Wednesday, December 17, 2008

Financial Literacy

Financial literacy is the ability to understand finance sufficiently to make appropriate decisions regarding one's personal finances.

December 2008 -Today’s generation lives better—and larger—than any in history. For example, 50 years ago the average U.S. home was around 1,200 square feet. By 1976, the average home had grown to 1,645 square feet. By 2005, the average home was 2,434 square feet. Houses are bigger, cars are more extravagant, and, as every parent of a teenager knows, designer clothes and electronic gear are the norm.

But high living comes at a high price, as the ongoing subprime mortgage crisis demonstrates. Too often, what people consider a “normal” lifestyle is in fact financed by debt. Surveys suggest that Americans lack basic financial knowledge about how to successfully manage debt. For example, most Americans neither understand credit scores nor regularly review their credit reports. A study by Experian, one of the three largest credit-reporting agencies, on whether consumers are using more debt to finance the “American Dream,” found that consumer debt rose 12.5% over the two-year period from February 2004 through February 2006, and averaged $11,669 in 2006. More ominously, the number of late payments rose almost 20%, and personal bankruptcies increased over 31% during that time period.

An individual’s first experience with debt often occurs when borrowing money to finance a college education. As college costs soar, students increasingly finance their educations with easy-to-obtain student loans and credit-card debt. The Project on Student Loan Debt notes that one-fourth of graduating seniors in 2004 carried more than $25,000 in student loan debt. At public four-year institutions, 62.4% of graduating seniors have student loan debt, while 73.9% of graduating seniors at private, nonprofit four-year institutions have student loan debt. Upon graduating, many young professionals incur more debt to purchase a home (which must then be furnished) and a car. The pressure on young professionals to appear successful (e.g., new clothes, and meals at expensive restaurants) often fuels additional credit-card debt.

Cultural Trend Toward Materialism

Pursuing a financial goal of owning more “stuff” reflects a general cultural trend towards materialism. For example, a 1970 survey of about a quarter-million new college students found that about 40% considered “being very well-off financially” to be very important, and about 70% considered “developing a meaningful philosophy of life” to be very important. By 1987, and continuing through the most recent survey, these numbers reversed: In 2005, about 70% of entering college students considered being very well-off financially to be very important, while about 40% consider developing a meaningful philosophy of life to be very important.
One online dictionary defines materialism as “the preoccupation with, or emphasis on, material objects, comforts, and considerations, with a disinterest in or rejection of spiritual, intellectual, or cultural values.” Making the attainment of material possessions a priority in one’s life leads to a bigger house or better car, but the hidden psychological and relationship “costs” of materialism are considerable. For example, higher credit-card and mortgage payments often lead to a stay-at-home spouse needing to return to work, to work overtime, or to take a second job. Less time with family and community follows from such choices. What is the psychological cost of these choices?

Are people happier with bigger homes and better cars? Research suggests not. More-materialistic people are less happy, and have poorer psychological health, than are those who are less materialistic. These results hold true in many countries, including Australia, Bulgaria, England, Germany, Romania, Russia, Singapore, South Korea, and the United States. Research also indicates that progress toward materialistic financial goals (e.g., a bigger house, a better car) does not increase psychological health or emotional well-being.
In addition, results from both the United States and Hong Kong indicate that workers who care more about money are more willing to engage in unethical and illegal workplace behaviors. Hence, materialism is a threat to workers’ psychological health and to organizational internal control systems. Because of this vast body of accumulated evidence, we have come to think of materialism as a public health problem.

However, despite the contrary claims of some psychologists, not all financial goals are psychologically unhealthy. Our research results suggest that positive (i.e., functional) financial goals contribute to happiness. For example, financial goals of saving for college or retirement, or thoughtfully giving to charity, all correlate with better psychological health. Furthermore, research has shown that progress toward nonmaterialistic goals (financial or otherwise) increases psychological health, while progress toward materialistic goals does not.
The AICPA’s 360 Degrees of Financial Literacy program ( focuses on educating the public about the importance of financial literacy, and provides tools that help individuals at various life stages work toward setting and achieving functional financial goals. This program, begun in 2004, has earned widespread praise. No one, however, has investigated the possibility that financial education like 360 Degrees may also reduce materialism.

Personal financial literacy is at the very core of happiness in life. One can have a loving family, good friends, a satisfying job, and a supportive church. But living life with too many bills and no reserve savings account is stressful. Missing a few paychecks and facing an emergency vehicle repair or hospital bill can make life horribly stressful. These kinds of financial events negatively impact one’s health, relationships and work performance.
Financially literacy leads one toward positive financial behaviors such as creating an emergency savings account of $500 to $2,000, paying off credit card balances, and saving for retirement. These actions result in decreased financial distress and increased financial well-being.
Financially healthy employees make good benefits selections that save them money as well as save their employers money. When compared to employees with poor financial well-being, financially well employees have higher job performance, less absenteeism and short-term disability, better health, fewer wage garnishments, and less turnover.

Friday, May 2, 2008

Save in Small Bites

by Mary Dalrymple

The Motley Fool

It can be a little daunting to think about all your major savings goals at one time There's the massive retirement fund that you want to build, which never seems to get big enough There's the emergency account that should be filled with at least enough money to cover three to six months' worth of expenses There might even be one or more college funds, assuming college doesn't cost an actual arm and a leg by the time the little tykes grow up. Add these all up, and we're talking about hundreds of thousands of dollars. Yikes!

Obviously, you can't save all that money tomorrow, so let's start small. Think in more humble terms, especially if you're not saving at all or you can't figure out why you're not saving more. Ask yourself how you could put aside just an extra $100 per month.
Saving an additional $100 a month means (obviously) you'll have saved an extra $1,200 in a year. If you had put an extra $1,200 in your kindergartner's college fund this year, it would be worth $2,263 by the time she heads to college. That assumes a pretty conservative 5% growth rate. Let's say you saved that money for retirement and invested your $1,200 in a fund that tracked the performance of the Standard & Poor's 500 Index, which represents about 70% of all U.S. publicly traded companies. Buying an index fund gets you shares of some of the biggest companies in the country.
The long-term average growth of the market has averaged about 10%. If the market kept up that performance, the $1,200 saved by a 35-year-old today would be grow to $20,939 by the time that person retired at age 65.

So, there's plenty of incentive to figure out how to save that extra $100 every month. To get you started, here's a list of savings ideas that don't require any major lifestyle changes. You may have to do a little research, but you won't have to sacrifice your morning jolt of caffeine. Combine a few and you might hit $100 in savings without doing much at all.
Contribute an extra 1% of your salary to your 401(k) or other workplace retirement plan. Because the money is withdrawn before taxes, you'll lose less than 1% from your take-home pay. You'll probably never even notice the money's gone, but your retirement fund will start to fatten up faster.

Review your telephone, mobile phone, Internet, and cable service. If your mailbox is anything like mine, it's full of special offers and bundled packages. See if you can get a better deal than the one you have now. If you see a better rate advertised, try calling your current providers and asking them whether they'll meet the competitor's rate. While you're reviewing all this, cancel any flashy services or premium channels that you don't use.
Call your credit card company and ask them to lower your interest rate. This could mean serious savings for anyone struggling to pay off a balance. (Your extra $100 should go straight to the credit card instead of going into savings, by the way.) If your credit company is hesitant to lower your rate, arm yourself with offers from competitors. You've probably gotten a bunch recently. If they won't budge, look for balance transfer options with lower rates. Before making any move, examine transfer fees and look at the interest rate that will be in place after any teaser rate expires.
Reexamine your car insurance. Your policy probably renews automatically. If you haven't looked at it since you first signed up, see if you still need all the coverage you have. Consider raising the deductible. You can take that extra money and stash it in an emergency fund so paying the deductible won't be a problem.
Stop heating the whole neighborhood. A little weather stripping and a programmable thermostat can go a long way to cutting the utility bills. They're cheap and easy to install, and they also save energy. Turn down the heat on your water heater if you have it set to "scald." Fix anything that's leaking. By the same token, shut down your computer at night and turn off the lights when you leave the room. (Yes, I know I sound like your nagging mother, but there's a reason she nagged you about this.)
Cancel any gym membership or subscription you aren't using.
Eat out of your pantry for a while. If you dig back there, you will find long-lost bags of pasta, cans of soup or beans, piles of rice. I, personally, have enough dry goods in my kitchen to feed the entire neighborhood for about a year. There's probably enough in your pantry to cut your grocery bill down significantly for a while. And, if you've been buying bottled water, consider switching to a filtered pitcher.
Hopefully, that will get you started thinking creatively about ways to fill your savings accounts without making radical changes. Then make sure to put that $100 in spare change toward your big savings goals.