Saturday, November 29, 2008

Black Financial Scholar Questions The Trustworthiness of Governments Ability to Protect Our Money



By Dr. Boyce Watkins
www.BoyceWatkins.com

Media reports show that many Americans are not quite sure of what to do with their money. Watching banks fail left and right, people are logically afraid of what might happen to their savings. This fear is justified, as we are seeing our accounts beaten and stomped by the global financial meltdown.

This grave concern is magnified by the fact that those we’ve trusted are the ones who’ve left us vulnerable. Our most cherished financial experts handled our retirement accounts like flashy vehicles on a Nascar speedway. Our elected officials allowed executives in the banking industry to run rampant like 3-year olds with dirty diapers. Then, when the crash came, a massive bailout package was created for those most responsible for the damage, while the rest of us were left holding the tax bill.

This begs the question: Why in the hell should we trust the government?

I recall that during the failure of Enron, one of the most respected companies in America at the time, the firm made several statements designed to create confidence in the company’s financial condition. Like captains of the Titanic, company leaders explained that there was nothing to worry about, even as they themselves were preparing their lifeboats. When the company failed, those who did not protect themselves reminded us of one grim and fundamental truth: when the “you know what” hits the fan, it’s every man for himself….and every woman too, in case you’re wondering.

In response to such sentiment, the American consumer has been working overtime to protect his/her resources: people have (against my advice) moved their money away from the frightening stock market, they are diversifying money into different banks, and some are taking their money out of banks altogether. All of these actions are occurring in spite of government calls for calm in a world on the verge of financial panic.

The honest to goodness truth is that I don’t blame Americans for being afraid. I don’t blame them for not trusting the government right now. Trust must be earned in any relationship, whether it is a tough marriage of the relationship between a government and its citizens. Our government must work to regain that trust through sound and efficient financial management. It will NOT regenerate the public trust through excessive spending on meaningless wars, selfish pork-filled bills being passed through Congress and budget deficits that strain the resources of Americans everywhere.

I can’t tell you if the government is lying to you, but I can tell you this: There was a time when government guarantees such as FDIC insurance were as pure as the driven snow. There was a time when the United States Federal Government had pockets and resources so deep that even God himself could be bailed out with our cash. The sad truth, however, is that no empire lasts forever, and there is destined to be a day in the future when we are no longer the unquestionable economic super power that we once were. A country that can’t even afford its social security obligations is hardly a nation that has risen beyond economic risk.

Another sad truth is that if the financial world really were coming to an end, the citizens would be the last to find out about any such crisis. We would, simultaneously, be the first ones asked to suffer the burden of irresponsible behavior by our leaders. If that doesn’t justify a bit of skepticism, I am not sure what does.

Dr. Boyce Watkins is a Finance Professor at Syracuse University. He does regular commentary in national media, including CNN, ESPN, CBS and BET. For more information, please visit www.BoyceWatkins.com.

Wednesday, November 26, 2008

Consumer Confidence Advice From Finance Expert Boyce Watkins


Dr. Boyce Watkins
www.Boycewatkins.com

If you wish to see a video explaining consumer confidence, which is one of the driving issues behind the recent moves in the stock market, please click here.

This has been an interesting week, with auto execs showing up on private jets to request a bailout from the government and the Dow moving to below 8,000 points for the first time in 5 years. I still hold to the fact that this is a great time to get into the stock market if one has never done so before, especially if you are under the age of 50. By the way - please visit our sponsor, GreatBlackSpeakers.com if you are interested in hiring a top notch African American speaker or seeking to become one.

Take care!
Boyce Watkins
http://www.blogger.com/www.boycewatkins.com
Click here to join our money advice list.

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If you listen carefully to the words of Treasury Secretary Henry “Hank” Paulson and Ben “Big Ben” Bernanke (chairman of the Federal Reserve) you might notice a trend in their language. The word “confidence” is used a lot when they speak. Many of their monetary proposals are not necessarily valuable for their financial power, but also for their psychological power.

Some of you may wonder what confidence has to do with anything. After all, if you’re broke, confidence doesn’t exactly put money in your pocket. If you’re 100 pounds overweight, confidence won’t help you win the Olympic 100 meter dash. When you are flying on a crashing plane, confidence doesn’t keep the plane from slamming into the ground. But confidence is important to an economy, and one of the most significant drivers of economic growth. In fact, over confidence has driven US economic growth for the past 10 years. Here are some reasons that confidence matters in the minds of Hank and Big Ben:

1) Confident consumers spend money

If you think you might lose your job next year, are you going to max out your credit cards? I certainly hope not. If you are worried about being able to make ends meet, are you going to buy that big screen TV? Not unless you want your wife to leave you. So, even if it doesn’t hold any truth, the mere forecast of a weak economy is enough to make many Americans hold off on consumer spending, one of the great driving forces of the American financial system.

2) Confident companies invest money and hire workers

Investments involve risk. Your hunch may work out, and it may not. If you don’t believe the economy is getting better, you are not going to consider taking that risk. No one plans to go to the beach if the weather man says that it’s going to rain. When economic rain is in the forecast, companies pull out their umbrellas and hold off on new projects. This reduces the number of jobs in the economy, because nearly every job created in America is the result of someone making an investment.

3) Confident Americans do not take their money out of banks

In case you didn’t know, your bank does not have your money. Your money is part of a large base of financial capital that is loaned out to individuals and consumers seeking to get a good return on their investment. So, without investing, your bank would have no interest in paying you any interest at all. So if, say, 30% of all customers of the same bank decide to get their money out at the same time, the bank would have serious financial problems. It is a lack of confidence that could cause customers to “run” on their bank and take out their money.

4) Confident investors keep their money in the stock market

The stock market is a place where fortunes are made and lost. Some part of that fortune is psychological, given that no asset can have a value which exceeds that which someone is willing to pay for it. When investors lose confidence, they take their money out of the stock market, and reductions in demand for stocks lead to massive paper losses in the market. Additionally, most Americans are “momentum traders”, meaning that when the market goes up, they tend to buy more, and when it goes down, they tend to sell. History shows that it is actually the opposite approach that tends to work best.

5) Confident banks make loans

Banks have to keep a certain portion of their funds on hand at all times to meet federal requirements. If they are fearful that their customers might come and demand their cash, they hold onto their capital to ensure that it is available. If they are afraid that their borrowing customers will not be able to repay loans due to a weak economy, they also hold back on issuing new loans. The truth is that when economic forecasts are grim, conservative bankers become even more fearful than the rest of us.

The bottom line of this article is that confidence matters. So, the next time you hear Ben Bernanke give a speech, you can be confident that he is going to use language that makes you feel more secure. Whether you choose to believe those words is up to you.

Dr. Boyce Watkins is a Finance Professor at Syracuse University. He does regular commentary in national media, including CNN, BET, ESPN and CBS. For more information, please visit http://www.blogger.com/www.boycewatkins.com. To join our money list, please click here.

Wednesday, November 19, 2008

Is Having Confidence In This Economy Possible - Dr. Boyce Watkins




by Dr. Boyce Watkins
http://www.boycewatkins.com/


If you listen carefully to the words of Treasury Secretary Henry “Hank” Paulson and Ben “Big Ben” Bernanke (chairman of the Federal Reserve) you might notice a trend in their language. The word “confidence” is used a lot when they speak. Many of their monetary proposals are not necessarily valuable for their financial power, but also for their psychological power.


Some of you may wonder what confidence has to do with anything. After all, if you’re broke, confidence doesn’t exactly put money in your pocket. If you’re 100 pounds overweight, confidence won’t help you win the Olympic 100 meter dash. When you are flying on a crashing plane, confidence doesn’t keep the plane from slamming into the ground. But confidence is important to an economy, and one of the most significant drivers of economic growth. In fact, over confidence has driven US economic growth for the past 10 years. Here are some reasons that confidence matters in the minds of Hank and Big Ben:


1) Confident consumers spend money
If you think you might lose your job next year, are you going to max out your credit cards? I certainly hope not. If you are worried about being able to make ends meet, are you going to buy that big screen TV? Not unless you want your wife to leave you. So, even if it doesn’t hold any truth, the mere forecast of a weak economy is enough to make many Americans hold off on consumer spending, one of the great driving forces of the American financial system.

2) Confident companies invest money and hire workers
Investments involve risk. Your hunch may work out, and it may not. If you don’t believe the economy is getting better, you are not going to consider taking that risk. No one plans to go to the beach if the weather man says that it’s going to rain. When economic rain is in the forecast, companies pull out their umbrellas and hold off on new projects. This reduces the number of jobs in the economy, because nearly every job created in America is the result of someone making an investment.

3) Confident Americans do not take their money out of banks
In case you didn’t know, your bank does not have your money. Your money is part of a large base of financial capital that is loaned out to individuals and consumers seeking to get a good return on their investment. So, without investing, your bank would have no interest in paying you any interest at all. So if, say, 30% of all customers of the same bank decide to get their money out at the same time, the bank would have serious financial problems. It is a lack of confidence that could cause customers to “run” on their bank and take out their money.

4) Confident investors keep their money in the stock market
The stock market is a place where fortunes are made and lost. Some part of that fortune is psychological, given that no asset can have a value which exceeds that which someone is willing to pay for it. When investors lose confidence, they take their money out of the stock market, and reductions in demand for stocks lead to massive paper losses in the market. Additionally, most Americans are “momentum traders”, meaning that when the market goes up, they tend to buy more, and when it goes down, they tend to sell. History shows that it is actually the opposite approach that tends to work best.

5) Confident banks make loans
Banks have to keep a certain portion of their funds on hand at all times to meet federal requirements. If they are fearful that their customers might come and demand their cash, they hold onto their capital to ensure that it is available. If they are afraid that their borrowing customers will not be able to repay loans due to a weak economy, they also hold back on issuing new loans. The truth is that when economic forecasts are grim, conservative bankers become even more fearful than the rest of us.

The bottom line of this article is that confidence matters. So, the next time you hear Ben Bernanke give a speech, you can be confident that he is going to use language that makes you feel more secure. Whether you choose to believe those words is up to you.

Dr. Boyce Watkins is a Finance Professor at Syracuse University and author of “Financial Lovemaking 101: Merging Assets with Your Partner in Ways that Feel Good”. For more information, please visit http://boycewatikns.com/

Monday, June 23, 2008

Couples and Money, Financially Fit Divorce?

by Dr. Boyce Watkins
www.BoyceWatkins.net

I just saw an article today on "How to Leave Your Husband". The article focuses on how women can have a financially fit divorce. I find it amazing that we have gotten to the point that these are the kinds of articles that appear on the front pages of major media outlets. This speaks well to the state of love in America.

The article also seems to imply that beyond the 50% of all Americans who end up in divorce, there are many others who would be divorced if only they could find a way to get it done efficiently. Since when did the bliss of love make us so unhappy?

When I wrote Financial Lovemaking 101, one of the objectives I had in this book was to teach couples how to be jointly responsible when it comes to money. The truth of the matter is that being financially smart and responsible also increases your ability to be financially independent. Therefore, one might conclude that if you end up as one of the millions of Americans who chooses divorce, you might be able to erase your mistake without destroying your bank account.

I once counseled a couple that was nearing retirement. The couple had modest resources, but the wife was quite determined. Over a period of 10 years, she worked overtime and saved her butt off to pay off the family's credit card debt. She also looked into retirement plans on her job, putting thousands into a 401k plan to prepare for the family's golden years. Her husband had other plans. Without his wife's knowledge, he maxed out all the credit cards to start a business. He then withdrew all of the family funds from the retirement plan. The business failed, and his wife was in tears. She wanted to leave her husband, but she was financially drained. What's worse is that staying with her spouse would not have made her any more financially secure.

The reality is that money and love are linked in ways that we never envisioned on that first date. A person's beauty, body shape, and quality of sex become secondary to how well they pay the mortgage and put food on the table. Then, when we find that the love is gone and we want to move on, money becomes the barrier between freedom and misery. Planning ahead financially can be the way to plan your escape route, if that is what you choose to do.

The irony of it all, however, is that being financially intelligent and responsible reduces one major source of conflict in your marriage. It also allows you to make a stronger contribution to the overall well-being of your family. Therefore, by being financially intelligent and independent, you are more likely to have a successful marriage. Kind of paradoxical, don't you think?

I don't judge those who get divorced, never get married or are trying to get divorced. I only say that whatever you do, make sure you do it right. Your love depends on it, and so does your LIFE.

Monday, June 2, 2008

The Fine Art of Financial Lovemaking: Love and Money Always Mix

by Dr. Boyce Watkins
www.Financiallovemaking.net

Some people think that love and money don't mix. They think that the mere discussion of money in the context of a romantic relationship is simply taboo. Not only do I disagree, but I think that it is literally insane to keep from discussing your financial situation with your partner. Financial security makes a major difference in all of our lives, and the idea of merging your life with another person who puts your financial security in risk should scare you to death.

As a finance professor, I would hear a long list of horror stories about love and money going wrong. Couples would tell me that they fight like hell over money. Women would tell me that their ex-husband spent all the family resources at the casino. Angry divorcees would complain about how their ex-spouse left them and took all their money. That is what led to my writing Financial Lovemaking 101: Merging Assets with Your Partner in Ways that Feel Good.

You can think of the Financial Lovemaking system as the “Kama Sutra of Money Management”. It teaches you the ins and outs of the financial lovemaking process, and how your financial choices can serve to stimulate and strengthen your relationship, rather than destroy it. Millions of couples are making financial love, and a lot of them are doing it the wrong way. Here are some tips on how you can avoid being one of the millions of people who find themselves with battered relationships due to bad financial choices.

Here is just a small list of ways that someone could ruin your life financially:

A partner with horrible credit could keep you from ever getting loan.

A partner with terrible spending habits can ruin a family’s financial security.

A partner with a substance abuse or other costly addiction could deplete a family’s assets.

A partner with unhealthy connections to deadbeat relatives, who always need money, may drain
your assets.

A partner that with an income that is too low due to a lack of education or poor professional choices could ruin you financially.

A partner may steal money from you or borrow it without your permission and use it for something frivolous (i.e. a bad business investment, gambling, etc.)

A partner who makes bad financial choices may get you into trouble with the IRS.

A partner who decides to separate from you may end up dragging you and your money through a long and costly legal battle.

Things you should know before you start the system:

The key to good financial lovemaking is oral – you must communicate with your partner

You must be prepared to be honest.......Honest about areas that need improvement.

The key to good financial lovemaking is rhythm.

It’s not a matter of someone being good or bad. It’s about whether or not they are compatible with you.

Do they complement you if you are seeking to be complemented? Do they contrast with you in ways that you know you need to be contrasted? Do they serve to strengthen your good habits or enable your bad ones?

Steps in the financial lovemaking system

1) Getting financially naked with your partner
2) Request documentation of credit reports, debt levels and income levels

The documentation must be recent, not delayed.

3) Taking and giving your partner an FIV test (The Financial Irresponsibility Virus)
Does your partner have a financial venereal disease?

4) Getting your body ready for financial lovemaking....How are you going to look when you are financially naked?

If you do not have a partner, how do you get ready for when you do?

How do you feel about your financial body in the first place?

5) Financial foreplay

This process can be fulfilling, rather than frightening and draining. Spend time getting your partner excited about making financial love. You may have to educate them about the process.

6) Financial fantasizing: Do you have any financial dreams and goals you want to share? Write them down together and tackle them together. Try to find mutually exciting fantasies.

7) Consider doing a 3-some: Get good advice – bring in an objective outsider who can facilitate your lovemaking process. Subscribe to magazines and websites that are going to enhance your financial lovemaking with one another.

8) Finding a rhythm: It’s not a matter of them being spenders or savers. The question is whether or not you can live with what you see. Does the person’s habits complement your own and allow you to reach goals more easily? Do you have a plan on how you are going to merge your money and manage it together? Is everyone involved, or are there silent partners? Remember – Silent partners don’t get to make financial love. Silent partners just get screwed.

9) Reaching your climax together: Are you on the mountain top alone? – Have both of you agreed that your financial goals work best for each of you, or is one of you taking the lead and running with it? Did both of you participate, or did one person do all the work? This can leave you feeling burned and bitter.

Good financial lovemaking is the couples guide to mixing money and love in the right way. Money is a part of love and how we manage our joint resources connects directly to how we learn to actually love one another. In fact, loving your mate is a verb, but I think you already know that.


Dr. Boyce Watkins is a Finance Professor at Syracuse University and author of Financial Lovemaking 101: Merging Assets with Your Partner in Ways that Feel Good.

Paying for Your Child to go to College: Using 529 Plans

by Dr. Boyce Watkins, Syracuse University

Worried about the high cost of college for your children? This concern is certainly legitimate. On average, the cost of a college education rises by twice the rate of inflation. However, the fear of a cost increase can be mitigated if parents and students are aware of the tools available to help them cover the expense.

The 529 prepaid tuition and savings plans are among the weapons parents and students can use to cover the cost of college tuition. The 529 plans, also known as “qualified tuition plans” are designed to encourage families to save for higher education. They provide incentives to save, and also allow for additional financial and tax benefits that can make the process easier for families who plan ahead. All 50 states sponsor at least one type of 529 plan, so there are options available for any citizen in any state.

Note that there is a difference between the 529 prepaid tuition plans and the 529 college savings plans. The 529 prepaid tuition plans allow parents and students to purchase credits for tuition at a chosen university and sometimes even room and board. The price of tuition, room and board is held fixed, with no inflationary changes for the duration of the investment (in other words, the cost of tuition doesn’t change for you like it does for everyone else). Most of the plans are sponsored by the state government and also have some kind of residency requirement. In exchange for meeting these requirements, the state government will provide a guarantee for the investment made in the 529 plan.

The 529 savings plans are similar to the prepaid tuition plans, with some mild variations. The plans allow an individual (usually the parent) to set up a plan for another individual (the student) with the goal of paying for the student’s educational expenses. The plans allow plenty of flexibility in choosing the beneficiary, and you can even choose yourself as the beneficiary. The funds are not guaranteed by the state or federal government and you are given an array of investment options for the funds you’ve deposited into your account.
The tax advantages of 529 plans are quite strong. While rules can vary by state, you are not typically required to pay state and federal taxes on earnings from the 529 plan. The only requirement is that any withdrawals from the plan are being used to pay qualified college expenses. Withdrawing the funds to pay for items not related to the cost of college attendance will lead to a 10% penalty in addition to any applicable federal and state income taxes.

Here is a mathematical example to help you understand the financial impact of avoiding taxation on investments in a 529 college savings plan. Assume Teresa invests $1,000 per year in her son’s 529 college savings plan from the time he is born until he is 18-years old. Also assume that her investment earns an annual rate of return of 8%, which is relatively easy to earn on a well-diversified stock portfolio (you can simply ask your investment company to give you a mutual fund that matches the risk and return of the rest of the stock market). She doesn’t engage in stock picking. She just puts her money in a simple mutual fund and leaves it alone.

How much will Teresa have contributed to the account over an 18 year period? $18,000. How much will she have available to pay her son’s tuition when he leaves for college? $37,450. That is more than double the amount she invested in the plan over the 18-year period. Not being taxed on the income gives Teresa an extra $5,000 (roughly speaking) to pay college tuition that she would not have had by investing without the tax benefits of the 529 plan.

One thing that Teresa must remember is the fact that the average tuition increase is 8% per year. So, this increase is going to match dollar-for-dollar the increase in Teresa’s investment portfolio. So, the truth is that she is going to have swim forward just to keep up with the current. This match in growth rates is what makes prepaid tuition plans roughly the same in attractiveness as prepaid savings plans. Had Teresa invested in a prepaid tuition plan (instead of a savings plan), she would have found herself paying tomorrow’s tuition at today’s prices. So, either way, she is going to pay tuition, but investing with tax benefits makes it easier.

My thoughts on the issue? Prepaid tuition plans are the safest bet, as long as you are sure that you don’t want to leave the state to attend college. While you are allowed out of the deal in most cases, there is a penalty for doing so. Savings plans are better for those who want to have a bit more flexibility in attendance options, as well as the chance to possibly outrun the cost of college tuition. Remember: Teresa earned 8% per year on her investment, but the average rate of return on the stock market has historically been around 12%. Therefore, an average portfolio over 18 years would have likely given her more than the cost of tuition.

The key is to remember that the greatest investment in this process is the one in your child. Your child’s greatest investment is the one in his/her educational future. Also, there are a litany of financial aid options available in addition to 529 savings plans. Money should not be a hurdle to building a great future.

Dr. Boyce Watkins is a Finance Professor at Syracuse University. He is also the author of “Everything You Ever Wanted to Know about College”, and “Financial Lovemaking 101: Merging Assets with Your Partner in Ways that Feel Good”.