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Thanks to Folks Who Make It Easy to Give

November 15th, 2010

My daughter’s soccer team — The Storm — defeated the rival Tornados 4-1 in an exciting finals match this weekend. Charlotte scored the first goal in the first two minutes of play – which I missed, unfortunately, because I had to get her sister to a play date, Dad having left early to tailgate at the Meadowlands before the Giants game. (I think it’s hilarious that they could spend $1.6 billion on a new stadium and have the power go out twice during the game, the second time leaving the entire place in utter darkness. Given the ugly loss to the Cowboys, it might have been better if they left them off.)

In any case, the coach emailed us this morning with information on an organization called ”Jerseys from Jersey,” which collects old soccer uniforms and donates them to kids’ teams in China, Bangladesh, Nepal and Uganda. Since all three kids have been playing in the last few years, I have a bunch of old jerseys, and I’m grateful to regain the drawer space. And it always feels good to give.

I’m even more grateful to the people who took the time and energy to organize Jerseys from Jersey. I’m good at donating and occasionally showing up to volunteer, but don’t have the bandwidth to be the organizer. So I rely on the people who collect canned goods for the community food bank and Halloween candy to send to the troops overseas; run the blood drives; put together the Thanksgiving baskets and Christmas luncheons for the poor. For instance, my neighbor Patrick stopped by yesterday to tell us about the food and winter coat collection that his church has organized. All I have to do is leave the stuff on the front porch in plastic bags and Patrick and his kids will get it where it needs to go.

So an early Thanksgiving shout out to the facilitators — the ones who make it easy to be generous. You make it possible for the rest of us to make the world a better place.


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Consumer Financial Protection Bureau Sets Priorities

November 10th, 2010

Making the costs and risks of credit cards and home mortgages more transparent to consumers will be among the first priorities of the new Consumer Financial Protection Bureau (CFPB), said Elizabeth Warren, the interim agency director and Harvard Law School professor, in a call with reporters today.

“The consumer agency will make it easier for a family to see the costs and risks of a mortgage upfront and will give them the tools to make the choice that is right for them,” Warren said. “A mortgage is the biggest financial commitment most Americans will make in a lifetime. But getting stuck with the wrong mortgage can cost a family tens of thousands of dollars over the life of the loan, and could cost them their home.”

Second, the consumer agency plans to cut down the fine print in credit card agreements, empowering consumers to make direct comparisons between products, Warren said. ”Almost four out of every five families now have a credit card, and almost half of those families carry a balance,” she noted. “When there is no fine print, there are no surprises for consumers. We know that if the costs are clear, some people will dial back the risks, purchase less, and some will decide to use a different payment method.”

Warren said her team is building “a 21st century consumer agency…in the age of iPhones and the Internet.” The agency will use technology to tap directly into the experiences of millions of Americans to develop a rapid-response approach to policing credit markets.

But that policing won’t begin until next year. On July 21, 2011, six other agencies that currently oversee consumer finance, including the Federal Reserve and the Office of Thrift Supervision, will transfer rule-making and enforcement authority for 19 existing consumer financial protection laws to the CFPB. The hope is that centralizing authority in one consumer-focused agency will result in a better government response to the tricks, traps and scams littered in bad financial products and services.

Warren says she has met with large banks, community banks and  consumer advocates across the country. “I’m committed to hearing from the people working on the ground in the consumer credit market—the discussions I’ve had with housing counselors, consumer advocates and leaders in the non-profit world are informing all of the work we’re doing here,” she said.


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Avoiding Holiday Sales Gimmicks

November 10th, 2010

Smart Money has a great piece on the slick sales tactics that play off consumer psychology. The piece outlines several hidden triggers designed to get you to overspend and blow your holiday shopping budget. For example:

-”Shop Today and Save 50% Next Week”: This gimmick appeals to people who think they can game the system, buying a few items now and then coming back for the big purchases and the hefty discount. But stores use this strategy to lure customers back when they know they’ll have new stock or other promotions that will prompt people to overspend.

-Limiting the amount – ”five per customer” — or the time “sale ends tonight”: The former plays into consumers’ competitive spirit. A study in the Journal of Retailing found that changing the structure of a sale from “Buy two” to “Buy eight” resulted in a 55 percent increase in sales — regardless of the price of each option. The latter plays into your fears — that if you don’t grab what you can, you’ll be out in the cold.

The article reports that on the last day of Old Navy’s 25% off sale, the company sent consumers an email saying, “Last chance; Hurry before the discounts drop!” That day, the number of people visiting OldNavy.com increased more than 8 percent, and those visitors spent 6 percent more time on the site, according to Compete.com.

For more ways to avoid retailers’ psychological warfare, you can check out the story here.


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Income Inequality and Financial Pain

October 17th, 2010

I haven’t posted in a while because I’ve got a lot on my plate at the moment. Aside from writing the weekly column for Yahoo!Finance, I’ve been working on a blog at RealSimple.com and coaching Leah West, a single working mom of three, who won the “Blog Your Way Out of Debt” competition to write a paid blog for Woman’s Day online. Leah has some terrific insights; you can read her work here.

It’s enormously satisfying to help someone one on one, because as a writer, I hope my work motivates people to improve their finances, but I never know. (The feedback from the anonymous Yahoo posters can be pretty nasty.) Aside from the work stuff, I have three kids and a dog and my husband has been working a lot of overtime. So this blog has gotten the short shrift.

I wanted to point out a must-read in the New York Times today. Cornell University’s Robert Frank writes on growing income inequality. Frank and co-researchers Adam Seth Levine, a postdoctoral researcher at Vanderbilt University, and Oege Dijk, an economics Ph.D. candidate at European University Institute, studied the census data for the 100 most populous counties in the U.S. They found that the counties where income inequality grew fastest also showed the biggest increases in symptoms of financial distress.

For example, these counties had the largest increases in bankruptcy filings and the largest increases in divorce rates. They were also the counties where commute times had grown the most. Commute times are an indication of financial stress “because families who are short on cash often try to make ends meet by moving to where housing is cheaper — in many cases, farther from work,” Frank writes.

Why is income inequality problematic? Because the ultra-rich shift the frames of reference for the rest of us. It’s not just in the consumption norms — i.e., “the neighbor has a Lexus, I want a Lexus.” It’s in the larger cost of living, or what Frank calls “expenditure cascades.”

 Consider housing. “Top earners have more money, so they build bigger mansions,” Frank told me in an interview. “The middle-class doesn’t care, but the new mansions shift the frame of reference that defines what people just below the top consider desirable or necessary. So people just below the top build bigger.

“Their spending, in turn, affects others just below them,” he adds, “and so on, all the way down the income ladder. As a result, the median size of a newly built house in the U.S. is more than one-third larger now than in 1980, even though real median family earnings have scarcely risen since then… And so most middle-class families work longer hours, save less, borrow more, and commute longer distances in order to meet community standards on housing expenditure,” Frank points out.

Moreover, there’s a clearly defined link between neighborhood housing prices and school quality. I’m experiencing this myself at the moment. My oldest daughter goes to high school next year. She is intimidated by the size of our public school, which has 2,000 students, and ranks in the top quarter of schools in the state. We have been looking for smaller public high schools that rank in the top 5 percent. To buy the same size home would cost at least $200,000 more. (I live in New Jersey within 45 minutes of New York City, so housing prices are well above the national norm.) We could obviously send her to private school for a lot less than $200,000, but I have three kids, not one.

Frank also argues that income inequality is one factor behind the rising cost of college tuition. “Tuitions have been growing in part because of the consumption amenities universities now feel they must offer to remain competitive for students with the best academic credentials,” he suggests, citing state-of-the-art climbing walls, gourmet food courts, and luxury apartments.

Frank says income inequality can be addressed with a progressive consumption tax. ”There is no persuasive evidence that greater inequality bolsters economic growth or enhances anyone’s well-being,” he writes. “Yes, the rich can now buy bigger mansions and host more expensive parties. But this appears to have made them no happier. And in our winner-take-all economy, one effect of the growing inequality has been to lure our most talented graduates to the largely unproductive chase for financial bonanzas on Wall Street.”

Have you bumped up against the “expenditure cascades” in housing, college tuition or other costs of living? Do you think income inequality is a problem? Comment here or email me at laura at laurarowley dot com.


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The Beauty of Goals

September 27th, 2010

I ran the Newport Liberty Half Marathon on Sunday, Sept. 26. It was an amazing experience. The route is sublime, through the historic neighborhoods of Jersey City and then out to the waterfront with views over the Hudson River of New York City and the Statue of Liberty. The weather was perfect, temperature in the mid-60s with a light breeze and clear skies. The crowd of 2,600 runners was big enough to create excitement but small enough to avoid elbow-bumping on the path. 

Before I started training for the 13.1 mile run, the farthest I had ever gone was six miles – and that was in 1986. My usual routine is 4 to 5 miles, three or four times a week. Then in July my friend Carol said that she needed a goal to keep her from getting bored with her running routine, and suggested I join her in the half marathon. (This was her fourth half.) I could do it, she assured me, if I gradually pushed from six to eight to ten miles. My friend Ann, another first-time half-marathoner, sent me Facebook  cheers as my training runs stretched farther and farther.

It’s amazing how powerful a goal, and a little encouragement can be. I went into the race just hoping to make it to the finish without walking the last few miles, and ended up posting a time of 2:12:30, averaging a 10-minute-mile pace. Your mind meanders when you’re running for that length of time. Looking at the Statue of Liberty, I thought about my grandparents — how difficult it must have been to leave everything familiar behind, and how long and hard they worked once they arrived in the U.S. By comparison, my race was easy — it gave me the perspective I needed to keep going at the half-way mark.

Maybe it was the runner’s high, but I was filled with appreciation for good health, for the beauty of the day, for the small groups of onlookers applauding their encouragement, and for my family, who appeared suddenly at mile 10 and 11 — my youngest holding out a white petunia. Near the finish, the cheering was overwhelming. I’m still high from the rush (and started looking online for a new race to run).  

So set a financial goal today — to pay down credit card debt, save an emergency fund, set up a 529 college savings plan, join your 401(k) plan. Find like-minded souls who are seeking the same reward and will encourage you on the way. Put the difficulties in perspective when you feel like you want to stop. There’s no question the road will be challenging. But the finish may be glorious.


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Another Reason to Choose a State College

September 15th, 2010

The Wall Street Journal this week published a survey showing U.S. companies prefer to hire graduates of large state universities for entry-level positions over graduates of Ivy League schools.

The Journal surveyed 479 recruiters at the largest public and private companies, nonprofits and government agencies. Among the 25 highest-ranked schools, 19 were public. Their top choices for graduates who are best prepared and most able to succeed: Pennsylvania State, Texas A&M and University of Illinois at Urbana-Champaign.

(I’m a proud graduate of the Illinois’ journalism program and will be in Champaign as an Illini Comeback Guest October 21-23.)

Private schools in the top 25 included Cornell University, Carnegie Mellon and University of Notre Dame.

The Journal study is encouraging to parents who feel overwhelmed by the cost of college. Private four-year colleges charge, on average, $26,273 per year in tuition and fees, according to the College Board. Add in another $12K or so for room and board, books and supplies and transportation.

Public four-year colleges, by contrast, charge an average of $7,020 annually in tuition and fees for in-state students and an average of $11,528 for those who live out-of-state, according to the College Board.  

I covered this topic in the past, reporting on a study that found 20 years out of college, equally talented students who attended state universities earned just as much as students who went to Ivy League institutions.

Students who have a possibility of getting into the Ivies — which reject more than 90 percent of those who apply — are usually inundated with offers from lesser schools. Someone who plans to go directly to graduate school or law school should consider those other institutions, says Mark Kantrowitz, founder of finaid.org.

As he put it:  ”If you get a PhD. from Harvard, nobody cares if you got your undergrad from Podunk U.”


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Earnings Over $75K Don’t Buy A Lot More Happiness: Study

September 7th, 2010

A lot of media today are jumping on a story that I broke two months ago in my Yahoo!Finance column: A new study shows earnings beyond $75,000 don’t buy a whole lot more happiness.

Back on July 7, I reported on the study by Nobel laureate Daniel Kahneman and Angus Deaton of Princeton University. They analyzed more than 450,000 responses to the Gallup-Healthways Well-Being Index, a daily survey of 1,000 U.S. residents from 2008 to 2009. This survey used a “ladder” scale question, asking people to rank their happiness with their lives on an imaginary scale from 0 to 10. It also asked questions about emotional experiences in the prior day.

The authors found that while hedonic well-being — or happy feelings — rises with income, it plateaus around $75,000 — although life satisfaction ratings continue to improve. Moreover, lower income exacerbated the emotional pain associated with poor health, divorce and being alone.

“More money does not necessarily buy more happiness, but less money is associated with emotional pain,” the authors write. “Perhaps $75,000 is a threshold beyond which further increases of income no longer improve people’s ability to do what matters most to their emotional well-being: spending time with people they like, avoiding pain and disease and enjoying leisure. It is also likely that when income rises beyond this value the increased ability to purchase positive experiences is balanced, on average, by some negative effects.”

Those negative effects might be a highly stressful job, a long commute, a toxic boss or long hours that keep a worker tied up at the office and away from family and friends. “Our data … do not imply that people will not be happy with a raise from $100,000 to $150,000, or that they will be indifferent to an equivalent drop of income,” the authors write. “Changes of income in the high range certainly have emotional consequences. What the data suggest is that above a certain level of stable income, people’s emotional well-being is constrained by other factors in their temperament and their life circumstances.” 

What do you think? Would $75,000 a year do it for you? Comment here or email me at laura at laurarowley dot com.


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Lottery Winners and Insuring the Future

September 3rd, 2010

My Yahoo!Finance column this week looks at a new study that finds big lottery winners — those who win $150,000 — are just as likely to declare bankruptcy as those who win $10,000. That doesn’t mean that lottery winners are more likely than the general population to declare bankruptcy — it just means people who don’t know how to manage money apparently maintain their unwise habits when they get a windfall. About 5 percent of winners in the study filed Chapter 7 or Chapter 13 within five years of winning the jackpot.

What struck me most about the study was the finding that when the big winners did file for bankrtupcy, they had net assets that were very similar to people who won much less. In other words, they blew the money. They didn’t buy stocks or bonds, put the cash into savings, pay off their mortgages or purchase a home for cash. Since these were Florida lottery winners, the latter two strategies would have been especially wise, since the state allows homeowners to keep their primary residence out of bankruptcy. (Some Floridians have been known to game the system by buying the biggest home possible for cash before they file to keep some of their assets out of bankruptcy court. The lottery winners in the study didn’t do that.)

Consider, for example, this tale of two lottery winners: First, Dr. Shirley Press, who won $17 million in the Florida lottery in 2001. She grew up poor in Camden, NJ. Her father was a grocer and her mother a nursery school teacher (both were Holocaust survivors). Press worked hard, went to medical school and became director of pediatric emergency care at a hospital.

After she won the lottery, Press, now 59, continued to work one day a week. She serves on the board of the hospital’s charitable foundation and started another charity that pays uninsured medical expenses for Holocaust survivors. She and her husband made sure their two children, now in their 20s, got an education and a career, and could support themselves. “We insist on that — that was one of our goals to make them self-sufficient and lead a normal life,” she told the Miami Herald. Press and her husband live in a 2,900-square-foot home, and she drives a Toyota Camry hybrid.

Now consider  Alex Snellius, 73, who collected an $18.5 million prize in 2000 in Illinois’ Big Game lottery. Now it’s mostly gone. Snelius, a retired truck mechanic who immigrated from Lithuania, bought houses for all four of his children and eight other relatives to live in, including paying for a $1.4 million copy of Elvis Presley’s Graceland mansion for his daughter and son-in-law. ”I spent money like it was running through your hands,” Snelius told the Chicago Sun-Times.

Snelius said his lottery windfall was both a blessing and a curse — he has lost friends who borrowed money and never paid him back, and received thousands of requests from strangers who needed cash. When he overheard cash-strapped parents in a store tell their children they couldn’t afford to buy something, he would sometimes hand them a $100. ”It’s beyond imagination what a pleasure it is to give,” Snelius told the Sun-Times. He also gave to charities.  He now drives a 10-year-old car and would like to sell his home in a wealthy suburb and move back to “the other side of the tracks,” as he put it. 

I never play the lottery — sometimes my husband will buy us a ticket if the jackpot is over $200 million just for entertainment value (although we do actually know a family that won $10 million. Somehow I think this diminishes our odds. How likely is it to have two major lottery winners from the same town?)  But in terms of securing our financial future, we take the more mundane approach — earn, save, invest, use a budget that helps us live within our means. And we have enough life insurance to take care of the other person and the kids in a worst-case scenario. Unfortunately, the number of Americans who have life insurance has declined in the last few years. Check out my Real Simple post on that here. 

What would you do if you won the lottery? How would your life change? Comment here or email me at laura at laurarowley dot com.


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Advice for the Homeowner Looking to Trade-Up

August 30th, 2010

I appeared on CNN’s “Your Bottom Line” this past weekend to give advice to Michael Andrews, who has been looking to sell his home in Maryland and move up to a larger place before his son started kindergarten this fall. He and his wife bought in 2005, close to the top of the market. The problem: Prices are forecast to decline another 10 percent in Prince George’s County in 2010 because of an oversupply of homes on the market. Although sales are up over last year, and homes are on the market a shorter length of time, that may be because of more foreclosure sales, and banks agreeing to short sales.

The Andrews live in a family-oriented community with low crime and good schools. Michael works for the University of Maryland and his wife for the federal government. The last few years, the university has not offered cost-of-living increases, and even furloughed workers because of budget constraints. Michael told CNN that he can’t refinance, and that his mortgage interest rate is “kind of high.”

Television time constraints being what they are, I didn’t have a chance to give a full response to the Andrews’ situation. I thought I’d give it here, since so many homeowners are in a similar boat:

1) Before they consider a move, the Andrews should reinforce their financial foundation. They have
a “kind of high interest” loan and can’t refinance. Why can’t they refinance? Typically it’s an issue of inadequate income, excessive debt, negative equity or poor credit. If they are underwater on the loan, they don’t have a whole lot of options. But if the issue is excessive debt or poor credit, they can tackle those issues. Lenders typically look for a debt-to-income (DTI) ratio of roughly 40 percent – meaning all monthly debt payments are no more than 40 percent of monthly income. (So if someone earns $60,000 and takes home $5,000 each month, their debts should total no more than $2,000.)

The Andrews should eliminate all revolving debt (credit cards, car loans, home equity lines of credit),and save up at least six months living expenses in the event of a job loss. As they pay off debt and boost savings, their credit scores will organically improve.

2. The Andrews should look at the bigger picture and rank their priorities. Maybe it’s wiser to open a 529 college savings plan for their son than to buy a bigger home, because the cost of college continues to exceed inflation (and the amount most people are receiving in their investment returns). To reach the goal, you have to start early. 

3. Remember the “hedonic treadmill.” Psychologically, very often the more we have the more we want; we get something – like a home – adapt to it, and want a bigger home. But the Andrews probably won’t enjoy a bigger home as much as they expect: There will be a higher mortgage payment, higher property taxes, utilities, insurance and maintenance costs, and possibly a longer commute. That may reduce the happiness they get from the purchase. 

They should think about other uses for the money they would put into a bigger home. Research shows the money spent on experiences, and time with family and friends, makes us happier than the money spent on things. So they might find higher well-being spending the money on traveling, sporting or cultural events, or hosting barbecues for family or friends right in their own back yard.


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Saving on Back-to-School Shopping on GMA

August 10th, 2010

I worked with Good Morning America on two segments that aired Monday and today, helping the Myer family of Connecticut save on back-to-school supplies and back-to-school clothing. We were able to cut their annual budget in half with a number of strategies. (In my own family, we’re waiting for Labor Day sales to tackle the clothing needs, but we finished our school supply shopping at the end of July, and saved a bundle over last year by shopping at a big-box store (Target) over an office supply store (Staples). Here’s the video from today’s Good Morning America:

Like me, Beth Myers has three kids — Emily, 12, who is going into seventh, Brian, 10, who is entering fifth grade and Lindsay, 3, who is headed off to pre-school. Clothing costs can get pretty hairy at this age, when your kids start to gravitate to the specialty stores in the mall where their friends shop. Here’s the segment where we discussed ways to save on your back to school clothing budget:

Back to school is a great time to talk to kids about the value of a dollar, and try to instill a few money lessons. Click here to see a few of the outtakes with additional ideas.

I also contributed to a Bankrate.com slide show featuring a roundup of back-to-school shopping tips. Check out Heather Larson’s story here. How will you save on back-to-school shopping this year? Comment here or email me at laura at laurarowley dot com.

Meanwhile, back-to-school is one tiny drop in an ocean of parental financial responsibility. Is it possible to keep life, and finances, simple and frugal after you have kids? Check out that topic — and post your comments — on my Real Simple blog.


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