The Reality of the Math

Last week, I had the good fortune of speaking at the 12th Annual Destination College event which is designed to help high school juniors and their parents prepare for the whole getting-into-college “thing.” This event sells out every year and this year was no exception with over 1,000 in attendance.

During my presentation, “Cash or Plastic,” I provided an overview of the changes with credit and debit cards and the importance of using online banking and the current tech tools to track your fees and manage your money. One of my segments dealt with personal responsibility and basic math. I cited a article released from the New York Times that indicated the average starting salary from the Class of 2010 was $46,000. Using that as the baseline, I showed a simple Excel spreadsheet, made the assumption of a 28% tax bracket and then determine the monthly take-home pay. I then asked a series of questions about monthly expenses and lifestyle.

It didn’t take very long for the students and parents in the session to realize that basic math will force you to make decisions about how to manage your money. It also brought home the point that planning ahead, deciding the difference between needs and wants, the level of student loan debt and living within your means are old-school concepts that serve us well today.

Here’s the simple file that I used - fill the blank line items to suit your situation.

Salary $46,000.00

Taxes $12,880.00

Net $33,120.00

Monthly $2,760.00

Rent

Student Lns

Auto Pmt

Gas

Auto Insurance

Utilities (don't forget cable & internet)

Phone (data plan?)

Food

Amount Left for your lifestyle

It’s all about the math really.

Credit Cards in 2011 - Fall Back or Spring Forward?

Last week, the nation's top credit card issuers said the number of accounts that slipped into default fell to their lowest points of 2010 in December, and signs point to continued improvement in coming months. Five of the six biggest card issuers posted their lowest rates for charge-offs, or accounts written off as uncollectible.

While the rate of balances that companies are writing off remains high by historical standards, it has fallen consistently throughout the year. That is certainly good news.

Importantly, lender rates for payments late by 30 days or more also reached lows. That figure, also known as the delinquency rate, is considered an indicator for what's to come, which means charge-offs should be expected to keep falling through the first few months 2011.

Usually, credit quality on these portfolios worsens in the second half of the year, as consumers stop using tax refunds to pay down debt and start shopping for the holidays.

But uncertainty remains, as persistently high unemployment slows the rate of recovery at consumer lenders. Overall charge-off rates have fallen at most banks but remain high by historical standards. Loan portfolios are still shrinking, with consumers reluctant to take on new debt.

The wild card will be how the bank examiners will interpret the new financial regulations in their examinations this year. Until lenders get a comfort level on that reality, it could be another lean year for new loans and access to credit for borrowers with blemished credit.

We’ll be watching.

The Commodity of a College Degree

It’s January – that time of year when SAT exams are being studied for and taken – when FAFSA forms are being agonized over by parents and students – when college notification letters in mailboxes are met with anxious faces and fast-beating hearts.

Why did it have to get to this? Why do we allow our kids to go through so much pressure and anxiety about going to college? It’s just a given now that if you don’t go to college you’re not going to turn out to be successful – and – if you don’t go to a prestigious school (translation: expensive), then you’re not very high on the impressive scale.

I know I’ve spent a lot of blogging time railing against the cost of college. One might get the impression that I’m anti-college. Nothing could be further from the truth. We should always be striving for more knowledge – everyday. What has trouble me for years, and continues to trouble me, is the business of the college / university industry today.

This industry continues to get a pass from economic realities the other industries have had to deal with.

According to a recent article from the National Inflation Association,

• College is the only thing in America that never declined in price during the panic of 2008. It actually rose in price substantially.


• The annual tuition for a private four-year college was $21,235 in the 2005-2006 school year.
  Despite Real Estate beginning to collapse in late-2006, college tuition rose by 4.6% in the 2006-2007 school year to $22,218.


• Despite the stock market beginning to collapse in late-2007, college tuition rose by 6.7% in the 2007-2008 school year to $23,712.


• Despite oil and other commodities collapsing in late-2008, college tuition rose by 6.2% in the 2008-2009 school year to $25,177.


• Even after the Dow Jones crashed to a low in early-2009 of 6,469, college tuition still rose by 4.4% in the 2009-2010 school year to $26,273.

At the same time,

• College students borrowed $106 billion in total student loans for the 2009-2010 school year, up from $96 billion in 2008-2009, $94 billion in 2007-2008, $87 billion in 2006-2007, and $83 billion in 2005-2006.


• Total student loan debt in the U.S. currently stands at $830 billion and now exceeds credit card debt.

The NIA is predicting a college bubble in 2011. I still think we are 8 years away – two cycles of college graduates who have difficulty getting a job that allows them to pay their bills and begin their adult life. They will be the ones who will question the return on the financial investment in their college degree. Then perhaps the education model will change.

What a Week on the Internet!

What an interesting week I had on the Internet!

It started with the amazing story of Ted Williams – dubbed the man with the “Golden Pipes.” It really demonstrated the power of viral communication – this time in a positive way. The week ended with the Twittersphere that was humming with the sad tragedy in Arizona. Again the speed on which information travels these days is amazing.

But the item I learned last week that I got really hung up on was about haul videos. Though I just learned about it last week, it turns out the Internet has been talking about this for over a year.

Never heard of it? Let me explain it then.

Here’s how it works. First, kids power shop, buying as much as they can afford and often even more. Then they post a video of all they hauled home. Kids say it is no different than trying on clothes for their friends just on a larger scale.

I first learned about this last week while watching a Boston news segment on WBZ TV.

Not surprisingly, there are websites dedicated to this like HaulVideos.Net . They describe a haul video as a place where anybody can show off, review, and give advice on the things they have bought. It’s easy to do and fun to watch, so get out there and jump into the haul community.

My issue with this is not in the sharing of information but in the potential addiction for teenagers. Like with so many things in our culture these days, we seem to have an “all-or-nothing” mentality when it comes to consumerism.

The reality is that our economy is largely based on shopping. So it stands to reason that our children will follow down the same path. It’s incumbent on us as parents and adults to teach our kids the old-school basics of needs vs. wants and to find the right balance. The success in properly managing your financial affairs rests largely in knowing your cash flow, controlling those spending impulses, and saving for the unexpected occurrences that life brings.

That will ultimately provide you satisfaction for the long haul.

The Spin of Holiday Spending and Math

Well the fever over the holidays is now in our rearview mirror. And from all accounts it appears that holiday shoppers were in the mood to spend money this year.

According to a report by MasterCard SpendingPulse, they found that since Novermber 5th, spending was up more than 5 percent from the same time last year - the best showing since 2005, well before the recession. It went to say that there had been sizable increases in spending on apparel, jewelry and luxury items over the holiday shopping season.

I guess those ads touting luxury cars and big presents were effective after all.

I happen to think that basic math is playing a role here – yet again.

According to Gallup, “An upper-income spending splurge led the way to strong self-reported spending during Christmas week 2010. Upper-income Americans’ self-reported consumer spending in stores, restaurants, gas stations, and online averaged $183 per day during the week ending Dec. 26 — up from $126 during the same week in 2009.”

The number is an extraordinary 45% improvement.

“Americans’ overall self-reported spending surged to an average of $85 per day during the week ending Dec. 26 — up from $77 during the prior week and $66 during the first two weeks of December. As a result, spending during Christmas week 2010 exceeded that of 2009 and 2008.”

None of the information in the Gallup data allows for a forecast of whether this aggressive consumer spending will last into next year. It is possible that many of the expenditures were made on credit. This could mean that folks in this income-level group are re-leveraging themselves. They are less reliant on the housing market and more sensitive to the investment market and Wall Street did pretty well last year.

We still have 9.8% unemployment and housing prices look wobbly again. Gas prices are on the rise and I doubt that the extra money in our paychecks will be enough to offset rising fuel prices. It still seems to me from afar that lenders are being extra cautious on lending – who can blame them since they don’t really know what to expect from the regulators this year – but that doesn’t help the consumer and ultimately their ability / willingness to spend.

So let’s keep watching the numbers and doing the math.