Financial and Economic Videos

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Andrew Zumwalt, MS

Personal Financial Planning

University of Missouri

Columbia, MO 65211

Looking backwards at the dots...

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

 

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

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

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

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

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

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

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

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

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

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

 

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

 

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

 

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

 

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

By David A. Lopez, Research Associate

 

NOTES:

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

 

 

Additional Articles and Further Reading on the Great Depression

 

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

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

 

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

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

 

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

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

 

 

Ryan H. Law, M.S., AFC

 

Personal Financial Planning Department

Office for Financial Success Director

University of Missouri Center on Economic Education Director

 

239E Stanley Hall

University of Missouri

Columbia, MO 65211

 

573.882.9211 (office)

573.884.8389 (fax)

 

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

---

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

Buying a new car

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

 

Consider these suggestions: 

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

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

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

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

 

Learning the terms

 

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

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

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

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

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

 

Financing

 

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

 

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

 

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

 

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

 

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

 

Trading in your old car

 

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

 

Service contracts

 

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

 

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

 

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

 

·         Is routine maintenance covered?

 

·         Who pays for the labor and parts?

 

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

 

·         How long does the service contract last?

 

·         What are the cancellation and refund policies?

 

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

 

To file a complaint

 

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

 

Brenda Procter, M.S.

Associate State Extension Specialist & Instructor

Personal Financial Planning Department

College of Human Environmental Sciences

University of Missouri-Columbia

 

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

 

Coupons R Cool

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Student Loans Part II

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

STUDENT LOAN DEFAULT RATES

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

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

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

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

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

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

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

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

 

PREVENTING STUDENT LOAN PROBLEMS

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

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

 

 

Ryan H. Law, M.S., AFC

 

Personal Financial Planning Department

Office for Financial Success Director

University of Missouri Center on Economic Education Director

 

239E Stanley Hall

University of Missouri

Columbia, MO 65211

 

573.882.9211 (office)

573.884.8389 (fax)

 

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

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

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