Six Years of Car Payments Sounds Like A Student Loan

I just saw a TV commercial where they were offering 0% financing on a new car for 72 months; that's right - six years. The rule of thumb is to never finance a car for more than three years or 36 months and keep the car for at least six years. If you do that and then continue the amount of the car payment into your savings account for three or four more years, you will be able to pay cash for your next car.

We all know that money is not free, so if there is cash back offer or 0%, pay cash and take the discount.

I don't know about you, but ten years to pay off my student loans seemed to take forever. I personally couldn't stand for paying for a car over a six year period.

The problem with debt is that you are pledging future earning to the banker. In simple terms, you are enslaved to your lender. Vehicles depreciate over time –a vehicle is not an investment. At least with your student loans, it's an investment that pays off.

When you are debt free, all the money you make is for you (and the government in taxes). Being free of debt liberates you to pursue your passions and work for less doing something you love.   When you can turn your passions into profit, you never have to "work" a day in your life.

Be careful of low monthly payments. Dave Ramsey says "poor people ask how much down and how much a month. Rich people just ask how much."  Here it to you becoming rich and debt free.

Who Do You Trust?

Peregrine Financial Group and a missing $200 million? Cedar Falls, Iowa, the Heartland, where corn is tall and people are honest. It's of small towns where people leave their keys in their cars and they don't lock their front doors. Embezzlement of this nature happens in New York, Greece, but not in Iowa.

Peregrine Financial Group was an Iowa-based brokerage firm and the CEO allegedly used $200 million of his clients’ money to keep the business going. He attempted suicide and confessed to embezzling in his suicide note.

If this can happen in Iowa, it can happen in your neighborhood and with you investment counselor. I do not want to imply that all financial advisors are dishonest, but the few bad ones remind us to keep on our toes. A few basic points to keep in mind as you talk to your financial professional:

1. No one is going to be or should be more concerned about your financial wellbeing than you. It is your money and your future. You need to take responsibility for your financial future. This may require you to increase your financial literacy by talking a personal finance class, researching the investment on your own, and being aware of market trends. Don't bury your head in the sand when it comes to financial knowledge - you can learn it, you can do it.

2. If it sounds too good to be true, it probably is. How often have you heard that? If you are making money on your investment and everyone else is losing, it may be time to question your investment broker.

3. Ask questions. If you don't understand an investment or investment strategy, question it. This is a great way to increase your knowledge.

4. Use your BS detector. If an investment doesn't feel right, smell right, and you have an uneasy feeling about it, it may not be the right investment for you.

5. Be aware of the con-artist. The "con" in con-artist stands for confidence. The goal of the con-artist is to get you to trust him or her so he or she can rip you off. Be aware of these phrases: "this is standard language and you don't need to read every detail," "trust me, everyone is doing this." I have a special deal for you that not everyone can have."

Again, it is your money and being knowledgeable about the investment options helps you make wiser investment decisions.

Community Supported Agriculture (CSA) Basics

Question: What enables you to both eat healthy and be a good steward of your community? 

Answer: Buy a share membership to your local Community Supported Agriculture (CSA). Through a CSA membership, you are buying seasonal food directly from a local farmer. In a CSA, the farmer offers a set number of "shares" to the public. A share consists of a box of farm produce. You purchase a share up front at the beginning of the year and in return, you receive a box of seasonal produce each week throughout the season. Information about CSAs and how to find one in your community can be found at http://www.localharvest.org/

Advantages for the Farmer

• Market your produce prior to the growing season
• Receive payment early in the season, which provides cash flow
• Connect with those who will be consuming your produce

Advantages for You

• Fresh food, packed with flavor and vitamins as they will be consumed or frozen very soon after they are harvested
• Exposure to new fruits and vegetables and new ways to prepare them keeps you from getting bored with eating healthy options
• Good for the environment as you have a lower carbon footprint when there is a shorter distance from field to table

Consideration

• CSA will not meet 100% of your fruit and vegetable needs. For example, depending on the CSA, they may focus only on vegetables. You probably will find that you need to supplement your CSA share
• Eating seasonally is an adjustment. If you are not accustomed to eating seasonally, it may take you some time to transition from eating whatever is at the grocery store to a focus as to what is in season from the current week’s CSA box.  Many CSAs provide a list of what produce to expect and when
• Quantity varies. Farmers try to provide a variety of items in a reasonable quantity on a weekly basis. An important question to ask before you sign up with your local CSA is how much produce to expect to be delivered weekly as well as the expected variances throughout the full season
• Policies vary. For example, learn what arrangements can be made if you are out of town for a week; What does it mean for you if there is a bunker crop or low productions due to influences from Mother Nature

All in all, buying a share in a CSA provides you a way to invest both in your local community and in your own health, as well as it helps keep your environment healthy. Bon Appetite!

College Debt or a New Car?

I was talking with a colleague the other day about student loan debt. She shared back "Perhaps we are thinking about student loan debt in the wrong way. We will go into debt $20,000 - $40,000 or more for a new car and not think twice. But we start to panic when a student graduates with $20,000 - $40,000 in debt. The car will last 6-10 years, but your education will last a lifetime."

Now I don’t want you to go into debt to finance your college education if you don’t have to, but I want you to think of your college debt as an investment that will last a lifetime. In Chris Farrell’s article “College Degree Still Worth the Cost Despite the Risk”, he quotes a study at the Booking's Institute that shows the return on investment for a college degree has been about 15% a year for the past 60 years. Not a bad return if I do say so myself, given the stock market has only shown a 6.8% return on investment over the same time period.

However with college, like any investment, there is risk involved. If you are looking at college as just a way to get a higher paycheck, there is a risk that a job may not be waiting for you when you graduate. In fact, your financial return may differ based on your major. So the question is “How much should I borrow to finance my education?”

Think about it this way…what kind of car do you want to drive, and be able to afford 10 year after you graduate? Look at others in your future profession to see what they drive. If they are driving Mercedes, BMW, Audi and Lexus, then they have a relatively high income and therefore they can go into greater student debt based on their future earnings potential. However, if you see professionals in your chosen field driving used cars that just get them from point A to point B, your profession may have a lower earnings potential and you may not be able to repay high students loans easily.

My suggestion is not to borrow any more money than 1-2 times the cost of the car driven by the professionals in your field 10 years after they graduated from college. Yes, I know, many who are 10 years out of college are driving a mini-van, SUV or crossover to haul the kids around, but is it a new loaded car or used-vehicle? This rule of thumb will help you keep your student loans to a reasonable amount based on your future earning potential.

There are many different calculators you can use to see what your earning potential will be, the likelihood of employment, what your take-home pay will be, cost of living, etc., but I like looking at cars. Let me know what you think this 'calculator' to estimate a reasonable amount of student loan debt.

4 Days ‘til Christmas; 10 Days ‘til End of Year

As we rush around getting last minute gifts, we should also be mindful of the end of the year for tax reasons. Here are a few items to check off your list before 2012 rolls around.

- Last Minute Charitable Contributions: Time to get in the last minute charitable contributions for the 2011 tax year. Is it time to clean out your closet and make a donation to Good Will? Can you afford to give a little extra to a charitable cause? It has been a rough few years for a lot of people and your donation may be just what your favorite charity needs to help those in need.

- Unreimbursed Medical and Dependent Care Accounts: These are your "use it or lose it" accounts. You have to use the money by the end of the year or you forfeit your balance. If you have money in these accounts, maybe it is time to get your eyes checked or a new pair of glasses. Make sure you have paid all of your dependent care expense and that your balance is zero. 

- 529 or Educational Savings Deposits: In some states, your contribution into an educational savings account or 529 plan is a deduction on your state taxes. Do you need to add a little more for next semester's U-bill? Consider adding a little more to receiving the deduction?

- Taxes: Do you have any tax bills due in December or January? These bills might be deductible on your taxes. You might consider paying your January taxes in December to take advantage of the deduction.

- Medical and Dental Expenses: Did you have a lot of medical expenses this year or are you going to have medical procedures next year? You may be able to deduct medical expenses on your taxes if the amount is greater than 7.5% of your adjusted gross income (AGI) and you itemize your taxes. A little tax planning can save you a lot of money.

- IRA Contributions and Future Tax Planning: You have until April 15, 2012 to maximize your IRA contributions. However, an IRA or 529 contribution to someone else might be a great last minute Christmas gift.

We wish you and your family a great and save safe holiday season. As always, check with your tax professional to see what strategies work best for your individual situation.

Credit, Debit or Cash - Holiday Shopping

Black Friday is less than a week away and there is no place I would rather NOT be than shopping at 4:00 a.m. when the stores open.  I will be in my bed sleeping off a good Thanksgiving meal of smoked turkey and ham with all the fixings.   But as we get into the season of spending, shopping and giving; here are some ideas to keep in mind.

When shopping for gifts make a list and check it twice.  Find out where you can get the best deal and make a budget for your gift giving. This may be a tougher holiday season financially so it is even more important than ever to keep both hands on your purse strings as you walk into stores playing holiday music and seeing displays that say “buy me!”  Using cash and the envelope system of budgeting keeps you within your budget.

Using credit cards provide some protection, however you may be tempted to spend beyond your budget. Credit cards are governed by the Fair Credit Billing Act which provides you specific rights to dispute your credit card charges when your purchases are not delivered as agreed.  You can also build rewards for using your credit card, whether airlines miles, cash back or points to use how you would like.  The major downside of using a credit card is that if you keep a balance, you could make the holidays last all year long or longer, trying to pay off what you purchased.

Cash and debit cards can keep you from having the credit card holiday hangover.  You will not receive monthly bills of unpaid balances.  This also helps you stay within your budget.  If you don’t have the cash, don’t buy it.  Debit cards do not offer the same as credit cards. Debit cards are regulated by the Electronic Funds Transfer Act (a federal law), and you only have a specified time to dispute charges.  If you wait too long, you may lose all of your money.

If you use cash, be sure you hang on to your receipts and keep track of what and where you spend money.  Sometimes my wallet is like a black hole.  I put money in and I don’t know where it went. Receipts can also help you in returning items.

You can also make holiday gifts if you have the time and talent, but that is a blog for another day. We hope you all have a great holiday season, spend your money, time and talents wisely and -- get a quiet moment to reflect on your blessings. Happy Thanksgiving!

Free Checking a Thing of the Past?

The day has come. We are beginning to see the ramifications of the Durbin Amendment - Dodd-Frank Act, which became effective October 1, 2011. The amendment imposes limits on the fees that banks can charge merchants for each customer debit card purchase. To compensate, some banks are looking to make up for the lost revenue via other means, such as charging you a fee for the use of your debit card and/or checking account. You have options as to where you do your banking. It is important to select an institute where the service and products best match your needs.

ABC News has compiled a list of the 10 largest banks and how much each is charging for basic checking accounts and the debit cards. Additionally, you can learn about your local bank and credit union options online.

It only takes a few minutes to do a side-by-side comparison as to your options but can save you significantly over the long run.

Leadership and Personal Finance

In my Senior Seminar class at Mount Mercy University we are reading "Good to Great" by Jim Collins. Chapter 2 is on Level 5 Leadership. As I read this chapter, I couldn’t help but to think how each one of us can be a leader in personal finance and how we can take some of the principles from Jim Collins and apply them to our daily lives. Collins describes a Level 5 Leader as someone who “builds enduring greatness through a paradoxical blend of personal humility and professional will.” We all want our families to be successful and I want my kids to be more successful than me (building enduring greatness).

A central theme of this chapter is setting up the company for future success and not worrying about individual success. Our last blog entry was on how much money it will take to retire so I naturally put the two together. I want my kids to be able to retire and live successful lives, so I want to set them up for future success. The questions are how do I do that and am I doing the right things.

What we decided to do is a Roth IRA "parent match"; matching up to a certain dollar amount each year, dollar for dollar, that the kids put into a Roth. For the kids, they are doubling their money. For us (the parents) we are giving them their inheritance early and hopefully instilling in them the importance to save for retirement. At age 17, Clay has a Roth IRA which will be tax free income when he retires. Fifty years of compounding will really cause his Roth IRA to grow.

We have also helped the parents of our grandchildren to set up 529 college savings. I know it doesn’t sound exciting, but at Christmas and birthdays, we contribute to their 529 accounts. We like to look at it as long-term love. Over 15-18 years, 3-year-old Jordan’s and 5-month-old Emmy's money will grow and ease some of the cost of a college education.

So I guess what I’m trying to say and do is that it is not so much about us anymore as it is about the future of our family. We all try to do the right things, share our love, and now share our knowledge and finances. We make a comfortable living and it would be nice to have more, but I would rather cut back a little so we can help the kids and grandkids with their future expenses and saving goals; in personal finance and leadership, taking our family from "Good to Great".