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Choose to Seize All of the Marrow Out of LIfe

February 5, 2016
Henry David Thoreau wrote in his book, Walden, “I went to the woods because I wished to live deliberately … and not when I came to die discover that I had not live. I wanted to life deep and suck all the marrow out of life … to put to rout all that was not life.” While written more than a century ago, we might inquire what Henry David Thoreau might write about today. Perhaps that we know how to live life fast, but not deep. Or perhaps that we are so distracted by television, video games, and other mindless activities that we don’t actually live life at all.

Over the past few years I’ve assigned students in some of my classes various activities designed to expand their “comfort zones.” The result? While some students did not obtain all they could out of the assignment, most appeared to gain significant benefits from it. Here are a few of the comments I’ve recently received:

  •  “These experiences have taught me that it doesn’t always matter what people think about you in life. The ones who matter don’t mind, and the ones who mind don’t matter.”
  •   “What scare me most? Rejection … but now I will try to take more risks and I now understand even if someone does say no to me there is nothing wrong with that because there will always be more opportunities.”
  •  “I want to change my fixed mindset to a growth mindset.”
  •  “This assignment helped me realize how small my comfort zone really is. It forced me to do things I wouldn’t normally do and got me to expand my horizons. I think this assignment can be beneficial to whomever is doing it.”

Make the most out of your college life. Decide right now to make the next seven weeks the most impactful of your life. Choose to undertake one activity a week, from the list (see excerpt from Ron’s book, below), and you can dramatically change your life for the better. You own self will love you for it!

There are great pearls of knowledge and skills to be learned in the classrooms at college. But not all learning is done in the classroom; much wisdom can be found elsewhere. Hence, in addition to choosing to expand your comfort zone through the attached activities, I also suggest you team up with a friend or a family member and watch one or more of the following videos, from my personal list of favorites
Just take one hour out of your next day, and you can propel yourself down a path of greater success with the insights you obtain from these interesting, and often entertaining, short videos:

  • Kalina,”Before I die I want to…” [Big Talk]  (6:23)
  • Carol Dweck: The power of believing that you can improve  (10:24)
  • Paul Solman, PBS Newshour: ‘Sesame Street’ Tells You How to Get to Sunnier DaysFinancially   (9:35) (be certain to watch the last half of this video!)
  • AngelaLee Duckworth: The key to success? Grit (6:12)
  •  TheSkill of Self-Confidence – Dr. Ivan Joseph  (13:20)
  • Eric Thomas, “Success … How Bad Do You Want It?” (5:30)
  •  “LiveLife the Real Way”  (4:58)

Believe in yourself. And act to become a better friend, companion, family member, student, and person – each and every day.
Carpe diem.
Thank you.

Ron A. Rhoades, JD, CFP®

Ron is a college professor, where he provides innovative instruction in financial planning and other business courses. Commencing July 2015 he will be joining the Department of Finance at Western Kentucky University, Bowling Green, KY, where he will serve as Program Director of its rapidly growing and nationally reknowned personal financial planning program.


 Eleanor Roosevelt once wrote, “Do one thing each day that scares you.”
I once met two brothers, students in my class, who – despite having characteristics of introverts – were outgoing, friendly, and always willing to tackle new challenges. Having lunch with them one day, I discovered their secret. Each and every morning, as their mother sent them off to school, their mother said: “Do one thing today that scares you.”

We must realize that our brains are hard-wired, from the days of the cave men, to flee from danger. But in today’s society, where interpersonal skills are so highly valued, we need to learn to overcome fear. Otherwise fear prevents us from achieving, and it takes a far greater bite out of our life than we should permit it to do.

While not all fears should be overcome, many fears cause us to be anxious in social situations. To overcome these and related fears, each of us needs to seek to “expand our comfort zone.”

As you expand your comfort zone, you actually grow as a person to fill out these new boundaries.

If you have a larger comfort zone, and continue to push the edges of it out, you really do grow as an individual – you have more experiences, undertake more learning, and acquire more wisdom.

Understand the Need to Say “Yes”!
In the 2008 movie “Yes Man,” Jim Carrey plays Carl, who reluctantly promises to stop being a “No Man” and vows to answer “Yes!” to every opportunity, request or invitation that presents itself thereafter. While the result (in the movie) is both hilarious and, at times, moving, the movie is actually based upon a real experiment. In fact, after the movie, some individuals chose to say “Yes!” for an entire week. Here’s one blog post indicating the results:

If saying “Yes!” to everything for a week is too much of a challenge, then consider an alternative – calculated activities to expand your “comfort zone.” For much of the past 30 years, I’ve taken on the challenge of expanding my comfort zone. Being a severe introvert, I first learned how to socialize at receptions and similar events (a skill I am still working on). I began to give speeches and presentations, first to small groups; this evolved into my current ability to give speeches to a several hundred or a few thousand people at various conferences without any undue nervousness.

Each and every one of us has her or his own “comfort zone.” Studies have shown that 40% of college students possess social anxiety – i.e., shyness. And the remaining 60% possess anxiety in other circumstances, such as public speaking, meeting someone new for the first time, etc. The truth is that each and every one of us can expand their comfort zone, significantly, over time. And college is a great place to undertake this effort.

Why do this? Life’s magic occurs largely outside your current comfort zone. If you want to suck all the marrow out of life, as I do, you need to be willing to put yourself out there into areas of “discomfort.” Then, as you adjust, you become more and more comfortable in those situations, thereby expanding your comfort zone, you actually grow as a person to fill out these new boundaries.

If you develop a larger comfort zone, and continue to push the edges of it out, you really do grow as an individual – you have more experiences, undertake more learning, and acquire more wisdom.

In short, you experience life more fully.

As an added bonus, when you interview for a job in your career field you will be a better interviewee, and job candidate. The better jobs go to the graduates who are more personable and well-rounded!

Learn to Rush Toward Your Fears!
I am deathly afraid of heights, and always have been. As a child, during a visit to New York City, I was very nervous about going up the Empire State Building, and even more so when my parents urged me to peer down from the observation deck to the streets below. My fear of falling was intense; and my parents could never get me to ride any roller coaster – regardless of how small or tame it may have been.

So at the age of 18 years, I faced a dilemma. I was in my first summer at the U.S. Coast Guard Academy. I found out that on the summer cruise, in just a few weeks’ time, I would be required to climb the rigging of the tall ship, the U.S.C.G. Eagle, and to work aloft handling the sails.

While at the Coast Guard Academy I received instruction from a Boatswain’s Mate, who had been in the Coast Guard for about a decade. He previously had served on the Eagle, and as he taught us various types of knots he explained where on the Eagle we might find a use for each one. As he was teaching several cadets and me the intricacies of tying a bowline (a type of knot), I asked the Boatswain’s Mate, with some apprehension in my voice, “How difficult is it to climb the Eagle’s rigging?” The Boatswain’s Mate paused from working the line in his hands, looked me straight in the eye, and simply said: “Rush toward your fear.”

A few weeks later, my fellow swabs – that’s what they called first year cadets – were flown to Miami, where we picked up the Eagle to take her on a week-long training cruise. So here I was, at the Port of Miami, aboard the docked ship, with my gear stowed.  It was an early summer evening, and I was on deck, looking up at the three masts, the 10 yardarms, the crosstrees, shrouds, halyards, and all the other rigging. As I was looking up, contemplating my fate, the Officer of the Deck approached me and asked, “Want to go aloft?”

I imagine I turned white a bit, but just then I remembered what the Boatswain’s Mate had said.  “Rush toward your fear.” So I nodded to the Officer of the Deck, stowed my hat, and headed up the rigging. I climbed up the rope ladder, past the first platform and the lowest yardarm. I continued higher and higher, pausing every several steps to look around – and at times down to the deck, appearing smaller and smaller as I went higher and higher. Past two more yardarms, and finally I made it to the second and higher platform upon which I could sit, pause, and regain my senses.

But just then the Officer of the Deck shouted up, “Keep going. Touch the commissioning pennant.” I looked down, then up, terrified. The shrouds (lines running up and down) were very narrow at this point, and it was difficult to fit my big shoe in the rigging to go higher. But, keeping in mind what the Boatswain’s Mate had told me, higher I did go, the last thirty feet, and touched the commissioning pennant at the top of the mainmast, some one hundred fifty feet above the deck.

As I headed back down, I traversed out onto the footrope that hung beneath each of the yardarms. My big feet found each single footrope that hung beneath each yardarm with ease with a firm grip on the handrails affixed to each yardarm. I traversed out to the end of each yardarm, then returned back to the mast.

I also paused and sat on each platform, partly to rest and partly to enjoy the view.  In the rays of the setting summer sun, I felt a sense of accomplishment. Not only had I climbed the rigging, far beyond the point where I ever thought I would, but I was the first among my classmates to do so.

From that day forward, I was known as a “rigging rat,” always willing to go aloft to furl or unfurl the sails.

A year later, I was aboard the Eagle for a longer summer cruise, this time across the Atlantic and back. When returning, just northwest of Bermuda, the ship encountered a low-pressure system. (A better description of the low-pressure system would be “minor hurricane” – although I was not convinced that hurricanes could be minor.)

It was the middle of the night. Cadets were not allowed on deck, except for the bridge crew. The Eagle was under sail, in seventy-five knot winds, with gusts up to ninety knots. Even though it was the dead of night, the sea was awash in white, as the wind and waves combined to brew a froth of whitecaps and foam atop the thirty-foot high waves.

That night I was on duty on the ship’s helm. I led a team of six cadets, on three connected six-foot ship’s wheels, as we sought to keep the ship on course. The Eagle did not have power steering, so turning the rudder, via the wheel, required a good amount of muscle applied by the six cadets.

Only the three lower sails on each mast were deployed that night, as the top two sails had long been furled in order to not strain the masts too much. Suddenly the gaskets that constrained the topsail to the yardarm blew out. This posed a dangerous condition – not only could we lose a sail in the powerful wind, but the stress being placed on the mast by the sail flapping in the high wind could cause it to snap. If the mast snapped, it could fall to and through the deck, even punching a hole in the hull of the ship. In short, the ship was at risk.

The Captain quickly sent an experienced enlisted man aloft to secure the sail. After twenty minutes, the enlisted man signaled down that he needed more line. The Captain looked around, spotted me on the wheel, and asked: “Rhoades, want to go aloft?”

I wouldn’t say that I wanted to go aloft in those conditions. But a request from your Captain was more like a very strong suggestion, and somewhat close to an order. So I headed down to the Boatswain’s Locker, measured out eighty feet of line, cut and spliced the ends of the line, and wrapped it in a coil. With the coil of line slung over my shoulders, I headed up to the deck, crossed to the side of the ship, and in a pause between the waves crashing over the ship’s side, I then grasped the rigging and headed aloft.

The Eagle, though under sail, reeled from side to side and yawed fore and aft. Climbing the rigging was instantly a challenge, for as the ship careened over onto one side I found myself not climbing vertically, but rather at times almost horizontally, looking down at the deck. Then, as the Eagle careened to its other side, I hung on, for I would find myself hanging on to the rigging, looking straight up to the sky, with all fours – and even at times with my head seemingly below my feet.

Fifteen minutes of effort later, I finally reached the top yardarm. I left the rigging and traversed out onto the footrope beneath the yardarm. There I encountered the enlisted man – the very same Boatswain’s Mate who had taught me knots more than a year before. We looked each other in the eye, and he nodded at me, with a slight smile passing his lips. I nodded back, and then together we set to work, wrapping up the sail with the line and tightly securing it to the yardarm. Some thirty minutes later, we were back on deck, exhausted from battling the high winds and sea spray as we worked aloft. Yet it was a physical exhaustion only, for our minds raced as we recalled the journey we had together pursued during the past hour.

Rush toward your fear – or you will miss out on the great experiences in life.

Today I am still afraid of heights. But I have been on roller coasters since I was eighteen years of age.  And I have gone up in many tall buildings (and even, at times, I have peeked over the edge).

If you are confronted with some fear, realize this. Whatever fear is facing you – whether it be the fear of meeting someone new for the first time, or the fear of public speaking, or some other fear in life – rush toward it. For once you are past it, life is great on the other side.

Your Assignment: 
First, watch the following TedX talk, only six minutes long: “Measuring Comfort Zones” by Marcus Taylor at TEDxMelbourne. (6 minutes).

Then, for each of the next seven weeks, choose two activities each week from the list below. Choose those activities that scare you – i.e., those activities that expand your comfort zone. Please note that you may not repeat any activity.

At the end of each week, you should write down your progress in your journal. Schedule a reminder on your smart phone for the same day and time, once a week for nine weeks, to record your journal entries.

Your journal entries might start off in the following manner:

I expanded my comfort zone over the past week by undertaking two activities I would not have normally undertaken.
For the first activity I … (Describe the activity. What was the result for you? How did it make you feel?) As a result of all of this experience, I have realized that ….
For the second activity I … (Describe the activity. What was the result for you? How did it make you feel?) As a result of all of this experience, I have realized that ….
Here are the activities to choose from:
1. Eat something different – a food item you have not tried in at least a year.
2. Give at least three people compliments on any day, when you normally would not (counts as one activity).
3. Smile at (all) strangers, and say “Good morning” or “Good afternoon” or “Hi” to all the people you pass by, for one entire day – and wherever you are!
4. Get to sleep (bed) one hour earlier for four nights straight, and at the same time each night (this counts as one activity).
5. Speak up in a class – when you normally would not speak up.
6. Go to an on-campus event or which you typically would not go to, or engage in a new activity on-campus.
7. Thank a friend or family member for their ongoing support.
8. Tell someone they are loved.
9. Let go of your self-judgment for a day. And do something others would never think you would do. Feel good about yourself. If others think ill of you – they do not matter; they are no longer part of your personal universe.
10. Peform on Karaoke night.
11. Show three friends or acquaintances the benefits of the “Power Pose” and show them the video (Google search: “TedX Power Pose”).
12. Unplug your t.v. and video games for one entire week.
13. Use the writing center on-campus for assistance in reviewing the draft of an essay or paper.
14. Do your math homework in the math lab, seeking assistance when needed.
15. Ask for a tutor.
16. Form a study group, or join one, during the next seven days.
17. See a professor for guidance on “how to do better” in a particular class, or on a particular assignment.
18. See a professor for tips or career paths and/or “how to best network to find jobs or internships.”
19. Obtain counseling at the student health center to talk through a problem or to seek ideas on how to relieve stress.
20. Apologize to someone you have done wrong / admit you were wrong.
21. Write a “personal log entry” in which you forgive someone for a wrong done to you. Let go of bitterness and anger. Let go of a grudge. (Whether you choose to communicate your forgiveness to the other person is up to you, and dependent upon the circumstances.)
22. Perform three “random acts of kindness” in one day (counts as one activity). For ideas on random acts of kindness you might undertake, Google search the term “random acts of kindness.”
23. Go up to a stranger in a student dining or coffee shop area. Introduce yourself and ask him or her if you can ask them a few questions, for an assignment you are working on. Find out the person’s name, major or occupation, hometown, and what they like most and least about the college or the program they are in.
24. Change your group of friends (i.e., don’t “lie down with dogs”), or disassociate yourself over time from one friend who tends to drag you down.
25. Undertake a civic engagement activity with others.
26. Post a “success tip” once a day, each day, or your dorm room door or another place on campus, or on your social media page, for five straight days. Make certain you indicate below the success tip your identity, such as: “This success tip provided courtesy of (your name).”
These exercises can be powerful, if you approach them with an open mind and a view toward personal growth.
Prior comments received from students include:

  •         “Some students don’t really understand the point of these exercises. But, it’s teaching the confidence that you need to survive in the business world.”
  •         “As a result of all these experiences, I have realized how important it is step outside your comfort zone.  I never realized how much you could be missing out on when you stay within your safe day-to-day routine.  Although not every experience was a pleasant one I still enjoyed all of these exercises.”
  •         “I feel that doing things which are uncomfortable can make life more worthwhile.”
  •         “I know some of these tasks might come by easy to some people, but they were hard ones for me. I realize that stepping outside your comfort zone not only builds strength, but it also helps you realize things about yourself you would have never known if you didn’t do the unusual.”
  • ·         “I would do this project one hundred times over again.”

Three Key Concepts Every Personal-Finance Class Should Teach

January 28, 2016

I have started to write a blog for the Wall Street Journal, and I hope you will follow my blogs there. I provide the link below. However, I will keep posting the blogs here as well as I write a longer text than it is published because there is a hard word limit at the WSJ.

More than ever before, we must make financial decisions that are important and consequential. How much should we contribute to retirement accounts and how should we invest our retirement savings? Should we enroll in a health insurance plan with a low or high deductible? What do we need for our children’s education? Household finances have become sufficiently complex that simple intuition or the advice of family and friends is not enough to guarantee good choices.
There are courses in corporate finance and specialized curricula for managing firms’ finances, but what is available when we serve as our own Chief Financial Officer (CFO)? Fortunately, personal finance is a subject making its way into schools, from high schools to colleges to graduate programs. Online courses are also springing up, and some employers have started to offer financial education programs to their employees.

What should the content of such courses be? As member of the Board of Directors of the Council for Economic Education, I served as an adviser on the National Standards for Financial Literacy. From these standards, we can identify some of the crucial concepts that everybody needs to make informed financial decisions. I am going to focus on just three, the Big Three as I tell my students.

One fundamental principle of personal finance is the power of interest compounding. This knowledge is key for saving, borrowing, and investing decisions. It enables us to understand, for example, why it is important to start to save early. And we need to do calculations to see results. If I borrow at 20 percent on my credit card, how long does it takes before my initial debt doubles? If expenses and fees reduce my rate of return by one percentage point, how is my wealth affected over a 30-year horizon?

Because financial decisions are inherently about the future, we must consider how money’s purchasing power changes over time. We must also acknowledge that the future is uncertain. That brings into play two more building blocks: knowledge of inflation and risk. Distinguishing between real and nominal values is essential to keeping a stable standard of living over a lifetime. Indeed, personal finance is where we can fully appreciate the critical role the Fed and its monetary policy play, especially when it comes to low and stable inflation and its implications for financial planning.

Knowledge of risk and risk diversification is at the basis of portfolio choice. We can formally prove that the old adage “do not put all of your eggs in one basket” is, indeed, good advice. Even more, we can learn how to implement it well. Moreover, we can protect ourselves and our wealth from the many sources of risks: interest rate risk, health risk, and the risk of living too long!

The Big Three are the stanchions of a personal finance course we launched three years ago at the George Washington University School of Business. While I cannot say whether this course will lead to smarter financial decisions, students’ eagerness to enroll, performance on the tests, and comments when they complete it give me much hope.

Durable Goods Orders Hit All-Time High

January 21, 2016
by Bill Sweet

The most interesting economic news this week: new durable goods orders spiked almost 23% in the month of July to an all-time survey high. The indicator, measured in millions of dollars of US goods expected to last three years or more, is an interesting measure of expected current and future economy activity. The data are complied from a Census Bureau survey of about 4,000 manufacturers of durable goods.

Last month’s jump really stands out looking at the same data series going back to 1994:

Because this is a measure of orders placed, it will be a few years before this work shows up as output in the economy (Gross Domestic Product or GDP measures production of goods and services, not orders). About $70 of that $300 billion in orders was from civilian aircraft manufactures, and it probably takes a minimum of three months to build a commercial airliner. Yet removing transportation orders (which tend to be volatile) still leaves us with an 8% trend over the past year. We won’t be able to look back at 3rd quarter GDP until late October to confirm whether or not these orders are going to materialize in increased output.

I am not a fan of single-factor analysis, and these data are very noisy and subject to numerous revisions. I also dislike surveys in general. Yet I find this indicator to generally be reliable, and I think it’s worth paying attention to. When you combine these data with the increasingly improving employment situation, relatively low inflation, healthy manufacturing production, positive demographic trends, accelerating loan growth, and the shrinking government budget deficit, we can paint a picture of an economy on the upswing. Even if all of the news isn’t great.

I remain surprised with how gloomy investors and my fellow investment managers remain about our prospects, in spite of a growing series of strong economic data. I concede that anything could happen, and we know that a solid economy doesn’t mean that we’re going to experience strong investment returns, but the persistence of pessimism in 2014 surprises me.

– Bill

What Should I Do If I Haven't Saved Anything for My Kid's College?

January 12, 2016

by Bill Sweet

While financial planners (like me) urge young parents to save early and often for their child’s college education, reality is that many families don’t have enough saved by age 18, by choice or because they simply cannot. If this is the case for you, you’re not going to be surprised that your options are limited, but there are still things that you can do to help soften the blow.

A lot of the information below comes from an article by Ron Lieber from mid-October, which I was reminded of by Michael Kitces’ weekend commentary. Definitely check out Lieber’s article here.

If you find yourself in this situation, there aren’t going to be a ton of great options. One fallacy that I’ve heard clients tell me that they INTENTIONALLY don’t save for college in the hopes that this will increase their chances of receiving student aid. While certainly having savings for college does affect the formula that determines aid (via the EFC, explained below), this is pretty terrible financial advice. The impact of available savings on the formula that determines student aid is drastically dwarfed by other factors, primarily your income, but other factors as well, such as how many kids you have in college at the same time. Bottom line: don’t expect to be rewarded for not planning ahead.

Probably the first step is to find a round estimate of the annual cost of college. Speaking to a university financial aid office is probably the best way to do this. For a ballpark figure, use the Department of Education’s Net Price Calculator, which accounts for aid and scholarships.

Next is to determine what you might receive in student aid, which is usually composed of grants and loans subsidized by the federal government. The College Board has a useful tool for this online to determine your Estimated Family Contribution (EFC), which is the figure that you are annually expected to provide to your child’s education. Most student aid calculations are based on this number, so if it is high relative to the expected tuition, you aren’t likely to receive much in the way of student aid and probably need to plan on providing those payments out of your current income.

My perception is that many clients who are in the situation of entering college years with nothing saved are expecting or at least hoping that some magical grant will become available for their child that will pay all or most of the bill, which of course rarely happens. It is possible to win a large merit-based scholarship, or receive an income-based package (don’t expect this if your income approaches the median household income in the US, of about $57,000 per year), but competition for these gifts means your chances of winning are very slim. This is especially true for the more competitive (hence, usually better) schools – a college with a ton of applicants doesn’t need to offer financial aid packages and won’t, unless your child is truly exceptional. Scholarships are probably the best bet for finding “free” money – academic, athletic, and local – but the competition for these programs is going to be equal to the application process.

Borrowing is the option of last resort. I’ve written a lot lately about the challenge that student loans present (here), since you’re borrowing funds today that will likely be repaid at 6.8% interest over the following 10 years or more (roughly doubling the total cost). The days of affordable borrowing for college have been gone for some time. Taking out a parent loan (Direct Plus) is problematic, since the rates can be even higher and can sometimes push into retirement years. While noble, sacrificing your retirement income in order to fund education costs is not usually a good idea, since you’re likely to rely on your children to help if you get in trouble.

Probably the best strategy is to find ways to keep the overall cost of college low and affordable. Consider a school in the area, for example, to avoid room and board fees. Or a community college for the first two years of school, followed by a transfer to a larger school for graduation, since this not only decreases cost but buys an additional two years in order to prepare and to save. Finally, be careful when selecting a major – earnings for some degrees are multiples higher or lower than others.

There are few easy answers, but that’s okay. Few things in life are as beneficial as a college degree, and if you’re prepared to make some sacrifices you can make it happen.

Tell your friends who are young parents to start saving early, though. I can help.

– Bill

Yet Another Post Trying To Answer If College Is Worth The (Increasing) Cost

January 5, 2016
by Bill Sweet
The short answer: yes. College is still worth the cost.

While the cost of college has increased in the last few decades, the net present value of a college degree has held relatively steady, according to a research report by the Federal Reserve Bank of New York.

Thus, someone obtaining a bachelor’s degree today would hold an asset worth about $260,000. Keep in mind that this is a median figure; as we’ve discussed previously, due to earnings potential some degrees will be worth more (engineering, medical), while others will be worth less (social services, arts). This is not meant to be an analysis of the relative cultural or emotional worth of these degrees, but rather solely an economic observation.

However, in considering the value of a degree, one must also consider the earnings potential of someone without a college degree, as this chart (also from the Federal Reserve) shows:

Here you can see that the median earnings of someone with a degree has stayed relatively steady, once adjusted for inflation, while the earnings potential for those without a degree has decreased steadily. Alarmingly, the chart above ends in 2008, just before the effects of the recession began to be realized. I would guess that data from 2008-2014 has decreased earnings for those without degrees even more.

Thus, the relative value of a college degree has increased not because of an increase in earnings for the degree holder, but a decrease for those without.

The increasing cost of college has certainly increased, steadily, for my entire lifetime. This is the real root of the problem. Today it costs about four times as much after adjusting for inflation (about 12 times in nominal terms), outpacing the increase in just about every other expenditure, including energy and medical care.

Hence, as the current cost increases, the present value of a degree decreases, as we saw in the first chart.

Another one way of thinking about value is considering the time needed to pay for a college degree. Again, from the Federal Reserve Bank of New York:

With the median wage difference for those with and without a college degree at $15,000 – $20,000 per year, it would make sense that it would take about ten years of working at that higher salary to pay off the cost of college.

The final consideration is the prospects of finding a job. Just like when we looked at the data back in May, the unemployment rate is about three times higher for those without a degree (9.1%) than those with a college degree (3.2%). Thus, people with a college degree not only get paid more on average than those without, but they have an easier time finding a job. 
Of course there are many other factors, including the cost of the degree (including financing costs), as well as the type of major, and job opportunities, but on average obtaining a college degree is still a very good idea. 

The best we can tell, each additional year of education adds about 8% to your lifetime earnings potential.

– Bill

Debt and Debt Management Among Older Adults

December 29, 2015

I am writing this post and several subsequent ones on research findings. I spent a lot of the summer in front of the computer, looking at data, running regressions, scratching my head, walking around my office, and writing papers. Some of you might think that this sounds like a boring way to spend the day, but in fact, I am truly happy when I can spend time in the office or at home doing research.

The latest project I have been working on is in conjunction with my longtime co-author, Olivia Mitchell from the Wharton School. We examine debt and debt management among adults on the verge of retirement. We focus on debt for several reasons. First, debt generally rises at interest rates higher than those that can be earned on assets. For this reason, debt management is critical for those seeking to manage their retirement assets. Second, not only do families have greater opportunities to borrow to buy a home and to access home equity lines of credit but they also need lower down payments to buy a home. Additionally, as sub-prime mortgages proliferated, credit became increasingly accessible to consumers with low credit scores, little income, and few assets. Consumer credit, such as credit card borrowing, has also become more accessible, and this type of unsecured borrowing has increased over time. Third, in many states, alternative financial services have proliferated, including payday loans, pawn shops, auto title loans, tax refund loans, and rent-to-own shops.  Fourth, a focus on debt may help to identify financially fragile families who may be sensitive to shocks and unable to afford a comfortable retirement. Last, the recent financial and economic crisis was largely driven by borrowing behavior, so understanding debt may help us avoid a repeat of past errors.

What do we do to examine debt? We use data from the Health and Retirement Study (a great data set which, as the name implies, provides a lot of information for understanding retirement readiness) and compare three different cohorts of people on the verge of retirement: those who are age 56–61 at three different time periods: 1992, 2002, and 2008. We look not only at the debt these three groups of older adults hold at the time they are surveyed but also at how much debt they have in relation to their assets. We have the following findings, which I list here for ease of presentation (okay, call me nerdy).

·         Americans today are more likely to arrive at retirement with debt than in the past. Of the cohort surveyed in 1992, about 64% held debt, whereas by 2008, over 70% of the group surveyed held debt. This tells us that people retiring in the next several years (the baby- boom generation) are more likely to carry debt into retirement compared to previous cohorts.

·         Not only has the number of people holding debt increased, but the value of this debt also grew sharply. For those interested in values, median debt more than quadrupled from about $6,200 in 1992 to $28,300 in 2008 (in 2012 dollars) and many boomers (the 2008 survey cohort) had large amounts of debt (over $100,000) with respect to previous cohorts, something to worry about if interest rates increase.

·         A key reason that debt rose so rapidly for the 2008 (boomer) cohort is that this group spent more on housing than earlier cohorts. As a result, boomers are now more likely to have loans outstanding on their primary residences. Boomers are also more likely to carry non-housing debt.

·         Debt ratios have also increased, making recently surveyed (younger) cohorts more leveraged than older ones. For example, boomers have a much greater ratio of mortgage to home value to pay off and will have to service mortgage debt well into retirement. They are also much more likely to have debt equal to or greater than their liquid assets, meaning they will likely have to sell off less liquid assets (or borrow more) to pay their bills.

To get some insights into explanations for such debt and debt ratios, we turn to a data set that I have mentioned often in previous posts, the National Financial Capability Study. This is another rich set of data and because two waves are now available—2009 and 2012—we can look not just at the boomers of the same age group as were surveyed with the HRS, but also at older households in the wake of the financial crisis. The news derived from these data is not good either and reiterate the finding that many older Americans are exposed to illiquidity and/or problems with debt management.  Here are some more numbers:
·         Not only do older adults carry costly credit card debt but many have already tapped into their retirement accounts, and more than one in five have used high-cost methods of borrowing, such as payday loans, in the period from 2007 to 2012.

·         About 40% of older adults state they have too much debt, confirming the high values and ratios we see in the Health and Retirement Study data.

·         While older adults should be close to the peak of their wealth accumulation, in fact more than 35% state they could not come up with $2,000 in 30 days, one of our measures of financial fragility. Thus, many older Americans are vulnerable to shocks.

Several variables can be linked to the conditions of having too much debt and being financially fragile: having experienced a sharp decrease in income, number of dependent children, poor health, and low education and income. Financial literacy also strongly correlates with both high debt levels and financial fragility.
While protective legislation can be useful in situations where people lack opportunities to make repeat financial decisions, so as to learn from them, it can also be useful to better inform Americans of potential consequences of decisions such as buying a home, cashing out their 401(k) plans, or taking out credit card loans. As Olivia and I concluded in our recent review of financial knowledge and financial success, “the costs of raising financial literacy are likely to be substantial, but so too are the costs of being liquidity-constrained, over-indebted, and poor.”
I offer below the links to the data sets we have used in our study as well as to the Senate’s Special Committee on Saving, where Olivia testified on September 25, 2013.

Key 2014 Tax Benefits Finally Passed By Congress

December 21, 2015
by Bill Sweet

With 14 days to spare, Congress just this week got around to looking at the US tax code for 2014. In particular, the subject of the discussion are tax incentives that generally everybody thinks are good ideas that expired on December 31st, 2013.

To be very clear: the people we elect to oversee the tax code just finished approving items that should have gone into effect 12 months ago. Granted, this is a slight improvement on the timeline of the tax reforms of 2012 (signed January 2nd, 2013), yet remains an embarrassing failure of governance that has wide and sweeping effects for those of us who help people make important business and financial decisions.

I consider complaining about Congress America’s fifth professional sport, and a great way to win new friends and impress people. According to Gallup a full 79% of our nation currently disapproves how Congress handles its job. The point of this post isn’t to add fuel to that nation-sized tire fire, but rather to point out the actual effect that this has on those of us who have to give business owners advice based on the US tax code.

The bill, H.R. 5771, extends certain tax breaks to individuals and small businesses until next week (December 31st, 2014). Here’s a quick rundown of a few of the provisions (more detail here):

  • $250 above-the-line deduction for teachers 
  • Exclusion of income for debt discharge due to loss of primary residence (foreclosure)
  • Commuter transit benefits (TransitChek in NYC)
  • Tax deduction of qualified tuition & fees (in lieu of education credits) 
  • Exemption of income for IRA distributions to charities 
  • Bonus / accelerated depreciation for certain business property
  • Exclusion of gain from small business stock
  • Energy efficiency tax credits

Most agree that these are all generally good things. I think that we can all get behind a (very small) tax deduction for teachers, for college education, for charitable contributions from an IRA, etc.

The business deductions are a little trickier. The way that most deductions work for larger items that have a usable life is not as straightforward as items that are “consumed” during the operating year. If a business buys property that is expected to last more than a year – for example, computer, desk, telephone, car, larger equipment – the tax code requires that these items spread the deduction over the usable life of the item (e.g., for five-year property, the first year deduction is close to 1/5th the total cost in year one, another 1/5th in year two, etc.). The rules are somewhat more complicated than that – the IRS mandates use of a bizarre formula called Modified Adjusted Cost Recovery System (MACRS – more here) which is difficult to explain in plain English.

The sixth bullet above outlines a way to accelerate the deduction with a purchase of (new) business property. The bonus depreciation rules apply to most classes of property, allowing a 50% deduction in the first year, while Section 179 (a more restrictive class of property) allow for 100% deduction (treating it like an expense).

The effect that these provisions have is that many businesses with surplus income might purchase additional equipment towards the end of the year to take advantage of the accelerated deduction. This effectively nudges the business owner to spend funds in the broader economy. While these expenses are generally taxed to the recipient, because one company’s expense is another company’s income, generally economic activity is a good thing worthy of an incentive.

It should be noted that this accelerated expensing isn’t “free” – it doesn’t create deductions out of thin air. Not only must the company actually purchase the item (and spend the money, unless they borrow it, such as with an auto loan) – but they also have a lower deduction going forward. In fact, in the case of a Section 179 deduction, all of the expense is “used up” in the year of purchase, meaning zero deduction going forward. This is generally in the business owner’s interest, since they can pay less income tax now, thus enjoying the economic benefit of that untaxed income while also enjoying the use of the property.

This comes up often in the year-end strategy meetings that I am currently having with clients. For example, an additional Medicare surcharge tax applies to any investment income once a married couple exceeds $250,000 in modified gross income. A business owner who hypothetically is looking at $260,000 in net business income in 2014 might choose to spend $10,000 or so on a piece of equipment next week, and if that transaction is Section 179 eligible, they can then deduct the $10,000 expense and only pay tax on the remaining $250,000 of net income (possibly staying below the surcharge tax threshold). Without Section 179, or a bonus deprecation, much less of this expense can be deducted in the current year, meaning that even though the owner spends $10,000 on this hypothetical expense, they can only deduct $1,400 or so, subjecting the remaining income to that higher tax rate.

Another case arrives with business owners who are relying on health insurance plans whose incomes must remain below a certain level to qualify. For these owners, who are usually self-employed, small businesspersons, the year-end accelerated deprecation or Section 179 expensing is a very valuable tool to use in their overall financial arsenal.

It is very frustrating to be well into December of the current tax year before Congress begins to look at these provisions. For all of 2014, I was advising clients not to count on this bill being passed, simply because Congress has been extremely unreliable.

Regardless of what side of the aisle you may or may not support, millions of American small business owners are being hurt every year by our legislature’s refusal to work together, even when they generally agree on 90% of the issues (such as with H.R. 5771).

I would ask you to consider supporting candidates for Congress who are willing to work with their fellow elected leaders. I’m Bill Sweet and I approved this message.

– Bill

Tax Filing Begins January 20th

December 13, 2015
by Bill Sweet

We can begin filing our client’s tax returns with the IRS on January 20th, or about three weeks from now. IRS Commissioner John Koskinen made the announcement earlier this week.

We’re a bit surprised since tax filing has been delayed the last two years until the first week of February because of last-minute law changes. This year was no different in that regard – key tax extensions we’re signed into law until December 19th.

It’s good news. We’re excited to get the ball rolling. I hope that we can help you – if we can, please reach out.

Happy New Year. See you in 2015.

– Bill

Reading This To The Kids Tonight

December 5, 2015

– Bill

Book Review: Never Smile at a Crocodile by Paul DioGuardi

November 29, 2015

This book (available here on Amazon) of several dozen two to four page mini-stories, is a disparate random collection with many messages:

  • cautionary tale about the single-minded unforgiving nature of the CRA bureaucracy and the dangers of disobeying tax laws, deliberately or accidentally (as he says, there is “no compassion in a crocodile brain”)
  • cautionary tale about citizens who don’t pay the taxes they should, some of them due to reasons we can be sympathetic to, and others who are just plain cheats – he has met all types
  • how the insider game works in politics and business deals where who you know makes a big difference
  • self-promotion and self-congratulation of the tax services of the author
  • memories of personal holiday and work adventures, (I’d guess all of which were arranged to legitimately be tax-deductible as business expense though he never utters a word about his own tax affairs)
  • how sometimes innocent people get caught up in the CRA idiotically and harshly using its power
  • how sometimes very guilty people get away with lots of cheating by hiring a good lawyer

There’s no specific tax advice, just the general message to pay your taxes on time .. because the crocodile is lying in wait.

It’s quick reading, always light and chatty, flows easily, not technical even when discussing specific (all of them non-viable) tax avoidance schemes. One could imagine all these stories being told over a drink in a bar, the reminiscences and tales of an old raconteur, most of it true but some of it probably embellished. Good entertainment value, a few good laughs along the way. 
[There is even a defense in the book of his law firm’s current on-going dispute with the Law Society of Upper Canada, reported in the Toronto Star in 2014, about how to hold client retainer money. He makes a pretty good case. He describes himself a number of times in the book as a fighter, not easily deterred. It certainly seems to be so, as he has announced his candidacy for the Law Society Bench in order to shake it up. If the CRA is a crocodile, DioGuardi might be a leopard, which this site says occasionally eats crocodiles. I don’t know if he looks soft and fluffy but he certainly seems to have claws.]