Don’t Speed – The Financial Speedometer

In 1995, Congress repealed the Emergency Highway Energy Conservation Act. Prior to repeal, the law established a national speed limit of 55 mph and later 65 mph. Repeal of the law allowed the individual states to establish their own speed limits as they had done prior to passing the Federal law. In my home state of Illinois, the speed limit of most interstate highways is 65 miles per hour. Historically, state speed limits had widely varying limits. For example, prior to passing the law Rhode Island and New York for example limited speed to 50 mph. Nevada and Montana had no posted speed limit on rural roads. After the 1995 repeal of the Law, Montana again reverted to having no posted speed limit in daylight hours.

The speed limit has been established for two major reasons energy usage and the likelihood of having an accident. One of the greatest critiques of speed limit laws is that there is a low net reduction on fatalities and energy usage because of the huge amount of non-compliance. I know many folks who have no trouble driving 85 mph on interstates. The lure of time savings is much more attractive to them then the risk of accidents or increased fuel economy. Some folks will reduce their speed during periods where they believe police are more likely to be monitoring roads. Their fear of tickets pressures them to take things more slowly. Each individual constantly makes decisions about what is the right amount of risk they are prepared to accept relative to the perceived gain the expect to receive. We know, for example, that the likelihood of our receiving a ticket is much greater if we choose to drive 90 mph rather than 68 mph, when the speed limit is 65 mph. From my perspective, it is much more a question of self-governance than any outside influence that encourages people to drive more slowly.

There has always been a debate about how speed limits may have reduced roadway fatalities and conserved energy, but I believe there are lessons that can be drawn from applying an analogy to our financial lives.

When it comes to money, many of us speed all the time. I’d like to introduce to you the concept of the financial speedometer (or more accurately spend-o-meter). Each month each of us earns and spends a certain amount of money. When we divide one by the other, we realize what proportion of our earnings we spend every month. If we make $4,000 (net income) and we spend $2,400, we are spending 60% of our income and we’re driving 60. $3,000 during a month, we are spending 75% of our earnings and we are driving 75. While if the speed limit is 65 mph you can reasonably expect not to receive a ticket when you are driving 60 mph, sooner or later you can expect to receive a ticket if you are always driving 75 mph, if for no other reason than the officer who pulls you over has had a bad day.

The key learning here is every time you are financially speeding, you are running the risk of being ticketed. Moreover, since tickets cost money, it is much more likely that you will need to speed more just to keep up. If you are spending 80 percent of what you earn and, for example, your car breaks down, it is likely you will feel you have no other choice than to place the repair bill on your credit card. Now you have to pay $50 more a month than you had been previously. You now must drive 84 just to keep up. If you never have an occasion to either increase your income or lower your expenses, it will only be a matter of time until you are exceeding 100 mph. At this point, you are driving out of control and you are destined for a catastrophe.

However, if you are driving at 60 mph and your car breaks down, after repairs you might have to drive 64 mph for a few months, but you have the capacity to pay down the bill faster and can quickly return to driving at a leisurely 60 mph. Better yet, you may have the money in the bank needed to pay cash and never be forced to change your speed at all.

Another consideration is that of energy usage, if you are driving above 80 mph in your car, you must concentrate a great deal more, you have less margin for error, you must be more attentive to hazards ahead, the movement of other cars relative to your own, your adrenaline is pumping at a much greater rate. When you finally reach your destination, you are exhausted because the physical toll of driving at this speed is so much greater.

Drawing the analogy out, if you are financially driving your life greater than 80 mph, you are taking a huge physical toll on yourself. You experience high stress, greater sleeplessness, more moodiness and your personal relationships suffer. This is made all the worse because it is an experience from which you cannot escape. There is no short term destination to reach. You deal with this stress as long as you are moving that fast, which for many people is a period of years. It leads to physical ailments, emotional trauma and depression and various forms of self destructive behavior. The human body and mind is not designed to accept such physical exertion over the long term. We see similar struggles from soldiers returning from a war zone.

Finally, storms are going to happen. When the storms come, it is suicidal to continue to drive at the same speeds you were driving in clear weather. When heavy fog, hail and blizzards hit you while driving, you need to be able to reduce speed. You will experience at least 1 major financial obstacle in 10 year period in addition to several small to moderate obstacles. You will be laid off, have a major accident or illness. The car will need to be replaced. An investment will go bad. When you have a setback, life cares little if you cannot afford to reduce your speed. You will crash.

As a general rule, it has been my experience that for most families, who have regular income and expenses, a self-imposed family financial speed limit of 65, that is to spend no more than 65 percent of what you earn is a great value to achieve in the long term. We call this the “Green Zone”. This will allow you keep you financial stress low, provide you great resources to plan for your future success and still allow you to have some enjoyment in your life.

The zone on the financial speedometer between 65 and 80 is referred to as the “Yellow Zone”. For short periods of time, if your speed moves between 65 and 80, though you have some increased risk, you can utilize this zone to both adjust to surprises and to take reasonable risks to get ahead. When you have a financial setback, if you remain in the yellow zone, though you may have to tighten the belt a little, it is likely that you can work yourself out of the problem relatively quickly. In addition, if you start in the green zone and you wish to take a risk, such as start a part time business and are in need of start-up capital, you have some capacity to use some of your earnings to subsidize the business until it gets off the ground. The Yellow Zone is a tool which allows you to manage risk over short periods. Again, if you are driving 75 mph, eventually you will be pulled over. In general, you should never be in the Yellow Zone more than a year, 6 months is even better.

The Red Zone is located on the financial speedometer between 80 mph and 100 mph. If you find yourself consistently spending more than 80 percent of your earnings in a month, you are probably steadily increasing your speed and you one step away from financial tragedy. Above 80, you no longer have the capacity to work yourself out of the hole you’ve dug for yourself, or even if you do, the amount you have extra to clean up your mess is so small that you cannot gain traction. Every small setback adds additional burdens to your financial engine. Doctors appointments, replacing clothing, even basic cable television become luxuries. Every dollar you spend for these items usually is placed on credit which steadily pushes you closer to 100 mph. Financial stress skyrockets. You begin to jeopardize basic needs. You personally undergo psychological and physiological changes that reap havoc on your personal and interpersonal health. It is an existence that tears you apart and one from which is not easily escaped. If you find yourself in the Red Zone, you must urgently get yourself out of it. If you do not dramatically cut your expenses or increase your income, you are on the headed for financial death.

Once you reach 100 mph, every dollar you earn is being spent on supporting yourself and your family. At this point, you financial life resembles much more of that of a serf in Feudal Europe than a member of a free society. I call the zone above 100 mph the Black Zone as is symbolizes financial death. If you have any savings, every day you live costs you some of it. Every day you work, you do so not for yourself, but for others. It is made all the worse by the fact that you have absolutely no capacity with which to change your situation. If you ever find yourself in this situation, you are financially flat-lined. It is possible that if you work quickly, deliberately and are willing to make huge sacrifices you can be brought back from the brink, but the odds are against you. Those who are brought back suffer scars that are with you for years. Those who die, suffer scars that stay with you forever-scars that stay on your soul and your heart and on any mortgage application you will ever file. Bankruptcy is financial death; and in case you aren’t aware, death is something to be avoided.

To summarize here are the recommended ranges for financial speeds on your financial speedometer. As a caveat, if you are in a household with variable income, such as self employed individuals, I highly recommend a lower range of speeds for the Green and Yellow Zones.

Zone Expense to Income Ratio

Regular Income Irregular Income

Green Zone 0 to 65 0 to 55

Yellow Zone 65 to 80 55 to 70

Red Zone 80 to 100 70 to 100

Black Zone 100+ 100+

Tuition Revenue in Higher Education – What’s the Real Cost of Offering Degree Completion Programs?

The landscape of higher education has changed significantly in the past thirty years. In the past, tuition revenue was driven primarily by traditional academic programs. A student would graduate from high school and move on to a college or university. They would attend class full-time for four years in order to earn their bachelor’s degree. Students registered for courses twice a year, were billed and paid their tuition. Anticipated revenue from these students was relatively stable across their four years of attendance. This stable source of revenue made budgeting and planning for the future an easily manageable process. Higher education, for the most part, was an uncomplicated operation financially, kept in business by student tuition revenues and a system of full-time faculty teaching a set number of courses each semester. A steady group of full-time faculty throughout the academic year anticipated payroll expenses another easy number to calculate on a college or university’s financial statements. Administration of these full-time, traditional students was straightforward too. Twice a year you would register students, bill them and collect tuition revenue.

Beginning in the late 1980’s and early 1990’s this traditional landscape in higher education became more competitive and complex. The traditional demographic of high schools students looking to attend college as full-time students over the course of four years began to shrink. Enter nontraditional degree programs, known today as Degree Completion Programs, which were designed to recruit students outside of the customary demographic of recent high school graduates looking to attend college full-time. These programs were intended to expand the shrinking revenues associated with the traditional student market and they have worked – to a certain extent. On the surface, the tuition revenue from these programs may look like a simple addition to revenue income on the financial statements of a college or university; however, there are some hidden costs that have to be taken into account.

The pool of nontraditional students participating in Degree Completion programs and the revenue that these students generate is more difficult to anticipate and plan for over the course of an academic year. In many cases, a cohort of students will begin their Degree Completion program as soon as a certain number of students have been admitted to that cohort. These programs are in most cases are running on a schedule that is completely outside of the traditional semester system.

One result of the addition of these types of Degree Completion programs to a college or university’s menu of course offerings is that faculty personnel costs are more difficult to budget. For the most part, these Degree Completion programs are offered as evening courses to accommodate the large number of students who work full-time during the day. In order to teach these courses, institutions have had to look outside their institution to find new employees, adjunct faculty, who are willing to work in the evenings in order teach nontraditional students. Although adjunct faculty are valuable and flexible assets that can be added as needed when cohorts of students are admitted and classes begin, they add uncertainty to the forecasting of institutional expenses over the course of the academic year.

Another difficulty with accounting for Degree Completion programs is the added personnel costs that are associated with administering these programs. Since they run on a schedule that is outside of the traditional semester system; new procedures have to be put in place to adequately provide essential services to these students. Typically, staff must be added in the registrar and billing offices to handle the additional administrative work that goes along with registering, billing and grading Degree Completion students outside the twice yearly cycle of traditional academic programs. In many cases, there is also extra effort expended by other employees for which the costs are not easily calculated. For example, when staff in the Institutional Research office are attempting to submit the required government reporting for their students, extra time is needed to accurately calculate full-time equivalencies (FTE’s), retention and other key indicators for the student population. These are payroll expenses that are hard to account for and detect on the financial statements of colleges and universities.

Degree Completion programs and other nontraditional academic program offerings are here to stay and provide real value to students. However, the tuition revenue that these types of programs add to a college or university’s financial statements have to be analyzed in a different manner than the addition of revenue from traditional students. There are hidden costs that need to be accounted for when you look at the bottom line.

How to Find Money for Your College Education

Going to college can be a costly venture with tuition, room & board, meal plans, books, the list goes on and on. It’s enough to stress out anyone about to take this important step. But furthering your education doesn’t have to be a stressor on your body or your bank account. Here are a few of the ways you can find money for college:

Scholarships: Scholarships are the most common way to get money for college but you might be surprised at how many of them are out there and how you can qualify. Fastweb.com is an internet database that allows you to search thousands of scholarships offered for everything from making good grades to making a good peanut butter sandwich. You can also search other websites like Scholarships.com or the Federal Student Aid website at Studentaid.ed.gov. You can also inquire about scholarship opportunities with corporations and civic organizations in your hometown or the town where you will be attending college. It will require a lot of time and research, but in the end, the amount of money you could score for college is well worth the investment!

Grants: Grants are based on financial need and can range from hundreds to thousands of dollars. They typically are awarded either by the federal government, the state government or the institution where you will be attending. They are based on specific guidelines and are given out on a first-come, first-serve basis so it is important to file your student aid application early. You can do this by filling out the Free Application for Federal Student Aid or FAFSA at ed.gov or at your school’s financial aid office. You may also have to fill out a financial aid form specific to your institution.

Work Study: Work study allows students to earn money toward their college expenses by working at their school or for select private employers in the school’s community. The positions are part-time and are guaranteed to pay at least minimum wage, although they can vary in responsibilities. Some examples of typical work-study positions would be tutoring, working in office administration, assisting in the school’s library or the student center. Work study positions are also given out based on financial need and can be applied for by filling out the FAFSA.

Student Loans: Although loans don’t qualify as “free money” since they have to be paid back, they are still a huge help to students looking for a way to pay for their education. Loans are available from the federal government by filling out the FAFSA, as well as from private institutions such as Sallie Mae or your banking institution. When selecting where to apply for a student loan, pay attention to the Annual Percentage Rate (APR), the guidelines for repayment, benefits and how available they are for customer service and questions.

There are plenty of places you can find money for your education; you just have to know where to look!

Financial Education Beyond a Piggy Bank

Has our financial education stopped after the piggy bank years or did we even have one when we were growing up?

This question reminds and brings me back to the days when I was working part-time as a financial planner for middle income families. The typical household will have:

– 2 nice vehicles park outside or in the garage
– 1 big screen TV
– 1 set of beautiful couches set in front of the big screen TV

As we go through the financial analysis, most are in great financial stress; credit card debt, type of mortgages that no ordinary person understands, no life insurance, no savings set aside for children’s education let alone emergency funds. Emergency funds come in the form of a plastic, called credit card. For many they have more than one plastic and they can’t keep up with the balance of each of them. It is real, my friends.

Our families do not even have $80 per month for life insurance and we do not have $100 to set aside for our children’s education. Yet, we are driving all these beautiful brand new vehicles and sitting in front of a big $2,000 TV. LIMRA reported in August 2010, that 44% Americans below 40 with children under 18, do not have life insurance. According to a report by Palm Beach Post, July 2, 2010, the average credit card debt is NOW $15,519 in America. If it is at 18% interest and the family pays $300 a month towards the debt, it will take over 93 months to pay that off.

Do we have a problem with our financial education?

What are we passing on to the next generation?

Are we so caught up with being entertained by all the latest gadgets, video games, cell phone games, computer games…
….being numbed out and did not see the crisis that we and our children are facing in the near future?

Back to the question: Do we know how to manage money beyond the piggy bank? Do we learn how to earn, save, invest and spend?

We learnt a great lesson about money from one of our mentors. So we are using their concepts to teach our children about money. The easy concept of 70-10-10-10. That is:

10% charity
10% investment
10% savings/debt payment/fun money
70% spending

It is true that when we walk in the mall or at the local high schools, we see young people with trendy clothing, latest cell phones, nice book bags, driving big trucks or nice cars. Parents willingly pay for the car and latest gadgets for the phones and video games. Our children are so used to this lifestyle. But, upon leaving home for college or a job, the only way to keep up with the lifestyle that they had was to either take up many hours of work or to go into credit card debt.

Parents and young adults, is it just me or do you see the danger that we are facing? I want to raise awareness and help you and I to raise up a generation that are smart with their money, who knows how to earn, save, invest and spend. See the sequence!

Let’s be money smart for the generations we are raising!