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Monthly Archives: November 2016

When Good Incentives Lead on Bad Situation

An Experimental Field Study

In an experimental field study, the researchers set out to test the efficacy of three distinct incentive schemes for employees in charge of assessing risk and issuing loans: the origination bonus (in which officers are rewarded a commission for every loan issued); the low-powered incentive (in which officers receive small rewards for loans that perform well and small penalties for loans that perform badly); and the high-powered incentive (in which officers receive big rewards for issuing loans that perform well, but big penalties for loans that default).

To begin, the researchers collected a random sample of actual applications from entrepreneurs seeking commercial loans for the first time. They acquired the loan files from a large commercial lender in India, a country challenged by a dearth of verifiable financial data. As is common in emerging markets, many residents have no personal identification documentation, let alone a credit score. Loan officers often end up relying on qualitative information and intuition, all the while knowing that these loans may be vital to the nation’s economy.

“Small businesses in emerging markets are thought to be among the large engines of employment and economic growth,” Cole explains. “But they often find it hard to get access to financing because they lack the large amounts of collateral that banks typically require. So we were interested in studying this small business segment, which is difficult to lend to but could potentially have a large impact.”

The researchers then recruited 209 experienced loan officers from several leading private—and public-sector Indian commercial banks to participate in up to 15 loan assessment sessions. Participants were asked to evaluate six applications per session, rating applications on personal, business, management, and financial risk before granting or denying the loan.

The Small Business Administration

A look under the hood at SBA, however, reveals a small but important agency. In fact, the SBA is perhaps the perfect prototype for a Trump administration agency: a public-private partnership driving valuable outcomes to a critical (but often neglected) part of the economy, all at a low cost to taxpayers.

Gallup and other surveys show high support for small businesses. However, programs that support small businesses are not popular for superficial reasons. Instead it’s because small businesses touch the lives of every American in ways that are not only tangible, but also, in fact, consequential.

Half of the people who work in America either own or work for a small business. And small businesses have created 60 percent of all net new jobs since 1995. Four million Main Street businesses—including neighborhood restaurants, dry cleaners, and local grocery stores—form the backbone of communities across America and they are responsible for about 40 million jobs. And, as Mercedes Delgado and I show inresearch released earlier this year, small business suppliers—locally and across the country—contribute importantly to American innovation and growth.

Small businesses are actually the foundation for economic growth and, with that, critical to policy that purports to care about the average American. In fact, if we consider what Americans expect from their government, small business should have a voice in all of the key decisions facing the next president’s administration, from Dodd-Frank reform to the anticipated overhaul of the Affordable Care Act.

If you ask small business owners what they need to grow and thrive, they will talk about lower taxes, less burdensome regulation, and—what I spent four years working on as the head of the SBA and what I continue to write about today—access to capital.

SBA’s flagship loan programs are made through more than 3,000 banks, where the private sector picks “winners and losers” and the government provides a guarantee in areas where the bank wants to make a loan but needs some credit support. This allows women-owned small businesses, minority-owned small businesses, and others in underserved geographies to get credit even if the private sector market is not fully providing access.

As my co-author Brayden McCarthy and I detail in research released last month, the credit gap in small-dollar loans—those under $250,000, which is the size that 76 percent of small businesses say they need—is very real. While new private sector players like online lenders can help in this segment, they will certainly not replace the SBA. A well-functioning, low-cost agency—that expands access to credit to small businesses across America with an overall loss rate under 5 percent—should be viewed as a huge asset, as it most certainly was when I joined the agency in 2009 at the height of the credit crisis.

SBA’s loan guarantee programs were actually a mechanism that helped unlock capital to small businesses at a time when most banks had stopped lending to small businesses altogether. In fact, SBA’s guarantee brought many banks back to small business lending, helping resuscitate this critical sector of our economy right where it was needed, on our nation’s Main Streets.

The effectiveness of SBA programs also explains why during my time at the SBA, we hosted more than 150 delegations a year from countries around the world who wanted to use the agency’s programs for small business assistance in their own country. The Chinese visited nine times. And, David Cameron’s U.K. government borrowed from the SBA’s contracting efforts, setting an even higher small business contracting goal than ours here in the United States (25 percent versus our 23 percent) and achieving it in less than two years


4 Tips to Prepair Your Finances for Your First Baby

1. Track your current expenses

The first step in preparing for the future is knowing exactly what the present looks like. Having a handle on how much money is currently coming in and what it’s being spent on each month will provide the baseline you need to make educated decisions going forward.

You can go over your expenses yourself by looking at receipts and bank statements, or you can use tools like and You Need a Budget.They make budgeting easier by automating most of the process, pulling in transactions from bank accounts and credit cards and helping you categorize them.

2. Estimate your new expenses

Having a baby will add some expenses to your monthly budget, but you can get a handle on them ahead of time.

Babycenter has two great tools for estimating the overall costs of raising a childand the specific first-year costs. Use them to get a ballpark figure for baby’s first year, then divide that number by 12 for a monthly amount you can plug into your budget.

3. Build a cash cushion

Take that estimated baby budget and start setting the monthly amount aside insavings account now — before the baby gets here. This will do two big things for you:

  1. It will help you adjust to your new budget before you have the additional stress of caring for a newborn.
  2. It will help you build up a cash cushion to handle unexpected expenses that come up after the baby is born, so you won’t have to resort to credit cards.

4. Keep the lines of communication open

Having a baby is a huge change, and no matter how well you plan, there will be plenty of ups, downs and surprises.

Setting a regular time to talk money with your spouse or partner can do more than anything else to keep you on track. Open, honest conversations allow you to stay focused on your biggest personal goals, adjust to changing circumstances, and solve problems before they get too big.

Just like learning to walk, adjusting to the new financial realities of having a child is a matter of taking things one small step at a time. If you track your spending, build your savings, and have regular check-ins with your partner, you’ll have all the tools you need to get up and running.

Don’t Wait Till Year’s End to Fix Your Finances

Add to an HSA

A health savings account, or HSA, is a powerful tool that many people don’t know much about. If you have a qualifying high-deductible health plan, you can make tax-deductible contributions to an HSA, much like you do with a 401(k). The money also grows tax-free within the account and can be withdrawn tax-free for medical expenses. That’s a triple tax break you won’t find almost anywhere else!

As it turns out, an HSA can also serve as a fantastic retirement account, if you manage it correctly. That triple tax break is too good to ignore, and with the right provider, you can invest the money just like you would within an IRA. So I recently maxed out my HSA contribution for 2015, putting $3,350 into my account and investing it in low-cost Vanguard index funds. (The maximum contribution for individuals is $3,350 in 2015; for families, it’s $6,650).

Make a video for homeowners insurance

I encourage my clients to create a video record of their belongings, which serves two purposes if something were to happen to their home:

  1. It documents their personal possessions for insurance purposes, which increases their chances of getting fully reimbursed.
  2. It make it easier for them to re-create the home they love.

I recently realized, however, that I hadn’t taken my own advice. So I got out the video camera (phone), and took a slow stroll through my house.

It was especially important to me to document my dearest possession, a 16-volume pictorial history of the Civil War my grandfather gave me years ago. You could burn the rest of my stuff, and I might not care. But I wanted to be absolutely sure that I had this on record.

Max out a Roth IRA

Finally, I went ahead and maxed out my Roth IRA for 2015 with a $5,500 contribution, ensuring that I’ll have a little more money to tap tax-free years down the road when I’m ready to retire.

I still haven’t met my goal of opening a Roth Solo 401(k) through my business, but nobody’s perfect! That is in the works for early 2016.

Waiting until the last minute to handle financial responsibilities creates a lot of stress as we rush to get things done before the calendar turns over. Take these or other positive steps to improve your finances sooner rather than later this year.