Darwin's Finance

Why Your Kid’s KinderGarten Teacher is Worth $320,000

Darwin — Fri, 30 Jul 2010 02:25:52 +0000

There have been some rather controversial yet entertaining posts on teacher pay in the PF blogger world of late. First, Evan at MTJM threw some fuel on the fire by venting about Why Teachers Anger Him. Well, with my wife being a teacher and seeing first hand the various myths and misunderstandings about teachers, work hours, pay and stress that continue to propagate amongst people unfamiliar with the role, I did a post on In Defense of Teachers. Similarly, Crystal at Budgeting in the Fun Stuff shared her insight being the spouse of a teacher as well in A Teacher’s Reply. (sorry Evan, it’s the gift that just keeps on giving).

Well, anecdotes and opinions aside, today, the NY Times had a piece on how a Kindergarten teacher is worth $320K as calculated by the present value of ADDITIONAL future earnings of your child into adulthood when they have a strong kindergarten teacher. This of course does not even account for the benefit of quality of life, longer life expectancy, better fiscal management outcomes, etc., over peers that have lousy teachers.

In essence, while previous studies had focused on test scores and scholastic achievement through primary schooling, for the first time, a major study (and seemingly well controlled) was conducted to track 12,000 children in a planned experiment from the 1980s. Now that they’re into their 30s and the data set was so large, meaningful data could be gleamed by comparing their adult outcomes with their Kindergarten teacher experience.

Key Findings:

Children who learned more in Kindergarten were more likely to go to college than peer group (normalized for other background noise)

These students were also less likely to become single moms and dads

They exhibited better retirement/savings behaviors

They earn more money

They earn about $100/percentile per year improvement over average. So, if your child had a top tier teacher/test score of 90 percentile, your child could reasonably be expecting to earn $4000 more per year than an average student and the effect tends to grow over time.

Based on these outcomes and considering the financial impact of future earnings, it was calculated that the value of a top kindergarten teacher is $320,000 per year. That’s about 4-6 times what most of them make, depending on location and experience.

The key takeaway here isn’t the number; that’s actually a bit of a silly anecdote to me with many assumptions built in. For instance, when I was in a sourcing role and saved $5 Million for my company on a single deal, I didn’t expect to get paid $5 Million that year, or even see anything different than my typical income – since that was my job!…to save money. So, a teacher’s job is to teach and do it well. This isn’t an argument on whether teachers should get paid more, but rather, people should take note of the key financial and net economic benefit teachers provide to society now that there is more firm data tied to it. To naysayers who consider teachers to be high paid babysitters, the data is tough to ignore. They matter.

Your thoughts?

With Bleak Job Market, Should College Students Go Right to Grad School?

Darwin — Thu, 29 Jul 2010 02:17:52 +0000

Frustratingly, the job market environment is so bleak that many graduating college students are starting to question what to do with their degrees. The offers are few and far between, the jobs they were targeting have no openings, and the starting salaries aren’t what they anticipated in an environment where even tenured employees are seeing salary freezes and reductions. That begs the question as to whether it’s even worth entering the job market at this time if other options present themselves. Here are a few considerations:

Why Grad School?

Primarily, you’ve got to ask yourself whether you really want or need a graduate degree. There are such diverse choices from continuing your undergrad with an M.S. or PhD in a similar discipline to your undergrad, to an MBA, law degree or medical school, there are definitely merits to having that graduate degree, but before rushing in due to the current circumstances, you’ve got to think about whether the approach and the timing are right. If you’ve always wanted to be a doctor and were heading down this path anyway, it’s a no-brainer (if you’ve got the funding capabilities). Same with law school. However, MBA programs are often different. It’s often recommended that you have some industry experience FIRST, then pursue an MBA. Otherwise, you’ve basically a school-smart, street novice going through an MBA program with little or no real-world experience to apply in the classroom.

Something that students don’t always consider is that a graduate degree doesn’t necessarily make you any more attractive to employers. Often times, work experience is more important. There are many “MBA preferred” listings that go to non-MBAs that have the 2-3 years work experience instead of an MBA. And same with Master’s degrees. A Chemical Engineer with a couple years experience in the lab or the plant is often viewed as more valuable than a wide-eyed recent Master’s program graduate. This is a trade-off to think about.

Who’s Paying?

This is a huge factor. If the bank of mom and dad stand ready and willing to fund your graduate studies, then perhaps it makes sense for you personally financially, family factors aside. Now may be a better time than when you’re working and trying to raise a family. However, if you’re paying for it out of your own pocket (likely taking on large loans), now may not be the best time. Even though the job offerings out there may not be ideal, if you can land a job with a college tuition reimbursement program, even though it’s not your ideal job now, pragmatically speaking, it is a way to fund your degree. This isn’t cool for the employer if you’re completely using them, but who knows, perhaps the role turns into something you’d want to stick with the the degree opens more doors for you. I interviewed a candidate once who admitted as much in a bit of TMI, so of course, I didn’t recommend him for an offer since I knew he’d jump ship as soon as his PhD was complete. But people do this. Just like companies opportunistically hire and retire employees, graduating students need to think about what the optimal set of benefits are they can realize from their various employment opportunities (if they even present themselves).

Grad School Bubble?

There are probably a lot of people thinking the same thing right now. With no viable offers and the capability to complete a degree now while they’re young, there’s likely to be a larger class of students entering and graduating from these programs in the next few years. There are also tons of for-profit and online outfits popping up. This could lend itself to a bit of a bubble, or perhaps the perception that the current class of students (in aggregate) is in some way flawed – a bunch of kids who couldn’t get jobs out of college so they completed random graduate degrees. Perception is reality when it comes to the hiring process, so it’s important to ensure you’re attending a top school or program that employers will really find useful, not just going back to school for the sake of doing so while riding out a poor job market.

While such a heavy decisions is weighted by so many factors, I think if I had a decent job prospect that offers tuition benefits after some period of time, I’d probably take the job and go to school at night. However, if the job market is still unforgiving after months and the resources are available to obtain a valuable degree (in my estimation), I might just jump right into grad school. And of course, for law school or medical school, the plan probably would have been to skip the corporate world and continue with education right out of the undergrad program anyway.

5 Reasons Why You Should Consider Using a Health Savings Account (HSA)

Guest Author — Mon, 26 Jul 2010 12:00:49 +0000

Unlike many financial planners and personal finance bloggers who tout the benefits of a health savings account (HSA) – I actually have one. That is not to say of course that just because someone does not have a Health Savings Account that this somehow precludes them from talking about the benefits of HSA’s but as someone who has studied HSA’s, runs a consumer health insurance website, who owns a Florida health insurance agency that sells HSA’s, and also as someone who has personally had an HSA for close to 4 years I can say without reserve that I think there are many benefits to having an HSA. Here are 5 reasons why you should consider using an HSA yourself (and then please let me know your thoughts on HSA’s via the comments below):

#1 Tax Savings, Tax Savings, Tax Savings

When I began to make this list I quickly realized that I could fill up even a much longer list of HSA benefits strictly from the tax savings category. I love Health Savings Accounts because they enjoy in a sense a triple benefit of tax savings goodness. What do I mean by that?

1) Contributions to an HSA are deductible as an “above the line” deduction on the front of your 1040 personal income tax return with NO AGI phaseouts (Bill Gates can take the same HSA contribution deduction that you or I can – incidentally, if Bill Gates saw a $1,000 bill on the ground it technically would not be worth his time to pick it up according to this estimate – just something to think about )

2) All of the money in an HSA grows tax free and rolls over from year to year (note that I said “tax free” like a Roth IRA and not “tax deferred” like a traditional IRA)

3) Money in the HSA that is used for qualified medical expenses OR for retirement past the age of 65 comes out 100% tax free.

This triple tax benefit is rarely seen in the tax code because quite often if you get a tax deduction for a contribution to something then you end up paying taxes on the back end (and example would be a traditional IRA) and if you pay taxes on the front end then you may be able to take out money on the back end tax free (an example would be the Roth IRA). The beauty of the HSA is that you get tax benefits for contributions (up to certain annual IRS limits), annual growth in the account, and even when you use the money in the HSA.

#2 High Deductible Health Plans are CHEAP

While an HSA is strictly the savings account portion of the “HSA health plan” the true health insurance plan component (required in conjunction with the HSA by the IRS) is the high deductible health plan or HDHP. The beauty of the HDHP is that since they are by definition health plans with high deductible then the monthly premiums are much lower than traditional health plans with low deductibles and copays. The higher the deductible the lower the monthly premium. After all, even if you are typically a fan of low deductible health plans don’t you think that monthly premium savings of $100 or more a month to accept a deductible that is $1,000 or so higher (in some cases) is well worth it? Why not put that monthly savings into your HSA and let the money accumulate from year to year and simply use the funds in your HSA should you have a large medical expense?

#3 HSA Setup is Simple

If you can set up a savings account or a checking account then you have all of the necessary expertise for setting up a health savings account as well. If you should decide to set up an HSA for yourself be aware that when you apply for your required high deductible health plan from a health insurance company that although almost every health insurance companies will attempt to steer you into also setting up your health savings account with the bank that they recommend (or in many cases own) then you are certainly able to (according to the IRS anyway) set up your HSA at a different bank altogether that may offer you a higher interest rate, lower fees, the chance to invest some of your HSA funds in the market, etc. HSA setup is simple but just like you should shop around for the best online savings account rates and also just like you likely shopped around for the best insurance quotes before choosing a health plan you should also shop around to find the best HSA bank for your needs.

#4 HSA’s Help to Bend the Health Care Cost Curve Down

Rising health care costs in the US is a certainly a concern almost regardless of who you ask – from either political party (wow – consensus across party lines on something!). When you use an HSA and act as a price conscientious shopper for your health care – in fact, even if you are 1/10 as price conscious as you are at the grocery store shopping for groceries then you likely are much more price conscious than the average US consumer, you help to drive health care costs down for everyone.

Essentially, when the system is set up so that 100% of the costs are borne by a 3rd party payor (i.e. the insurance company) starting at dollar 1 then people have no incentive to price shop or even care one flip about the cost of their physical, colonoscopy, pap smear, etc.

However, if you are responsible for paying for your health care bills out of your HSA (until you reach your deductible and then your HDHP kicks in) then you will likely be much more price motivated then someone with a copay plan and no deductible or a very low deductible.

#5 HSA’s are a Great Savings Vehicle

As I alluded to earlier in the tax savings section you can use an HSA as a very attractive vehicle for accumulating retirement savings. You not only get the great tax benefits all along the way along with a nice growing sum of money that can be used for medical expenses but you also get a great vehicle for accumulating some retirement funds if you should (hopefully) not have to use the money in your HSA for medical expenses. This is also contrasted to a flexible spending account where you have to use the money in the flexible spending account every year – with an HSA the money rolls over from year to year all the while growing on a tax free basis. Compound interest + no taxes = HSA bliss.

What do YOU Think About HSA’s?

Do you have any other reasons for why you think HSA’s are a good idea (or a not so good idea for that matter)?

This is a guest article by Joel Ohman, a Certified Financial Planner who loves writing about various personal finance topics online. He has started a number of different websites that include a car insurance comparison website and a website with an easy to use credit card finder.

Is Long-Term Care Insurance Worth It?

Darwin — Sat, 24 Jul 2010 00:19:31 +0000

My mom asked me about long term care insurance recently and I started to mull over the financials to see if it made sense or not. We had some experience with other distant relatives that had to tap the insurance and in one case, they were surprised that they didn’t qualify when they thought they would due to the fine print. First, it’s worthwhile understanding what it’s all about and how it might help you or your loved ones as they age.

What is Long Term Care Insurance?

Long Term Care Insurance is different than your conventional health insurance or life insurance. It’s insurance that’s meant to offset the costs associated with long-term care you may need in the future, typically a consideration for the elderly who anticipate health issues in old age.

Key considerations of Long Term Care Insurance

At a high level, you get what you pay for, right? So, if you’re looking for very generous coverage, you’re going to pay high premiums. The key facet of these programs is that it’s not just getting insurance payouts for “getting sick”, but rather, you’ve got to qualify for a series of activities that you’re unable to perform and then the policy pays for support to perform those duties. For instance, if you can’t perform pre-determined activities like dressing yourself, feeding yourself, etc., the policy would generally cover the cost of either a long term care facility or in-house assistance.

Your health and age matter quite a bit in what kind of rate you’re going to pay. On the applications I reviewed, I noticed they asked about tons of different ailments and whether you were EVER or within the past 10 years, diagnosed with certain ailments. Of course, the older you are, the more likely it is that you’d need to tap the policy as well, so those risks are factored into the premiums.

Unlike what you’ve probably heard in the news about certain malicious health-care practices, the insurance company can’t cancel your policy once you become sick. Once you sign the policy, the actual language of the policy can’t change and you should be able to continually renew for life. For that reason, some advisers advocate that you start a policy early in life. You’ve got to balance that with the costs though.

Example

Let’s say you purchase a policy from a major carrier that has a premium of $3000 per year and provides coverage for up to $250 per day of expenses for up to 6 months, but it only kicks in after a waiting period of 120 days. These are some typical key terms you’d see in a policy. So, let’s say you have an ailment that requires an extensive hospital stay followed by an assisted living facility, but it’s only about 2 months that you’re out of your house, the policy wouldn’t pay out to assist at all since you hadn’t hit the 120 day threshold. This is often a surprise to people who sign up for these policies without reading the fine print. Another catch is that you may have to fail to be able to conduct 3 or 6 or some number of activities as opposed to just one. So, if you can’t dress yourself, but you can feed yourself, use the bathroom and do everything else, the policy may not be activated. Therefore, it’s key early on to really understand what you’re buying.

My Thoughts

Insurance is not an investment. You don’t actually hope that you need it, just like you don’t hope you die to collect on life insurance and you’re not rooting for a wreck to have a “positive ROI” on your auto insurance. It’s a risk mitigation tool. Can you personally weather a catastrophic event in your life from a financial standpoint? If so, then there’s no need to consider it. If not, then you’ve got to consider whether the premiums, the coverage and the likelihood of such an occurrence equate to a prudent use of funds for a policy.

Personally, my wife and I don’t have policies, and probably wouldn’t consider one in the future since the premiums are very much likely to exceed any benefit we’d see (the insurance company’s gotta make a profit, right?) and we have other assets/insurance to help cover such circumstances.

Charitable Contributions – Avoid being Ripped Off

Darwin — Tue, 20 Jul 2010 02:56:42 +0000

While people mean well by donating money to seemingly noble causes, often times that money ends up being eaten up by administrative costs, waste, or outright fraud. The other day, I came home from work and my wife was at the door with a teenage kid holding a clipboard talking about clean water and pollution in our state. My wife, being the trusting do-gooder she is had already signed a petition the guy had and was mulling over writing him a check when I intervened and asked him to leave. For all I know, his charity was legit, but look, we donate all kinds of money and wares to legitimate organizations like the Red Cross, American Cancer Society, Humane Society, Purple Heart Veterans and others, and with thousands upon thousands of organizations out there looking for your dime, we can’t be forking over money to every foot soldier showing up on your doorstep.

I asked my wife if she had ever even heard of this organization and if she knew what she was signing. She had no idea. And for all I know, even if it were a legit organization, often times, most of the money goes to a select few people and waste, as opposed to dealing with the issue they purport to be experts in. Often times, people associate with term “non-profit” with a nice little charity where people are doing things like volunteering and saving the world. Well, a non-profit just means they can’t distribute a profit to shareholders – but they CAN pay officers exorbitant sums of money for doing essentially nothing. Because they are tax exempt and can draw huge sums of money, they can often be ground zero for waste and fraud. As the NY Times points out, they tallied up a fraud and embezzlement tally of $40 Billion per year or 13% of all giving!

How to Avoid Charitable Giving Scams and Waste

As a sad commentary on greed and human nature, we can surely recall the various scams and riches achieved in the process by plying on your sentiments for every disaster from Katrina and 9/11 to the tsunami and Haiti’s earthquake. With every catastrophe comes the scam artists. Well, here are a few tools to help you combat both outright fraud as well as leakage for some legally legit outfits that are just not good with money:

Between these two sources, you can search out everything from complaints and resolution to just how efficient thousands of charitable organizations are. Does it bother you when your pastor lives like a king? Would it bother you if a medium-sized charity were paying its directors $250,000 per year? Well, I guess it depends on what they’re doing for the charity and how you view the fairness of such compensation. But if efficiency and frugality are your priorities, it’s definitely worth investigating before you give.

Do you even wonder by Bill Gates, Warren Buffet and now, Steve Ballmer have announced they over the next several years, they will donate the substantial portions of their wealth to charitable organizations they either approve of or oversee? Because they know if they pass it on to their kin it may be squandered, the remaining estate taxes collected will be squandered by the government and because they have confidence in the efficiency and expertise of the organizations they are affiliated with. Small pop-up outfits are often frauds and the government has proven over and over again to be a horrible steward of money.

Is a Security System Worth It? It Depends

Darwin — Thu, 15 Jul 2010 01:54:25 +0000

Last night was one of those nights I wish I had a security system. I’m a light sleeper to begin with, but when I hear a huge bang in the house, I spring out of bed, fists clenched ready to take on the invisible intruder. This happens about once a month and it drives me nuts. I suspect the culprit is one of the kids jostling around in bed and hitting the wall with their head or the dog downstairs moving around in his bed and hitting the wall. I also have a shaving mirror that falls off the wall every few weeks which always tends to occur between the hours of 1AM and 6AM. Anyway, I’d probably sleep better and not go jumping out of bed with each noise if I had an alarm system which I was confident would reasonably alert us to any intruders at night. So, each time this happens and I’m wide awake walking around the house I say, “I’m getting a damn alarm system” so I don’t feel compelled to go on maneuvers every time this happens.

And that’s the most trivial of reasons. Occasionally, I have to travel, leaving the wife and kids home alone. My wife doesn’t sleep well when I’m gone. And finally, there’s the home invasion threat. We had a home invasion a few months back where a town resident was killed, never heard more on whether the perps were caught or why his home was targeted. So, at least with an alarm system, not only would an intruder be less likely to be successful, but they’re probably be deterred from attempting to burglarize or terrorize our house to begin with (why go for the house with a dog and an alarm system when 8 out of 10 neighbors have neither?).

With all these considerations in mind, I’ve still never pulled the trigger on a new security system.

Security System Costs

I’ve seen various outfits offering free installation and monthly monitoring for around $30 per month. The problem is that this is usually the most basic system. If you want to add motion detectors, windows, basement, top floors, etc., it will often cost more for installation or monitoring or both. For a system I’d be happy with, I assume we might have to shell out a few bucks and pay at least $30 per month. You’ll likely pay more for fire and carbon monoxide remote monitoring. In some cases, you can cut costs by having an install from a major company and then negotiating a lower price from a smaller local firm once your initial contract expires. Finally, there’s the potential to reduce your homeowner’s insurance as well (below).

Security System Downsides

First of all, there’s the cost obviously. You’re paying for something that you hope you never need, kind of like insurance. With a monthly cost of $30 and up, there may be additional costs for false alarms (depending on your police department).

There are some stories of police responding slowly or not at all to some security calls since most alarms are false alarms. Additionally, some shoddy firms don’t do a good job of handling security alerts that come into their monitoring centers.

Security System Benefits

There’s the obvious benefit of protection. But also, your insurance company is likely to offer you a discount. My company quoted about 20% off the cost of my homeowner’s policy. So, at around $1000 per year, that’s a savings of $200. If it’s $360 per year to monitor, my net cost is now only about $160. That’s not too bad at all, slightly over 10 bucks per month.

There’s also an interesting study out definitively showing the “deterrent effect” of alarm systems. This study showed that as the density of security systems increased in a neighborhood, break-ins decreased. This is logical, but it’s the first study I’ve seen actually proving what I assumed to be the case.

So, with all this in mind, I think I’ll end up getting a security system; I just haven’t prioritized it amongst the various things I’ve been meaning to do. The deterrent effect alone and the peace of mind at night is probably worth the 12 bucks or so per month.

How About You? Is a Security System Worth It?

Elliott Wave: Dow 1,000 Here We Come?

Darwin — Fri, 09 Jul 2010 12:46:16 +0000

There are often obscenely optimistic, pessimistic or outright ridiculous titles to get clicks in major financial outlets and the vast majority of the time it’s complete bunk. From the book Dow 36,000 to predictions of gold prices at astronomical levels, it’s a game of one-upmanship to see who can devise the most outrageous theorem and use some estimates and historical black swans to make the numbers fit the title. Well, this week, the New York Times ran an article on a chartist predicting that the Dow will drop below 1,000, losing over 90% of its value over the next several years. That’s right, a 90% correction from here.

On one hand, you’ve gotta question why someone like this even gets any press, but on the other, what if he’s right? And he does hold some legitimacy in trading circles as the head of Elliott Wave International and heads the Market Technicians Association. In decades past, Elliott Wave theory caught on by predicting trends in the market based on technical analysis, but logic and history dictate that more recently, the predictions are not as accurate given the vast amount of information available to all participants and the notion that “if everyone can predict it, it would have happened already” right? If you knew with high assurance that the market would be 20% lower in a month, wouldn’t you be selling already instead of next month?

How to Invest in Dow 1000 Scenario

The best way to invest is to not really invest at all under a scenario like this. If we encounter a situations where prices decline precipitously, you’d want every dollar you have at your disposal within your possession. In a deflationary environment, just having cash under the mattress is earning a positive return when all other asset prices are declining. This is hard to envision since most of us have never seen a truly deflationary environment for a sustained period of time. However, note that those holding cash from the lows of last march missed a nice upward move in excess of 60% from the bottom. Some joke that the best investment would be a gun and lots of bottled water since it would mean the world has pretty much come to an end.

Could Dow 1000 Really Happen?

Well, anything can happen. But technical mumbo-jumbo aside I don’t see how such a scenario is plausible, even under a double-dip recession scenario. For equities to be worth 10% of their current value, dividend yields would become astronomical (for those companies still paying out a dividend) and with companies with any earnings whatsoever (surely there would be some), their price-to-earnings ratios would be so low that savvy investors would be forced to continue buying at those values. There’s a natural ebb and flow of buying and selling in a free market, with overshoots in between, as we saw during the financial collapse. When it was evident that Armageddon was not upon us, stocks rocketed back within months. I do envision if the economy falters, unemployment stays high and we enter a new Recession, it’s plausible that stocks decline substantially again, but they’ll be back. Much of the bad news is currently baked into stocks now. And I don’t make predictions on “price targets”, but I will predict what WON’T happen – Dow 1000.

Thoughts?