Eyewitness to the Death of a Credit Union

Credit unions are dying at the rate of almost 20 per month. Rosa and I witnessed the death of one of our small, local credit unions two weeks ago when we attended a special membership meeting to vote up or down on a voluntary merger with another local credit union that was ten times larger.

Voluntary mergers are common

Mergers of this type are not unusual. In recent years, credit unions have been disappearing through mergers at an average rate of 229 per year nationwide. Ninety percent of these mergers involve small credit unions ($50 million in assets or less) joining with larger credit unions to provide their members with products and services the smaller credit unions could not afford to provide on their own. Additional services and the convenience of additional branches were cited as reasons for the merger in the meeting notification letter Rosa and I received.

We opposed the merger

We were against the merger and intended to vote that way at the meeting. The merger offered no advantage to us: we already had access to the services and additional branches as members of the larger credit union into which the smaller one was to merge, and we stood to lose several advantages the smaller credit union provided such as higher interest rates on certificates of deposit, dividends paid monthly rather than quarterly, and the opportunity to adjust the interest rate once during the term of a certificate of deposit if interest rates increased during that time. In our view, members of the smaller credit union who wanted more services and branches could join the larger credit union; membership in that credit union is open to all who live within the county.

Our minds are changed at the special membership meeting

The chief executive officer (CEO) of the credit union welcomed those who attended the meeting and explained the process by which the board of directors had arrived at the decision to merge with the larger local credit union. He noted that the credit union was in sound financial condition. It was a desire by the chief executive officer and chief operations officer to retire within the next couple of years after serving in their positions for 43 and 37 years respectively that had prompted an investigation into the options open to the credit union. No plans had been made for the succession of top management, and there was not enough time now to bring in new management and adequately train them to take over the operation of the credit union, a process that the CEO estimated would take five years. Other options were considered to keep the credit union independent, but a decreasing and aging membership along with a shrinking loan portfolio made them unfeasible. A merger appeared to be the best solution and the best candidate for merger was the larger local credit union.

According to the National Credit Union Administration, 47% of recent credit union mergers cited declining membership as the primary reason for merging with a larger credit union, while poor management succession planning was the primary reason for 18% of mergers.

The CEO’s presentation changed our minds. We now understood the real reasons for the merger; a vote in favor of the merger appeared to be the only rational choice. The credit union would need to merge eventually; nothing was to be gained by postponing it.

After being assured that the terms of our current certificates of deposit would be honored by the larger credit union, we cast our votes in favor of the merger. The results were announced shortly thereafter. Out of 5,000 members, a little over 500 actually cast votes, most of which were submitted by mail prior to the meeting. Roughly 70% voted in favor of the merger. As of June 1, 2015 the credit union will cease to exist.

Fewer credit unions equal less competition, fewer choices, less freedom

The passing of this credit union means less competition in the local market and the further erosion of personal service in the financial services industry. The management and staff of the deceased credit union were on a first-name basis with a large percentage of their membership and had developed personal relationships with their members over the years. The word “family” was used many times during the special membership meeting. That will not be the case at the larger credit union which is moving relentlessly to automate as many services as possible. We already have credit unions in our local market that utilize centralized teller services for their branches. Much like a call center, tellers are located at a remote office and interact with members at the various branches via a video terminal. Another credit union has gone completely electronic and charges members a five dollar fee for each transaction conducted face-to-face with a teller; all business with the credit union is done remotely via the internet or call center personnel.

With the death of each credit union, the consumer is left with fewer choices and less freedom.

K. C. Knouse is the author of True Prosperity: Your Guide to a Cash-Based LifestyleDouble-Dome Publications, 224 pages

The Elements of a Sustainable Standard of Living

In our consumption obsessed culture, few people have a sustainable standard of living, because they use credit to maximize their consumption and their living standards.  They spend money before they have earned it.  They have little or no savings and few investments.  They substitute credit for savings when faced with an unexpected expense.  When an interruption in income occurs, they scale back their consumption and liquidate their assets in order to pay their debts and everyday living expenses—a sure sign their standard of living is unsustainable.  Even without an interruption in income, they are dependent on either periodic wage increases or additional credit to maintain their standard of living, because loan payments and inflation rob them of money with which to spend on consumption in the future.  Any financial security they may think they have is an illusion:  they are dependent on financial institutions for credit, employers for jobs and wage increases, and the government for unemployment benefits when there is an interruption in income.

If you are to enjoy financial security, you must establish a sustainable standard of living, one that reflects your true financial capacity, is backed by cash assets, and can withstand an interruption in income or a stagnant income.

These are the elements of a sustainable standard of living:

  • Live on less than you earn.  A sustainable standard of living requires cash and lots of it.  The difference between what you make and what you spend is where the cash comes from.  If you are a dual-earner couple, live on one income and save the second income.  In addition to having money to save, living on less than you earn gives you flexibility to deal with financial challenges when they come along.  Often you will find that the only adjustment you need to make to handle a financial challenge is to save less money for a while.
  • Buy only what you need to get the job done.  Once you get beyond the basic function a product is intended to perform, additional features provide less value relative to their cost.  To maximize the value of the money you spend, buy only what you need to get the job done.  For example, if a used vehicle will provide reliable transportation, the additional money spent to obtain a new car will realize very little additional value.
  • Establish and maintain an emergency fund.  An emergency fund is cash to replace wage income when it is interrupted by a job loss, medical leave, or a temporary layoff.  Accumulate at least six months of living expenses in the emergency fund, keep it in a liquid account (passbook savings, money market account, or short term certificate of deposit) so you can get your hands on it when you need it, use it strictly for replacement of income and nothing else, and replenish the emergency fund as soon as possible whenever it has been depleted.
  • Pay cash for everything except a house.  If you can’t pay cash for an item or service, you cannot afford it.  Earn your money before you spend it.  Save in advance for purchases you know you will need to make with targeted savings accounts.  Save and pay cash for a vehicle, furniture, appliances, clothing, vacations— everything.
  • Accumulate capital for investment.  Set aside money regularly for investment.  Unlike targeted savings, this money is not for spending; it is used to build financial wealth.  This is capital.  Capital is invested and earns money.  The earnings are added to the capital and earn money, as well.  This money earning money has a compounding effect that produces an abundance of financial wealth over time.  Eventually, this financial wealth becomes large enough to produce sufficient earnings to replace wage income.

A sustainable standard of living reflects financial reality; it is the true standard of living.  Anything beyond it is an illusion created by the use of credit, an illusion that will one day collapse under the weight of the debt used to maintain it.  A sustainable standard of living is available to anyone regardless of income provided they are willing to take control of their finances by setting financial goals and prioritizing their spending through the use of a budget.

K. C. Knouse is the author of True Prosperity: Your Guide to a Cash-Based LifestyleDouble-Dome Publications, 224 pages

Don’t Raid Your Retirement Savings to Spare Your Children Student Loans

Over half of the parents who participated in a recent T. Rowe Price survey indicated they would rather withdraw money from their retirement account, delay retirement for a few years, or work an additional job than have their children take out student loans to pay for college. If you are in that group, please reconsider because sacrificing retirement savings to spare your children student loans is a big mistake. Here’s why:

  • You cannot fund your retirement with borrowed money.  While your children have the option to borrow money to finance a college education, you don’t have that luxury when it comes to financing your retirement; you will need savings.  The vast majority of Americans have not saved enough for retirement.  You cannot afford to tap your retirement savings to pay for your children’s college education.
  • Your children will have forty years to pay back student loans and save for their retirement.  Your children have their entire lifetime to build their fortunes; you have less than twenty years to secure your retirement.
  • There are other ways to pay for college in addition to student loans and your retirement savings.  Funding the costs of a college education is not an either/or proposition:  student loans or your retirement savings.  Your children can pay for part or all of their own college education with scholarship money, wages from part-time employment during the school year and full-time employment during the summer,  by taking evening classes while working full-time,  by delaying college to work full time and save for college expenses, and so on.  See my post How to Graduate from College with Less Student Loan Debt for more ideas.
  • Delaying retirement may not be an option.  Recent surveys confirm that a significant percentage of American workers retire sooner than they had planned, usually due to health reasons or a layoff.  You may not be able to work longer to compensate for the retirement savings you spend on your children’s education.
  • Working a second job is easier said than done.  The rewards of working a second job will be far less than you imagine them to be; see my post The Hazards of Chasing Additional Income.  If you are a professional, moonlighting will probably detract from your performance at your  primary job.  Do you really want to put your full-time job in jeopardy to earn a few extra bucks so your children can graduate from college free of student loan debt?

Your children will be the beneficiaries of their college degrees by way of increased earnings over their lifetime.  Let them invest in themselves by financing their college education with scholarship money, their own earnings, and if necessary, student loans.  You can help them avoid unreasonable student loan debt by encouraging them to make financially prudent decisions with regard to the cost of their higher education.  I know from experience that if a child has a financial stake in her higher education, she will get more out of the college learning experience, because she will be motivated to put more into it.  It’s her money on the line.

Plan ahead and save for your children’s college education

If you feel you must pay for part or all of your children’s college education, then make a plan to save for it along with your retirement.  Start early and save aggressively.  To successfully finance all or part of your children’s education as well as your own retirement, you will need to keep a lid on your standard of living so you have the money available to adequately fund college and retirement savings simultaneously.  Use a 529 plan to accumulate college savings tax free.

Financing college with student loans is a good investment

Whatever course you take, don’t try to make up for lost time by raiding your retirement savings to avoid student loan debt for your children.  You cannot afford it.  Besides, repayment of student loans should not be viewed as a hardship.  When done prudently, financing a college education with debt is a good investment.  It is well worth the interest paid on a student loan to obtain a marketable college degree that will pay for itself many times over though an increase in earning capacity.

Average student loan debt for those graduating in 2014 was $ 28,400 about the price of a new, mid-sized automobile, less than the average cost of a wedding ($29, 858), and a whole lot more valuable.  Your children can handle student loan debt and prosper with a little guidance from you.

K. C. Knouse is the author of True Prosperity: Your Guide to a Cash-Based LifestyleDouble-Dome Publications, 224 pages