Sushi Money

If your community is typical in America, most of the public school districts in the local area struggle to make ends meet and ensure there are enough financial resources to pay for textbooks, salaries and maintenance. Every few years taxpayers groan at the mention of bond issues or a tax proposal to increase revenue necessary to help our kids acheive the best education possible. Many people differ that this is an efficient way to fund public education at the local level, but it is the model for most districts across the nation.

Yet knowing how difficult it is for many school districts to simply pay for expenses every year, I was amazed to read how several large financial institutions have snookered many Pennsylvania school districts into signing derivative interest rate contracts with exhorbitant hidden fees.

“The Pennsylvania deals show that school districts routinely lose when making derivative deals. They pay fees to banks that are as much as five times higher than typical rates and overpay advisers by as much as 10-fold.”

“In 15 Pennsylvania school districts, officials entered into interest-rate-swap deals worth $28 million since 2003, according to data compiled by Bloomberg. Of that dollar amount, the schools took in $15 million, and banks and advisers got the rest as fees, Bloomberg data show”

I think this has the propensity to turn into a scandal of national proportions, and something the public may be shocked to learn has happened frequently throughout the years.

How can community school district officials explain losing millions of taxpayers dollars with these investments? And how can the government inadvertently sanction these practices by letting them continue? I’m not a big government kind of guy, but in this area I think we need much stronger oversight. From the Bloomberg article above, it sounds like the SEC agrees, but this is not in their regulatory focus.

Christopher Cox, chairman of the U.S. Securities and Exchange Commission, says he’s concerned that municipalities are taking on more risk than in the past when they raised money primarily from bond sales.

“It’s a serious issue, not only in Pennsylvania but across the country,” says Cox, 55, who has headed the SEC since 2005. “That is what we have seen repeatedly. More often than not, the municipalities aren’t configured to have financial sophisticates in charge of these offerings — and the result is that the firms are the only ones who know what’s going on.”

While the SEC doesn’t regulate derivatives, it has authority to oversee how banks conduct transactions. SEC Chairman Cox says all financial firms should tell clients what their fees are before signing any deals. “Brokers and advisers should disclose their compensation and conflicts of interest to their customers, and to the extent that they are regulated by the SEC, they must,” he says.

“Cox also says school district officials have a responsibility to the public and to bond investors to ensure their advisers are actually independent and acting in the best interests of taxpayers. “To the extent that municipalities are participating in transactions they are not qualified for, there is an obligation to get good independent advice,” he says.

Let’s hope more school districts, and other public financial entities, think twice before entering into these types of deals in the future. And if any district is thinking of some type of investment that brings in money for the district, then taxpayers should be aware of the risks and costs as well.

     While reading the Sunday Paper today I found a few good ideas for manging money in college.  One article highlighted ways for saving money while emphasizing that many college-bound students (and parents) underestimate the spending  money necessary while attending college.  Rather than be surprised by these expenses, why not take a proactive approach and plan ahead?  Here are a few other money management tips to consider:

• Consider a “semester budget” and make a list of anticipated monthly expenses.  Try to estimate the expenses you’ll need, both fixed expenses like monthly utilities or residence hall costs, cell-phone bills, and discretionary expenses for items such as food, recreation and transportation.  You may not get it right the first month or two, but having a place to start is far better than simply spending money as you go along.   If you do it right and foster a disciplined approach, you’ll have money when you need it later for things you didn’t anticipate.
• Avoid spending money just because your friends are.  There are going to be tons of situations where you have the choice to spend money… or not.  Keep that in mind- it’s your choice.  You don’t need to spend money in many situations, but you may find you want to.  The choices we make in many present situations limit the choices we have at later times.  Try to anticipate how you will spend your money so you have more choices for things you really want to do later on.
• Keep track of spending.  Try to check and monitor your spending regularly, whether you do on-line banking, or have a pre-set spending limit on a debit card.  If you find yourself running out of money frequently, take a look back to see where your spending habits are taking place.  If you have a computer… try using Quicken or Microsoft Money.  It can help you form a picture of your spending, and provide a framework for your accounts that makes managing your money much simpler.
• Choose the free or low-cost option for recreation and entertainment.  There are many opportunities for entertainment, recreation and keeping busy on college campuses.  Everything from top-notch fitness facilities to a symphony performance or a play can be found on campus.  Join a club or other student organization that interests you.  So often we can be overwhelmed by everything going on that we just hang out in our ”own space” without really getting involved.  But getting involved is an integral aspect of the university experience… as long as you don’t forget why you’re there in the first place!
• Try to moderate the cell-phone use if you’re not on an “unlimited plan.”  Minutes can really sneak up on you, so try to use e-mail or IM for keeping in touch with friends.  Remember that calling home later at night is much cheaper, or even free depending on your cell phone plan.  If you don’t have a plan, consider a pre-paid service like Tracphone.
• Try not to eat out so often.  That’s a biggie for watching the money leave your pocket in a hurry.  If you’ve already paid for the food on a campus meal plan, try to use it for most of your meals.  
• Minimize credit card use.  Another biggie… if you have a credit card, the bill can be run up in a hurry to a point where keeping up with payments may become unmanageable.  If you don’t have a credit card, you’re going to be inundated with opportunities to get one.  Remember that you are building your credit rating. It may not seem like a big deal right now, but a few years down the road you may need a good credit rating to get that car you really want, or even the job you’ve applied for.  Many employers are now routinely screening credit records of potential employees… what we do in college can follow us for years if we’re not careful.
• Consider a part-time job to help with expenses and generate spending money.  Better yet, to generate savings!  There are many part-time job opportunities, and every college or university has a career or employment office to help you find one.  Sometimes, a part-time job can be the best balance to completing your studies and offer rewarding opportunities for professional growth and development.  You’ll meet people, learn more about the work force and gain valuable experience by getting that part-time job, and increase your bank account as well!

  There are a lot more strategies to save money while in college of course.  How do you manage it?  For too many students, just paying for college is the real challenge, and student loans are a must.  But try to keep the goal in mind… namely to complete your education and begin your career.  Money is a tool… use it wisely and it will work for you.  Peace of mind financially can make studying a lot easier along the way.  There will be many times when you can’t stand a professor or a living situation you find yourself dealing with.  But try to pace yourself… I had a professor once who gave me some great advice.  He said to remember that no matter where we are in life, we’re only there for a short while… in a few years we’ll be somwhere else doing something far different.  Try not to get too wrapped up in the present by making decisions you’ll later regret.  Just do your best, keep the big picture in mind and everything will fall into place along the way.

     How are money market and savings yields in your local region?  It’s not hard to see that most smaller and regional banks offer very poor (low) rates to consumers on their money market and savings accounts as compared to what you can find nationally.  And many of those same local banks require much higher minium deposits than their national counterparts.  Sure, they are trying to make money too… but why do consumers settle for 1.00% or 2.0% yields on local money market or savings accounts when they can get closer to, or better than 5.0 % nationally through companies such as UFB Direct, GMAC Bank, HSBC Direct, CitiBank Direct, ING Direct, etc?   Sometimes I wonder if convenience prevents us from achieving financial success in many areas of our lives.  Sure, many people have a local branch where they feel more comfortable ”keeping” their money… which obviously means where they “keep” their paperwork and relationships.  But we can do so much better!  Let’s use an example of Mr. Johnny and Mrs. Debbie:

     Mr. Johnny has $10,000 in  “Low-Rate Bank’s” money market account, earning 1.5%, compounded monthly.  He likes the bank… it’s local, and they have nice people.  He always knows who to talk to, and feels secure “keeping” his money there.  After one year, Johnny should have earned $151 for a total of $10,151 and change. Hypothetically, Johnny leaves his money in that account for many years- let’s say 10 years.  Money market account interest rates fluctuate greatly over time, but let’s assume Johnny earns an average of that 1.5% at “Low-Rate Bank” over the course of 10 years.   His total earnings over that time would be $1,617  for a grand total of $11,167. 

     Now Mrs. Debbie also has $10,000, but she keeps her money in “High-Rate Bank’s” money market account, earning 5.0%, compounded monthly.  Debbie’s bank is an internet bank based somewhere she doesn’t even know, but it is a reputable, large institution that provides the same security for her money as the local banks.  Debbie also has a local branch bank account, but at 1.5% she thinks their money market or savings rates are too low, so she keeps most of her funds at High-Rate Bank.  After one year, Debbie checks her earnings at High-Rate Bank  and sees that she earned $511 for a total of $10,511!  She’s happy with that, and knows she earned $360 more than her local bank would have paid her at 1.5%.  Debbie decides to leave her money in that account over time.  She knows interest rates on her account may not always be at 5.0%, and in fact Debbie achieves an average of 3.7% on her money over 10 years.  If she kept her original $10,000 there, her total earnings over that time would be $4,469,  for a grand total of $14,469 in her money market account.  That’s $3300 more than she could have had at 1.5% with her local bank!  Wow… all because she kept her money somewhere that earned more interest!

     Just an illustration… realistically, if Johnny or Debbie had $10,000 to set aside for 10 years or more, and didn’t need the money, they should have been in the market invested in a low-cost, diversified stock or index mutual fund.  The S&P 500 Index alone has achieved better than a 7% average total return over the last 10 years. So that same $10,000 invested in a good low-cost fund such as the Vanguard 500 Index Fund (VFINX), with a 7% average total return would have doubled your money!  Unless you wanted to withdraw it at about the 5 year point… in which case it’s value would have been pretty close to the original $10,000.  Which brings up a key point:  If you need the money in the next 3-5 years, then you need a more conservative investment vehicle, maybe even a savings or money market account.  You’re taking on a lot of risk if you put money you need for something (down payment on a home, emergency funds, etc) in the market for a short period of time.  But for long-term investment returns, few things can compete with the returns found in the stock market.

     One other point… interest you earn from taxable savings and money market accounts may be taxed at the highest rates for your tax bracket as ordinary income… but since 2001 dividends and capital gains (from stocks and mutual funds) are taxed much more favorably, at least for now. Keeping your money in a low-cost mutual fund for long periods of time can save you money on taxes as well!

     A little here, a little there… earning higher rates, compounding over time.  Whatever we can do to save more of our money, earn more interest and dividends on our money, and keep more of our money is a good thing. The saving and keeping part is the challenge… but interest and compounding works its magic by itself, we just have to find a higher magic number!

Do you read the newspaper?  The Sunday paper?  I think I’ll start a new weekly tradition on the blog… and call it “Sunday Paper”.  I was paging through the weekend paper this morning, chuckling at myself (for digital shame!) that we’ve actually subscribed to our metro newspaper!  I wouldn’t have thought about it, but we came across a booth at a major league baseball game the other day offering a special deal.  Not just any deal mind you, but an amazing deal.  Previously we only bought a newspaper once a week… on Sundays.  I like the business and sports sections, and the rest of the family likes the lifestyle, funnies and coupons.  We would pick up a Sunday paper at the grocery store for about $1.50 a week… averaging $6.00 a month.  So here’s this booth at the game… they offer us a year of the newspaper, everyday and weekends, for the grand total of $107!  And delivered to our house!  Wow… my mind quickly does the math… that comes to about .30 cents a day, for a year!   That’s not much more than the $78 we would spend in a year buying the paper just on Sundays. Now I don’t read the paper everyday… just don’t find the time and I’d rather read the news on the internet.  The paper always seems behind with news.  But the deal offered more as an incentive… they threw in a nice big sports umbrella and a good-sized baseball teddy bear.  How could we resist?  Our son would love the teddy bear.  But we had one more rationalization to seal the deal.  We have a nice garden in the yard every year, and to help with landscaping, we put down mulch.  But if you throw mulch right on everything, soon the weeds grow right up through it.  What helps? Newspapers!  We’re always looking for extra newspapers to lay on the ground to prevent weeds, and put the mulch on top.  Since the newspaper ink is soy-based, it doesn’t hurt anything, and decomposes quite well over time.  It really keeps the weeds down for a season.  So that was it… we are now getting the paper everyday at a pretty good price.  It may only last a year, but maybe we can renegotiate next year for a similar deal.  Do they offer deals like this where you live? Seems like a losing proposition for the newspaper company.  We’ll see how it goes!