TedCo Software Financial Matters Blog

The May job numbers seemed good, but were really bad news. The recovery had been producing steady real job growth, and on the surface the May numbers looked great with total non-farm employment up 430,000. The unfortunate truth was that the vast majority of those new jobs were census workers whose jobs are to last only a short time. Hiring by private employers was quite small (+41,000) and few real jobs were created. Unemployment dropped to 9.7%, but most of that improvement was due to census hiring. The market responded to the ugly truth behind the happy numbers negatively, as was expected.

Last week June’s numbers were released. It was an unpleasant decline of 125,000 non-farm payrolls reported. However, this includes the layoff of 225,000 census workers. Private sector payrolls increased to 83,000, more than double last month. This is really good news, though the private sector needs to add more than 100,000 jobs a month just to keep up with population growth. Also, the unemployment rate dropped to 9.5%, though this is not particularly good news as the drop is mostly a result of workers becoming discouraged and giving up. The market responded negatively to the good news.

The market is not a great indicator in the short term. Sometimes the market treats bad news as neutral and good news as good news. Not right now though. Right now the market treats good news as neutral and bad news as bad. Don’t expect a nice uptick in stocks until the market shakes the blues.

Let’s get back to the unemployment rate. This number is an important indicator of mood and economic activity, but it is a bit deceptive. The rate is a measure of the percentage of people who have or want a job and don’t have a one. A person is said to want a job if they have actively looked for work in the prior four weeks. This is supposed to weed out those people who do not want to return to the workforce. In an extended downturn (or slow recovery) a number of workers become discouraged and quite looking. The drop in the unemployment rate is more a result of a reduction in those who are actively seeking work rather than a real increase in total employment.

The headlines will cover these signs of weakness, trumpeting the poor showing as compared to the average post-war recovery. However, this slow recovery, particularly in employment, was what we saw for the last two recoveries (1991 and 2002). We may need to adjust our expectations; the jobless recovery may be the new normal in the information age. It is neither good nor bad, it is just the way it is. Unless you need a job, then it is just bad.

Jim Heitman, CFP®, is a writer, speaker, Certified Financial Planning practitioner in Southern California, and the founder of Compass Financial Planning – a fee-only planning and money management firm.

Start early: While many families don’t turn to relatives for help until there’s an immediate need, earlier planning almost always produces better results. Grandparents already know that saving for a child’s college education is easier if it starts at birth. The same is true for the next generation, so grandparents or adult children need to set a plan in place as early as possible for maximum benefit.

Coordinate college support with overall estate planning: Grandparents should look at their support for their adult children and grandchildren as an overall part of their estate strategy. A CFP® professional, in concert with estate and tax experts, can help grandparents and their adult children settle a series of estate issues at one time, saving time, money and worry later.

Consider the 529 plan option: A 529 college savings plan is an investment vehicle operated by a state or educational institution designed to help families set aside funds for future college costs. It is named after Section 529 of the Internal Revenue Service Code, which created these plans in 1996. If parents have set up a 529 plan for their child, grandparents can contribute to that plan or they can set up their own 529 plan account with their grandchild as the beneficiary.

Watch the fees: No matter what savings or investment options you choose, make sure you’re not overpaying fees. A stock mutual fund may charge in excess of 1 percent of assets; you can certainly find quality mutual funds that charge less. Two good resources: Morningstar.com can provide you a general review of most mutual funds you might be considering. The second is the Security and Exchange Commission’s online Mutual Fund Cost Calculator which can help you determine how the fees and other costs associated with the fund will add up over time.

Offer some investing training wheels: Grandparents have a unique relationship with their grandchildren. They can teach without “lecturing” like their parents, and for that reason, they might consider setting up an investment account with a small balance that the kids can monitor and discuss under the supervision of the grandparent.

Make the grandkids beneficiaries: Naming your grandchild as the beneficiary of a retirement account or insurance policy can be a tax-smart way to provide financial support for college or possibly a first home.

Jim Heitman, CFP®, is a writer, speaker, Certified Financial Planning practitioner in Southern California, and the founder of Compass Financial Planning – a fee-only planning and money management firm.

Though many grandparents have taken a hit to their portfolios recently, and seen little growth over the past decade, careful planning can ensure a healthy contribution to the education and to their grandchildren’s future.

The first step involves a talk between grandparents and their adult children. According to 2008 research from The Hartford Financial Services Group, 65 percent of grandparents surveyed reported that they plan to contribute financially to their grandchildren’s college education, but that less than one third of all survey participants talked with their adult children about those plans.

Statistics show the amount of money that transfers from grandparents to grandchildren is substantial even before college. Hartford reports that more than 40 percent of grandparents spend more than $2,000 annually on their grandchildren before they reach 18 years old. And once it’s time for the kids to head off to school, over half of grandparents who plan to contribute will give more than $10,000, with a quarter of those planning to give more than $30,000. That’s a nice chunk of college.

A visit to a CERTIFIED FINANCIAL PLANNER™ professional can help grandparents and their adult children coordinate a gifting strategy that makes sense. In the meantime, there are several options to consider:

Communicate: Adult children and their parents might find it difficult to talk about money issues in general, but discussing a positive goal like funding a child’s future can pave the way to make discussions later about the grandparents’ estate issues and end-of-life care a little easier to handle. But initially, these discussions will hopefully deliver a reality check. The Hartford survey points out that 60 percent of the grandparents surveyed believe that financial aid will be the most likely way their grandchildren will pay for college in an era where federal aid is declining and grants and scholarship cover only an estimated 15 percent of total college costs.

Jim Heitman, CFP®, is a writer, speaker, Certified Financial Planning practitioner in Southern California, and the founder of Compass Financial Planning – a fee-only planning and money management firm.

Schedule a holiday budget and credit check: When the triumphant freshman returns home for the holidays, schedule some R&R, home cooking and the first reading ever of their fall budget figures and their first credit reports. Since credit reports can be ordered online, parents and student should sit down with each of the child’s three credit reports from Experian, TransUnion and Equifax and review them for activity and errors. Since everyone is entitled to one free report from each of the agencies each year, go to www.annualcreditreport.com for theirs.

Help them open their first IRA: If your 18-year-old child is earning wages by working part-time at school, at home during breaks or for your own company, have them open a Roth IRA in a growth fund. Make sure they understand this is essential to their future savings so they don’t cash it in. Ask your planner about this.

Discuss identity theft: Personal financial data left on laptop computers, cell phones and other electronic devices can be readily stolen on campus or in a dorm or roommate environment. Tell your son or daughter to keep all paper records in a safe place and introduce passwords to keep all their digital information safe.

Get them networking: Internships and jobs in their chosen field during summer breaks can give your student a head start on their career path. Encourage them to research these opportunities in their freshman year so they’ll be in the front of the line when it’s time to apply.

Handle mistakes carefully: Most kids will make money mistakes in college. If they overdraw a checking account or overdo it with their credit card, make the criticism constructive but firm and always come up with a corrective plan you’ll work on together.

This time of semi-independence can be a great learning time for your children, but it is only semi-independence. Help them through it and the lessons they learn will pay dividends for the rest of their lives.

Jim Heitman, CFP®, is a writer, speaker, Certified Financial Planning practitioner in Southern California, and the founder of Compass Financial Planning – a fee-only planning and money management firm.

Bank smart: Students need to get some familiarity with the banking system before they head to college. Kids generally should set up a checking account on campus, but talk to them about debit options and fees, particularly for overdrafts, which are sky-high at many banks now. Also ask your child to ask the bank about direct-deposit options if you’re planning to deposit money for their tuition or agreed-to spending needs. Check to see if there are branches of the bank you choose both near campus and near home. This makes it much easier for parents to make deposits.

Work with them to set up their first emergency fund: A young person should get used to the idea of savings and reserves for unforeseen events such as emergency trips home or related expenses. Make it clear that late-night pizza is not an emergency. (OK, late night pizza is an emergency, but not that kind of emergency.)

Put the student in charge of maintaining her financial aid: Each year, the FAFSA (Free Application for Federal Financial Aid) is due in June. State applications are due earlier. While parents need to run the financial aid process, students need to be equally aware of how their education is paid. Everyone should file the form whether or not you think your child may be eligible, and your child should be searching for scholarships at all times. By the way, legitimate scholarships never charge fees and are typically open to all applicants for consideration. It might also make sense to take your child to your tax preparer to make sure you’re taking advantage of any income tax opportunities.

Make them budget: If they’re leaving for college with a new computer, consider giving them personal finance software to track their everyday expenses and make sure the computer has a security password. (Keeping track of spending by calculator is fine, too.) Work together to determine necessary realities about everyday expenses, tuition and financial aid. Then tell your kid that when he or she comes home at Thanksgiving, you will sit down again to review those figures and make reasonable adjustments. You obviously need to trust your kids, but you might want to do this for as long as it takes them to develop solid and consistent money habits.

Jim Heitman, CFP®, is a writer, speaker, Certified Financial Planning practitioner in Southern California, and the founder of Compass Financial Planning – a fee-only planning and money management firm.

The National Center for Public Policy and Higher Education reported last December that college tuition and fees increased 439 percent from 1982 to 2007 while median family income rose 147 percent. The report also noted that student borrowing has almost doubled since 1998.

The most worrisome statement to come from the report? That if current trends continue, our country might be without an affordable higher education system in 25 years.

This is why it’s crucial to train incoming college freshmen in critical personal finance skills. Before you send your child off to school, make sure you cover the following lessons:

It’s never too early to plan: If you think your words won’t hold enough weight – or you need some guidance yourself – consider bringing in an expert such as a Certified Financial Planner™ professional. It’s never too early to deliver the message that how a child manages his money in college will set the stage for how well she manages it in adulthood. A planner can help a child focus on spending and debt issues in college, but it also makes sense to discuss how your student will save for a home and a car. That might force some smart spending, saving and investing decisions while she’s still in school. Once your child gets the message, consider a meeting for yourself.

Focus on credit: It’s one thing for a teenager to use their parents’ credit card while they’re still living at home. It’s quite another when they get their first taste of freedom hundreds of miles away, often without the parents’ knowledge. Parents should opt to co-sign the student’s credit card but keep it in the student’s name. That way, parents will know when financial missteps occur, which will be a strong incentive for the student to keep his credit rating clean for the next four years. Most important: Parents should do whatever it takes to make sure the child doesn’t sign up for any credit cards on campus where they’ll be bombarded with offers.

Jim Heitman, CFP®, is a writer, speaker, Certified Financial Planning practitioner in Southern California, and the founder of Compass Financial Planning – a fee-only planning and money management firm.

On the bright side: oil prices are still low. Other than that there is not a great deal to be happy about in the equity markets. My last “hedge now” signal lit up last week, so expect some rough travel ahead.

So what is going on? The market is reacting to a number of issues. As I mentioned in an earlier post the market has been looking for an excuse to drop back some, and the world has given it plenty of excuses.

The latest bugbear is the Hungarian debt crises. Fears of contagion and an unraveling of Eastern Europe dropped the Euro to new recent lows. (As a note, this last drop puts the Euro back into the middle of its long term average.) If Hungary goes under it will be, well, mildly disturbing. While the world watches Hungary the real danger continues to reside elsewhere, particularly Spain. If the real estate bubble pops there soon then Europe is in a world of hurt and it will impact us here in the US. The RE bubble in Spain is going to collapse; the question is one of timing.

The US jobs report was disappointing. There was little private sector hiring. Most of the big number of reported new jobs were census jobs. The jobless rate dropped largely because many of those who had become encouraged and re-entered the job market were disappointed and promptly exited (though the real rate of unemployment did drop a very small amount). Weekly hours are up, as are temp workers; all good signs. The pattern of recent (1991-92 & 2001-02) recessions has been little job growth until well into the recovery. The history of big job growth early in a recovery is mostly a post-WWII phenomenon. The sad reality is that a jobless recovery is the historical pattern reasserting itself. Why did this report upset the markets so much? First, the market is looking for excuses to drop. Second, people have little sense of history.

We are still in a recovery and a double-dip still appears unlikely. This recovery, however, could be the weakest in a long time (I’m still hoping for better).

Be glad if you are not in Europe.

Jim Heitman, CFP®, is a writer, speaker, Certified Financial Planning practitioner in Southern California, and the founder of Compass Financial Planning – a fee-only planning and money management firm.

It is clear now what a pivotal role the Federal National Mortgage Association (FNMA or Fannie Mae) and the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac) played in the economic meltdown we are living through. These government run and supported entities encouraged the creation and sale of bad loans, purchased the same from vendors, then re-packaged the toxic waste and re-sold the loans to others (like Wall Street) who again re-packaged the toxic waste and convinced still other people to buy. Everyone who dealt with this junk got burned, and many more besides. The government owns a fair chunk of the blame for this mess (this goes back decades; both parties had a hand in this). Wall Street does too, as does Main Street. Plenty of blame to go around, but these Federally Sponsored Corporations are in the middle of the failure.

Freddie and Fannie, however, have the backing of the Federal Government (who can always raise taxes or print money to cover its bills). These two mortgage monsters have sucked in about $146 billion (that’s $146,000,000,000.00). One millionth of that figure would pay off my mortgage and leave enough to install solar. Worse, the bleeding is far from over. We easily have another $150 billion or so to shovel in this hole before we see bottom. The administration has committed to supporting them until 2012.

So if they had such a hand in the economic mess, why is there no urgency for reform in Washington? The Republicans have signaled a desire to move ahead, phasing out the mortgage giants in five years or so. The Democrats don’t trust the markets to fill the gap. The Federal Housing Administration (FHA), Freddie, and Fannie originate or purchase 90% of all new mortgages. Some changes will come and the government agencies will shrink, though not by much and not quickly. It would cause such turmoil if they just disappeared that it is unlikely that you will see them go. Also, these are very well connected agencies with many friends in DC.

What does this mean to you? With the federal agencies shrinking and private lenders tightening the mortgage lending market will remain subdued into the foreseeable future. It won’t get easier to get a mortgage anytime soon.

Jim Heitman, CFP®, is a writer, speaker, and Certified Financial Planning practitioner in Southern California.

European debt issues are dominating the headlines, and those problems are serious, but the Europeans are not the only ones swimming in the debt pool. Excessive debt is a global reality and most of the developed nations are playing the game hard. Really very few nations operate in the black, mostly oil producers. Many emerging economies have kept control of the debt load. It isn’t that it can’t be done by developed nations; Norway operates in the black, and Canada and Australia carry very reasonable debt loads. China carries little debt, and has huge reserves (however, they have significant infrastructure issues that will need to be addressed in the next decade).

So who’s overspending? Greece, obviously, and all the bailouts are likely to accomplish is to ease the sting of an eventual default. Spain, Portugal, Ireland, and Italy are in some trouble, and Germany, France, the UK, and Japan are spending way too much. Japan and the UK control their own currency so expect efforts to devalue. The Euro is already at a four year low and likely to continue to drop versus the dollar.

What about the US? We are in slightly better shape than our G7 partners (or is it G8 now?). Our debt load is somewhat lower than others (as a percent of GDP), but out deficit spending (as a percent of GDP) is near the top and presents a real danger.

Over the long run the problem must be resolved with a mix of higher taxes and less government spending. That will have a depressive effect on the economy. If the same effect happens to many economies world wide then you can expect slow going for the world economy. That means slower job growth and smaller fixed returns on investments. The sad truth about debt is that somebody always pays. When the debt is your country’s then that somebody is probably you.

One of the sad things here is that a politician who says that we have to radically reduce spending to pay off the debt is probably not getting elected. Nobody likes the sad-sack downer guy, even when he is right.

Jim Heitman, CFP®, is a writer, speaker, and Certified Financial Planning practitioner in Southern California.

It’s time to review your goals, personal, financial, and professional. Those personal and professional goals are important, but they are outside the scope of this BLOG, so I will keep to some financial ones. I would share with you my new weight loss goals, experiences in launching a business, or how I can’t get a dog, but I don’t have a personal blog so you will just have to guess.

All your financial goals need periodic review. Is the asset allocation still in line with your time frame? Has the goal changed, or what adjustments do you need to get back on track?

Retirement is the big one, the goal most everyone has on the top of their list. As this very long term goal tends to be the most aggressive allocation it is the hardest hit by market craziness. Just because the target is many years away does not mean you can’t take steps now to build it up. If you find you are behind you may be tempted to try and “catch-up” by taking on more risk. Consider instead making some adjustments in your expectations. Often pushing the target date out a year or increasing savings slightly will get your plan looking healthy again.

With college savings and other goals you typically do not have the extended time frame. If the big bear market of ’08 put you way behind you will need to look at your allocation to begin with, you may have been too aggressive to start. Also, look for ways to reduce these costs. On the education front start situating your student for scholarships and consider completing some GE at a junior college. Saving for a house? Maybe it is time to consider a smaller one, or waiting another year before you buy.

Remember that financial goals are based on assumptions that are, more likely than not, incorrect. The best plans are flexible, dynamic, and can be tweaked to respond to the ever shifting circumstances of the world, and our lives.

Want some help with this? Find a fee-only Certified Financial Planner near you and ask them if this is something they can help you with.

Jim Heitman, CFP®, is a writer, speaker, and Certified Financial Planning practitioner in Southern California.