As featured in The Wall Street Journal, Money Magazine, and more!

June 2011


College tuition costs for undergraduates increase beyond the rate of inflation. Particularly in a recession-focused economy, it’s popular to question whether college degrees are worth spending the money. It’s hard to escape bias in opinions; successful college graduates see their circle of friends who have college degrees and are succeeding at a level higher than those they know without degrees, and those who have been successful without completing college often see their peers exceeding the success of those who hold a degree.

That’s why I like reading about studies. While they are often not perfectly executed, they do eliminate at least this one personal bias. The Brookings Institute just released a study that shows that a college degree is not only worth the investment, it’s a much better investment than even the stock market.

In today’s tough labor market, a college degree dramatically boosts the odds of finding a job and making more money. On average, the benefits of a four-year college degree are equivalent to an investment that returns 15.2 percent per year. This is more than double the average return to stock market investments since 1950, and more than five times the returns to corporate bonds, gold, long-term government bonds, or home ownership. From any investment perspective, college is a great deal.

The study even considers the cost of giving up four years of salary, considering a student who goes to college gets a later start on earning income. The total cost for a four-year degree within the study is about $102,000. The study finds that the increased earnings over a lifetime are worth the $102,000 in up-front costs that those who go to work right after high school avoid. According to the study’s calculations, a two-year Associate’s Degree provides an even better return than a four-year Bachelor’s Degree, but only due to significantly lower up-front costs, not an increased lifetime income.

Another calculation analyzed by the study is the net present value of a lifetime of earnings (age 22 through 64) for works whose highest education levels are some high school, a high school diploma, an Associate’s Degree, and a Bachelor’s Degree. The NPV for the earnings proceed in that order, less than $300,000, less than $500,000, more than $600,000, and more than $1,000,000 (as measured visually from the chart provided — the report from the Brookings Institute did not include a link to the full study).

The study doesn’t seem to take into account the cost of debt, however. Most students do not pay tuition up front. In addition to the costs of missing out on four years of salary, students who go into debt can take ten years to pay off student loan bills, racking up thousands of dollars in interest payments.

While it is possible for those without college degrees to succeed, the cost of a college degree is, on average, worthwhile. The relationship between the degree is not necessary based on cause and effect; the same external factors that drive one to complete a college degree might be the same factors that drive that person to earn a higher income throughout their lifetime. College degrees help in this regard, particularly in a low-employment environment when employers can afford to be selective about new hires. A Bachelor’s Degree, regardless of the field of study, is the ground floor. To compete in a tough job market, make sure you’ve invested in your education and walked away with the parchment to show for your work.

When I worked with a touring drum and bugle corps, the touring caravan included two semi-trailer trucks, one box truck, four buses, and three vans. One of the truck drivers mentioned to me that he saw no purpose in a college education — he could make a good living, $50,000 a year, as a truck driver. That was more than my salary as a program manager in a non-profit organization at the time. Without a college education, a truck driver may earn $50,000, but that won’t grow much over the course of his lifetime unless he goes into management — and the college degrees are favored for management jobs, even in the trucking industry. With a college degree, salaries may start less than $50,000, but on average, the lifetime potential income is much greater.

The study compares the $102,000 investment in college with the same cash investment in other sectors, like stocks, and shows that the return or a college degree, through higher income, is better than the other investments. It’s not a likely scenario because of the logistics of paying for a college degree — most families do not choose between paying for college and investing in lump sums. Nevertheless, the comparison is interesting because the expense of paying for college can be perceived as an investment in someone’s future.

Has your college degree proven to be worthwhile in your experience? Or if you do not have a college degree, are you successfully competing with those who have?

Brookings Institute via Fortune Magazine

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One of the most popular suggestions for people trying to cure themselves from overspending with credit cards is to freeze credit cards in a block of ice. It’s a cute approach to removing the temptation to overspend. It’s a fun concept to consider. You can make an event out of the freezing process. Invite your wife or husband and your kids to help. Partly fill a bowl with water, freeze the bowl for a few hours, drop in your credit cards and continue filling the bowl with water, place the bowl back in the freezer, and check back in a few hours. The result is a block of ice with credit cards securely frozen in the middle.

The block of ice prevents you from carrying the credit cards in your wallet or bag. You won’t have them with you, so, in theory, you won’t be able to give in to the temptation to spend. If you do need them in an emergency, you can go home, break the block of ice, and present a wet card. The frozen cards aren’t completely inaccessible, they’re just inconvenient.

It’s a nice gimmick, but this just isn’t a good long-term solution in reality.

  • Overspending can be an addiction. Certain activities are addictive because they trigger the brain’s pleasure centers. For individuals whose spending habits have become so bad they need to continue buying things to feel good, a block of ice is not going to get in the way of having a good time. Not everyone’s spending habit approaches the level of addiction, though. For many, a block of ice will work as a deterrent, but it won’t last forever.
  • Freezing a credit card doesn’t solve the desire to spend on credit. Removing the ability to fulfill a negative desire, such as spending to the point where income can’t cover the purchases on a long-term basis, doesn’t address the root cause. Anyone who is a compulsive credit spender needs to address the issue directly. Sometimes, spenders need to seek professional help. Again, not every over-spender’s behavior is damaging enough to warrant outside assistance.
  • The block of ice can’t always be the first step. When people hear the advice to freeze their credit cards, they may find the idea innovative and clever, and jump to this approach before carefully considering their financial situation. If income is a problem, quitting credit cards cold turkey isn’t going to work. You can’t tell the parents of a family of several children to stop buying food if they have no income. Some situations call for a gradual reduction of credit card spending.

What do you think? Is the concept of literally freezing your credit cards a gimmick without proven effectiveness or is it a great idea for resisting the temptation to spend?

Photo: Jökull Sólberg Auðunsson

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Prenuptial agreements are on the rise, as more individuals are concerned about losing their assets in the wake of the recession. Prenups, when handled correctly, can protect an individual’s assets in the increasingly likely event of divorce. Without a prenup explicitly defining how assets should be divvied up, if a divorce occurs, any income earned during the marriage, including any money added to retirement accounts, could be split between the two individuals. Depending on the state, this split could be 50% to each or it could be some other method considered fair by the courts.

Regular earned income isn’t the only type of wealth that could be affected. Any increase of the value of an asset, whether stock investments or a business, that occurred during the marriage could be considered marital property and divided by a court. For example, even if one spouse purchased a house before marriage, the increase in the value of the house during the marriage will likely be distributed partially to the spouse who doesn’t own the house. A business that’s started years before the marriage but thrives during the marriage, even if the non-owner spouse is not involved with the business, could be split in the event of a divorce.

For someone who has worked hard his or her entire life to build a solid financial future, a divorce is one of the most financially devastating events one can endure. We buy insurance to protect ourselves against loss of health, we diversify investments and choose an appropriate asset allocation to help shield us from financial downturns. A prenup is just another way of protecting assets.

Although we don’t feel edgy about discussing insurance with someone we plan to spend the rest of our lives with, prenups are one of the most taboo topics within the broader taboo topic of money. No one wants to seem greedy. The point of marriage is to make two lives one, not to continue living two independent lives within the same household. A prenup would indicate that divorce is an option down the road, and many couples would not be interested in facing that possibility at a time, before marriage, when the only thought should be living a happy life together.

Classically, couples who opt for prenups usually have one or two individuals who fall into these descriptions:

  • Wealthy, either by inheritance or by effort. When one individual has a much higher level of wealth than the other, the wealthier spouse often wants to protect his or her money in the event of a divorce.
  • Unequal income. Like an unequal net worth, unequal income or income potential can tilt the balance of power within a marriage. A prenup can either protect the balance or protect the tilt.
  • A business owner. For someone who owns a business, a divorce could mean the end of that business. Selling the business is an option for liquidating enough cash to pay for the expenses of breaking up a marriage. If the business is location-based and the owner prefers to move, this, too, could have a devastating affect on the business.

State laws govern prenuptial agreements, and each state falls into one of two categories. In 41 states, divorce without a prenuptial agreement falls under equitable distribution, where the court considers the individual case, circumstances, and finances to determine the most fair division of assets. In the remaining nine states, courts divide all marital property. Prenups can override these state defaults.

Prenuptial agreements are often in the news when celebrity couples move towards marriage. Most recently, Kim Kardashian, who earns about $12 million a year according to Forbes and has a home in Beverly Hills, has signed a prenup with fiancé Kris Humphries, who earns only $3.2 million a year. Kim will be protected through the prenup; in the event of a divorce, she will keep everything she owns now in addition to any income she earns during the marriage.

For engaged couples whose wealth and income are already evenly split, there is still a case for a prenuptial agreement. The court system can be complicated and expensive. A couple that doesn’t discuss financial issues could have a harder time during a divorce. A prenup can smooth some of these difficulties and help both partners leave the marriage with most of their own wealth intact. While prenups have traditionally been instruments of the wealthy, the recession has affected many people’s approach to protecting their assets. More middle-class couples are considering prenups now.

Would you or did you consider a prenuptial agreement before getting married?

Photo: david_shankbone

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For the last six months, potential credit card customers have been courted by companies offering bigger bonuses and better offers. Different customers look for different things when choosing to sign up for a new credit card, whether it’s a 0% introductory interest rate, a lucrative rewards program, or thousands of miles to use on a favorite airline. By far, the most enticing aspect of a credit card offer is pure cash back. There’s no gift cards to worry about, no confusing conversion tables, just a pure cash bonus. The Chase Freedom® credit card is one of the best of these offers available today.

All new cardholders of the Chase Freedom® have the potential to earn $100 statement credit after spending $500 during the first three months of card ownership. After qualifying, it takes six to eight weeks for the points to be added to the cardholders account.

Above the $100 cash back bonus is a competitive rewards program. All Chase Freedom® cardmembers will earn 5% cash back on up to $1,500 spent in bonus rotating categories throughout the year and 1% cash back on all other purchases. Here is the 2013 fourth quarter bonus cash back schedule for the 5% cash back program:

  • October through December – Amazon.com and select department stores

These cash back rewards never expire. Unfortunately, the 5% cash back is capped at only $75 each quarter, reducing the attractiveness of the rewards programs for customers who routinely use rewards credit cards for all expenses. After the 5% opportunity is exhausted, the standard 1% cash back rate applies.

The purchase APR on the Chase Freedom® Visa is 13.99% to 22.99% variable, and any cardholder’s rate depends on his/her credit history. There is no annual fee for using this credit card.

You will not receive this offer among the solicitations you receive in the mail. Chase has not provided an expiration date for this offer, but these tend to end quickly. If the $100 cash back bonus would be helpful to you and you’re looking for a card to earn 5% cash back in select categories on a regular basis, consider signing up for the Chase Freedom® credit card.

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Get Rich By Thinking About Being Rich

by Luke Landes

In her new book, Delusions of Gender: How Our Minds, Society, and Neurosexism Create Difference, the author, Cordelia Fine cites studies that show how our lives are affected directly by the labels we give ourselves. I’m not interested in the strictly gender-related aspects of this discussion, at least not for Consumerism Commentary, but I am ... Continue reading this article…

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Unplug Your Cable Box to Save Money

by Luke Landes
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Set-top boxes continuously run in homes who have them. Cable boxes, satellite boxes, and digital video recorders (DVRs) are designed to constantly remain on, even while no one in the household is home. According to the National Resources Defense Council, these devices cost $3 billion to run every year, and $2 billion of that cost ... Continue reading this article…

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Updated: Hackers Steal Credit Card Numbers From 360,000 Citi Customers

by Luke Landes

The latest big business security breach affected Citigroup and about 1 percent of the company’s credit card customers. Hackers were able to access the customer database, finding customers’ names, credit card numbers, and email addresses free for the taking. The hackers were not able to gain access to other personal information, like Social Security numbers, card ... Continue reading this article…

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$300,000 on Credit Cards and an 815 FICO Score

by Luke Landes
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The choice to use credit cards tends to be more personal than financial. While credit card use can be the gateway to a lifetime buried in debt, it doesn’t have to be. Most people are Type A credit card users. Type A credit card users see credit cards as a tool for buying anything for ... Continue reading this article…

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Podcast 114: Summer Cooling Tips, Steve Rosenstock, EEI

by Luke Landes

Today on the Consumerism Commentary Podcast, Tom Dziubek speaks with Steve Rosenstock of the Edison Electric Institute (EEI) about tips to cool your house in the summer. Steve discusses many ways to cool your house down, including giving your air conditioning unit a checkup, using a programmable thermostat and several cheap and easy methods which ... Continue reading this article…

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Reader Question: Invest $100,000 or Pay Off Mortgage

by Luke Landes

To someone with debt, receiving an inheritance can feel like winning the lottery. Occasionally, an heir doesn’t realize money will be coming her way and hasn’t planned for the windfall or thought about her options. Even those who do plan often realize that contemplating options for managing a potential windfall is quite different from making ... Continue reading this article…

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The True Cost of Rent to Own

by Luke Landes
Refrigerator

The debate pitting the concept of buying versus the concept of renting will never end. With a primary home, there may be a plethora of financial calculators and endless real estate analysts to help you make the decision. There are financial considerations as well as non-financial considerations, and pundits on either side who swear their ... Continue reading this article…

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Last Year: Return of the Millionaires

by Luke Landes
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According to the latest World Wealth Report, a study designed by Merrill Lynch Wealth Management, last year was a good year for high net-worth individuals (HNWIs), people with more than $1 million in investable assets. After a few years of lagging due to the global recession, the number of millionaires worldwide has climbed past the ... Continue reading this article…

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Citi Dividend Platinum Select Card $100 Cashback Bonus

by Luke Landes

Credit card issuers seem to be getting more competitive with offers lately, and Citi has recently decided to increase their latest bonus. For a limited time only, the Citi® Dividend Platinum Select® Card will be offering $100 cash back after making $500 during the first three months of card ownership. I’ll review the Citi® Dividend ... Continue reading this article…

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Reverse Mortgages

by Luke Landes
Old house

Homeowners over the age of 62 have a unique option available for accessing cash. Reverse mortgages can help seniors access home equity without having to make monthly payments to repay a loan. When a qualifying homeowner has paid off a mortgage in full, or is very close to paying off a mortgage, a reverse mortgage ... Continue reading this article…

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J.P. Morgan Misled Investors, Will Pay $153.6 Million

by Luke Landes

As the market was collapsing, J.P. Morgan Securities continue to convince clients to invest in a complicated investment made up of credit-default swaps, even though the underlying investments were selected by a hedge fund, Magnetar Capital LLC, that would benefit from seeing the investment fail. Allegedly, J.P. Morgan was knowingly selling an investment designed to ... Continue reading this article…

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Full-Year Budgeting for Teachers

by Luke Landes

The school year within the United States public education system lasts about ten months, so some teachers face an interesting budgeting issue that most American workers do not. The first issue is handling a below-average paycheck. Compensation for public school teachers varies wildly depending on years of experience and location, but for the most part ... Continue reading this article…

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Move Where Cost of Living Is Low

by Luke Landes

When living on a budget, there are circumstances where it might make sense to move to a location that makes living more affordable. Living in Manhattan, for example, can be a struggle for anyone earning under six figures of income each year. It’s possible, of course, but other areas of the country offer better housing ... Continue reading this article…

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Podcast 113: The Money Couple, Scott & Bethany Palmer

by Luke Landes

Today’s guests on the Consumerism Commentary Podcast are Scott and Bethany Palmer, also known as The Money Couple. The Money Couple talks about many topics in their book, First Comes Love, Then Comes Money: A Couple’s Guide to Financial Communication such as financial infidelity, money personalities and how couples can better understand each others’ money ... Continue reading this article…

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Capital One Buys ING Direct, Now What?

by Luke Landes

ING Direct has been on sale for the past few years, and I’ve speculated on the rumors of possible buyers like Ally Bank and GE Capital Bank. The winning bidder has been announced. Capital One has purchased ING Direct for $9 billion. Capital One is a financial institution that is historically known as a credit ... Continue reading this article…

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Don’t Live Within Your Means

by Luke Landes

For as long as I’ve been reading about smart money management, “live within your means” has been the underlying mantra that, when uttered repeatedly and internalized, will result in a much more fulfilling life overall. By living below your means, you are sure to come out the end of each month with a net worth ... Continue reading this article…

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