Message from CFP Board

Our recent economic downturn has shown us that we must re-examine some basic assumptions about the ways we manage our finances. What made sense pre-recession no longer works today. To help explain these new realities, CFP Board is rolling out a series of informational videos by Consumer Advocate Eleanor Blayney, CFP^®. In the series, Blayney will offer nine personal finance strategies to help consumers plan for what's ahead. To see the video series, follow the link below. -Eleanor Blayney, CFP^® Consumer Advocate, CFP Board

There is a simple generational rule in my family. If G1 likes it – be it a book, an outfit, a car model – then G2 will not, and vice versa. Pretty amazing, but the other night I sat stonefaced and uncomprehending through a movie that had my nephew rolling on the floor.

This generational divide makes shopping for holidays or birthdays challenging, to say the least. I find it nearly impossible to buy someone else a shirt or shoes that I myself would never wear. Money is always an option, but it seems so…well, monetary. When it comes to cash, it is never the thought that counts, but the cold, hard amount.

So enter the gift card. Here, too, it’s the amount that counts, but coming in brightly colored plastic with a favorite store logo, the gift card seems a lot more festive and friendly than money. Kids absolutely love them. Vanished are the days when the best presents under the tree were the big boxes. Macro satisfaction comes in micro 2” x 3” form.

Retailers love them, too, which leaves me, as a CFP® professional and parent, pretty much on my own in my dislike of gift cards. I am not so hypocritical to say I never buy them – even financial planners run short on ideas and time during the holidays – but for the most part, I’ve gone back to asking the bank for new crisp bills for my gift-giving.

Why do I hate gift cards? Let me count the ways:

• They rob the recipient of choice. Kids, in particular, need to learn lessons about allocating money – saving some, spending some, giving some – and this is just not possible when they get, in essence, 25 Banana Republic dollars that have to be spent at the BR store.
• They create huge windfalls for retailers at the expense of consumers. How likely is it that the recipient of a $50 store card spends exactly $50 on merchandise? If she spends less, she either loses the balance to the bottom line of the store, or she is induced to go back and buy something more, usually in excess of the remaining balance on the card. Thus the retailer has transformed my intention of spending $50 on a gift into $50-plus worth of sales.
• Don’t get me started on all the gift cards that are never used, because unbeknownst to the recipient, they had an expiration date on them. Or they have a transaction fee for using them. Or they are no longer redeemable because the store issuer has gone bankrupt.

Apparently our ever-inventive capitalistic market is finding ways of addressing the inefficiencies of gift cards, through the creation of secondary exchanges whereby you can trade one gift card for another or even for cash. But usually there are costs associated with this barter, depending on the type of card you are attempting to exchange, and the card amount.

Econ 101 teaches us that economies that use currency as the basis of exchange are far more efficient than those that rely on barter. If I have only a potato or a Macy’s card in my pocketbook I have to find someone who not only wants a potato or stuff at Macy’s, but also has what I want – say, eggs or a Starbucks card. If, on the other hand, I have cash, I am good to go.

I agree – gifts of money can seem rather dreary at times, and they always come in the same size and color. But so far, even in my generationally divided household, no-one has yet returned a gift of money for something they like better.

Top News Stories

Students Wisely Turn From Private Loans
Washington Post (10/25/09) Singletary, Michelle

Students grappling with the recession are moving away from the typically higher-interest private student loans, writes personal finance columnist Michelle Singletary, citing data from the College Board that students borrowed nearly 50 percent less in private student loans for the 2008-2009 academic year compared to the previous year. Indeed, Sallie Mae reported a decline in third-quarter private lending to $893 million, down from $2.1 billion last year. The subsidized government loans have lower interest rates and the government pays the interest while the student is in school, and they also offer better consumer protections, so it is better all-around that students are moving away from private loans. But the College Board is still concerned that students are over-borrowing even on subsidized loans--the median student loan debt for college graduates was $20,000, with 6 percent of public school students and 24 percent of private school students borrowing $40,000 or more. Subsidized or not, that is a lot of debt for a student and family to take on, Singletary says.

Pre-Paid College Tuition Offers Big Savings
Philly.com (10/26/09) Shah, Nirvi

With tuition rates soaring much faster than the rate of inflation, many financial planners are advising clients to pay for their children’s college in advance and lock in today’s prices. For example, Florida raised tuition at state universities by 8 percent this year, and individual universities raised it another 7 percent on top of that, for a one-year increase of 15 percent. The Florida Prepaid College plan can lock in existing rates, and payments begin in April, though anyone signing up after Jan. 31 gets 2010-11 rates instead of 2009-2010 rates. Some private universities have prepaid programs as well, though there are higher upfront costs because their tuition tends to be higher. By locking in the cost, “someone else is assuming the risk of the investment—and there is no annual fee,” says Cathy Pareto, CFP^®. One risk, however, is that after pre-paying the tuition, the child decides to go to another school, or no school at all. The money can be transferred to another school, but it may not cover as much.

Personal Finance News

Age the Wrong Gauge for Portfolio Allocations
Chicago Tribune (11/01/09) Leckey, Andrew

Market fluctuations are leaving many investors unsure of how much more action they can tolerate in their portfolios. "Right now, a lot of folks feel they'd have a hard time accepting the same kind of experience they had with equities in 2008," said Marilyn Capelli Dimitroff, CFP^®. "They came to understand just how volatile stocks can be." Conventional wisdom says to start off young with a higher percentage of stocks than bonds, and transition to a bond-heavy portfolio closer to retirement. But that adage has lost some momentum. "Age is probably the least relevant factor in considering how much an individual should have in stocks," said Evensky & Katz President Harold Evensky, CFP^®. "Even someone 65 years old could have another 20 years to go." Additionally, it can be risky to believe bonds are 100 percent secure, Dimitroff added. Bonds can fluctuate widely, especially when an investor is entering the market with historically low interest rates, and inflation could be on the horizon.


The Best Savings Account Rates: An Ongoing Quest
New York Times (10/30/09) Saranow Schultz, Jennifer

It can be difficult to find an accurate and comprehensive list of the best savings rates, because an Internet search will bring up many questionable results, and sifting through the litany of blogs and other sites that list rates can be an exhausting task. The New York Times conducted its own search for user-friendly comprehensive lists of rates, and found that the best sources were Bankrate.com and MoneyRates.com. The sites did require a few extra clicks to actually get to the rates and there were some ads trying to lure users away, but both had the most comprehensive and easy to read rate listings. Links to the actual banks were present only for those banks that had advertised on the Web site, so for some banks the user had to do a separate search for the bank’s site to confirm rates. Another site that garnered positive marks was MoneyAisle.com, while BillShrink.com did not list rates but instead focuses on “highly personalized recommendations” for users.


Financial Planning: What Every Woman Should Know
Atlanta Journal-Constitution (10/30/09) Cash, Rana

While women tend to be less interested in money management than men and less confident in their abilities, research has also shown that once women are given some financial education, they turn out to be better at money management than men, writes Meg Shepard, a graduate student in the University of Georgia’s Financial Planning Program who recently held a seminar to help women get on the right track to meet their financial goals. Men tend to be overly confident in financial matters and take more risks, trading 45 percent more often than women, Shepard says, leading to higher losses. Women need to act now to get their finances in order, and some basic tips are to spend less than is earned, find a good CERTIFIED FINANCIAL PLANNER™ professional, create a financial plan for the future, listen to instinct, and always keep learning, because increasing knowledge increases confidence. There is a plethora of financial literature available, much of it specific to women, and there are always classes at local colleges or civic centers that can keep one up to date on money matters.


Making Your Money Last in Retirement
Fort Wayne Daily News (10/30/09) Wilson, Mike

When planning for retirement, diversification is key, writes Mike Wilson, CFP^®. Stocks will sometimes soar and other times plummet, and diversification is the best way to weather swings in either direction--especially with people living 20 to 30 years into retirement. Retirees should also make a decision about how much money they withdraw each year, because higher withdrawals will require greater long-term growth of the portfolio. A reasonable withdrawal rate is between 3 percent and 6 percent, but it will depend on many factors such as when Social Security payments begin and how much they will be, how long one expects to live in retirement, whether one is planning just for oneself or for a spouse as well, whether the intent is to leave an inheritance, and what kind of health insurance one has. A retiree’s budget should be considered as well, and whether there are other potential sources of income such as converting a life insurance plan to an annuity. The ultimate goal is to have a practical plan so that one can still enjoy retirement without running out of money.


Money Talks to Have Before Marriage
New York Times (10/24/09) Lieber, Ron

Before a couple gets married, it is imperative that they consider and settle financial disagreements. Lantern Financial's Lisa J.B. Peterson says one of the issues couples should discuss before marriage is their financial ancestry, or the way their parents handled money, how it has influenced their money management, and how it might affect their relationship. Credit history is another important topic for premarital discussion, as it provides a catalog of past missteps and general spending habits. Control over monthly bill payments also can be a flashpoint in a relationship, according to financial planner Jeff Kostis. "People understand that in a relationship, money is control," he says. "If you're not paying the bills, you don't know where the money is going, and you feel like 'He doesn't want me to go out with my friends' or 'She doesn’t want me to play in the fantasy football pool.' " Desired level of affluence is a fourth item that should be considered before marriage, says New York City psychologist Gregory A. Kuhlman. "Are our career paths going to be something that pulls us together?" he muses. "Or, more often, are they things that will tend to pull us apart, where we'll really have to be proactive to make sure it's under control?"


5 Myths About Wills, and What You Should Do
USA Today (10/23/09) Block, Sandra

About 60 percent of Americans lack a basic will, and there are a number of myths about estate planning that should be debunked. The first myth is that estate planning is only for the affluent. Attorney Liza Hanks says that there are do-it-yourself programs available that are suitable for a basic will, while an estate-planning lawyer should be hired for a trust. A second myth is that spouses receive everything if the estate-holder dies without a will. In point of fact, laws in most states dictate that the estate will be divided among the estate-holder's spouse and children, says attorney Ronald Fatoullah. The idea that an estate will not go through probate if there is a will is also a myth, according to attorney Craig Hersch. Probate can, however, be avoided by placing property in a living trust. Fatoullah says a living trust "is a no-brainer" if the estate-holder owns property in multiple states. A fourth myth is that the estate-holder's job is done once a will or living trust is created. Hersch says that the estate-holder will have to retitle the assets he or she wants to transfer to the trust, while the will must be periodically revised to reflect major events in the estate-holder's life. WealthCounsel co-CEO Matt McClintock recommends that the estate-holder meet with their attorney every four or five years to discuss changes in their circumstances that could impact the estate plan. A fifth myth is that liability for a deceased parent's debts could be assigned to the children. Hersch says children are not generally held responsible for such debts. The responsibility lies with the estate, and the debts go unpaid if the estate does not have sufficient assets to cover the amount owed.


There's Still Time for Auto Tax Breaks by Year-End
Associated Press (10/21/09)

Consumers who are in the market for a new vehicle can take advantage of a number of tax credits and deductions being offered by the federal government, so long as they make their purchase before the end of the year. For example, the federal stimulus package that was signed into law earlier this year allows consumers to deduct sales tax and other fees associated with a vehicle purchase made before Jan. 1. According to Arthur Bloom, a tax partner at Marks, Paneth & Shron in New York City, the deduction--which is limited to the first $49,500 of the purchase price--could save a New York taxpayer in the 25 percent tax bracket roughly $635 on the purchase of a $30,000 vehicle. However, the deduction begins to phase out for individual taxpayers who earn $125,000 a year and for married couples filing joint returns who earn $250,000 a year. Individuals who earn $135,000 and married couples filing jointly who earn $260,000 are not eligible for the deduction at all. Meanwhile, the government is offering tax credits on certain 2009 and 2010 hybrids, as well as some 2009 and 2010 vehicles that come equipped with engines designed to use less fuel. The credits range from $650 to $2,350.

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