Financial Literacy

To Merge, or Not to Merge

Several years ago, my then-girlfriend (now wife of eleven years!) and I called our respective parents to give them the Big News: No, we weren’t engaged. We were taking a big step and opening joint checking and savings accounts! While they were happy for us, it wasn’t quite the Big News they were hoping for. Regardless of our parents’ feelings, I believe merging our finances was an extremely important step to building a healthy relationship. So, whether you’re newly married or contemplating moving in with your significant other, read on for my thoughts on the subject of merging finances.
           
All couples bring different financial strengths and weaknesses to their relationship. Most couples I meet with did not learn personal financial skills in school – which is unfortunate and something I’d like to change. Personal financial skills, habits, and beliefs (or lack thereof) were usually taught or modeled by family members. As you can imagine, these differences often cause stress in a relationship.

In addition to bringing their individual financial strengths and weaknesses to the table, it’s not unusual for one individual to take on most of the financial responsibilities, such as paying bills. This is great for the individual that doesn’t like dealing with finances. However, I believe imbalances such as this cause unneeded stress and can make it more difficult for couples to achieve their short- and long-term goals.
           
So, how do you reduce financial stress and have a better shot at achieving joint goals? Here are some tips:

  1. Share all financial information: This means assets AND liabilities. For example, it’s important for both parties to know how much student loan or credit card debt the other has. Once you know how much debt there is, if any, you can come up with a plan to pay it off.
  2. Establish joint bank accounts: At a minimum, I recommend opening a joint checking and savings (AKA the emergency fund) accounts. Other accounts, such as house or travel funds, can be opened later.
  3. Share your short- and long-term goals with each other: Take some time to discuss what each you want to achieve. My wife and I set goals when we first moved in together. We no update them at least once a year.
  4. Get a joint credit card: You’ve been building up your personal credit, right? Now it’s time to have a shared card. Make sure both of you review the transactions on the monthly statement.
  5. Agree upon a spending threshold: Come to an agreement about how much either of you can spend without checking in with your significant other. For example, you could agree that buying anything over $200 requires a conversation.
  6. Allow yourselves some “fun money”: Think of this as an allowance. You each get to set aside some money that can be used for whatever you want – no questions asked. Do you want to buy something more expensive? Save some or all of your monthly allowance until you have enough for it.

I understand couples may be wary of merging finances because it can mean giving up some financial freedom. From personal experience, at home and in my financial planning practice, couples that merge finances have a stronger relationship and are much more likely to achieve their goals.

Listening / Reading / Watching

Here's what's got my attention this week:

  • Hillbilly Elegy: A Memoir of a Family and a Culture in Crisis by J.D. Vance. I'm about two hours into this book and really enjoying it. Summary from the publisher: Hillbilly Elegy is a passionate and personal analysis of a culture in crisis - that of white working-class Americans. The decline of this group, a demographic of our country that has been slowly disintegrating over 40 years, has been reported on with growing frequency and alarm but has never before been written about as searingly from the inside. J. D. Vance tells the true story of what a social, regional, and class decline feels like when you were born with it hung around your neck.

Fundamental Analysis vs. Technical Analysis: Fight!

The Rebel Alliance vs. the Galactic Empire, Less Filling vs. Tastes Great, Batman vs. Superman, Cain vs. Abel, and Seinfeld vs. Newman.

These are among the greatest matchups in history. Allow me to add one more to the mix:

Fundamental Analysis vs. Technical Analysis

I know this matchup may not be as exciting as the ones listed above, but it is fascinating. At least to me. And really, it's all about me.

Both methods can be used to analyze financial markets and investors have been debating the pros and cons of each for decades. Before I tell you which method I prefer, let's explore each in turn...using references from Star Trek.

Fundamental Analysis: The Method for Logical Vulcans

If this was the Star Trek universe, investors using fundamental analysis would be from the planet Vulcan. For the uninitiated, this means investors who use logic and reason with zero emotion to analyze financial markets and companies. Here are examples of some metrics used:

  • Macro and microeconomics
  • Growth rates
  • Risk levels
  • Earnings per share (EPS)
  • Price to earnings (P/E) ratio
  • Dividends paid

In other words, fundamental analysis involves using quantifiable metrics to better understand financial markets and companies.

Technical Analysis: The Method for Irrational Humans

If fundamental analysis is the method of choice for cold, emotionless Vulcans, then technical analysis is perfect for irrational humans. Investors who use technical analysis are often known as "chartists" because they use charts to determine when to buy and sell in financial markets. Specifically, chartists make use of past trading activity and price to determine future prices in financial markets and companies.

Which Method Do I Prefer?

It may be obvious by my choice of wording, logical versus irrational, that I favor fundamental analysis. I'm sure I drive my wife crazy with my logical, rational take on life and investing. Still, we make a good team. Yin and yang. But I digress.

The following quote, which you may have heard at one time or another, sums up my rationale for choosing fundamental over technical analysis:

Past performance does not necessarily predict future results.

I cannot fathom why anyone would base investment decisions on past trading activity and price.

But Wait, There's More!

First, I have an intern. His name is Zach Snyder* and he's studying econ at my alma mater, the University of Maryland at College Park. Fear the turtle! Zach is seriously considering a career as a financial planner, so he'll be working with me over the next several months.

Second, Zach will be writing posts for my blog, www.frugalplanner.com. His first post, titled "Gen Y Got Off to a Bad Start, but it's Not Too Late to Get Back on Track" was published this week. Please take a few minutes and check it out.

*Thankfully, Zach is not the Zach Snyder responsible for directing Man of Steel or Batman vs Superman: Dawn of Justice.

Listening / Reading / Watching

Here's what's got my attention this week:

CPI: DOA or A-OK?

Personal finance blogger Financial Samurai noticed the traditional CPI-based approach to determining inflation may not be accurate.

"See this latest price change chart for various consumer goods and services. Unless you plan not to go to college, not have kids, not get sick, not eat, and not live under a roof, you are feeling inflation at work. At least we can buy all the TVs, software, and toys we want!"

What Is The Consumer Price Index (CPI)?

The CPI is calculated by the Bureau of Labor Statistics and is the weighted average of prices in a basket of consumer goods and services, such as food & beverages, housing, education, and medical care. Think of the CPI as a measure of the cost of living. It's a number that's incredibly complicated to calculate. Hundreds of federal employees have to go to stores all over the country - every month! - and price thousands of different things.

The Federal Reserve Board, Congress, and the president monitor changes in the CPI to determine whether the US economy is going through a period of inflation or deflation. Armed with this information they can formulate fiscal and monetary policies to aid the economy. The Federal Reserve's goal is to maintain a 2% rate of inflation and that goal has been achieved with some consistency since the mid-90s.

Pardon Me While I Put On A Tinfoil Hat

Run a Google search and you'll find plenty of people questioning the accuracy of the CPI and inflation. That's because certain variables in the calculation have seen dramatic increases in price over time. Check out the graph above and you'll see what I mean. Consumer goods and services such as textbooks, college tuition, childcare, and medical care have seen significant price increases since the mid-90s. While we know which goods and services are price-checked to determine the CPI, the weightings of those goods and services is a secret. There's a reason for the secrecy: People could probably make some serious money if they could figure out the CPI before the numbers are released.

Would the government underreport or manipulate the CPI? I can think of at least two reasons why they might:

  1. The desire for social and economic stability. Obviously, this is important. Keeping the economy running smoothly ensures stock markets perform well, unemployment remains low, and prices for good and services are held at reasonable levels.
  2. Low CPI = Low(er) government spending. The higher the CPI, the more the government has to spend on income payments to, among other things, Social Security beneficiaries and food stamp recipients.

While the CPI may be manipulated to some degree, I honestly don't believe there's a nefarious group working to control society. I'll leave the conspiracy theories to the writers of entertaining TV shows like Mr. Robot.

Okay, tinfoil hat removed.

The Takeaways

I'll break this down into three important points:

  1. Consumers need to remember that inflation estimates from the government may not be entirely accurate. Anyone who regularly pays for food, housing, medical care, or childcare knows this because prices on these items have outpaced the Fed's target inflation rate.
  2. Even with higher-than-stated inflation, you have control over what and where you consume goods and services. Let's use food as an example. Everyone needs to eat, so there's no way to avoid higher prices for food. However, we can choose where we buy food. Buying groceries from Whole Foods will almost certainly cost more than shopping at Giant or Safeway.
  3. Financial planners should review the inflation assumptions used when developing plans for their clients. The planning tools I've worked with have always provided the option of using either a default inflation assumption or one set by the user. My fellow planners: Be sure to check your settings!

Would You Like To Know More?

NPR's Planet Money Episode 222: The Price of Lettuce in Brooklynprovides a great lesson on the CPI and how it's calculated. The segment is 14 minutes and 27 seconds long.

Listening / Reading / Watching

Here's what's got my attention this week:

  • Framed: A Mystery in Six Parts by Christopher Goffard of the L.A. Times. A PTA mom and afterschool volunteer. A power couple, both lawyers. Accusations of verbal and physical abuse to a child. Drugs found in a car, most likely planted by the lawyers. This is a fascinating story about a petty fight that gets out of control.
  • Paradigm Shifts, Parts 1 through 4 by Alex Danco of Social+Capital. This is a lengthy, but worthwhile read about how technology is changing our world. As a big fan of Tesla, I found part four especially interesting.

Your Credit Score Demystified

At one time or another most of us have heard how important a credit score is for our financial well-being. Unfortunately, how your credit score is calculated remains a mystery for many people. If you know your credit score, and it’s above 690, you’ll want to keep it that way. If you don’t know your credit score, or if it’s below 630, you’ll want to raise it. Either way, keep reading.

Credit Score Ranges

  • < 630: “Bad” credit
  • 630 – 689: “Average” credit
  • 690 – 719: “Good” credit
  • 720 – 850: “Excellent” credit

I’d like to note that having “bad” credit does not make anyone a bad person. It’s simply a number that our financial markets rely upon as a measure of risk. This system has its advantages and disadvantages – more than enough for me to write another post.

Components Of Your Score

Finding Your Score

The first step in managing your score is finding out what it is and keeping a close eye on it. There are many sites which offer this service but only a handful come at no cost.

  • Federal law entitles you to one free report every 12 months. Go to AnnualCreditReport.com to get yours.
  • CreditKarma.com is a free site that allows you to see your credit score, track your credit history, view all your credit cards, and attain credit education and management suggestions.

Taking Control Of Your Score

Once you know your score, it’s time to take control of your credit by setting up payment reminders and automating monthly payments. This is absolutely critical to helping you make payments on time. Remember, timely payments are the most heavily weighted component of your credit score.
 
In addition to making timely payments, here are three things you can do to boost your credit score:

  • Always use less than 1/3 of the available credit per card
  • Do not open multiple credit cards too quickly because your score will temporarily decrease
  • Do not close more than one account per year because closing an account decreases your total available credit, which lowers your credit score

All of the aforementioned tips will help raise your score, but that Visa you opened when you were 18 is probably your most valuable tool. Keeping old cards open and making timely payments will increase your credit score over time.

Listening / Reading / Watching

Here's what's got my attention this week:

  • Outliers: The Story of Success by Malcolm Gladwell. So far, this has been a great book that asks "what makes high-achievers different?"
  • I Always Loved You: A Novel by Robin Oliveira. This audiobook came highly recommended by a client. The story follows the relationship between artists Mary Cassatt and Edgar Degas.