Archive for ‘personal finance’

February 10, 2015

Better math skills lead to better personal financial behavior

by Grace

A new study suggests that children need to learn more math, not finance, to be better with money.

The way our schools teach students about personal financial planning may be misguided.

For decades, studies have extolled the benefits of financial education, pointing out that students who take finance classes score well on tests of financial knowledge—and higher financial literacy leads to better financial behavior.

Conclusions like these have led to a growing consensus that schools should teach children about managing their finances, with 43 states now mandating some kind of training.

Shawn Cole found this troubling. Not because the studies aren’t true: Many, he says, do show a correlation between financial education and good financial behavior. But few studies demonstrated a strong causal link.

Mandated financial education did not lead to improved personal financial outcomes.

So, the professor of finance at Harvard Business School wondered, if widespread financial education were really effective, why are so many young people struggling with debt, foreclosure and low asset accumulation? He and a group of researchers set out to find an answer. They looked at the states that mandated personal-finance curriculums in high school, and compared the financial health of students who graduated before the mandates to those who graduated after. Their hypothesis: If personal-finance education worked, the students who graduated after the programs were implemented would be better off financially.

They weren’t. After controlling for state, age, race, time and sex, and analyzing a huge pool of historical financial data, the group found that there was no statistically significant difference between people who graduated within a 15-year span either before or after the personal-finance programs were implemented. Graduates’ asset accumulation and credit management were the same, with or without mandated financial education.

But better math skills lead to better personal financial outcomes.

But the study, issued last year and currently under revision for publication, did find one school subject that does have an impact on students’ financial outcomes: math. Students required by states to take additional math courses practiced better credit management than other students, had a greater percentage of investment income as part of their total income, reported $3,000 higher home equity and were better able to avoid both home foreclosure and credit-card delinquency.

Well, this seems obvious.

“A lot of decisions in finance are just easier if you’re more comfortable with numbers and making numeric comparisons,” says Mr. Cole.

The lesson here is to focus more on better math instruction.

A new magazine from Jean Chatzky wants to teach children financial lessons.

Last month, Ms. Chatzky and Time for Kids, a division of Time Inc., introduced a magazine intended to teach financial literacy to fourth, fifth and sixth graders. The PwC Charitable Foundation, which was started by the giant financial consulting firm PwC, is backing the publication.

“Kids are very interested in money,” Ms. Chatzky said. “What we’re trying to get across to them is money is a tool that they need to know how to manage to succeed in life.”

… Each four-page issue will cover an aspect of finance, like budgeting, investing and taxes.

Perhaps this new magazine should include a section on math instruction.

Related:  ‘math skills are correlated to higher earnings’

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Charlie Wells, “The Smart Way to Teach Children About Money”, Wall Street Journal, February 2, 2015.

Sydney Emberfeb, “New Magazine Teaches Children Financial Lessons”, New York Times, February 1, 2015.

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December 24, 2014

The ‘deadweight loss of Christmas’

by Grace

If you’re still trying to find last-minute Christmas gifts, maybe you should relax and consider that there is a sound economic reason to give cash.  Gift-giving creates what economist Joel Waldfogel called the “deadweight loss of Christmas”, which is the monetary loss that arises from people making bad gift choices for other people.

In a 1993 American Economic Review article “The Deadweight Loss of Christmas,” Yale economist Joel Waldfogel concluded that holiday gift-giving destroys a significant portion of the retail value of the gifts given. Reason? The best outcome that gift-givers can achieve is to duplicate the choices that the gift-recipient would have made on his or her own with the cash-equivalent of the gift. In reality, it’s highly certain that many gifts given will not perfectly match the recipient’s own preferences. In those cases, the recipient will be worse off with the sub-optimal gift selected by the gift-giver than if the recipient was given cash and allowed to choose his or her own gift. Because many Christmas gifts are mismatched with the preferences of the recipients, Waldfogel concludes that holiday gift-giving generates a significant economic “deadweight loss” of between one-tenth and one-third of the retail value of the gifts purchased.

Gift cards may be cutting into the deadweight loss.

The real drag on the economy then isn’t gifts; it’s bad gifts. And Mr. Waldfogel cheers the rise of the gift card as a substitute for the bad gift: Something you can buy your niece or grandson when you have no idea what they actually like.

“What’s interesting about gift cards is that they are a lot like cash but have emerged as a way to give the choice to the recipient without the ickiness of cash,” he says. In other words, the deadweight loss problem he identified in 1993 may be on the wane because of a technological advance.

On the other hand, it is estimated that between 10 to 30 percent of gift cards are never used.

What’s not mentioned is the pleasure experienced from giving and receiving presents.  It’s hard to put a price on that, and we should remember that it’s the thought that counts!

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Mark J. Perry, “Holiday shopping? Consider the most economically efficient gift of all: cash, and avoid the deadweight loss of Christmas”, Carpe Diem, December 17, 2014.

Josh Barro, “An Economist Goes Christmas Shopping”, New York Times, December 19, 2014.
DEC. 19, 2014.

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December 17, 2014

Gifts for college students

by Grace

Do you have a college student on your gift list?

Here’s a list of “20 great holiday gifts for college students”.

This idea caught my attention.

Airplants. These super-cute, trendy plants survive on air — do not plant them in soil — and can be perched anywhere to decorate a dorm room. (Many are under $10).

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Holiday Gift Guide: 25 Under $25 for College Students and Young Adults

An electric kettle that boils water in a few minutes for tea or hot chocolate would probably be welcomed by almost any student.

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Another idea is to give the gift of experience.  Maybe something like tickets to a concert or cooking lessons would appeal to your college student.

However, for the recipients in my life, I consider cash to be the best holiday gift for young adults.

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Lynn O’Shaughnessy, “20 great holiday gifts for college students”, CBS Moneywatch, November 24, 2014.

“Holiday Gift Guide: 25 Under $25 for College Students and Young Adults”, Grown & Flown, December 13, 2014.

November 11, 2014

What is Work-Study?

by Grace

Federal Work-Study is a program that provides part-time jobs for undergraduate and graduate college students with financial need, allowing them to earn money to help pay education expenses.

How does it work?

You apply for work-study just like you do all other forms of financial aid: by filling out and submitting the Free Application for Federal Student Aid (FAFSA). Your financial need usually determines the amount of work-study you are eligible for.

You find work-study jobs through job banks or postings by the financial aid or college employment offices. In most cases, students will have the opportunity to interview with potential work-study employers. The interviews help students and employers find out if the job is a good fit. Sometimes the college arranges these interviews; sometimes the student does. Even if you are eligible for work-study, there is no guarantee you’ll get a work-study job. In the end, whether or not you are hired is up to the employer.

What kinds of jobs are available?

If you get a work-study job on campus, the college will usually be your employer. Typical jobs include working in the library or bookstore, serving other students in the dining hall, and assisting with college events. Off-campus work usually benefits the public in some way and should relate as closely as possible to your course of study.

How can work be considered financial aid?

Sometimes it’s difficult to see how working part-time during college could be considered “financial aid.” Keep in mind that the money you make from a work-study job does not need to be repaid, nor does it count against you when you apply for aid the following year. Plus, the smooth hiring process, flexible hours, choice and availability of jobs, and preset salaries of a typical work-study program usually make finding a work-study job easier than finding work on your own.

Work-Study can be an important benefit, with advantages over other types of jobs. Contact colleges to obtain details about their programs.  The federal student aid site is a good source of information:

Federal Work-Study jobs help students earn money to pay for college or career school.

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“How Work-Study Works”, College Data.

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August 6, 2014

Gloomy outlook on recovery from loss of net worth suffered during Great Recession 

by Grace

Median net worth declined by 36%  and wealth inequality substantially increased over the ten years ending in 2013.  The Great Recession of 2007 and the slow subsequent recovery can be blamed for much of this economic pain.

The inflation-adjusted net worth for the typical household was $87,992 in 2003. Ten years later, it was only $56,335, or a 36 percent decline, according to a study financed by the Russell Sage Foundation. Those are the figures for a household at the median point in the wealth distribution — the level at which there are an equal number of households whose worth is higher and lower. But during the same period, the net worth of wealthy households increased substantially.

 

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These numbers come from a study, “Wealth Levels, Wealth Inequality, and the Great Recession”, released by the Russell Sage Foundation.  According to the authors, the outlook for the “coming years” does not look much brighter for prosperity among the overall population.

Through at least 2013, there are very few signs of significant recovery from the losses in wealth experienced by American families during the great recession. Declines in net worth from 2007 to 2009 one large, and the declines continued through 2013. These wealth losses, however, were not distributed equally. While large absolute amounts of wealth were destroyed at the top of the wealth distribution, households at the bottom of the wealth distribution lost the largest share of their total well. As a result, wealth inequality increased significantly from 2003 through 2013; by some metrics inequality roughly doubled.

The American economy has experienced rising income and wealth inequality for several decades, and there is little evidence that these trends are likely to reverse in the near-term. It is possible that the very slow recovery from the great recession will continue to generate increased wealth inequality in the coming years as those hardest hit may still be drawing down the few assets they have left to cover current consumption and the housing market continues to grow at a modest pace.

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Anna Bernasekjuly, “The Typical Household, Now Worth a Third Less”, New York Times, July 26, 2014.

Fabian T. Pfeffer, Sheldon Danziger, and Robert F. Schoeni, “Wealth Levels, Wealth Inequality, and the Great Recession”, Russell Sage Foundation, June 23, 2014.

July 30, 2014

Sometimes individual bonds are less risky than bond funds

by Grace

Although usually considered safer than stocks, bonds carry their own risks.  In particular, bond funds present specific risks not found in individual bond investments.

Bonds have long been viewed as a port in the storm, a low-risk asset class that creates consistent cash flow and helps to balance equity market mood swings.

But Shelly Schwartz of CNBC wrote about the “top six ways the most benign securities in your asset mix can potentially pack a punch”.

1. Interest-rate risk …
2. Bond fund risk …
3. Credit risk …
4. Liquidity risk …
5. Inflation risk …
6. Reinvestment risk …

Each item is detailed in the CNBC article.  I have a particular aversion to bond fund risk, and strongly prefer individual bonds or Unit Investment Trusts over bond funds in my own portfolio.  I invest in bonds for longer-term stability and consistent yield, two features often missing in bond funds.

Bond fund risk

Unbeknownst to many, bond funds also expose investors to a unique set of risks in a rising rate environment that individual bonds do not. Why?

Individual bonds, like Treasuries, municipals and corporate bonds, are sold with a finite maturity: the date on which you, the investor, get your principal back—if the debt issuer doesn’t default—and the interest payments you’ve been receiving stop.

Interest-rate fluctuations don’t affect investors who hold individual bonds to maturity.

Fixed-income securities held within a bond fund, however, are designed to mature on a staggered basis, creating a perpetual income stream for investors. The fund manager replaces bonds as they mature, when the issuer’s credit is downgraded and when the issuer “calls,” or pays off the bond before the maturity date.

When bond prices fall as interest rates rise, the net asset value (NAV) and return of a bond fund also decline, said Greg Ghodsi, senior vice president of investments at Raymond James.

A $300,000 investment in a fixed-income mutual fund with an average maturity of 20 years (a mix of 10-, 20- and 30-year bonds), for example, would be worth $260,000 if interest rates climb just 1 percent. (Shorter-term bond funds would be less volatile.)

But the pain doesn’t end there. The drop in value makes investors nervous, which prompts more selling. That forces the fund manager to unload some of their holdings to meet redemptions, said Ghodsi.

Depending on how significant the redemptions are, he noted, they may have to sell their highest-yielding bonds and replace them with those offering a lower yield, or assume more risk to obtain the same return, which can drive prices quickly lower.

The investors who didn’t bail get stuck with an investment that may not match their risk profile or income needs—one that is suddenly a lot less liquid on the secondary market. Ouch.

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Shelly Schwartz, “6 ways bonds can bite you”, CNBC, July 14, 2014.

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July 7, 2014

Student debt and net worth

by Grace

College-educated young adults with student loans have a lower net worth than those who did not graduate from college.

Nearly four-in-ten U.S. households headed by an adult younger than 40 currently have student debt and a median net worth of just $8,700.

That’s a stark contrast to the median net worth of $64,700 that young college graduates without student debt have accumulated. Additionally, consumers without a degree and without student debt have a net worth of $10,900, once again greater than that of degree holders with debt.

While student loan debt does play a large role in the low median wealth of college graduates with student loan obligations, Pew found these consumers were more likely to take on other debts that contributed to the wealth gap.

College graduates are making more money.

… College-educated student debtors typically have a household income of $57,941, nearly twice that of homes in which the heads do not have bachelor’s degrees.

And their debt load is greater.

… Among the young and college educated, the typical total indebtedness (including mortgage debt, vehicle debt and credit cards, as well as student debt) of student debtor households ($137,010) is almost twice the overall debt load of similar households with no student debt ($73,250)….

It is reasonable that college-educated young adults, with their higher incomes, are able to take on more debt.

Though student debtor households tend to have larger total debt loads, indebtedness needs to be assessed in the context of the household’s economic resources. In other words, households with greater income and assets may be able to take on more debt. Using the conventional total debt-to-income ratio, where debt is measured as a share of income, college-educated student debtors are by far the most indebted.2 The median college-educated student debtor has total debt equal to about two years’ worth of household income (205%). By comparison, college-educated households without student debt and less educated households with student debt have total debts on the order of one year’s worth of household income (108% and 100%, respectively).

The hope and expectation are that their income will keep pace with inflation, and continue to grow at a rate that will enable them to manage their debt.

These young adults should also start saving for retirement, since the “power of compounding is a reason to start saving for retirement as early as possible”.

Saving “$5,000 per year only from ages 25 to 35 (10 years)” will generate a larger retirement nest egg than saving “$5,000 per year, but from ages 35 to 65 (30 years)”.

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Ashlee Kieler, “College-Educated Consumers With Student Debt Have Median Net Worth Of Just $8,700″, Consumerist, May 14, 2014.

Richard Fry, “Young Adults, Student Debt and Economic Well-Being”, Pew Research Center’s Social & Demographic Trends, May 14, 2014.

June 30, 2014

Advice for getting your first credit card after graduating from college

by Grace

A new college graduate has some questions about getting a credit card.

How do I get a credit card? You can’t qualify for a card unless you can prove you’re worthy by having a credit history, but how can you have a credit history when you don’t have a credit card?

Kerry Hannon, personal finance and work blogger, offers some answers.

First, some advice to pay off your balance each month.

Sure, you typically need a credit card to pay for big expenses from hotels to airline tickets. I get it. But repeat after me: “I will always pay my credit card bill each month when it’s due — and in full.” If you only make the minimum monthly payment, you’ll likely be slammed with a high interest rate.

Twentysomethings these days often pay credit card rates of 22% or higher (!) because they lack a credit history and may have a low credit score. The average credit score for Millennials, according to the Experian credit bureau, is 628; for boomers, it’s 700.

So when you do get a card, pay your balance each month and be happy that you get about 30 days to make the payment (that’s called the “float”).

Do your homework before applying for a credit card.

… if you don’t have a credit history to speak of, you might want to hold off applying for a card until two months or so after you start working. Card issuers want to see an income stream before they’ll approve you, so by waiting a bit you’ll boost your chances of getting plastic.

Before applying for a credit card, get your latest credit report (free from Annualcreditreport.com) and credit score (free from sites like Credit.com, CreditKarma.com, CreditSesame.com and Quizzle.com). These will let you see what a card issuer would find out about your credit history and prepare you for your chances of being approved. If you see a mistake in your credit report, fix it by following the advice in Next Avenue’s article, Why You Must Check Your Credit Reports for Errors.

Piggyback on your parent’s reputation.

An easy way to build a credit history is to ask your parents to add you as an authorized user on one of their cards. The card will then show up on your credit report, and it’ll have your name on it. Your parents must make on-time payments to the account to protect your credit record and theirs. After about six months as an authorized user, you can then apply for a card on your own.

Or check out secured credit cards that do not depend on a credit history, but require a security deposit.

… With a secured card, you’ll get a credit line of generally one to three times the amount of your deposit. Manage your card responsibly and you may earn credit limit increases. After several months, you can apply for a regular card from the same issuer or from another one.

Once you obtain an unsecured credit card, close your secured card account and your deposit will be returned.

Some recommended sites:

… CardHub.com, which just published its 2014 list of the Best Credit Cards for High School and College Graduates … also has a list of cards for people with no credit history.

…Visit Lowcards.com to find the best deal. In general, look for cards with no annual fees.

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Caitlin Bonney, “What New College Grads Need To Know About Money”, Forbes, 6/04/2014.

June 20, 2014

Go online to check the accuracy of your Social Security account

by Grace

Although most millennials “believe they will receive no Social Security money by the time they retire”, it is still a good idea to understand the basics of how this retirement system works.

Social Security benefits are based on your past earnings

First a summary of the earnings you had throughout your career is calculated. This measure is called the Average Indexed Monthly Earnings (AIME). Your wages for prior years are typically indexed, meaning they are adjusted to reflect inflation over the course of your career. For example, if Peggy earned $20,653 in 1990 this figure would be reflected as $43,531 in her calculation today. The higher your AIME is, the larger your benefit.

Second, a benefit formula is applied to the AIME to determine your Primary Insurance Amount (PIA). In 2014 you receive 90% of the first $816 in AIME, and 32% of AIME between $816 and $4,917, and finally 15% of AIME over $4,917.

Third, an adjustment may be made to the amount you are entitled to depending on the age at which you start benefits, the Social Security earnings test, or other factors.

Fourth, benefits for dependents and survivors are based on the worker’s PIA. For example, a spouse may get a spousal benefit of 50 % of the worker’s PIA, and a widow might get 100% of the worker’s PIA generated benefit.

More basic Social Security information is provided by Ken Tacchino at MarketWatch, including this bit that was news to me.

You can monitor your Social Security account online

From 1999 to 2011 the Social Security Administration mailed Social Security Statements to anyone who was 25 or older. In May of 2012 they stopped these automatic mailings and went online to save money. They will resume mailings every five years (ages 25, 30, 35, etc.) starting in September. However, the online statement that’s created by you in the “my Social Security” section of their website might be your best option to track retirement.

One benefit of the online Social Security Statement is that it can determine whether your earnings are accurately posted each year. Assessing this is crucial because the Social Security benefit is based on the amount you earn each year of your career. If there’s an error in posting your annual earnings, the amount of benefits you receive may be compromised. Regardless of whether your statement is online or not, the statement contains an estimate of the monthly retirement benefit you will receive at age 62, full retirement age, and age 70. Keep an eye on it and factor it into your planning.

Bottom Line: Tracking what Social Security will provide will enable you to better prepare for retirement.

I created a “my Social Security” account, and I would advise everyone to do the same as a way of monitoring the details and accuracy of potential future benefits.

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Kenn Tacchino, “8 Social Security basics you need to know”, MarketWatch, June 16, 2014.

June 4, 2014

Home equity loans regain popularity as college costs continue to rise

by Grace

A rebound in house prices and near-record-low interest rates are prompting homeowners to borrow against their properties, marking the return of a practice that was all the rage before the financial crisis.

College costs continue to rise, so home equity loans may rebound in popularity as a tuition-funding vehicle.

Ian Feldberg planned to open a $200,000 Heloc this week with Belmont Savings Bank to help pay his son’s college tuition. The medical-device scientist purchased his home in Sudbury, Mass. for a little over $1 million in 2004, and estimates that its value dipped as low as $800,000 during the financial crisis. However, after applying for the line of credit, he found that its value had completely recovered.

“I’m very pleased about that. My options for tuition fees were either that or to cash in on my pension prematurely,” he said.

A too-big-to-fail bank steps up home equity lending, and Tyler Durden of Zero Hedge expresses some concern.

The Wall Street Journal reported yesterday that home-equity lines of credit (Helocs) had increased at a 8% rate year-over-year in 1Q14. Some banks are more aggressive than others, and perhaps we shouldn’t be surprised to see TBTF government welfare baby Bank of America leading the charge, with $1.98 billion in Helocs in the first quarter, up 77% versus 1Q13.

What could possibly go wrong?

As HELOC delinquencies are off their highs (for now) but remain elevated… (we are sure this renewed ATM usage on the back of created wealth and stagnant wages won’t harm that downward trend at all…) – will we never learn?

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And then there’s this.

Think about that for a minute. A “medical-device scientist” can’t send his kid to college without either a Heloc or cashing in on his pension.

Life goes on.

Related:  “Federal Direct PLUS or home equity loan for college costs?” (Cost of College)

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Tyler Durden, “Home Equity Loans Spike As Americans Scramble For Cash”, Zero Hedge, 05/31/2014.

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