BE A SMARTER INVESTOR

Greed and fear – commonly characterized as the most prevalent factors that drive investment activities … I recently read material published by the FPA (Financial Planning Association) offering 20 keys/steps to rein in greed and ease investing fears. It is not offered to turn you into an investment pro, or enable you to accurately predict the future of the stock market. It will provide information to help you use time-tested principles and techniques [helping you learn from the failures as well as successes of the past] so that despite the inevitable ups and downs of the markets, you can realistically achieve your financial goals.

1. Understand the difference between saving and investing. Saving is for short-term goals/needs (family vacation, emergencies, car, etc.); investing is for goals that are 5+ years away. Savings can be met with CDs, high yield savings accounts, etc. Although investing carries more risk (losing your principal, not earning as much as you’d planned, etc.), wise investing will also provide a greater opportunity for earning significantly higher returns in the long run [relative to savings vehicles].
2. Put the rest of your financial house in order first. Before investing, you may want to tackle other financial issues: creating a budget to enable you to invest more on a regular basis, developing an emergency fund, make sure you have adequate insurance in place, and paying off high interest rate debt to name a few.
3. Clarify your goals. Invest with a specific purpose. Doing so will make it easier for you to stick to your plan. Goals should be realistic, specific, and provide a timeline for accomplishing them.
4. Don’t just grab for the highest return. With reasonable, specific goals, you can make informed, realistic investment decisions to accomplish your financial goals without taking unnecessary risk. The tortoise wins the race every time I read the book.
5. Understand your own tolerance risk. Risk tolerance is a function of several factors – your investment goals, how much time you have to invest, other resources you have, and your “personal fear factor.” Investments that keep you up at night [although they may make the most sense ‘financially’ may not be right for you]. Gauging that can be tricky – people obviously tend to feel more risk tolerant when the market is doing well …
6. Educate yourself about investments and investing. Even if you work with a financial planner or advisor, you should understand how investments work, their risks, and how they fit into your financial plan. Many people understand the risks associated with stocks or real estate, but fail to realize that bonds and other investments also carry risk.
7. Hold realistic market expectations. One downfall of the market boom of the late ‘90s was the belief that high double digit returns for stocks were normal. Historical information reveals otherwise. I have a chart on my wall (Ibbotson chart) that shows that between 1926 and 2001, small company stocks returned an average of 12.5% per year; large company stocks 10.7%; and long-term government bonds 5.3%. These historical returns don’t guarantee anything (I can earn more or less than that any given year), but they allow me a benchmark/ perspective for comparison when things are going very well [or very poorly].
8. Follow a detailed written plan. Use this like a road map to keep you focused and on-track; it is easy to lose focus when things don’t go as planned. Obviously, this plan should change as “life happens” – marriage, job/career changes, family, as well as changes in objectives.
9. Allocate investments according to goals and needs. The shorter the timeline, the more conservative your allocation should be. Will you have other resources at retirement? Depending on your circumstances, you may feel more [or less] comfortable with an aggressive portfolio.
10. Diversify your investments. Spread your dollars across several investment classes (stocks, bonds, large/small companies, international, etc.). Research has shown that diversification will reduce risk while at the same time maintaining [or even improving] portfolio performance.
11. Don’t overload on company stock. Financial planners typically recommend limiting company stock to no more than 10-15% of the account value. One word speaks volumes … Enron!
12. Don’t chase ‘hot’ performance. Today’s hot investments are often tomorrow’s cold turkeys. Technology stocks, represented by the Nasdaq 100 Index returned an amazing 85.6% in 1999, but fell nearly 40% the next year and another 21% the next …
13. Don’t ignore ‘cool’ performance. The opposite of chasing ‘hot’ performance. The easiest way to avoid these two problems is to stay diversified and stick to the game plan that you spelled out in your investment plan.
14. Stay in the market. Don’t try to “time” when to get in and get out of the market. Nervous investors often want to wait on the sideline until a downturn in the market is over … a study by SEI Investments reviewed 12 bear markets (market downturns) since World War II. Those who stayed in the market saw the S&P 500 gain an average of 32.5% (not counting dividends) during the first year of the market recovery. Those who missed the first week of that recovery earned 24.3%; those who waited three months to get in gained only 14.8%.
15. Start investing early. The most powerful weapon on your side is time. The earlier start, the more financial leverage you gain.
16. Invest regularly and automatically. Those issues of greed and fear tempt us to try to time the market. Financial professionals commonly recommend instead investing on a regular basis regardless of what the market is doing. This will help you keep your eyes on your long-term objectives. Funding investments not only makes this easier to do, but in many instances will allow you to start without having a large initial investment.
17. Pay attention to investment expenses. You can’t control the market – you can control your expenses. Investing with an eye toward lowering your investment costs can significantly improve your returns over many years.
18. Don’t let taxes dictate. Yes, it is smart to invest with an eye on tax-saving strategies. Taxes shouldn’t be the ultimate deciding factor, however. If it makes sense for you to sell an investment, you should sell the investment.
19. Rebalance your portfolio. It is inevitable that over time the asset mix you originally assign to your portfolio will become unbalanced over time as different asset classes perform differently. If, for example, the stock market does very well this year, the stock portion of your allocation will become ‘heavier’ than your desired allocation. This means that you will now have more risk in your portfolio because you have a heavier weighting in stocks. How often you rebalance is a personal question – many suggest doing it about once a year.
20. Monitor and revise your investment plan. As with any financial plan, you’ll want to review your investment plan at least once a year to make sure you’re still on target, that it is still accommodating your needs, etc. Whether you turn your investments over to a professional or manage them yourselves, ultimately, it is you that is responsible for the results!

CREDIT SCORING

When you apply for credit, lenders want to understand the risks associated with loaning money to you. Credit scores are what most lenders use to determine your credit risk. The most commonly used credit scoring model was created by Fair Isaac Corp. (the FICO Score). Credit bureaus often use different names, such as the Beacon Score or Empirica Score. Each, however, uses the same underlining methods as Fair Isaac. Consumers have three credit scores – one for each of the three credit bureaus (TransUnion, Experian, Equifax). Each is based upon the information that particular agency keeps on file about you. Your score will determine loan terms (interest rates, fees, etc.) as well as how much a lender will offer you. The higher the consumer’s credit score, the less risk for a lender (FICO Scores range from 300 to 850). It is possible to have no credit … Many individuals don’t realize that many of the monthly bills paid (i.e., rent, phone, gas, utilities, insurance, etc.) are not reported to credit reporting agencies [unless you miss payments of course!]. Payment history for mortgages, student loans, credit cards, store cards, auto, and other loan and revolving credit accounts are typically reported to credit bureaus on a monthly basis. For a FICO score to be calculated, your credit report must contain at least one of these types of accounts [which has been open for at least six months; also must contain at least one account that has been updated in the past six months]. This ensures there is enough information [and recent information] on which to base a score.

How is the score calculated?
The FICO score is calculated from a lot of data contained in your credit report. The data is most commonly grouped into five categories: payment history (35%), amount owed (30%), length of credit history (15%), new credit (10%), and types of credit used (10%). The percentages indicate the relative weighting of each area to the overall score. The following site will allow you to see what specific items constitute each of the five areas.

While most lenders use credit scoring to make credit granting decisions, each lender is likely to use a ‘personalized’ strategy to determine how they are going to define a “creditworthy” customer or what an acceptable level of risk is for a given product. There is no universally defined “cut off” where if you’re below a certain point you will be denied credit regardless of where you go. The following MyFICO resource nicely illustrates the financial benefits of having a strong credit score. In addition, more and more people are using credit scoring as a way of evaluating risk in other areas of life – employers, landlords, insurers, utility companies – and the list is growing rapidly.

* It is important to understand that a credit score is a measure of how well you manage debt. Many people are debt-averse [or haven’t relied on debt to date] – there is nothing wrong with this; I would never suggest going into debt merely to have a credit score. You will want to ensure that when applying for insurance, a future mortgage, etc. that your lender uses manual underwriting if you have 'no credit.'

Getting your score …
I mentioned last week that the legislation (FACTA) that provides consumers the opportunity to receive a free annual credit report does not provide a free credit score. You have some choices – a simple score estimator; also, the e-loan resource I mentioned last week. If you’re interested in purchasing your score [I also have included some other types of scores to give you an idea of the types of information available], you can go to the following sites – current prices (as of 4/4/07) are listed. Read through the information provided – all of the sites offer additional products beyond credit scores (monthly credit monitoring, other ‘packaged’ services to go with the credit score, etc.)…

- FICO Score (you choose report score is based on) - $15.95
- Equifax FICO Score and Equifax Credit Report - $15.95
- Experian VantageScore - $5.95
- TransUnion Insurance Score - $9.95

Additional Credit Resources.
- Credit issues
- Credit myths
- Credit scores by state
- Credit statistics
- Improving your score
- MyFICO
- Ordering free credit report(s)
- Specialty credit reports
- Vantage Scoring
- What is not in your score?

PERSONAL FINANCE COURSE OFFERINGS (FALL 2007)

Have you considered taking a Personal Finance course this fall? A one-credit course through the Personal Financial Planning Department may be just what you're looking for ...



FINPLN 1183 (Financial Survival).
A one-credit course geared to underclassmen; class focus is on "student-specific" financial issues: credit cards, student loans, debt management, avoiding common financial pitfalls, credit issues, etc. Offered pass/fail.

• Reference #79997
• Fridays -- 2:00-2:50
• Meets once/week for full semester
• Instructor - Dr. Mark Oleson

FINPLN 4483 (Financial Success).
A one-credit course geared to upperclassmen [nearing graduation]; class focuses on common post-graduation financial issues: Investing (stocks, mutual funds, bonds, etc.), Retirement Planning (401(k)s, IRAs), Managing loan and other debt after graduation, Insurance, Purchasing a home, etc. Offered pass/fail.

• Reference #97665
• Thursdays -- 3:00-3:50
• Meets once/week for full semester
• Instructor - Dr. Mark Oleson

* PERSONAL FINANCE COURSES AVAILABLE THIS SUMMER...

FREE CREDIT SCORE

A few years ago, FACTA (Fair and Accurate Credit Transactions Act) was passed offering free access to one’s credit report [once per year per agency]. Unfortunately, free credit scores have not followed. A credit score is viewed by many in the financial world in the same light that a GPA is viewed by many in the academic world (the usefulness of both those numbers are widely debated, but we’ll save that debate for another day).

Yesterday (3/28/07), VISA launched a new website targeted to college students and young adults called What’s my Score (http://www.whatsmyscore.org). The financial resource is designed to help individuals understand credit reports and scores, and take control of their financial futures. “Money Guides” are available, covering topics from saving for college, student loans, renting an apartment, and buying a car. You may find their information helpful (others may be a little cynical due to the source); regardless, part of the site launch was a deal struck with Fair Isaac (the company that created the most widely used credit score – the FICO score) to provide free credit scores to the first 5,000 students wanting to check their credit score. To receive the free score, go to the site above, or click to walk through a 15 minute tutorial/quiz on credit basics, credit cards, and building credit. Once that is completed, you’ll be given a code and link to myfico.com which you can use to order the score [that will be free by using the code]. The following link will walk you through the process of ordering your score after getting your code.

After getting your score, you can “break the code” at: http://www.whatsmyscore.org/break. In addition, past financial tips as well as the OFS website provide additional credit resources. MyFico is one of the best resources on the web for credit scoring. E-loan was the first site to offer access to your credit score for free, but it does require that you create a log-in [provide some personal info] to get it [and you can only do it once]. A free score estimator is also available at the What's my Score site.

The truth is, credit scores are no longer the big mystery many make them out to be [although it wasn’t long ago that they were]. I’ll write next week more about what credit scoring is in a follow up to this tip … after all, here at MU, we’re on spring break!

IDENTITY THEFT RESOURCES

Identity theft is an issue that is regularly in the news - over the past couple of years, I’ve written multiple financial tips on the potentially devastating effects of identity theft. It is frightening to think that 25,000 Americans are victimized daily [that equates to nearly 5% of all Americans last year alone!]. I’d like to review the general strategies available to consumers to help minimize ID theft that have been shared prior and then discuss a new FDIC resource I recently came across.

Personally viewing your credit report. Every 12 months you can order a credit report from each reporting agency for free. Most experts suggest staggering your reports (ordering one every four months). Use the gov't site: (http://www.annualcreditreport.com NOT www.freecreditreport.com).

Opt out. One way to reduce the risk of ID theft is to reduce the number of solicitations you receive. You can opt out of credit card solicitations and phone solicitations.

Fraud alert. This is a ‘flag’ you can place on your credit report after being victimized. Alerts potential creditors that you are a potential fraud victim. Unfortunately, creditors aren’t required to abide by [or even check] the alert.

Credit monitoring service. A service where an annual fee (average of $75) is assessed to tell you when people are viewing your file. Most services don’t add much of a benefit beyond what you can do for free [see above].

Credit freeze. This is a very intriguing option and the only viable option that allows you to ‘stop’ ID theft before it happens rather than reacting to issues that surface. Several problems exist – laws have been established in some states, but not others; some states require you to be a victim prior to being able to use the freeze. I was very pleased to learn that Missouri initiated a credit freeze law since my freeze tip last June. For a list of state freeze laws, click link.

FDIC – “Don’t Be an On-line Victim” (free CD-ROM).
Nice, free resource on guarding yourself against internet thieves and electronic scams. The free CD-Rom can be ordered at the FDIC website. There is also an online version. The ID theft resource has seven sections:
- Introduction to identity theft
- Introduction to electronic scams
- Protecting your information
- Protecting your computer
- What to do if you are a victim
- Help for identity theft victims
- Resources

ADDITIONAL ID THEFT RESOURCES.
– Deter, Detect, Defend
– Fighting Back
– FTC ID Theft Site
– Guard Against Internet Fraud
– National Data
– Publications
– Resolving Specific Problems
– State Data
– Steps to Take
– Test Your Knowledge

PERSONAL FINANCE COURSE OFFERINGS (SUMMER 2007)

Have you considered taking a Personal Finance course this summer??


FINPLN 1183 (Financial Survival).
A one-credit course geared toward underclassmen focusing on "student-specific" financial issues: credit cards, student loans, debt management, avoiding pitfalls, credit issues, etc. Offered pass/fail only.

• Reference #23005
• M/W/F -- 12:00-1:00
• June 11 - July 6 (first 4 week course)
• Instructor - Dr. Mark Oleson

FINPLN 2183 (Personal/Family Finance).
Three credit course that focuses on introductory financial planning issues: savings, insurance, investments, taxes, use of credit, and financial aspects of housing. Meets math proficiency requirement.

• Reference #22985
• M/T/W/R/F -- 9:00 - 11:00
• June 11 - July 6 (first 4 week course)
• Instructor - Dr. Mark Oleson

* Both courses will also be available this fall [2183 by different instructor]; the one-credit Financial Success course (FINPLN 4483) that is being taught this spring will also be available in the fall. A notice will be sent when the final scheduling kinks get ironed out.

COOPERATIVE EXTENSION RESOURCES

I’m always looking for ways to stay ahead of the [financial] curve. I want the most up-to-date information possible. This is often difficult as information and policy is changing continually. A consistent source of current financial information is Extension. What I’ve encountered is that the notion of Extension is often a cloudy one. Did you know that personal/family finance is a prominent area of programming efforts in most states?

In 1914, Congress established the Cooperative Extension Service to deliver information from land-grant colleges to Americans. This ‘cooperative’ (educational partnership) helps people put research-based knowledge to work for businesses, communities, and individuals resulting in economic prosperity and an improved quality of life. Extension links the resources and expertise of nearly 3,150 county government offices, 104 State Universities, and the US Department of Agriculture Cooperative State Research, Education, and Extension Service, literally “taking the University to the people.” In other words, you have professionals that gather information and provide it to the public in an understandable way [often for no or minimal cost]. I would like to focus this week on the financial literacy resources that Extension provides … publications, web resources, classes and programs are simply a few of the ways that Extension is helping people put knowledge to work.

Debt Management, College Funding, Estate Planning, Investing, Insurance, Retirement Planning, Budgeting, Consumer Protection, Buying a House – these are just a sampling of the types of topics where Extension information is readily accessible. Rather than you needing to dig around, I’ve done the initial digging for you and have organized the information by state (see resources below). Links are provided to a general “financial management” homepage and a list of available publications. If no link is provided, it could be that the state doesn’t have a financial specialist; it could also be that their information was not organized in an ‘easy to find’ manner. If you find “better” links for a particular state’s program or pubs, let me know and I’ll change our links as necessary.

Links to Extension Financial Resources.
- Links to state resources
- Missouri Families
- MU extension resources
- National eXtension personal finance site


MU EXTENSION.
Using science-based knowledge, University of Missouri Extension engages people to understand change, solve problems and make informed decisions. MU Extension makes University education and information accessible for:
- Economic viability
- Empowered individuals
- Strong families and communities
- Healthy environments

WHAT IS YOUR MONEY PERSONALITY?

What are your attitudes/values about money? Do you tend to do things the way your parents did [or do you find yourself rebelling against their example?] … A lot of people [myself included] would argue that “understanding yourself” (i.e., what drives your spending and saving decisions) is critical to achieving financial success. It is very common for money personalities to get in the way of making good choices. A study published by the American Psychological Association found that the #1 source of stress for 73% of Americans was money. This to me emphasizes the importance of exploring our feelings and attitudes about money. The ultimate goal is not necessarily to change your current personality/values to different ones, it is to learn to prosper with the one you have.

Different experts have different names for these money personalities. Jordan Goodman, author of “Master Your Money Type: Using Your Financial Personality to Create a Life of Wealth and Freedom” summarizes money types as:

STRIVERS. You are all about achieving success and letting others know just how successful you are by buying lots of stuff. Money equals success. Ambition is the upside; overspending is the downside.

OSTRICHES. You are uncomfortable with money, even confused, intimidated or embarrassed by it. So you bury your [financial] head in the sand. The upside is you’re not consumed by money and you focus on more important things in life; the downside is eventually you’ll wind up regretting your avoidance of money problems and not setting financial goals.

DEBT DESPERADOS. You get a thrill from buying, which leads you to overspend. You quickly accumulate debt and may find yourself on the run from creditors. If there is an upside, it is that you likely understand the anguish debt can cause and that can be used to motivate and provide the resolve to get out of it. The downside is overspending is a weakness that is often bailed out through credit cards.

COASTERS. You may be coping or even thriving financially, but a lack of a money crisis has made you comfortable with the status quo. The upside is that you’re organized and responsible. But complacency means you’re missing out on opportunities and greater prosperity.

HIGH ROLLERS. You’re a thrill-seeker and gambler with money, thinking you’re smarter than others and are certain you’ll get a ‘big score.’ The upside is that you’re comfortable with risk, which can pay off with big rewards. The downside is that unbridled risk-taking can be dangerous and can land you in financial ruin.

SQUIRRELS. You hoard your money like a squirrel gathering nuts for the winter. You’re intensely afraid of losing money and exert a great deal of effort to spend less. The upside is you’re an excellent saver, but often at the expense of other things money is good for – spending, giving, etc.


A recent study by Putnam Investments outlined six financial beliefs and habits that they found to be most important in achieving financial security:

1. Realistic Expectations
2. Resisting temptation for quick rewards and fads
3. Patience in the face of adversity
4. Greater satisfaction from saving than spending
5. Ability to tolerate above-average risk
6. Receptivity to advice on how to save and invest


What’s your money personality? Are you interested in exploring your attitudes, values, and beliefs about money? If so, here are a few free resources to get you started …

- Color of Money
- Financial Compatibility Test
- Keirsey Temperament Sorter
- Money Psychology Tests
- Myvesta Money Personality Test
- Putnam Investor Profile

The following ISU Extension publication can also be a useful tool in beginning a dialogue about money and values …

AMERICA SAVES WEEK

“America Saves Week is an effort aimed at reaching more institutions and individuals to increase awareness that people need to save money, reduce debt and build wealth. The primary focus of America Saves Week is to encourage Financial Action – commitments to save, invest and build wealth” ...

Launched in 2001 and managed by the Consumer Federation of America, America Saves was initiated to focus greater attention on the need and opportunities for personal savings. To date, more than 67,000 Americans have enrolled as Savers by committing to implement a detailed plan to achieve a specific savings goal. This week (February 25 to March 4) has been set aside as the first America Saves Week. Several items included in accompanying press releases have stuck out to me as worthy of mention …

A recent Federal Reserve Board study identified successful saving strategies:
- Have a reason to save. Households with an identifiable goal for saving were more likely to have financial assets [and also have higher levels of assets]. Setting a goal is an important part of any saving strategy.
- Think ahead, plan ahead. Looking into the future can be an important motivational tool to help people anticipate and be prepared for future expenses. The most prominent goal of the Savers in the program is to develop an emergency fund.
- Develop a savings habit. It is no secret that getting started is the biggest challenge people face financially. Once the habit is developed, people comment on how ‘second nature’ saving becomes.
- Make savings automatic. Automatic savings via payroll deductions or automatic transfers from a checking or savings account is one strategy found to be very effective in “creating” Savers.

Two great ways to establish automatic savings:
(1) Online Savings Accounts – provide high yields; the following all currently pay 5% + with no minimums to establish [or maintain] an account, no fees, and are FDIC insured.
a. Emigrant Direct
b. FNBO Direct
c. HSBC Direct

(2) Mutual Funds – while many mutual fund companies require a large initial investment to open a mutual fund account, some companies will waive the initial investment if you establish an automatic investment (typically $50/month). T.Rowe Price and TIAA-CREF are a couple of notable ‘no load’ fund companies; AIM Funds and American Funds are examples of load fund companies that allow for automatic investments to open accounts. The Mutual Fund Investor Center provides a search tool to find companies that accommodate people looking for automatic investment opportunities.

Accompanying the America Saves Week is the announcement by eXtension of its new personal finance interactive website.


Related Sites and Resources.
- America Saves
- American Saver Newsletter
- Find a local campaign
- Military Saves
- Money 2020
- Youth Saves

GETTING THE BEST DEALS

I’ve always been interested in obtaining the best deals [financially] possible – getting the lowest rates [and fees] associated with mortgages, car loans, credit cards, and other financial products. An article in this month’s (March 2007) Consumer Reports Magazine suggests that the source of these deals are commonly credit unions. Credit Union membership is no longer the exclusive group that it used to be. Almost anyone (everyone?) is eligible to belong to a credit union (8,700 credit unions in the U.S.) based upon some criteria (being a student, geography, employer, religion, family member of someone that meets criteria, etc.)…

Credit Unions are often able to offer superior rates [not always, but often the case] because their shareholders are the customers (referred to as “members”) of the credit union, commonly referred to as a “cooperative.” That means that instead of profits going “out” to stockholders; savings are distributed “within” to its membership through higher interest/dividend payouts and lower loan rates on financial products. This “not for profit” ownership structure means that credit unions also pay fewer taxes, giving them more opportunities to return value to their members. Datatrac is a market research firm that surveys nearly 20,000 financial institutions weekly to gather rate information. I mention this to give you an idea of “average” national rate differences between banks and credit unions. You can view the site to see more rate comparisons as well as up to date information. In addition to differences in rates, fees also often vary between banks and credit unions, so that should also obviously be part of the ‘shopping list.’

National Rate Averages as of 2/20/2007.
Money Market Accounts (CU = 1.93%) (Banks = 1.18%)
1 Year CD (CU = 4.73%) (Banks = 4.16%)
Regular Credit Card (CU = 12.25%) (Banks = 14.98%)
48 Month Used Car (CU = 6.48%) (Banks = 8.12%)

Let me share a local [local for me] example. Tigers Credit Union (http://tigerscu.org) is a small entity that serves students, alumni, and family members of the University of Missouri-Columbia, Columbia College, and Stephens College. The credit union has recently begun offering a student credit card with interest rates as low as 9.9% and offers a 0% rate for 6 months to individuals that meet with a financial counselor at the Office for Financial Success or complete one of our personal finance courses (such as Financial Survival and Financial Success) to encourage individuals to understand the costs/benefits of credit, potential pitfalls, etc. It’s also refreshing to see credit card terms that are advertised in a readable font size! They also offer a money market account that yields 5.35%, above average CD yields, competitive auto loans, free access to thousands of ATMs (not unique to them), and are working on an account that would allow a member to start an IRA for as little as $25.

At the University of Michigan, their Campus Information Centers have created a listing of local financial institutions that shares information about free accounts, fee structures, ATM access, and other information to help their students make more informed choices. We're planning to create something similar in the coming months that we can share with the MU community.

Click to locate credit unions near you.

FAFSA PRIORITY DEADLINE ...

Just a reminder that the priority deadline for the 2007-08 FAFSA (Free Application for Federal Student Aid) for Mizzou students is March 1st. Students who file by this date will receive priority consideration for need-based financial aid. You can complete it online at: http://www.fafsa.ed.gov. Workshops and other assistance is available at the Student Financial Aid Office (11 Jesse Hall).

Additional information is available in the January FAFSA tip ...

FREE BUDGETING TOOLS

Prior to setting up the Financial Tip of the Week as a blog about 6 months ago, I’d never read a blog. I now find myself reading various personal finance blogs on a fairly regular basis. I have found some to be very useful sources of information. I came across this blog recently that provides links to several free budgeting tools. The vast array of options to me underlies the importance of evaluating different methods of budgeting before ‘giving up’ altogether simply because one didn’t work for you. Given that all are free, perhaps you can give them a whirl before dropping some money on the most talked about budgeting tools (i.e., Quicken and MS Money). You may find something that works for you; you may find something that will spark some creative juices within you to modify something you’re currently doing … [I’d begun typing explanations of the different programs, but it was getting too long. I’ll let you explore them on your own. All of the links have been verified]. If you find something of interest, I’d be interested in your feedback. Also, if you are aware of other online resources that are free that aren’t listed, let me know – I’ll add them. Take a few minutes to peruse these – lets face it, most people are YNAB (You Need A Budget).

FREE Budgeting [Download] Resources.

• AceMoney Lite
• Buddi
• Budget Ace
• BudgetOnWeb
• GnuCash
• Grisbi
• KMyMoney
• PearBudget
• Moneytrackin'
• MS Office Accounting Express
• MySpendingPlan
• SimpleD Budget
• StackBacks
• Yodlee MoneyCenter
• Zero-Based Budget
  

FREE Budgeting Spreadsheets.

1. Spreadsheet A
2. Spreadsheet B
3. Spreadsheet C
4. Spreadsheet D
5. Spreadsheet E

ORDERING YOUR FREE CREDIT REPORT

“I’m thinking of a number …” says a smiling host that then brags about how high his number is – his credit score that is – and how much money it saves him when he gets a new car loan or mortgage. Certainly true – a good credit score will allow you to borrow at lower rates than those with low credit scores. I’m sure most of you have seen it – the advertisement for FreeCreditReport.com. These types of advertisements for your “free” credit report are some of the most misleading you’ll encounter. The fine print - if you use this [Experian owned] site, you will begin your “free” trial membership in Triple Advantage Credit Monitoring Service; if you don’t cancel your membership within the 30-day trial period, you will automatically begin being billed monthly. Thousands of people mistakenly go to FreeCreditReport.com to order the free credit report that they are entitled to under FACTA legislation.

When you want to see your credit report, you want to use the official government site: http://annualcreditreport.com – there you actually get your credit report for free, without strings attached. You have the right to see your report every year for free, so there is no reason to visit any “pay” sites. The easiest way to identify if you’re in the ‘wrong place,’ will be if you’re asked for credit card information. September, 2005 marked the date that every consumer in America was eligible to obtain a free credit report [can obtain one report per agency (Experian, Equifax, TransUnion) per 12 month period]; ironically, it was only two weeks prior that the Federal Trade Commission announced a lawsuit against Experian [and freecreditreport.com] and other companies for “misleading” and “deceptive” claims for ‘free’ reports aimed at consumers. Obviously they largely benefited from the confusion over news stories telling consumers that they were entitled to a free copy of their credit report [and the importance of reviewing it]. While admitting no wrongdoing, Experian agreed to give consumers refunds and make the terms of its product clearer. 18 months removed, where are we? I don’t know that people have any clearer picture than they did then … I give students in my classes an assignment to pull one of their credit reports, providing the direct link for the free government site and without fail, some students will wind up at freecreditreport.com. Recent polls suggest that about 70% of American adults are aware of their right to obtain a free credit report – this is an amazingly high awareness rating. The challenge – to make sure people are going to the right site! FYI – the Federal Trade Commission has contacted more than 130 impostor sites (websites that misspell or sound similar to the real government site). There are 233 "scam sites" at last count.

Considerations.
- Go to http://annualcreditreport.com to order your free report
- Remember - no purchase is required when ordering free report(s)
- If you find mistakes on your report, fix them
- Stagger ordering your reports (order one every four months)
- Staggering enables you to monitor your own credit
- Don’t provide your credit card unless purchasing your credit score

Web Resources.
- FTC - Free Credit Reports
- Call, Don't Click
- Consumer Tips

DO YOU UNDERSTAND YOUR DEBIT CARD?

Debit cards are commonly seen as a good thing – a way to spend only money I have [unlike a credit card where you can obviously spend money you don’t have]; in theory, this is a good thing, but is this reality? It used to be - not any more. Did you know that if you don’t have enough money in your account to cover a debit card purchase (including ATM transactions) you probably won’t be denied? What? Isn’t that the reason most people use debit cards – to avoid that problem? A recent study has discovered that most banks will actually allow the transaction to go through …

Today, many financial institutions enroll customers [by default] in overdraft (“bounce protection”) programs when they open checking accounts. Under the program, the fee a customer pays when a withdrawal exceeds the available account balance is actually a finance charge for a loan. These overdraft loans are usually very short term and very costly. When these fees are converted to APR (the common measure to express the "true cost" of credit), the APR is often quadruple digits (or higher)! A 2005 report published by the Center for Responsible Lending (CRL) found that checking account holders will pay more than $10.3 billion in overdraft loan fees each year. The number one cause of overdrafts? Debit card purchases! These debit card overdraft loans have proportionately much higher APRs because they carry the same flat-rate fee on what is typically a much smaller transaction amount.

To me, the irony of this all is that banks have the technology capable of warning customers at the time of a debit transaction or ATM withdrawal that their account has insufficient funds, yet most do nothing about it. They can also decline the transaction and save the customer the overdraft fee, yet most do nothing about it. Yet, the CRL study learned that most people would prefer that the bank deny their withdrawal or purchase when they don’t have adequate funds in their account to pay for it.

Summary of CRL Findings.
- 46% of all overdrafts were triggered by debit card transactions.
- 72% of overdrafts were for electronic transactions (debit, ATM, etc.)
- Debit card overdrafts cost [median] $2.17 for every dollar borrowed
- Check overdrafts cost [median] $.86 per dollar borrowed.
- Expressed as an APR, the median debit overdraft rate is 20,000%+.
- 61% would prefer a denied purchase than an overdrafted account.
- 98% would cancel an ATM withdrawal if warned of insufficient funds.

Given what we know (in the past decade, debit card use for purchases has grown at an explosive 20% per year), it is likely the problem will continue. It is anticipated that a fee-based overdraft loan program will boost a bank’s overdraft revenue by 200% to 400%. I bring this to your attention primarily to enable you to be aware of the potential, costly trap of debit card overdrafts. In the study, over 60% of respondents who overdraft thought that they had enough money in their account to cover their purchase or ATM withdrawal.

Bottom Line.
Monitoring your account(s) regularly and maintaining a check register are a couple of simple things you can do to help avoid the problem created by overdrafts.

- CRL Report
- Montana State University Extension Check Register
- OFS Budgeting and Money Management Resources

FREE TAX ASSISTANCE (VITA)

Back-to-back tax tips – good indication that it’s that time of year again. Numerous resources are available to assist the majority of taxpayers with free tax preparation assistance as well as free electronic filing of tax forms.

Resources.
At the University of Missouri, students in the Personal Financial Planning Department and University of Missouri Extension Faculty have partnered to sponsor several community VITA (Volunteer Income Tax Assistance) sites as well as a campus site (that will be housed in the Office for Financial Success). These IRS-certified volunteers will prepare tax returns for students and working individuals/families with incomes under $40,000. The returns are prepared and filed electronically with the opportunity to have refunds direct deposited into checking, savings, IRAs, and other types of accounts (up to three) – see last week’s tip for more information. This is a great resource to help consumers avoid preparation fees and costly refund anticipation loans. This filing also includes your state returns and everything is done at no cost! Services will begin next Monday – January 29th. Walk-ins only – no appointments needed. Locations and availability are provided below.

Additional Tax Helps.
Additional information on tax issues is available at the OFS site. Information available includes:
- Current tax info (standard deductions, exemptions, tax brackets, etc.)
- Information on deducting student loan interest
- Do I have to file? [normally is worthwhile even if you “don’t have to”]
- Information on earned income tax credit
- Information on education tax benefits
- Tax forms
- Link for free online filing (AGI below $52,000)
- Tax tips, recent law changes, and other tax topics
- “Understanding Taxes” – an interactive, instructional IRS tax program

Getting FREE Assistance.
Free volunteer tax preparation sites are available across the country. VITA locations are available in most communities as is AARP locations for the elderly. Missouri VITA sites can be found by clicking here... The VITA link above can help you locate VITA sites if you live outside Missouri. Andrew Zumwalt is the University contact for VITA.


Columbia Locations (1/29 – 4/14/07).
*MU Location
OFS – 61 Stanley Hall (basement)
Tuesday & Wednesday (4:30 – 8:00), Saturday (10:00 – 1:30)

*Bank of Missouri
3610 Buttonwood Drive
Monday (4:30 – 8:00) FEBRUARY ONLY

*Central Missouri Community Action
400 Wilkes
Monday & Wednesday (10:00 – 1:30)

1500 Vandiver
Friday (10:00 – 1:30)

*All sites closed March 24 – April 1 (Spring Break).

SPLITTING YOUR TAX REFUND

Three months ago I sent a tip about the Pension Protection Act of 2006; a bill passed late last summer that primarily included provisions geared toward helping consumers improve on long-term savings habits. Item #3 of those mentioned was an interesting change, one that you will likely have the opportunity to participate in shortly … splitting your tax refund.

Each year, more than 75% of U.S. taxpayers are entitled to a refund (of more than $2,000 on average). Studies have demonstrated that individuals are more likely to save if it is easy and automatic. The government is attempting to accommodate this tendency. In the past, the majority of refunds were provided via direct deposit to one’s checking account. With the new “split refund” option, individuals can opt to have their refund split into up to three different accounts. Account options include checking, savings, IRAs, and health savings accounts. Doing so appears very simple. Just include Form 8888 – Direct Deposit of Refund to More Than One Account – with your return. Indicate the account number and routing number for the financial account(s) where you want your refund deposited and instruct how you want the refund allocated among the accounts.


What you need to know …

- What is a split refund? A split refund allows you to divide your refund [in any proportions you want] among up to 3 accounts with U.S. financial institutions.

- Does my refund have to exceed a certain amount to be eligible? The deposit into each account must be at least $1.

- Can I split my refund among different financial institutions? Yes.

- Must I split my refund equally? No. You have the flexibility to divide your refund however you choose.

- What types of accounts are eligible? Checking and savings accounts, IRAs, Health Savings Accts, Archer MSAs, and Coverdell Education Savings Accts.


Things to do …

- Confirm that your financial institution will accept direct deposits.

- Confirm your account numbers and routing numbers.

- YOU WILL NEED TO SET UP YOUR ACCOUNTS FIRST! If you want to have all or a portion of a refund put into [for example] a Roth IRA, you will need to have an account established in order to have money directed to the account.


More information about splitting your Federal Income Tax Refund can be found at the FAQ section of IRS.gov.

STUDENT LOAN INTEREST RATE FOLLOW-UP

Last week I commented on potential legislation that would ultimately cut in half the current interest rate on Subsidized Stafford Loans for undergraduate students (click here to read). Good news to report - yesterday (1/17/06), the House of Representatives passed the legislation (356 to 71 vote). Next step - the Senate. I'll keep you informed as things hopefully continue to progress positively ...

If you are interested in reading more about this piece of legislation, or about the expected reintroduction of the Student Debt Relief Act (which proposes to: cut student loan rates, increase Pell Grant Assistance, cap student loan payments, and provide loan forgiveness options to individuals in public service areas). Here are some helpful resources:

- National Association of Student Financial Aid Administrators
- Student Debt Relief Act Press Release

UNDERSTANDING YOUR CREDIT CARD STATEMENT

The monthly credit card statement is one of the most commonly overlooked financial documents we receive. Why? It could have something to do with the high volume of information that is ‘squished’ into a small page of paper. It could be the complexity of the information provided. It could be the small font size used. Regardless of the reason, it is time to take a closer look. Although statements from different companies will look slightly different, there are many common elements [here are a few]:

Monthly Charges.
Reviewing your monthly charges is very important. The most obvious reason is to make sure that your actual expenses match what the credit card company is reflecting (mistakes do happen); but this will also alert you to fraudulent charges as identity theft is becoming a bigger problem by the day. By law, you have 60 days to dispute [in writing] errors on your credit card statement.

Minimum Payment.
This is the smallest payment (normally 2% - 4% of your balance) your credit card company will allow you to make and remain in good standing. Making this payment on time is important for maintaining your credit; ideally you will pay the balance in full and thus avoid all interest charges.

Interest Rate/Annual Percentage Rate (APR).
Most of us are familiar with the interest rate – the amount of interest paid per month typically stated as an annual rate. The APR, however, documents the “bottom line” cost you’re paying for your card. The APR includes not only interest charges, but also fees [such as late and over-limit] and other transaction costs.

Grace Period.
This is the “free” period of time that you can avoid interest charges by paying your balance in full each month. The law requires the grace period to be minimally 14 days (meaning that the bill must be mailed at least 14 days before the due date). Most cards have grace periods of 20-25 days. If you fail to pay your balance in full, you will forfeit the grace period (in addition, most cards will forfeit your grace period when cash advances, balance transfers, or convenience checks are used – even if you paid the balance in full the prior month).

Credit Card Limit/Available Credit.
This is the maximum debt allowed by the credit card company on the particular card. Your maximum credit as well as your available credit (maximum credit minus current balance) will be listed on each statement. Keep an eye on your limits – card companies will regularly increase your limit when you pay on time as they want to encourage you to spend more. You can call and request that they lower your limit if you’d like.

Owning a credit card includes with it the responsibility of learning how to use the credit card. Understanding the monthly credit card statement is essential to your success as a consumer. Take the time to review the information on your credit card statement and seek assistance if you have questions/concerns/problems.

LEGISLATIVE INFORMATION FOR CURRENT STUDENTS ...

It wasn't long ago that I sent a weekly tip regarding the legislation that locked the interest rate on all Stafford Loans [taken out after 7/1/06] at 6.8%. Well ...

This week [expected tomorrow], the new House of Representatives leadership plans to introduce legislation that would cut the interest rate on certain student loans in half!

The Project on Student Debt has prepared a brief analysis of this bill, which would reduce interest rates on Federal Subsidized Stafford Loans for undergraduates from the current 6.8% to 3.4% over the next five years. When fully phased in, borrowers on a 10-year repayment plan would see their payments reduced by 14% and save $4,000 in interest costs on $20,000 in covered loans.

The proposed interest rate phase-in would occur according to the following schedule:
6.12 percent in 2007
5.44 percent in 2008
4.76 percent in 2009
4.08 percent in 2010
3.4 percent in 2011 and subsequent years.

To read more ...
- Project on Student Debt
- Inside Higher Education

FAFSA

The beginning of the year triggers a lot of financial events for most [or at least resolutions]: Evaluating your financial situation, perhaps rebalancing investments, getting your finances organized, beginning the process of getting out of debt, starting a Roth IRA, etc. If you’re an MU student, taking one of our one-credit personal finance courses (financial survival or financial success) would be a great way to get your financial goals for the new year off to a good start. Links to register for a course are available under the “Mizzou Resources” section of the blog site (http://financialtip.blogspot.com). Another student [or parent of a student] event at the start of each year is completing the Free Application for Federal Student Aid, better known as the FAFSA.

The FAFSA is the first step in the financial aid process. It is used to apply for federal aid such as grants, student loans, and work study or University aid in the form of scholarships. Even if you don’t think you are eligible for financial aid, you should still fill it out because schools also use it to award non-federal aid. Schools have different “priority deadlines” for submitting the FAFSA (March 1 at Mizzou) – students meeting the appropriate deadlines are given first consideration for aid. After that, aid will be administered based upon fund availability.

Even if you don’t have a need for loans, you can fill out the FAFSA to apply for scholarships, work study, etc. and you can refuse the loans if you don’t want or need them. You aren’t required to take the loan because you filled out the FAFSA. Don’t wait till the last minute to file – if you [and/or your parents] haven’t filed your taxes and the priority deadline is approaching, you can estimate the needed information [use last year’s tax info if the situation is similar]. You can then update the numbers when you get them.

Information you will need to fill out the FAFSA.
- Student driver’s license and Social Security card
- Income tax returns or as close an estimate a possible
- W-2 forms and other records of money earned
- Parents tax return [if dependent student]
- Current bank statements
- Records and documentation of other untaxed income received
- Records of investments (stocks, bonds, etc.)
- Current mortgage information
- Your alien registration card [if not a U.S. citizen]
- Business or farm records [if applicable]

Additional FAFSA Resources.
- http://www.fafsa.ed.gov (fill out the FAFSA online)
- 1-800-4-FED-AID (Dept of Ed can address questions or complications related to completing the FAFSA)
- Financial Aid – your financial aid office is another great resource for addressing FAFSA-related questions.
- Five common mistakes/errors to avoid (https://sfa.missouri.edu/FAFSA_Errors.pdf)

PRIVATE STUDENT LOAN CONSOLIDATION

Last week I wrote about federal loan consolidation and emphasized the importance of reviewing offers closely. There are two changes I wanted to point out: (1) Educational Loan Company - mentioned as a good baseline for comparing “medium-term” repayment offers – had required a minimum consolidation amount of $20,000; that has been reduced to $10,000. (2) The North Carolina Program, which had offered a 2% rate reduction incentive, offers incentives totaling 2% for on-time payment and an additional .25% reduction for auto payment (2.25% total rate reduction benefit available).


Contrary to popular belief, private loans can be consolidated … Here is what you should know if you have them and are considering consolidation:

• DO NOT consolidate them with federal loans even if they provide the option.

• They can’t be consolidated until you’re out of school and beginning repayment.

• In most cases, consolidating private loans will leave you with a variable rate loan – it will not typically fix your loan rate [like federal consolidation].

• Keep in mind that the best option is often to leave them alone. How to know?

1) Look at the benefits of your current lender. There are only about ten lenders that will consolidate any private loans. Most companies require that you have loans with them to be eligible to consolidate with them. The amount will vary – some will require that you have one or more loans with them – some will require 50% or more of the consolidating amount be with that lender. Researching your lender is a good start …

2) Shop around. As mentioned, there are a few companies that don’t have stipulations in order to use their consolidation/refinance program. Here’s a published list - http://finaid.org/loans/privateconsolidation.phtml. The lender, not the government, dictates the interest rates provided [most are linked to the Prime Rate or LIBOR].


Private loan are credit-based loans [as is the refinancing/consolidation process]. If you had poor credit when getting the loan initially, consolidating them may make sense if you now have better credit and/or a co-signer with good credit. The difference in rate from poor to excellent credit can be as much as 6%+ with some lenders. If you had good credit from the beginning, consolidation is not likely to provide much benefit to you. There are distinct costs to weigh in the decision. All of the criteria used to assess the ‘utility’ of the original loans should be examined when evaluating consolidation options. See my alternative loan article on the OFS website - http://financialsuccess.missouri.edu/altloanselection.pdf - for more detailed information about ‘cost’ considerations such as fees, potential prepayment penalties, borrower benefits, etc.

FEDERAL STUDENT LOAN CONSOLIDATION

As the end of the semester is upon us, it seems timely to review the issue of student loan consolidation. This week I’ll address consolidation of federal loans and will address consolidation of private loans next week.

First off, some reminders about some of the recent law changes:
- In-school consolidation is no longer an option. You will need to be out of school in order to be eligible to consolidate.

- You are no longer required to have multiple lenders in order to be able to choose your lender – even if all of your loans are with one lender [i.e., DMU], you are able to shop for the best deal for you.

- You are now unable to consolidate your loans with your spouses’ loans – this was never smart, but is no longer an option.


Other important consolidation considerations:
- You do not want to consolidate Perkins loans [or other loans] if they may be forgiven or repaid by your employer, state, etc. It is ok to consolidate them otherwise.

- If a lender is offering to combine your federal loans with private loans, credit cards, or any other non-federal loan debt, RUN!

- You can AND SHOULD consolidate even if you consolidated prior to take advantage of lower rates. You can always reconsolidate (to combine) loans as long as you have loans to consolidate that haven’t been consolidated prior. As most of you heard last year from me, doing this WILL NOT negatively impact your interest rate. Your overall rate will be a weighted average of your loans rounded up to the nearest 1/8th. For example, if you consolidated $5,000 of loans at 6.8% and $5,000 at 4.8%, you would now have a $10,000 consolidation loan at 5.8% … view resources below to access a calculator to find out your weighted average.

- Some people are afraid to consolidate because their repayment will be extended (thus more interest paid). Keep in mind that you can select the repayment option you want as well as choose to pay whatever amount you want (no legitimate program will assess a penalty for early payoff). Consolidation, however, is the only way to ‘lock’ the rate of otherwise variable rate loans.


“How do I decide where to consolidate – I get so many offers?”
This is perhaps the most important question to address … My experience with consolidation issues over the past several years has drawn me to one primary conclusion – the ‘financially smart’ place to consolidate is not going to be the same for every student; it is largely a factor of how you plan to repay your debt.

(1) If you haven’t borrowed much or plan to repay your debt quickly, you should search for a company that will reward you for doing so. This benefit will normally come as a principal balance credit. For example, Key Bank offers a 5% credit for consolidating with them. Some companies will provide a max credit, as well as other ‘fine print’ caveats, so read the application. While a couple ‘Benjamins’ is nice if this is my situation, if I have a long-term repayment scenario, being enticed by this type of benefit would be a big mistake!

(2) If I find myself in a ‘long-term’ repayment situation (I’m going to define this as 10 years or more of repayment anticipated), the best “deal” for me would be the company that will reduce my interest rate the most. This won’t solely be people that have large debt levels; these will also be individuals that wisely consolidated during the past couple years when rates were at historic lows and they see an opportunity to repay their debt at amazingly low levels and want to minimize that payment while they invest, prepare for homeownership, and focus on other financial goals. Your baseline when comparing rate benefits is to understand that an “average” company will offer a 1.25% reduction (normally .25% reduction for auto pay will be provided along with a 1% reduction in rate for on-time payments [normally of 36-48 months]). As part of the resource links below, I provide links to state programs that provide ‘above average’ benefits, like North Carolina, which offers a 2.25% total benefit for automatic and on-time payments. Information about the programs as well as other information are available below …

(3) The first two scenarios will cover most individuals, however, some individuals will have borrowed too much to pay off quickly; others may be debt averse and don’t want to extend it, so they fall somewhere in between the above two options. In this case, where you plan to repay your debt over an ‘intermediate’ term, review a company that will provide interest rate benefits (these will almost always work out better than the principal credit benefits) where the benefits are offered up front. For example, the Educational Loan Company offers a better than average rate reduction benefits (1.75%), but rather than needing 4 years of on-time payment, .5% of the benefit is up front for auto pay and 1.25% is available after only 24 months of on-time payments.

NOTE. Three things I want to emphasize. (a) These are general guidelines/rules of thumb – run the numbers to see what will make sense for YOUR LOAN SITUATION. (b) Read the applications to see if there are caveats – for example, the principal balance credit by Key Bank is foregone if you defer or forebear the loans during the first 36 months of repayment; Educational Loan Company requires you to be consolidating at least $10,000 total in debt. So read through to make sure the program fits with your situation. Don’t, however, assume that you’re not eligible either. It’s easy to say “I’m not from North Carolina, so I can’t do that” when the reality is that if you’re willing to spend 5 minutes, you can create a connection that will enable you to be eligible for their program. Thus, (c) BE SMART and take a few minutes to figure things out, it will be well worth your time!


*CONSOLIDATION RESOURCES.
- Calculating your loan payment
- Calculating your weighted average
- Consolidation strategies
- Repayment options
- State consolidation programs

* All of these links are available via the OFS site click on the “student issues” button …

EXTENDED WARRANTIES - UNWARRANTED?

A lot of electronics will be purchased this holiday season. For those of you that will find yourself in this situation, the inevitable question awaits … “Would you like to purchase our extended warranty?” What do you do …?

What do the experts say … Consumer groups [and common sense] will normally tell you to turn down the urge to accept the offer. A fast-growing $15 billion dollar industry has been built on the likelihood, however, that you’ll succumb to the impulse to say yes. Millions of people each year pay anywhere from 10% to 50% of a product’s original purchase price to extend a warranty. The decision to buy the extended warranty defies the recommendations of most economists, consumer advocates, and product quality experts who warn that the plans rarely benefit consumers and are almost always a waste of money.

What are they … Extended warranties were first introduced as a high-pressure sales tool by large electronics stores in the late 1980s. Now, they are a core product sold by all kinds of retailers and cover a wide range of products. The warranties are technically insurance products where the premium is paid in a lump sum at the time of purchase. Extended warranties generally lengthen the coverage provided by the manufacturer’s warranty on a product. While terms vary dramatically, the plans typically add from one to three years of protection.

How do they work … In terms of service, most warranty providers use third-party contractors to repair broken items, and consumers don’t get to choose who performs a covered repair. Many policies won’t cover accidents or normal wear and tear (the most common causes of breakdowns in common household goods). Most importantly, however, is the fact that the vast majority of extended warranties are never used.

One distinct disadvantage for consumers is its vast difference versus selecting other “insurance-type” products. When buying auto insurance, for example, it’s relatively easy to make an informed purchasing decision by comparing terms and prices among different providers. It’s not nearly as simple a process to comparison shop for an extended warranty at the checkout counter. Not all salespersons are provided a commission for selling the product but be certain that they’re trained to make sure you know about the warranty and its benefits.

By the numbers … Warranty Week, an industry publication, last year estimated that of the $15 billion in premiums charged to consumers in 2004, $7.5 billion went straight into the pockets of the stores that sell warranties. Of the remaining $7.5 billion, it was estimated that only $3 billion was paid in claims by the insurance companies that back the plans (20% payout ratio). Contrast that with the auto insurance industry that paid out $66 in claims for every $100 in premiums during the same year (Insurance Information Institute).

Bottom line … Consumer Reports almost never recommends buying an extended warranty, especially on automobiles. But even Consumer Reports makes exceptions to the rule. Last year, for the first time, they discovered that repairs on some products (namely laptop PCs, treadmills, and plasma TV sets) were common enough and expensive enough that a decently priced extended warranty would make sense. So what does that mean for you? More times than not, an extended warranty is an unnecessary, expensive option – think twice about it when making that purchase this holiday season.

(SOURCE – Washington Post, October 2006)


ADDITIONAL RESOURCES:
- Extended Warranties & Service Contracts (Univ of FL)
- Extended Warranties: Are They Worth Buying? (Univ of KY)
- Take a Hard Look at Extended Warranties (CUNA)

ELIMINATING DEBT (Psychological vs. Financial)

Is one way better than another to get rid of debt? The answer to your question will likely differ depending on who you’re asking.

“FINANCIAL” METHOD. Nearly every ‘financial’ person will advise that debts should be paid off in a particular order: start with highest interest rate and move to the lowest interest rate (done by rolling the payment from one debt to another as debts are paid off). While this method makes perfect sense from a mathematical point of view, more and more people are finding that there is another method [often overlooked] that works better on their psyche ...

PSYCHOLOGICAL METHOD. This system of debt repayment, often referred to as the “debt snowball,” organizes one’s debt from the smallest balance to the largest balance. This method is not likely to save the most money or time (as the interest rates are not likely to align in that manner), but many find this approach very empowering and motivating because they see progress quickly. Focusing on the smallest balance first will accomplish this end.

In both of these methods, pay the minimum amount on all debts except for the “focus” debt (smallest balance in psychological method; highest interest rate in financial method); pay as much as possible on the focus debt until it is eliminated and then approach the next debt in the list with similar intensity.

I’m not arguing against the merits of the financial method as outlined above. Obviously, if someone has the discipline to adhere to the plan, you’ll save the most time and the most in interest expenses. The psychological method merely takes a seemingly more “human” approach to finances that suggests that people will be more likely to stick with their ‘financial diet’ if they see some ‘debt pounds’ come off quickly … that is what Personal Finance is all about – doing what works best for you (which very well may be something different than the next person). After all, the point is getting out of debt [the end]; don't get caught up in the means to the end. How you decide to do it is much less important than doing it.

Check out the following Excel spreadsheet if you want to play around with the different methods …

NEGOTIATING A LOWER CC RATE

There have apparently been some 'issues' with registration for the 1-credit Financial Success class. They should [hopefully] be resolved now - there are no prerequisites or requirements for class entry. More info below ...

Negotiating a lower credit card rate:
Any “get out of debt” strategies/plans you come across will consistently tell you to lower your credit card rates. Obviously this is good advice and a no-brainer strategy – if I can repay my credit card debt at 10% instead of 20%, I’ll be better off. What most of these plans leave out is how you go about getting a lower rate on your credit card. Let me share some ideas with you if you find yourself in a high rate CC situation.

1. Call your credit card company and ask for a lower rate. Most have lower rates available to good customers (customers paying on time every month), but they don't volunteer the information ... you have to ask. This is likely to work if your high rate was the result of a missed payment and not a long-term problem.
   
2. If your card refuses to give you a lower rate, find one that will. Do some homework – there are over 30,000 credit cards out there. In this highly competitive industry, if someone won’t treat you the way you deserve, someone else will. A few websites to search for no-fee, low rate cards [assuming you haven’t already gotten several acceptable offers in the mail] include:
   - CardRatings.com
   - CardWeb.com
   - CreditCards.com
   - Index.Credit.Cards
   
   After you’ve done your homework, contact your company to inform them of your offer. Being specific is important, because an offer in hand will create leverage for you. Let them know that you wanted them to have the opportunity to match the competitors offer before you transferred your balance. Ask to speak with a supervisor if necessary. Click here for a sample script.
   
3. Be prepared to switch. If what you’ve tried to this point hasn’t worked, consider switching to a card that is more interested in your business [willing to work with you]. If you have a card without a balance, call that company first to see if they have a balance transfer special prior to opening a new account.

Call confidently – a 2002 study found that more than half of the people [from a wide variety of credit situations] that called to request a lower credit card rate were granted their request – from an average starting rate of 16% to a lowered rate of 10.47%. I met with a student this afternoon and we talked about her credit card rate and tactics she could explore to try to lower her rate. All of these things above were discussed – the source of these three suggestions to negotiating with your CC …? AMERICAN EXPRESS!


Seats in the 1-Credit courses for spring are filling quickly ...
Financial Survival -- FIN PLN 1183 (Ref #43500) - (68 seats left)
Financial Success -- FIN PLN 4318 (Ref #43587) - (117 seats left)

The "award winning" Financial Tip of the Week is a service of ...
University of Missouri-Columbia
Department of Personal Financial Planning
Office for Financial Success
Dr. Mark Oleson - OFS Director

For those receiving the weekly blog via e-mail, you can click this link [or go to http://financialtip.blogspot.com] to view prior tips and other resources.

SUCCESSFUL MODELS IN FINANCIAL EDUCATION

As I sit here in a hotel room in Washington D.C. contemplating what to write about in this week's tip, I think I'll take the opportunity to toot our horn a little bit ...

Since arriving at the University of Missouri about 15 months ago, the Personal Financial Planning Department has been supportive of just about everything I've wanted to do in starting/operating the Office for Financial Success. We've had many rewarding successes along the way - today among those. I was very honored to be invited to D.C. by Freddie Mac to receive two awards that provide national validation to the good things being done at MU.

2006 Successful Models in Financial Education Awards:
Freddie Mac today announced their 2006 successful models within four financial education categories. The OFS was proud to be recognized in two of the four!

• Successful Outreach and Marketing Efforts for Financial Education.
  We received the top recognition in this category for our Financial Tip of the Week. Time has only increased the popularity/readership of the tip; the new conversion to a weekly blog has been popular as well.
  
• Successful Tools or Resources Used in Financial Education Initatives.
  We were runner up in this category for our Financial Survival course for college students. The unique 1-credit pass/fail Financial Success course that hasn't even been offered yet (next semester will be the first offering) is already receiving attention.

Seats in the 1-Credit pass/fail courses are filling quickly ...
Financial Survival -- FIN PLN 1183 (Ref #43500) - (<100 seats left)
Financial Success -- FIN PLN 4318 (Topics) (Ref #43587)


The "award winning" Financial Tip of the Week is a service of ...
University of Missouri-Columbia
Department of Personal Financial Planning
Office for Financial Success
Dr. Mark Oleson - OFS Director

PERSONAL FINANCE - EDUCATIONAL RESOURCES

It is amazing the amount of resources available in the area of Personal Finance. Some resources are stellar, some are poor, and a whole lot fall in between. My objective this week is to expose you to some of these resources [the better ones]. Keep in mind that this is not an endorsement for any of them – my hope is that you’ll be able to find some that will be beneficial to you [as a teacher, a parent, a student, or whatever situation you find yourself in]. You will find that some of the resources are geared toward beginners; others are geared toward individuals that have a good understanding of beginning personal finance principles … all of these resources [at least the basic information] are available at no cost. This should not be considered an exhaustive list of resources, merely a broad brush stroke. Here are a dozen different resources covering various aspects of personal finance:

• Checkbook Basics
• FDIC - Money Smart
• Florida State - Fundamentals of Financial Planning
• Freddie Mac - Credit Smarts
• MoneySKILL
• MU Extension - Info Sheets
• My Money
• NEFE - Get Smart About Your Money
• NEFE - High School Financial Planning Program
• Practical Money Skills for Life
• Rutgers - Investing for your Future
• Smart Money - Investing 101
  

SUMMARY of LAST MONTHS WEEKLY TIPS:
- 10/05 - 8% Rule
- 10/12 - Pension Protection Act of 2006
- 10/19 - Credit Card Trap Widens
- 10/26 - Credit Myths
--> TIP ARCHIVE

THE FINANCIAL TIP OF THE WEEK IS A SERVICE OF...
University of Missouri-Columbia
Personal Financial Planning Department
Office for Financial Success
Dr. Mark Oleson - OFS Director