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Funding Higher Education with an ISA

Written by William Cowie - Leave a Comment

Have you ever watched the popular television show “Shark Tank”? In it, entrepreneurs pitch their young businesses to five rich tycoons (the “sharks”) in hopes of attracting an investment from one or more of them. Some entrepreneurs are youngsters with a great idea, some are savvy veterans, and others are ordinary families hoping to turn a great idea into a million-dollar business. Not all get an investment. When you do get an investment, it usually takes one of two forms:

  • An equity stake in your business
  • A royalty on gross sales

The sharks don’t invest in every business that gets pitched to them. They especially don’t invest in businesses where where the pitch revolves around a tear-jerking story. They don’t care that you had hardships, no opportunities, or that you’re the most upstanding citizen on Earth. They only care about two things:

  • Getting their money back
  • Getting a handsome return, in addition to just their money

Crowdfunding

You may also have heard of Kickstarter and other sites which offer something similar: an opportunity for entrepreneurs to raise money to fund their ventures. But as the name implies, you don’t attract investments from one or a few individuals; you attract a crowd of investors to fund your idea. The crowd usually gets a financial stake in the new business in proportion to the money invested, but not necessarily. For $5 invested, all an investor may get is a discount coupon on the new product when it gets launched.

In one form or another, crowdfunding has been around as long as the human race, it seems, whether the person giving the money has a direct stake in the venture’s financial results or not. Grandparents giving kids money to start a lemonade stand or paper route are classic examples. Don’t let the down-home examples fool you, though. The City of Green Bay, Wisconsin, is a master at this: In 2011, they raised over $60 million for the NFL team it owns, the Green Bay Packers, by selling shares which have no votes and no share in any profits. It was just a huge civic-crowdfunding exercise.

Not Loans

You can think of venture capital as the halfway point between crowdfunding and “Shark Tank.” Anybody has access to venture capital, just like they have access to crowdfunding; but the venture capitalists (VCs as they like to be called) are even more stringent than the sharks in their focus on the money generated by a fledgling business.

What all of these funding mechanisms have in common is: They are not loans. Loans have to be paid back — with some interest — whether the venture fails or succeeds. None of these investments carry that requirement. If the venture pays off, they make way more money than the interest on a loan. However, if it doesn’t, investors lose it all with no recourse.

Risk

The essence of crowdfunding, venture capital and the “Shark Tank” is that they put up money and take a big risk. The risk is that the venture will be a bust. Think of when England would send merchant ships to the Far East to trade for tea and spices. Fifty rich shareholders would invest a million dollars (in today’s money) to build, outfit and crew a ship, which would take two years to sail to India, Indonesia and China.

Sometimes the ship would come back and the shareholders would split five million between them. That would be wonderful. They would throw lavish parties and hire painters to paint portraits of their wives.

Frequently, though, the ships would not return, and the shareholders would lose all that money. That would be a tragedy — no parties and no paintings.

In other words, every venture had a chance for either riches or tragedy. They called that chance risk. They understood that when they pony up the money for a trip, they might lose it all. However, they take the risk because, along with the risk, there’s the promise of a rich reward.

When you invest money for your retirement, you limit your risk with something called diversification. You are not alone.

Instead of three investors putting everything they have in a single ship in the olden days, fifty investors put a tenth of their wealth in a single ship. Instead of sending just one ship, they sent four or five. If one goes down, others will survive and make it back. Lloyds of London is a famous place where ship owners shared risk and reward. There are, as you can see, many ways for investors in risky ventures to alleviate that risk through diversification.

You, Inc.

Imagine you’re a high schooler, and you’re thinking of going to college. College these days almost costs as much as one of those shipping expeditions to the Far East. “But,” you think to yourself, “I should make a lot of money with a degree. Everyone tells me I’m smart, but I don’t have the money to pay for a college degree, and neither do my parents. Hmmm… I wonder if I could persuade all of those people who tell me I’m smart to put their money where their mouths are?”

The good news is that you can. And your friendly Congress is looking at ways to help you do it. The wellspring of three-letter acronyms is mulling yet another one for the Income Share Agreement (ISA).

ISAs allow students to raise funds to pay for their degrees by selling shares in their future earnings, kind of a cross between crowdfunding and venture capital. ISAs are financial instruments that can be administered by the government or by private financial institutions. Their defining characteristic is that an individual gains access to cash for a college degree in exchange for a promise that they will pay back a fraction of their earnings for a prescribed period of time to the entity that put up the money. And, by grouping a number of students’ funding, it spreads the risk over many students.

It is like a venture capitalist investing in You, Inc. A graduate who earns less than expected will pay back less than the full amount of the initial funding, while graduates who earn more than expected will pay back more than their share.

Does anybody do anything like that? The New York Times recently published an article about online “trade schools” like the App Academy, which charges no tuition, but will take 18 percent of the income graduates earn in their first year.

This is a classic good news/bad news situation.

Good News, Bad News

The good news is obviously that, with something like an ISA, more students will have access to increasingly expensive higher education. Furthermore, when a hundred investors invest in a pool of a hundred students, the diversification allows them to spread the risk, much like those old ship owners from days gone by.

The bad news is that outside investors, more likely than not, will, like venture capitalists and the sharks on “Shark Tank,” focus strongly on the financial outcomes of the education. If you are a student looking to get investors to fund your engineering or medical degree, you are much likely to attract ISA money than, for example, for a degree in art or history.

But, is that a bad outcome? This is not to disparage a degree in the liberal arts; but the moment outside money, whether it be student debt or something like an ISA, enters the picture, the financial return on higher education becomes much more important.

What limits the use of ISAs? Uncle Sam. At the present time, there are well-used mechanisms in place for the Federal Government to assist colleges with grants and loans, but not ISAs. Because of that, most students would only elect an ISA over a traditional loan or grant if they were tapping into private sources of funding.

We live in a time of evolving technologies and opportunities. The student debt problem is pushing the issue of higher education funding into the crucible of change.

Would you, as an investor, invest in an ISA for a student you know? For one you don’t know? Would you, as a student, accept a form of education financing that, in effect, indentures you for a specified period of time?

Published on October 29th, 2014
Modified on October 25th, 2014 - Leave a Comment
Filed under: Education

10 Steps on the Career Ladder

Written by Richard Barrington - Leave a Comment

With the unemployment rate recently edging below 6 percent, the job market is starting to look healthier than it has been since before the Great Recession. While that market does not yet favor employees the way it did during the 1990s, it has recovered enough to justify a more ambitious focus. People who had to scuffle to find a job can now start thinking about their next career move.

Climbing the Career Ladder

How you handle your career is one of the most important financial tasks you will ever tackle. Think of it this way: Your career is an income-generating asset, and unless you become very wealthy, it is probably the biggest income-generator you will ever have. Beyond that, though, it is how you spend most of your waking hours, so handling your career correctly has a huge impact on your happiness as well.

Mention a climb up the career ladder to most people, and their first thought is moving into the job of their immediate supervisor. This might be the most obvious move, but it is often not the best. Besides looking at how to move up, you should consider whether it may make more sense to move out or sideways instead — out to another organization, or sideways to a different type of role that might eventually lead you in a more productive direction.

Here are ten steps to help you determine and make the right moves on the career ladder:

  1. Visualize your long-term goal. Each step leads in a direction, so before you plot any short-term move, think about where you want to be in the end. Otherwise, your career can become a series of short-term steps that don’t lead where you want to go.
  2. Identify the right fit. Now shift your focus to your next move. After all, you aren’t going to go from entry-level to a corner office in one promotion. Look at the organization and identify a position that is both a step in the right direction and a good fit for your current skill set and experience.
  3. Assess your peer group performance. Basically, look at the staff the way your employer would. Is there any reason you stand out as the next to be promoted, or are other people out-performing you? Don’t neglect your current job while dreaming about your next one.
  4. Consider the company’s growth. Look outside yourself to the company as a whole. Is it dynamic and fast-growing, or is it stale and losing market share or stuck in a shrinking market? Growing companies create opportunities; stagnant ones generate layoffs.
  5. Look at outside opportunities. If your company does not look like it is going to create the right kind of opportunities, scan the job market for alternatives. Even if you don’t make a move, this will give you a stronger sense of how your current situation stacks up within the broader employment market.
  6. Target appropriate skills. The move you want to make may take skills you don’t yet have — perhaps an additional degree, or a specific type of training or experience. Just because you’ve been out of school for a few years, don’t consider yourself a finished product. In a changing job market, updating your skills is not only necessary for advancement at times, but it can also be the key to job security in your current position.
  7. Make your interest known. Don’t just throw your hat in the ring when an opportunity arises. Make it known that you are taking the long view of your future in the company. Politely but assertively letting it be known that you are interested in advancement will help management view you as a natural candidate when openings do arise, and might help you get some coaching on what you need to do to get those promotions.
  8. Be open to feedback. Speaking of coaching, this only helps if you are coachable. You might not like criticism, but it is the only way to understand how to improve.
  9. Know your financial worth. Don’t just demand raises because you think you are due. Make an analytical assessment of what your performance has been worth to the company financially, and what it would command on the open market. You are most likely to optimize your salary if you know enough not to sell yourself short — or overreach.
  10. Be comfortable at your own ceiling. Decades ago, something called “the Peter Principle” posited that people keep rising until they reach the level of their incompetence. From an employee’s perspective, people often rise to the level of their misery. If you find a comfortable niche, value it. Don’t feel compelled to keep climbing just because the next step is there.

The key about taking this approach is not to judge yourself by another person’s path or pace. Think about what suits you, and that can help forge a career that is uniquely your own.

Published on October 27th, 2014
Modified on October 25th, 2014 - Leave a Comment
Filed under: Planning, Working

When Taking Vows, Vow to Spend Less

Written by Jeffrey Steele - One Comment

Talk to anyone 19 to 90, and they’re likely to have very clear memories of their first experience going steady. Mine came at the decidedly ancient age of 17, and I can recall that star-crossed life chapter like it happened last week.

My perky, mahogany-haired, 16-year-old inamorata and I didn’t have much in common other than a passion for hours-long sessions in lover’s lane. When we stopped long enough for a conversation, I became aware that her hopes for the future centered on a single day — her wedding day.

It didn’t matter that we had no money. It didn’t matter that I was headed to my freshman year of college and she still needed to matriculate from high school. It didn’t matter that there was no way in hell to support ourselves as newlyweds.

All those niggling nuisances were subordinate in her fevered mind to the big gala she foresaw unfolding the day she cantered down the aisle dressed all in white.

About the time it dawned on me that I was an easily replaceable cog in her dreams of that day, I was gone like last spring’s prom decorations. Ever since, I’ve harbored a deep distrust of those whose views of marriage centered not on the life they would build for themselves after the wedding, but on the wedding itself (and not just on the day itself, but how much would be spent on the day).

Lessons in Love

That’s why I lapped up the recent take by the Wall Street Journal on the George Clooney-Amal Alamuddin multimillion dollar nuptials in Venice like a parched Mojave nomad at a punch fountain. Titled “Mega-Weddings: Why You Should Say ‘I Don’t,’” the October 3rd piece by Brett Ahrends confirmed all the suspicions about weddings I’d harbored for decades, but had never been fully able to articulate.

Not only is a costly and extravagant wedding no predictor of a successful marriage, it is actually a harbinger of trouble in paradise, followed by the retention of his-and-hers divorce attorneys. Citing a recent Emory University paper titled “A Diamond is Forever and Other Fairy Tales” by Andrew Francis and Hugo Mialon, Ahrends asserted there’s an inverse relationship between levels of big spending on wedding ceremonies and a couple’s duration as blissfully wedded partners.

I tracked down the report the Journal cited, and pounced on some intriguing factoids that should hearten any couple planning a wedding reception at Denny’s.

“Spending $1,000 or less on the wedding is significantly associated with a decrease in the hazard of divorce in the sample of all persons and in the sample of men, and spending $20,000 or more on the wedding is associated with an increase in the hazard of divorce in the sample of women,” it reported.

Predictably, it wasn’t just the spending on the wedding, but all the collateral expenditures that also foreshadowed an appearance in divorce court.

“Spending between $2,000 and $4,000 on an engagement ring is significantly associated with an increase in the hazard of divorce in the sample of men,” the authors reported. “Specifically, in the sample of men, spending between $2,000 and $4,000 on an engagement ring is associated with a 1.3 times greater hazard of divorce, as compared to spending between $500 and $2,000.”

There it was in black and white, proof positive that blowing wads of cash on lavish weddings and Hope Diamond-like wedding rings was more closely linked to love on the rocks than a more fiscally conservative approach. It quickly made me wonder why a study was even necessary to reach that conclusion.

Wouldn’t it make sense that two people renting out the Giza Plateau for a wedding in the shadow of the sphinx might be less focused on one another, and staying married, than a couple eloping on a Megabus to suburban Buffalo?

It does to me.

From That Day Forward

Just think, if a guy and gal recognize even before they’re even married that free-flowing wedding spending doesn’t necessarily translate to happiness, they may embrace the reverse in other situations throughout their life together. And that could stave off arguments over lack of money, which is known to be a huge factor in divorces.

Big New Year’s Eve celebrations? They’re often a lot less fun than the simple, cozy evening spent at home away from staggering drunks. Spending big on costumes at Halloween might not yield as great a get-up as shopping for odds and ends at Goodwill, and fashioning your own one-of-a-kind guise.

Braving the crowds at the Cineplex for this seasons’ blockbuster could yield less enjoyment than taking in a little-known independent flick at the local art house. And the major league cost of parking and those $13.50 chicken nuggets plates at a big league baseball stadium? It could make you decide you had a better time rooting for up-and-coming phenoms at a Class A Rookie League game.

Yup, there are lessons galore to be learned from a less-expensive wedding. From homes to cars to vacations and more, it’s not impossible to get more by spending less.

Are you among those making the mistake of spending a lot on a wedding? It may not be too late to have your walk to the altar altered.

Published on October 22nd, 2014 - One Comment
Filed under: Family & Life, Frugality, House & Home

Top 10 Money Mistakes New Parents Make

Written by Suba Iyer - One Comment

Having a child is an exciting and exhausting experience. The feeling of holding your newborn in your arms cannot be described in words. Along with this exhilarating feeling, though, comes sleep deprivation, hectic schedules and the determination to provide nothing but the best for your precious little one. Even with the best intentions, it is very easy to lose track of finances or make unwise decisions with money. Here are some of the top money mistakes new parents make:

  1. Not having life insurance (or skimping on insurance): We do not want to think about dying, especially after a bundle of joy just entered our lives, but we need to make sure the little one is provided for after us. A childless couple may need little or no life insurance, but having a child changes everything. If you do not have life insurance yet, please start shopping for a policy.
  2. Ignoring disability insurance: According to the U.S. Social Security Administration, one in four of today’s 20-year-olds will become disabled before they retire. What protection do you have for your biggest asset — your ability to earn income?
  3. Buying life insurance for the baby: I never knew people buy life insurance for babies until I started receiving at least one brochure a week from companies selling whole life insurance. Some even kept calling me with different tactics, either to scare me into thinking about any potential illnesses my baby could have in the future that would make her ineligible for insurance (if I don’t buy something right now) or to make me believe I am building her a solid financial foundation with the investment portion of the whole life insurance product.
    I can easily see how these arguments would work on parents who want to do everything possible to give their kids an advantage in life; however, neither of these arguments are valid reasons to buy insurance for your baby. With the recent changes in the health insurance law, the chances of not getting insurance due to an illness are very slim. Even if that were the case, the insurance that is provided by these baby insurance products are too small to really make a difference. And regarding the second argument of providing a solid financial foundation, you will be better off by putting that amount in a college savings account and teaching your kids about finances. How much income does your baby bring in? Zero dollars? That is exactly how much insurance you should get for the baby.
  4. Over-spending on baby items: The Internet is filled with lists of items you need for the new baby. In my experience, the best way to go about this is to buy the absolute basics — a place for the baby to sleep, a few Onesies (or sleep-and-plays if you are having a winter baby), diapers, car seat, a few bottles if formula feeding. For the rest, purchase other items as and when you feel the need after the baby arrives. You might find you never miss anything.
  5. Falling into the must-have traps: This is similar to the previous point but causes a lot more damage because the cost is high. I am talking about how it is expected of a family with kids to need a bigger car, a bigger house and a nursery that is completely set up before they welcome the baby.
  6. Forgetting what is more important, financially — your retirement: Saving for college is important, but even more important is saving for your future. You can get a loan for college, but there isn’t one to fund your retirement.
  7. Ignoring college savings: After you fund your retirement and other immediate goals, make it a priority to re-work your budget to find money to start a college savings account. Start small and set it up to automatically increase the contribution with every birthday. If you get cash gifts for birthdays and other holidays, make sure to immediately set aside a portion of it to go to the college fund.
  8. Postponing estate planning: Many parents assume that, if they don’t have a big estate, they don’t need a will or any type of estate planning. If you have any assets and you want your beneficiaries to receive them without a lot of hassle, set up a trust or a will. When you add a minor child to the mix, it gets even more complicated if you don’t have anything set up. Who will get custody of the baby in case you go? How will your money be spent? Do you want your child to get access to the money right away or do you want to set some money aside for his or her education? Do you want your child to get all your assets or do you want to donate some to a charity? Meet with an estate planning attorney if you have not already; the first meeting is most likely free and you will be able to figure out how much assistance you need to put a plan in place.
  9. Not taking full advantage of all the tax/employer benefits: Most people only think of insurance and 401(k)s when they think about their employer benefits. A lot of employers offer much more than that — a flexible spending account, dependent care account, gym memberships, discounts to stores and even subsidized child care. Find out all the benefits you are eligible for and take advantage of them.
  10. Failure to plan: When the baby comes, it is pretty much “stop everything else that is going on in your life and take care of the baby.” It is a lot easier and better to make a plan as soon as you know you are going to have a baby. The number of options available to save money might also go down the longer you wait.

Those are the big money mistakes of which I am aware. There are also other things like missing the deadline for a bill which can be fixed by planning ahead and automating bill pay, but from personal experience most of the companies will understand and waive the late fee once if you explain your new life change.

Have you made any of the mistakes above? What do you think are the top money mistakes new parents make?

Published on October 20th, 2014
Modified on October 24th, 2014 - One Comment
Filed under: Family & Life, Insurance, Planning, Retirement, Saving & Investing

The Latest Occupational Hazard? Binge Working

Written by FCN Staff - Leave a Comment

This post comes from Jacqui Kenyon at our partner site LearnVest.

binge working

Have you ever gotten absorbed in a project on your laptop, only to look at the clock to see that three hours have passed?

TODAY Money calls it the “hypnotic effects of technology,” and it’s just one of several factors contributing to a new and dangerous office trend: binge working.

With more and more employees connected at all hours, anxious about money and job security, and pumped up on good ol’ caffeine, working beyond any semblance of a normal office day is becoming more common—and sometimes with dangerous results.

Several binge-working-related deaths have made the headlines in recent months, including Mita Diran, a 24-year-old copywriter who worked a 30-hour stretch before collapsing and dying shortly thereafter.

Although Diran’s is an extreme case, there are many negative consequences that can stem from binge working, including a decrease in work quality, unplanned long-term absences and health problems. Ken Matos, who researches workplace trends at the nonprofit Families and Work Institute, told TODAY that the long-term effects will also include shorter lifespans for those who forsake taking breaks in the evening and on weekends.

The Real Reason Behind the Bingeing

Why do employees feel the need to toil for so many hours in a row without rest? It’s not just about how technology enables workers to be available at all times. Matos says there’s a deeper reason: Companies recognize and reward the wrong attributes.

“Organizations can develop a culture that focuses on the effort expended rather than the quality provided. I call these cultures of self-sacrifice, where employee value is measured not by how productive they are but by how much time and personal sacrifices they need to make to complete their work,” he said. In this mindset, Matos says, it doesn’t matter if two employees produce the same quality results—whoever sat at his or her desk longer is considered the better employee.

Does this sound like your office? Check out our ten signs that you’re burning out—and how to stop it.

More stories from LearnVest:

10 All-Inclusive Resort Secrets—Revealed

How I Did It: Opened My Own Etsy Shop

8 Ultimate Opening Lines for Fearless Networking

Published on October 17th, 2014
Modified on September 25th, 2014 - Leave a Comment
Filed under: Working

How California’s Drought Will Affect You

Written by William Cowie - One Comment

Statistically, 80 to 90 percent of you live outside of California. When you read reports of the drought in California, then, your reaction may be something like, “Bummer for those dudes. Patti, please pass the peas.” You might want to reconsider, though, because chances are this drought could affect you more than you think.

Saying the drought in California is severe is a bit like saying the Queen Mary is a nice little boat. At least one Bay Area scientist says that, based on historic tree ring data, the 2013-2014 rainfall season is on pace to be the driest since 1580 (not a typo). That’s more than 150 years before George Washington was born!

How much longer will it last? A bigger question is: Will this drought continue, and how will it affect you if it does?

The answer to the first question is not encouraging. The toughest previous droughts in modern recorded history occurred between 1987 and 1992 and the Dust Bowl era of 1928-1932. The peaks of those droughts coincided with major recessions. And the current drought is already considered worse than both of those.

But, compared to some of the droughts in California’s history, it’s still minor. Scientists at California State University, East Bay, looked at historical data by examining the rings of old trees. They discovered California has a history of what they call megadroughts: droughts lasting ten or twenty years in a row. That means things could get considerably worse before it gets better.

Where does the water come from?

Given that California is arid, the state can’t make it on its rainfall alone. Fortunately, it’s flanked by the Sierra Nevada mountains, the highest mountain range in the lower 48 states. It’s the snowfall in the Sierras which accounts for much of California’s runoff, mainly through the Sacramento and San Joaquin Rivers.

And that’s the heart of the problem. Below are two NASA satellite pictures taken exactly one year apart, on January 18, 2013 and 2014. You can see the stark difference in the Sierra snow pack between those two dates:

California snow pack
Image: NASA

In years when the runoff from rain and snow are insufficient, water users make up the difference from the state’s natural underground reservoirs, called aquifers. The aquifers, just like man-made reservoirs, depend on the runoff from rain and (mostly) snow to be replenished after the droughts ease.

The aquifers have always been sufficient to see the state through droughts, and the subsequent natural run-off replenished them again. However, it appears they are now being depleted at an unprecedented rate, creating concern that their level may have reached an unsustainable level. NASA and the German space agency DLR, collaborating on the Gravity Recovery and Climate Experiment (GRACE) satellite mission since 2002, released this composite image of the aquifers in California’s Central Valley recently:

California drought satellite image
Image: UCI/NASA

The situation is so dire, California’s governor recently passed legislation mandating water table management throughout the state.

Who uses the water?

Contrary to popular opinion and bandwagon-jumping celebrities, it’s not irresponsible suburbanites with their backyard pools and manicured lawns that use the water; it’s nature. About half the State’s water is left alone, or “given to nature,” to run off in streams and rivers. In times of drought, those sources are left untouched for the most part. Farmers use 80 percent of the remainder, and homeowners use only about 10 percent of California’s water.

Because farmers are by far the biggest users of water, they are the ones most affected by the drought.

What does this mean for you?

The Central Valley of California is to agriculture what Silicon Valley is to technology. Producing more food per acre than anywhere else in the world, it’s America’s top dairy producer and accounts for about two thirds of the entire nation’s fruits and nuts as well as over a third of America’s vegetables. It is also the largest producer of cut flowers.

Farmers have been adjusting for decades to rising water costs, switching their valuation metrics from yield per acre of land to yield per gallon of water. As a consequence, wholesale crop changes are taking place before our eyes. For example, cotton fields are being replaced by almond groves, because nut trees in general use far less water per dollar of revenue. Corn acreage in California has dropped 34 percent from last year; and wheat is down 53 percent, according to the USDA, either replaced with other crops or simply left fallow because there isn’t enough water.

It is obvious that food prices are going to rise because of the drought, and that has already started.

That’s not the worst part, though. California, on its own, is the world’s ninth largest economy, and agriculture is a significant component of its economic output. If the drought continues, thousands of jobs in California will be lost, hurting employment in the largest state of the union.

Dropping demand from the largest state in the union is bound to ripple through the entire nation to manufacturers of fertilizers, pesticides, seed and farm equipment, as well as food processors and transporters.

At a time when the nation’s economy is hanging in a delicate balance, that would be the last thing it needs. Think that’s perhaps a little dramatic? The last two major droughts peaked in 1932 and 1992, both low points in recessions (or in the case of 1932, depression). Given that food is the lifeblood of a nation, not just in terms of direct sales and employment, it’s not too much of a reach to expect a continuation of the largest drought in modern history to become a trigger for another recession, especially considering the fragile state of the American economy these days.

There’s not much you can do about food prices, except to brace yourself and not be surprised. However, there’s a lot you can do to prepare for another recession.

How do you prepare? In short:

  • Pay down your debt
  • Create or expand your emergency savings account
  • Do not buy any upgrades: wait till the recession, when you can get everything a lot cheaper
  • Stay away from speculative bubbles

Next time you see or hear a report on the drought in California, it might be worth your while to tune in. Forewarned is forearmed.

Published on October 15th, 2014 - One Comment
Filed under: Consumer, Economy, Frugality, Miscellany, Saving & Investing

9 Things I Wonder About IPOs

Written by Richard Barrington - One Comment

The initial public offering (IPO) of the international e-commerce company Alibaba recently attracted a lot of attention — not to mention a couple billion dollars of investment money. This might be okay if it were an isolated occurrence, but lately there has been a flurry of IPOs — and they make me feel a little itchy about the investment environment.

I understand the principle that growing companies opening themselves up to new sources of capital is one way the economy grows. However, when investors go overboard for IPOs — either by overpaying for specific stocks or supporting too many new issues at once — it raises questions about both individual stocks and the market as a whole.

What kind of questions? Well, here are nine things that IPOs make me wonder:

  1. Is it just a status buy? The clamor to get in on IPOs reminds me of the lines of people outside a store waiting to buy some fad toy. You have to wonder how many of these people are making independent assessments of value, as opposed to just trying to capture the status of being one of the first to own a much-hyped introduction — in effect, people who are just lining up because everyone else is lining up. I don’t see much utility in going to great lengths to own something a little earlier than everyone else, and I also know that kind of hype can obscure the questionable worth of these fads. After all, do Cabbage Patch dolls really seem worth all the fuss in retrospect? Or, to ask about a more recent example, how’s that Groupon stock doing?
  2. Raising cash or cashing out? Publicly, companies issuing stock talk about raising capital so they can continue to invest in the business plan. Privately, the owners of those companies talk about creating liquidity — a smooth way of saying they are giving themselves a means of cashing out while the company is still worth something. Trying to figure out whether a management group is really raising cash or cashing out leads me to ask this next question.
  3. Raising cash for what? Given the magnitude of the capital being raised, there should be some pretty extensive expansion/upgrading plan for how to use that money to grow the company. If you don’t see a plan commensurate with the amount of money being raised by an IPO, you have a right to question the motives of management.
  4. Can entrepreneurs and public shareholders get along? Entrepreneurs are often stubborn, long-term thinkers who would rather pour profits into the next idea than simply bank the profits from their successes. That’s why some of them make a huge difference to the economy and society — and also why many others eventually fail. Once a company goes public, there is a natural friction between this kind of risk-taking, long-range thinking and the demand of shareholders for positive quarterly results.
  5. What’s the incentive now? The classic start-up fantasy is that a small group of young, hungry entrepreneurs working out of a garage somewhere goes on to become instant billionaires on the day of their IPO. The question is, once they have achieved that fantasy, how many of them can stay hungry about their work?
  6. Is the earnings multiple justified? You may love a company’s products and the way it does business, but that does not mean it’s worth the price once the stock gets driven up by IPO hype. Alibaba, for example, was recently selling for just over 40 times its annual earnings. That means it would take you 40 years to earn back each dollar you invest, unless the company’s earnings grow into that price level — which leads me to another question….
  7. How does this impact the earnings growth rate? An essential part of IPO hype is the growth story — imagining what the company will become if it can simply continue its impressive rate of growth to date. The problem is, given the scale necessary to be considered ready for an IPO, and the investment implicit in raising that much capital, continuing that growth rate for years and years becomes problematical. Mature companies simply don’t have the opportunity to match the growth rate of new start-ups.
  8. Will there be a better buying opportunity in the near future? If you still like the company, consider whether there might be a better buying opportunity after the initial hype has died down — either when the stock experiences a post-offering slump or during the next broad market downturn.
  9. Has indiscriminate investing taken over? This is the bigger-picture question, about the state of the market as a whole when IPOs start to pop like popcorn. In that environment, are people still thinking of companies as an earnings mechanism designed to pay a return to shareholders, or are they just buying stocks like lottery tickets?

None of this is meant to imply that you should not invest in IPOs, but you should ask yourself some tough questions before you do.

Published on October 13th, 2014
Modified on October 10th, 2014 - One Comment
Filed under: Saving & Investing

What the CIA Knows About Your Finances

Written by FCN Staff - Leave a Comment

This post comes from Julia Chang at our partner site LearnVest.

cia data

First it was your phone records; now it could be your financial transactions.

The Wall Street Journal reports that the Central Intelligence Agency is collecting data from U.S. money-transfer companies such as Western Union in an effort to find or track suspected funding for terrorists.

With its focus on foreign intelligence, the CIA cannot target Americans in its investigations, but it can conduct domestic operations that aid its intelligence-gathering. The agency says it isn’t collecting transaction information that takes place within the U.S.—but it can obtain records through court order for those that happen between the U.S. and foreign countries.

The CIA is being allowed to do this under the same provision of the Patriot Act that enables the National Security Agency to collect phone records that they believe to be relevant to a terrorist investigation. But the broad interpretation of “relevant,” as brought to light by whistleblower Edward Snowden, meant the NSA was able to collect the records of millions of Americans. This revelation raised red flags for lawmakers concerned about privacy.

The justification for the program comes from the discovery that some of the terrorists involved in the 9/11 hijacking were using money-transfer services to send funds to one another.

Depending on the company, some service providers will ask for such information as names, addresses, phone numbers and even Social Security or passport information before you can wire cash. But the CIA says it obtains the data from the company in bulk and takes efforts to mask personal information about Americans—unless that data is deemed important to foreign investigations.

Even so, some lawmakers still want to stem the use of the Patriot Act to collect large swaths of data collected on Americans.

Do these latest revelations make you nervous about your financial privacy? Here are some tips for how to safeguard your financial data.

More stories from LearnVest:

10 All-Inclusive Resort Secrets—Revealed

How I Did It: Opened My Own Etsy Shop

8 Ultimate Opening Lines for Fearless Networking

Published on October 10th, 2014
Modified on September 25th, 2014 - Leave a Comment
Filed under: Banking

Is retirement good for you or bad for you?

Written by Jeffrey Steele - 2 Comments

A neighbor who lives directly below me in my condominium building wakes up before 6 a.m. each morning, gets dressed, skulks outside and on some days begins looking for parked vehicles of neighbors he doesn’t like.

Under the protective cloak of a cover of darkness, he removes a key from his pocket, walks alongside those cars, and ensures the key he’s holding gouges a line six to nine feet long in the finish. If he really doesn’t like someone, while strafing the long line in the paint job, he will dig the key in with such force that the paint on either side of the furrow literally stands at 90 degrees off the surface.

For a change of pace, he’s been known to plunge a jackknife into one of the tires of folks he doesn’t like, or rip their car’s antenna from its moorings.

That this psychopath is on the far side of 70 would surprise many people. This isn’t the kind of behavior one expects from a senior citizen. But ironically, I can attest this was a much better guy when he was younger — and had a job.

Since retiring, though, he’s had nothing to do all day. So he apparently sits around from sunup to sundown, imagining enemies and ways to get even.

Just think. At the hour most people are getting ready to head off for another productive workday, this guy who spends every hour of every day not working is out making their lives even more challenging by vandalizing their cars.

This isn’t the first time I’ve seen retirement leave an older person much the worse off. Anger, depression, domestic problems and social isolation are a few of the pathologies I’ve witnessed in folks who have “hung ‘em up for good,” presumably so they can spend every day dwelling deeply on negatives.

Good state of mind?

If it sounds like I’m not a huge fan of the retirement concept, you’re right as rain. I think retirement is one of the worst ideas anyone ever devised. That someone should spend her life in productive work where she is socially engaged and rewarded for her labors, then chuck it all to start a new chapter with vastly diminished challenges and social engagement is absolutely loony.

Sure, some people hate their jobs and can’t wait to grab the gold watch and walk away. But that doesn’t mean they can’t wake up the next day and start a new vocation doing something they love. There’s nothing about reaching your mid-60s that should consign you to the hell of afternoons with “Maury.”

So you can imagine my eyebrows arching heavenward when I came across an article two weeks ago entitled, “Retirement: A Good State of Mind.”

“Is retirement good for one’s mental health? The evidence is all over the place,” the report discloses. “A new study of the United States and 11 European countries finds that it improves subjective well-being, measured both in terms of satisfaction with one’s life and the incidence of depression.

“The study is based on two comparable sets of surveys of age-50-plus Americans and Europeans taken in 2004, 2006 and 2010.”

Based on preliminary findings across a dozen countries, the study concluded that retirement reduces depression, has a significant positive effect on life satisfaction, and that incomes have relatively little effect on retirees’ levels of depression or their satisfaction with their lives.

The entity that funded this research? That would be the U.S. Social Security Administration, through the Retirement Research Consortium.

Hazardous to health, wealth

Again, based on what I’ve seen of a good many retirees, a more accurate picture might have been painted in a June article by Paul Irving called “Retirement is bad for your health, and your wealth.” The article’s message? The retirement years aren’t what they once were, and that might be a very good thing.

“It’s clear that the old model of retirement — days of decline and disengagement, a period of withdrawal and mass leisure — is thankfully on its way to being retired, as our goals and values change with the times,” he wrote.

“As the world moves toward its largest-ever population of older citizens, both scientific and financial opportunity offer an encouraging new path.”

In the article, the author cites research that shows working longer confers substantial health benefits. Older folks who stay mentally and physically active give themselves an immeasurable gift, Irving writes. “Those who work and are active are less likely to develop diseases associated with aging,” he adds. “They have a greater possibility of living longer lives, mostly free from disability.”

Engaging, enjoyable and purposeful work after age 66 can mean income, and that in turn spells less worry about outliving savings, which in turn is likely to bring enhanced health and longevity. “Work is good for self-esteem and for purposeful, financially secure and healthy aging,” Irving concludes.

I’m not surprised the downstairs neighbor in my building hasn’t gotten this message and found something to keep him busy. Why am I not surprised? Well, he has never impressed me as the sharpest instrument in the drawer.

The same can’t be said for his key and switchblade.

Published on October 8th, 2014 - 2 Comments
Filed under: Retirement, Working

Planning a fun, frugal Halloween

Written by Suba Iyer - One Comment

Tis’ time for the spookiest holiday of the year and a record number of Americans are planning to participate in the scare festival. According to the National Retail Federation, more than two-thirds (67.4 percent) of celebrants will buy Halloween costumes for the holiday, the most in the survey’s 11-year history. The average person will spend $77.52 this Halloween and the total spending on Halloween this year will reach $7.4 billion. That is a lot of money. Here are some tips on how to stretch the budget for everyone so there’s more fun for everyone on All Hallows’ Eve.

Costumes

The forecast is that partygoers will spend $1.1 billion on children’s costumes and $1.4 billion on adult costumes. Fido and Fluffy will also participate, with consumers planning to spend $350 on costumes for their pets. If you’re looking to slash costs, what can you do?

  • Do it yourself: Social media, especially Pinterest is full of ideas to do pretty much anything yourself and costumes are a piece of cake for a crafty person. Even if you are not a crafty person, there are still plenty of ideas and excellent step-by-step tutorials to help you whip up a great costume in an hour or two.
  • Look for a swap: I am a member of a local swap group on Facebook and it is now filling up with costume swap requests. Most people wear their costume just once, so it is pretty much brand new. Why not trade last year’s costume for something new (to you) for this year? Rinse and repeat every year, your costume spending is $0.
  • Layer up: Buy something that can be worn throughout the year and make it spooky or funny or whatever your style is, by adding some layers to it.
  • Shop your closet (or your mom’s): If you or any of your older relatives have really old clothes, like an old prom dress, that can be a great dress up. You can always create a costume from your closet by adding a few embellishments.

Party and decorations

One-third of Americans will throw or attend a Halloween party this year; and almost half the country (46.7 percent) will turn on the spooky meter and decorate their homes and yards.

  • Use what you already have:
    • Use cheap tissue paper to cover lights you already have to create an eerie glow.
    • Drape your furniture with cheap black sheets from a dollar or thrift store
    • Design your menu using an image editor like Picmonkey where there are special Halloween fonts and print them out
    • Use cheap cheesecloth to create cobwebs
    • Collect tree branches from your backyard, spray them with black spray paint and hang them from the ceiling.
  • Be creative with the menu: Again, Pinterest has plenty of great ideas from two-minute witches fingers with carrots and almonds to a much more elaborate menu that can serve your entire neighborhood. You don’t have to make special items. Simple menu items can be modified to make it a little more scary and appropriate for the occasion.

Candy

Fully 71.1 percent of America plans to hand out candy, and my family won’t be the exception. In fact, this is the major cost for us as there are quite a few kids in our neighborhood. Last year, we ended up buying bulk at Costco; this year, I am trying to be better prepared.

  • Keep an eye on candy deals: Blogs like TheCouponMom.com and TheKrazyCouponLady.com have all the deals listed out by state and store name. They also match coupons if any are available. Keep an eye on those deals for candy. Sometimes you can hit the candy jackpot at drug stores with a Sunday coupon.
  • Skip the dollar stores: I have seen a lot of sites recommend dollar stores or discount stores for candy. Personally, I don’t find that they offer good value for the money. Yes, they are cheap; but the quantity is lower than the regular stores, so you end up paying more per piece. Candy is something you need a lot of, so it is better to look at the cheapest by piece price and stock up.
  • Begin with a budget: As with any holiday or event, it is always good to begin with a budget and keep track of it as you spend on each item.
  • Don’t wait until the last minute: Planning is the best way to spend less and not go broke celebrating a holiday. If you wait until the last minute, you might have to buy everything in your over-priced neighborhood Halloween super store.
  • Get everyone in the family involved: Involve everyone in the planning and make it fun. You can have several weeks of fun for super cheap (or even for free) — make a jack-o-lantern, plan your decorations, bake pumpkin pie, involve everyone in making the costumes.
  • Hit the after-sales: Plan for next Halloween now. When the item goes on clearance, stock up on decorations and other items that can be used for a long time.
  • Use cash-back sites: When you shop, use a cash-back site like Mr. Rebates or Ebates to get something back to your wallet.
  • Stock up on some delicious pumpkins and gourds: This is not a Halloween tip per-se, but this is the time when they all go on sale. Stock up on them, prepare them however you like — pies, jams, curries, etc. — and preserve them to enjoy throughout the year.

Are you planning to celebrate Halloween this year? What are you planning to do? How are you planning to save money? Any tips you want to add?

Published on October 6th, 2014
Modified on October 3rd, 2014 - One Comment
Filed under: Consumer, Family & Life, Frugality

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