Personal finance served family style

Canadian Personal Finance Blog serves up this edition of the Carnival of Personal Finance. It was Family Day in Canada this week, so his blog is themed accordingly: advice that might come from a member of your family. My three fave posts:

• What we learn from tragedy. Jason of MyMoneyMinute offers some heartfelt "practical applications" and "fundamentals" to think about. I'd add that make sure you also have powers of attorney in place.
• A macroeconomic look at credit cards, by David of Davidonfinance. Read the post, and the first few comments. David initially characterizes credit cards as "inherently evil," but then seems to be persuaded otherwise by some readers.
• Valentine Day flowers a rip-off? by MoneySmartLife. Valentine's Day flowers are worth the gouging by flower shops because" they perform a valuable service," according to the unnamed blogger. It made me wish I'd spent a little more on the flowers I got M, which I gave her a few days ahead of Valentine's Day. After her initial surprise and gratitude, she said knowingly, "Were they on sale?" Guilty as charged.

Help! Man Overboard! Help!

Robert O. Weagley, PhD, CFP^®

The seriousness of the economic downturn has hit academia and universities across America are taking steps to reduce their costs, as a way of staying within their budget. Particularly hard hit are those institutions that rely heavily on endowments to provide income for their operations. In December of 2008, Stanford University announced a 10% pay reduction for its top administrators. In a similar vein, the prospects of employee furloughs have surfaced from Maryland to California, including being mentioned this week by the President of the University of Missouri System, Gary Forsee.

I’ve had people ask me what a furlough means. It is essentially a pay cut, for the employee is asked to take time off from work without being paid. On the other hand, it is different from a pay cut, because a furlough is temporary. Moreover, if you don’t have to go to work at, say, the university, you could actually find a temporary job, or self-employment, to enhance your income – while maintaining your benefits at your place of employment.

What should you do, if the prospect of you being thrown overboard as a cost saving measure looms on your horizon? The answer is relatively simple. You need to budget now to prepare yourself for additional cost-saving decisions should they become necessary. In that light, it is very important for you create and maintain an emergency fund to help you through this potential time of reduced pay.

To begin, you must budget your money. Some helpful worksheets and other information are provided on our Office for Financial Success website . You need to know where your money is going, if you are to have any hope of plugging the holes in your bucket, reducing expenses, and succeeding through these tough times.

An important part of this program is to establish an emergency fund. When you hear the word furlough, you have to wonder, “How long can I go without a paycheck”. Most financial professionals recommend you have from three to six months living expenses in your emergency fund.

We know that most families do not have an emergency fund. As a result, they pay more for insurances that have lower deductibles and they face greater stress when it comes to economic uncertainty. Most would agree that these are key areas to establish if you are able to enjoy your financial life. A liquid emergency fund of three to six months living expenses is a real key to financial success.

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

Chair, Personal Financial Planning

University of Missouri

Columbia, MO 65211

When having a land line and cell phone makes sense

I used to think M and I paid too much for our phone usage. Not anymore. I discovered the costs—largely non-financial—of moving to a cheaper plan actually outweigh the benefits.

We pay how much??
For the past five years, we’ve resented paying more than $100 a month for a cell phone plan and unlimited long distance on our home phone. We’d go back and forth about getting rid of either service to reduce our costs, but honestly, we're hooked on the convenience.

I use the cell during my two hours of commuting time to catch up with family or do “chores,” such as scheduling appointments. M uses the land line while at home with the kids to keep in touch with her mother and best friend, both who live out of state. She also likes not having to keep track of her minutes to avoid overage charges, or having to call late in the evening or on weekends.

But last November, we took a first step and went with a pay-as-you-go land line plan. We expected some small savings, maybe $10-$20 per month, as we better utilized the unused minutes we had each month in our current cell plan to make long distance calls, and took more advantage of the ability to make free calls to each other. Maybe we’d even get rid of the home phone altogether.

Old habits die hard
This week, we went back to unlimited long distance. In the three months, we spent more—not a lot, but still more—for phone calls instead of less. Changing our behavior was not quite as easy as changing our calling plan.

We tried hard to break the habit of reaching for the home phone. At one point, M stuck a “Use cell phone” Post-It on the cordless handset as a reminder.

But obstacles stood in our way. We have phones on three of our townhouse’s four levels, so the temptation to simply make a call, especially a quick one, from the land line was great. M also wasn’t keen on always having to remember to keep the cell phone at her side.

Most importantly, phone calls became a source of friction. I tired of reminding M to call me back on the cell instead of the land line, and she tired of me reminding her. We may have eventually ended up with a lower phone bill by not speaking to each other, but that hardly seems the point.

If we’d stuck with it, we probably would have developed phone habits that could have saved the few bucks each month. But for us, it’s just not worth it. We can find other, less wearisome, ways to trim the budget. And our once “high-cost” phone bill now seems like a pretty good value.

There's no place like...the Carnival of Personal Finance #191

Dollar Frugal hosts this week's Carnival, with a Wizard of Oz theme. So follow the yellow brick road to these cool posts:

• Being married seven years has taught Mighty Bargain Hunter seven lessons about money. Nothing real surprising here, but some good reminders, such as listening to your spouse is key and don't keep secrets!

• Bible Money Matters shares why good financial decisions don't always make financial sense. Amen, brother!

• Michael James offers an interesting analogy between playing poker and successful saving. Deal me in, Michael!
  
  
  
  

Bonds. (We're not talking about baseball.)

Robert O. Weagley, PhD, CFP®

The recent carnage in the stock market has increased interest in bonds as an investment category. While many corporations’ bonds have also been hit hard in the current economic malaise, many writers point out that the difference between the yields on bonds and Treasury bonds has not been this great for half a century. This is even true for municipal bonds, that are generally free from federal and, sometimes, state and local income taxes. Why is this and what should you know?

Municipal bonds have a reputation for safety. Municipal bonds, for example, that are general obligation bonds, have the full taxing authority of the issuing government behind them. So why, then, are municipal bonds packing after-tax yields of 8%. (This is greater than the 7% after-tax yield on stocks since 1926.) The answer, unfortunately, rests in the fact that the municipal bond market is rather fragmented and that most issuers use bond insurers – the same insurers that have been beat-up in the mortgage meltdown.

According to Jason Zweig, of The Wall Street Journal ($$$), another reason is the fact that many municipal bond mutual funds have invested in tender option bonds which take the bonds and create two separate products, the short-term fixed part and the long-term variable part. The long term variable part has examples where upwards of 50% of the value of the bonds has been lost in the past year.

So what’s an investor to do?

First, do not purchase individual mutual bonds, unless you’ve substantial assets to invest. Most municipal bonds have face-values of $5,000. Thus, an investor with $100,000 would purchase 20 different municipal bonds with his/her money. One default or mistake could easily cost you 5% of your principal. On the other hand, investors could purchase municipal bond funds. In fact, investors with state/local income taxes can often find municipal bond funds that only have bonds from their state to take advantage of this additional “no-tax” benefit. (Guess what, New Jersey, New York, and California are high income tax states with the law favoring in-state bonds. Would you like your municipal bond portfolio to be only invested in one of these states at this time? I don’t think so.)

Each time we think about investing in a mutual fund, remember to do some simple things:
· Try to only consider bond mutual funds with annual expense ratios of less than 0.5%, or lower. For stock funds, the threshold can be raised to 1%.
· Read the prospectus. Better yet, download it from the web, and then read it – first with the “find” option on your document editor. Look for key words:
o Tender
o Option
o Bond
o Derivative
o Inverse
o Ratings – see what the prospectus says are the “ratings” of these bonds. Remember BBB, or greater, are investment grade bonds. BB, or lower, are “junk” bonds.
o Make sure you know the expense ratio and that it is within reason (0.5%, or less, for bond funds)
o Turnover ratio should be 50% or less. More than 50% for a bond fund is excessive and adds to the funds internal costs which are passed on to the investor.
· Try to stick with fund families with stalwart reputations; Vanguard, T. Rowe Price, PIMCO, among others.
· Finally, read and study more about personal finance. Seek out programs offered by your local Extension office, on-line courses or informative websites, community college coursework, adult education programs, or your local university.

Yes, there appears to be investment opportunities in today’s market – a market that has slowed many a person’s quest for financial success. Look at these opportunities but do your homework and seek more information. While many people can manage their personal finances without the aid of paid assistance, others need assistance to help wade through the details of today’s investing world. If you’re one of these, pay someone to help you. Success rarely comes to one who sits and waits on her. Success prefers those who pursue her.

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

A coin jar adds up to more than just saved pennies

Given my new mission, I was mulling over changing the name of this blog to better reflect my goal of linking behavior and spirit to building wealth. Then as I thought about it, I realized that a coin jar is actually a pretty good example of that alignment. Here’s why:

It’s easy to start. You can use just about any container you find hanging around the house to hold your coins, which removes a big barrier to saving and building wealth: Just getting started. I use a medium-sized white porcelain bowl we got as a Christmas gift one year, and I’m not even sure how it ended up being my container. But I need something bigger because it's overflowing.

It’s habitual. Many people keep their containers close to the place where they empty their pockets each day, so they can toss coins in automatically. My bowl is in my nightstand, where I put my cell phone, Ipod, and employer security badge each night after work. When you make saving part of your normal routine, you give yourself a great chance of being a successful saver.

It builds up over time. Coin jars teach a valuable lesson: Wealth-building requires action and patience. You won’t get rich quick by saving pennies a day, but you'll be surprised at just how much your spare change adds up to over a long period of time. And that’s true for any type of saving, whether it’s a down payment on a house or your 401(k). Little things mean a lot.

So nothing's changing: The Coin Jar is here to stay. (Good thing, too, otherwise I’d have to write off as a loss all those Coin Jar t-shirts I printed up…just kidding. ; )

How much money have you saved using a coin jar? Have you ever used the savings to purchase a big-ticket item, like a TV or computer? E-mail me your story and make The Coin Jar Honor Roll.

Carnival of Personal Finance offers good reading

The Carnival of Personal Finance for the week is up at Funny-about-Money. A few favorites related to behavior and money:

Financial lessons learned from my younger self at Monogamoney.
Why I never budget (though he does in a way) at Bret Frolich.com
Biggest financial lesson learned from the bear market at personalfinancestartup.com.

Check 'em out!