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How to Instill a Sense of Financial
Responsibility in Your Children
By A. B. Jacobs

One question I hear often is “How far should parents go in helping their financially irresponsible grown children, especially when these offspring have children of their own to support?” The problem posed does not lend itself to resolution. Although the predicament may appear to deal with money—or the lack of it—it’s not inherently a financial dilemma. It actually goes far deeper and is the result of a lifetime of behavior that failed to be addressed a quarter century earlier. More to the point, attempting to instill principles or inculcate habits in children by their third or fourth decade on this earth will prove to be a futile exercise. It’s my belief that a person’s attitudes and values are pretty well established by the end of puberty. With that said, let me provide a few guidelines that may help you guide your offspring in more suitable directions.

1. Instruct by Precept and Example. Whether you believe it or not, your children really pay attention what you say and do. As the first authority that normally appears, a parent becomes a model on which the child fixates. Even before verbal communication is established, parental activities provide guidelines that offspring tend instinctively to emulate. Through repetition, later supplemented with oral reinforcement, a bond of behavior develops that can become an ingrained pattern. It’s important to realize, however, that this input must be consistent if the lessons are to be learned. Thus, if the messages are contradictory, they will be received as mixed signals by kids. If, for example, parents proclaim the importance of living within their financial means while simultaneously indebting themselves through purchases they cannot afford, it will not go undetected by the children nor induce them to pursue habits of thrift. The only way that sound financial values can be transmitted from one generation to the next is by a systematic and continuous program that reinforces these values. Only through precept and example will sound habits be engrained.

2. Don’t Encourage Unattainable Goals. Although I regard myself as an optimist, I nonetheless subscribe to the message mounted in a twelve-by-fifteen-inch frame on my wall. It is one of the many versions of Murphy’s Law, which reads: “Nothing is as easy as it looks. Everything takes longer than you expect. And if anything can go wrong—it will, at the worst possible moment.” Admittedly overstated for humor and effect, Murphy’s Law contains an element of truth. It reminds us that life is unpredictable and if not taken into consideration can bring devastating results. Often parental aspirations fail to keep things in perspective. Well-meaning parents, who urge their children to aim for the stars while ignoring reality, do them no service. One typical example is the encouragement given to attend a prestigious university when family funds are insufficient. Over the past several years I’ve fielded many a letter from these children, themselves well into parenthood and overburdened with tens of thousands of dollars in unpaid student loans. In most cases, the grandiose plans envisioned never came to pass. Whatever added luster a high-priced school is designed to impart generally proves to be illusion. Instead, two years at a community college followed by two more at a local state university, in keeping with my blueprint of college on the cheap, proves far more appropriate. The point I want to stress is that realistic and attainable goals, taking into consideration the inherent abilities and limitations of each offspring, must be the basis on which guidance is given. Despite the prevalent attitude in modern society that everyone is endowed to achieve at any level, the wise parent will recognize reality and seek to counsel the child accordingly.

3. Don’t Fight Against Human Nature. We individuals are programmed to behave in certain ways. Just as night inexorably follows day, we may expect certain human actions to trigger other actions. As one example, it is now established, perhaps not unexpectedly, that if a high school student is rewarded for report card grades, with $100 for each “A” and $50 for each “B,” that the student’s grades will rise. The anticipated reward triggers self-interest, with a desire to collect the money as the primary motive. From the student’s perspective, any learning acquired that may in the long run prove beneficial is probably unimportant. What counts is cash in hand. Over the years I’ve witnessed a lot of strange behavior that ignored human nature. One of the more bizarre instances concerned an indolent young woman, who over many years repeatedly received instruction from her wealthy father on how to balance her checkbook. She habitually issued checks whenever she chose. If the account balance fell below zero, the bank phoned her father who deposited more money in the account. Somehow her father never understood that his instruction sessions ignored human nature; the checkbook balance held no meaning for her. So what is the purpose of this lesson? It’s to stress the importance of parents’ awareness of what is important to their offspring. Human nature dictates that all actions actually have real meaning.

AL JACOBS has been a professional investor for nearly four decades. His business experience ranges from real estate, mortgage, and securities investment to appraisal, civil engineering, and the operation of a private trust company. In addition to managing his investments on a day-to-day basis, he is a featured financial columnist for both online and print publications. He is the author of Nobody’s Fool: A Skeptic’s Guide to Prosperity. You may subscribe to his financial Newsletter, "On the Money Trail," at no cost or obligation, by visiting www.onthemoneytrail.com.

Some Thoughts on Schooling
By A. B. Jacobs

Much is made over the importance of higher education, and rightly so. Those youths whose schooling ends with a high school diploma will, throughout life, find themselves with the same opportunity as persons who marry in haste: that of repenting at leisure. Just as a secondary school diploma was the prerequisite for entrée as a participant in the industrialized society of the early twentieth century, a bachelor’s degree from a college or university is a minimal requirement for effectively competing in the technological environment that exists today. To ignore this fact is to ignore reality.

Although there is general agreement that advanced education is necessary, there is no consensus as to exactly what constitutes first rate schooling. If today’s institutions of higher learning share one thing in common, it is the hyperbole each exhibits in promoting itself. Scholastic reputation, whether real or perceived, is a marketing tool, and there seems no limit to the claims of excellence used to induce students to attend, alumni to endow, and prestigious educators to affiliate. Above all else, higher education is big business in every sense of the word. The result is as you might expect. Large numbers of students throughout the nation obtain their college diplomas at a huge financial cost. Whether the funds are provided by parents, many who must literally mortgage their own existence, or by students who graduate with tens of thousands of dollars in student loan debt, the sacrifice is often immense.

While we’re on the subject of money, we’ll scrutinize a few numbers. Despite the costs of attending certain private universities, where annual tuitions, fees, room, and board, can exceed $40,000, there are many schools that are far less expensive. Here in my state, the University of California charges $5,684 tuition for resident students, the California State University system recently set its charges at $2,334, and at the bottom of the financial totem pole are the community colleges that a full-time student can attend for $780 per year.

The question then becomes, how might a prospective student best select from among the many institutions? As you might guess, I harbor some opinions. Essentially I disfavor the standard methods that include recommendations of school counselors, ratings by such resources as Barron’s Profiles of American Colleges, or the brochures and press releases issued by each university. Instead, my approach advocates college-on-the-cheap, where the student seeks first-rate learning at the lowest cost. My blueprint calls for the first two years at a local community college followed by two years at a state university, commuting from home. Used textbooks can normally be purchased at a fraction of the cost of new ones, either from the school bookstore, or directly from a student just completing the course. This not only trims the expense, but also offers a serendipitous effect—the book often contains important portions underlined, and helpful comments and notations included in the margins. Furthermore, the student should spend each summer at a job, so to earn at least a portion of the year’s education costs. There is something about working that adds an important dimension to the learning experience.

Let me acknowledge that there will be many to brand my program an outline for mediocrity. I’m familiar with the claims: Unless a student attends a prestigious university, the education received will be second-rate. Lord knows, the academic community has been repeating that catechism for decades, and many persons believe it to be so. The actual fact is that four years at Harvard or Princeton Universities does not impart, to a talented and dedicated student, learning that is in any way superior to the 4-year program I’ve outlined. Nonetheless, there will be parents who will spend unbelievable sums and deprive themselves of many things, at the risk to their own eventual retirement, so that their progeny can attend the idealized institution. No doubt many parents feel that no financial limit can be set when it comes to providing their offspring with the ultimate gift. However, a fortune spent by parents who can ill afford it, jeopardizing their own financial well-being, is money pathetically wasted. Actually, the finest gift that parents can give a child is the assurance that in later years that child will never be required to support their indigent parents.

Let me offer a testimonial of sorts, reaffirming my belief that the academic source of education is far less important than the student’s efforts, and that neither the architectural characteristics of the campus and classrooms nor the credentials of its professors will determine the extent of learning acquired by a motivated student. My mastery of algebra in no way suffered by my classroom being a primitively lighted and ventilated Quonset hut. Similarly my grasp of partnership law is sound, despite a one-time nameless and faceless course instructor located in a post office box two thousand miles away. Admittedly, a smiling and enthusiastic professor in an elite university adds a touch of stature to the process, but the eager student who strives to learn will do so regardless of the accouterments.

I’d like to conclude with a response to those critics who contend that a degree from an institution without an exalted reputation will forever stigmatize its holder. To you, I pose this question: Do you actually know from what schools your dentist, attorney, accountant, and physician received their bachelors’ degrees?

AL JACOBS has been a professional investor for nearly four decades. His business experience ranges from real estate, mortgage, and securities investment to appraisal, taxation, and the operation of a private trust company. In addition to managing his investments on a day-to-day basis, he is a featured financial columnist for both online and print publications. He is the author of Nobody’s Fool: A Skeptic’s Guide to Prosperity. You may subscribe to his financial Newsletter, "On the Money Trail," at no cost or obligation, by visiting www.onthemoneytrail.com.

Five Ways to Make Sure You’ll Never Retire
By A.B. Jacobs

Author of Nobody’s Fool: A Skeptics Guide to Prosperity

I recently attended a retirement party for a close friend. It was inspiring to listen to the speeches lauding him for forty-three years of diligent service, interspersed with accolades for selfless devotion to clients and coworkers.  In all, it was a moving experience, culminating with his announcement that he planned to spend his retirement years contentedly with his wife and family, engaged in morning rounds of golf with friends, and accented with travel to exotic places.  If anything detracted from the celebration, it was his admission to me in the washroom later that evening that he dreaded the thought of giving up work.  He added that golf had become a bore, that there were no places he particularly wanted to visit, and that a few hours a month with his children and grandchildren was all he could stand.  Finally he blurted out: “Damn! I still have ten or fifteen good years I could continue.  If I hadn’t accumulated so much money, I couldn’t retire—I’d have to keep working.”

Though there’s nothing I can do to assist my friend, I can pass on some tips to those of you who never want to find yourself in his predicament.  If you want to make certain you’ll always be sufficiently insolvent so as to require perpetual nose to grindstone, I know just how to do it.  Pay attention as I describe five surefire methods to guarantee financial inadequacy.

1. Announce to the world that the motor vehicle you drive is a reflection of your personal excellence. This is accomplished by driving only a current year model of a recognizably prestigious vehicle. Driving a Toyota, as I have for the past five years—and will probably continue to do for the next five—is no way to inspire adulation. All it will do for you is provide comfortable, reasonably priced, and maintenance-free transportation. But that will never do. What you want is this year’s Jaguar, Mercedes, or, at the least, BMW. In that way your bank account will avoid accumulating those dollars that might one day force you from the rolls of the habitually employed. And if you want to make absolutely certain you’ll not fail in this endeavor, do not purchase what you drive. Instead, lease it, as there is no surer way of motoring unprofitably than by driving a rented vehicle. In that way you’ll not only incur all the normal operating expenses and depreciation of an owned auto, but provide an extra profit to the middleman from whom you lease it.

2. Send your progeny to the finest universities. The fact that learning can be acquired inexpensively is no reason not to expend huge sums in its attainment. With tuition, books, fees, lodging, and incidentals included, you should be able to blow upwards of $40,000 annually for each child if the right schools are chosen. You may have heard that two years at a community college, followed by two years at a local state university commuting from home, can provide a motivated student with as fine an education as four years in residence at Harvard or Princeton. Despite the fact this is true, it won’t meet your basic requirement, which is to avoid accumulating all that money you don’t want. Therefore, you know what you must do. Encourage each of your offspring to select a high-priced institution at an exclusive location. It may not address their needs, but it will resolve your problem.

3. Don’t settle for reasonably priced merchandise when something more expensive is available. The fact that an $18.75 Timex wristwatch is as reliable and precise as a $3,500 Rolex does not matter. The prospect of being observed wearing a timepiece that is—God forbid, cheap—will forever mark you as someone devoid of what the marketing professionals have established as a mark of prosperity. The same is true with the writing implement you use.  Consider the hyperbole employed by one firm to convince us of the importance of a $600 ballpoint pen.  Their pitch focuses on its beauty and workmanship, as well as the implication that you will be admired by clients and associates for your taste and culture. With that as your goal you’ll not want to emulate someone like me; the pen in my shirt pocket, with probable value of about 29 cents, carries the worn inscription “Resdeck Plumbing, Redondo Beach, Calif, Your problems are our problems.” So keep those lofty principles uppermost as you shop your way through life, favoring such products as $300 per ounce bottles of perfume, $250 pairs of Adidas-1 athletic sneakers, and $500-per-night hotel rooms on Las Vegas weekend getaways, to name just a few.

4. Never say no! Did your brother-in-law just lose his weekly paycheck by a bad pick on the third race at Hialeah? If he needs a bit to tide him over, give him your help. Is a generous contribution to the bridal shower of coworker’s daughter requested? It will certainly be a nice gesture on your part. The plea given from the pulpit by your pastor last Sunday made it clear that without your assistance, the natives of Rwanda will continue to suffer. Surely you can’t turn your back on mankind. And as there is no limit to the needs that others will impose on you, it is a reliable device to rid yourself of money. Simply turn off your head and follow your heart.

5. Accept without question your stockbroker’s suggestions on the securities you buy and sell. Should a heavily loaded mutual fund be recommended, as it most assuredly will, signify your approval with a nod of the head and a broad smile. Finally, as a last resort, if your portfolio refuses to head in a sufficiently southward direction, give discretionary authority to your stockbroker. In this way, the inevitable churning of your account to generate maximum commissions for the broker, irrespective of performance, will be guaranteed. Simply follow this program and you may rest assured that it won’t endow you with unwanted assets. Your status as a working stiff will be guaranteed in perpetuity.

AL JACOBS has been a professional investor for nearly four decades. His business experience ranges from real estate, mortgage, and securities investment to appraisal, civil engineering, and the operation of a private trust company. In addition to managing his investments on a day-to-day basis, he is a featured financial columnist for both online and print publications. He is the author of Nobody’s Fool: A Skeptic’s Guide to Prosperity. You may subscribe to his financial Newsletter, "On the Money Trail," at no cost or obligation, by visiting www.onthemoneytrail.com.

The New Bankruptcy Law
By A.B. Jacobs

Author of Nobody’s Fool: A Skeptics Guide to Prosperity

On April 20, 2005, President Bush signed legislation designed to overhaul the federal bankruptcy laws.  The consummation of this project, in the works for nearly a decade, was no small accomplishment.  Its enactment required overcoming the objections of labor organizations, consumer advocacy groups, and the leadership of the Democratic Party.  The 2004 elections that gave the Republican Party congressional domination, particularly their 55-seat majority in the Senate, made this possible.

For a brief historical background, the concept of bankruptcy is relatively modern, dating in this country to 1800 when Congress adopted the first national bankruptcy law, modeling it after a British statute of the time.  Prior to that time, unpaid debts were treated as criminal offenses throughout the world.  In ancient Rome, creditors were literally able to divide the body of an insolvent debtor or to enslave him and his family.   Under the laws of England during the reign of King James I (1603-25), a debtor unable to explain insolvency was placed in the public pillory and might be put to death if his failure to pay creditors was considered improper.  But with the development of trade and commerce, steps were taken to ameliorate the condition of the debtor. Modern legislation dealing with bankruptcy generally contains the basic principle that a person unable to pay debts in full may be discharged of them by giving up all property for ratable distribution among the creditors.  The U.S. bankruptcy laws have been modified and remodified over the past two centuries, principally in 1898 when Congress passed the fourth national bankruptcy law, establishing many of the procedures currently in effect.  Thereafter periodic modifications were enacted, with the last significant overhaul occurring twenty-five years ago.

America’s financial landscape has evolved during the past quarter century. Innovation in the marketing of goods has reached a level previously unimagined. The credit card, created as a shopping convenience, has mutated into a device in which its use—and misuse—is epidemic. Consumer borrowing, once held in check by realistic limits, is today a national scourge. Understandably, when citizens find themselves extended beyond their limits, they seek a way out. The bankruptcy court is often the answer, with 1.56 million Americans filing in 2004, double that of a decade earlier. The method most popularly chosen is that under Chapter 7 of the Bankruptcy Code by which the debtor may retain selected assets, together with their accompanying obligations, while renouncing all other indebtedness.  As expected, credit card debt held by wage earners of modest means, often extending into the tens of thousands of dollars, is now systematically repudiated.  The answer by the nation’s creditors to this predicament is as you might expect: enactment of a law prohibiting the use of Chapter 7.

With the scene set, we’ll consider the provisions of this law that will become effective in October 2005. Although the legislative verbiage extends to 500 pages, its intent is captured with two major changes.

1) Means test for Chapter 7 eligibility. Any debtor whose income equals the state’s median income and who can pay $100 per month over five years is ineligible to file. The alternative in that case must be to file bankruptcy under Chapter 13, resulting in court-ordered repayment plans. With a national median family income of $42,654, the exclusionary net will sweep wide.

2) Mandatory Consumer counseling. Individuals who seek bankruptcy protection must obtain credit counseling at their own expense from “an approved nonprofit credit counseling agency” (not unsurprisingly, often affiliated with a credit card company). In addition to this requirement that can extend for up to six months, bankruptcy fees, currently at about $750 and $2,500 for Chapters 7 and 13 respectively, are expected to double. You may add to that the financial-education course which debtors must complete within 18 months of filing before their debts may be discharged.

Now that you’re aware of the changes, let’s consider the standard arguments, pro and con. The pro side, favored by banks, credit card companies, and other assorted creditors, is easily understood. They maintain that the current system permits unscrupulous debtors to flagrantly ignore their debts, thereby passing these costs on to creditors. They further contend that honest citizens who reliably pay their bills are the real victims of opportunists that default on their obligations, as the costs must be passed on to the general public. To emphasize their arguments, they point to persons who run up massive credit card bills, only to default on them when it becomes convenient. Those on the con side see things differently. They decry the measure as one that guts a safety net essential to many who encounter financial problems not of their making. They offer as examples persons who have lost a spouse, been laid off from a job, or incurred large medical expenses. They further allege that the credit card companies have contributed to the problem by extending credit to vulnerable consumers.

As you might guess, I harbor some opinions that I’d like to pass on for your consideration. To begin with, the supporters are correct that some deadbeats do take advantage of the rules. As an example, a one-time close associate could serve as a poster boy in depicting the abuses possible. Because of personal financial difficulties, he systematically ran up 5-figure balances on multiple credit cards, collecting the proceeds in cash while dutifully servicing each card with minimum payments. With maximum credit limits achieved, and over $65,000 safely secreted, he filed Chapter 7 Bankruptcy, and got away with it quite neatly. But, as I consider the effect of these revisions, he could perform exactly the same operation with no difficulty. The new law will not deter a sophisticated conniver from defrauding creditors with impunity. So what will it really accomplish? I’m convinced that it will insure exactly what its sponsors intend: It will permit America’s lending institutions to target the mass of middle-class, middle-income, citizens, coercing them to further extend their borrowing, while safe in the assurance that most will never get away. Perhaps it was pure coincidence that on April 14, the day on which the House of Representatives gave its final approval to the legislation, I received in the mail a solicitation from Citibank, one of the nation’s largest credit card issuers. The pitch was an offer for a free iPod in conjunction with my application for their credit card, prominently boasting “0% APR on balance transfers until August 1, 2006.” It required closer scrutiny with a magnifying glass to locate the fine print in the literature stating “All your APRs may automatically increase up to the default APR if you default under any Card Agreement that you have with us . . . The default rate equals the U.S. Prime Rate plus up to 23.99%.” Is there any doubt that the credit card companies know, with statistical certainty, exactly what percent of the general population will, within a prescribed period of time, default on “any Card Agreement”?

Though it was a long time in coming, the law will soon go into effect. Exactly what it will bring in family disruption and misery is incalculable. The simple fact is that a substantial portion of the population is incapable of astutely handling money. Uncontrolled borrowing, whether the result of a lack of sophistication, unexpected financial reverses, or a psychological impulse to spend, leads many to the brink of insolvency. But further, in the event of a major decline in the economy, particularly a real estate collapse, the number of persons affected will be formidable. If the safety valve of Chapter 7 Bankruptcy becomes unavailable, it’s difficult to know what will be the final result.