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Naked With Cash is an ongoing series at Consumerism Commentary in which readers share their households’ finances with other readers. These participants benefit from the accountability that comes from tracking their finances publicly and the feedback of the four expert Certified Financial Planners (CFPs).

For more information, read this introduction.

This year, we have four participants who will share their financial reports, exposing the results of their financial choices. Each participant is paired with one of our Certified Financial Planners. The experts will provide insight and guidance that will help our participants take their finances to the next level by the end of 2014. Learn about this year’s participants and experts.

Brian and his wife have two children. They are a one-income family since Brian’s wife stays home. They pay off their credit cards each month, so their only debts are student loans and a mortgage. This month, the focus is on estate planning. (Read Brian’s update from last month.)

After reading Brian’s comments, you can see video commentary from Jeff Rose, CFP. Jeff Rose appears courtesy of Good Financial Cents and Life Insurance By Jeff.

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Naked With Cash is an ongoing series at Consumerism Commentary in which readers share their households’ finances with other readers. These participants benefit from the accountability that comes from tracking their finances publicly and the feedback of the four expert Certified Financial Planners (CFPs).

For more information, read this introduction.

This year, we have four participants who will share their financial reports, exposing the results of their financial choices. Each participant is paired with one of our Certified Financial Planners. The experts will provide insight and guidance that will help our participants take their finances to the next level by the end of 2014. Learn about this year’s participants and experts.

Jake and Allie are animal lovers who enjoy their pets and have no plans for children. Both are committed to early retirement. Jake and Allie are both interested in owning side businesses, even though they plan to use their nest egg for living expenses. The couple enjoys travel and make it a priority to take trips throughout the year. They believe that it makes sense to use part of their combined $140,000 income to enjoy life now. (Read their update from last month.)

After reading Jake and Allie’s comments, you can watch a Google Hangout they participated in with Financial Planner Neal Frankle. Neal Frankle appears courtesy of Wealth Pilgrim and MCMHA.org. This month’s Naked With Cash focus is on estate planning.

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As of today, the Dow Jones Industrial Average has erased all of its gains this year. We’re not quite in “market correction” territory, though. The S&P 500 is still up year-to-date, but it isn’t presenting as fantastic a return as was evident earlier in the year. We could be getting to the point where the market finds itself in the midst of a market correction.

I wouldn’t pretend to be able to predict the daily, weekly, monthly, or annual swings of the stock market, but there’s no reason to rule a correction out as a possibility. Investing professionals typically define a market correction as the point at which an index that measures broad market performance is down 20 percent from a high. The Dow would have to be below 14,000 for there to be a market correction (and that would be down 20 percent from high of 17,279.74). The Dow could theoretically get there.

And if something is a possibility, it’s good to plan for it in advance. Here on the east coast of the United States, residents are prone to hurricanes. The good thing about hurricanes, and where they differ from stock market corrections, is that there are warning signs. If you pay attention to the weather segment in the news, you should know when a hurricane is going to arrive.

Before the destructive weather arrives, you have time to go to the store and buy water and food, nail boards to your windows, or evacuate. There’s little excuse for waiting until the last minute in most cases.

There are claims that there are warning signs of a market correction well in advance of a stock market crash (if the correction happens to come with one). But these claims generally come in two different situations. The first consists of those claims by people who are always predicting a correction is nigh — a broken clock is correct twice a day. The second consists of “experts” who point out the signals after the fact but were suspiciously silent while the signals were supposedly present.

Because markets generally operate in cycles, corrections are bound to occur. We just don’t always know when. So it’s good to know what to do ahead of time so you’re not searching for information in a moment of panic. If you just begin your planning during a moment of market panic, you’re going to find information from other people who are also affected by the panic.

And panic has never done any good for anybody, at least not with financial decision making. Panic supposedly developed as a biological response to physical threats and real danger. Panic causes adrenaline to pump through our bodies, increasing physical strength and agility in times of danger — like when you suddenly need to outrun a lion. Good luck with that. We haven’t adapted biologically to emergencies of a more cerebral nature, and that’s when panic fails us.

Before you think about taking any action with your finances during a correction, it’s good to know that corrections are not bad. The only reason the stock market is, in general, such a good place for investing for the long term is because of the corrections.

If the stock market offers an average of 8 percent returns over the course of any thirty-year period, it’s thanks to the occasional opportunities to invest during market corrections. If you want to get the market returns promised by financial planners, you have to be invested and continue to invest during times when newscasters and talking heads on television are concerned about the future of the economy.

Knowing what to do during a market correction starts long before any market correction. If, during the good times and bull markets, you create your plan to consistently invest a portion of your income, there’s no need to change course just because the stock market dips. In theory this makes sense, but in practice, there can be some complications.

Here is the one thing you need to do during a market correction.

Continue your investment plan.

One might say this isn’t an action to take, but a state of being to continue. Your ability to earn good returns in the long term relies on your willingness to continue your plan when the market is showing no sign of recovery. And this isn’t as easy as just tuning out the noise and leaving your automatic investment plan untouched.

Just think back to the recession of 2008. Those who invested through the recession came out on top, even with the Dow down for 2014 so far. But many people lost their jobs during the recession. Many couldn’t find work for a long time, and some are still out of work. Many graduates college between 2008 and today and haven’t had the opportunities others have had to continue — or even — start investing during a period of time in which investing in the overall stock market was crucial for receiving the best long term gains.

(Don’t worry if that’s you, and if you’re still young. There will be more opportunities in the coming decades.)

Some workers, perhaps because they were unable to maintain their jobs during the recession, retired early during this time frame. They retired early not necessarily because they were financially independent, but because the job market was unfavorable to men an women of a certain age looking for work. Some just gave up on the job hunt and learned to make do with a smaller nest egg than the one they were hoping for.

Even though just continuing your investing plan doesn’t sound like an action you take it’s absolutely necessary for coming out of a market correction with an advantage. It’s not even an advantage — it’s the baseline.

If you want those advertised market returns, don’t change your plans when the world of the stock market is crumbling.

So, when the world is shouting at you that the stock market is a terrible, horrible way to invest, how do you get through it and take advantage of a correction? The answers all require starting now, before the correction.

  • Save during the good times. The character of Joseph in Joseph and the Amazing Technicolor Dreamcoat (I also hear he was in a prominent figure in another book) seemed to have the plan down and could probably offer some lessons to today’s CEOs. Use your profitable times to set aside some of your surplus money for difficult times. Create that emergency fund that will help support you in the case of a break in your income.
  • Make your investments automatic. Don’t worry about individual stocks unless you have a small percentage of your portfolio you want to “play around” with. Choose a broad, low-cost index mutual fund like VTSMX. Start with your 401(k). Your employer will set that up for you if it hasn’t been done already. If you max out your tax-advantaged investment options, Vanguard will help you set up a recurring purchase of a fund every time you receive your paycheck’s direct deposit in your checking account.
  • Rebalance your investments automatically. Your 401(k) administrator may be able to set this up for you. And it’s only necessary if you’re investing in a basket of funds rather than one index fund. But if you do invest beyond your 401(k), you might need to rebalance manually. Twice a year is all that’s necessary. Don’t even worry about rebelancing during a market correction if you already have a schedule.
  • During the correction, tune out the noise. If the stock market is making headlines in non-financial news, everyone is going to be talking about their investments. And they’re going to be offering you advice, telling you what to do. Just ignore it. Turn off the television. Avoid social media. The less you’re exposed to panic, the less of a chance you’ll feel you need to change your plan.

How do you maintain your sanity during a stock market correction? Share your tips for investing here.

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We expect much from people we see on television. And it’s worse when we perceive someone to be smart and talented, even if they’re speaking beyond their area of expertise.

We think someone who is a great community leader or someone who is a great business leader will make a great President of the United States. We see the similarities in roles and responsibilities and believe that intelligence and talent in one area leads to success in another. The same bias happens in ourselves. Why else would Donald Trump, a successful business person who doesn’t appear to have interpersonal communication skills based on his public statements and television appearances (I don’t know him personally) believe that he could be a successful politician?

And success that takes the form of money often empowers one’s belief that their ideas on any topic are worthy of attention. It’s easy to fall into this trap, because there are many people who idolize financial success and seek out these people for leadership. It’s a self-feeding cycle. The more we seek out “advice” from people who have lots of money, the more individuals feel they have something important to say, the more they put themselves out there, and the media are happy to oblige.

So when Mark Cuban, a billionaire who built and sold a major online property, diversified his wealth, owners a basketball team, participates in a popular prime-time television program, and can easily afford a four-year education at any of this country’s top universities, feels like speaking about a topic, the news media is right there to give him an even more prominent place from which to address the country than his own blog. One topic on which Cuban spoke recently is the practice of allowing taxpayers in the United States to subsidize the higher education of its citizens — student loans.

Student loans represent an important piece of a system that allows expanded access to education. Having a highly educated citizen base allows the United States to stay competitive. There are a number of initiatives in place to improve education in this country, and the media loves the soundbites that compare citizens of the United States with the progress of other countries in science, technology, engineering, and mathematics. The general impression is that the United States is failing to keep up with the progress of other countries, and that has inspired governmental action in all levels. It may not be successful, but at least it brings the issue of education to the fore, inspiring spirited discussions about how we can ensure we are providing the best education to as many of our citizens as possible.

But at the same time, an anti-education movement looks critically at the state of the university system, and identifies some problems. While access to education is a key factor in eliminating poverty and allowing breakthroughs into the middle class, those who start off in the middle class may not be getting all that they once were able to receive from a four-year college education. It certainly feels that way when so many college graduates are still out of work in this recovering economy. (Keep in mind today’s college graduates are still much better off economically than those who did not graduate college.) Another criticism points to the outliers who are able to build significant companies and effect the economy in powerful ways without completing a college education, but those are clearly not the norm.

Combine a tough job economy with growing student loans and you have a hot button issue that is perfect for attention from someone like Mark Cuban, who because of his success in business believes he might have some insight on public education and economic policy. His approach to higher education is to boil all the complicated variables into one concept: easy money.

As the government made it easier for all citizens to attend a college by backing student loans — loans that can’t be eliminated through bankruptcy like most other loans — it gave colleges guaranteed income. Because the money was coming in so freely, colleges could raise tuition without the increase affecting enrollment numbers. They could increase salaries for administrators (while adjunct faculty salaries remain an affront to education) without any damage to the budget.

Students take student loans so easily, but then have such a difficult time dealing with them once they need to start repayment. I went to school with student loans, and despite the initial orientation and exit interviews, my low salary in the nonprofit sector didn’t give me much of an opportunity to both pay off student loans and save for the future. I did neither, at least not well, for many years. And I had the benefit of at least being employed.

Cuban argues, perhaps correctly, that if students did not have such a financial burden upon graduation, they might be using their income to contribute to the economy (which probably means buying tickets to Maverick games or buying houses). If we could cap student loans to $10,000, the burden would be less, and with less free-flowing money, colleges would have to lower tuition to maintain enrollment.

None of this will work. It’s a very short-sighted approach. College graduates earn so much more than those without a degree, even in a difficult job economy. The best thing for the economy in the long term is to make sure as many people as possible, those who have the capacity to develop lucrative skills, get those college degrees. Reducing access to college will send this country’s competitive stance and overall level of production down, inside and outside of the United States.

Furthermore, in today’s economy, having students graduate with less debt is no guarantee they’ll still be generating income to spend boosting the economy. Low-income or no-income graduates can take advantage of deferment or income-based repayment plans. These program lower the immediate financial burden, so if there was to be any boost by limiting student loans to $10,000, we would already be seeing that today. The bigger problem is that graduates are still unemployed or underemployed (though less so than non-graduates).

Colleges are not going to lower tuition just because the government might not be backing as much in loans. If government loans were limited to $10,000, the most likely scenario is that private lenders take up the slack. And even if they didn’t, the best that could happen is that the rate of tuition increases slows down. That’s a good thing, but not nearly a strong enough reaction that would allow the same access to education, all other things being equal.

Germany took the opposite approach recently, announcing that all public colleges universities would eliminate tuition entirely for all domestic and international students. Almost 95 percent of colleges in Germany are public colleges and universities. In the 2000s, German states wrestled with the German federal government to win back control of education, and in doing so, the federal government needed something to do with the money it had been setting aside for education priorities while the German states began funding loans and grants to students.

Because of higher education’s positive effect on the economy, and because a higher-educated populace is culturally and socially important, universal access is a worthwhile goal, and that is why there is a tax system in the United States. There are certain things that are good for the country — and the world — as a whole. There’s no denying there needs to be improvement. Institutes of higher education are businesses, though, despite their charters. They need to operate on a budget. They need to generate profits to pay employees.

There should be institutional reform to make sure these businesses are running efficiently, and those reforms could open the opportunity for using available funds in ways that directly help students and increase the value of a college degree. Limiting government-backed student loans to $10,000 is the wrong approach.

Am I wrong? Is Mark Cuban right? Do you believe colleges (which are still businesses) will lower tuition if student loans were to be capped at $10,000?

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Hard Work and Practice Can’t Guarantee Success

by Luke Landes
Children Playing Chess

I’ve written extensively about taking control of one’s own finances. My life changed for me when I realized I had more control over my personal situation than I previously believed. Every human has the power to make every decision based on a future benefit. One can choose to use a pay raise to pay off ... Continue reading this article…

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How Do You Determine Your House’s Value?

by Luke Landes
House

Yesterday, I pointed out that the house you live in is an essential part of your net worth calculation. But determining the value of your house, especially if it’s the house you live in and not something you track as an investment, can be tricky. It’s easy to determine the value of your mortgage to ... Continue reading this article…

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Naked With Cash: Betsey S, August 2014

by Luke Landes
Betsey - Naked With Cash

Naked With Cash is an ongoing series at Consumerism Commentary in which readers share their households’ finances with other readers. These participants benefit from the accountability that comes from tracking their finances publicly and the feedback of the four expert Certified Financial Planners (CFPs). For more information, read this introduction. This year, we have four ... Continue reading this article…

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Naked With Cash: Laura and Leon, August 2014

by Luke Landes
Laura and Leon - Naked With Cash

Naked With Cash is an ongoing series at Consumerism Commentary in which readers share their households’ finances with other readers. These participants benefit from the accountability that comes from tracking their finances publicly and the feedback of the four expert Certified Financial Planners (CFPs). For more information, read this introduction. This year, we have four ... Continue reading this article…

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You Need to Include Your House in Your Net Worth

by Luke Landes
House

Naked With Cash participants include their houses in their net worth, if they own houses. Is that really necessary?

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Naked With Cash: Brian, August 2014

by Luke Landes
Brian - Naked With Cash

Naked With Cash is an ongoing series at Consumerism Commentary in which readers share their households’ finances with other readers. These participants benefit from the accountability that comes from tracking their finances publicly and the feedback of the four expert Certified Financial Planners (CFPs). For more information, read this introduction. This year, we have four ... Continue reading this article…

1 comment Read the full article →
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