Friday, November 26, 2010

Open Post #5

 A university degree is of great advantage in the job market only to the extent that everyone does not have one. - Quoted from an anonymous source.
With that statement seeming to be the gloomy reality these days, it's no wonder that students feel pressured to continue their education after receiving their undergraduate degrees.  One might consider an undergraduate degree equivalent to nothing more than just a high school degree.  What choice does a struggling student, eager to succeed in the real world have, after this depressing news?  Driven by pressure (from  parents, media, peers, own self-ambition), one enrolls them-self in graduate school to embark on another four year journey filled with all-nighters, papers and full blown stress.  They find themselves desperately needing the years of education to pay off (in the form of $$$).  But what if  attaining this education results in decades of  monthly payments to a principal that never seems to get smaller?
Now an article from Fortune magazine reported that nearly 20% of  business graduate students are failing to repay their student loans!  This scares the sh*t out of me, given in a few years I could easily become that statistic.

The stereotype of a greedy, money-laundering, white collar criminal of a business student might be reinforced by this startling data.  How are all the recent business graduate students funding their BMW's and over-priced lattes as they leave their high-rise office building?  Who knew that behind the glamorous exterior resided a debt-ridden over-educated student?

Now the pressure heats up even more to find a job out of school.  There are options for repaying student loans.  Students pay opt for forbearance, income-based repayment or deferment.  Just to get an idea of of the dismal factoids: public colleges have a repayment rate of 54%, with private schools doing only 2% better.  Let's keep in mind that this information only pertains to government student loans.  I would bet that an overwhelming majority have private loans, which would undoubtedly inflate the repayment rates mentioned above.

So who cares?  What does this article have to do with the indifferent student that plans on repaying all payments in a timely manner?  Well, much to my dismay, according to the article, a school's repayment rate affects the amount of financial aid the school will receive in future years.  This means that a school's past graduates have the ability to affect how much financial aid we will receive today.  


Why the lack of repayment?  Seems simple enough, but the article cited several reasons.  Some might open up their own business and not become profitable until years later or  others find low-paying government or non-profit jobs.  Still others might take a non-paying internship, or do volunteer work abroad. The most scary factor is that some fail to find jobs altogether.

Random fact:  Carnegie Mellon's Tepper School of Business has the highest repayment rate for student loans clocking in at 81%.

 There is a bright side to the story.

According to financial aid directors "as salaries rise and the economy recovers" the repayment statistics will improve.  Those are pretty broad and general statements.  I tend to take the approach of working hard and expecting high returns in the future.  Work hard and everything will pay off in the end - something I try to tell myself everyday.  Wishful thinking and hoping does not pay the bills or get the work done.  Studies are conducted all the time, and depressing reports of lack of jobs and low savings rates will continue to invade our Twitter feeds. It is up to determination and self-motivation that will get us to to the finish lines.

Monday, November 22, 2010

Open Post #4 Current Event

You’d be hard-pressed to find a person out there who is not passionate about their cell phones and service providers. There is intense competition within the telecommunications industry and many cell phone companies market their products heavily in order to gain market share. For some, this means slashing phone prices to a penny or even selling them for free. Smartphone’s (iPhones, Blackberry’s, Droids) are the leading source of revenue for many companies because along with it comes unavoidable pricy data packages. (If you’ve ever wondered how phones can be so inexpensive, well you’ve got your answer) With the advent of social media and the trend of mobile devices being used as a means of instant communication, the intense competition in the marketplace is not surprising.

Nearly every major competitor is synonymous with a certain device; for example AT&T and the iPhone. Sprint received positive reviews with their HTC Evo. Apple has now confirmed Verizon will carry the iPhone within the next few months. It was recently announced that Amazon is selling all Verizon Droid phones for 1 penny. This may seem absurd, but might be a brilliant move on the part of retailers. By Verizon subsidizing the phone so heavily, this guarantees that new Verizon customers are locked into a two year contact. Companies like Amazon and Verizon might take a onetime hit for subsidizing a $600 phone, but will see high returns on investment when that same customer pays monthly data and service packages. Consumers might view this as a “deal” and will want the same phone for their spouses and children, heck even for their grandchildren. Why not switch the whole family over to Verizon and enroll in a family plan?? Smart move. And that’s exactly what companies like Verizon want you to think.

You think you’re only spending 5 cents per phone for a family of four, but in reality a typical family plan with unlimited text and data can run upwards of $275 per month. The upfront savings hardly seems like a bargain after a year of service (if you do the math that’s about $3300 per year).

There are also other psychological things to consider. If the Droid phone only cost 1 penny to the consumer, they might think that the product is an inferior one. One might wonder, why anyone would pay more than $50 for a phone that costs a penny. This leaves other companies like T-Mobile and AT&;T with no other choice but to meet those same prices, or just risk losing a customer to Verizon. An inexpensive price might denote that no one was willing to buy the phone before the markdown. If no one is willing to pay $199 for a Droid (like everyone would happily do for the iPhone), why not just buy the “better” phone?

In the long run the positioning of this product as an inferior one could hurt the corporate image of the Droid phones and compromise profits in the long run. I mean, you’ve never seen an Apple product below the sticker price, much less sold for a penny. So, before logging onto Amazon and expending your precious pennies, take out your calculator and crunch the numbers. If it makes financial sense to spend less now in order to pay more later………..I say hit the Buy Now button and start entering your credit card information!

Saturday, November 20, 2010

Open Post # 3 – Black Friday is Just around the Corner

To some people, Thanksgiving is a time where families get together and share what they are thankful for. To others, it means waking up the morning after to snag some Black Friday deals. From an economic standpoint, some might consider the opportunity costs associated with standing in long lines just to get a few dollars off some electronic device that’s probably been unable to sell without a substantial discount.

Whatever standpoint you take, it’s almost an American tradition to spend excessively on things they don’t need. What I’m trying to say here is, I’d assume that people end up spending more than planned because of a perceived discount. In other words, people purchase things because they are on sale. Because of the money “saved,” some psychological processes tells the consumer that they must now buy another “discounted” item with the money they saved. At the end of the day, you might go home with a bunch of things you didn't really need, but bought anyway because they were on sale.

In my accounting class, the following problem was proposed:
Assume that you have spent $100 on a ticket for a weekend ski trip to Big Bear. Several weeks later you buy a $50 trip to Mammoth. You think the second trip will be more fun than the Big Bear trip. A few weeks later you notice that both trips are on the same weekend. Since it’s too late to sell either ticket and you can’t return either one, you have to choose one trip. Which trip do you choose?

Most people who do not consider the “sunk costs” (those costs that cannot be recovered) usually choose the first trip that they spent $100 on. However, that $100 cannot be recovered, so it would be preferable to you to go on the second trip because you think you’d have more fun. However, the “sunk cost effect” psychologically manipulates the individual into believing if they don’t choose the $100 trip, they’d be wasting it. In reailty, the $100 would have been “wasted” either way.

This just goes to show that Black Friday is in some ways psychological. Marketers are always trying to find positive ways to position their products and prices in the most positive light.  In the end it seems that companies are always out to make a buck, and consumers are always out to save one.

Black Friday isn’t all bad. The day after Thanksgiving is deemed Black Friday because historically consumers go out and shop after Thanksgiving, putting retailers that were operating with negative profits (in the red), into the “Black.” In other words, it’s the perfect storm of economic stimulation and a consumer buying frenzy. Retailers like Wal-Mart have already begun to advertise their Black Friday deals. There is a sense of urgency this holiday season because Wal-Mart lost market share this quarter to other discount retailers. November and December is very crucial for Wal-Mart, as they expect to generate 50% of their sales and profits from these two months alone. Many other companies also rely heavily on this faux-holiday.

So as Thanksgiving approaches make sure to think twice before you buy an item you think you might need. Have a set spending budget so you are not left with an empty wallet or maxed out credit card by the end of the day.

Wednesday, November 3, 2010

Open Post #2 - Consumer Confidence

Hello World.
I recently did an informational presentation on a book entitled “Stop Effing Yourself” by Dr. Sean Kennif for my communications class. The book highlighted several ways in which people “eff” themselves in their lives with regards to money, jobs, relationships and health. My group decided to present on how people “eff” themselves when it comes to their money. How do people eff themselves exactly? Well according to the author we are victims of sucker syndrome, participate in brainless buys and are in the pursuit of trying to keep up with the Jones’. This all boils down to the #1 effing problem – NO SAVINGS.

After the 2008 financial crisis, the savings rate increased because people were afraid to lose their jobs and homes. (It’s a vicious conundrum because high savings rate can also correlate to lack of stimulation in the economy). I assume that a healthy balance of both will make for a more efficient market.
Dr. Sean Kennif said that the U.S. savings rate in 2005 was -0.5% and improved slightly to 5% in 2009 after the huge U.S. financial crisis. This sounds promising right? Well our counterparts in Europe and China boast a 25-30% savings rate. The U.S. pales in comparison. According to Dr. Kenniff Americans find themselves in dire straits because they suffer from the sucker syndrome. They give in easily to salespeople, telemarketers, etc. To combat that, victims need to research and educate themselves before going out and buying things. They need to arm themselves with self-confidence and have the willpower to say “no” both to themselves and to the salesperson.

The brainless buys and keeping up with the Jones’s was my most favorite part of the book. It brought to light our obsession with the Jones’ and the continual quest to attain everything they have. Focusing on what others have is very distracting and detrimental to one’s wallet. Brainless buys consist of random impulse purchases that can quickly add up to large amounts of hard-earned money. An example of this is when people buy their breakfast lunch and dinner and by the end of the day have spent away nearly $30 (possibly more).

This talk of the recession and no savings may be depressing. There is a light at the end of the tunnel.
According to recent reports, based on consumer behavior, the economy has begun to rebound and reports of the recession coming to an end have begun to show merit with consumer spending. Retail stores reported a 6% growth rate in March. With the beginning of the fourth quarter and key holidays such as Thanksgiving and Christmas – we might be at the beginning of a healthier economy. Consumer confidence plays such a large role in the recovery of the economy. If consumers are not fearful of losing their jobs or homes, this opens up the door to retail therapy.

I realize that my blogs may be pessimistic towards consumer s giving in to instant gratification. But I can ease up a little and allow consumers to purchase at their own discretion. It’s nice to splurge on an iced caramel latte from the Coffee Bean on occasion. So go ahead…..ENJOY….but not too much :)

Tuesday, November 2, 2010

Open Post #1 – Why do big banks target college students?

Hello World!

Today we will explore the realm of personal finance. As I was scrolling through my CNN app on my BlackBerry, I came across an article entitled “Banks Spend Big to Sell Credit Cards to Students.” I was struck by this because credit cards have always made me uneasy. To me, credit cards represented fear, uncertainty and massive amounts of debt.

When I got my first credit card, I wasn’t sure if I was supposed to pay my bill in full. I was told that if I were to do this, it would indicate to the credit card company that you had no use for their card, so they had no incentive to offer you lower interest rates. In the beginning, I wasn’t even sure whether interest charges were standard or paid only if you kept a balance. I questioned whether my interest rate would fluctuate. I wondered if getting a credit card would help me improve my credit score. All these questions and more ran through my head.

Now to take a step back, I was worried about how one little piece of plastic could affect my life. Over thinking it? Maybe. But a few missteps here and there can lead to intense migraines for the future. I thought banks were supposed to have our best interests at heart, but with further consideration, they only have their best interests at heart. It may be a pessimistic outlook in life, but professional services are only concerned with you if you can pad their pockets. Back to the article, I was compelled to read further.

I was shocked to find out that in 2009 Bank of America paid colleges $62 million for the right to market their credit cards on university campuses. Banks and credit card companies alike are willing to take the financial hit with direct-marketing costs because they can project a tenfold return on investment. The marketing costs employed today will probably pale in comparison to the massive amounts of interest revenue accrued from the debt that students take on in college. If you think about, this hurts our economy in the long run. As these college students graduate and become members of the workforce, a large portion of their income will go towards paying down their student loan debt. This is money that would be better spent funneling back into our economy to stimulate growth in real estate and the stock market, etc.. This might seem like a dramatic exaggeration, but when we take a step back to calculate where in the heck all our money goes, we might find that a large portion of it wasn't that necessary. Take a minute to think about unnecessary luxuries, and focus on the bare necessities. Failure in paying down the principal of a loan or balance on a credit card can lead to disastrous financial ruin. Can we say Real Housewives of New Jersey?

Which brings us to a question for self-reflection…..Why did I just buy that?