Ever Wonder Why Frequent Flyer Miles Seem So Valuable?

People often focus on near-term concrete goals in financial decision-making. While trying to maximize these immediate and clear goals they forget or discount the real reason for the actions. This is called Medium Maximization. Having something measurable within reach can redirect our motivation. Immediate and concrete goals by which to measure ourselves give a sense of progress. Plus it just seems an easier decision to make.

When an airline offers a frequent-flyer program it allows members to accumulate miles. The miles begin to obtain value to the program member despite being only a medium you can trade for free travel. The member doesn’t truly care about the miles. He cares about the benefit of accumulating those miles, free travel. The medium, in this case, frequent flyer miles, truly has no value yet still draws the concentration of the program member. “The money we earn from work is also a medium. Thus, the potential implication of research on medium is not medium; it is extra large.” Christopher Hsee, Journal of Consumer Research, June 2003 

The tenet of Medium Maximization says people often fail to fully skip over the medium (frequent flyer miles) in favor of the benefit (free travel). For example, consider the opening scene to the film Wedding Crashers. The scene concentrates on a divorcing couple in the midst of a Divorce Mediation session. They begin arguing over who should be awarded the frequent flyer miles. Frequent flyer miles and other frequent buyer or cash back rewards programs are considered by family law courts to be a community asset in California. The husband says “I earned those miles”, the wife seems to agree but believes he earned them on trips to see his -insert expletive- girlfriend. The miles are the medium to this couples’ financial decision-making process (dispute). By focusing on the medium (frequent flyer miles) rather than the benefit (free travel) of owning the medium, they have both failed to consider the decision at hand from a rational perspective. The real decision at hand is who will be awarded the right to free travel in the future not who gets the frequent flyer miles. The value of this free travel can be estimated fairly easily. Twenty-five thousand (25,000) miles might earn a one way ticket from Los Angeles to New York while the same ticket would actually cost $300. The wife lost sight of the benefit of the miles immediately when she associated the medium with the outcome in her mind, her cheating husband. She has missed the point by concentrating on the medium rather than the benefit.

The wife is very clearly upset by the situation and allows her emotions into the decision making process. I don’t blame her. The point of the illustration is to realize that economic theory tells us people will never concentrate on the medium because it has no value. The emotional turmoil of the dispute in the movie tells us humans often place a value on the medium and may ultimately make emotional decisions because of their tendency for medium maximization. Understanding Behavioral Finance can help mitigate emotion but we can never hope to completely remove it making Behavioral Economics vital to appreciating real life financial decision-making especially in Divorce Financial Planning.

 

 

Financial Infidelity Survey

A non-profit organization, CESI Debt Solutions, recently completed a survey of more than 200 American consumers. The survey revealed some interesting facts about how couples manage their finances in a marriage and revealed frequent financial infidelity.

According to the survey 80% of couples have at least one member who spends money their spouse does not know about. Almost 20% of married individuals have a credit card with a balance unknown to their spouse. 38% of those with secret spending habits and credit card balances worry their spouse would consider divorce if they ever learned of the Financial Infidelity.

Clothing and Accessories top the list of secret purchases with 35% of respondents reporting they buy purses, clothing, shoes, jewelry, etc.. in secret.

When asked why the spending was kept secret, the overwhelming majority said it was to avoid problems at home.

Access the full Press Release here http://www.cesidebtsolutions.org/downloads/marriageanddebt.pdf

 

California Divorce Dictionary: 4320 Factors

§4320 Factors; The factors set forth in Calfornia family Code Section 4320 for determining the proper amount of permanent Spousal Support.  Earning capacity, marketable skills, child-rearing, education, the foregoing of education, contributions to careers, “marital standard of living”, interests of the minor children, length of marriage, half the length of marriage, presumption of lengthy marriage and the needs of each spouse.

 

 

IDFA 2010 Survey: Recession and Divorce

The Institute for Divorce Financial Analysts recently completed a survey of it’s membership. Almost two hundred members responded from around the United States.

69% of Certified Divorce Financial Analysts said they had seen clients who could not afford to get divorced because of recession-related financial problems.

When asked to assess the difference that current economic conditions have made to the number of new divorcing clients coming through their doors, 39% say that the recession has not affected the number of cases, and 25% say that the recession has increased the number of new cases they’re seeing (these numbers compare with 43% and 19% respectively the previous year.

The most common reason cited for an increase was the clients’ desire to reduce the cost of their divorce. Other common responses included:

  • Economic climate is straining marriages
  • People are exploring the financial feasibility of being able to divorce before they file or see an attorney
  • An increase in mediated and Pro Se divorces using CDFAs as financial neutral.

The most common reason cited for the decrease was fear: fear of the economy, job loss, losing (or not being able to sell) their homes, and of not being able to make ends meet without their spouses. Other common responses included:

  • People are afraid to divorce while they’re unemployed
  • Clients can’t afford to divorce until the economy improves
  • Not enough money to hire a financial expert
  • People just can’t afford to live apart – especially if the matrimonial home is “underwater” (meaning that they owe more on the mortgage than the house is currently worth).

22% percent of respondents said that the number of clients whose matrimonial homes were “underwater” has increased dramatically over the last year. An additional 34% said that the number had increased slightly, and 24% said that the number had remained the same. Eighteen percent of respondents do not presently have clients with underwater houses, and only 2% report a decrease in the number from the same time last year.

Sixty-seven percent of respondents said that the current housing market has forced them to come up with creative solutions to property-division problems when the matrimonial home fails to sell – or would sell for less than what clients still owe on the mortgage. This number is down from 73% the year before. The most common solution is for ex-spouses to retain joint ownership and continue to live in the house (often, he moves into the basement and she lives upstairs) until the market improves, agreeing to postpone final division of assets until after the house is sold.

Fifty-eight percent of respondents said that the current economic climate has affected the type of assets their clients wish to receive as part of their divorce settlement (compared with 63% the year before). The most common request was for liquid assets only: their clients want cash rather than stocks, investments, real estate, or retirement plans. In other words, “Cash is King.”

According to the survey, Mediation and Collaborative Divorce proved to be the most cost-effective ways for clients to process the financial aspects of their divorce in 2009-2010. Many CDFAs work in two or more models, and they were able to paint a pretty clear picture of expenses incurred by their clients in each.

“These survey results are copyrighted and are used with permission from the Institute for Divorce Financial Analysts.  www.InstituteDFA.com

 

The Patient Protection and Affordable Care Act – What does healthcare reform mean for Divorce?

The Patient Protection and Affordable Care Act was signed into law on Tuesday, March 23, 2010. The complete details are not yet known as many of the provisions require sweeping overhauls to the way medical insurance has been sold and administered in the United States. As is common in bills of such a large magnitude affecting such a vast cross section of the American Public, this legislation will be enacted over a period of years beginning in June of 2010 and culminating with the final legislated change to take effect in 2018. Following is a summary of what I believe, at first glance, to be the most important portions of the reform for Family Law practitioners.

Immediate Access to Insurance for Uninsured Individuals with a Pre-Existing Condition.  This provision provides eligible individuals access to coverage that does not impose exclusions for pre-existing health conditions. In the past, pre-existing medical conditions, whether serious or minor, may have precluded an individual from obtaining medical insurance on the open market. Long term legal separations, delayed divorces and other creative solutions were used by negotiators in situations where an un-employed spouse had pre-existing health concerns. This reform will become effective June 30, 2010 and should provide long term solutions for your clients. Coverage under this program will continue until new exchanges are operational in 2014. The exchanges may even offer more affordable coverage than the COBRA continuation insurance many newly divorced and unemployed individuals opt for today. This new venue will enable comparison shopping for standardized health packages, facilitate enrollment and administer tax credits to make coverage affordable for all income levels.

Extending Dependent Coverage. Young adults age 19 through 29 are the largest growing age group in the country at risk of being uninsured. The growing population of un-employed or under-employed young adults has many of them landing back at home after college. Parents are increasingly making planning for the expenses of their able bodied adult children part of their divorce negotiations. Current medical policies provide dependent care for children until they are 19, or 23 if a full-time student. Purchasing catastrophic or high-deductible medical insurance for the kids has become a common risk management solution for parents to insure against major loss if their child should be in an accident or need expensive medical care. The problem remains the relatively high cost and relatively small number of options. The Patient Protection and Affordable Care Act will require any group health plan or plan in the individual market that provides dependent coverage for children to continue to make that coverage available until the child turns 26 years of age. This takes effect for plan years beginning on or after September 30, 2010 and should allow parents to more effectively arrange for sharing the costs of co-parenting their adult children.

There are many other important and far reaching provisions beyond the scope of my writing. The complete 2,409 page text is available at http://docs.house.gov/rules/hr4872/111_hr3590_engrossed.pdf.

So how are we going to pay for it? Tax increases. The upper middle class and wealthy will be footing the bill for much of the increased taxation. An increase in the hospital insurance tax rate (commonly referred to as Medicare payroll tax) and an additional tax on investment income will take effect in 2013. The Medicare payroll tax will increase from 1.45% to 2.35% and a “Medicare contribution tax” of 3.8 percent will be levied on net investment income (e.g., dividends, capital gains, rents, passive income) for taxpayers with Adjusted Gross Income greater than $200,000 ($250,000 for joint returns).

Increased access to affordable coverage should provide flexibility in divorce settings, reduce the use of risky long term planning scenarios and possibly remove expensive COBRA continuation coverage from our lexicon.  Like any significant income tax changes, those included in the reform will require changes to support guideline calculations and a base-line understanding of how those changes will affect individuals and families navigating divorce. We will learn more as provisions go into effect in the coming years.