Archive for January, 2011
Wednesday, January 26th, 2011
My previous post (and most recent Yahoo!Finance column) examined character traits and behaviors that make people rich. I included research showing that people who ranked high for conscientiousness and emotional stability had higher lifetime earnings. Now comes intriguing new research that finds young children’s self-control skills â€” such as conscientiousness, self-discipline and perseverance â€” predict their health, wealth and criminal history later in life regardless of IQ or social background.
That’s according to latest findings out of the University of Otagoâ€™s Dunedin Multidisciplinary Study, a long-range study of 1,000 New Zealanders born in Dunedin between 1972 and 1973. The research was published this week in the Proceedings of the National Academy of Science. Researchers followed the children during the first decade of their lives. They were assessed by teachers, parents, observers and the participants themselves on a range of measures including “low frustration tolerance, lacks persistence in reaching goals, difficulty sticking with a task, overactive, acts before thinking, has difficulty waiting turn, restless, not conscientious.”
Even after accounting for differences in social status and IQ, children as young as three who scored lower on measures of self-control were more likely than children with higher self-control to have the following outcomes as 32-year-old adults:
* Difficulty with financial planning (including savings habits, home ownership, investments, retirement plans)
* Difficulty with credit and money management (including bankruptcy, missed payments, credit card problems, living from paycheck to paycheck)
* Physical health problems (including poorer lung function, sexually transmitted infections, obesity, high blood pressure, bad cholesterol, dental disease)
* Substance dependence (including tobacco, alcohol, marijuana, and harder drugs)
* Rearing a child in a single-parent household
* A criminal record
On the bright side, self-control can be taught, the researchers said, especially if parents start young. â€œ…children whose self-control increased with age tended to have better adult outcomes than initially predicted, showing that self-control can change and with desirable results,â€ said co-author Terrie Moffitt of Duke University and Kingâ€™s College London in a press release. For ideas to improve self-control in kids, see this column.
Thursday, January 20th, 2011
That headline, a quote from legendary basketball Coach John Wooden, is one of my favorite.Â Todayâ€™s Yahoo!Finance column looks at personality traits and behaviors that are closely correlated with accumulating wealth. Research has found one of the most significant factors is something called â€œpropensity to plan.â€ Planners have higher levels of net worth and gross financial assets.
I interviewed John Ameriks, an economist at Vanguard and co-author of the research, about this trait. He said along with being conscientious, organized and thorough, people with the propensity to plan also tend to set a budget for their overall spending.
â€œItâ€™s the opposite of the absent-minded consumers, the people who are not monitoring what they spend very closely,â€ said Ameriks. â€œIn the economic models we could work out, simply by monitoring expenditures and paying attention to them you can get higher wealth accumulation.â€
Although budgeting is essentially just mapping out where oneâ€™s income goes, the researchers suggest that people who budget see the activity as one that helps reduce their spending. â€œWe hypothesize that households are sometimes spending at an excessively high rate given their actual preferences and resources,â€ the researchers write. â€œThose with a high propensity to plan both notice this pattern of over-spending relatively early, and find it relatively easy to correct. Those with a low such propensity notice problems later, and find them more difficult to correct. According to this vision, saving may be as much a matter of skill as of preference.â€
Could it be that planners simply hold more stocks and therefore accumulate more wealth? The answer is no. On average stocks made up about 63 percent of financial assets in the research regression sample. Even those who reported low planning levels had 60 percent of their financial wealth in equities.
Another motivation that boosts wealth: the desire to leave an inheritance to family or charity. â€œThe bequest motive has a significant positive impact on planning, and has a separate positive impact on wealth accumulation,â€ the researchers write. â€œThose with higher bequest motives accumulate more not only because of their greater concern with the size of their bequest, but also because the desire to leave a bequest induces higher planning.â€
In the story I also talk about conscientiousness; Angela Lee Duckworth of the University of Pennsylvania and David Weir of the University of Michigan have found that this personality trait leads to higher lifetime earnings. Duckworth studies something she calls “grit”Â — a combination of courage, focus, the ability to delay gratification and persevere over the long-term — that leads to success. See my column on her work and check out her TED talk here on that topic.
What personality traits, habits or behaviors have helped you accumulate wealth (or hurt your efforts)? Comment here or email me at laura at laurarowley dot com.
Monday, January 17th, 2011
Kiplinger.com just released its new ranking of the best college values, both public and private, for 2011-2012. Kiplinger’s ranks schools based on academic quality, including the school’s student-faculty ratio, its admission rate and its four-year graduation rate. The ranking also examines in affordability, such as the total cost of attendance with or without financial aid. In the public sphere, University of North Carolina at Chapel Hill ranked as the best deal for the money, with an in-state cost of $17,000 — a figure that drops to just $7,000 for students who qualify for need-based aid.
Princeton took top honors among private colleges, because the university reduces its nearly $50,000 price to just $16,352, on average, for students with need. Click here to use an interactive tool to find the best public school deals by state and here to find the private schools identified as good values. Separately, The New York Times is hosting a Q & A with college finance expert Mark Kantrowitz, founder of Finaid.org. Today is part seven of his blog series on financial aid.
Elsewhere, Marketwatch.com has a story on why it will may make more sense to buy instead of rent in the near future, as apartment dwellers face double-digit rent hikes. I’ve been bullish for a while on single-family homes as investment property, considering that fewer young families will be able to afford to buy (with salaries depressed and student loan burdens higher than in the past). But I wouldn’t gamble on one in my home state of New Jersey, where budget troubles (such as underfunded pensions) are legion and the property taxes legendary.
Higher gas prices cutting into your budget? It’s definitely putting a damper on consumer sentiment. Check out my post at RealSimple.com for more on that topic, and tips for saving on gasoline.
Wednesday, January 12th, 2011
The New York Times had a fascinating chart on the Economix blog yesterday showing income distribution in the U.S. Basically it suggests that for Americans below the 95th percentile of income, the income distribution is relatively flat. For instance, moving up from the 30th to the 35th percentile of income would require a raise of $4,000 (or about 17 percent).
However, once you pass the 95th percentile, the jumps in income are extreme. Someone who wants to rise from the 91st percentile to the 96th percentile would require an increase of $324,900 (or 171 percent). The writer suggests this is why so many rich people don’t feel rich — they are comparing themselves to the Jones’ — and falling much farther short of those aspirations than people below the 95th percentile who compared themselves to the neighbors.
I’m not sure if I agree. Would people at the top and bottom of the highest income bracket really live in the same neighborhood and have the opportunity to do relative comparisons? For instance, which of these four groups do you think would be most likely to live in the same neighborhood?
-the 99th percentile ($515,000)
-the 94th percentile ($190,000)
-the 70th percentile ($76,100)
-the 50th percentile ($44,400 in income)
I would guess the two in the middle are more likely to be neighbors, and thus more likely to make relative income comparisons than the two at the top. What’s your view?
Tuesday, January 11th, 2011
A few good stories about how to save money on healthcare: The New York Times has an interview with a physician on when and how to bring up the subject of cost and ways to try to lower your bill. I’ve done this myself; I have no prescription coverage at all. When I mentioned this to my doc, she sent me home with a bag burgeoning with free samples of a prescription medication. Always ask for the generic version of the drug a doctor is prescribing, and compare prices; I’ve found warehouse clubs and discount stores offer the best deals.
Separately, The Wall Street Journal has a piece on home-testing kits for conditions such as high cholesterol, that allow people to keep tabs on their health without having to see their physician on a regular basis and deal with a burdensome co-pay. The story offers advice on making sure you’re buying a legitimate kit, and when you may want to take the results to a doctor.
Also check out CNNMoney’s story on a health care solution from Sam’s Club: “For $99, buyers of the program get an annual subscription to a web-based program that includes an at-home blood screening test that tracks an individual’s cholesterol, blood sugar and hemoglobin levels. That information is then used to create a personalized Prevention Plan that identifies, prioritizes and explains users’ health risks and recommends steps to improve their health. Buyers of the program also get access to a 24/7 nurse line, two health coaching sessions, recommended prevention screenings, schedule and alerts based on age, gender and risks and a physician summary that can be shown to a doctor.”
Meanwhile, if you’re interested in the health care debate, check out this story “How American Health Care Killed My Father” by David Goldhill from an issue of The Atlantic last fall. It’s a long but worthwhile read, underscoring why the new law isn’t really going to solve the health care financial crisis (health care now devours 18 percent of GDP).
Goldhill discusses the evolution of employer-sponsored health insurance, which was a historical accident: With wage controls set in place following the second World War, employers competed for talent by offering comprehensive health benefits. The system was institutionalized after Congress provided employers with a tax break for these benefits in the 1950s.
What Goldhill does brilliantly is explain why those “free” health benefits are killing your pocketbook. Employer-provided health insurance is like landlord-provided air conditioning — you use a ton of both resources when you don’t have to foot the bill. But here’s the problem: You are. The money has to come from somewhere. As Goldhill describes it:
“In 2007, employer-based health insurance cost, on average, more than $12,000 per family, up 78 percent since 2001. Iâ€™ve run several companies and company divisions of various sizes over the course of my career, so I can confidently tell you that raises (and even entry-level hiring) are tightly limited by rising health-care costs. You may think your employer is paying for your health care, but in fact your companyâ€™s share of the insurance premium comes out of your potential wage increase. Where else could it come from?
“Letâ€™s say youâ€™re a 22-year-old single employee at my company today, starting out at a $30,000 annual salary. Letâ€™s assume youâ€™ll get married in six years, support two children for 20 years, retire at 65, and die at 80. Now letâ€™s make a crazy assumption: insurance premiums, Medicare taxes and premiums, and out-of-pocket costs will grow no faster than your earningsâ€”say, 3 percent a year. By the end of your working days, your annual salary will be up to $107,000. And over your lifetime, you and your employer together will have paid $1.77 million for your familyâ€™s health care. $1.77 million! And thatâ€™s only after assuming the taming of costs! In recent years, health-care costs have actually grown 2 to 3 percent faster than the economy. If that continues, your 22-year-old self is looking at an additional $2 million or so in expenses over your lifetimeâ€”roughly $4 million in total.
“Would you have guessed these numbers were so large? If not, you have good cause: only a quarter would be paid by you directly (and much of that after retirement). The rest would be spent by others on your behalf, deducted from your earnings before you received your paycheck. And thatâ€™s a big reason why our health-care system is so expensive.”
Think about it: Does your auto insurance cover oil changes or door dings? Does your homeowner’s cover the paint job needed after a long winter, or cleaning the gutters? Unless someone has a chronic condition, health insurance should work the same way: A high-deductible, low-cost catastrophic policy and a health savings account that allows the consumer to set aside their own cash tax-free for doctor’s visits and prescriptions — and keep it if they don’t use it.
Any thoughts or tips on saving money on health care?
Saturday, January 8th, 2011
In my last Yahoo!Finance column on the essential rules of financial success, #2 was: “Debt is a fairy godmother. She will empower you with designer duds and flashy jewels â€” and then ruthlessly take it all away at midnight, leaving you standing in rags. Then she will demand you pay her back three-fold for a single perfect night. Do not use a credit card unless you have the money in hand to pay for the item. Do not charge everything and plan to pay it off with the next paycheck. The job market is volatile. The next paycheck may not come.”
I got this comment, which was clearly sarcastic, but I thought it was worthy of discussion anyway: “I thought credit cards are for buying things you want when you don’t have the cash money. Why use a credit card when you have cash? It doesn’t make sense. It’s when you don’t have cash you then need to use a credit card. Credit cards are for when you are broke.”
I’m guessing most readers of this blog know that you don’t put stuff on a credit card that you can’t afford; that you have to pay them off on time and in full every month. But this rather silly comment raises an interesting issue about cash flow. I used to put everything on my credit card to get the frequent flyer miles and would pay it off in full at the end of the month. It’s nice to get the one-month float of free money and the rewards.
But I realized that over time, I was depending on my following paycheck to pay off spending I had done in the previous month. Let’s presume I get paid once a month, on the 1st. So, for instance, I would charge from June 1 to June 30 and pay off all of those charges in full with the check I received July 1 (for the work I did in June).
That’s not the way to do it — because I was still effectively spending money I didn’t have yet. Let’s presume I get laid off on June 30. That July 1 paycheck goes to cover the spending I did in June.Â Now there are no more paychecks. What will cover my expenses in July? Hopefully I have three months’ of emergency cash laid aside. But the reality is most people don’t. Or alternately, let’s say my company suddenly goes bankrupt, and there is no July 1 paycheck. Now I’m really in trouble.
Using my budgeting software Mvelopes, I finally got to a position where I have the cash on the 1st of the month to fund my spending for the upcoming month. Over the next 30 days I use all sorts ofÂ transaction vehicles — cash, credit, debit, etc.Â But the money to pay off those credit purchases is already on hand. What this does is create a one-month emergency fund out of your cash flow. Because if I have the check in hand June 1 to pay June expenses and then I get laid off on June 30, I’ll get my last paycheck on July 1 and have the cash on hand to pay for one month’s rent, food, etc. in July. Make sense?
Anyway, I don’t put everything on the credit card for the rewards because it can hurt your credit score, even if you pay off the bill in full at the end of the month, because the percentage of utilization will typically be high. Let’s say you have a credit limit of $10,000 and you charge $6,000 a month. That’s a credit utilization rate of 60%. People with the best credit scores have utilization ratios of 10% or less.
One other interesting comment: “Credit and debit cards, checks, electronic payments, all generate an electronic history that can be easily accessed. I charge most things on credit and always pay the bill in full. It is very easy to track my spending at the bank website, or even using the paper statements, so I can see where money goes.”
Ah — that’s the key: There it goes! I can’t plan a budget for the month and then look backward at the end of the 30 days and hope I stayed within budget. I have to track as I go, which is why I use online budgeting software. Every time I spend, theÂ transaction shows up in a generic folder, and I click and drag it to the spending category, which decreases by that amount. So on June 1, I assign $150 to the eating out envelope (money that’s already in my checking account). If I spend $50 dinner out, the transaction shows up in a transactions folder, and I click and drag it to the dining out envelope, which now declines to $100.Â Easy, exact budgeting. No vague rationalizations about somehow cutting back next month to live within my means. Life is peaceful.
The last thing I would say about using software to budget before you spend is that it gives you the opportunity to think really hard about your choices, priorities and values. It makes the whole process a very conscious effort, so you don’t spend mindlessly or frivolously, but spend on what really matters. In the book “Your Money or Your Life,” Joe Dominguez and Vicki Robin did a wonderful job convincing me that money something you trade your life energy for. I work too hard to waste it.
So in a nutshell, here’s what I think credit cards are for:
2) Cash-back rewards (but only maximize them if you’re not in the market for any kind of loan). Also make sure the annual rewards are worth any fee you pay for the card; I recently dumped my frequent flyer card because the annual fee rose to $85 and I could never get the dates and times I wanted for the flights anyway. I have a Costco card that pays cash-back and the cash always exceeds the annual fee (plus the fee gets me the warehouse membership).
3) To help get your credit score over 800 so you can get the best deals on mortgages and other loans.
4) To help small business people, in rare instances, access capital so they can close a deal. For instance, let’s say I paint murals in kids’ rooms. I’ve been hired by a homeowner to do two bedrooms. I use the credit card to buy the paint and pay it off when the homeowner pays me for the job. Obviously a bank line of credit is cheaper than using credit cards, but sometimes small businesses can’t get approved for them when they are first starting out. I hate this use of credit cards because there are always bad clients who don’t pay (a friend of mine had a television production company that went under this way). So I think this use is legitimate if used sparingly.
Credit cards are not good tools to use as an emergency line of credit (that’s what savings are for); or to budget (that’s what budgeting software is for); or to buy something and pay for it over time by rolling the debt repeatedly onto new cards offering a 0% interest teaser rate. (That’s risky and hurts your credit score.)
Why do you carry a credit card?
Friday, January 7th, 2011
Check out my post today on RealSimple.com called “Financial Regrets of a Stay-At-Home Mom.” Minnesota journalist Katy Read wrote a piece on why she regrets staying home with her two sons for 14 years — as the headline puts it: “I opted out, now I’m broke.” Would love to hear your comments over there, or here, on how your family balanced work and kids.
I stayed full-time in my television job for about five years after the birth of my oldest, got laid off and started my own business when I was pregnant with my youngest. Turned out to be a spectacular move in terms of fulfillment, flexibility, money and general chaos (if you like that sort of thing). One of my initial projects as a freelancer was the book “On Target: How the World’s Hottest Retailer Hit the Bull’s-eye” published by John Wiley & Sons, which sold quite well for a first book and was translated into Japanese and Chinese. I’ll be appearing on the CNBC documentary “On Target: Inside the Bull’s-Eye” which debuts January 13 at 9pm EST and airs several other times this month.
Americans increased their debt loads for a second straight month in November — led by student loans, an issue I’ve been reporting on over at Yahoo and on the blog. Consumer credit increased $1.35 billion, or a 0.7% annualized rate, in November to $2.402 trillion, and revised to a sharply higher number in October. Consumers continue to pay down their credit cards, which recorded their 27th straight monthly drop. See the full story here.
Some readers of my last column on the essential rules of financial success disagreed with my stance on credit cards — arguing that putting everything on the card was a great way to track their expenses. I hate that idea. I use Mvelopes budgeting software (I used to write a column for the site) that allows me to fund my budget categories at the beginning of the month; as each transaction comes in electronically, I move it to the appropriate envelope and it decreases by that amountÂ so I always know what I have left to spend for the month. I couldn’t do that with a credit card statement, because I wouldn’t find out if I had stayed within my budget until after the fact. What’s your budgeting method?
Thursday, January 6th, 2011
I was at the gym this morning, and the place was packed. Every treadmill, bike and climber-thingy taken, as New Year’s resolutions apparently kick in. (Has anyone ever done a study of whether it’s worthwhile to buy health club stocks in December and sell them in February?) I only managed three miles on the treadmill as I’m recoveringÂ from a cold I picked up on an airplane to Chicago over the holidays. (There is nothing like sitting knee to knee with someone coughing for two hours straight on a tightly packed plane with stale recirculating air. I could just feel the despair in my immune system.) Instead of holiday sweets and a few glasses of fine wine on vacation, it was two glasses a day of half carrot-half orange juice, no sugar, lots of sleep. I swear it cures anything.
In any case, my New Year’s resolution is to post on this blog at least four times a week. A couple links to share today: My Yahoo!Finance column looks at four essential rules for financial success. I’d like to expand it to “top ten” with readers, so post your essential steps to wealth here or email me at laura at laurarowley dot com.
Over at RealSimple.com, I recently blogged on why the risk of identity theft rises in January; top consumer scams of 2010; new financial protections for consumers that take effect January 1; and the easiest way to save money in 2011. I’m continue to coach Leah West, a mom of three, who is blogging her way out of debt for Woman’s Day. Leah’s hard work will inspire you. Check out her blog here. For a lively conversation on money and happiness, check out the recent podcast interview I did with Tom Dzuibek over at Consumerismcommentary.com.
I’m keeping a close eye on mortgage rates, which ticked down this week. I could kick myself for not refinancing into a 15-year fixed when rates hit a historic low of 3.57 percent in November. (I have about 22 years left on my 30-year mortgage at 5.125 percent. I say “about” because I started shoveling extra money toward the payments a few years ago, then stopped when home values declined. It made more sense to shovel the extra money into my retirement plan, which returned well above 5.125 percent. We have no other debt but the mortgage.) Those of you who were brilliant enough to refinance in November, go ahead, comment or email me and tell me how much you’re saving every month, you earned your bragging rights.
The reason we didn’t refinance was because we were waiting to see if my oldest daughter’s application to private high school was accepted. (She’s in! Yippee!) Plan B was to move to a nearby town with a smaller public high school (she was a little overwhelmed by the size of ours.) So now we’re staying put. If we refinance, I don’t plan to take out any equity (never have — regular readers know how much I hate debt; I have about 60% equity in the place). But it’s super tempting. The house could use a coat of paint and a second shower would do wonders for the morning rush, and money at 3.57 percent (if rates fall again) seems practically free. On the other hand, I want the whole mortgage gone by the time the kids graduate from college. (Oh the interminable tension of enjoying today vs. saving for the future! Drives me kinda crazy.) Anyway, keep your fingers crossed for another decline in mortgage rates.
Tell me your New Year’s financial resolutions — comment here or email me at laura at laurarowley dot com.
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