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

Funding the Costs of College

By Robert O. Weagley, Ph.D., CFP^®

Last night, our local newspaper, The Columbia Tribune, had an AP article that you might have seen. It focused on a study conducted by Sallie Mae, the student loan agency. The implications of the story are real, yet surprisingly little understood by the college “buying” public. The bottom line is that choosing a college and the means by which to pay for college are no different than any other purchase decision. One has to compare the perceived benefits to the costs required.

This logic is compelling but too often ignored. For example, if you plan to major in a career where the expected salaries are lower than in another field, why would you incur as much debt as someone with a degree in, say, engineering? For example, in 2006, bachelor’s degree recipients in Engineering from the University of Missouri earned, on average, $51,000, while those graduating in Arts and Sciences earned an average of $29,400. Clearly, the larger salary will support a greater level of debt payments and indebtedness. Sallie Mae’s research indicates that most families and students do not consider their child’s (or, their) expected incomes when considering the potential of using debt to pay for college.

Another startling finding of Sallie Mae is that 40% of all families do not consider the cost of attending a college as a factor in their college search. Most families consider the size of the mortgage when they purchase a home! An investment in the human capital of a family member is worthy of the same considerations. Many children, with great talent and a plan to attend graduate school, will be well served to go to the less expensive state university, for their bachelor’s degree, and to then pursue the finest graduate program they can afford – and oftentimes have a graduate assistantship to help.

Perhaps the most positive finding is that 53% of all families surveyed did not borrow any money to send their child to school. Middle income families, defined by Sallie Mae to earn between $50,000 and $100,000, had the greatest reliance on debt, while those with lesser incomes used more grants and scholarships. Speaking of scholarships, do not neglect grants and scholarships, regardless of your means. Many schools have scholarships that are left unused, due to a shortage of applicants. Moreover, local civic organizations often have the means to help with college expenses.

On average, the study found that parents paid for nearly half of all college expenses (32% from current income and savings and 16% from borrowing); students paid for a little over a third of all costs through borrowing, savings, and earnings; while scholarships and grants made up the rest of college expenditures.

For more information about funding alternatives for college, check out Sallie Mae at http://www.salliemae.com/ and from the National Association of State Treasurer’s, the College Savings Plan Network at http://www.collegesavings.org/index.aspx .

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

Chair, Personal Financial Planning

University of Missouri

Columbia, MO 65211

You Can’t Purchase Financial Freedom with a Credit Card

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

University of Missouri

A few years ago we did an informal survey of students at the University of Missouri and Missouri State University. We asked them what three things they would recommend to a student that was just graduating from high school and beginning their time at college or university. The “hands down” most popular warning was to encourage young people to avoid credit card debt. Many mentioned that they had not understood that it was not “free money”.

Some days it feels like we’re the only people in America cautioning people in their use of credit cards. Yet, if many of your peers could speak to you about it, they would join our chorus.

First, we would be wrong to say that all credit is bad. Credit fuels much of our economy and, if the debt is being used to create wealth through investments in one’s human or non-human capital, it is a tremendous tool. Credit is convenient. Credit cards are much safer to use than carrying a pocket full of cash. It can be the key to solving many emergencies. As such, credit is not bad.

Unfortunately, however, financial problems are the main reason students exit college before earning a degree. Major universities report (and MIZZOU is no exception) that more students report considering leaving school due to credit card debt than due to their grades!

What causes this? Oftentimes, students report to us that they are anxious to build their credit history and to rush into indebtedness. We have to ask them, “What’s the rush?” Credit is easy to access in today’s marketplace and, most importantly, the “good” credit you might seek to purchase a home or to pay for graduate school will depend more on your ability to demonstrate the businesslike management of your personal finances. What you do not want is a bad credit history. A bad credit history is worse than no credit history.

The National Endowment for Financial Education (NEFE) points out there are five steps for building good credit:

1. Pay your bills, such as rent and utilities, on time.

2. Make loan/credit card payments on time.

3. Pay your loan payments first. Then, spend money on other purchases.

4. Apply for only the credit you need. Do not apply for all the credit you can. Each new credit card counts against your credit score.

5. Never overdraw your checking/cash account.

Using a credit card is spending your future income in advance so, when it is time to pay the credit card bill, you need an income that exceeds your current spending. This is not the usual description of a college student. Consider the following, if you think you need a credit card, discuss it with your parents - not the bloke from the credit card company that is offering you a free T-shirt. Then, when you get a credit card, get only one credit card, use it wisely, and pay it off every month. Better yet, avoid credit cards altogether until you get a full-time job. We know that many people with full-time jobs can’t pay off their credit card balances each month. One has to ask, as a full-time student, what are the odds you’ll have better success?

Financial patience is not a bad thing. In fact, financial patience depends on personal discipline a key ingredient to financial success.

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

Chair, Personal Financial Planning

University of Missouri

Columbia, MO 65211

Making Economic Education Fun

Occasionally, I have a student that stands out above the others with their desire to learn and to share what they’ve learned with others. One such student was Jack. Jack, when taking an introductory personal finance course from me, would send me links to interesting articles that he wanted to share.

Although he took the course several years ago, Jack subscribes to the Financial Tip of the Week and this weekend Jack sent me an email about an article he read in the Kansas City Star (attached). Within the article were links to sites maintained by the Federal Reserve Bank. I found the sites interesting, fun, and to be potentially very useful in engaging young people in learning more about our financial system.

The Federal Reserve Bank maintains a website dedicated to financial education with particular emphasis on teacher resources – for all levels of instruction. Link: http://www.federalreserveeducation.org/FRED/?CFID=116485&CFTOKEN=89597974 . For the high school teachers in our readership, I particularly want to call to your attention the academic competitions; LifeSmarts, the Fed Challenge, Essay contests, and, in Missouri, the Missouri Personal Finance Challenge. These are excellent ways to engage your classes in learning, as well as providing opportunities to highlight your school.

For individual and classroom use, the Federal Reserve Bank in Boston maintains a website (http://www.bos.frb.org/economic/quiz/index.htm) that has, approximately, sixty quizzes each with four to five questions that are quite interesting to read and to ponder the answers. The quizzes use subjects ranging from the “Music Industry and Sales” to “Ethanol” to “March Madness” as a way to teach economic principles – the root discipline of finance.

I often say that there is no shortage of good information on the subjects of personal finance but there is a huge shortage in readership. While I know I’m preaching to the choir, I encourage you to take advantage of resources such as those provided by our Federal Reserve System to help pave your road to Financial Success.

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

Student Loan Update - August 2008

Yesterday, while driving[i] down Interstate-70, I was listening to National Public Radio and heard a report on problems within the Massachusetts’s student loan program. The predictions were grim, the interviews were heart wrenching, and the somber tone created real concerns within me. Why wouldn’t it? The way I see the world, today’s college students are our light into the future. Besides, on a personal level, my paycheck depends on them. Regardless, I wanted to learn more and provide you with what I had learned.

The bottom line is to take this off your list of worries.

I spoke with the Director of Financial Aid at the University of Missouri, Joe Camille, to get his take on the local situation and his vision of the situation elsewhere. While he admitted that some states’ student loan programs are in difficulty, due to the reluctance of investors to purchase securitized debt, most states, including Missouri, are not in this situation. We briefly talked about student loans and our advice is simple. I encourage you to consider it, in light of your situation.

First, do you really need the student loan to go to school, or are there other sources of financing available to you like a part-time job, scholarships you could apply for, or participation in a work-study program? A student loan is debt. Loans of all types cost you money and have the potential to lower your level of living upon graduation and to reduce your ability to reach other goals.

Second and importantly, if you have questions about your financial aid, including the availability of student loans, first contact the financial aid office of your university. Always take advantage of the expertise of those that are hired to help you succeed.

Third, if you need a student loan to pay for your investment in yourself that you are making by going to school, chose it wisely. Spending a few minutes researching the various loan products can save thousands of dollars over the repayment of the loan. The following is adapted from a past Financial Tip of the Week…

FEES & INTEREST RATES.

· Most of the application and loan origination fees can be avoided, if you shop around.

· Interest rates vary dramatically (as much as 2.5%+) depending on the credit of the individual; fees charged, borrower benefits, and repayment terms.

LOAN ELIGIBILITY ISSUES.

· Do you need a cosigner and will a cosigner reduce the loan costs to you? Is there a cosigner release option.

· Do you need to be enrolled full-time in school to be eligible?

BORROWER TERMS.

· What is the interest rate?

· If the rate is variable, what is the formula they utilize?

· What is the interest rate cap? (As interest rates rise, most alternative loan rates will also raise because they are linked to the Prime Rate or LIBOR Rate.)

· Are there fees? What are they? When are they assessed (rolled into loan?)?

· What are the minimum/maximum borrower limits?

· What is the aggregate borrower limit?

· Will loan terms change if your debt-to-income ratio changes?

REPAYMENT TERMS.

· When does repayment begin? And what are your repayment options?

· Are payments required while you are in school?

· Is interest capitalized? If so, when?

· What will be your monthly payments?

· What will be the total costs of the loan (interest, principal, fees)?

BORROWER BENEFITS.

· Are there any discounts for on-time and/or automatic payments?

· Is consolidation available? What are the costs/benefits for doing so?

· Are there deferment/forbearance options during repayment if needed?

· What benefits does this company offer that makes their loan better for you than other lenders’ programs?

LOAN PROCESS.

· Can you apply online?

· Is the money disbursed (paid out) electronically?

· How long will it take for you to receive the money?

· Are there other elements that would simplify the process? Save you time/money?

Once you have your loan try to use the loan for the expenses that are required by you to attend school. Do not use it to upgrade your life style by buying frills that you may want but that you do not need. You know that loans need to be repaid – with interest – and they can greatly reduce your choices upon graduation and make it harder for you to reach your Financial Success.

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

Chair, Personal Financial Planning

University of Missouri

Columbia, MO 65211