Why Giving Matters

by Ryan H. Law

Did you know there is one thing you can do that has been scientifically proven to:

  • lower your levels of stress
  • make you more productive and more successful, and
  • make you happier, healthier and more prosperous?

It’s a simple thing as well.

It’s giving.

Giving of your money, your time, or even giving blood.

Of course, most of us don’t give because of the benefits we gain, but because we genuinely want to help other people.

My post today mainly comes from Arthur C. Brooks’ work, who is one of the leading researchers on charitable giving in the United States.

Rockefeller2Brooks came across a statement from John D. Rockefeller where Rockefeller stated that he was rich because he gave so much, and he believed if he stopped giving that God would take his money away from him.

Rockefeller was very wealthy.

His net worth was about $340 billion, and during his lifetime he gave away about $540 million.

He came across statements from a number of other wealthy people who basically said the same thing.

This bothered Brooks so he set out to prove that Rockefeller and others were wrong. Brooks says, “…what I found was that Rockefeller was right and I was wrong [1].” You can read the article referenced below to get into the details of the studies that he did, but what I want to look at here is the results of his studies.

Here are some things that Brooks discovered:

  • Prosperity – when people give they prosper
    • This is true whether you are giving of your time, money or even giving blood.
    • If you take two identical families except that one family gives $100 more to charity than the other family, the giving family will earn on average $375 more in income than the non-giving family, and that $375 is statistically attributable to the $100 gift.
    • As people and our country gets richer, they give more away, but as we give more away it translates into better economic growth for the country and the individual – it’s a wonderful cycle – the more you give the wealthier you become, which allows you to give more, which leads to more prosperity and on and on.Giving cycle
  • Happiness & stress reduction
    • People who give are happier than those who do not give
      • People who give money are 43% more likely than people who don’t give to say they are very happy people.
      • People who give blood are twice as likely to say they are very happy people than those who don’t give blood.
    • When people give, it lowers their levels of stress which makes them more productive and more successful at work.
      • One study showed that those who gave cut their stress hormones in half.

Let me share a story with you that illustrates at least one aspect of this. When I was younger – probably about 10 years old, there was a big snowstorm that left a fair amount of snow in our neighborhood. There was an older widow who lived on the corner, and my older brother and I and a friend from across the street decided we would shovel her driveway, but we were going to do it quietly so she wouldn’t know who did it.

Well, you can imagine how quietly three boys that age can shovel a driveway, but we did try! Every time she would peek out her window we would throw our shovels down and dive behind a bank of snow, figuring we were so fast she wouldn’t be able to see us. I remember going home feeling tired from shoveling, but also feeling really happy. Happy that we had pulled off this great feat of both strength and stealth, but happier because we had done something for her that she wasn’t physically capable of doing for herself. To this day I still feel happy when I think about it. We were definitely the main beneficiaries of this.

cookiesWe did find out later that we weren’t quite as stealthy as we thought when she brought us some cookies, so not only did we get the benefit of feeling happy, but some nice warm cookies as well. =)

I’m sure you have similar experiences – perhaps you have volunteered at a Food Bank, or a homeless shelter, or coached a little league team or done countless other acts of service as so many Americans do, and you felt the same way I did – giving of your time makes you happier.

I find the same is true of money. The very first thing on our budget line is the 10% we give to our church [2]. We never miss this money. Giving doesn’t make you poorer.

Brooks says, “What I charge you with today is what I charge myself with, which is to discover more creative solutions to working these concepts into our everyday lives.” Remember that you are the main beneficiary of your giving – it will lower your levels of stress, make you more productive and more successful, and make you happier, healthier and more prosperous. Just like Brooks I encourage you and me to examine our giving to see where we can do better.




Who Really Cares[1] http://speeches.byu.edu/?act=viewitem&id=1826 Note: This speech was given at Brigham Young University in 2009. Brooks, a Roman Catholic, talks about Mormon giving in this article but also deals with giving in general. You can also read Brooks’ book: Who Really Cares (http://www.amazon.com/Who-Really-Cares-Compassionate-Conservatism-ebook/dp/B004VRP37S/ref=sr_1_1?ie=UTF8&qid=1396546413&sr=8-1&keywords=who+really+cares+brooks) which deals with the subject matter without getting into the specifics of Mormon giving. The article is a great synopsis of the book, though, regardless of your religious affiliation or non-affiliation.

[2] Brooks found that of those who practice a faith (attend church weekly), 91% give to charity each year, compared to 66% of those who don’t attend weekly. Practicing faith is the number one predictor of giving. Malachi, in the Bible, says essentially the same thing Brooks is saying: “Bring all the tithes into the storehouse, that there may be meat in mine house, and prove me now herewith, saith the Lord of hosts, if I will not open you the windows of heaven, and pour you out a blessing, that there shall not be room enough to receive it” (Malachi 3:8-10). Giving brings us a myriad of blessings, as Brooks has pointed out, but you certainly don’t have to be religious to give!

3 day cooling off period

Our home still has the original windows in it with metal frames. It lets in a lot of heat in the summer, and a lot of cold in the winter. They are single-pane and incredibly inefficient, so we have been in the market for new windows.

We’ve had two door-to-door salespeople come by offering to do a quote. The first guy wanted 2.5 hours for the appointment, and never would give us an estimate until he looked at every window and pointed out all the problems (tip for that type of salesperson – we know we need all new windows, you don’t need to spend 10 minutes analyzing each one!). The second guy was really nice, but we fell for a marketing ploy. “We don’t do any type of advertising. In a 3-square mile area we pick two homes and you become our marketing home. We put a sign up in your yard for 60 days and direct people to look at your windows. For that, we give you a big discount.” He sold us on the virtuous of their 3-pane windows and lifetime warranty. (It turns out, by the way, that you don’t need 3-pane windows unless you live in a really cold or hot place.)

We needed new windows, so we decided to take the plunge and put 20% down and signed the contract. The windows would take about 8-weeks because they special order them for your home.

The salesman gave us a bunch of paperwork and we set it aside since this was just before Christmas. Christmas and New Years came and went and we started doing some research (well, asking friends on Facebook. That counts as research, right?). It turns out that those who had new windows put in paid about half of what we paid. We decided to get out of the contract. However, just above where we signed it said this:

“YOU, THE BUYER, MAY CANCEL THIS TRANSACTION BY DELIVERING WRITTEN NOTICE TO THE SELLER AT ANY TIME PRIOR TO MIDNIGHT OF THE THIRD BUSINESS DAY AFTER THE DATE OF THIS TRANSACTION.”

Oops….we were well past the third business day, but I figured I would contact the seller anyway since they hadn’t done any work yet and the windows hadn’t been ordered. I e-mailed the salesman and his regional manager and got an e-mail back basically saying, “Tough luck. You signed the contract and we’re going to make you stick to it.” We went back and forth – “do you really want your marketing home to be an unhappy customer? Let’s look at doing something different – maybe double-pane windows instead.” They basically said, “No, you are beyond the third business day. We’re holding you to it.”

I decided to do some actual research, though, to see if there was any way out of the contract. I first went to the Federal Trade Commission’s website and found an article about the FTC’s cooling off rule (http://www.consumer.ftc.gov/articles/0176-buyers-remorse-when-ftcs-cooling-rule-may-help). It basically says that as long as the sale was over $25 and not at the seller’s place of business the seller has to do three things:

1. The seller must tell you about your right to cancel at the time of sale
2. The seller also must give you two copies of a cancellation form (one to keep and one to send if you decide to cancel your purchase) and a copy of your contract or receipt
3. The contract or receipt should be dated, show the name and address of the seller, and explain your right to cancel

The seller had done two and three, but not the first one – he neglected to tell us about it. I sent the article to the regional manager and he said, “You are beyond the third day, but I’ll check with the company owner. You’re not getting out of this contract. We had a Utah lawyer write the contract and it complies with Utah law in all matters.”

While I was waiting for him, I did more research. I went to the Utah Division of Consumer Protection website (http://www.consumerprotection.utah.gov/) and it turns out that Utah law (http://www.rules.utah.gov/publicat/code/r152/r152-11.htm) states:

(a) The notice required shall:
(i) be a conspicuous statement written in dark bold with at least 12-point type on the first page of the purchase documentation; and
(ii) read as follows: “YOU, THE BUYER, MAY CANCEL THIS CONTRACT AT ANY TIME PRIOR TO MIDNIGHT OF THE THIRD BUSINESS DAY AFTER THE DATE OF THE TRANSACTION OR RECEIPT OF THE PRODUCT, WHICHEVER IS LATER.”

I had something here – their contract neglected the words “OR RECEIPT OF THE PRODUCT, WHICHEVER IS LATER.” I called an investigator with the Utah Division of Consumer Protection Services, explained the situation and asked if “receipt of the product” is a receipt like you get at a store or physical receipt of the product. She confirmed it is physical receipt of the product. She said the company was in violation of Utah law because their contract didn’t have that provision on it and that we were entitled to a full refund until the windows are installed. She also said that she was going to investigate the company to be sure they add that to their contract, and that if they didn’t promptly refund the money her office would take over and get it back.

I sent this all in an e-mail to the company and shortly thereafter got a phone call from the regional manager. “Of course it’s no problem. We’re going to let you out of your contract and as a thank-you for helping us realize we didn’t have the correct wording on there we’re willing to take $2,000 off double-pane windows if you would like to do that.”

We aren’t taking them up on the offer.

We learned some important things:

1. We’re putting up a no soliciting sign. I know this won’t stop all salespeople, but it will help. In general, door-to-door salespeople use high pressure tactics and count on you not being able to do any research. They will have slick advertisements and endorsements convincing you to take action now. Our sign will say that youth are welcome to knock. After all, we still want some Girl Scout cookies =)

2. It pays to do your research. If you are in Utah you have until the physical receipt of the product to cancel. If you live outside of Utah check your own state’s rules (if you find it for your state, please put it in the comments below).

3. Don’t sign a contract without reading it in full.

4. Do some comparison shopping before you sign a contract.

5. Don’t be pressured by “you get 15% off, but only if you sign today” or “we only need one more marketing home in your area.” They know that three days is too short to really do any comparison shopping, so they will try to pressure  you to buy that day. Inform them that you are going to comparison shop and you aren’t worried about not getting the best price from them today. If you decide to go with the company insist they give you the discount they were going to give you that day.

6. Talk to your friends – Facebook is a great start – about companies they used and if they liked or didn’t like them. We have since received several referrals for window companies and will likely go with one of them.

We almost had to learn a really expensive lesson, but we will be sure to follow all of these from this point forward.

Remember, if you find your state’s rules, please post them in the comments below.

The Difference

For each attitude or behavior listed below indicate whether it describes you Very Well, Well, Slightly or Not at All.

Very Well Well Slightly Not at All
I feel stocks are worth the risk.
I devote money to personal savings each month.
I save regularly for emergencies.
I have invested for retirement.
I am significantly reducing or I have eliminated outstanding debt.
I have a goal to be financially comfortable during my working years.
I have a goal to retire comfortably.
I know what I want to do for a career and I am actively pursuing it.
I have a goal to accumulate $1 million.
I own a home (or plan to).
I am confident.
I am optimistic.
I am happy.
I am competitive.
I am a leader.
I have a college degree or I am actively working on getting one.
I socialize with friends at least once a week.
I exercise at least 2-3 times per week.
I read newspapers (or online news) regularly.
I am married (or plan to be married).

According to research conducted by Merrill Lynch, Harris Interactive and Jean Chatzky, these twenty attitudes and behaviors were the most critical in determining individuals varying levels of wealth.[1]

The initial question asked by Chatzky was, “Why do some people seem to move relatively easily from a paycheck-to-paycheck existence into comfort or wealth, while others get stuck or – worse – fall back?”

The study, which included hundreds of questions and was administered to more than five thousand individuals, identifies four levels of wealth, along with what percentage of the population falls into each category:

  • The wealthy – 3%
  • The financially comfortable – 27%
  • The paycheck-to-paycheck – 54%
  • The further-in-debtors – 15%

Chatzky and her team found that the wealthy can select at least twelve of the twenty attitudes and behaviors listed above as describing them “very well”, the financially comfortable have at least ten, while only half of those in the paycheck-to-paycheck group or further-in-debtors have more than three that describe them “very well”. In her book, The Difference, Chatzky stresses that most of the above factors are things that can be learned, and that moving up is not only possible, but inevitable if you focus on the right things.

There are, of course, other important factors. While these were identified as the top 20, Chatzky also discusses gratitude, giving, hard work, long-term thinking and others.

Here is Chatzky’s description of those who understand the difference their attitudes and behaviors make and have achieved success in life:

“They knew what they wanted, they plotted a course, and they arrived. They’re not stagnant. That wouldn’t do. Every day, they think about what’s next and set about achieving it with intention and purpose. And today, as a result, they are surrounded by people they care deeply about – and who return the favor. They wake up happy and go to sleep fulfilled. And they don’t lose sleep at night worrying about paying that next bill or any other financial matter.”[2]

It does take time, after developing the attitudes and behaviors listed above, to move from one group to the next. On average, it takes about seven to eight years to move from paycheck-to-paycheck to financially comfortable, and an additional eight to move to a life of wealth. In can be done faster – in fact there were some people that moved from paycheck-to-paycheck to wealth in a total of about ten years. The research also showed the number one reason people slipped from financial security to living paycheck-to-paycheck is overspending.

So where does all of this data leave us? First, Chatzky says, is that you need to make a decision that you want to change and achieve higher levels of wealth. “You choose The Difference,” Chatzky says, “it does not choose you.” Second, you have to take action. Look through the list above and select some things you can begin to work on. Maybe you can start building up your emergency fund, or start exercising more, or focus on your career goals. Any step in the right direction is a good step to take.

For further discussion on this topic, I encourage you to read Jean Chatzky’s book The Difference.

Ryan H. Law, M.S., CFP®, AFC®

[1] The study and findings are discussed in detail in Jean Chatzky’s book “The Difference”  ISBN: 978-0-307-40714-6
[2] Chatzky The Difference pp. 2


     

 

 

 

 

 

 

 

 

Meeting Jean Chatzky at a conference

Safe Holiday Shopping Online

Black Friday and Cyber Monday have come and gone and according to the stats, it appears it was (another) record-breaking weekend:

  • The National Retail Federation reports that we spend about $52 billion on Black Friday. [i]
  • IBM, who tracks online transaction sales, reported that we spend between $1.5 and $2 billion on Cyber Monday.[ii]

I personally am not a big fan of Black Friday, especially now that it is creeping onto Thanksgiving. It seems more and more companies put their sub-par products on sale for the weekend. I am also not a fan of standing in line for hours in the cold or being trampled or assaulted by people fighting over a phone or yoga pants, but that’s beside the point.

Today’s Tip is about the remaining shopping that you will be doing. A lot of people will shop online for gifts, and I want to make sure you do so safely.

Here are five tips for sale holiday online shopping:

  1. Be sure the website’s purchase page is secure. It doesn’t matter if the rest of the site is secure or not, but be sure the page where you enter your credit card is secure. Here’s how you can tell – the browser should say https instead of http, and you should see a lock icon somewhere on the page. Here is what the Amazon.com sales page looks like:amazonScreen
    You can see both the https and the lock icon, which means it is a secure page.
  2. Don’t purchase items from e-mails unless you can verify where they came from. I get deals in my inbox from Walmart, Target, Amazon and many other reputable companies. E-mail marketing is cheap and effective. However, I also get deals like this one:“Get the New 32GB iPad Sold for $31.08!”This is from an e-mail send by “Adison Greg” from some website that no one has ever heard of. When you get those emails don’t click any links in them, including the “unsubscribe” link. Delete them immediately! They are Spam and many have some kind of virus. If you don’t click on them you will be safe.
  3. Use your credit card to purchase online. Never trust a website that doesn’t accept credit cards, or that encourages you to pay using Western Union or something like that. Your credit card has protection built in, as do websites like PayPal. If you never receive the item, you can file a dispute and your credit card company won’t charge you for the item.
  4. This is a tip I almost learned the hard way – I got an email saying that my purchase of 2 Nexus 7 tablets being sent to California from Walmart had been cancelled because they couldn’t verify the shipping address.  Concerned, I logged into my Walmart account and sure enough, there was an order for two Nexus 7 tablets that were scheduled to be sent to some random address in California. After doing some research I found that this isn’t uncommon – hackers get into the databases of these websites and can try to order things using your account. This only works if your credit card is stored on the website. Walmart.com, for example, stores your card without asking if you want it stored – they do it automatically. I immediately changed my password and deleted my credit card from their system. I no longer store credit cards on any websites – it only takes a minute to enter the card number and I feel more secure that way. Each time I purchase on Walmart.com now I immediately go to my account and delete the credit card number.
  5. Consider purchasing pre-paid shopping cards to purchase online. I know some people don’t like to use their personal credit card online, so they purchase pre-paid shopping cards and use that for all their Holiday shopping. A bonus is that you can set your limit and not spend any more than that.

Like many of you I do quite a bit of online shopping and will continue to do so. If you will follow today’s tips (especially tips 1-4) you can shop online with confidence.

 

Revolving Savings

As Christmas approaches and the stores get more and more aggressive with their sales, far too many people are buying on credit without thinking about how much they are spending and the consequences of paying the minimum payment.

A 2013 survey from Credit Donkey (www.creditdonkey.com) showed the following stats for those who charge Christmas on their credit cards:

  • 52% will pay it off in full in January
  • 23% will pay by the end of tax season
  • 13% will pay if off by the end of the summer
  • 6% by the beginning of the next holiday season and
  • 6% past the end of the next holiday season

There’s a better way to do it. In fact, it will help you will all of your known, but irregular expenses. I call it my Revolving Savings account. It’s a simple concept, but it works!

First, let’s identify what some of those known but irregular expenses are:

  • Holidays
  • Birthdays
  • Car Registration
  • Car Insurance (unless paid monthly)
  • Life Insurance (unless paid monthly)
  • Tuition and books
  • Vacations

Those are the most common ones that I see, but you may have a few other things that would fit in there as well.

The next step is to make a list of each month, then go through and plug all your known, but irregular expenses in there along with how much you are going to spend. Your calendar might look like this.

JANUARY FEBRUARY MARCH APRIL
Books: $300 Spring Break: $200
MAY JUNE JULY AUGUST
Dad Birthday: $20 Mom Birthday: $30
Books: $300
SEPTEMBER OCTOBER NOVEMBER DECEMBER
Car Registration: $85 Christmas: $200

The next step is to add up the total – in this case the total is $1,135. You then take that $1,135, divide by 12, and you get how much you need to save up each month ($95). If that amount seems too high, you have a couple of options:

  1. Reduce how much you are spending on these categories, or
  2. Figure out a different way to fund some of the items

As an example of the second option you may consider times when you get extra money, such as a tax refund, to fund some items such as your Spring Break trip and Car Registration.

You then put that $95 in a separate account (I call this my Revolving Savings account) that you only use to pay for these expenses.

Each December my wife and I sit down and review the previous calendar and draw up a calendar for the next year. Not only does this make it less stressful as you approach each of these events, but you can actually save money by buying things when they are on sale.

If you have major expenses that come up early in the year you may want to run your Revolving Savings calendar on a different schedule (i.e. July-June of each year instead of January-December). In the calendar above the person is going to need $300 in January, but only have $95 if they run their Revolving calendar from January-December.  If they ran their calendar April-March they would have enough money by the time they hit each expense.

As I said above, this is a simple concept, but it works!

Ryan H. Law, M.S., CFP®, AFC®

The Importance of Personal Financial Planning for College Graduates

by Ryan H. Law

Over the past 6 weeks I saw more than 500 graduating seniors come through my office (The Office for Financial Success) to receive student loan exit counseling. Exit counseling is required for all graduating students with federal student loans. At the University of Missouri they can choose to do the counseling online or they can come through our office and meet with another student who is trained to offer this counseling.

Seeing all these seniors come through our doors has caused me to reflect on my own graduation and some things I did well as well as some things I wish I had known or done upon graduation.

Today’s post will focus on some specific steps that I think all graduating seniors should take (but don’t worry – it’s good advice for everyone – even if you haven’t graduated yet or graduated years ago).

Become financially literate

Financial literacy in the United States is, unfortunately, not widespread. Most high school students fail a personal finance exam (less than 50% of questions answered correctly) and college students score just 62%[1]. One of the best things you can do for your future is to become financially literate. If you can take a college course in personal finance I highly recommend it. In a 3-credit personal finance class you will learn about everything on this list and you will be more financially literate by the end of the course than most people in America. If you don’t have the option to take one on campus look into one of the many excellent Open Courseware classes – you won’t get any college credit for it, but you can’t beat the price tag – free![2]

As a part of becoming financially literate I recommend you learn the fundamentals of how the U.S. economy works. Learn about the business cycle, unemployment rates, inflation and interest rates. All of these things affect your personal finances, so a basic understanding of them is helpful.

Don’t get your financial advice from amateurs

Financial advice can be found almost anywhere – it is prolific on the internet and on the bookshelves at libraries and bookstores. However, I would caution you to be careful that you are not getting your financial advice from amateurs. For example, a few years back there was a taxi driver who “figured out the system to wealth” day-trading stocks. A lot of people lost a lot of money following his advice. Be careful of advice received from friends or family about the latest “hot tip” on a stock. This tip, like all the others, will take you back to the first recommended suggestion – a good solid class will teach you much about how to win at personal finance.

Establish financial goals and take action to achieve them

You need to start thinking about some short and long-term financial goals. How soon do you want to pay off your consumer debt? How much money do you need at retirement? Do you plan to buy a home eventually? Do you plan to have children and send them to college? What are your plans for increasing your earning potential? I recommend you take some time to sit down and make some decisions about where you are financially, where you want to be, and how you plan to get there.

Learn to budget

No company would go one day without a good, solid budget. They understand how much is coming in, how much is going out and exactly where those dollars are going. You should likewise have a budget. A budget is not a record of where your money went (though that is important as well); it is a plan for where you want your money to go. Learn the process for budgeting then discipline yourself to take action and stick to your budget[3]. A key component of your budget should be to spend less than you earn and to pay yourself first. As part of your budget you should work diligently to build up a 3-6 month emergency fund.

Develop a net worth statement and update it annually

A net worth statement is a snapshot of a particular moment in time. It should list all of your assets (everything you own that is worth money) and all of your liabilities (debts). Minus your liabilities from your assets and you will come up with your net worth. You should update this annually to see how you are doing. Over time this number should increase.

Care about your credit

You should know what your credit report contains[4], what your credit score is and what steps you can take to improve that score[5]. Your credit score determines what interest rate you pay on loans, what your auto insurance will cost, if you can rent certain apartments, and in some cases if you can even get a particular job.

Pay off consumer debt as quickly as possible

Carrying consumer debt, especially credit card debt, is toxic to your financial goals. Pay it off as quickly as possible by paying more than the minimum and refusing to take on additional unnecessary debt[6].

Start saving now for retirement and take advantage of employer-sponsored retirement plans such as a 401(k) or 403(b)

If your employer offers a tax-advantaged retirement savings plan, such as a 401(k) or 403(b), take advantage of it! You will save on taxes now and can often get free money through a company “match” of your savings.

Time is your best friend when it comes to saving for retirement. If a 23-year old saves $3000 a year at 8% interest until he or she is age 65 they will have about $912,000 in the bank. If a 33-year old does the same thing they will have about $402,000. That is the power of compound interest!

Understand taxes, insurance and basic estate planning

Even if you pay someone else to prepare your tax return for you, you need to understand your own taxes. You should know your average tax rate, your marginal tax rate, and some steps you can take to reduce your tax burden. You should understand the difference between taking the standard deduction and itemizing deductions.

You also need to understand your insurance products. We spend a lot of money on disability insurance, life insurance, auto insurance, renter’s or homeowner’s insurance and other types of insurance. You should understand what your policy covers, what it doesn’t cover and how much you are paying for each one. You should occasionally check around to see if you can get lower cost insurance.

Everyone needs to do some basic estate planning. Even if you are single with no dependents you at least need a basic will, healthcare directives and a power of attorney. As your situation changes you should review these documents and update them and add other important estate planning documents as necessary.

Start an uncomplicated financial record-keeping system

You and your loved ones should know where important financial documents are and what each one is for. For example, if I were to pass away today I would want my wife to know exactly where my life insurance policies are and how to begin the process of collecting that money. The system I use is a fireproof file box with the HomeFile Organizer system[7]. With this low-cost system I can file and find auto titles, insurance policies, medical records, warranties and any other financial documents.

Give yourself an annual financial checkup

I recommend that you set aside a day each year to give yourself a financial checkup. Review your goals, your budget, your net worth, your insurance and estate policies, your savings and your debt level and determine some steps you can take to improve in each area. As part of the review I recommend you choose a new personal finance book to read over the next year. Take this opportunity to reassess where you are and determine a plan for how to get to the next level.

Conclusion

Hopefully you got some good ideas about improving your financial situation from this list. I recommend you choose just one or two things from this list that you can take action on today. As that becomes a habit you can incorporate another item until you have implemented all of them that fit your situation.

[2] If you are looking for an excellent course I recommend Alena Johnson’s Family Finance course from Utah State Open Courseware: http://ocw.usu.edu/Family__Consumer____Human_Development/Family_Finance/index.html. This is the course I took that convinced me to change my major and helped determine my life’s work.
[3] www.Mint.com is a great, free resource for budgeting. The software I personally use can be found at www.YNAB.com. It isn’t free, but I highly recommend it.
[4] www.AnnualCreditReport.com is the only place to get a free copy of all three of your credit reports annually
[5] www.MyFico.com has a great explanation of credit scores and is the most reliable place to purchase your score.
[6] www.PowerPay.org is a great free resource to figure out how you can pay your debt off quickly

The Affordable Care Act in Plain English

by Ryan Law

At the end of the day, what everyone wants is a way to make sure we’re taken care
of when we’re sick, and that it doesn’t ruin us financially to get that care
.”
– Jonathan Gruber, architect of the Affordable Care Act

There is a lot of controversy, confusion, misunderstanding and unfortunately, even blatant lies in the media about what the Affordable Care Act (ACA or Obamacare) is and how it will affect you, your insurance coverage, and the amount you pay for insurance.

Whether you like it or not the ACA is the law and it is important you understand what it is and how it relates to you and your family. After all, your health is one of your most important assets! I won’t go into a lot of detail and I won’t cover all parts of the law – if you want a lot of detail I recommend you visit http://www.healthcare.gov/index.html.

My attempt with this article will be to describe, non-politically, what the ACA is in plain English. If you want to hear a partisan description of the law you can tune in to your favorite Liberal or Conservative commentator. Trust me; they have plenty to say about it!

Jonathan Gruber, Mr. Mandate

The ACA was put together by Jonathan Gruber, an MIT Economist who has studied and analyzed the effects of health-care reform extensively. When Mitt Romney was governor of Massachusetts he called Gruber in to help design a health-care law for Massachusetts, which has become known as Romneycare.

As a side note – Romneycare was seen as a “Republican ideal” because it required individuals to take responsibility for having insurance and didn’t give anyone a free-ride. Liberals actually hated the law because they wanted national health care such as the one in Canada. Romney said that this law was his “singular policy achievement” and that it could be applied nationally. Interesting how an election can change things. Romney became Obamacare’s harshest critic, vowing to repeal it if elected and even calling it an “unconscionable abuse of power” by Obama. After studying both laws I’m not sure how anyone can say there is much of a difference, though.[1].

In 2008 Obama called on Gruber to help him design the ACA. Gruber has written extensively about the law. He says it is the opposite of public health care and that insurance companies like the law because they get more customers, especially young, healthy ones that will pay insurance but not need as much healthcare. He says that the most important provision of the ACA is the individual mandate – without requiring people to get insurance it doesn’t work. There will be more on the mandate later.

In 2011 Gruber wrote a book titled Health Care Reform: What It Is, Why It’s Necessary, How It Works. This is actually a good book for understanding the ACA, and best of all, it is written in comic-book format. (I think more books should be written this way! After all, a picture is worth 1000 words. Maybe I need to find an illustrator for my blog..) It’s obviously slanted as he is the architect of the law, but it’s worth checking out from your local library.

Goals of the ACA

  • Decrease the number of uninsured Americans. There are currently 44 million uninsured Americans[2], most of which are either young and they don’t think they need insurance, or they are poor and cannot afford insurance. The ACA should reduce this by 30 million.
  • Reduce health care costs

Important Provisions of the ACA

  • Pre-existing conditions: Requires insurance companies to cover all applicants of the same age at the same rate, regardless of pre-existing conditions or gender. This provision is something that will be extremely beneficial to millions of people who were denied coverage due to a pre-existing condition.
  • Coverage up to age 26: If you are under the age of 26 you can stay on your parent’s plan, regardless of whether you live at home or on your own, or are single or married.
  • Individual mandate:  This is one part of the law that the government was sued over and that went all the way to the Supreme Court[3]. Because the Supreme Court upheld the Constitutionality of the individual mandate it will go into effect in 2014. Essentially it says that if you don’t buy insurance you will be charged a $95 penalty or 1% of income (whichever is greater) in 2014. That amount will increase until it reaches $695 per person or 2.5% of income in 2016. Regardless of your family size you will never pay more than three times the penalty amount if all your family members are without insurance. However, if health care coverage would cost you more than 8% of your income you don’t have to pay the tax.
  • Health Insurance Exchanges: By 2014 each state is required to set up a health insurance exchange (states that don’t set one up will use the national one) where consumers can compare health insurance policies and premiums.
  • Elimination of lifetime coverage caps: In the past health insurance plans typically had a maximum you would be covered for over your lifetime. It was often as low as $1,000,000. With the ACA coverage caps were eliminated.
  • Businesses must offer insurance: Businesses with 50 or more employees must offer health insurance or they will pay a $2000 fine per employee. They don’t have to provide it for employees working less than 30 hours a week. Businesses with less than 25 employees could qualify for a subsidy to offset the costs of insurance.
    NOTE: Some companies have said they may have to lay off employees or reduce employee’s hours due to this portion of the law, the most famous of which was Papa John’s CEO John Schnatter. Schnatter later said he was taken out of context and plans to comply with the law and that his company is still doing analysis on how it will affect the company.
  • Deductibles and out-of-pocket maximums: Employer plans have a maximum annual deductible of $2000 per person, or $4000 for a family. By 2014 the out-of-pocket maximum per person is $6000 per person per-year (out-of-pocket includes your deductible and co-pays).
  • Preventive Care: There will be no co-pay, co-insurance or deductibles for preventive care.
    NOTE: This portion is sometimes referred to as the Contraceptive Mandate because under this portion of the law contraceptives and the “morning-after” pill must be free to people with insurance. Some groups, including the Catholic Church, have sued the government over this as they are religiously opposed to contraceptives. Other groups (Hobby Lobby being the largest) have sued the government because they are opposed to providing the morning-after pill to employees. There are currently 28 separate lawsuits about this provision. Under current rulings churches are exempt from providing contraceptives or morning-after pills, but church-run hospitals and schools are not exempt, and they were given until August 1, 2013 to comply. Hobby Lobby and others opposed to offering the morning-after pills were given until January 1, 2013 to comply or they will pay $1.3 million per day in penalties. Hobby Lobby has chosen to stand by its principles and pay the fine rather than offer the pill.
  • Insurance subsidies/tax credits: The Central Budget Office has predicted that insurance premiums may go up 10-13% due to the ACA. To offset this, low-income Americans will not pay anything for health insurance, and many in the middle-class will get some form of tax credits. Individuals making between $14,400 and $43,320 and couples filing taxes jointly making between $29,330 and $88,200 will receive some tax credits.
  • Insurance company profits: Insurance companies must pay out 80-85% of insurance premiums received in medical costs and can use 15-20% for administrative needs and profits.

Costs of the ACA

  • Jonathan Gruber claims that by his analysis the ACA should reduce the federal deficit by $143 billion by 2019 and by $1 trillion within 20 years.[4]
    NOTE: Niall Ferguson in the August 19, 2012 Newsweek cover article[5] claimed that the CBO (Central Budget Office) and Joint Committee on Taxation have said net federal spending will be $1.2 trillion by 2022 even after all taxes and penalties have been collected. However, the CBO has actually said that it will decrease the deficit by more than they originally thought.[6][7] I believe the jury is still out on this one – in 2022 we will know for sure, but I struggle to see how it will actually reduce the deficit. I hope I am wrong, though!

Paying for the ACA

The following taxes, fees and penalties have been put into place to help pay for the ACA:

  • .9% tax on incomes over $200,000 (individual) or $250,000 (family).
  • 3.8% tax on unearned income over $200,000 (individual) or $250,000 (family).
  • Insurance providers will pay an annual fee.
  • Pharmaceutical companies and other companies that manufacture medical devices will pay taxes and fees.
  • The 7.5% AGI floor for itemized deductions is being raised to 10% (You can deduct your medical expenses if they exceed 7.5% of your Adjusted Gross Income and itemize deductions – that is being changed to more than 10% of your Adjusted Gross Income).

I hope this article has helped you understand the law better and how it will affect your family and your insurance. I believe there are both good and bad portions of the law and I’m sure we will see more lawsuits and attempts to change portions of the law through legislation. As major changes come about I will continue to post them on my blog.

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[1] Among other similarities, Romneycare requires individuals to have insurance (individual mandate), gives free health insurance to the poorest citizens, penalizes employers not offering insurance and sets up a health care exchange. The only real difference is that Romneycare is administered on a state level and Obamacare on a national level.

[4] Gruber, J., Health Care Reform: What It Is, Why It’s Necessary, How It Works, 2011 ISBN: 0809053977

The Fiscal Cliff

by Ryan Law

With President Obama’s re-election a number of news articles are saying one of his first challenges is to deal with the upcoming “fiscal cliff”. Today’s article will attempt to explain what that means in simple terms and what it can mean in your life.

The “Fiscal Cliff” will begin on January 1, 2013 and means $7 trillion in tax increases and spending cuts over the next ten years. On the front-end that may not sound like a bad thing, but it could be crippling to the economy the way it is set up.

Spending Cuts

In 2011 the Budget Control Act was passed that increased the debt ceiling and called for a bipartisan debt-reduction deal or there would be automatic spending cuts. No deal was reached, so the following spending cuts begin in 2013:

  • Defense – $50 billion is cut from discretionary defense spending each year for the next ten years. Some military officials have said these cuts would be “devastating”[i]
  • Non-defense – a similar amount would be cut each year from non-defense spending. Some programs, like Medicaid, Social Security, civil and military employee pay and veterans benefits, are protected, but everything else, including education and air traffic safety, will be affected.

Tax Increases

The Bush Tax cuts would be eliminated, which means specifically:

  • Marginal tax rates will increase – they will go from current levels of 10, 15, 28, 33 and 35% to 15, 28, 31, 36 and 39.6%, respectively.
  • Capital gains rates will increase from 15% to 20%
  • Child tax credit will decrease from $1000 per child down to $500
  • The marriage penalty relief will expire
  • The estate tax exemption will go from $5 million to $1 million

In addition, the payroll tax holiday will expire, taking your payroll taxes from 4.2% to 6.2%, which means someone earning $30,000 will pay an extra $50 per month in payroll taxes

The Challenges

Experts have commented that there are two big challenges Congress and the President face:

1. If all tax cuts stay where they are and no cuts are made in federal spending we will continue to face a mounting deficit of $1 trillion per year, which is unsustainable.

2. If all the cuts go into effect the economy could be thrown back into a recession (cuts often mean job elimination or pay cuts and those with jobs will pay higher taxes).

Neither option is a good one – obviously Congress and the President need to work together to figure out the best path. Both parties have expressed that they plan to work together to come up with a solution.

While the country faces difficult economic challenges and has a long road ahead to get on solid financial ground, you can take steps to stabilize your own financial situation. As we always preach, learn to live on a budget, get out of debt and set up an emergency fund. These three steps can lead to financial peace of mind.

How to Look Really Smart in Front of Your Friends

by Ryan Law

As you’re driving home in the evening or watching the news you probably hear the reporter say something like, “The Dow closed up a fraction to finish up the day at 12,988 while the S&P lost 12 points to finish up at 1370 and the Nasdaq advanced 12 points to finish at 2971.” As they are saying that do you know what they are talking about? If not, after today you can look smart in front of your friends and say something like “Wow – I expected the Dow to peak over 13,000 today – it did earlier in the week. I imagine it will do that soon, though. I really should call my broker in the morning. What do you guys think?”*

What are stock market indexes?

The Dow, S&P 500, Nasdaq – what does it all mean?

Each of these represents a group of stocks, or in other words, they represent companies. They are meant to represent either how the overall stock market is doing or how a certain segment of the market is doing.

Here are five of the most common indexes you might hear about:

Dow Jones Industrial Average (also called the Dow, Dow Jones, the Dow 30, DJIA): The Dow was created in 1896 by Charles Dow (hence the name – the “Jones” part came from Dow’s friend and business associate, Edward Jones). The Dow has 30 stocks in it, all of which are major corporations in the global economy and most of which you will know – names like 3M, Coca-Cola, Wal-Mart, IBM, Disney and Chevron. These companies do change occasionally – for example in 2008 Kraft replaced AIG. GE has been the longest one on the index. For the full list see the Wikipedia article in sources, below.

Standard & Poor’s 500 (also called S&P 500): The S&P 500 was created in 1957 and contains 500 stocks, which represent the 500 largest companies in the United States and 75% of the stock market (there are a few non-US companies, but just a handful). For this reason it is, along with the Dow, the most widely quoted and compared stock index. A lot of people see how well their portfolio did in comparison to the S&P 500. To fill up space in this article, I am going to list all 500 companies below (just kidding! If you want to see the full list, see the S&P link below).

Nasdaq: The Nasdaq is actually a stock exchange, rather than an index, but it is often reported as an index. It was founded in 1971, and there are about 2700 stocks traded on the Nasdaq. While the Nasdaq has a variety of stocks, it is often seen as being representative of technology stocks.

Wilshire 5000: If you were on a game show and they asked you how many stocks are in the Wilshire 5000 you might be tempted to answer 5000, but you would be wrong and might just lose the game show because of it. Since you read this, though, you will know it is a trick question – there are actually about 4100 stocks in it (to be fair, when it started in 1974 it did have closer to 5000 stocks). The Wilshire 5000 is intended to cover most publicly-traded companies that are headquartered in the United States. Because it is larger it gives a broader measure of the overall US market and includes a number of medium and smaller sized companies.

MCSI World: MCSI has 1600 stocks from developed countries all over the world and is often used as a benchmark for how the global stock market is doing.

What do the numbers mean?

When the news reporter says the Dow was up 12 points, what does that mean? Look at it this way – if you had an index made up of 5 stocks that were worth $100 today, and tomorrow it was worth $110, it went up $10, or 10%, so you would say “My index went up 10 points today to close at 110.” The next day if it went down to $103, you would say “My index went down 7 points today and closed at 103.” You’re still up 3% overall, though, from the original date.

That’s an oversimplified example, but it gives you the basic idea. Different indexes use different formulas, but remember this rule of thumb: If the numbers go up and you have investments similar to the index, you should have made money that day.

Great – sign me up!

Now you know all about indexes so you want to invest in one? Well, too bad, you can’t invest directly in an index. After all, it’s simply a number that represents the underlying stocks. There is good news, though – you don’t have to go out and research which 4100 stocks are in the Wilshire 5000 and purchase them yourself. That would get expensive and time-consuming. There are mutual funds that have created index tracking funds, and there are also stocks that are traded on the stock exchanges that also follow a certain index. If you want to follow the S&P 500, for example, instead of you purchasing the stocks you purchase shares of a mutual fund, and then they combine your money with a bunch of other investors and buy the 500 stocks. A number of mutual fund companies sell index tracking funds, including Vanguard, T. Rowe Price and Fidelity.

I hope that you have learned something today and that on your drive home you will tune in when the reporter talks about the stock market. Really, though, it’s all about looking smart in front of your friends!

Sources and Further Reading:

Dow:
http://www.djaverages.com/?go=industrial-overview
http://en.wikipedia.org/wiki/Dow_Jones_Industrial_Average

S&P:
http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf–p-us-l–
http://en.wikipedia.org/wiki/S%26P_500
http://en.wikipedia.org/wiki/List_of_S%26P_500_companies

Nasdaq:
http://en.wikipedia.org/wiki/Nasdaq
http://www.nasdaq.com/

Wilshire 5000:
http://en.wikipedia.org/wiki/Wilshire_5000
http://www.wilshire.com/Default.aspx

MCSI World:
http://en.wikipedia.org/wiki/MSCI_World
http://www.msci.com/

*If one of your friends says that you could come back with “Well, yes, but the housing market is still flat and interest rates are poised to stay low for at least the next year, according to Bernanke, so I think it still might be a little high. I think we will see it hold steady by the end of the fiscal quarter, given the circumstances.”

Is Your Religion Your Financial Destiny?

by Ryan Law

Last year the New York Times[1] published an article titled “Is Your Religion Your Financial Destiny?”. I have come back to this article and discussed it with several people and finally decided to write about it. The graph about speaks for itself, but I have a few comments about it.

First, the graph:

If you have a hard time reading the graph in your e-mail, you can pull up a copy online here:

http://www.nytimes.com/imagepages/2011/05/15/magazine/15-Leonhardt.html?ref=magazine

A couple of notes – the y-axis shows the percentage of households with an annual income above $75,000 in each religion listed. The x-axis shows the percentage of college graduates from each religion listed. For example, among Anglicans/Episcopalians, approximately 52% have an income above $75,000, and about 52% are also college graduates. The national average of all households in America that make over $75,000 is about 30%, while about 27% of all households in America have graduated from college.

On the low end of the graph we have Jehovah’s Witnesses, with less than 20% of households making over $75,000 and less than 10% college graduates, while at the other end about 65% of Hindus make over $75,000 and about 74% have a college education.

As you look at the graph, do you notice a trend? Does it almost look like you could draw a line that would slant up and to the right and hit almost every point? With the exception of a few in the middle, and a slight dip at the end, you almost could draw a straight line. What does this mean?

First, and this is definitely worth noting, religion does seem to have a factor in how much money people make. The study, conducted by the Pew Research Group, shows that religion plays a greater role in predicting your income than the differences among states or even racial groups.

Second, college education and wealth go hand-in-hand, and some religions place a high emphasis on education.

I would be interested to seeing where atheists fit on the graph. We have one titled “unaffiliated religions” but nothing for atheists.