University Students: Getting Suckered in with Credit Cards (2007-08-27)

University Students: Getting Suckered in with Credit Cards

(2007-08-27) by David John Marotta

Every University student knows they should have a credit card. You have to have a second form of ID on many financial transactions. You have to have one to establish good credit. And, the more you use them, the more you will accrue bonus points toward cash, mileage credits and various "free gifts". P.T. Barnum said, "There's a sucker born every minute." But it doesn't have to be you.

About half of first year University students have at least one credit card. By the second year they nearly all do. About 60% of them pay off their balance each month. Even the most responsible of these students is succumbing to developing the worst mental rules of thumb on how to think about their finances.

They need to have rules of thumb that are not influenced by Madison Avenue. They need visual images to help them understand what the use of credit does even if they think they are using their credit card responsibly. They need to understand the credit card company's goal of ensnaring them into perpetual servitude.

In most states, eighteen year-olds are eligible for a credit card without parental consent or personal employment. The next generation can't learn to live within their means if parents keep supplementing their means. We don't do our children any favors by intervening and ruining life's lessons.

Emulate the best frugality in your parents. If your dad was the frugal parent, then whenever you go to use that credit card ask, "Would dad think this is a great idea?" If your mom was the frugal parent, then whenever you go to use that credit card ask, "Would mom think this is a great idea?"

Your parents had to learn the lessons of income, debt and savings in order to send you to school. Each generation must learn the lessons of life in the same way that the previous generation did - on their own. Students have to develop their own financial compass.

Targeting university students is a strategic decision for credit card companies. They know students are more likely to exceed their credit limit, make minimum payments and remain loyal to the company that issues them their first card.

Credit card companies attract students with loud music, flashy giveaways and free food. The most typical give away is a free T-shirt. There are at least nine ways that T-shirt could cost you thousands of dollars.

True story. A friend's son filled out a credit card application at a booth outside the stadium at one of the University of Virginia's home games. He was promised a T-shirt in the mail for completing a form. Instead they used all of his credit information to steal his identity and have the credit card sent to another address. Thousands of dollars later he was still trying to clear his name.

When you see those T-shirt offers, imagine they read, "I had my identity stolen and all I got was this lousy T-shirt." But you probably won't get the T-shirt.

Studies have shown that when people use a credit card, they are willing to spend twice as much money as when they use cash. Those same studies show that the biggest savings are enjoyed by a refusal to make small everyday unnecessary purchases. Put those two studies together and you will double your spending and cut your savings in half simply by using a credit card.

That means that you have to imagine that everything you purchase with a credit card costs twice as much. Only if it costs twice as much would you be as hesitant to purchase it as if you had to pay cash.

Although 60% of college student's pay off their balance each month, that leaves 40% who do not. It is relatively easy for a bill to be lost, misplaced or forgotten in the hectic lifestyle of college activities.

If you lack the money to pay cash the credit card is very convenient. The smaller minimum payments are easier to pay than the accrued balance. As a result, it is very easy to get suckered into the pattern of just paying the minimum each month instead of the balance.

Next week we will examine the economics of how students are impacted by these convenient monthly payments.

from http://www.emarotta.com/article.php?ID=246

The Business of Being an Artist - Part 2 (2007-08-20)

The Business of Being an Artist - Part 2

(2007-08-20) by David John Marotta

For those working in the arts, financial planning is artistic freedom. You can be an artist and also eat well if you don't avoid the subject of financial planning all together. After you have your cash flow and career planning in place, you also need to address your insurance and legal concerns.

First, shop smart for health insurance. Consider opening a Health Savings Account. One of the worries when you are self employed is health care, especially the worry of a medical emergency that will swamp your family's finances. If you are in relatively good health and you don't smoke and you don't abuse alcohol or drugs you should lean toward covering your own medical expenses out of pocket and having a very high deductible health insurance in case of an emergency. This is exactly what a Health Savings Account was designed for.

To protect you against catastrophic medical expenses, Health Savings Accounts are coupled with a High Deductible Health Plan (HDHP). However, to qualify as a HDHP, insurance deductibles must be a minimum of $1,050 for individuals and $2,100 for families.

The good news is HSA-eligible HDHP premiums are only a fraction of the cost of a traditional medical insurance plan. A study by the Galen Institute found that the majority of HSA-eligible plan participants pay premiums of less than $100 per month. Try comparing that to the premiums for most insurance plans which average $335 for individuals and $906 for families - per month.

Qualified expenses may also include items which may or may not count toward your deductible. This means that you may be able to use pre-tax money to pay for vision and dental costs like contact solution and teeth cleanings.

The higher your deductible the less expensive the insurance will cost. I recommend you get as high a deductible as you can, probably in excess of $5,000, and put your savings toward building up the balance of your health savings account until it is larger than your deductible. Anything you don't spend one year carries over to the next year. You need medical coverage to protect you and your family in an emergency, and a Health Savings Account is the first place to look.

The next step is to get your documents in order. There are five very important documents to make sure that you have readily accessible. First you need a will so that your partner and children are taken care of in the event of your death. Second, you need a living will so that someone else can make decisions about your life if you can't. Third, you need a power of attorney that authorizes some one to manage your finances if you are sick or disabled. Fourth, you need to compile a directory of basic information for anyone who needs to take over handling your finances in an emergency. And fifth, you need an annual collection of financial statements both for yourself and also for those helping you with financial planning. This collection of documents will help you track your finances.

These yearly financial statements should include a net worth statement, an asset allocation analysis, the cost basis for all taxable investments, the past year's performance, your current income and a copy of the first two pages of your tax return. Pulling these documents together is difficult the first time, but updating them every year thereafter is much easier and will help you visualize your progress.

Also, if you have children you should have some life insurance. Don't hesitate to buy the minimum life insurance you need. I recommend that you buy low cost term life insurance and invest the difference. You should also look at disability insurance and an umbrella policy.

You will need to know some tax basics. You also have to understand when taxes and tax reporting is due. If you have income you must make estimated quarterly tax payments. Our tax code is ridiculous, burdensome, and stupid beyond measure. But it doesn't need to make sense and they will still send you to jail and take away your house for not understanding it.

The IRS also doesn't care if you send them too much money, so you need to understand how to take every possible deduction. Good record keeping is the key, and potentially your weakness.

The artist can take a number of unique tax deductions. Expenses that are tax deductible are those that are 1) incurred in connection with your trade, business, or profession 2) ordinary and necessary and 3) not lavish or extravagant under the circumstances.

You cannot know what qualifies simply from that description. Only by looking at the actual IRS legal cases can you determine what qualifies and what does not. You need a supportive CPA to help you through this process. More than just helping you fill out the forms, they should be proactive in their tax planning and advice.

Life's many and varied financial responsibilities put a lot of stress on all of us, but they are easier for the analytic to address than the artist. Hopefully this two part series has given you some practical advice to begin to manage the financial challenges you are facing. Remember, if you need help, ask. The National Association of Personal Financial Advisors at www.napfa.org is one of many helpful sources of competent fee-only financial advisors.

from http://www.emarotta.com/article.php?ID=245

The Business of Being an Artist - Part 1 (2007-08-13)

The Business of Being an Artist - Part 1

(2007-08-13) by David John Marotta

The image of the starving artist has prevailed too long. At the July 24-29 San Diego Comic-Con there were tens of thousands of people working in the arts. Of the 650 hours of events and presentations, only one hour was devoted to financial planning for artists. Here are the financial essentials that artists avoid at their peril.

Financial planning is simply doing what it takes to give you the where-with-all to do what you want. The first time that financial planning keeps you from making a big mistake, it will have paid for itself ten times over. It is that important. The poorer you are the more you need financial planning. You don't have any margin for mistakes.

Complicating the topic, the artistic temperament tends to avoid the analytical activities required for financial planning. This leads them to make one of these mistakes: avoiding the subject all together, trusting people they shouldn't, or trying to do it themselves. You can be an artist and also eat well. But first you must admit you need help, and find someone trustworthy who will.

For each area you need help, identify who will accomplish the task. When you are just starting out you may have to do some of the financial planning yourself. Family members can also be very helpful. As your artistic time becomes more valuable, it will pay to outsource some of these functions to trustworthy and competent professionals.

Members of the National Association of Personal Financial Advisors (NAPFA) are truly comprehensive and strictly fee only. They sign a fiduciary oath and accept no commissions which helps eliminate many potential conflicts of interest. You can visit www.napfa.org to find a fee-only advisor in your area. A comprehensive financial planner can help you with everything without trying to sell you anything.

This column will describe what you need to do regarding cash flow and career planning. Next week we will describe what you need to do about insurance and legal concerns.

The first step is to keep track of what you spend each year and where the money actually goes. As many artists know, an artist's freedom often lies in being extremely frugal. Some of your expenses will be weekly or monthly, others will be once or twice a year, and some will be tied to a specific artistic project. Plan with a 12 month perspective, handling each of these three categories separately. Job related expenses should be packaged under a corporation and associated with a job budget.

Your day to day financial spending should be approximately 65% of your take home pay. The other 35% should be set aside for longer term savings. Living off 65% of your income may seem extreme, but it allows a family to stay out of debt and spend their money more deliberately to meet the financial goals they value most. Failing to account for the 35% is the greatest cause of financial trouble. Here is where the 35% you don't spend each month will go.

Those who are artistic are sometimes generous to a fault. Until you are running a surplus, just set aside 10% for charities. Another 10% percent should be put toward retirement savings even if the entire amount cannot be tax deferred. This amount should be deducted before you even see your paycheck. This represents 20% of the 35% we are setting aside.

How should your 10% retirement dollars be allocated? Assuming you don't work for a company that matches your 401k contributions, maximize your contributions to a Roth IRA first. Next look at a SEP or Simple IRA for additional retirement savings as part of being self-employed. You can consider an individual 401k if your financial success warrants it.

Next, put at least 5% of everything you make into a taxable savings account. You can make this higher if you can live off less than 65% of your income. Retirement savings is all well and good, but if you are between patrons, you will need some cash to buy food. Taxable savings can serve as an emergency fund, provide a down payment on a home, or be used to expand your current business or get a new venture started.

Of the initial 35%, there is now 10% left. Save this 10% for large unexpected expenses. Families who go into debt usually do so because of unexpected spending on their car, home, or emergency medical bills. The smartest way to go forward financially is to avoid going backwards.

As your business grows, you should probably start a corporation, perhaps more than one. It actually isn't that hard, and there are many more opportunities for financial planning and tax management if you have a corporation. Putting income and artistic expenses under a corporation can allow you to take more deductions and pay less tax.

To progress to the next level, you need to have a plan for maximizing your art making money. Many artists view this as a crass compromise with the prevailing culture when in fact their art is counter-culture, edgy and avant-garde. It doesn't matter. Edgy art can be just as lucrative as pabulum for the masses. You don't necessarily need to change your art; you need to have someone who can make money from whatever your style of art is.

Assuming that you are going to have a career in the arts, you need to have a reasonable and realistic career plan and know what the next step is toward reaching your goals. If you are in the performing arts or in an art that requires a collaborative effort, it is more important to plan the next step of your career. Try contacting people who are doing what you would like to be doing and ask them what intermediate work led them to where they are. If you are producing art, it may be more important to determine the next step in marketing and selling your product. In this case you may find it important to have a business partner whose sole job is selling whatever you produce.

Like all endeavors, the first 20% of the time you can spend on a career path or business plan will reap 80% of the benefits. My advice is not to miss the 80% benefits because you neglected to invest the 20% effort of getting started. If your work at creating one piece of art can be multiplied by using that art on lots of different products the time and effort may well be worth it. To stay productive, update your career or business plan once a year on a weekend retreat.

As your art becomes more successful you need to focus on saving and investing. Artistic windfalls should not be spent on short term increases in your standard of living. A sound savings plan will begin to work for you, providing interest, dividends and capital gains that can make permanent increases in your standard of living. Patience and perseverance with your 5% taxable account and 10% retirement account will reap a lifetime of rewards.

Want to know how to be a financially independent in just 20 years? Save $1,100 a month and invest it in the stock market averaging 11.5%. You'll have a million dollars that could spin off enough income to allow you to do whatever, and eat well. Behind the magic of compound interest though is first and foremost a financial plan that lives off less than you make. The 65/35 formula is a good place to start.

The real lifestyles of rich artists would get very low television ratings. They are frugal to the point of being miserly, but they are also willing to take risks by investing their wealth in the markets, their businesses, and themselves.

Financial stress does not usually enhance creativity in the arts. It is essential for artists who want to gain the freedom to pursue art as their livelihood that they follow the advice in this article. Financially successful artists do what they're good at, follow the 65/35 rule, and secure the analytical help of other financial types to help them along the way.

from http://www.emarotta.com/article.php?ID=244

With Great Characters Come Great Stock Returns (2007-08-06)

With Great Characters Come Great Stock Returns

(2007-08-06) by David John Marotta

Last week I attended the San Diego International Comic-Con. The four day event has grown from covering comic books to all things associated with popular culture. But comic books are still at the heart of the convention, and Marvel Comics is still the industry leader.

I've been a Marvel fan since growing up reading the very early years of Spider-man. My earliest issue is The Amazing Spider-man #5 featuring the villain of Doctor Doom. Since then the comic industry has evolved and changed as the average age of fans has gotten steadily older and the stories have gotten steadily more sophisticated. Today the average age of a comic book reader is late thirties and it is the exception, not the rule, for a comic publisher to gear a line of comics toward younger readers.

The Comic-Con boasted over 130,000 in attendance and more than 350 hours of presentations as well as miles of vendors and booths in the convention hall. Imagine putting more than the entire population of Albemarle County into a convention hall.

Stan Lee, the co-creator of most of Marvel's most notable characters, was at the Comic-Con speaking and signing. Stan Lee was Marvel's editor-in-chief from 1941 to 1972 during which time he co-created The Fantastic Four, Spiderman, the Incredible Hulk, Iron Man, Thor, Doctor Strange, Daredevil, the Silver Surfer, and the X-Men. Today, comic fans and non-comic fans alike recognize Stan Lee's face and voice as the embodiment of the comic book super hero.

Currently Marvel Comics has 44% of the comic book market share. DC Comics (Superman, Wonder Woman, and Batman) comes in second with 27%. Dark Horse Comics (Buffy, Hellboy and Star Wars) comes in a distant third with 6.7%. And Image Comics which includes Todd McFarlane Productions (Spawn) and Top Cow Productions have 4.4%.

Much of Marvel's ascension over DC Comics stems from Stan Lee's development of the personal side of super heroes during the 60s and early 70s. Fans felt like they were catching up with old friends and looked forward as much to the soap opera of their comic private lives as the battles of their super powered persona. This paved the way for Marvel to become much more than just a comic book publisher.

Marvel Entertainment, like the Comic-Con, has expanded to include much more than just comics. In fact, Marvel only gets 31% of its revenue from publishing comic books and trade paperbacks, including related advertising revenues. Another 33% is gained from toys and action figures. Marvel's toy line is currently sold exclusively through Hasbro which has benefited that company immensely. Hasbro (HAS) stock is up 77% over the year ending June 30, 2007.

A full 36% of Marvel's revenue is gained from licensing their characters on other products, feature films, television programs and theme parks. This last category of licensing brings in the most revenue and has much less cost associated with it. This is the elusive prize that is gained by developing characters and stories so popular as to develop into a franchise.

Marvel Comics owns over 5,000 characters and franchises them in licensing, entertainment, publishing and toys. They emphasize feature films, DVD/home video, consumer products, video games, action figures and role-playing toys, television and promotions. On the first day of the convention the US Postal Service released their line of Marvel Comics stamps.

Movies based on Marvel characters this year include "Spider-man 3" and "The Fantastic Four: Rise of the Silver Surfer". Planned for 2008 are "Iron Man" and "The Incredible Hulk".

I also met Joe Quesada at the Comic-Con. He is the current editor-in-chief of Marvel. Quesada gained this position in 2000 and took Marvel from its bankruptcy and reorganization in the late 1990s to a revival of the comics of its primary characters. His focus on hiring quality writers and artists helped boost sales that were relying too much on past glories. His leadership must have done something right. Marvel Entertainment (MVL) stock is up 44.6% over the year ending June 30, 2007, and has averaged a 40.2% annual growth rate over the past five years.

Marvel's latest Annual Report has a section entitled "Risk Factors" that highlight the need every artistic endeavor has for a savvy financial, marketing, production and legal team behind them. For example, historically Marvel has not controlled the decision to proceed with the production of films and television programs based on characters that they license to studios, and they have not controlled the timing of the release of those films and programs. As a result, delays and cancellations of movie releases can greatly affect the sale of merchandise related to those characters.

To offset this lack of control Marvel is taking the risk of self producing the next two movies under their own Marvel Studios. Producing their own movies allows them to both control the timing of their release and retain the full benefit from any revenue stream but has the potential to effect the quality of the final product. These decisions are amazingly risky and incredibly important. But then, "With great risk often comes great returns."

from http://www.emarotta.com/article.php?ID=243