. Check your library for cookbooks that have Mexican, oriental or pasta recipes that may feature beans, cheese or vegetables instead of meat.

· Mix one part of reconstituted instant milk with one part of 1 percent or 2 percent milk. Again, you are stretching a high-cost product with a low-cost one in a way that will not likely be noticed by your family.

· Buy skim milk. The lower the fat, usually the less expensive the milk.

· Compare prices per unit: pound, ounce, dozen or package. Take your calculator with you. Comparing cost per unit allows you to accurately compare products of differing sizes.

· Plan how to use leftovers. Millions of dollars worth of food go to waste each year.

· Wrap and store foods carefully to prevent waste and health hazards.

· Make your own convenience foods. The more convenience built into a food product, the higher its price. Check with your library for cookbooks that specialize in homemade mixes.

· Entertain with potlucks, or simple, inexpensive foods like casseroles and salads. Rethinking what we serve and how we entertain can save on company meals.

· Take nutritious snacks like fruit or oatmeal cookies with you to work for break time. Vending machines can be expensive.

· Growing your own fruits and vegetables can sometimes save money.

· Preserve fresh fruits and vegetables by canning (if you already own or can borrow the canning equipment), freezing or drying.

· Form or join a food co-op. Check with your Community Action Agency to see if there is one in your area. Food co-ops buy in bulk so you don’t pay for expensive product packaging.

· Prepare brown-bag lunches when possible. Take leftovers for lunch - eating out is expensive.

· Cut down on meals away from home. Eating at home usually saves money.

· Take advantage of the school lunch program. This program can provide well-balanced lunches to children at a reasonable cost. Check about qualifying for reduced-price or free lunches.

· Ask the local Family Services Division Office if you qualify for food stamps.

· Use the WIC (Women, Infants and Children) nutrition program if you qualify. This program provides vouchers for many nutritious foods. Check with your local health department.

· If your family stays healthy, you will save on medical bills. Make sure everyone eats nutritious meals. Use the USDA’s MyPyramid as your food guide. Go online to mypyramid.gov and make your own food pyramid based on your size, age, gender and activity level. This is a free service.

Clothing

· Buy any needed clothing on sale. End-of-season sales often offer some of the best savings.

· Swap clothes with friends or neighbors. Many children’s garments are still in good shape when a child grows out of them. You can exchange items you have for items you need.

· If you cannot start a swap program, take clothing to a consignment shop where they will give you money or trade yours for others in stock.

· Shop for clothing at yard sales to save considerably on slightly used items. This is especially true of children’s clothing or maternity wear.

· Before buying any garment, check the fabric labels and care instructions. Avoid clothing that requires expensive care like dry cleaning.

· Read and follow care instructions to make clothes last longer.

· Encourage family members to hang up clothes after wearing to eliminate unnecessary laundry. The cost of doing a load of laundry is no longer a minor expense.

· To get more life from each pair of shoes, do not wear the same pair all the time. Resting shoes between wearings extends their overall life.

· If they’re not dirty, wear clothes more than once before washing.

· Use a coin-operated dry cleaner for savings on items that must be dry cleaned.

· Keep clothes in good repair, so a minor problem does not get worse.

· If you buy a factory second, check the item for flaws. Some flaws you can live with, but some you cannot.

· Investigate whether using cloth diapers and laundering them yourself is a reasonable option.

· Hang laundry out to dry. The average cost of a load dried in an electric dryer is higher than using a gas dryer.

· Clean and polish dress shoes often to keep them in good condition. They will look good longer and will need replacing less often.

· Store clothes properly to prevent damage from sun, moths, mildew or stretching.

· Spot clean clothes promptly and save on cleaning by careful wear.

· Wear old clothes for messy jobs. Try to anticipate tasks that would cause damage to better clothing and take the time to change.

Transportation

· Use self-service gas pumps. Remember to check oil and water levels to keep from having unnecessary repair bills in the future.

· Keep your car in good condition. It is safer and less expensive to operate a well-maintained automobile.

· Protect against salt damage and rust by keeping your car clean. This will extend the life of your car.

· Read and follow the instructions in the owner’s manual. The recommendations can keep your car operating more efficiently for more miles.

· Learn how to maintain your car. Change oil, air filters and oil filters when recommended. Doing it yourself can cut costs considerably.

· Take advantage of auto repair classes held in your community. A major portion of auto maintenance or repair costs is the labor. Using your own skills can trim these costs.

· Get to know which gas stations in your community sell good-quality gas at the lowest rates. Gas up when you are in the area rather than making a special trip to save a few cents per gallon.

· Walk more, drive less to save money and improve your health.

· Form car pools for going to work, meetings, children’s activities and shopping trips. The average family spends 18 percent of their income on transportation.

· Save on fuel with good driving habits (like slowing down gradually rather than braking at the last minute).

· Save money by washing and waxing your own car.

· Organize your errands to eliminate unnecessary trips.

· Try to get along with fewer cars. Automobiles are expensive to own when you include the cost of insurance, taxes and maintenance.

· Use school and public transportation whenever possible.

· Consider carrying just liability coverage on any automobile that no longer has much dollar value. The ongoing cost of collision and comprehensive coverage may not make sense given what you would be paid if you had a claim.

Personal Habits

· Barter talents and resources. Trade skills like typing, wallpapering, painting, sewing or hair trimming with a friend or neighbor. You can obtain things you need without spending money.

· Give a gift of your own personal services. Window washing, baby-sitting, lawn mowing and garden weeding are all examples of jobs friends would appreciate having you do. There are many ways to be generous without spending money.

· Start a child care cooperative. Co-ops provide free child care in exchange for you taking a turn at caring for the children.

· Look into freecycling programs in your community. Freecycling is when a person passes on, for free, an unwanted item to another person who needs that item. The Freecycle Network™ online at freecycle.org can help you find local resources.

· Make gifts. Grow plants from seeds or cuttings to give as gifts. Fill an inexpensive basket with loaves of fresh bread. Develop a unique, quality craft to use as a gift. Gifts do not always have to mean an expensive purchase.

· Trim your children’s hair between professional cuts. Better yet, you may be able to give simple cuts yourself.

· Choose an easy-care hair style - you’ll need fewer styling products.

· Evaluate your need for cable television services. How much time do you really spend watching cable stations, and how important is that to you and your family?

· Write more letters or e-mails if you have access to a computer, or make fewer long-distance calls. The cost of a stamp is usually less than long-distance rates.

· Check through your telephone and cell phone bills carefully each month to be sure all the calls you are paying for are correctly billed.

· Cancel any phone services you are paying extra for but don’t really need (call waiting, call forwarding, text messaging, etc.).

· When you must use long-distance, make your calls when the rates are the lowest. If you use a cell phone, call when minutes are free.

· Take advantage of learning opportunities at local schools, attend University of Missouri Extension classes, community-sponsored workshops and other adult education courses. All of these can increase the skills and knowledge you have to work with.

Housing

· Rent, share or borrow household equipment that is seldom used.

· Simplify your possessions. Get rid of anything you’re not using to save on cleaning, maintenance and repairs.

· If furniture or appliances are needed, check the classified ads in the newspaper or try an auction, garage sale or secondhand shop.

· Learn how to refinish furniture. Refinishing takes skill and time, but is an inexpensive way to acquire attractive furniture.

· Maintain your home. Make minor repairs before they become major ones requiring an expensive financial outlay.

· Learn to clean, repair and restore household items yourself. Substitute your time and skills for dollars you would have to pay to someone else.

· Make your own draperies, curtains, spreads, slip covers and table covers. Look for instruction books at your library.

· Cut down on cleaning supplies by buying all-in-one cleaners. You will have fewer dollars invested in cleaning supplies.

· Follow instructions on amounts of cleaning products to use so there is no waste from using more than actually needed.

· Wash walls instead of painting. Washing may be all that is needed to freshen the look of a room.

· Install a water-saver shower head (available at most hardware stores). There will be water and energy savings, and family members may not even notice the change.

· Take short showers instead of baths to save water. There will be additional savings from not having to heat the extra water.

· Rent out a room or garden space for additional income.

· Provide a room in exchange for child care or elder care.

· Service your furnace yearly and change filters regularly. A well-maintained furnace with clean filters will operate more efficiently.

· Turn off air conditioning and open windows in temperate weather. Consider installing an attic or roof fan, which costs less to operate than the air conditioner.

· Stop watering the lawn. The savings on your summer water bill can be considerable.

· Try energy-saving measures like placing plastic over single-pane windows in winter. Your furnace will not have to operate as much because there will be less heat loss.

· Close rooms and turn off the heat or air conditioning to rooms not being used.

· Use window shades or insulated drapery liners to block sun in summer and drafts in winter. You will be more comfortable and spend less on heating and cooling your home.

· Contact your utility company to have an expert check the insulation in your house to make sure it is adequate. If it’s not, insulate where needed. Insulate open areas, like the attic, yourself. Proper insulation provides long-term savings on your energy bill because the furnace and air conditioner will not have to run as often.

· Replace incandescent light bulbs with compact fluorescent light bulbs where possible. This is especially helpful in rooms where lights are left on for long periods of time.

· Turn off lights, TV and appliances when they are not in use. It saves on energy usage and will help the appliances and light bulbs last longer.

· Adjust your thermostat setting in both cold and hot weather. For every degree adjusted, you can save 1 to 3 percent on heating and cooling costs. When in the house, dress appropriately for the adjusted temperature.

· Save energy and money by turning down the hot water heater. A setting of 110 degrees F to 120 F is adequate if you do not have a dishwasher, 140 F is recommended if you do have a dishwasher.

· Whenever you must buy equipment, study the Energy Guide labels that compare estimated annual operating costs. The label provides information on the average cost of operating that specific appliance annually.

Managing money

· Keep track, item by item, of where your money goes every day, week and month. Go over this spending record periodically with the entire family. Decide together if money is being spent the way you really want.

· Do not carry more money than you can afford to spend. You can’t buy impulsively if you have to return to make the purchase.

· Check to see if you are eligible for specific income tax credits. Certain federal tax credits can provide a larger tax refund or can cut the amount withheld from each paycheck.

· Have a garage sale to get rid of unwanted items. This frees up storage and generates money for other needs.

· Stay away from malls. It’s too easy to spend money on impulse when browsing at a mall.

· Analyze your insurance coverage to make sure you are adequately insured at the lowest price. Comparison shop for insurance. The cost for the same coverage can vary widely from one insurance company to another.

· Take advantage of community recreation services like concerts, fairs and public tennis courts.

· Consider taking up less expensive sports and hobbies than you have now. There are many ways to have fun at little or no expense.

· Pay bills early when creditors give a discount for early payment.

· Balance your checkbook soon after the bank statement arrives to stay on top of your finances - overdrafts can be expensive.

· Read magazines and books from the library. Cancel book club memberships and magazine subscriptions, especially for those that remain unread for a long time. Look for ways to enjoy the same resources at little or no cost to your family.

Brenda Procter, M.S.

Consumer & Family Economics Extension Specialist

MU Personal Financial Planning Department

162 Stanley Hall

Columbia, MO 65203

Phone: 573-882-3820/5115

Fax: 573-884-5768

ProcterB@missouri.edu

http://extension.missouri.edu/hes/poverty.htm

http://missourifamilies.org

Investing versus Gambling

2012-01-11T14:55:00.000-08:00

I read the other day that the price of Powerball ticket is increasing from $1 to $2 on the 15^th of January. So, for the same expenditure, lottery ticket purchasers will get half as many chances to win or, if they want to maintain a pattern in number of tickets purchased, they will spend twice as much for the same number of tickets. The good news is that the chances of winning are actually going to increase, as the lottery commission is reducing the number of red Powerballs by four, to 35, and increasing the second prize to $1 million, up from $200,000. Why do people want to play the lottery? Why are some players habitual players, while others are only occasional recreational players. A sad indictment is that lotteries have been shown by research to be an inferior good, where more tickets are purchased, the lower the income of the purchaser. Maybe they just don’t know any better or maybe they are really desperate.

The payout on Powerball remains at 50% of the funds from the sale of lottery tickets, so lottery players will continue to expect to receive $0.50 for every $1 of tickets purchased. The overwhelming majority of lottery “players” lose everything they spend on lottery tickets, yet they fantasize by buying tickets in the hopes that their financial lives will change. There are even lottery ticket purchasers who claim to be “investing” in the lottery when they buy a ticket, with the knowledge that they only expect to receive half the price as a return from their “investment”. Many people, in fact, buy lottery tickets like some of us save for retirement, through dollar-cost averaging. When we dollar-cost average into retirement savings we purchase more, say, mutual fund shares when prices are lower and less when prices are higher, by making the same periodic investment. If the market rises over time, we are assured that we will have more money at the end of our investing cycle than the principal we put in. Lottery ticket dollar-cost averaging purchasers buy the same dollar amount of tickets each week with relative certainty that they will get half the money back. Is this extreme fantasy or simply quiet desperation to hope to be the one in 195 million players to win the jackpot.

The gambler and the investor are linked, however, as both are driven by the amount they are gambling/investing and the “action” they receive from the process. Those driven by the action will put more money into the game, as they are excited by the game. It is curious, however that when a stock sells at a high, say a three digit (APPL) or six digit price (BRK-A), investors shy away from the stock. The high price, relative to other stocks, causes many investors to be reticent to buy the stock as it is high priced. Those same investors might be willing to purchase low-priced, “penny stocks” in the hope of finding a hidden gem. Neither the investor nor the gambler is rational, if they continually spend/invest large sums of money on low probability events. The cumulative value of losses in these “investments” can be quite large.

When lottery tickets were just becoming commonplace, I heard a financial planner call them a “tax on stupidity”. Given the wide gap between the cost and the expected value of the payout, why would anyone buy a lottery ticket? Perhaps, some people simply enjoy paying money to others so they can lose their money. It is not, however, the path toward financial success. I have read that one in ten British citizens believe that they will win the lottery to pay for their retirement. That is not a retirement plan. Rather, periodic dollar-cost averaging, across a lifetime of saving and investing in a diversified portfolio designed to reach financial goals is financial planning. And, guess what, you will become a millionaire. Now that you understand more about the lottery, you can see that lotteries really are a tax on ~~stupidity~~……. those lacking your understanding.

What do Financial Market Indicators Tell us?

2012-01-05T13:23:00.000-08:00

Each month the Federal Reserve Bank of St. Louis publishes a newsletter titled Liber8, which is a selection of useful economic information, articles, data, and websites compiled by the librarians of the Federal Reserve Bank of St. Louis Research Library. This month the article is about financial market indicators. If the financial lingo you hear reported on the news doesn’t seem to make a lot of sense, this issue should help you understand it better. We encourage your comments and thoughts at http://mufinancialtip.blogspot.com.

There is a classroom version of Liber8 available to teachers for free at: http://liber8.stlouisfed.org/newsletter/2012/Lib0112ClassrmEdition.pdf

To subscribe to their newsletter or for more information and resources, visit their website and archives at http://liber8.stlouisfed.org.

The views expressed are those of the author and do not necessarily reflect the official positions of the Federal Reserve Bank of St. Louis, the Federal Reserve System, the Board of Governors, the University of Missouri, the Personal Financial Planning Department or The Office for Financial Success.

By Linpeng Zheng, Research Associate

Financial market data are reported daily in the news—usually as prices, indexes, or interest rates. While these data provide direct information (e.g., a Treasury bill pays 2 percent interest), they also give some indication of future economic growth, inflation, and financial market stability. Changes in these data can also affect decisions about consumer spending, educational loans, and retirement plans. Financial markets are important in everyday life because making good business decisions is difficult without understanding how key financial indicators behave. Popular financial indicators usually fall into four categories: commodity prices, stock indexes, interest rates, and yield spreads (the difference between two interest rates).

We start with the simplest financial indicator—commodity price. Various commodities (e.g., corn, gold, oil) are traded on commodity exchanges, much like the stock markets for individual stocks. If an airline wants to purchase 1,000 barrels of oil today, it needs to pay the current price, which is called the spot price.^[1]

However, if the airline company wants to purchase 1,000 barrels of crude oil for delivery next year, then it can sign a contract at a fixed price today for the oil it will buy next year; this price is called the futures price.

If some event reduces the future supply of oil, which may increase the spot price at a certain time next year, the airline will pay only the locked-in price specified in the futures contract. Hence, this lower futures price reduces the oil expense for the airline. Futures prices are affected by various factors, such as the spot price, storage costs, and interest costs.

The most common financial indexes refer to the prices of the stocks of publicly traded companies. For example, the stock price of Microsoft was $25.76 on December 12, 2011. Other than individual stock prices, an aggregate stock price index also plays an important role. For instance, the Standard and Poor’s 500 (S&P 500) is a market value-weighted^[2] stock price index of 500 stocks chosen based on market size, liquidity, and industry. It covers various industries in the entire U.S. economy. If investors plan to allocate their funds to equity markets, they likely will pay attention to two factors: the prices of the stocks of individual companies and the prices across the broader stock market, as measured by indexes like the S&P 500.

Stock prices generally increase or decrease as a result of changes in expected future earnings. If a company’s new product launch is viewed positively by the market, the stock price of that company may rise. On the other hand, movements of aggregate stock indexes tend to signal changes in the state of the macroeconomy: Good economic news should increase the earnings of many companies. For instance, the S&P 500 may increase after better-than-expected job growth. Similarly, a sequence of bad economic news causes investors to lower their profit forecasts for firms. Thus, the S&P 500 is one of the most closely watched stock indexes because it incorporates new information about the future health of the economy. Just as stock price indexes cover equity markets, interest rates determined in the bond markets are also important.

An interest rate is simply the price of borrowing money for a fixed period. In the United States, the federal funds rate, which is importantly influenced by Federal Reserve monetary policy decisions, is one of the most important interest rates. It is the interest rate at which banks borrow money from other banks. In bond markets, interest rates are referred to as yields. Bonds with different maturities have different yields. It usually costs less to borrow for a few days or months than a few years because of a factor known as the term premium.^[3] If borrowers expect projects to generate higher profits in the future, they may be more willing to borrow at a higher rate. But interest rates can also be influenced by other factors. For example, if inflation is expected to be higher in the future, creditors or investors tend to require higher yields to compensate them for the inflation risk they incur.^[4] As a result, the nominal interest will increase. Thus, bond yields also convey information about future inflation and economic growth. In addition to Treasury securities, corporate bonds are also important financial indicators. Corporate bonds have letter designations (e.g., AA+, B+) that represent the quality of the bonds (i.e., the risk of borrower default).^[5] Lower-quality bonds tend to have higher yields to compensate investors who are willing to take more credit risk. A corporate bond is considered investment grade if its credit rating by rating agencies is “BBB” or higher.^[6]

Now that we know what yield is, let’s talk about yield spread. The yield spread refers to the difference between the yields on two different bonds. Popular spreads are those derived from yields of Treasury bonds of different maturities (i.e., the term spread) and of corporate bonds with different credit risk (i.e., the credit spread). First, the term spread on Treasury securities—the difference between the yield on a 10-year Treasury bond and a 3-month Treasury bill—is frequently mentioned in the news as the yield curve^[7]: When the yield curve slopes downward, future short-term interest rates are expected to fall because investors generally believe the economy will weaken or fall into a recession. The second type of spread—the credit spread—can also increase or decrease because of changes in the possibility of default risk. For instance, when credit spreads widen, it implies that the market is factoring a higher risk of default on lower-quality bonds, which may occur during times of financial distress.

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] The spot price of oil contains information about the current demand and supply of oil conditions.

[2] A market value-weighted index is an index whose components are weighted according to the total market value of their outstanding shares.

[3] Investors need the extra compensation for locking up their money for a longer period

[4] Unexpected high inflation will hurt creditors if the dollars paid back to them are worth less than the dollars lent.

[5] U.S. government Treasury securities are also rated by credit rating agencies, such as Standard & Poor’s or Moody’s.

[6] Some institutional investors (e.g., pensions) will invest only in AAA-rated bonds based on S&P’s credit rating standard. Bonds with ratings below “BBB” are collectively called junk bonds.

[7] This is because the slope of the yield curve can be approximated as the term spread between the 10-year Treasury security and a 3-month Treasury security.

Stuff, stuff and more stuff

2011-12-16T06:08:00.000-08:00

NOTE: The Financial Tip will be on break while the University of Missouri is on break. The next scheduled Financial Tip will be January 20, 2012.

Stuff. Most of us have it—tools, toys, knick knacks, collections, clothes, files, school papers, tech gadgets, appliances, etc. Many of us save and collect items. Some of it was given to us as a gift, some was inherited, some bought and other stuff seems to just miraculously appear. According to Sartre “to have” is one of three basic forms of what we do as humans (the other two are “to do” and “to be”).

What do we do with it all? Sometimes we keep it, try to organize it, store it somewhere else or sometimes the stuff piles up in a room, on a desk or in a drawer. Regardless, taking care of items (even ignoring the stuff) requires our resources of money, time and energy. These resources can be better spent in many other areas of our lives.

If the stuff becomes clutter or becomes overwhelming, it can add stress to our families or work situations. People often set new goals during this time of year, including getting rid of things or getting organized. A search on Google for “cleaning clutter” gives over 9 million results and “organizing” brings up 125 million hits. Stuff is obviously on our minds and many consultants and companies make a living helping others take care of what they have.

Organizing and cleaning out make a big difference. Sometimes we fix a space only to have it fill up again. In order to get rid of things, it is a helpful to understand why we keep what we do and questions to help us deal with the items.

I got this as a gift or it was inherited

“I can’t get rid of this; my friend gave it to me.” We often feel like we have to keep a gift to be respectful to the person or out of obligation. Even if we don’t like the item, we hang on to it. One way to let go of the object is to shift the focus from the object itself to what your friend or family member wanted for you.

Focus on the kindness and what the friend wanted for you. “That was so nice of her to give me that vase. She wanted me to have somewhere to show off my garden flowers.” The focus becomes gratitude toward your friend and remembering good things about the relationship. You can take a picture of the object if you want to “keep” it.

· Does this bring me happiness or truly serve a purpose? If not, find someone else who would really like it, or donate or sell it.

This can be even harder to do with heirlooms (furniture, dishes, etc) given to you by a family member. For that family person, that object meant something—it was tied to a memory or to another person. You, however, may not have that connection or that item does not bring you happiness or a special memory. Once again, you might use the strategy of thinking about what this meant to the family member and how that family member wanted you to have the same type of feeling.

· Does this bring me happiness or truly serve a purpose? If not, find someone else who would really like it, or donate or sell it. Or choose one piece (if it’s a set of something) and donate the others. You might decide you do want to keep it, but you do not want to display the item in your home. You can also see if a different family member would like the piece.

I spent money on it—I have to keep this to get my money’s worth.

You spent your money on something—and often the more expensive the item, the harder it is to get rid of it. For example, you bought a high tech toaster oven. It takes up a lot of counter space and takes longer to toast bread than you thought it would. You haven’t really made other recipes in it, either. But, you spent $89.99 on it and don’t feel like you can get rid of it.

You are holding on to the item because of a sunk cost. In economics and business decision-making, sunk costs are retrospective (past) costs that have already been incurred and cannot be recovered. (http://en.wikipedia.org/wiki/Sunk_costs) You spent the money and that is done. But you might look at the other costs that are involved—what is this toaster oven costing you by keeping it?

What happens every morning when you see the toaster oven? How much time do you spend thinking about how much you don’t like it and how you wish you would have spent your money on something else? You spend energy and time that takes away from other experiences. Maybe you could brainstorm your presentation for work. Or be more present with your family, instead of thinking about this toaster oven.

Is the frustration worth it? Are these other costs worth keeping the item? Ask if anyone wants to buy it, give it to someone who wants it, or donate or sell it.

I’ll save this for when I get older or when I am retired or when I….

In The Clutter Cure, Judi Culbertson writes about a time when she was waiting in line at a store. An elderly man in front of her was talking with the clerk (obviously enjoying life by his conversation) and then hefted a propane cylinder to take with him. The author had the thought that he probably wasn’t going home to read old Christmas cards like the ones she kept at home. He was living his life.

That passage truly resonated with me. That’s me trying to capture and save memories to relive at some later point. What am I missing in the here and now by putting so much energy into those papers and pictures? The author asks the reader to think about future moments. Won’t we always want to live in the moment and keep on having new moments, instead of looking back through boxes?

Do I really need all of those papers and scraps? How can I live in the here and now?

I might need this one day

We hear messages daily to reuse items, recycle and not be wasteful. In our “consumer” culture, this can be overwhelming. Think about all of the number of items that we come in contact with on a daily basis—yogurt, milk and food containers; school papers; mail; e-mails; packaging, scraps of metal or fabric. We might have gifts, toys, fans, books, fixtures and decorations that we keep for that future need. And that’s what is so difficult—we don’t really know what we will need.

· Set a limit for what you can keep (e.g., 10 food containers and recycle or throw out the rest, 4 packages of nails and give the rest to a local charity or vocational school).

· Focus on using what you have at home and not buying more of that (e.g., craft materials)

· Remind yourself that if you do need something in the future, you can figure it out (either using something you already have on hand or getting something from a neighbor for example)—you do not have to keep everything

Questions to ask yourself as you go through your stuff:

· Can I live without this?

· If this thing were destroyed by a fire or flood, would you replace it? (From Culbertson; if the answer is “no” then you do not need to keep it)

· What do I want for myself or my family?

These points are a starting place for dealing with “stuff.” There are many web sites, books and places to help you with the process. I wish you peace, calm and positive energy in the new year! I hope you find ways to use your resources in ways that you and your family want and to help you be in a better place.

Note about hoarding

For someone who is a true hoarder of stuff and clutter, there are many other issues involved. Many do not hoard because they did not have things growing up—many grew up having things and food in their homes. They are just not able to get rid of things. Many are not able to discern between items (e.g. a family picture and a scrap of paper hold the same amount of meaning). Furthermore, forced clean-outs do not work. Finding counselors who specialize in hoarding can be very helpful for the person or for family members.

Drs. Steketee and Frost offer insights and research into compulsive hoarding. You can find an overview, questions and answers with the authors and pictures of degrees of hoarding on the following web site:

http://www.amazon.com/Stuff-Compulsive-Hoarding-Meaning-Things/dp/0547422555/ref=wl_it_dp_o_npd?ie=UTF8&coliid=IV6PDQIOK2BL6&colid=1NT2JE39IGORV

Lucy Schrader
HES Associate State Specialist and
Building Strong Families Program Coordinator
University of Missouri Extension
162 Stanley Hall
Columbia, MO 65211
573-882-4071
SchraderL@missouri.edu

References

Culbertons, J. (2007). The clutter cure: Three steps to letting go of stuff, organizing your space, & creating the home of your dreams. McGraw-Hill.

Steketee, G. and Frost, R. (2011). Stuff: Compulsive hoarding and the meaning of things. Mariner Books.

Overview; Q&A with authors; pictures of degrees of “hoarding”

http://www.amazon.com/Stuff-Compulsive-Hoarding-Meaning-Things/dp/0547422555/ref=wl_it_dp_o_npd?ie=UTF8&coliid=IV6PDQIOK2BL6&colid=1NT2JE39IGORV

A Little (More) Economics Goes a Long Way

2011-12-05T13:55:00.000-08:00

Back in April 2010, we published a piece on Mr. Antoine Cournot, a 19^th Century French economist, mathematician, and philosopher. Specifically, we used Cournot aggregation, to make the point that the more you spend on a good, the greater price increases in that good will reduce your consumption. Similarly, price decreases will increase your average consumption by more, the more you spend on that good.

The following is a table of the rate of price changes for broad categories of goods that we purchase (for more information: Bureau of Labor Statistics). The second column is the percentage change in prices between March 2008 and March 2009, the third column is the percentage change in prices between March 2009 and March 2010, the fourth is the change in prices between March 2010 and March 2011, while the fifth column is the combined rate of inflation over the three years 2008-2011. We have taken the liberty to highlight double-digit increases in prices in blue and any decrease in prices in red. As you can see, the price changes are not uniform across categories. Take, for example, prices, from 2008 to 2011, for “Other Recreation Goods” went down every year, while “Motor Fuel”, on average went up 8.83% across the three years. What is starling is that these changes were wide with prices decreasing by nearly 40%, in 2008-09, while increasing by 41% and 28% in 2009-10 and 2010-11, respectively. Yet, in total, prices of “All Goods” increased a mere 4.64% over this thirty-six month period.

Category of Expenditure	Rate of Change March 2008 – March 2009	Rate of Change March 2009 – March 2010	Rate of Change March 2010 – March 2011	Rate of Change March 2008 – March 2011
All Goods	-0.4%	2.3%	2.7%	4.64%
Food and Beverages	4.3%	0.3%	2.8%	7.54%
Food	4.4%	0.2%	2.9%	7.64%
Food at Home	4.3%	-0.7%	3.6%	7.30%
Food away from Home	4.6%	1.2%	1.9%	7.87%
Alcoholic Beverages	3.6%	1.1%	1.4%	6.21%
Housing	1.4%	-0.6%	0.8%	1.60%
Fuels and Utilities	0.6%	0.9%	2.1%	3.64%
Household furnishings	1.8%	-2.3%	-1.6%	-2.13%
Apparel	1.4%	-0.4%	-0.6%	0.39%
Transportation	-13.1%	13.3%	9.8%	8.11%
Private Transportation	-13.6%	13.8%	9.8%	7.96%
Motor Fuel	-39.6%	41.1%	27.7%	8.83%
Public Transportation	-5.0%	6.1%	10.5%	11.38%
Medical Care	2.8%	3.7%	2.7%	9.48%
Recreation	1.7%	-1.1%	-0.1%	0.48%
Sporting Goods	3.2%	-1.2%	-0.2%	1.76%
Other Recreation Goods	-3.5%	-3.1%	-4.6%	-10.79%
Recreation Services	2.4%	-1.2%	1.0%	2.18%
Education	5.6%	4.9%	4.0%	15.21%
College Tuition	5.8%	6.0%	4.5%	17.19%
Communication	1.7%	0.0%	-1.4%	0.28%
Other Goods & Services	5.7%	4.9%	1.8%	12.88%
Tobacco	18.1%	15.9%	5.5%	44.41%
Personal Care	2.1%	1.2%	0.6%	3.95%

Now, look at what happened to motor fuel prices and public transportation between 2010 and 2011. You will note that while prices for fuel fell from March 2008 to 2009, it increased from 2009 to 2010 and from 2010 to 2011, resulting in motor fuel costing 8.83% more in 2011 than in 2008. (Here’s the math: If gas cost a $1 in 2008, it would fall to $0.604 in 2009, with a 39.6% decrease. Then, if the $0.604 price increases by 41.1%, we have $0.852. If the $0.852 increases by 27.7% between 2010 and 2011, the gallon of gas now costs $1.0883.) The change has been erratic and we can’t help but think that some consumers, who bought gas guzzling cars after witnessing the near 40% decrease in fuel prices in 2008 through 2009, are feeling the pain of motor fuel price increase of 80.1% from the 2009 price of $0.604 in our example!

Another case to consider is the case of college students. They are often large consumers of tuition, education, public transportation, and food. Each of these increased in price by more than the rate of inflation of “All Goods”, across the period. We don’t need to remind them of the costs and consumption sacrifices they are making while they are investing in themselves for our futures.

Look back at the Financial Tip from the last week of January 2010: Are You Middle Class?. In it you will see the proportion of the average household budget spent on various categories of goods. The table tells us that housing takes up the largest proportion of the average budget. Thus, when the price of housing decreases, assuming you didn’t previously purchase the now over-priced home, the total effect on you is an increase in consumption of other goods, including savings. On the other hand, if you are working part-time while you are going to school and much of your income purchases college tuition, you notice the decrease in your consumption of everything else, as college tuition rose, on average, by 17.19% over the past three years. Interestingly, the increase in the price of tobacco, 44.4% over the three years, did not matter to you if you do not smoke as the average effect is 0, if you don’t purchase tobacco.

The lesson of 2010 bears repeating in 2011. The lesson is simple and not widely practiced. Moreover, it is difficult to practice during the “gift” season. The lesson is to encourage you to be modest in your expenditures and maintain them at a reasonable level, relative to your income. Save 10% of your income and have adequate reserves to provide liquidity in the case of an emergency. If you do these, you are a financial success.

Happy Holidays!

13 Smart Things for Students to do During the Winter Break

2011-12-01T13:53:00.000-08:00

I was recently reading the article “13 smart things to do before year-end” by Stacy Johnson on MSN Money[i] and thought she had some great tips. Utilizing some of her tips and adding some of my own I am calling my article “13 Smart Things for Students to do During the Winter Break”.

1. Review your credit report. We’ve talked about this a number of times on the Financial Tip of the Week, but reviewing your credit on a regular basis is an important financial step. Up to 25% of all credit reports contain errors serious enough that you would be denied credit. At www.AnnualCreditReport.com you can get a free copy of your credit report from each of the three major reporting agencies. If you find any errors go to the website of the credit reporting agency and search for their dispute form. They are required to research and correct any errors.

2. Put a credit or security freeze on your credit reports. A credit freeze stops thieves from being able to open new credit in your name. Here is a statement from the Equifax website: “A security freeze is designed to prevent the information in your credit file from being reported to others, such as credit grantors and other companies, except those exempted by law or those for whom you contacted us and requested that we temporarily lift the security freeze or those that access during a period of time when you requested we temporarily lift the security freeze.” What this means is that if a thief does steal your identity they can’t open new credit because your record is frozen. This will also prevent you from opening new credit unless you plan ahead and “unthaw” your credit report for a period of time. Credit freezes and unthaws do cost money, but think of the money spent like an insurance policy. In Missouri it is just $5 for each freeze. Here are the websites to freeze your credit report:
https://www.freeze.equifax.com/Freeze/jsp/SFF_PersonalIDInfo.jsp
https://annualcreditreport.transunion.com/fa/securityFreeze/landing
http://www.experian.com/consumer/security_freeze.html

3. Clear the clutter. A number of students are required to move out during the Winter break, so this would be a great time to turn some of your clutter into cash, or perhaps a tax deduction. Spend some time each day (after finals, of course) getting rid of stuff you aren’t using anymore. Do this in your college dorm as well as your old bedroom back home. If it’s junk, throw it out. If it's easily sold, sell it online. If you'd rather help someone less fortunate, donate it. You might even find some potential gifts among your stuff!

4. Work on your budget. If you haven’t done so already spend some time on a budget over the holiday break. Write down your income, including money from a job, money you receive from parents or others on a regular basis, student loans, etc. Next, write out your monthly expenses – start with your needs then move on to your wants. Put a dollar amount next to each item. Minus your expenses from your income, and the final number either needs to be a zero or a positive number (meaning you are making more than you spend). You will need to review your budget on a regular basis, but getting a jump on it in December can help make the process smoother in 2012.

5. Digitize documents. If you're buried in paper, maybe it's time to invest in a scanner. You can get a decent one for $50 and start transferring the contents of your filing cabinets and drawers to your computer. Just make sure to keep backups. The June 3, 2010 Financial Tip[ii] discusses how long to keep documents.

6. Make a plan to get out of debt. I talked about this item in great detail in the Financial Tip of the Week on March 4, 2010.[iii] Review that Tip and make a plan, using free PowerPay software, to get out of debt.

7. Make a will. Yes, even students should have a simple will. Most of you won’t need a lawyer to do so. You can find a number of do-it-yourself software packages for less than $50 and you can do it in less than an hour.

8. Make a living will and health care power of attorney. These are things that none of us like to talk about, but you should discuss with your loved ones what your wishes would be in you were seriously injured and were being kept alive by life support systems only. Also, who would make your healthcare decisions if you were hurt and couldn’t make them yourself? If you are a minor then your guardians will make these decisions for you, but you should take some time to draw up a living will and health care power of attorney and discuss your wishes with your loved ones. Just take a day and get your will, living will and health care power of attorney knocked out in one day. Then go out and do something really fun to take your mind off of it!

9. Review your insurance coverage. Are you paying your own insurance? If so, take some time over the break to review it. Are you getting the best deal possible on your car and renters insurance? Have you reviewed your life insurance coverage lately? Call up your agent and schedule an appointment.

10. Review your cell phone plan. A lot of people never check to see if they can get a cheaper cell phone plan, but it may be worth looking into. For example, Wal-mart sells a plan called Straight Talk that is unlimited text, talking and internet for $45 a month. Republic Wireless sells an unlimited plan for $19 a month. If it makes sense to switch you could potentially save a lot of money. Be sure to check your contract, though. Often getting out of your contract early will cost you a lot of money, so you may have to wait to switch until your current contract is up.

11. Check your student loan status. At www.nslds.ed.gov you can review all of your federal financial aid. It’s a good idea to check in regularly to know where you are. Your private loans won’t be on here – but you can find them on your credit report. To access the NSLDS website you need a Federal Pin Number. If you don’t have one yet you can request one at www.pin.ed.gov.

12. Read a book. What – read over the holidays? When it’s not assigned? YES! If you want to be really crazy, read a financial book! I really like The Millionaire Next Door by Dr Stanley and Dr. Danko. I also like Rich Dad, Poor Dad by Robert Kiyosaki. A few classics are George Clason’s The Richest Man in Babylon, James Allen’s As a Man Thinketh and Russell Conwell’s Acres of Diamonds.

13. RELAX and enjoy your family and friends. While I recommend you do a few of these items over the break, it’s even more important to relax and enjoy time with family and friends. Most of us are truly blessed and have many things to be grateful for – topping the list for most people are their family and friends. Be sure to enjoy this time with them.

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)

[i] http://money.msn.com/how-to-budget/article.aspx?post=29380d80-dbdc-417d-a845-487f764e232b

[ii] http://mufinancialtip.blogspot.com/2010/06/how-long-to-keep-financial-documents.html

[iii] http://mufinancialtip.blogspot.com/2010/03/strategy-for-getting-out-of-debt.html

Financial and Economic Videos

2011-11-17T08:52:00.000-08:00

It is a FTotW tradition on the week before Thanksgiving that I talk about a video on the Internet that deals with either economics or personal finance. Last year, I took a very narrow approach with the Royal Society for the Arts video on SuperFreakonomics; the video combined the audio of the SuperFreakonomics authors’ RSA presentation with an animator working on a whiteboard. Several of you checked it out and/or sent it on to friends; the link was clicked over 250 times.

This year, instead of a single video, I wanted to highlight a few videos (and the less I type, the better)!

The Great Stagnation by Tyler Cowen: Our current economic malaise stems from our lack of innovation. Life from 1901-1951 changed radically (cars, electricity in the home, radio communication, airplanes, etc…); life from 1951-2001 got better, but the scale of the innovations slowed (where is the flying car!?). (17:50)

When Ideas Have Sex by Matt Ridley (Could also be titled “The Power of Trade in Bringing About New Ideas”): Our prosperity has much to do with our trade with each other and the sharing of ideas. By sharing ideas faster, we create new ideas and products to help improve our lives. (16:27)

Both of these videos are done in the TED format: one presenter has about 10-15 minutes to present their idea in an engaging format. There are plenty of TED videos covering all sorts of ideas. I encourage you to visit their website.

Authors @Google : Burton Malkiel . Dr Malkiel gives an enthusiastic presentation on investment strategies that is not overly technical and easy to follow. (1:11:45)

Authors @Google : Richard Thaler . Dr Thaler gives a presentation on his book, “Nudge: Improving Decisions about Health, Wealth, and Happiness.”The book focuses on the field of behavioral economics and how individuals can overcome their biases to make better life choices. His presentation is light and easy to follow. (56:57)

_____@Google is a video series that highlights presentations given at Google by those not working at Google. This ranges from Chefs@Google, Authors@Google, Candidates@Google, Musicians@Google, Women@Google, etc… Over 1,187 videos have been uploaded covering a wide range of topics, people, and ideas.

Fight of the Century : Keynes vs . Hayek , Round Two : This video uses hip-hop music to explore the difference between F. A. Hayek and J. M. Keynes. The video is educational in nature and is ‘clean’ for classroom use. (10:10)

The above videos are generally longer than your average Internet video, but they are still worthwhile to watch. As always, let me know what you think: Zumwalta@missouri.edu.

There is likely no financial tip next week. Have a great Thanksgiving!

Andrew Zumwalt, MS

Personal Financial Planning

University of Missouri

Columbia, MO 65211

Looking backwards at the dots...

2011-11-09T09:44:00.000-08:00

Steve Jobs once said, “One can only connect the dots looking back, not forward”. I have found that such wisdom is usually better understood by those with more to look back upon and less to look forward toward. As of 10:30 am the day of this writing, the 9^th of November 2011, the markets are down about 2% due to the European debt crisis – or so they say – which was a “dot” I never would have foreseen, when I began my career. Recently, the European debt crisis has been the story. Tomorrow, we may have another story, another “dot” in our inventory of “dots”. In times like these, it is good to provide a refresher on investment principles – the lenses we should look through when viewing our investments.

Only a few days ago, I read an article in the T. Rowe Price Report written by Ned Notzon, a retiring senior asset allocation strategist, where he passes along the lessons he has learned from his career in asset allocation. Since I agree with him and, with the above attribution, I will summarize his thoughts below.

· Individuals have to stop being passive about their finances. The decisions they have to make are numerous and the responsibility for our financial success increasingly rests on their shoulders. Each of us must take responsibility for our financial futures, if there is to be hope for the financial futures of our larger economies and for those who follow.

· People are living much longer than they expected. This trend is projected to continue. The ravages of inflation, even a low rate of 2%, will destroy a retirement lifestyle if assets, such as equities, are not a part of individuals’ portfolios. (At 2% inflation and a 30 year retirement, the last year of retirement will see average prices being 81% greater than in the first year of retirement.)

· Even in the face of inflation, bonds still play a major role in a portfolio. They diversify risk exposure and reduce the losses when equities “turn south”. Not having to panic during the inevitable market cycles is a key to controlling the behavioral side of finance.

· Speaking of behavior, some investors are reluctant to embrace any market risk, the risk where most securities move in cycles. Yet, to gain wealth and to increase one’s purchasing power, one must take advantage of higher expected return assets (i.e., riskier assets). On the other hand, some investors are very willing to embrace market risk and some do it at precisely the WRONG time! They buy late, after gaining “certain” confidence in the market’s upward trend, and sell when they can’t stand the sick feeling in their stomach any longer. Selling low and buying high is a sure way to not gain the advantages of equities. Many years ago, the editor of Money magazine said, “Timing is everything, but impossible.” Thus a person needs a sound investment plan that continually is rebalanced (i.e., diversified) over a long period of time, while being disciplined to continue to save more. These actions will make sure that a plan remains true to course. In fact, rebalancing is a gentle, disciplined way to assure that you sell portions of your portfolio when they are relatively high priced and buy more of others when they are low priced. Research continues to point to the importance of saving money, being diversified, and having a long-run, disciplined commitment to financial success.

· Add some inflation hedges to your portfolio; like real estate, commodities, and precious metals. These can reduce volatility and provide exposure to different market cycles. Yes, some have not been in favor recently (e.g., real estate) but diversification is a key to long-run performance.

· Have some money invested in countries outside the United States. Sure, there is some risk involved, which is why you want to invest in overseas securities. Risk works to enhance positive returns, as well as negative returns. Importantly, the United States is an increasingly smaller portion of the world’s economy, as a result of much of the world’s growth occurring overseas. To protect your family’s financial future, make sure you have exposure to these growing markets in order to provide the necessary diversification, unavailable through single-country investing.

Most of the above is not new information. It might, however, be new to you as far as your decisions are concerned. We all wish for a world where there is no poverty and upward mobility is the outcome of hard work and good personal decisions. Certainly, there exist public policies that could be changed to improve economic mobility. I, also, have no doubt that there are millions of private decisions that could be changed to help enhance the chance for financial success and independence.

Then and Now: Fed Policy Actions During the Great Depression and Great Recession

2011-11-03T08:56:00.000-07:00

Each month the Federal Reserve Bank of St. Louis publishes a newsletter titled Liber8, which is a selection of useful economic information, articles, data, and websites compiled by the librarians of the Federal Reserve Bank of St. Louis Research Library. This month the article is titled “Then and Now: Fed Policy Actions During the Great Depression and Great Recession. It is re-printed here with permission from The Research Library. We encourage your comments and thoughts at http://mufinancialtip.blogspot.com.

There is a classroom version of Liber8 available for teachers for free at: http://liber8.stlouisfed.org/newsletter/classroom-edition.php

To subscribe to their newsletter or for more information and resources, visit their website and archives at http://liber8.stlouisfed.org.

“Regarding the Great Depression. You’re right, we did it. We’re very sorry…we won’t do it again.”

—Federal Reserve Chairman Ben S. Bernanke, November 8, 2002

Any mention of the Great Depression conjures up images of unemployed masses queuing in bread lines and frantic crowds trying to withdraw money from banks. And yet these illustrations tell only part of the story. The Great Depression was undoubtedly the most severe economic downturn in the United States and caused untold suffering among millions. To contextualize it, national output fell by about 33 percent and consumer prices plummeted by over 25 percent between 1929 and 1933; one in four workers was unemployed by 1933. The resulting protracted slump only ended at the onset of World War II.(1) In contrast, during the Great Recession of 2007-09, national output fell by only 5 percent, consumer prices increased by 1 percent, and unemployment peaked at 10.1 percent.(2)

Scholars have posited a variety of causes for the Great Depression, and the role of central banks in exacerbating the crisis has emerged as a key point. This article thus considers (i) how Federal Reserve policies during the Great Depression weakened economic conditions and (ii) how policymakers used the lessons learned from the Depression to stabilize the economy during the Great Recession.

Federal Reserve actions in the run-up to the Great Depression were important in hastening the decline in economic conditions. The speculative effects of the stock market boom in 1928-29 caused the Fed to increase interest rates to curtail the bullish trend.(3) While this policy action dampened excessive borrowing to finance stock purchases, it also brought unintended consequences. Capital spending (e.g., for equipment and infrastructure) slowed dramatically in many sectors of the economy, leading to a drop in industrial production and output growth. The infamous stock market collapse in October 1929 finally ground the economy to a halt, and the Depression hit with full force soon after.

In the early 1930s, continued policy missteps by the Fed significantly lengthened the Depression. Specifically, the Fed failed to prevent four massive banking panics from battering the economy in 1930-33. On each occasion, anxious depositors descended on banks to withdraw cash because the public had lost confidence in the ability of financial institutions to service deposit obligations. Due to fractional banking procedures,(4) banks did not have enough cash on hand to meet this increased demand. The Federal Reserve, as the lender of last resort, was in a prime position to limit the fallout by providing emergency funds to banks under distress. However, Fed policy at that time dictated that only banks with sufficient collateral or member banks of the Federal Reserve System were eligible for these funds. Consequently, cash-starved banks failed in large numbers.

The effects of the banking panics were catastrophic: The money supply(5) fell precipitously and a prolonged bout of deflation set in. As the institution directed to maintain price stability, the Fed should have flooded the economy with additional liquidity(6) to stop consumer prices from falling. However, policymakers dithered and hampered the prospects of a quick recovery. With a decline in the price level, real (or inflation-adjusted) interest rates soared.(7) As a result, borrowers became saddled with higher debt burdens, contributing to widespread defaults and bankruptcies. In addition, the increase in real borrowing costs depressed consumer and business investment, further slowing economic activity.

By 1933, government policy actions (e.g., provision of deposit insurance) helped stabilize the banking system and the economy improved significantly in the mid-1930s. As investor confidence grew, gold and other funds began to flow into the United States once again, expanding the money supply. Fed officials, though, became increasingly alarmed at the prospect of high inflation and increased reserve requirements for banks (the percentage of deposits that banks must hold in reserve). Some experts suggest that this increase caused a decrease in lending, which in turn caused the money supply to decrease once again.(8) The recession that followed in 1937-38 temporarily derailed the recovery. Although the economy rebounded again in 1939, the nation’s unemployment rate returned to its pre-crisis level only after the United States entered the war in late 1941.

By contrast, Fed policies implemented during the 2007-09 Great Recession were markedly different from those during the Great Depression. When the Recession began, the Fed acted decisively to stave off the collapse of the financial sector. Specific policies included decreasing the federal funds rate to nearly zero percent and establishing programs that lent money to banks on a short-term basis. The latter was especially significant in providing stopgap funding to American International Group (AIG), whose failure could have plunged the financial sector into further chaos. Through an expansion of its balance sheet, the Fed also facilitated the sale of distressed investment bank Bear Stearns to a commercial bank (JPMorgan Chase). In addition, to reduce the risk of deflation that devastated the economy during the Depression, the Fed made large-scale purchases of Treasury bonds in two rounds of quantitative easing.

Philosopher George Santayana (1863-1952) said that “those who cannot remember the past are condemned to repeat it.” Recent experience shows that the Federal Reserve avoided the policy pitfalls of the Great Depression. During the 1930s, inadequate Fed policy compounded the downward slide in the economy.

This experience served as a wake-up call for the Fed, however, resulting in more assured policy measures that prevented the meltdown of financial markets during the Great Recession.

By David A. Lopez, Research Associate

NOTES:

1 As determined by the National Bureau of Economic Research, the Great Depression officially lasted from August 1929 to March 1933. Although output rebounded significantly from 1934-37, the effects of the Depression lingered throughout the 1930s and the economy only returned to full employment when the United States entered World War II.

2 As determined by the National Bureau of Economic Research, the Great Recession lasted from December 2007 to June 2009.

3 Prior to this, the Fed reduced the discount rate on loans made to banks from 4 percent to 3.5 percent between July and September 1927. Some observers contend that this prolonged an unsustainable boom in the stock market and that the Fed should have tightened monetary conditions sooner.

4 Fractional-reserve banking is a system where banks hold a portion of their deposits (cash) in vaults or at the Federal Reserve and use the remaining cash for lending activities.

5 The two most common measures of money supply are called M1 and M2. Further information can be found here: http://www.ny.frb.org/aboutthefed/fedpoint/fed49.html.

6 In this case, liquidity refers to the ease of obtaining credit and meeting the demand for money. The Fed increases liquidity by purchasing Treasury securities, which increases bank reserves and, all else equal, lowers nominal interest rates.

7 The real interest rate is the difference between the nominal interest rate and the inflation rate. During the Depression, nominal rates were close to zero percent and the inflation rate was negative, leading to very high real interest rates. For further information, see Carlstrom, Charles T. and Fuerst, Timothy S. “Perils of Price Deflations: An Analysis of the Great Depression.” Federal Reserve Bank of Cleveland Economic Commentary, February 2001.

8 More recent research, however, finds that an increase in the reserve requirement did not significantly affect the supply of money at that time; see Calomiris, Charles C.; Mason, Joseph R. and Wheelock, David C. “Did Doubling Reserve Requirements Cause the Recession

of 1937-1938? A Microeconomic Approach.” Working Paper No. WP2011-0021, Federal Reserve Bank of St. Louis, January 2011.

Additional Articles and Further Reading on the Great Depression

“Closed for the Holiday: The Bank Holiday of 1933,” by the Federal Reserve Bank of Boston, 1996.

Recaps the stock market crash of 1929 and the bank holiday of 1933 and resulting political resolutions.

“Remarks on Milton Friedman’s Ninetieth Birthday,” by Ben S. Bernanke at the Conference to Honor Milton Friedman, University of Chicago, November 8, 2002.

A speech providing detailed information on (i) the four key monetary policy episodes during the Great Depression and (ii) the impact of the gold standard and bank failures on the economy during 1929-33.

“Great Depression,” by Richard H. Pells and Christina D. Romer, Encyclopædia Britannica.

Provides an overview of the factors that caused the Great Depression and the sources of recovery from it.

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)

To err is human, to forgive....Don't count on it!!

2011-10-26T12:54:00.000-07:00

We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.
- Warren Buffett

The above is attributed to Warren Buffett, the Oracle of Omaha, and one of America’s wealthiest persons. It points out his contrarian style and his value oriented approach to investing. It is often pointed out that value investing, as opposed to growth investing, will lead to statistically greater returns[i]. That is not the subject, however, of this tip. This tip is about human behavior and investors are human. They make mistakes and they may behave irrationally and human behavior affects investment decisions, just as it affects others spheres of life. By studying human behavior and identifying common investor mistakes, the field of behavioral finance can contribute to improving returns or reducing investors’ mistakes that emerge from the confluence of finance and psychology.

What are some common behaviors that we observe and from which we can learn to behave more rationally?

One of the first is overconfidence. Nothing can lead to regret more quickly than success. An investment decision that turns out to be great often leads investors to overestimate their knowledge and their abilities. Such an increase in confidence may cause them to increase the amount of risk they are willing to take with their investments. Investors need a plan – a well thought out plan. Then, they need to stick with the plan, while constantly learning and modifying as necessary.

A good lesson, that is hard to learn, is to not allow sunk costs to change your decision. We are disposed to hold onto investment losses, as we do not want to lock in “regret”. We do not want to regret, so we postpone this feeling and hold investments that have losses (or not taking some gains) in the mistaken belief that the investment will recover (or continue to increase). (Investors are, unfortunately, more likely to take small gains and let losses increase, as they do not want to regret their bad decisions. We think less about opportunity costs.)

Closely related is the Ostrich effect, where the investor simply puts her head in the sand. This is true on many levels. Investors are reluctant to cut their losses and ignore them until the pain drives them to sell – often just before the market turns around. (Reminder: Be greedy when others are fearful.) The same thing can happen when markets have been on a sustained upward run, when valuations are quite high.

An easy mistake to make is for investors to consider winnings to be house money and to rationalize their losses, as simply money that wasn’t really theirs. First, investing is not gambling. Investing is the implementation of a plan. “Gamblers” who buy a stock and win will often seek riskier investments with their house money. At the same time, if they invest and lose, they again tend to buy riskier investments in an effort to recoup their initial losses. Don’t play this game. The house always wins.

It has been observed that investors are more comfortable investing in companies with whom they are familiar. Familiarity increases comfort and may come from building investors’ confidence in their knowledge or a sense of control. Yet, when we only invest in companies in a single geographic region or if we combine employment and investments, we have a diversification problem. (If you don’t believe me, ask an ex-employee of Enron.)

The fancy word for having a selective memory is cognitive dissonance, where our mind remembers successful investment decisions but represses the bad ones. One must learn from their mistakes, before they go broke learning.

When individuals act together, they are known to be herding. Yes, like the cows coming to the barn to be milked. If investors lack the discipline to have independent thoughts and to be committed to their plan, their desire to be a part of the parade will often lead them to get in line when the parade is about over. As such, you buy when the market is high (greed) and sell when it is low (fear). Of course, herding will magnify individual investors’ biases as we have others – many others – who seem to agree with us.

Investors must learn to overcome detrimental behaviors, in order to be committed to financial success. While human behavior is a part of the market for investments and human behavior helps markets maintain their efficiency, we are all human. Try to remove emotions from financial decisions and limit your use of trial and error. Become informed, develop a plan, save more money, stay diversified, and make good decisions over a long period of time. If you do, you will reach your goals. Count on it!

[i] One of our past-colleagues has written much about this topic and a short “lay-press” article about the subject is here.

Buying a new car

2011-10-20T10:26:00.000-07:00

The 2012 models of cars are out. Are you in the market? It can be scary to buy a new car, especially if it is your first time. There is a lot to think about, so do your research. Decide what car model and options you want, and how much you can spend. If you have already given your purchase some thought, you’ll feel less pressured into making an expensive decision at the showroom and more likely to get a better deal.

Consider these suggestions:

· Check publications at a library, bookstore or the Internet that describe new car features and prices. You can find information on the dealer’s costs for specific models and options.

· Shop around to get the best possible price by comparing models and prices in ads and at dealer showrooms. If you can, go to three different dealers.

· Plan to negotiate on price. Dealers sometimes give up some of their profit to make a sale — sometimes as much as 10 to 20 percent. This is usually the difference between the manufacturer’s suggested retail price (MSRP) and the invoice price that the dealer paid to the manufacturer. Make sure you reduce the price you offer by any cash-back offers the dealer has.

· You can order a new car if you don’t see what you want on the dealer’s lot. This may take more time, but cars on the lot may have options you don’t want and that can raise the price. Dealers want to sell their current inventory quickly, so you may be able to negotiate a good deal if an in-stock car meets your needs.

Learning the terms

Negotiations often have a vocabulary of their own. Here are some terms you may hear when you’re talking price.

· Invoice price – what the manufacturer charged the dealer. It is often higher than the dealer’s real cost because dealers get rebates, allowances, discounts and incentive awards from the manufacturer. The invoice price usually includes freight (also known as destination and delivery). If you’re buying a car based on the invoice price (e.g., at invoice, $100 below invoice, 2 percent above invoice) and the freight is already included, make sure the dealer doesn’t add it again to the sales contract.

· Base price – the cost of the car without added options. This includes standard equipment and factory warranty. The price is printed on the Monroney sticker.

· Monroney sticker price – shows the base price, the manufacturer-installed options with the manufacturers suggested retail price, the manufacturer’s transportation charge and the fuel economy (mileage). Federal law requires that this label may only be removed by the buyer of the vehicle.

· Dealer sticker price – usually on an extra sticker, is the Monroney sticker price plus the suggested retail price of dealer-installed options. This price is negotiable and may include additional dealer markup (ADM) or additional dealer profit (ADP), dealer preparation and undercoating.

Financing

If you decide to finance your car, be aware that dealer financing, even if the dealer contacts lenders for you, may not be the best deal you can get. Contact lenders yourself and compare the financing they offer with what the dealer offers.

Offers vary, so shop around for the best deal, comparing the annual percentage rate (APR) of interest and the length of the loan. Try not to focus only on the monthly payment. The total amount you will pay depends on the price of the car you negotiate, the APR and the length of the loan.

Dealers sometimes offer very low financing rates for specific cars or models, but won’t negotiate on their price. You may have to make a large down payment to qualify. It might be more affordable to pay higher financing charges on a car that is lower in price or to buy a car that requires a smaller down payment. Ask lenders to tell you the total amount you will have to pay before you own the car.

Before you sign a contract to buy or finance the car, consider all the terms of the financing and be sure you can afford it. Before you drive off the lot, get a copy of the contract that both you and the dealer have signed and make sure that all blanks are filled in.

Some dealers and lenders may ask you to buy credit insurance to pay off your loan if you should die or become disabled. It is rarely worthwhile. Check your existing policies to avoid duplicating benefits. Credit insurance is not required by federal law and it has to be reflected in the APR if they make you buy it. Contact the Missouri attorney general’s office by calling 800-392-8222 to learn about credit insurance requirements and regulations.

Trading in your old car

Discuss the possibility of a trade-in only after you’ve negotiated the best possible price and financing for your new car and after you’ve researched the value of your old car. Check the library for reference books or magazines that can tell you how much it is worth. This information may help you get a better price from the dealer. It might take longer to sell your car yourself, but you generally get more money for it than if you trade it in.

Service contracts

Service contracts that you may buy on a new car provide for the repair of certain parts or problems. Manufacturers, dealers or independent companies offer these contracts and they may or may not provide more coverage than the manufacturer’s warranty. Remember that a warranty is included in the price of the car while a service contract costs extra.

Before deciding to purchase a service contract, consider these questions:

· What’s the difference between the coverage under the warranty and the coverage under the extra service contract? What repairs are covered?

· Is routine maintenance covered?

· Who pays for the labor and parts?

· Who performs the repairs? Can repairs be made somewhere else?

· How long does the service contract last?

· What are the cancellation and refund policies?

The Missouri attorney general’s office has an excellent publication called All About Autos. It is available online at http://ago.mo.gov/publications/allaboutautos.pdf. Call the Missouri attorney general’s consumer protection hot line at 800-392-8222 to request a copy.

To file a complaint

You can call the Missouri attorney general’s consumer protection hotline number (800-392-8222) to report problems with Missouri car dealers. The Federal Trade Commission (FTC) also works for the consumer at the federal level to prevent fraud, deceit and unfair business practices in the marketplace, and it provides information to help consumers spot, stop and avoid them. To file an FTC complaint or to get free information on consumer issues, visit http://ftc.gov/ or call toll-free, 877-FTC-HELP (877- 382-4357); TTY: 866-653-4261.

Brenda Procter, M.S.

Associate State Extension Specialist & Instructor

Personal Financial Planning Department

College of Human Environmental Sciences

University of Missouri-Columbia

Adapted from Buying A New Car, (Federal Trade Commission, April 2006), http://www.ftc.gov/bcp/edu/pubs/consumer/autos/aut11.shtm (accessed November 10, 2008).

Coupons R Cool

2011-10-12T13:09:00.000-07:00

Recently, I read an article in our local newspaper about a resident of our community who was appearing on the television show named “Extreme Couponing”. Being one who thought X-sports were restricted to activities like jumping out of a helicopter to ski a pristine mountain or free climbing in Yosemite, I read the article and discovered that couponing, while not nearly as dangerous, is growing in popularity. Not only is couponing growing in popularity but the nouveau actress mentioned above runs a website on couponing (http://www.thecoupongirlz.com ) and teaches classes to help people learn more about how to coupon.

Many of us can recall our mothers clipping coupons to take to the store, as well as to mail to us when we were younger. Couponing hit its peak in 1999, with over 4.6 billion coupons being redeemed, and reached its nadir in 2008, when it reduced to 2.6 billion. Since then, as we have been battling the recession, coupon growth has increased with the largest ever reported increase in redemptions occurring between 2008 and 2009. Not surprisingly, internet redemption growth has led the way with growth of 263% between the two years. It is estimated, however, that 83% of the coupons are used by only 22% of households. While the “crazed coupon clippers” are interested in a good deal, the heaviest users, representing 18% of households and using 65% of the coupons, actually have been found to make 70% more trips to the stores and to spend 80% more, than non-users. Hence, these results indicate that many people don’t actually spend less. They actually buy more and spend more time engaged in the activity of shopping.

Many would think that low income households would be the largest category of coupon users. They are not. Affluent households are more likely to subscribe and read the newspaper and their greater levels of education help them understand the value of money and the relatively attractiveness of deals. Thirty-eight percent of “super-heavy” users and 41% of “enthusiasts” households come from American families with incomes greater than $70,000. It is also interesting that greater coupon use is associated with greater age, larger families, being female, and living in the suburbs. (Much of the above was from: http://blog.nielsen.com/nielsenwire/consumer/the-coupon-comeback/ .)

If you want to enter the coupon-class, here are some tips on coupon use that were gleaned from the internet. (Most of these were from http://www.couponing101.com/2009/01/a-beginners-guide-to-couponing.html .)

Find your coupons in the newspaper, on the internet, or in the stores. You may Google “coupons” on the internet and find excellent coupons for national stores and brands.

Organize your coupons in files or envelopes that work for you. Perhaps, organize them by shopping experience – food, clothing, toys, restaurants, or whatever system works for you. Perhaps, you just want to stick to coupons for one item, say food, as a place to begin.

You need to be aware of stores’ coupon policies. Do not attempt to violate them. Many stores will double the face value of the coupon, with a maximum savings of $1.00, but most will only let you double a maximum of, say, four coupons. Some stores will allow you to “stack” coupons, where you use both a manufacturer and store coupon for the same item. Many stores limit the number of coupons per customer, per manufacturer, per day. Also, to be responsible, read the coupon before you try to use it.

If you really like this process, begin to monitor the prices by keeping a record of prices for commonly purchased items that frequently have coupons. Then, use the coupons when the item is selling for a reduced price, to maximize your savings. Don’t spend a lot of time going to many stores to save a few dollars, as the costs in time and transportation could negate any savings. A good thing to consider is to use your coupons with price matching policies. Say, for example, your local grocer has a good price on canned vegetables but you are going to Wal-Mart with your coupons. Take the grocer’s advertisement with you, Wal-Mart will match their sale price and you can still use your coupon.

Finally, I want to offer a couple of words of caution. While coupon use can save you money, it can take a lot of time and effort to maximize the savings. You may have better things to do. Also, beware of buying “stuff” you don’t want or need, simply because you can purchase it at a reduced price. If you don’t want something, you don’t want it - at any price. If you do buy too large of a quantity of an item for you to use in a timely manner, give it away. Unfortunately, shelters and food pantries are getting more business than they can adequately serve. Share your financial success, to enable others to simply be.

Student Loans Part II

2011-10-06T08:05:00.000-07:00

Last week we covered important information about student loans – some statistics, what types of loans there are, and some steps to take before going into default. If you didn’t read that article you can read it here: http://www.mufinancialtip.blogspot.com/. This week we will discuss default rates and some steps you can take to prevent student loan problems.

STUDENT LOAN DEFAULT RATES

If you do enter default, you should still try to utilize one of the methods discussed last week, including forbearance and getting a more flexible repayment plan. If you are in default here are some actions the federal government can take:

Deny new student loans
Report the delinquency on your credit report
Intercept tax refunds
Garnish your wages without a court order
Hire aggressive collectors
Charge high collection fees – as much as 25% of the total loan balance
Professional license revocation

In addition, there is no statute of limitations on federal student loans, which means they can attempt to collect on your loans indefinitely.

Earlier in September the U.S. Department of Education released the official FY 2009 national student loan default rate^{^[i]} – which is now at 8.8%, up from 7.0% in FY 2008.

Here is a graph of the national student loan default rates for the past 25 years^{^[ii]}:

As you can see from the chart the default rate is substantially lower than it was in the late 80’s and early 90’s, before some reforms in government lending. Unfortunately, after many years of declining default rates, the trend is again going up.

Here is a chart comparing Missouri, and specifically the University of Missouri (Columbia campus only) with the national rates, for the past 3 years^{^[iii]}:

	2009	2008	2007
National rates	8.8%	7.0%	6.7%
State of Missouri	7.6%	5.8%	6.0%
University of Missouri	2.9%	2.3%	2.4%

PREVENTING STUDENT LOAN PROBLEMS

There are steps I recommend you take while in school to try to minimize your student loans, which will help you have a lower payment after graduation:

Don’t use student loans to finance an unaffordable lifestyle – live like a student now so you won’t have to continue to live like one after school.
Don’t just accept the full amount of loans offered to you if you don’t need it. Review your budget and take the minimum amount you can.
Don’t use student loans to purchase all the newest electronic gadgets. I know, the iPads and latest iPhones and everything else with an “i” in front of it are really cool, but do you really need all of them while you are a student? If you haven’t had to distinguish between needs and wants before college, there is no better time to do so than now.
Consider working part-time. Some people won’t agree with me on this, but I think it is OK for students to work part-time while going to school to help pay for housing, food and other living expenses. Students who work part-time gain valuable time management skills as well as resume building experience. School needs to come first, though – if your grades are suffering you need to re-evaluate how many hours you are working.
While I haven’t talked about private student loans much in these articles, private loans are always going to be more expensive than Direct loans. Maximize your Direct loans before taking out any private loans.
Keep your grades up and apply for every scholarship you qualify (or might qualify) for.

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)

[i] http://www.ed.gov/news/press-releases/default-rates-rise-federal-student-loans

[ii] http://www2.ed.gov/offices/OSFAP/defaultmanagement/defaultrates.html

[iii] You can find State-by-State default rates for the past 3 years here:
2007: http://www2.ed.gov/offices/OSFAP/defaultmanagement/2007staterates.pdf
2008: http://www2.ed.gov/offices/OSFAP/defaultmanagement/2008staterates.pdf
2009: http://www2.ed.gov/offices/OSFAP/defaultmanagement/2009staterates.pdf
and rates for each educational institution here:
http://www2.ed.gov/offices/OSFAP/defaultmanagement/cdr.html

Student Loans Part I

2011-09-29T09:08:00.000-07:00

Student loan balances continue to increase every year – here are some of the recent statistics^{^[i]}:

67% of students take out federal student loans
The average federal loan balance is now $23,186 – if you include PLUS loans the balance goes to $27,803
Master’s degree students accrue an additional $25,000, Ph.D. students $52,000 and Professional students an additional $79,836.
There is approximately $945 billion in outstanding federal student loans, which exceeds credit card debt^{^[ii]}
It is estimated that there is $158 billion in private student loans

For this week’s and next week’s Financial Tips I will share some basics on student loans, including what types of loans there are, repayment issues, then finally the recently released default rates.

TYPES OF STUDENT LOANS

Federal student loans are also called Direct Loans because they are loans directly from the federal government to the borrowers through the school or university. Your Direct loan is either a Stafford loan or PLUS loan.

Stafford Loans are either subsidized or unsubsidized. Subsidized loans are given out based on financial need and the interest is deferred until after repayment begins (i.e. interest is not charged while you are a student). Unsubsidized loans are not based on financial need, but interest accrues from the day you take out the loans. Interest (and principal) payments can be made while going to school.

PLUS loans are loans for parents of undergraduates and for graduate and professional students. All PLUS loans are unsubsidized. As with Stafford loans, interest and principal payments can be made while going to school.

In general, repayment begins 6 months after you leave school – either dropping out of school or graduating. The interest that has accrued on unsubsidized loans will be capitalized when repayment begins (meaning the accrued interest becomes part of the principal balance).

You can view your Direct loans online by going to http://www.nslds.ed.gov. This system shows you your loan balances, the type of loans you have and who the servicer is.

STEPS TO TAKE BEFORE GOING INTO DEFAULT

Student loans generally go into default after nine months of no payment. If you are facing problems paying your student loans there are some steps you should take before you go into default:

Communication with your lender is always an important key – whether you are dealing with student loans, car payments, credit card payments, rent or a mortgage. If you communicate with the lender before payments are late, your lender is generally much more willing to work with you to find an acceptable solution.
Deferment – if you are unemployed or having some other type of economic hardship you should apply for loan deferment. During deferment you do not have to make payments on your loans. In addition, no interest is charged on subsidized loans.
Forbearance – Forbearance is similar to deferment (no payment is due during forbearance), but interest does accrue on subsidized loans. In many cases you can get a forbearance even if you are already in default.
Repayment Plan – If you don’t qualify for a deferment or forbearance you can often find a more favorable repayment plan. The standard plan is level payments for ten years. If that payment is too high there are repayment plans that will give you a lower payment:

Extended Repayment – you pay back the loan over 25 years instead of 10. You need an aggregate balance of $30,000 or more to qualify.
Graduated Repayment – you still pay the loan back over 10 years, but the payments start our low then increase every 2 years.
Income-based Repayment – most borrowers will pay no more than 10% of their income under the IBR plan. Most will pay even less (or have no payment at all). Payments are based on your income and family size. For more information on IBR visit http://www.ibrinfo.org/index.php.

As an important side note, in general, student loans cannot be discharged through bankruptcy.

Next week we will continue our discussion of student loans – looking at the current default rates and steps students can take to keep their student loan balances, and therefore their payments, low.

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)

[i] http://www.finaid.org/loans/

[ii] http://www.finaid.org/loans/studentloandebtclock.phtml

More liars than golf

2011-09-22T14:24:00.000-07:00

Will Rogers once said, “The income tax has made more liars out of the American people than golf has.” I read the following on the Commondreams.org website, following a Google search on President Obama’s tax plan. (Their website is: https://www.commondreams.org/view/2011/09/20-4) .

Taxes on the Wealthy Have Declined Steadily for Decades. Over the last decade –and really over the last fifty years -- the portion of income paid in taxes by our wealthiest citizens has steadily declined. In 1961, when Barack Obama was born, the effective rate paid by households with income over $1 million was 43 percent. Today it is 23 percent. The richer you are, as Warren Buffett has illustrated, the smaller the percentage of your income you pay.

Being naturally curious and wanting to have something to say when people ask me this question, it became time to do a little research. The Tax Policy Institute provides analyses on effective rates of taxation. The data are available at http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=366&Topic2id=48. What do we see for tax year 2002?

Chart 1: Tax year 2002:

First, being visual, we make bar charts that represent the percentage of each income group, defined by adjusted gross income, who pay at the range of effective tax rate listed on the horizontal axis. In the above chart, for example, we find that in total about 28% of the population paid no taxes, as indicated by the first ‘blue’ bar in the extreme left. In contrast, those with under $50,000 in adjusted gross income (the ‘red’ bar), 39% paid no income taxes. As the level of adjusted gross income increases, notice how the distributions move to the right, toward greater effective rates of taxation. For the greatest income group, in 2002, 10.3% paid between 30% and 35% of their adjusted gross income in taxes and 1.5% paid between 35% and 40% tax rates.

Chart 2: Tax year 2008:

Comparing 2002 to 2008 (Chart 2) , we find that for the greatest income group, 2.2% paid between 30% and 35% of their adjusted gross income in taxes, with a non-measurable percentage paying more than 35%. Thus, higher income households are paying less in 2008 than in 2002. But does this confirm the quote?

Looking further, we see that in 2002, 9.1% of the lowest income group (<$50,000) paid their highest tax rates of over 10%. By 2008, only 6% of the lowest income group paid at the highest category of taxation for the lower income households (10%, or over). It appears that households across the board are paying less in taxes in 2008 than in 2002. Importantly, we can conclude from both charts that the statement, “The richer you are, as Warren Buffett has illustrated, the smaller the percentage of your income you pay”, is not true, on average. It may, however, be true for Mr. Buffett but we cannot make policy based on the situation of a few wealthy individuals with large amounts of unearned income.

One more chart, from the Citizens for Tax Justice (2010a), is below. In it we see that when we divide the country into income quintiles (1/5 of the population in each quintile, as defined by income) a picture emerges. Notice that for the lowest three quintiles that each quintile’s share of income is greater than their share of all taxes paid. For the fourth quintile, upper-middle class, their share of taxes paid exactly equals their share of income. For the upper-income quintile, however, their share of taxes paid is 64.3% while they receive 59.1% of the income. As such, it appears that the desire for progressivity in our tax system is preserved with higher income households paying a higher proportion of their income in taxes than are lower income households.

Chart 3: Share of all income earned and all taxes paid, by quintile

Source: Citizens for Tax Justice (2010a).

This financial tip does not provide much in the way of a “tip”. It does, however, try to inform you with regard to the noise around one of the issues we face as a nation. You, as a taxpayer, have an obligation to pay taxes and we all enjoy benefits from the taxes we pay; such as our roads, schools, parks, and et cetera. Yet, our nation spends more on our benefits than our nation earns on our tax obligations. If households continually did this, they would fail. As a nation, we are coming to grips with the fact that our list of benefits is greater than what our taxes can continue to provide. If the benefits are worth that much to us, we must increase taxes. Otherwise, we must decrease expenditures. This is not quantum physics. It is, simply, budgeting to live within one’s means. We will make adjustments; probably both with respect to expenditures and taxes. We must. Our financial success depends on our freedom to act responsibly.

Child Care Costs

2011-09-14T10:37:00.000-07:00

When I was pregnant with my first child, friends and co-workers asked me if I had my day care arranged. “What?” zipped through my mind, “I haven’t even had the baby yet. How can I think about day care at this point?”

Getting into quality, licensed day care can be hard depending on what is available in the area. Families may need to start working on arrangements before the baby is born. Not only do families need to plan for the kind of care they will have, but the cost of that care.

Over the years I had seen commercials and advertisements for saving for college. Banks, financial planners, friends and colleges themselves—all sending the message to start early and save for education. Education for kids is pushed and talked about, but what I had not heard addressed was the cost of day care. And I had not saved for that expense at all.

In the first year after our baby was born, we paid over $5,500 for day care with a licensed, in-home provider (which was ten years ago). When my second child was born and in day care as well, we paid over $12,000 per year for both children. Although our child care costs are different now, summer programs and before and after school programs are still a large part of our budget.

For many working families, child care is a must. In the US, more than 11 million children under age 5 are in child care every week. Brain development is critical in birth through age 5. Children need to be in a safe setting and in a place that promotes healthy learning and development (whether this is home care or day care). These early years affect school readiness and learning in the future.

The National Association of Child Care Resource and Referral Agencies released a report on the costs of child care (2011). According to the report, in 2010, the average annual cost of full-time care for an infant in a center ranged from $4,650 in Mississippi to $18,200 a year in the District of Columbia. Care for a 4-year old cost an average of $3,900 to $14,500.

Relative care has costs, as well. Some people pay family members to watch their children. Even if families do not have to pay relatives to care for their children, there are still costs involved and someone “pays” for that care in resources, time, etc. The care giver has food, energy and material expenses and is not able to do other things during those times.

Child care also includes before and after school, summer and nights/evenings care (caregivers may work evening or night shifts or on the weekends and need care at those times). Families may not think about these times of care, but they affect their budgets.

Many factors affect the cost of day care:

· Where a person lives

· The type of childcare

· The child’s age and the number of children

· The number of hours per week that the child attends day care

How can families make decisions about child care? A place to start is to compare different options and see what fits for them.

· How much is child care in the area? Will the budget cover that?

· Would it make sense for someone to stay at home and not work outside of the home?

· What kind of child care does the person want?

· Are there other options? Such as, part time or flex time at work

· Has the person talked with friends and others to see what has worked for them?

To look at the pros and cons of different options and average costs for day care, home day care, nanny care, preschool, relative care and staying at home, go to the chart at http://www.babycenter.com/childcare-options.

To find licensed day care providers and centers, search at http://childcareaware.org/.

Each community is different, so finding out what resources are available can be very helpful.

· What child care options are available to families? http://childcareaware.org/

· Are there resources if families can’t afford quality, licensed care?

· What types of summer programs are available and accessible to families?

· Before and after school care?

Economic stress can affect families in different ways and shift how families need or use child care. A mom shared that her kids’ school district went to a four day week (longer days, but 4 days instead of 5), because the school district did not have funds to continue as they were. They went to 4 days to save money on buses, energy at the school, etc. For many families, they now had to find child care for that day off of school. How did families deal with the extra costs? Did it open opportunities in the community for someone to offer care on that day?

The care and development of children is critical to families and communities. Helping families think about child care options and costs can help them find the best place for their children and help them meet their family goals.

For more information on daycare options in your area, visit the Child Care Aware website http://childcareaware.org/ or call their toll free number at 1-800-424-2246.

For information on choosing day care, see Missouri Families for article and Q&As on child care http://missourifamilies.org/quick/childcareqa/

References:

Babycenter. Childcare options: pros, cons and costs. Retrieved September 12, 2011 from http://www.babycenter.com/childcare-options

National Association of Child Care Resource & Referral Agencies. (2011). Despite weak economy, child care costs continue to rise: Quality child care is becoming increasingly difficult to afford for working families. Retrieved September 9, 2011 from http://www.naccrra.org/publications/naccrra-publications/parents-and-high-cost-of-child-care-2011.php

Lucy Schrader
HES Associate State Specialist and
Building Strong Families Program Coordinator
University of Missouri Extension
162 Stanley Hall
Columbia, MO 65211
573-882-4071
SchraderL@missouri.edu

The Cash Horde

2011-09-08T15:31:00.000-07:00

Very few of our readers, perhaps none, were alive in 1929 – the year of the beginning of the Great Depression. Yet, we always refer to that pivotal point in history as a marker on our historical trail of investment performance. It is commonly heard that, since 1929, the Standard and Poor’s 500 Index has returned an annual average return of close to 10% per year. Yet, rarely has it returned 10% per year. Take recent history, as a close-up example of the volatility that exists in equity ownership.

In the year 2008, the market return was a negative 37%. Yet, in 2009, it partially rebounded with a positive return of 26.5% followed by a positive return of 15.06% in 2010. (While this sounds nice, I want to remind everyone that, for every dollar invested in the S&P 500 at the beginning of 2008, they would have had only $0.92 at the end of 2010. The math is as follows: (1-0.37)*(1+0.265)*(1+0.1506)=0.9170, although the arithmetic average return was a positive 1.14% (((-0.37+0.265+0.1506)/3)=0.0114).

The following chart shows the returns for the Dow Jones Industrial Average for each year from 1929 through 2010. You will note that it rarely has equaled 10% and has been quite variable from year to year. Frequently, it has decreased by more than 10% but, more frequently, it has increased by more than 10%. In fact, it has increased by more than 10% in more than half of the 82 years depicted.

Lately, it seems the market has been much more volatile than usual – especially the four days of August 8 through 11 – and it makes one wonder if, in fact, it has become more volatile for some period of time. Looking back from mid-November 2007 through September 7, 2011 to observe the daily rate of change in the Standard & Poor’s 500, as well as the standard deviation of returns over the 30 days preceding each day, we are able to make some observations. (Standard deviation is the accepted measure of volatility in a series of numbers which, in this case, are the daily returns.)

This is what we observe:

The fall 2008 market collapse is where the range in the Daily Rate of Returns (blue) is the widest. It is also the time period where the 30-Day Standard Deviation rose to its peak, around 0.0508 (November 7, 2008). As we recall, this was a memorable, though regrettable, time in history. For a moment, however, observe the far right of the chart. Today’s political and economic uncertainty is being played out in wider swings in the daily returns to the S&P 500 Index and the 30-Day Standard Deviation has been creeping upward since June.

Why do we care?

Hindsight is always better than foresight but, had one known in June that the risks from the market were going to increase over the next three months, one could have purchased put options in June. (Put options allow the purchaser the right sell securities to a buyer at a specified price on a stated future date. The purchaser hopes the prices of securities fall, thus giving value to the option to sell at a higher price.) Moreover, if everything else stays equal, options increase in value the greater the volatility of the underlying assets. In our example, a put option would have increased in value from both the greater volatility and the lower overall price of S&P 500. Yet, this is not the motivation for this Financial Tip.

The purpose is to try to answer the question of why American businesses are holding so much cash. Many believe that businesses should invest their cash in plant and equipment, in order to employ more people. Many believe that the lack of such investments stands in the way of our financial success. The cash being held by our businesses, however, is acting as an option. The cash takes on greater value, from both the greater the volatility and the greater uncertainty existing in the economies of both the United States and the World. Given the lack of direction and bitter divisiveness provided by those we have elected, as well as those who seek our future support, who can blame the businesses? “We the people” begins our Constitution, “We the people” are still in charge, and “We the people” must direct our energies towards productive activities and more constructive dialogue. That is not an option.

- Rob Weagley

* I thank my son, Daniel, a Ph.D. student at the University of Michigan’s Department of Finance, for the conversation that led to this Financial Tip. Good things happen when you take a day for trout fishing at Bennett Springs State Park in Central Missouri.

Time Inconsistency: Today's Actions = Tomorrow's Regrets

2011-09-01T13:35:00.000-07:00

Each month the Federal Reserve Bank of St. Louis publishes a newsletter titled Liber8, which is a selection of useful economic information, articles, data, and websites compiled by the librarians of the Federal Reserve Bank of St. Louis Research Library. This month the article is about Time Inconsistency and I thought that it brought up some interesting points, and some points that could be very debatable (particularly the author’s statement about a Federal balanced-budget rule). We encourage your comments and thoughts at http://mufinancialtip.blogspot.com.

There is a classroom version of Liber8 available for teachers for free at: http://liber8.stlouisfed.org/newsletter/2011/201109_ClassroomEdition.pdf

To subscribe to their newsletter or for more information and resources, visit their website and archives at http://liber8.stlouisfed.org.

“A budget tells us what we can’t afford, but it doesn’t keep us from buying it.”

—William Feather

Have you ever bought something you really couldn’t afford? You simply swipe your credit card and leave the store with something shiny and new. That instant gratification overpowers any thought of the regret you’ll have when you must start paying off your accumulated debt. Economists call this phenomenon time inconsistency. An individual with time-inconsistent preferences pursues happiness today even if it results in unhappiness tomorrow. Consequently, he will make decisions that do not maximize lifetime satisfaction (i.e., utility).(1) In “econ speak,” a person with time-inconsistent preferences values the present more than the future. Accordingly, he will make decisions with a present bias, choosing what makes him happy in the moment. Thus, time inconsistency can be understood as the inability to consistently follow a good plan over one’s lifetime.

Let’s return to the shopping example. Even though you know that in the long-run you will have to work more hours and/or sacrifice other fun activities to pay your credit card bill (and the act of paying off that debt does not make you happy), showing off your new purchase maximizes your utility today.

Although this example describes time inconsistency using microeconomics, this concept also applies to macroeconomics. For example, just this summer, the government debated whether to raise the debt ceiling (the legal maximum amount the federal government can borrow) and how to implement policies to reduce future budget deficits. Ultimately, Congress voted to raise the debt ceiling without immediately reducing the deficit. This plan implies the government will neither have to cut spending on current programs nor raise taxes in the short run. The new law is most beneficial to policymakers today: They can continue to provide for their constituents just as before, thereby increasing their chances of re-election. In the long run, however, taxpayers will still have to repay the debt.(2) Thus, raising the debt ceiling will likely make politicians unhappy in the long run because of the political risks associated with increasing taxes and/or cutting government programs.

On the other hand, if Congress had voted to maintain the debt ceiling and reduce the budget deficit, the government would have had to cut current spending, raise taxes, or some combination of the two. Doing so would have made most politicians unhappy in the short run because cutting programs and/or raising taxes could risk their re-election and possibly hinder economic growth. In the long run, maintaining the debt ceiling could have resulted in more sustainable budgeting choices and programs in the future.

So how can individuals and governments maximize lifetime utility in the face of time inconsistency? Rather than making decisions with discretion—that is, selecting a course of action once a situation occurs— economists propose enacting credible rules—that is, mandating a predefined action/plan for a given situation. For our shopping example, a cash-only rule or a credit card with a lower spending limit may have prevented a splurge. In the case of the debt ceiling, a balanced-budget rule (as many state governments have) may have prevented the debt ceiling crisis. Using credible rules (e.g., enforcing a strict personal spending limit or a federal debt ceiling that cannot be raised) forces people to commit to certain actions. As a result, they will act in a more time-consistent manner: Their decisions today will take into account their future happiness.

—By E. Katarina Vermann, Research Analyst

(1)In contrast, a person with time-consistent preferences chooses what makes him happy today and tomorrow. These choices maximize lifetime utility (satisfaction).

(2) The government always has the option of defaulting on its future debt by monetizing the deficit (printing more money) and generating higher inflation. This option would also be suboptimal.

Articles on Time Inconsistency

“Like There’s No Tomorrow: How Economists Think About Procrastination,” by Ray Fisman. SLATE, Thursday, May 15, 2008. http://www.slate.com/id/2191140/

This article discusses specific ways to overcome procrastination (a time-inconsistent behavior).

“Time Inconsistency,” by Greg Mankiw. Random Observations for Students of Economics (blog), Wednesday, April 19, 2006. http://gregmankiw.blogspot.com/2006/04/time-inconsistency.html

This blog post discusses the time inconsistency of government policy and the need for fixed policy rules.

“Rules vs. Discretion: The Wrong Choice Could Open the Floodgates,” by Jason Buol and Mark Vaughan. Federal Reserve Bank of St. Louis Regional Economist, January 2003. http://stlouisfed.org/publications/re/articles/?id=426

This article discusses (i) how discretionary policy can lead people to make poor choices in expectation of a government bailout and (ii) the need for policy rules to enable the outcome demanded by the public in the short run to be consistent with that desired in the long run.

Free Resources

Resource: “Political Negotiations Also Shaped by Human Psychology,” by Shankar Vedantam. Morning Edition news story (audio), July 28, 2011

Description: A psychological look at the debt-ceiling debate.

Published by: National Public Radio, The Two-Way, NPR’s News Blog

Location: www.npr.org/blogs/thetwo-way/2011/07/29/138802290/political-negotiations-also-shaped-byhuman-psychology

Resource: Budget Hero

Description: An interactive game that allows the user to decide use of tax dollars based on the budget model and forecasts in the Congressional Budget Office “CBO’s 2011 Long-Term Budget Outlook.”

Published by: American Public Media, Minnesota Public Radio

Location: http://minnesota.publicradio.org/projects/2008/05/budget_hero/

Resource: “Q. & A. on the Debt Ceiling,” by Michael Cooper and Louise Story, New York Times, July 27, 2011

Description: Explains the implications of the debt ceiling and includes explanatory charts and the video “The History of the Debt Limit.”

Published by: New York Times

Location: www.nytimes.com/2011/07/28/us/politics/28default.html?ref=nationaldebtus

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)

Financial Tips for Students

2011-08-24T12:26:00.000-07:00

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:

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.
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.
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.
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) http://financialsuccess.missouri.edu. 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” www.credit.com/press/statistics/student-credit-and-debt-statistics.html}

2 _{www.finaid.org/loans}

3 Duck9 www.duck9.com/Student-Research-on-Credit-Literacy.htm

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

5 http://www.bankruptcylawinformation.com/index.cfm?event=dspStats

6 Sallie Mae. 2009. How Undergraduate Students Use Credit Cards. http://www.salliemae.com/NR/rdonlyres/0BD600F1-9377-46EA-AB1f-6061FC763246/10744/SLMCreditCardUsageStudy41309FINAL2.pdf

[2] _{www.finaid.org/loans}

[3] Duck9 www.duck9.com/Student-Research-on-Credit-Literacy.htm

[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

[5] http://www.bankruptcylawinformation.com/index.cfm?event=dspStats

[6] Sallie Mae. 2009. How Undergraduate Students Use Credit Cards. http://www.salliemae.com/NR/rdonlyres/0BD600F1-9377-46EA-AB1f-6061FC763246/10744/SLMCreditCardUsageStudy41309FINAL2.pdf