Teacher's Guide to Finance

Marriage is a true partnership so the idea of a breadwinner in the relationship is somewhat of a misnomer. In a partnership, each partner has duties and responsibilities and a marriage is no different. One of the only exceptions is the gold-digger and sugar daddy relationship. And to an extent there is a certain level of responsibility shared by this type of partnership as well.

Reach the Finish Line
Rather than breadwinner, a truer name would be racehorse and jockey. In this relationship, each is dependent on the other in a symbiotic relationship as opposed to the traditional “breadwinner” relationship. Years ago, my mother viewed my dad as the breadwinner because he would work the long hours and provide a vast majority of the family’s income. That role has changed since more and more marriages rely on the communal income of both partners. Furthermore, my parents did not share the child rearing roles, while today many fathers enjoy the rearing of the children and are actively involved in development of the family unit. Mother doesn’t have to do it all.

Expanded Roles
Yet, mother does maintain a very busy schedule along with contributing to the family’s income. Marriage has evolved even though we cling to many of the old notions of what we are supposed to do in the relationship. Many problems in the marriage arise due to the lack of understanding the new expanded roles of men and women, men and men and women and women. Finances can become one of the most contentious issues in the relationship; sadly that is no different from most problems that arose for our parents and grandparents.

Understanding and Compassion
For the relationship to survive and thrive, here are a few recommendations for Teachers:
1. Communicate and do not assume
2. Discuss financial matters on a regular scheduled basis
3. Keep things in perspective, you are together for the long haul so have a cooling off period if things get heated
4. Set goals as a couple and as a family once you have expanded
5. Define your roles and agree to follow your concomitant arrangements
6. Reevaluate, nothing is cast in stone, so make adjustments

Unless you are in an arranged marriage, you probably married for love, so keep that going as long as possible. Don’t take each other for granted. And finally as Aunt PG used to say, “The key to a successful marriage is to always say Please and Thank you!”

As the joke goes, an old man goes to church on multiple occasions, always praying for one thing. He asks God to let him win the lottery. After his umpteenth visit to pray for the win, a voice comes out of the far reaches of the church’s fresco painted ceiling.
The voice says, “You come to church praying over and over to win the lottery, it’s always the same story with you. (Pause) I am tired of your prayers, so here is what I want you to do,” In a profoundly deep voice, he says to the old man,” Meet me half way for crying out loud, and buy a ticket!”

Like the old man you have to be in the game to even have a chance of winning. Likewise, you have to own stocks in order to receive their long-term rewards.

Six months ago, I wrote a section on buying stocks in the Lifestyles section of the book that gave specific stocks to purchase based on a combination of investment philosophies. The investors I tried to follow were Warren Buffet and Peter Lynch. Keep in mind this was my interpretation of what they would buy.

For the six months the results were pretty interesting, I must say. I didn’t take an unusual amount of risk and I tried to buy stocks that had weight from huge assets, and companies that made things our family used. You can see the list; it’s in the book. After reviewing the list today, I think it continues as a sound portfolio today, albeit, with a couple of minor changes.

The Results

Portfolio starting value $1177.46

Portfolio ending value $1429.55

Difference $252.09

Percentages gain 21.41%

Dow Jones Average 6.67%

Additionally, I recommended a mutual fund that invested in stocks and it returned 11% for the period. There were two other stocks I should have bought, but like the shoulda, woulda and couldas of the world, along with $3.85 I could buy a Vente Cappuccino with one sweet and low and a small bit of whip. This is a six-month period and is not a forecast of future results, but I am just saying… Buy the book!

Most teachers are confronted with the dilemma of choosing between these two payment options. From a financial standpoint the answer lies in a teacher’s discipline and financial needs.

Discipline
Most of the time young teachers are encouraged to take a 12-month payment option, while seasoned veterans are able to use the school year method. Ideally, you should take the income as it occurs, or as it happens during the school year. However, the reality is that if you take the payments over the school year you will be tempted to believe the 9 months or so of payments are going to continue for the full year. This may lead you to overspend.

This is especially true for young teachers who are inexperienced with handling money and who have a very optimistic, if unreal view of life. They see the larger school year paychecks as somewhat of a godsend and forget that they need to budget or average it out for the entire year. For example your paycheck for the entire year is $45,000 so it would pay $3,750, for 12 months, while a school year payment schedule would pay $5,000 per month for 9 months. This is before taxes on both cases.

The bills we pay are usually on a monthly basis so the school year paycheck may lead one to believe the payments are also monthly, which can lead to coming up short in July, August and September.

Seasoned teachers have learned to budget and have come to grips with the reality of a contract is a contract is a contract so they see the higher school year payments as a year’s worth of work so they take the school-year payments and divide by 12 so their income matches their outgo.

Financial Needs
In finance school you are taught:
1. Use other people’s Money (UPOM), and
2. Get your hands on today’s dollars as soon as possible.

Over the long run you are better off taking the payments as you earn the money, especially if you are investing some of the income in a dollar cost averaging approach (See “Dollar Cost Averaging” in A Teacher’s Pocket Guide to Finance). While the advantages seem minimal they represent your understanding of financial concept of investing today’s dollars. This is much like the old adage “a bird in hand is worth two in the bush”.

By taking your income on a school year basis you:
1. Have the money to invest for dollar cost averaging purposes and,
2. You have the money in your hands, not in the hands of district, which is probably using your money to earn interest for the district.
While you might be altruistic in allowing the district to use your money, ask yourself if you have a tax refund coming, do you wait until October for the refund or do you take the refund as soon as possible? Your tax advisor will tell you to file and get your refund as soon as possible so you have the money in your investment account, not in the US Treasury, where the Government is earning on your money.

Today’s Dollars are more valuable than tomorrow’s dollars, especially if you figure in inflation and opportunity cost. Earn and invest and by all means live!

In the recent past, banks have tightened their requirements for getting a mortgage and in giving refinances. The reason is simple, the banks earn less on your mortgage if they refinance from a higher rate of interest to a lower interest rate. For example, if your loan is for $100,000 and your loan interest rate is 5% and you refinance to a 4% loan, the bank will earn approximately $19,000 less in interest over the life of loan. Your payment would go from $543 to $477 and the breakeven would be 53 months. This illustration includes fees of $2500 and 1% origination fee (Bank Profit).

Put another way, you will save $19,000 in interest over the next 30 years and after 53 months the lower payment absorbs the fees and points. That looks simple but like any other financial tool, there needs to be a discussion about things that invariably come up when refinancing. These items for consideration include:
1. Points which are expressed as a percent of the loan,
2. Fees which include escrow, transactions, recordation, and legal,
3. Appraisal charges
4. More equity requirement
5. Home valuation/market valuation
Points, fees, and appraisal costs are usually miniscule compared to the “More down” requirement and effect of home values on a refi. Nevertheless, consider the costs going into a refi as part of the decision whether to go forward.

Banks have been putting up roadblocks to refinancing by changing the percent required down, and this amount can be large. In some cases it can ruin the idea of refinancing since it can exhaust your savings/reserves all to appease the bank’s higher equity requirement. Take into consideration declining real estate values and you may be required to come up with thousands of dollars to make the deal work. Even then, the bank will drag their feet, since you are paying them more interest while you go through the refinance process.
My rules for refinancing are:
1. Consider refinancing if rates drop 1% or more,
2. Do not use all of your reserves to accommodate your lender, consider competitors,
3. Look closely at “deals” offered by lenders, the fees can diminish the advantages of refinancing so read the small print,
4. Consider the monthly payment and the costs of the refinance, not just the monthly payment, and
5. Consider that if you have paid 5 years on the mortgage and whether going to a new 30-year mortgage is worth the loss of those 5 years, older teachers near retirement may wish to stay the course and pay off the mortgage as planned.
If you have questions, post on the blog for A Teacher’s Pocket Guide to Finance. Be patient and you will enjoy the ride, especially when refinancing your home.

So you are thinking about making the biggest step in your life? A point in time when what you do will have long-term repercussions. You want to know ahead of time; Will I be happy? Will I be sad? Que Sera Que Sera, what will be will be.

Financially, when you are considering marriage for the first time you will need to recognize that like the lessons you teach your students, marriage will be filled with learning. Here are five things to consider before marrying:
1. Comingle assets after you are married.
2. What is yours stays yours.
3. Marriage is a contract in the eyes of the law.
4. Discuss a five-year plan.
5. Do you Pre-nup.

Commingling Assets
Experience show that you should not buy big things together before you are married. Big things like houses, cars, airplanes, boats, artwork, or anything that is not easily divisible by two. Imagine the worst case scenario, as much as you hate to do this, it is simply wise to buy things as individuals not as a couple until you are officially married.

What is yours stays yours
Simply put if you come into the marriage with a million bucks you inherited or made via the biggest IPO of all time, ala Jeff Zuckerburg, those assets continue to be your sole and separate property. Unless you decide to put that asset in your spouses and your name as if you are one person, like a married couple. If both of you start out broke or with only your furniture from college then most likely you will own things together for the rest of your lives. The point is if you own significant assets going into the marriage it is yours and community property does not apply.

Marriage is a Contract in the Eyes of the Law
If you are marrying at a young age you most likely have no experience with contracts. Therefore, you are what a lawyer would call ignorant of the law. While your marriage is emotional and full of hope for the future it is still a contract where you accept the good with the bad and will be held to the standards set by society in the contract. I hate to be a Grinch but you need to know if your partner enters into agreements, like credit cards, auto loans, phone contracts and anything that can sour a budding relationship, you are part and parcel to the agreements.

Discuss a five-year plan
Before you take the step and sign on the dotted line, look into one another’s eyes and ask:
a. Are we both going to work
b. Do we want to have children
c. Who is going to pay the bills
d. Who is responsible for different household tasks or do we share
e. Where do we spend Christmas and Mother’s day

Do you Pre-Nup
It depends on each person’s upbringing, assets, age, and family history. My experience with pre-nups dealt with large assets and where the family had significant intertwining of “family assets”. While these are rare instances, there are circumstances where it is necessary financially to create a pre-nup. One big concern with pre-nups is the injection of the adversarial relationship of attorneys at the moment you are celebrating the start of a life together. If one party wants a pre-nup, don’t wait until the last second, as it is incumbent on the other spouse to hire a lawyer to represent his/her interest. Paraphrasing Ben Franklin, you would be a fool to represent yourself when negotiating like a lawyer. Be aware that if your betrothed springs this on you at the last second, it was his/her lawyer’s strategy to do this!

Well it seems, some of Morgan Stanley’s clients got a warning not to buy Facebook stock on the Initial public offering (IPO) since it didn’t look like Facebook would make as much money as everyone thought (Mobility Issues). You might think that this all normal, but if you are a small investor you wouldn’t normally be allowed to buy shares of a hot new stock on the IPO, yet many small investors got some Facebook stock and they felt lucky, at least until the stock dropped nearly 20%.

The problem is that when Morgan Stanley alerted their “good” clients not to buy the IPO, they, in essence, stiffed the small investors by selling them stock at the high of over $38. The next day the stock fell 10%, and the next 9% and everyone wondered how that could happen on a hot stock. Well the Morgan Stanley clients were given a private warning to stay away so the stock fell since the big clients didn’t provide the usual support for the hot new stock.

Another case is just as perplexing, but the Facebook launch has overshadowed the events at JP Morgan/Chase where they are racking up losses in the billions and they really don’t know how bad it is because the sovereign debt deals they are involved in continue to unravel. For every winner there is a loser.

Now compare this to Facebook’s loss of Billions in imaginary Zuckerbucks. In the case of Facebook, MZ is the biggest imaginary loser, his net worth dropped by billions after the company went public, but what was he worth before the company went public? Zuckerberg is the same guy, except for being married, so what does he care if he is worth 5 billion or 20 billion, he could not spend all that money if he was frat boy in Vegas attending a bachelor party for 500 years!

On the other hand the $3,000,000,000 or more lost by JP Morgan comes out of the pockets of the bank’s depositors, and if they don’t have the money to cover it Uncle Sam, aka you and I, will pay to keep them afloat. These are not imaginary bucks like Zuckerbucks, they are deposits and the public’s investment dollars entrusted to the bank.

Funny that a money manager at JP Morgan in one department of the Bank was taking the bets by another JP Morgan bank investment manager in another department, who was losing his shirt and job. The notion of a Chinese Wall is history, as referenced in A Teacher’s Pocket guide to Finance.

The bank was investing for its “good” clients in one account while all the while taking it out of the other side of the bank, from it’s not so “good” clients, I guess. One thing is for sure JP Morgan and Morgan Stanley took care of their “good” clients and the public be damned!

Stay alert my friends, there are wolves in sheep’s clothing among us.

Be aware of conflicts of interest at every turn, its your money and conflicts can take a chunk before you know it.