Thanks, Dad

This Tuesday morning, my father, Robert Weagley, Jr. passed away at the age of 90. As with many of you, my father was my best friend and, perhaps, my best teacher – although he never attended college.

I want to say a few things that I’m reminded of at this time. The first two are related to the plans for his funeral. The third is an example he set for all of us.

Dad had a prepaid burial plan. He picked out a casket to match my mother’s. He chose the music he wants played at his life’s celebration. He asked for a military salute. As I live two hours from where the ceremony will take place, this relieved my family of some travel and weighty decisions. I encourage you to make your desires known for your final ceremony. Write your letter of instructions, get a will, review the ownership of your assets, and talk about the inevitable. If you do not know if your parents have done some of these tasks, ask them. You’ll be glad you did. I am so lucky that he acted to remove pressures from us at this time.

Secondly, prepaid burial plans don’t cover everything. For one, sales taxes are suspended until delivery of the goods. As dad was living in a nursing home, close to my residence, we will pay $1 per mile to transport his body back to his hometown. Of course, being 120 miles from the funeral home where he purchased the plan, the involvement of a local funeral home was required as an intermediary, adding to the final cost. He did not pre-purchase flowers from our family. (Nor should he have purchased them!) While I’ve not seen the final cost, I estimate the cost for two easels of lilies to be about $450. Finally, he suggested having the funeral at the funeral home, as there would be no additional costs. (He could be frugal!) Here, I diverted from his plan and moved the service to the church where he had been a member of for 60 years. A church service usually entails an honorarium for the minister and the organist. This will be another $300. I don’t know what the costs are for the flag to be draped over his casket or the honor guard – if any. Still, I am so lucky that dad made the hard decisions and made this quite easy for our family!

Finally, his example for us and, please, excuse me, if I’ve told this story before. I do, however, think it to be an important testament to his life and a lesson for all. From his obituary: “Following the Korean War, Bob set three goals for himself: to own a farm, to own a Cadillac, and to be mayor of Liberty. His quiet determination and trustworthy character led to the achievement of all.” Not many people can say that and no one can say it, if they don’t set goals. I owe my life and my opportunities to my father making a commitment to the things that were important to him. I have to conclude that he achieved success, both in finance and in life. Thanks, dad.

(If you’d like to read more about dad, his obituary is linked here.)

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

Chair, Personal Financial Planning

University of Missouri

Columbia, MO 65211

School Year Resolutions

To paraphrase a Jimmy Buffet song, “We’ve all got ‘em and some stick better than others”. Here are some I’d recommend for the students in the readership that are serious about their long-run plan for financial success.

· Write your personal values statement. - I know this sounds a little too 1960ish but take some time and make a list of the values you embrace. Think of them as those one-word statements of what you’d like your life to represent. For example, the University of Missouri’s values are Respect, Responsibility, Discovery, and Excellence. I’m not sure of yours but, if someone were to write your eulogy, what would they say about you? What would you like them to say about you? (Your values will probably come from the latter list and, if you’re lucky, the lists are identical.)

· Set goals – What are your goals for the school year? Greater grade point average? Improved performance in sports? One-hundred percent attendance? Involvement in a student group? Better track record in doing your homework, readings, and other assignments – on time? Visualize reaching your goals – all of them. Write your goals down. Tell your roommate or parents about them. Make decisions that support them. Stick to them, even when the occasional wave washes away your progress.

· Get connected to the industry you want to work in. – Do you have an idea about where you’d like to spend your time in gainful employment? If so, find someone in that line of work and ask them if you can interview them about their life’s work. See if you can job-shadow them for a day. If the career feels right, look for a mentor to help you with the inevitable choices you are going to make over the next few months and years. Consider doing an internship to “test drive” an occupation. Often, I have found, students that do “unpaid” internships have fantastic experiences. You can learn a lot about yourself and a company, from four to eight weeks of life experience in their world.

· Go to a professional conference. – This one may be a tad expensive but if there is a meeting with many professionals present that are engaged in the line of work you’re pursuing, go to the meeting. Look for local, less expensive opportunities. When you are at the meeting, talk to people. Ask them questions. Don’t be afraid to ask someone to dance. (This is code for “not being afraid to talk to people and ask them to help you.” It is for certain that, if you don’t ask them, they won’t dance with you! You’ll be surprised how “old-folks” like to help “young people”.)

· Visit the local Chamber of Commerce. – While you’re there, ask for a list of members. Check out the members you think might provide you with opportunities to advance your goals. Firms that are very active within their communities tend to be very interested in others.

· Identify a weakness. – Everybody has one (or two) that they’d like to work on. Perhaps yours is public speaking. If so, practice until you gain confidence. Writing? Then, write letters to your friends, improve your emails or seek help from one of your teachers. Dress? Go to a workshop on professional etiquette and dress. Ask for some pointers from a quality clothing store. Weight? Lose it. Exercise? Do it.

I’m sure there are many more we could list but I think you get my point. The start of a school year is a new start – every year. At the start of a year, we are in a new environment with different classmates, roommates, and friends. This allows us to be the person we want to be, rather than the one that others expect us to be, since we’ve been that person for years! So, if you’re ready to be the person you want to be, you’re where you belong…in the beginning. And, as the Moody Blues sang in the song of the same name In the Beginning: “keep on thinking free”.

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

Chair, Personal Financial Planning

University of Missouri

Columbia, MO 65211

Who’s on first?

Sometimes we want to know where we stand, when compared to others. Economists call this behavior, with regard to saving and spending our money, the “relative income hypothesis”. (The relative income hypothesis has been credited to J. S. Duesenberry. He wrote about it in his Harvard Ph.D. dissertation: Income, Saving and the Theory of Consumer Behavior in 1949.) Simply put, we spend our money to buy things according to the social class to which we perceive we belong. If our income increases, we ratchet up to the next social class and, if our income decreases, we ratchet down to a social class that we perceive to be lower. The trouble is that we generally find people ratcheting up much faster than they ratchet down.

The other day I was reading an insert to the Journal of Financial Planning (June 2009) and saw a table on “Income, Assets, and Liabilities by Income Group” compiled from data collected by the US Bureau of Labor Statistics in their annual Consumer Expenditure Study. The data below come from 2007 and may be found in Table 2301 at http://www.bls.gov/cex . (There is additional information on the make-up of the families in each group that is represented in Table 2301, such as sources of income, average value of owned housing, average age, how much money each group spends in different expenditure categories, and other data that academics and policymakers find interesting. Perhaps, you will find it of interest.)

As did the Journal of Financial Planning, I found it to be instructive and of interest to note the differences in assets and liabilities across income groups. The group with income in the $80,000 to $99,999 range was “the spendthrift” group, adding $18,444 to their liabilities, while only adding $10,888 to their assets. This can be seen easily, as the group has a “net change in total assets and liabilities” of a negative $7,557 – a greater negative than any other group. Unfortunately, only the highest income households, those with average incomes of $243,376, demonstrated a propensity to save money, as indicated by a change in assets greater than their increase in debts (liabilities). Moreover, the stock market, as indicated by the Standard & Poor’s 500 (adjusted for dividends and stock splits), closed slightly higher in 2007 (1468.36), than in 2006 (1418.30)!

Another thing to point out, as many of our student readers are in this income group, is that those in the lowest income category, under $70,000, on average, spent more than their after-tax income. Fully 69% of the American population is in this group! Granted, we don’t know if they spent this money due to a financial hardship, to make tuition payments, to make ends meet, or to keep up with some mythical “Jones Family” down the street. All we know is that the average American family, except those with incomes over $150,000 (representing less than 7% of American households), borrowed more than they saved and the 69% with income below $70,000 spent more than they earned.

Ask yourself if this behavior is an ingredient to the recipe for financial success? On the other hand, is this simply another fact that makes us shake our head and hope that all of us have learned some valuable lessons over the past 10 months? No one has control over how you spend your money other than you and, frankly, it shouldn’t take a world-wide financial crisis to force Americans, all of us, to wake-up and start taking care of business – starting with the finances of our own family.

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

Chair, Personal Financial Planning

University of Missouri

Columbia, MO 65211

Stop lying, debunk those myths, and save money

Almost Frugal hosts this week's Carnival of Personal Finance. My top picks from the world of personal finance blogging:

Stop lying, 5 ways to stop overspending. Maybe I should have read this by Adam of Rabbit Funds before I wrote my previous post on how M and I overspend...

12 crazy myths of personal finance. I'd never heard this one before: "Myth 8: I couldn't possibly learn anything about money from a plane crash." But Gary from Total Candor proves that financial lessons are everywhere--even when a plane landed safely on the Hudson River earlier this year.

Grocery Hacks--how to save money on groceries. Matt Jabs at Debt Free Adventure gives a very comprehensive list on how to trim the grocery budget. Plus, as a result of his frugality and health-consciousness, he and his wife lost 60 pounds combined! What more motivation do we need?

Our spending plan is working...I think

“We broke the budget,” my wife M said to me recently with a sigh. “This system isn’t working.”

She gave me a frustrated glance as she scribbled in the checkbook register we use to track our expenses. June and early July are heavy spending months in our household, with birthdays, Father’s Day, and trips to the beach all in the mix. Plus, with all the additional fun-n’-sun activities, the little pile of receipts on our kitchen counter grew relatively big before we got around to logging them. Who wants keep track of your budget when a nice, hot summer day beckons?

As a result, we’d overspent our monthly spending plan to the tune of about $150. And consequently we had less to save toward the down payment we’ve been building to buy a new home.

“Maybe we should try something different.” M said. “This is becoming a habit.”

It’s not broke because it does work

She had me there. It wasn’t the first time we’d “broke the budget.” In truth, our budget is fairly “fluid;” we may overspend one month, and catch up (or almost) in another. August, for example, is a great month for us, with no family birthdays or holidays with gifts we have to wedge into our spending plan.

But our system isn’t broken. In fact, I think it’s working quite well. Here’s why.

• We aren’t overspending with credit cards. Our discretionary spending budget—how much we plan to spend on gas, groceries, gifts, entertainment, etc.—is fairly low, while our goal to save each month for our house down payment is fairly high. So any overspending simply reduces our savings amount that month. If our overspending resulted in racking up credit card debt, I’d be very worried.

(My sister commented to me that it may actually be harder to spend less if you’re saving more, and, ironically, she may be right. I find it easier to agree about to going out to dinner or to the movies when I know we have the money on hand to do so.)

• We know when we’re overspending. Since we’ve been on this tighter discretionary spending budget for several months now, we have a good feel for when we’re exceeding our limit—even before we log in the receipts. And our spending behavior naturally slows down and causes us to question additional purchases when we think we’ve gone over. That’s the whole point of having a budget, to keep our spending under control, and our system is helping us do that.

• We know why we’re overspending. A budget is about making choices, deciding what dollar goes where. In times that we spend more, we save less, and that’s not necessarily a bad thing; neither M nor I want to be so focused on saving that we become misers. Plus, we’re still making steady progress in building up our down payment, so it feels like we have a good balance between the two.

Doubts in the back of my mind

One thing about our overspending does gnaw at me a little; if, for some reason, we had to strictly follow a tight budget, would we have the discipline to do it? I’m not sure. Our record says we wouldn’t, but it doesn’t take into account a big change in mindset. It’s one thing to spend money you have. It's quite another to spend money you don’t.

We could find out soon. Some of the houses we’re seriously considering purchasing will stretch our budget even more and put our discipline to the test. If anything, it could make for some interesting blog posts.

So am I fooling myself that our budget system is working? I’d love to hear from you. Leave a comment and let me know.

Hombama

Some days it just pays to spend money. Such is the case with another of the many stimulus packages, where the government wants to help you pay for energy efficient home improvements. While this idea is not new, the programs have been expanded and extended through 2010. It just might be time to replace some windows, your air conditioner, or to install a new roof.

For starters, homeowners will be eligible to receive up to a $1,500 tax credit (one-time only) for energy efficiency improvements to their home. Prior to the stimulus bill’s passage, the limit was $500 and many of the previous credits were only allowed through 2007.

Still, like any purchase, homeowners need to put the pencil to the paper, in the context of their expected residency and the potential value of the additions to the next owner, to make the correct choice. A quick primer on the program:

As an example, assume you’re an average 2007 Missourian spending $86.22 per month on electricity. You purchase a new air conditioner for $1,700, netting you a tax credit of 30% of the purchase price, or $510. Each month, we’ll assume you’ll save 20% on your electric bill, or $17.24. If we assume a time value of money of 5%, it will take 82 months, or 6.8 years, for you to fully recoup your costs. Every month you live in the house, past 82 months, you’ll be “paid” for the home improvement. At a 0% time value of money (much closer to today’s APYs!), you would only need to live in the home for 69 months (5.75 years) to begin to profit from your expenditure. Of course, these figures ignore any increase in the resale value of your home or the smug satisfaction you feel by being “greener” than your neighbor.

While this may seem complicated, the point of the above should be reiterated. Your family is like a business. You need to work to reduce costs, while maximizing revenues. Of course, this is always done in the context of what brings you the greatest satisfaction – which is what makes your family different than a business. Regardless, consideration of the financial impact of expenditures, as well as your expected residency in a home and how the improvement is valued at resale, are key inputs to decisions in support of your financial success.

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

Ally Bank: The saver's "friend"

If the folks at Ally Bank were looking to catch some attention, they succeeded. Time will tell if it’s truly warranted.

Ally Bank, if you haven’t heard, is the new name of the old GMAC. That’s right, that GMAC, the former financing unit of General Motors. Ally is not owned directly by the troubled car company. Instead, it’s held by parent bank holding company GMAC Financial Services, of which GM still owns a large piece.

Ally caught my eye with its recent marketing campaign. Suddenly, I saw its ads popping up everywhere; on The Wall Street Journal’s website, during The British Open broadcast a few weeks ago. The TV ads were particularly catchy, with a schmarmy salesperson representing the “typical” bank using fine print and broken promises to hoodwink young kids out of a toy truck and a real pony. Ally, in contrast to other banks, “values integrity as much as deposits,” according to its website.

A good story
Sounds pretty good, especially today when consumer trust in financial institutions is pretty low. But make no mistake; Ally does value deposits pretty highly. It’s looking to grow, and grow fast, by offering very attractive interest rates on its products—among the highest around. Its online savings account, for instance, has a 1.75% rate, better even than traditional market leader, ING Direct (1.40% for its Orange Savings Account).

More competition is a good thing, but it’s also good to question just how real higher rates are, or how long they will continue. One thing Ally doesn’t highlight in ads or currently on its website is that parent GMAC Financial was one of the institutions to receive government bailout money for being undercapitalized. The institution is secure now, but that wasn’t necessarily the case at the end of last year.

And in recent weeks, the American Bankers’ Association cried foul to the Federal Deposit Insurance Company (FDIC) about Ally’s high-growth through high-deposit tactics, which it alluded to as “unsafe and unsound.” Like any bank, Ally loans out depositors’ money and if they depart the bank en masse for higher rates elsewhere, it could conceivably be caught short-handed. An unlikely scenario, but it’s why banks have to have a certain amount of capital on hand in the first place.

The FDIC also required Ally to get written approval to issue debt secured by bank deposits, as well as to keep the regulator informed on just how high above the market average its product rates are. Ally reduced the rates on its savings products from some much higher initial levels it started with in May.

Moral of the story
With savings accounts, like anything, an old rule still applies: If it sounds too good to be true, it often is. Chasing interest rates from one bank to another requires a lot of time and effort for what can often be very little gain. No one’s going to build wealth by getting an extra .25% interest on their emergency cash.

And despite the banking industry’s woes, another old rule also applies: Marketing prevails over common sense. “Valuing integrity” sounds great in a TV commercial. But it’s how actions demonstrate that integrity that really counts.

The true point of living by a budget

In a recent post, Matt at the blog One Million and Beyond describes the fluid budget. I was glad to see it because the "fluid budget" sounds a bit like the one my wife M and I are on.

We've gotten to the cash register at the grocery store and had to take things off the conveyor belt because we exceeded our spending limit for that trip. But at times we've also shifted money from one category because we suddenly decided to spend more in another category. As Matt points out, a "fluid" budget that has some give can work.

Most people think of a budget like a pair of financial handcuffs, very tight and uncomfortable. But the point of a budget is not to determine ahead of time exactly what you are going to spend in every category of your life and then rigidly spend only that amount. A budget is just a tool to help you control your spending so that you are living within--or even better, below--your means.

When your budget is working, it feels good. You know how much you have to spend, you're making conscious decisions about what dollars go where, and most importantly, you're not piling up debt.

Accomplish those things--whether using a rigid or fluid budget--and you'll take a big step toward reaching your financial goals.

More fun at the Carnival of Personal Finance

I saw Matt's post at this week's Carnival, hosted by Christian Personal Finance. Here are couple more of my (and the editor's) picks from the week's selection:

The whole armor of personal finance. At Debt Free Adventure, Matt draws an analogy between the armor of God described in Ephesians 6:10 and the "armor of personal finance." It's a cool and very appropriate parallel (though I prefer the more plain-English version of the verse, instead of ye olde King James version). After all, every financial decision is a spiritual decision.

Buy on the rumor, sell on the news. Dorian from The Personal Financier gives his take on the link between investing and psychology, my favorite aspect of money. One interesting thing he discusses here: How the expectation of getting money, in our own minds, is actually more satisfying than actually getting it. Go figure!