Sunday, February 27, 2011

College Debt Rules of Thumb

As part of my self imposed Dave Ramsey immersion in preparation for teaching his class, I decided to listen to his radio show for at least an hour. I have tried to listen on two earlier occasions but after 10 or 15 minutes I turned it off. Frankly, I found it depressing. People call Dave with unbelievable intractable financial problems brought on by amazing stupidity. Dave yells at them and lectures them for a few minutes. Then he tells them, “Sell the car.” That by the way is a Dave Ramsey joke. He calls his radio show, “The sell the car show.”

One of the callers wanted to talk about her daughter. The young woman was pregnant and living with her parents. She was unemployed with $90,000 in college debt. Dave asked the lady where one might find the father of her grandchild. Turns out the father was living with his wife, earning $12,000 a year. When Dave asked what degree generated $90,000 in debt, the woman replied, “Culinary Arts.” Dave then launched into a tantrum that included the useful suggestion of creating a job if none were available. He suggested the young woman work rich neighborhoods looking for someone who would pay her to prepare meals or starting her own catering service.

Obviously $90,000 in college loans for a degree in Culinary Arts is stupid, really stupid, but $90,000 doesn’t sound like a problem for a neurosurgeon. Where to draw the line? What is a good rule of thumb for college debt? Turns out there is a rule of thumb. I found it an article by the well know financial columnist, Liz Weston. She suggests no more in college debt than the student can reasonably expect to earn in their first year following graduation. That is a tough rule of thumb but it sounds like a pretty good suggestion. Far too many young people are crippled for decades by college debt.

What does this mean in practical terms? Liz provides some starting salary data.

Selected Starting Salaries by Major

$36,000 Business Administration
$43,000 Management Information Systems
$26,000 Psychology
$28,000 English

Just for grins, I looked up what starting salary a graduate in media arts might expect. I could find no starting salary data for a media arts degree. Can you say, “Would you like fries with that?” $18,000 first year salary (assuming at least one raise and some overtime).

Parents don’t get into a guilt trip and cosign for your children’s college debt. Liz Weston observes that it is easier for your children to find a college loan than it is for you to find a retirement loan. She does not completely let parents off the hook. After all, having children was your idea. She suggests another rule of thumb, save $25.00 a month per child for their college education. These funds should be invested in a tax sheltered 529 plan. These accounts like their 401 (K) cousins are allowed to grow and compound tax free. As an added bonus, the money in these accounts is not included when calculating the student’s eligibility for need based aid.

Finally, as I have mentioned on numerous occasions, scholarships and work study money is a much better option. There is a ton of scholarship money out there, but finding it requires a lot of effort. I contend that a serious determined student can find or earn enough money to graduate with little or no debt. It isn’t easy but it is possible.

Friday, February 25, 2011

Dave Ramsey's Financial Peace University

In April my church will be offering Dave Ramsey’s Financial Peace University, a 13 week boot camp in financial literacy. I have read Dave Ramsey’s book The Total Money Makeover. I am currently studying the material in the Church Leadership Kit both to get a sound understanding of the content and to begin visualizing the classes I will be coordinating.

For those of you not familiar with Dave Ramsey, he puts on a real show. His delivery is one part evangelist, one part cheerleader, one part blue collar comedian, and one part drill sergeant. If nothing else he is passionate. His message is simple. It boils down to setting priorities, developing a plan, and not deviating from that plan for any reason. Like a high school football coach, he is not interested in your opinion or possible alternatives. He is interested in convincing you that if you do it his way you will win the state championship. It isn’t subtle. It isn’t nuanced. It isn’t analytical. It does work. Dave has thousands of testimonials, ending with the battle cry, “I’M DEBT FREE!”

The course, like football practice, is repetitive. Dave Ramsey demands the audience finish his sentences over and over to drive home key points. He uses visual (DVD) presentations. He covers the same material for auditory learners by means of the (CD) set. He has a class workbook and homework for the kinesthetic learner. The homework will also force the participants into a planned budget that will allow them to take the seven baby steps to financial freedom. Finally, the small group meeting following the DVD presentations is there for accountability. Dave is big on accountability.

There is a wealth of material in the student’s course material including the CD set, a workbook containing all sorts of budgeting and planning forms, as well as such things as sample letters for dealing with debt collectors. The student kit also contains a hardback book, Financial Peace Revisited, and his deluxe envelop budgeting system.

I am excited.

Dave Ramsey’s Seven Baby Steps

1. Start a “beginner” emergency fund of $1,000
2. Start and complete a “debt snowball” except for a house mortgage
3. Create a fully funded emergency fund equal to three to six months’ takehome salary
4. Invest 15% of household income into Roth IRAs and pretax retirement
5. College funding for the children
6. Pay off the house early
7. Build wealth and give

Monday, February 21, 2011

Really Bad Advice And The Yes Set

Yesterday, while surfing The Motley Fool, an investment website well worth adding to your favorites, I came across an article entitled, “Stock Advice So Bad It Will Make You Cringe,” and I did. The author received an invitation to one of those “free” luncheon workshops where the presenter will teach you how to make money in any market, even in markets that are going down or not moving at all.


It turned out the workshop was a high pressure sales pitch for something called EduTrader, a computer program that flashes green (good), yellow (neutral), or red (bad) for any company in its database. All you then need do is buy a stock flashing green when the Moving Average Convergence Divergence (MACD) test crosses the line on the way up and sell when it crosses the line on the way back down.

Humbug! Bah, humbug!

For general information of the reader, MACD is one of many real measures used by technical analysts.

“Developed by Gerald Appel in the late seventies, Moving Average Convergence-Divergence (MACD) is one of the simplest and most effective momentum indicators available. MACD turns two trend-following indicators, moving averages, into a momentum oscillator by subtracting the longer moving average from the shorter moving average. As a result, MACD offers the best of both worlds: trend following and momentum. MACD fluctuates above and below the zero line as the moving averages converge, cross and diverge. Traders can look for signal line crossovers, centerline crossovers and divergences to generate signals. Because MACD is unbounded, it is not particularly useful for identifying overbought and oversold levels.”

What is interesting to me is not the Indian root elixir being sold by this particular medicine show, but the skillful use of the Yes Set by the presenter. This is a tool frequently used by salesmen and politicians.

The Yes Set works like this (I hear it all the time).

Politician: Don’t you love your families
Audience: Yes
Politician: Don’t you love America and want the best for our children’s future
Audience: Yes
Politician: Then vote for me
Audience: Loud mindless cheers

Salesmen are taught the same technique. If a salesman can get a prospective customer nodding his head in the affirmative as he makes point after point about his product, he will likely be able to successfully close the sale.

In the example presented in the article, the salesman delivered an enthusiastic evangelistic pitch about the importance of patience and research in investment combined into a stirring “knowledge-as-empowerment” stew. Then he ascended step by step from truisms and reality into Cloud Cuckoo Cuckoo Land.

That is the way this manipulation technique works. The salesman or politician will start with subjects and ideas you believe and gradually move you towards his goal. Salesmen are even taught to calibrate their subjects by discussing topics unrelated to the sale. When they talk about the weather, sports, or current events they are watching your reactions. They will remember your eye twitched a little when expressed displeasure at recent increase in the state sales tax or you moved your hands in a certain way when discussing a recent victory by your favorite football team. He will then use your reactions to measure his effectiveness as he delivers the pitch.

You can successfully learn how to build wealth, but the keys to an increasing net worth are not to be found by listening to a snake oil salesman offering a free lunch.

As the song says:

I know you're looking for a ruby in a mountain of rocks
But there ain't no Coup de Ville
Hiding at the bottom of a Cracker Jack box

Saturday, February 19, 2011

Rent or Own?

This post is a learning exercise for the author. I really don’t know very much about real estate. We bought one three bedroom two and a half bath track home 23 years ago. We paid it off in less than ten years. We still live in it today. End of story.

I always thought when I retired I would sell my existing house, move to a lower cost area, and buy a similar property, a one level brick box that required less maintenance. About a month ago, a coworker gave me a different idea to chew. His friends retired to Florida. After several years of vacation visits to different towns in Florida and a great deal of research, they picked out the perfect house in the perfect town. However, after two years they decided they made the biggest mistake of their lives. They sold the perfect house in the perfect town and moved somewhere else. Given the time frame, I suspect they suffered a considerable financial loss. My coworker recommended renting after the retirement move for a year or so. This would give me time to consider my options without making a major financial commitment.

My mind didn’t stop there. I thought, why should I buy another house? Could renting be a better option? When we first married, we didn’t have enough money to buy a house. As time went on, we had more money but the interest rates of the 1970s made renting a better choice. In 1987 our rent jumped something like 10%-12% in one year! We decided it was time to buy a house. I intuitively made a decision that was quite sensible. My mortgage payment (excluding taxes and maintenance) on a three bedroom home was lower than the rent on a two bedroom apartment. But where to draw the line?

It seems there is a rule of thumb. Always remember, a rule of thumb is a rule that only works thumb of the time. Take the annual cost of renting a property then multiply the result by 15. If the sale price of the property is greater, rent. If the sale price is less, buy.


Renting a three bedroom home in a certain city costs somewhere around $1,000 a month.
Hence $1,000 a month X 12 months in a year X 15years = $180,000
Therefore, if this home sells for less than $180,000, buy it.
If the home sells for more than $180,000 rent.

Of course there are other considerations. Since beginning this study, I have presented the problem to two real estate agents, one in Maryland and one in North Carolina. They both came back with the same answer, “Well what if property values are increasing?” Yes, choosing to rent right before inflation goes ballistic would be a terrible mistake. However, buying at the 2006 market top has left many people in upside down mortgages they can not possibly escape outside of foreclosure and bankruptcy.

Ask, “How long do I plan to stay in this property?” I have looked around the web for an appropriate rule of thumb. It seems that five or six years is a normal kind of break even time frame. Maybe renting for the first year in a new area makes a lot of sense even if home prices start to recover. Am I so certain the decision to move to a particular new location is correct that I am willing to commit to five or six years?

Of course there are tax implications. In the early years of a mortgage, interest deductions are a powerful incentive to buy, rather than rent, a home. However, I don’t plan on carrying a mortgage unless I decide to buy a rental property. If I buy another house, as I plan, I will be paying taxes on that house and bearing the cost of maintaining that house. I will also lose the opportunity to invest that money in stocks or other income producing assets.

Maintenance is becoming more of a problem. As I grow older, I am less and less amused by yard work. Given my heart condition, my wife will no longer allow me climb on the roof and nail the weather stripping back down after a bad storm. Work that requires kneeling, such as working with bathroom or floor tiles, hurts my arthritic knees.

Normally, for young couples, the down payment is the deal killer. An entry level home in this area runs about $300,000. That requires a down payment in the range of $30,000 to $60,000. I am not certain what closing costs on such a property might run, but I would guess somewhere in the $10,000 to $15,000 range. We had to cough up about $8,000 in taxes or fees of one sort or another at closing as well as a $9,800 down payment. That was 23 years ago. Coming up with that kind cash is hard for young folks.

The final question is, “Can your monthly budget accommodate the property you want to buy?” If you are living paycheck to paycheck in a rental property, the answer will almost certainly be no. Even if your parents help with the down payment and closing costs, it is unlikely you can cover the higher mortgage, insurance, taxes, and maintenance costs of owning a home.

Right now I am thinking about renting for at least the first year in a new location unless I am made an offer I can not possibly refuse.

Saturday, February 12, 2011

At Best This Glass is Half Empty

The subject of prepaid cards came up in yesterday’s post. Evidently, these things are variously called prepaid credit cards (sort of a contradiction in terms), prepaid debit cards or secured cards. They are marketed by Walmart and the other big box stores, as well as your local grocery or drug store. They are primarily aimed at people who do not have a bank account or can not qualify for a traditional credit card. Estimates are that approximately 10% of the population does not have a bank account. In 2009, over $28 Billion were loaded into these things. It is a big business and it is growing.

On the positive side, anyone can fork over some cash, load up the card and use it to buy things on line or in other situations where cash will not work. Some of the companies that issue these cards also report their customer’s bill paying practices to the credit bureaus, allowing them to repair their credit rating.

(Just a random thought)
I don’t know if the system has any safeguards, but it seems that these cards would offer criminal enterprises an opportunity for money laundering.

Some people use these cards to avoid the overdraft protection fees associated with traditional debit cards connected to a checking account. However, as one would expect in a product designed for the financially helpless or ill informed, they are not really a bargain.

These fees include a fee to buy the card, a monthly maintenance fee, an ATM fee, a fee when the card is used to pay a bill on line, a fee for any transaction requiring a PIN number, a fee to check the balance, an inactivity fee, and a fee to load more money on the card. This last fee can be waived if the cardholder direct deposits a paycheck into the card or meets some minimum monthly deposit criteria like $1,000.

The well respected organization, Consumers Union, “reviewed 19 prepaid cards, comparing their costs using a hypothetical consumer's activity. It found costs in the first month ranged from $16.59 to use a Wal-Mart Money Card, to $17.60 for an AccountNow card, to $43.75 for a RushCard.”

Beyond the question of fees, these cards are not covered by the same Federal regulations that protect customers of banks and traditional credit cards. Since these cards can be used with direct deposit of paychecks they can trigger overdraft fees just like a debit card. With direct deposit, they can also be used for a short term payday loan, "A cash advance on a prepaid debit card has triple-digit interest rates, and is repaid by deducting the next deposit to the card all at one time, so consumers don't get an installment repayment schedule," says Jean Ann Fox, director of consumer protection with the Consumer Federation of America. Tony Soprano should get such good returns on his loans.

The bottom line? On balance, at least some of these things are probably a better option than a check cashing store or money orders, but nowhere nearly as good as a traditional bank account.

A tip of the hat to Laura Rowley, one of my favorite financial columnists, for many of the facts in this post.

And Hey! Let’s be careful out there today.

Friday, February 11, 2011

Unintended Second Order Effects

Every time the Government or the management of a corporation or for that matter even parents implement some change in policy, often with good intents, there will always be unintended second order effects. Sometimes policy makers see these results in advance. Sometimes they come as a complete surprise. When a Congress controlled by Democrats sent the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009 to President Obama for signature, they hoped to end some of the most egregious and unfair tactics used by the credit card companies to exploit the unwary consumer.

The White House press release trumpets improvements in these five key areas.

1) Bans Unfair Rate Increases
2) Prevents Unfair Fee Traps
3) Plain Sight /Plain Language Disclosures
4) Accountability
5) Protections for Students and Young People

These reforms included long overdue action limiting unilateral retroactive rate increases, intentional late fee traps such as weekend deadlines and deadlines that change every month, and protection for students from universities working together with credit card companies to encourage the issuance of cards with less than desirable features.

Since credit card companies can no longer engage in these high profit tactics, they have reacted by simply closing down existing credit card accounts by the millions, sometimes offering as much as a 50% reduction in balance just to get rid of customers with dubious credit histories. They are now free to open new accounts with extremely high initial interest rates and that is just what they are doing particularly to customers with less than perfect credit. At a time when the banks are borrowing money from the Government at essentially 0%, they are lending money to their credit card customers at an all time high average rate of 14.72%. One company is issuing a card with a subprime rate of 59.9%. Really!

For a customer with a score below 599 expect an APR of 24% or higher.
For a customer with a credit score of 600-649 expect an APR of 20%.

Beverly Harzog, an credit card expert at recommends that these customers forget about traditional credit cards and instead use prepaid (secured) cards to build their credit. There are also fees and problems associated with this option but let’s save that conversation for another day.

For a customer with a score between 650 and 699 expect a rate in the range of 15% to 19%.

These rates are still pretty high but not completely usurious.

For a customer with a credit score between 700 and 749 expect a rate between 13% and 15%.

If you have a score over 750 check out these options from a CNN report.

Chase Sapphire at 13.24%
Citi Platinum Select Master Card with a starting rate of 11.99% and O% rate for the first 12 months.
Simmons First Bank of Arkansas at 7.25%
Pentagon Federal Credit Union PenFed Visa at 9.99% with a three year introductory rate of 7.49%.

The best option of all? Pay off your credit card on time, without fail, every month and pay 0% forever.

Saturday, February 5, 2011

15 Jobs from

I don’t think I have ever done this before, but I don’t really believe I have anything of value to add to this list. This list is directly quoted from an article entitled “15 Jobs That Pay Well No Degree Required,” by Anthony Balderrama of It was then published in its entirety by MSN Careers.

I hope it proves to be of value to some of my readers or their friends or family members.

1. Aides supervisor $63,231*
Aides supervisors supervise home-health aides, which involves setting their work schedules and monitoring their performance to ensure quality care for patients.

2. Air traffic controller $139,314
In order to ensure the safety of all flights, air traffic controllers monitor planes coming to and leaving an airport. They also monitor conditions to keep flights free of delays.

3. Assembly supervisor $66,034
In assembling and manufacturing plants, these supervisors oversee the flow of production work. Depending on the industry, assembly workers can produce anything from large mechanical and aviation components to small, technological devices.

4. Cable supervisor $76,739
Cable supervisors monitor workers who install, maintain and repair cables. Because these cables can be underground or overhead on poles, working on them can be dangerous and difficult.

5. Chemical supervisor $73,955
Chemical supervisors oversee workers who make chemical products, a careful process that involves handling dangerous substances and following strict safety guidelines.

6. Construction equipment operator $53,543
Construction equipment operators are in charge of the large-scale tools and equipment used on construction sites. They are also responsible for inspecting the equipment for safety and performance issues when necessary.

7. Credit and collection supervisor $66,847
Credit and collection workers calculate credit risks and collections information for consumers who apply for loans. Their supervisors monitor their performance and sometimes review client credit history to grant or deny extensions of credit.

8. Data control supervisor $66,554
Data control supervisors oversee the daily operations of data entry workers and are responsible for the completion and accuracy of their work.

9. Electrical repairer $58,960
Electrical repairers disassemble and fix electrical equipment and any related components. Depending on the job, the equipment can range from small mechanisms to large technological systems.

10. Elevator repair worker $67,538
Elevator repair workers perform routine maintenance on elevators and escalators and respond to any reported problems.

11. Home care aide supervisor $69,061
Home care aides visit homebound patients in order to assist with daily activities and some rehabilitation exercises. The supervisor ensures that all patients are being taken care of properly by their aides, according to legal regulations and quality standards.

12. Illustrator $60,060
Illustrators work in advertising agencies or as freelancers to design fonts and images for a variety of media, from websites to print campaigns and video.

13. Lead carpenter $73,055
Lead carpenters act as the head for carpentry workers on a specific task to keep the project on time and meet quality standards.

14. Payroll supervisor $72,951
Payroll supervisors oversee the calculating of compensation based on workers' hours, reviewing time cards, distributing pay and adhering to government regulations for payroll.

15. Real estate broker $79,494
Real estate brokers that help home buyers look for houses or condominiums. They research neighborhoods, find available homes, and assist buyers through the financial and legal aspects of the purchase.

Link provided below:>1=23000

The Death of the Secure Job

There is a disturbing trend in the American marketplace. It started as large vertically integrated companies shed jobs that were only marginally connected to their core business. Companies like General Motors discovered it was cheaper to outsource their cafeteria jobs rather than attempt to run those ventures with their own employees. In time this led to shedding major divisions such as Delco. The employees that lost their jobs always ended up earning less.

This trend is perhaps most advanced in the movie production industry. The great integrated studios of the 1930s through the 1950s no longer exist. Today movies are made as short term projects. Actors are no longer under contract to the studio. They are hired for one movie. The director doesn’t work for the studio. He is hired for the project. This is true of the special effects house, the cameramen, the sound men, and even the film editors. All the contractors and their subcontractors come together, do a job, and then go home. The producer gets the best people at the lowest cost without the legal hassles and long term costs associated with full time employees.

Recently Daniel Gross interviewed Jeff Joerres, CEO of Manpower, the temporary help agency. Joerres contends that the recent recession has fundamentally changed the way American companies will hire permanent employees. He is optimistic that more companies will hire in 2011 than in 2010. Joerres states, "Our clients — small medium and large — are looking at hiring more this year than last. The conversations are around "'how many and when' compared to 'not on my life' and 'never.'”

Still the chief obstacle to hiring is demand. American companies, large and small, simply don’t have enough demand to justify hiring new permanent full time employees. However, something fundamental has changed the American workplace. Joerres observes that the American corporation has become more efficient. They are learning to do more with less. The article observes, “Another ongoing structural shift is making companies commitment-phobic. "Companies are becoming much more adept at working in project-based environments," he (Joerres) says. They'll staff up with contractors to complete projects with a defined end date, rather than add new payroll workers.”

Joerres observes another recent trend in hiring he calls, “talentism,” the idea, “That every single talent in the company really matters.” In the past, companies considered important executives as exceptionally valuable properties. My uncle was a very successful chemist with a major company. At one time his life was insured with a “key man” policy. His company thought my uncle’s life was so valuable they wanted financial protection in case he died. This kind of mentality is now being extended to line employees.

There are 3.2 million job openings in the U.S. From the article, “Joerres explains this strange paradox as follows: It could be that companies can't find workers with the skills they need. Or, more likely, companies have become very good at understanding precisely what they need and are being extremely picky about finding the perfect candidate. Since demand isn't booming, they figure they can wait an extra 30 or 60 days to find the just-right candidate.”

The article gives an example of this phenomenon. Johnson Controls knows that they will need to hire 16,000 building service engineers with special skills in energy efficiency over the next few years. "But they're not being produced by universities and they're not growing on trees," says Joerres. As a result, "they're going to be very disciplined about where to place their bets on new hires."

Before America entered World War II, the German High Command believed that our country could not produce enough precision optics to support our military needs. A German lens maker was a master craftsman. He could perform all the operations required to produce any lens. It took about 20 years to train such an employee. The Germans just didn’t believe America could train enough people in time to make a difference. However, America solved the problem in another manner. Each step in the manufacture of each different lens became a separate job. While it was impossible to produce master craftsmen in time to make a difference in the war effort, it was very easy to train one person to complete one step in the manufacture of one optical device. The United States produced extraordinarily large numbers of precision devices, such as the legendary Norden Bombsight. However, those jobs that provided a middle class lifestyle to average employees are gone, probably forever. Today companies are looking for exceedingly high quality employees with specific skills. These corporations would like to avoid costly long term commitments that include health insurance and retirement benefits. The problem is most people, by definition, are not exceptional. We are mostly just average. The implications of these trends are truly frightening.