Boxing Day, December 26

When I was a young professional, I spent two years teaching at Mount Saint Vincent University in Halifax, Nova Scotia, Canada. My first Christmas in Canada, I discovered that much of the British Commonwealth of Nations celebrates Boxing Day. When I first heard it, I thought it referred to the fact that we have a lot of boxes following Christmas that we have to dispose of or the fact that we box things up and return them to the stores. For, as you no doubt know, the day after Christmas is one of America’s cherished “shopping holidays”.

The origin of Boxing Day in England, however, is a day to celebrate St. Stephen’s Day. Those of you with Christian origins might remember that St. Stephen was stoned to death, apparently with the approval of Saint Paul, as a result his being tried and convicted of blasphemy. Near death, he is said to have seen God.

Historically, Boxing Day is neither a day of shopping, a day to mourn, or a day to look to the heavens. Rather, Boxing Day is a day that refers to a tradition of giving gifts to the less fortunate members of the community. Although we’re in the midst of a recession, this Holiday Season we all have something for which we can be thankful. Perhaps, yesterday, in a moment of reflection, after we cleaned up the mess of our gifting and before we drifted off to sleep after our holiday feast, we had a glimpse of our good fortune. In the grand scheme of things, it was not that long ago when our ancestors were poor, persecuted, or enslaved. Today, many of us know people that are out of work, spending down their savings, or “enslaved” by habits that are counterproductive. Others are trying to stick with their plans, while confronted with the uncertainty and fear of not knowing who or what to trust. The bottom line is that we need each other.

So, on Boxing Day, regardless of your faith, I ask you to remember St. Stephen. Take some time or money and make a small statement about your confidence in your future, by making someone’s present just a little brighter. I’m willing to bet that by sharing your financial success, your generosity will come back to you ten-fold.

ps: If you have a New Year’s resolution that speaks to changes you’re making in your financial management, let me know. I’d love to provide a list of what our readers plan for the New Year and share it next week. (Please send your ideas to me at rweagley@gmail.com.)

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

Chair, Personal Financial Planning

University of Missouri

Columbia, MO 65211

The Benefits of Saving Money

The Benefits of Saving Money

Barbara O’Neill, Rutgers Cooperative Extension

oneill@aesop.rutgers.edu

One of the best ways to take charge of your finances in today’s uncertain economy is to accumulate a healthy savings account. Nobody wants to feel the stress of knowing that they are only a paycheck or two away from financial disaster because they lack money to fall back on when “stuff happens.” Specific examples include job loss, disability, a car breakdown, a sick child or pet, and other types of financial emergencies. Saving provides a financial “backstop” for life’s uncertainties and increases feelings of security and peace of mind. Once an adequate emergency fund is established, savings can also provide the “seed money” for higher-yielding investments such as stocks, bonds, and mutual funds.

There is also evidence from a recent study by the Northwestern Mutual insurance company that savings is linked to increased happiness. Actually, what the study found was that people who are “planners” and do future-oriented things such as setting goals and taking steps (e.g., saving money) to achieve those goals feel happier, and better about their lives, than those who don’t make plans. On a related note, the Consumer Federation of America found a strong relationship between having spending and saving plans and maintaining emergency funds. Particularly for low-income individuals, those with a spending plan with goals were far more likely to have saved money for emergencies than were those without a plan.

Economists and psychologists attribute findings like these to the sense of control that people have when they plan ahead and know what they need to do to get from where they are now to where they want to be. It is well established by research that people who feel a sense of control over life events are often happier, cope better, and are more resilient in times of stress than others. Conversely, people are especially unhappy in situations where they perceive themselves to have a lack of control. It is, therefore, no surprise that commuting ranks high on the list of things that make people most unhappy. Commuters never know from day to day what traffic gridlock, accidents, and weather-related hassles they’ll encounter.

Encouraging people to develop and implement a personal saving plan is the central focus of the America Saves program. The motto of America Saves (see www.americasaves.org) is “Build Wealth, Not Debt.” 2009 also marks the third year of America Saves Week (see www.americasavesweek.org), an annual event that focuses attention on the benefits of saving. Throughout the country, there will be information and events designed to promote saving and to help individual savers develop a personal action plan. The dates for America Saves Week 2009 are February 22 to March 1.

America Saves is an example of a “social marketing campaign.” This means that the messages associated with this program are designed to change people’s behavior rather than to sell them a product or service, as is typical with most marketing messages. Just like the “Buckle Up for Safety” campaign several decades ago that got many people in the habit of wearing seat belts, America Saves seeks to get more Americans into the savings habit to improve their future financial security and that of the country.

The America Saves Week Web site has a wealth of resources to help you get started on the path to financial security. Included are monthly savings messages written by financial experts, success stories from individual savers, a savings knowledge quiz, and tools to assess your financial progress. You can also register online as an American Saver at www.americasaves.org/enroll and receive regular newsletters from the non-profit Consumer Federation of America, the organization that runs the America Saves program.

So how do you get started as a saver or ramp up your current level of savings? Go for the goal! It’s a whole lot easier to save for something specific than to save for savings sake. Here’s an example. To calculate how much you need to save to achieve a goal, divide the amount you need to save or invest by the time (e.g., number of months) you have left to save. If, for example, you want to save $5,000 by next year, you’ll need to put aside $416.67 ($5,000 divided by 12) a month, or $96.15 ($5,000 divided by 52) a week. To download a goal-setting worksheet with spaces to calculate the savings required for short-, medium-, and long-term goals, see http://njaes.rutgers.edu/money/pdfs/goalsettingworksheet.pdf.

Consider becoming an American Saver during America Saves Week and, remember, “Build Wealth, Not Debt.”

Ps: I’m sorry I had to rely on my good friend, Barb O’Neill, for this week’s Financial Tip. It is Finals Week at MIZZOU and I’ve 71 students in my Investments class preparing for their final on Friday at 10:30. Needless to say, I’m busy and getting tired. Thinking of Barb and the Holidays reminds me of how grateful I am for friends, family, and whatever future I have in front of me. May all of you have a Blessed Holiday Season!! I’ll write soon! - row

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

Chair, Personal Financial Planning

University of Missouri

Columbia, MO 65211

Money Health!

Robert O. Weagley, Ph.D., CFP^®

with Mary Rotert and Qianyi Li¹

We all know how important it is for everyone to have an annual physical checkup. The goal is to ensure you are free of health problems and to address issues that might exist before they become larger issues. This information is crucial for our health and well-being. As you are well aware, the current economic situation has created an environment where many have been forced to think that their financial plan, not them, has contracted a terminal financial illness. Small problems, that can be overlooked when the economy is performing well, can become troublesome and more apparent during harder times. What can you do? Take some time to perform your financial checkup, detect potential financial problems, and identify opportunities to improve. The end-of-the-year is an excellent time to perform this “check-up” of your progress toward financial success.

An annual financial check-up takes only three steps to complete.

Step 1: Check Your Income and Expense Statement (Your Budget)

We all know that income and expenses are the major categories in a budget statement. Many, however, do not have a clue about where they are spending their money. If you’re one of these, this provides a great opportunity for you to take action to control your spending. There are many published recommendations of how people, on average, spend their money. If you’re average, follow one of these publications. Otherwise, if you’re like most of us and not average, make it a goal to begin the New Year with a better understanding of your sources of income and expenses. For income sources that can be realistically enhanced, enhance them. For expenditures that can be realistically reduced, reduce them – except for savings. The first item in your budget should be your savings for your future, as well as an emergency fund. Pay yourself first and try to save at least ten percent of your income. If this requires you to eat more meatloaf and less porterhouse, eat more meatloaf. Controlling your spending and seeing your opportunities grow is an incredible reward for making these “sacrifices”.

Step 2: Check Your Balance Sheet, or Net Worth Statement

A balance sheet outlines what assets a household owns and what liabilities (debts) it owes. We all know that the greater your liabilities, everything else constant, the less healthy your finances. Knowing this, if you can move toward fewer liabilities, your household financial health will improve. While we cannot control the returns on some of our investment accounts, we can control our decision to borrow and spend money. So, take control of what you can control. A simple trick is to first pay down loans with high interest rates. A helpful tool is PowerPay, freeware from Utah State University (https://powerpay.org/).

To help you make progress, I’ve attached a net worth statement in Excel that I have used for years – without my personal information on it – that allows the user to list the value of each of asset categories and each loan to calculate a net worth. There is also a column where I have listed a guess of possible returns for each category, to provide estimates of a household’s net worth at different points in the future. Then, in the following year, compare last year’s estimate of your future net worth to what it is, in order to see if you’re ahead or behind in the “finance game”. No doubt, this year will be a disappointment but, trust me; you will be positively surprised in many years. (Note: You can enter your own estimates of returns, and add rows for additional assets, loans, etc. just like any Excel file.)

Step 3: Check Your Assets

Take your assets and calculate the proportion of your assets in different asset categories: Small, mid, and large capitalized companies, value versus growth, bonds versus stocks, real estate versus financial, international versus domestic investments, risky assets versus less risky assets – whatever categorization is appropriate to help you. There are software programs on the internet that can help with this but I am unaware of any freeware. Regardless, you should have a better understanding of where your investments are invested and judge if the allocations are appropriate for the time-frames and magnitudes of your financial goals.

Importantly, the old adage, “don’t put all your eggs in one basket” is a maxim that points out the importance of diversification to your portfolio’s performance. Moreover, overtime, the diversification of your portfolio will change as deposits, gains, and losses change the actual weights from your desired weights. Importantly, diversification can increase your return on your investments, while decreasing the risk of your investments.

As we approach the end of the year, perform this simple three-step financial check-up. Your financial success requires you to be financially healthy. Lower your debts, add to your assets, reduce your expenditures, and take control of what you can control. Then, when the economy is back to her robust self – and she will be – the results of the habits you learn during this “teachable moment” in history will exceed your expectations. That is my promise to you, if you take this opportunity to give the gift of financial health to yourself.

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

Chair, Personal Financial Planning

University of Missouri

Columbia, MO 65211

1 Mary Rotert and Qianyi Li are MS students in the Personal Financial Planning Department, University of Missouri.

What to do about billing errors?

I-Ting Lu, MS[i]

Mary Ann Rotert

December is here and that means the holidays are upon us! Many stores are promoting great values and attractive discounts to stimulate their sales. We’ve talk about the need for consumers to be cautious in their consumer behavior and to make sure their choices are consistent with their goals. We also need to be cautious about the behavior of others. One way to do the latter is to check your credit card bill for errors during this busy buying season. If you are unlucky enough to discover billing errors on your credit card statement, don’t panic. You can correct errors before it’s too late.

First, you need to know what qualifies as a billing error and what you should do, if an error exists. The federal Fair Credit Billing Act (FCBA) was passed precisely to help protect consumers against unfair practices and errors by credit card companies. The FCBA gives specific examples of billing errors. They are:

· A charge for something you did not buy.

· A bill for an amount different from the actual amount you charged.

· A charge for something that you did not accept when it was delivered.

· A charge for something that was not delivered according to agreement.

· Math errors.

· Payments not credited to your account.

· A charge by someone who does not have permission to use your credit card.

If the error you find on your bill is one of the above, take the following steps to dispute the charge:

1. Write to the credit card company within 60 days after the statement date printed on the erroneous statement. Use the address listed on the bill for billing inquiries and tell the company the following four items:
(a) Your name
(b) Account number
(c) Clarify why you believe the bill contains an error, and the reason why it is wrong. Provide copies of supportive documentation if you have any.
(d) The date and amount of the error.

2. Be sure to pay all other parts of the bill that you do not dispute. You do not have to pay the disputed amount immediately.

3. Your account must be corrected by the credit card company, if there is an error. You will not have to pay any finance charges on the disputed amount, if you are found to be correct in your dispute.

4. If there is no error, you will receive an explanation and a statement of the amount you owe from your credit card company. Unfortunately, the amount you will owe will include any finance charges or other charges that accumulated while you were questioning the bill.

Pay attention to your bill every month and, if you find an erroneous charge to your credit card, dispute the charge. Paying money to others that you do not owe to them is not a destination on the road to financial success. Happy Holidays!

For additional information on disputing errors and your rights as a consumer, visit the Federal Trade Commission’s website at http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre16.shtm.

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

Chair, Personal Financial Planning

University of Missouri

Columbia, MO 65211

Giving Thanks

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

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

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

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

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

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

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

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

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

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

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

Chair, Personal Financial Planning

University of Missouri

Columbia, MO 65211

College Savings Basics

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

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

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

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

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

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

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

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

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

Saving for College

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

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

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

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

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

Take Control of Your Finances in Difficult Times

Barbara O'Neill, Ph.D., CFP^{® 1}

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

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

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

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

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

2. Prepare a Spending Plan- Also known as a budget, a spending plan is a written "best estimate" of the cost of future spending and saving. Ideally, a spending plan should balance income and expenses, including regular savings for future financial goals. Worksheets for creating a spending plan can be downloaded from the Rutgers Cooperative Extension Web site. To download a "paper and pencil" worksheet, visit http://njaes.rutgers.edu/money/pdfs/fs421worksheet.pdf . To download a spending plan spreadsheet, visit http://njaes.rutgers.edu/money/templates/Spending-Plan-Template.xls .

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

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

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

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

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

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

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

Rutgers Cooperative Extension has personal finance information available online including downloadable worksheets, self-assessment quizzes, and pre-programmed Microsoft ExcelR templates for personal financial calculations. Visit http://njaes.rutgers.edu/money2000/ <http://njaes.rutgers.edu/money2000/> to learn more. The University of Missouri has many publications as well located at http://extension.missouri.edu/explore/hesguide/famecon/ . Importantly, the Cooperative Extension system's online eXtension (pronounced ee-extension) information delivery system has personal finance experts who can answer your questions and provide additional resources. (The system of land-grant colleges and universities, across the United States, feed into this system.) To access the eXtension personal finance Web site, visit http://www.extension.org/personal_finance .

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

Chair, Personal Financial Planning

University of Missouri

Columbia, MO 65211

Credit Reports and Credit Scores

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

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

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

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

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

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

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

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

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

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

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

Chair, Personal Financial Planning

University of Missouri

Columbia, MO 65211

There’s a Fair Hope

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

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

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


Criteria 1: Equity

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


Criteria 2: Ability to pay

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

Criteria 3: Benefits received

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

Criteria 4: Economic Efficiency

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

Criteria 5: Transparency and Simplicity

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

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

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

Chair, Personal Financial Planning

University of Missouri

Columbia, MO 65211

It’s about the money, not the death

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

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

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

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

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

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

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

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

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

Chair, Personal Financial Planning

University of Missouri

Columbia, MO 65211

Little things Add Up

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

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

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

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

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

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

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

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

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

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

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

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

Neuro-finance

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

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

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

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

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

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

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

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

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

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

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

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

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

Chair, Personal Financial Planning

University of Missouri

Columbia, MO 65211

Dollar Cost Averaging – A Primer

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

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

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

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

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

Thursday, 4:23 p.m., CDT

If you’re writing a Financial Tip of the Week, in this economic environment, you want to wait until the last minute to see what, if anything, is going to change. These are dramatic times, or as Charles Dickens wrote in The Tale of Two Cities (1859):

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way - in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.

The above says it well for how many have felt over our lives. Yet, for most of you, today’s news must seem like a harbinger of doom as you work to manage the resources of your household, while preparing for retirement or college expenses. On the other hand, you may be near your beginning and are actively preparing yourselves for jobs after college or are planning on investing in yourself by attending college. (College education continues to be one of the best investments one can make in one’s self.)

Rather than try to provide you with my thoughts on this week’s events and to avoid talking about another financial topic of interest – many exist but nothing trumps what is going on in Washington and Wall Street – I thought I bring you some bullets of wisdom from the Sage from Omaha, Warren Buffett.

Warren Buffett was interviewed on CNBC news on Wednesday morning about his surprise investment of $5 billion in Goldman Sachs (complete transcript: http://www.cnbc.com/id/26867866/site/14081545/ ). Some bullets, from his comments:

·If I didn't think the government was going to act, I would not be doing anything this week. I might be trying to undo things this week…..government will do the rational thing here and act promptly. It would be a mistake to be buying anything now if the government was going to walk away from the Paulson proposal. (Editor’s note: As of this afternoon, Congress has supported Paulson’s proposal.)

·Last week we were at the brink of something that would have made anything that's happened in financial history look pale.

·…the economy and the financial markets, but they're so intertwined that what happens, they're joined at the hip. And it doesn't pay to get into horror stories in terms of naming institutions or anything. But I will tell you that the market could not have, in my view, could not have taken another week like what was developing last week. And setting forth the Paulson plan, it was the last thing, I think, that Hank Paulson wanted to do. There's no Plan B for this.

·…it's everybody's problem. Unfortunately, the economy is a little like a bathtub. You can't have cold water in the front and hot water in the back. And what was happening on Wall Street was going to immerse that bathtub very, very quickly in terms of business.

·…a collapse of the kind of institutions that were threatened last week, and their inability to fund, would have caused industry and retail and everything else to grind to something close to a halt.

·…you have all the major institutions in the world trying to deleverage. And we want them to deleverage, but they're trying to deleverage at the same time. Well, if huge institutions are trying to deleverage, you need someone in the world that's willing to leverage up. And there's no one that can leverage up except the United States government (underline added for emphasis). And what they're talking about is leveraging up to the tune of $700 billion to, in effect, offset the deleveraging that's going on through all the financial institutions.

·…if I could buy a hundred billion of these kinds of instruments at today's prices, and borrow a non-recourse $90 billion, which I can't, but if I could do that, I would do that with the expectation of a significant profit. (Editor’s note: This implies that the $700 billion price tag may be substantially reduced as the government oversees the disposition of these distressed assets.)

·But they (the U.S. government) have the ability to borrow. They can borrow much cheaper than I can borrow. They can borrow unlimited. They don't have covenants. They don't have -- I mean, they are in the ideal position…..I will tell you that the buyers of the instruments these days are going to do better than the sellers…..In fact, one thing you might do is, if someone wants to sell a hundred billion of these instruments to the Treasury, let them sell two or three billion in the market and then have the Treasury match that, for what they pay. You don't want the Treasury to be a patsy.

·But I'll tell you, with Hank Paulson on top of it, you couldn't have any better guy to do that.

I’ll join Mr. Buffett with my hope and prayer for a growing public confidence in the wisdom of our leadership and for an end to the foolishness of recent history. I’m sure many of you join me in a sincere desire to see us learn from this lesson of the markets. In particular, we must remember that ethics and principles have a place and that place is in the forefront of our personal and work decisions - each and every day. If principles guide us, the result will be Financial Success…with an Abundance of Wisdom.

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

Chair, Personal Financial Planning

University of Missouri

Columbia, MO 65211

Freddie, Fannie, and You

What a year! What a week! What a day! Everyone I have spoken with in the finance professions is shocked and awed by the events of the past week. Moreover, they are in various stages of grief or bewilderment as they ponder the future for their clients, as well as themselves. I thought it might be healing (at least for me) to put some thoughts on the screen with regard to what the bailouts mean and what I’m considering to be good advice…

The bailout of Freddie Mac, Fanny Mae, and AIG; as well as the purchase of Merrill Lynch by Bank of America was done, according to Treasury Secretary Paulson, to stabilize financial markets, support mortgage financing, and protect taxpayers. Most of us wonder what is in it for us, as we watch our portfolios shrink as the result of others’ actions. Many also question the government acting in such a way, apparently in contrast to our belief in the free market system. Good medicine sure can taste bad.

First, the Treasury could not let Freddie Mac and Fannie Mae fail. These shareholder-owned companies are actually the creation of the federal government charged with guaranteeing the mortgages issued by private lenders and government agencies. Investors around the world believed these diversified portfolios of mortgage loans to be safe and that the U.S. government guaranteed them, at least that was their perception. These securities were considered to be an almost-as-safe-as-Treasuries investment with a higher return and, together, represented about $6 trillion of the U.S. mortgage market. All this was good. Business in housing boomed for years. Subprime mortgages and speculation began to flourish…until the housing slump. (It does seem to rain on every financial parade.)

As the housing slump wore on, Fannie and Freddie began spending their capital to back these defaulting mortgage loans. In late July, an independent audit revealed that as much as $50 billion was needed to shore-up these firms’ capital accounts. Given the large amount of U.S. debt that is held by other countries, and our ever increasing need to borrow, it was concluded that it is in the best interest of the U.S./world for the U.S. government to intervene. We could not let our credit rating fall. Moreover, without Freddie and Fannie able to participate in the mortgage market, it is estimated that housing prices might fall another 10% to 20%, as it becomes harder to qualify for a mortgage and liquidity is reduced. (Trust me, this is not good news, even if you are a young, first-time homebuyer.)What should you do?· Look at your net-worth statement. If you have debts costing you double digits rates of interest and you’re having trouble sleeping, pay off some debts. Your net-worth will be intact and you’ll be able to sleep.

· Make sure your portfolio is diversified and well balanced among asset classes. Try to resist the urge to look for the “phoenix-investment” rising from the recent carnage. While I do think there are investment bargains in today’s market, do not abandon the discipline of diversification. Do not invest money in a “bargain” that you cannot afford to lose. (In our “in-class” portfolio for my investments class, one of my students “purchased” Fannie Mae, Lehman Brothers, and AIG at the beginning of the semester. Oops.)

· Mortgage rates are beginning to fall. If you’ve an expensive or exotic mortgage that you’d like to abandon, explore your options to refinance. Perhaps, this is time to buy that home. Perhaps, this is a good time to add a real-estate investment to your portfolio.

· Remember that this will pass. Continue to focus on the things that really matter and that define you to be a success. In many cases, real success is much more than financial success.

NEWS FLASH: While I was writing, a report has surfaced that a new entity, similar to the Resolution Trust Corporation, is being considered to handle the nation’s bad debt. As a result the Dow Jones Industrial Average is up 410 points, or 3.86%. What a day! What a week! What a year!

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

Chair, Personal Financial Planning

University of Missouri

Columbia, MO 65211

This week’s visit from the U.S. Treasury

Many of you know that we, the US taxpayers, have taken over mortgage giants Freddie Mac and Fannie Mae. The U.S. Treasury acted in an effort to calm world financial markets. So far, the results of the decision have been mixed and the press seems more concerned about swine wearing makeup than the financial outlook for the world. (The Treasury pledged up to $200 billion to recapitalize the firms. We will undoubtedly borrow the money and pay it back with interest over time. Given today’s estimated U.S. population, your share of this potential debt is $655. “Thank you for your continuing support,” as the old commercial used to say.)

Regardless of the news, our academic department had a visit this week from Dan Iannicola, Jr., Deputy Assistant Secretary of the U.S. Department of the Treasury. Mr. Iannicola is responsible for the Treasury’s efforts to improve the nation’s financial literacy. While in Columbia, he spoke to one of our classes and to a class at a local high school. He left some tips for building wealth…

· Pay yourself first. Make savings a priority over non-necessary spending.
· Track all expenses for a month. Write a budget. Stick to it.
· Set specific, realistic savings goals: education, home ownership, retirement.
· Enjoy the magic of compound interest. Save early and often. Use your employer-based retirement savings plan.
· Use tax-advantaged methods for saving for goals like retirement, education, and healthcare.
· Establish an emergency fund.
· Avoid high cost credit.
· Pay your bills on time to help build your FICO credit score. Not doing so can limit your employment and housing choices, as well as increase the cost of insurance.
· Comparison shop for credit and credit cards.
· Get a free credit report at least once per year. Use www.annualcreditreport.com .

Sound familiar? Enjoy your financial success…..

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

Are you heading for the “bad place”?

Many students do not recognize the importance of maintaining a good credit (FICO) score. A bad credit score can lead to, at least, two problems which should concern you. First, a low FICO score can be used by employers. Employers do not want to hire employees in financial difficulties. Financial difficulties cause stress and inattention at work, thus reducing employee productivity. Secondly, for similar reasons, credit scores are often used by insurance companies to set rates on insurance, especially automobile insurance. The conclusion, if you want a job and want the costs of driving to be the least expensive it can be, you need to work to increase your FICO score. Here are five credit behaviors that can take you to “the bad place” (where credit scores are low).

1) Make your payments late. Don’t be a slacker. Make sure your payment reaches the credit card company before the due date.

2) You are young and eager to establish your credit. That is, you are too young and too eager. Each credit application can lower your credit score, as you are potentially able to borrow more each time you apply. Remember, responsible use of a credit card you’ve had for a long period of time can increase your FICO score.

3) Destroying old credit cards too soon. When you open a new credit account, one is tempted to cancel the old credit account as soon as possible. While this may be best for you, if you’ve a spending problem, cancelling the old account actually will increase the percentage amount of your total potential credit you currently have outstanding.

4) Your spending is poorly timed. You make very large credit purchases too close in time to your job, insurance, or other applications. This increases the percentage of the total credit you have the right to use that you have already borrowed.

5) You do not check your credit score and correct errors. Errors in your credit report hurt you. Check your credit score at least twice per year. Check out http://annualcreditreport.com to see your personal credit history. Correct errors, if any.

Of course, a surefire way to avoid a low credit score is to only borrow for convenience or for an investment in yourself, a business, or a home. Use the credit cards you use responsibly and try your best to not incur finance charges. To my knowledge, few find Financial Success with a negative net-worth.

For those of you in the Columbia, Missouri area: Next Tuesday (9 September 2008) at 9:30 a.m., we are hosting Dan Iannicola, Jr., Deputy Assistant Secretary for Financial Education at the United States Department of the Treasury. The talk will be held in 22 Tate Hall on the beautiful University of Missouri campus. His talk is named, “Don’t let your credit put you in a bad place”. (Yeah, I borrowed his title as the “take-off” for this week’s Financial Tip.)

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

Chair, Personal Financial Planning

University of Missouri

Columbia, MO 65211

Maximize the Benefits of Education

Robert O. Weagley, Ph.D., CFP®

Last week’s Financial Tip of the Week concerned matching the cost of college with the benefits, with particular emphasis on borrowing. It occurred to me that it is just as important to maximize the benefits from education as it is to minimize the costs incurred. So, for the new school year, try these on for size:

1) Take responsibility for your learning. Yes, you have teachers but they’ve got to have learners to make it all come together.

2) Work on improving your time management. Reduce your TV, video game, party, and other non-productive times. Try finding the best place on campus to study between classes and use the 9:00-5:00 block of time to go to class and to study. You will be surprised how much more free time you’ll have and how your grades will improve. (Talk about a win-win!!)

3) Join an club. Meet new people by joining your departmental student group, a club athletic team, a church group, or other organization that causes you to push your envelope and expand your horizons.

4) Set up appointments to meet professionals in your chosen field and ask them if you can interview them about their job and life. Professionals love to help students discover themselves.

5) Work out. Stay healthy. Eat well.

6) Look into study abroad, undergraduate research, or community service opportunities to take you beyond the classroom and to stimulate your thinking and learning.

7) Look into campus resources that help you with finding summer employment, resume writing, financial counseling, or other activities to help build your human capital.

8) Take a course that is different from usual. If you love Shakespeare, try a course in practical physics. Try things you’ve never tried. (Of course, it is real nice if does count toward graduation and is safe and legal.) Go to a ballet, opera, rock concert, pep rally, or country diner – something you’ve never done before. Such stimulation can be powerful in ways you may not initially see.

9) If you are considering graduate school, learn more about what it takes to be accepted into the best schools in your field. Then try to do what it takes. If you are not considering graduate school, answer the question, “Why not?”, until you believe your answer. If you don’t believe your answers, consider graduate school alternatives.

10) Encourage Financial Success in yourself and others you know. (Doing the above will have a lot to do with your success in making that happen.)

11) Enjoy the time you’re a student. I guarantee you will miss it someday.

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