Back Home Up Next


Part I: Laddering
Bonnie Markham, PhD, PsyD, Chair
Division 42 Finance Committee

Most psychologists are people with strong commitments, wide ranging interests, deeply held beliefs, and clear priorities. We listen, we think about many things, and attempt to comprehend and appreciate the thoughts and feelings of others on an unlimited number of topics. We have significant investments in most aspects of human life. However, when the conversation turns to money management we frequently become glazed over. And when the conversation turns to the management of Division 42's money, your money...

Why should you be curious about what the Division does with your money? Let me tell you. The Board of Division 42 recently voted to support the Finance Committee's investment plan. This plan will help assure that the major projects being launched to preserve, protect, and promote independent practice can be financed and still keep dues increases to a minimum. So while Division 42 attempts to keep its hands out of your pockets, the Board is also working hard to make sure that our pockets won't be empty.

The two goals of our investment plan are to maximize income and minimize risk. These may very well be the goals of your overall investment plan. What the Finance Committee is thinking about doing with Division 42's available dollars will give you useful ideas for your own personal financial planning.

The Finance Committee proposed, and the Board approved, several concepts for organizing our money. In this first of a series of articles on our investments, I will review the basic categories (working capital, long-term reserve, and short-term reserve) and will describe in detail the plan for managing our short-term reserve funds, a method called "laddering". Working capital and long-term reserve funds will be the subject of subsequent articles.

Perhaps you are wondering how it is possible that Division 42 has enough money for three categories.

Non-profit organizations frequently work toward having one year's expenses in reserve. Voluntary contributions from the membership (dues) provide the lion's share of available funds in any one year. If there are unusual expenses, an extraordinary project, or a drop in income, the reserve fund provides a cushion which allows the work of the organization to continue uninterupted without an additional assessment to members. The goal of a year's income in reserve is a hard one to achieve, but we are already about two-thirds of the way to that goal. Those of you who have been saving for your children's college education will understand the challenge of meeting a goal of this sort, and also of its importance. Those of us who are totally dependent on the income from our practices might consider developing a cushion of one year's income to carry us during tough times.

Division 42's money is in:

Working Capital. Division 42 earns approximately $290,000-$300,000 annually from dues, investments, and income producing projects such as book royalties. The Board of Directors has committed to putting 10% of dues collected into reserve. The balance is available for operating expenses, and therefore needs to be highly available (liquid). Typically, Division 42's working capital is in a money market fund and shifted into a checking account, as needed. This is the kind of budgeting process that you might use for running your household or your business.

There is a significant opportunity for investment by the Division because dues income is cyclical. Most of our money from dues is received in January, with the balance coming in during the first quarter of the year. Expenses, on the other hand, are more evenly distributed over the twelve months. By investing the money that will not be needed until later in the year, the Division is able to earn additional working capital from its dues income.

Long-term Reserve Funds. These are invested with the expectation that they will not be needed to cover annual operating costs and/or special projects. They are largely for generating income and providing a financial safety net. These monies have the potential of making the highest percentage return because they can remain invested for years rather than for months. Strategies for investment in this category will be discussed in another column.

Short-term Reserve Funds. This is an intermediary category of invested dollars. A certain proportion of short-term funds needs to be relatively liquid and yet produce a higher rate of income than money markets. The goal is to maximize safety, liquidity, and income without requiring an investment commitment of several years. Money in this category should be accessible without penalty to support the operating budget. Laddering is one way to approach short-term reserve funds. The Division has about $100,000 allocated to this category.

Laddering Short-term Investments

Laddering is a way to invest money in time-certain and income-certain instruments such as Certificates of Deposit, U.S. Treasury Bills, and highly rated bonds. The advantage of these instruments is that there is close to no risk of loss of capital. In exchange for that surity, investors are willing to accept a somewhat lower percentage return than might be achieved from stocks or mutual funds.

Several factors need to be considered when laddering investments: how frequently the money needs to become available (e.g., every six months, once a year), how much needs to become available in that time frame, which investments meet the time frame, how much money is available overall for this type of investment, and which appropriate instruments have the best yield.

The picture below shows how laddering works using a six-month cycle. The lighter bars represent the initial investment, the beginning of the darker bars shows when the money first becomes available for use. If the money is not needed, it is reinvested for the period of time represented by the darker bars.

figure pg 14.jpeg (153187 bytes)
As shown, each original investment is reinvested for the longest term, in this case 30 months. Laddering makes it possible to have money accessible at regular six -month intervals while taking advantage of the higher interest rates that are generally offerred for longer-term investments. By staggering investments over time, the investor can average the advantages and disadvantages of market fluctuations in interest rates.

Division 42's short-term funds are currently in a Certificate of Deposit due in mid-November, 1997. The Finance Committee will review market conditions and begin a laddered investment using six-month intervals. Thus, money will become available twice during each fiscal year, at a known time, which will aid in planning.

An application of this approach for personal or business financing could be used to set aside funds for building a home or office, or some other long-term goals for which it is difficult to anticipate all of the expenses. Major projects frequently include fiscal surprises, such as increased material costs, unknown building code requirements, more expensive fixtures, costly delays, and others with which many of us are all too familiar. While waiting for the inevitable, you can invest your money in safe, time-certain instruments, and maximize rates by laddering.

Editors note: This is the first in a series of columns on investment strategies. If you have any questions that you would like the author to address in future articles, you may fax (732-494-6888)or e-mail ( them to her. Your comments are also welcome.

Jeff McKee
Saturday, April 25, 1998