collage of money, charts, student working and graduating

Buying Used Cars

One way to save money on a car purchase is to avoid buying brand new vehicles.  New car prices are inflated for various reasons including dealerships adding additional, often unnecessary services and the ability to finance the cost with debt.  As a result new cars often suffer from steep depreciation, a decrease in value, as soon as you drive them off the lot.  You may be familiar with this by the common phrases “upside down” or “under water”, referring to owing more on the car loan than the car is worth. Depreciation will continue throughout the life of the car, but it becomes more gradual with time, and the value becomes a reflection of how well the car has been maintained, overall condition, and its mileage. This makes buying a used car a good option for potentially saving money.

The benefit to purchasing a used car is that the depreciation can be accounted for, so you are more likely to get the car at a price closer to its real value. However, the trade-off with buying a used car is that there are fewer protections for consumers, making due diligence very important before closing a deal.

One major consumer protection lost is the ability to hold anyone responsible for a “lemon”.  Lemon cars have serious, warranty covered problems, which fail to be corrected after a reasonable number of repair attempts, or cause the loss of use for over 30 days.  If a car is a lemon, you may be able to get a refund or a replacement from the manufacturer.  This only applies to new cars; lemon laws do not apply to used cars.

Buying a used car that has serious defects requiring costly repairs, leaves you stuck with the bills and a potentially useless car.  It is in your best interest take steps to protect yourself before deciding to drive away with that new-to-you used car.  Below is a list of some things the Missouri Attorney General recommends before buying a used car:

  • Look at the car during daylight. Any damage, defects or other problems will be easier to spot.
  • Run a title search to learn more about the vehicle’s history.
    • This will show you if it’s been in accidents.
    • If there have been many different owners, it could be a sign of problems.
  • Test-drive it. Any seller should allow this.
    • Be sure to test out all of the features, switches, buttons, etc.
  • Have a mechanic (chosen by you, not the seller) put the car on a lift and inspect it.
    • You can also get an on board diagnostics (OBD) scan free from most car parts stores.  Helpful for finding out what’s causing that check engine light.
  • Get proof of inspections for safety and emissions if applicable. Missouri law requires a seller to take care of inspections before the sale. Exception: New vehicles are exempt from these inspections in the first two model years.

Buying a used car can be a great way to save money on the up-front cost of a car.  But, if you don’t take steps to make sure the car is in good working order, you may end up paying much more than you bargained for in repair charges.  For more information on the subjects covered in this financial tip, please see the Missouri Attorney General’s informational letter, “All About Autos, New Cars, Used Cars, and Repairs”, found at this link: https://www.ago.mo.gov/docs/default-source/publications/allaboutautos.pdf?sfvrsn=4

Teaching Children About Money

If you’ve spent much time on social media, you’re likely aware of the tendency for social media feeds to showcase users at their high points. For example, carefully constructed vacation selfies or clever captions highlighting expensive purchases (Ugh, I just want to bluetooth my iphone7 but I’m not techy enough to figure out BMW’s touchscreen!). Although some adults may be getting better at seeing through others’ (or curtailing their own) humblebrags, regular brags and all of their derivatives, children may still be socialized into thinking mindless consumerism is the norm, especially if their parents involve them in these behaviors.

What children might not realize is that parents are working long hours, or that they are stressed out paying for that consumerism. While the ability to buy on credit has made initial purchases easier, it doesn’t give children the whole picture. They may see big houses full of luxury items, but what they don’t understand is whether or not there’s money in retirement accounts.

The topic of money (other than showing that we have it) is often taboo and something many don’t talk about. But it can be framed as a fairly simple, logical concept, even for younger children. Although parents and children will make financial mistakes, it’s important to take advantage of intentional, teachable moments while children are young. Here’s three basic topics to be aware of.

Wants vs. Needs, Modified

Helping young children understand what is a need and what is a want by discussing the differences. Needs include food, shelter, utilities and clothing. You don’t want to buy your wants at the expense of your needs or of the future. Though easy to use, credit cards shift spending into the future, which can sometimes be a bad financial move.

To make money more concrete than swiping a credit card through a machine or waving a smartphone over a reader, make it a point to use cash once in awhile to demonstrate the value of the dollar.

For example, if a child has been given a dollar or two, let them physically hold it while shopping and talking about prices. Let him or her decide to use the money for a store’s product or opt to keep the cash for a later purchase. If you’re doing a monthly budget at home, involve children enough to understand that the work you’re doing on the computer now is connected to later swiping a card or uses a phone to purchase something.

Just make sure to keep the discussion developmentally appropriate- children shouldn’t be given too much information or worry about their family’s finances, just enough to understand that there’s intentionality behind spending money.

Opportunity Costs

Opportunity costs are the value of something that is lost because you have chosen an alternative course of action. Youngsters can begin to pick up on this as they age. In the cereal aisle of the grocery store (often designed to be extra eye-catching to young children), a parent or caregiver may say, “You can have one thing on the shelf. Pick one but give up the rest.” In a good way, this forces children to weigh their options.

As a child ages, parents can say, “Here’s $2 or here’s $5, but there’s no more.” On the other hand, if a parent gives in to a tantrum at the store, this can reinforce an immediate gratification mindset as well as teach that tantrums or pleading works. The reality, however, is that things cost money and there are tradeoffs.

Pick Your Battles

Taking children shopping can set up difficult situations, but can also get children used to the idea that “you don’t get something every time we go to the store.”

Conversely, times with children in stores become teachable moments. If they bring up the topic, it’s more effective than if the parent does. Rather than saying no, present a choice: You can have this or that, a tradeoff. Take your child’s questions and turn them into something more.

Overall, giving your children “a sense of agency,” a sense they have power and control in making financial decisions, is a positive.

Six Credit Myths

Hello! The Financial Tip of the Week is back just in time for the cool fall Missouri weather.

There have been some changes at the Personal Financial Planning department at the University of Missouri:

Dr. Robert Weagley, Associate Professor, retired last fall, but he had stayed as chair of the Personal Financial Planning department for one year. After many, many long years of serving the students of the university and the people of Missouri, he has moved on to other pursuits including visiting grandchildren. He can still be reached at his MU email, weagleyr@missouri.edu.

Dr. Michael Guillemette, Assistant Professor, will be moving on to Texas Tech University at the beginning of 2017. He taught many of the personal finance courses in the Personal Financial Planning Department and published much research during his tenure here at MU.

With these changes in personnel, MU has career opportunities!

Here is the link to apply for the Assistant Professor position: https://goo.gl/QozR4c

Here is the link to apply for the department chair position: https://goo.gl/ucew2M

Now, since this is a financial tip, we didn’t want to end it before actually providing a tip. So below, please find six myths about credit. See you next week!

Six Credit Myths

A credit score is a number based on your past credit history used by banks, lenders, landlords, employers and many others to try and predict your future reliability. Your credit score matters, but it’s not always clear what hurts or helps your score. Here are six common myths about credit scores and the related truth.

  1. Myth: Having no credit history is the same as good credit.
    FALSE! While having no credit history is better than having bad credit history, it’s not the same as having a solid track record managing credit. You have to use credit to influence your credit score, and it may be tough to establish credit without a credit history and an established relationship with a financial institution.
  2. Myth: You need to carry a balance in order to improve your credit score.
    FALSE! Carrying a balance from month to month does not improve your score, but it will cause you to pay interest. You can establish credit just as well by paying your charges off each billing cycle.
  3. Myth: Your income is used to calculate your credit score.
    FALSE! Your income is not listed on your credit report and isn’t used to calculate a credit score. However, a lender may ask for proof of income to verify that you can repay a loan.
  4. Myth: You need to pay to view your credit report.
    FALSE! AnnualCreditReport.com provides a free annual credit report from each of the three credit reporting agencies. The site even has it’s own jingle (just make sure you’re only visiting annualcreditreport.com and not falling for other similar catchy ads that later require you to pay for something).
  5. Myth: Paying off and closing an account can help improve your score.
    Partly FALSE! Paying down your debt can help your credit score, but actually closing the credit account can change your percentage of available credit (amount borrowed/total amount available to be borrowed). Lenders prefer to lend to individuals that are not using much of their credit, and they also like to see long credit histories.
  6. Myth: The amount of money you owe alone determines your credit score.
    FALSE! As mentioned in the previous example, lenders review how much of your total credit you have borrowed as a percentage of what you could borrow. This part of the credit score involves your “utilization ratio”, and lower is better. If you are using most of the credit available to you, then lenders may be wary of lending you more money. For example, let’s say you have a credit card with a limit of $1000 and you owe $900. If that same card had a credit limit of $2000 and you still owed the same $900, you’d have a lower ratio (which contributes to a higher credit score).

Doggone Expensive

I was sitting in my office thinking about what I could write as a financial tip of the week. It is spring. Many students are graduating and some are receiving graduation presents.  Some are presents that students buy for themselves.  Just yesterday, I visited with my friend’s daughter and three of her friends.  Between them, they had three dogs – two are puppies and the “old” one is turning a year old next month.  The dogs are great fun and the most recent acquisition is a Chesapeake Bay retriever puppy who will be trained to hunt for his owner. I truly understand this, as I purchased a golden retriever for myself, as a present for my successful matriculation form Mizzou 42 years ago.  Her name was Jessica and her photograph still adorns my office, as her love filled my heart during many a day.  She lived with me in Arkansas, Missouri, Nova Scotia, California, and New York, before returning to Missouri shortly before her untimely death.  To her credit, she not only swam in both the Atlantic and Pacific, but she also paddled in the Great Lakes, the Great Salt Lake, and many rivers while perched within my canoe. Truly, Jessica was loved by many who agreed that she should have been awarded a degree from Cornell, when I received mine, as she went to campus most days with me to her be adored by others. Moreover, she costs me a lot of money in care and attention and money was scarce while I was in school!  So, in case you’re thinking about getting a dog, consider what a doggone dog costs, before you make a commitment to join your life with that of your new best friend.

To begin, and shortly after the puppy has licked your face multiple times, there are initial costs.  If you are purchasing a pedigree dog, depending on the breed and local market, a dog can cost from $200 to close to $2,000.  (Don’t make fun of that high figure.  That is about what my son, the finance professor, and his wife spent on their dog, a Golden Doodle, during my son’s last year of graduate school!)

Other than acquisition costs, you may choose (or be required) to have the pet neutered.  This may cost you $200-$400. An initial medical exam will typically be $60-$80, a collar with a walking leash $25-$30, a training leash is another $15, a shipping/travel/sleeping crate will come in under $100, and the cost of signing up for a training class $150. (The training class is for you.  It keeps you disciplined to work with your dog so you can be proud of her when she is the star of the class.)  Taken together, the initial costs, at the low-end, is $750 upward to over $2,500.  The following site estimates the first year costs of owning a dog: http://www.thesimpledollar.com/pet-cost-calculator/ .

Next, the dog will live with you for twelve to fifteen years!  These years cost money, in addition to the one-time costs. Annual costs for food for a dog will range from $120 – $360 per year, depending on the size of the dog and the quality of the diet. Annual medical exams, vaccinations, and emergency visits to the veterinarian will run from $200 to some unbelievably large number if your dog is an extreme health risk and requires surgery or overnight stays in the doggie hospital.  Of course, you will want your dog to look good and to have some dog toys.  If you only buy 3 tennis balls a month from Amazon, they will cost you $45 for the year and monthly grooming could run to $200 for the year.  Doggy treats, depending on your preferred doggy diet, will cost at least $5 per month or $60 a year.  If you chose to purchase pet insurance that will be over $200 per year and, of course, we’ll throw in another $50 per year to cover miscellaneous expenses like repairing your friend’s door when your lovelorn puppy decides to scratch her way back to your welcoming arms when you leave her there, while you go to the movie. Of course, you can’t go on vacation without taking the dog.  If you do, you will need from $40 to $100 per day in kennel expenses.  In addition, many landlords will not allow pets.  If they do, they might require a second month’s rent as a dog damage deposit. (It always took me a while longer to find a place to live that allowed pets.)

Given the above and one week of kennel, a dog has an annual cost of from $755 to $1,465, perhaps much more. If we assume you will own the dog for 12 years, when you decide to buy that dog, you’ve made an immediate financial commitment of from $8,300 (for the economy model) to over $16,000 (for a dog tinged in gold with health issues).  Of course, at the end of the dog’s life, there may be heroic measures you wish to purchase to keep your friend at your side.  You may even consider going into debt. I recommend that you consider what actions you will take, should this occur, before it occurs! This eventuality puts additional pressure on your emergency fund.

Finally, I wouldn’t give anything in exchange for those years I had with Jessica. Many called her my first wife, as she went many places with me and always helped me meet people and make friends. A dog adds much to life, but a dog is a huge commitment and a large expense.  The total commitment to training, caring, and loving a pet is a big decision.  It is a decision to spend thousands of dollars which cannot be spent on tickets to events, cars, houses, books, food, or anything else you might want. Yet, coming home to that wagging tail and those “so happy to see you” eyes can be worth every penny it costs. Just make sure that those wags fit in with your vision of financial success, before you visit the breeder or your local Humane Society.

One Way to Get Student Loan Forgiven

Recently a Financial Tip reader shared some great topics she was interested in having covered in future tips, and this is one of those topics- breaking down student loan forgiveness programs (note, we always appreciate feedback from readers! Please feel free to send ideas for future tips or topics you want more information on to financialsuccess@missouri.edu).

For many students this time of year marks graduation, and for many of them graduation prompts thinking about student loans. Those graduating high school may be anticipating the disbursements of their first student loans in a few months to cover new tuition expenses. Alternatively, those graduating college may be expecting the end of student loan deferment and the beginning of repayment in the coming months. No matter where one is on the continuum of student loan debt, it is always important to think about the long term realities of student loans, including repayment options. This tip will outline one possible option for students who may go into careers in public service jobs.

Public Service Loan Forgiveness Program

What’s a public service job?

The definition of what is considered a public service job is fairly broad. Any employment with a federal, state, or local government agency, entity, or organization or a non-profit organization that has been designated as tax-exempt by the Internal Revenue Service (IRS) under Section 501(c)(3) of the Internal Revenue Code (IRC). The type or nature of employment with the organization does not matter for PSLF purposes. Additionally, the type of services that these public service organizations provide does not matter for PSLF purposes. Some private, non-profit employers that are not tax exempt (i.e., 501(c)(3) status) can even be considered qualifying employment for the PSLF program, provided the employer provides certain public services (e.g., public health, safety, etc).

What types of loans are eligible?

Loans are either:

  • Federal- Made and/or regulated by the government, including Direct Loans, Federal Family Education Loans (FFEL), and Federal Perkins Loans; or
  • Private- Made by a bank/private lender and generally carry higher fees and interest rates than federal loans. For more information about avoiding deceptive private loans, visit http://missourifamilies.org/features/financearticles/cfe63.htm)

Private loans are not eligible for loan forgiveness programs, and not all federal loans are either. For a list of debt cancellation/forgiveness programs and which types of federal loan types are eligible for each program, visit https://studentaid.ed.gov/sa/sites/default/files/public-service-loan-forgiveness-common-questions.pdf. Regarding the Public Service Loan Forgiveness Program (PSLF), only direct loans are eligible (i.e., loans you received under the William D. Ford Federal Direct Loan Program). Federal Family Education loans and Perkins loans are not eligible, however, they do become eligible if you consolidate them into a direct consolidation loan.

What do I have to do to get my debt forgiven?

  • Work full-time: At least an annual average of 30 hours per week. For purposes of the full-time requirement, your qualifying employment at a not-for-profit organization does not include time spent participating in religious instruction, worship services, or any form of proselytizing. If you are a teacher, or other employee of a public service organization, under contract for at least eight out of 12 months, you meet the full-time standard if you work an average of at least 30 hours per week during the contractual period and receive credit by your employer for a full year’s worth of employment. If you have multiple eligible jobs, you must work a combined average of at least 30 hours per week.
  • Make 120 on time, full, monthly loan payments. Basically, you have to put in 10 years of full, on time payments before you can be eligible for the remainder of your loans to be forgiven. On-time payments are those that are received by your Direct Loan servicer no later than 15 days after the scheduled payment due date. Full payments are payments on your Direct Loan in an amount that equals or exceeds the amount you are required to pay each month under your Direct Loan repayment schedule.
  • Be paying back your loan through a qualifying repayment plan. You cannot necessarily choose a repayment plan that will greatly lengthen your repayment period so that you are eligible for most of your loans to be forgiven. For example, 30-year extended repayment plans are not eligible for the PSLF program. However, income-driven repayment (IDR) plans are eligible. Check out https://studentaid.ed.gov/sa/repay-loans/understand/plans to see the full list of repayment plans, which includes the four main IDR options (also, you may want to check out this recent Financial Tip for info on a newly released IDR planhttp://ofsmizzou.org/a-new-student-loan-repaye-ment-plan/). The 10-year Standard Repayment Plan is also eligible, however, after meeting the PSLF requirement of 120 consecutive payments, there would be no debt left to forgive!
  • Stay on top of your record keeping. When using an IDR plan, borrowers will need to re-certify their income annually. Your lender will communicate with you on when and how to do this, but missing this communication or not completing the re-certification process can take you out of an IDR plan and default you into the standard 10-year plan (which doesn’t help you maximize the PLSF program). Also, you will need to file a form certifying your public service employment (https://studentaid.ed.gov/sa/sites/default/files/public-service-employment-certification-form.pdf). Each time that form is received, your past payments will show up as qualifying for the PSLF program. So, be sure to file the form as soon as you have a public service job, if you change public service jobs, or anytime your lender or the PSLF program prompts you to re-certify your employment eligibility.

Deciding whether or not the PSLF program is right for you depends on many factors, mainly how much student loan debt you have and how much money you will make during the first 10 years of your public service career. The more debt you have and the less you will make, the more attractive an option the PSLF may be for you (as payments tied to your income will be less when you make less money). Alternatively, if you make a high income you may very well have paid off, or be close to paying off, your student loans by the time you get to the end of the 10 year requirement under the PSLF.

There are many repayment options for student loans. A good first step would be to visit the Federal Student Aid repayment calculator at https://studentloans.gov/myDirectLoan/mobile/repayment/repaymentEstimator.action to see what all your options may be. You can also look at past financial tips (achieved at http://mufinancialtip.blogspot.com/, especially the September and October 2011 tips).

Again, whether you are just starting to take out loans or have been paying them back for years, it is always good to consider your repayment options and realities. Even though the PSLF program may help some (and does encourage public service jobs), you will still end up paying back a substantial amount of the debt you take out, so never take out more loans than you need.