Financial Health Matters

Today is #FinHealthMatters Day, a day devoted to discussing ways to improve the financial health of American families. It is also day #5 of Money Smart Week (April 21-28) and part of Financial Literacy Month (April) so there is a lot of conversation going on right now about money and personal finances.

Financial health matters to everyone. We are stronger as a country when people are financially healthy:

·        Financially Independent Citizens– Less burden on government services that everyone pays for

·        Happier People- Less anger about the American Dream slipping away and “haves” vs. “have nots”

·        Better Physical Health- Resources for healthier eating, medical care, and periodic check-ups

·        Stronger Economy- Resilience during economic downturns and more investors and shoppers

·        Fewer Predatory Loans– Less need for people to use high-cost payday and car title lenders

Two phrases come to my mind when I think about financial health:

Small Steps- Any step forward is progress, even if it is far short of doing what experts recommend. Doing something is always better than doing nothing.

More Options– Financial health puts people in charge of their money so they can handle unexpected expenses and have flexibility to make choices.

Several organizations have classified personal financial practices into categories. Each uses a slightly different term to describe a positive constellation of financial behaviors. All three entities include goal setting and planning in descriptions of financially successful people:

·        Financial Well-Being (Consumer Financial Protection Bureau)

·        Financial Health (Center for Financial Services Innovation)

·        Financial Capability (FINRA Investor Education Foundation)

Start taking action today to improve your financial health. Set personally meaningful goals, develop action plans to reach them, and celebrate any positive progress as “success.” Every small step matters!

Six Steps to Seven Figures

Becoming a millionaire with a net worth (assets- debts) of at least $1 million is a financial goal for many people. What can we learn from studies about characteristics of millionaires? Below are six take-aways about building wealth:

It Takes Time- It generally takes three or four decades to build wealth. Most people become millionaires after age 50. A study by Fidelity found that the average age was 58.5 for women and 59.3 for men.

Stocks Build Wealth – History tells us that stocks outperform other types of assets over time. The Fidelity study found that, contrary to stereotypes that women are more risk-averse than men, both genders invested in a similar fashion.

Free Money Helps- An employer match is basically “free money” and should definitely be accessed to maximize retirement savings. For example, an employer might match half of your savings contributions up to 6% of pay.

Career Longevity Promotes Savings- Millionaires in the Fidelity data base had long careers, thereby enabling them to invest for decades. Fidelity recommends that workers aim to save 10 times their final salary by the time that they retire.

Frugality Helps- Living frugally has helped many millionaires accumulate wealth.  Authors of The Millionaire Next Door, Stanley and Danko, found that millionaires were not interested in a lifestyle of consumption and high-status items.

Leverage the Power of Compound Interest- Most people simply don’t earn enough to become wealthy from their incomes alone. They need help from compound interest and patience to allow their money to grow.

It is possible for people of ordinary means to become millionaires through hard work, steady investing, and the magic of compound interest. Will you be a millionaire someday? This easy three-step online calculator can help you develop an action plan: http://money.cnn.com/calculator/pf/millionaire/

Miscellaneous Nuggets from a Professional Conference

I recently attended the Institute for Financial Literacy 2018 Annual Conference on Financial Education. Below are some ideas that I gleaned from this meeting and from a book (The Pouchplan Budget) that I read on the way:

• Personal finance revolves around decision-making. Good decisions are based on criteria that are important to a decision-maker. Every decision has consequences and opportunity costs (i.e., things that you give up).
   
• Useful investment planning tools include an Asset Allocation Tool from Vanguard and a Risk Tolerance Assessment from Wealthfront. Results are based on assumptions used and the accuracy of user data.
   
• Twitter posts (tweets) are increasingly used for research and planning. For example, tweets about illnesses have been used to predict flu outbreaks. Researchers review and code tweets to determine thought patterns.
   
• All financial education programs, no matter how well they are funded, need to be critically evaluated. Programs can’t be tweaked (improved) if their impact and results are not measured.
   
• Messages about saving should be reframed to appeal to people. Educators need to answer the question “What’s in it for them?” Example: The purpose of saving money today is to spend it with a purpose later.
   
• Knowledge of personal finance (or any topic), in and of itself, is not power. Knowledge gives people power only if they act upon it. People learn best through relatable stories, humor, and actionable instructions.
   
• People increase the probability of achieving a goal if they commit to someone that they will do it. Also, when you “start small,” you reduce your fear of failure. Stack small positive changes on top of each other.
   
• Many workers today do not have a steady paycheck. People with irregular incomes can “guesstimate” their annual income to make a budget by taking their last 3 month’s income and multiplying that number by 4.

Financial Tips to Last a Lifetime Shared at Workshop for Rutgers Students

Last summer, I was named a fellow of Next Gen Personal Finance (NGPF) after attending their 2017 Summer Institute for financial educators. Each NGPF fellow was given a $1,000 grant by NGPF founder Tim Ranzetta to deliver a financial education program where they work.

This week, a committee of passionate New Jersey financial educators and I held a program for Rutgers University students called R U Financially Fit (RUFF)? Below is a brief summary of this program:

• RUFF began with pizza and exhibits by 10 organizations involved in financial education: Affinity Federal Credit Union, Navicore Solutions, NJ Higher Education Student Assistance Authority (HESAA), NJ Coalition for Financial Education (NJCFE), Next Gen Personal Finance, Phroogal, Rutgers Cooperative Extension, Rutgers Federal Credit Union, Rutgers University Office of Financial Aid, and Wiley Publishing.
   
• Students played the online simulation game Payback, which provides feedback about decisions that college students make from selecting a college through earning a degree. Payback tracks student loan debt and three intangible factors: focus, connections, and happiness. In a debriefing of the game, students noted that it was difficult to balance the three factors and that student loan debt will likely affect their life after college.
   
• Keynote speaker Jason Vitug, the founder of Phroogal, spoke about financial wellness. In his presentation, he encouraged students to beware of lifestyle inflation, trade-offs between working long hours to earn more money, and to follow the ACT process: Awareness, Create a Plan, and Take Control. Specific suggestions included: starting an emergency fund, automating finances, reducing one expense, and saving spare change.
   
• Samantha Benson from HESAA spoke about college costs, financial aid, and the FAFSA form required to obtain aid. Key take-aways were the wide variety of state and federal financial aid programs available and students’ responsibility to respond to document requests. For further information, visit www.hesaa.org.
   
• NJCFE Executive Director, Michael Drulis, speaking about his path as an entrepreneur, noted that “passion is the difference between having a job or a career.” Currently enrolled in a Master’s degree program, he also noted that education is lifelong and that no one is too old to pursue additional educational credentials.
   
• I urged students in my Ignite presentation not to make a “$1 million mistake” by delaying retirement savings from their 20s to their 30s or beyond. Compound interest is not retroactive! The most valuable savings that students will have is savings in their 20s that has 4-5 decades to grow. Multiple financial goals (e.g., repaying student loan debt, saving for a house, and retirement savings) can be saved for concurrently.

The evening ended on a high note. Each student won at least one door prize (gift cards, T shirts, and gift baskets). Most importantly, participants received the gift of financial knowledge. As Jason Vitug noted in his presentation, “Knowledge is power. Financial knowledge is life-changing.”

How to Ace Retirement

AARP and the Ad Council introduced a web site www.AceYourRetirement.org to encourage people to take action to save for retirement. The savings promotion effort also has a dedicated Twitter hashtag: #AcingRetirement. Below are some suggested strategies that Ace Your Retirement suggests to prepare for retirement:

• Consider waiting until full retirement age (FRA) to claim a Social Security benefit so that it is not permanently reduced. If you delay further, up until age 70, the benefit will increase by 8% for every year that you wait.
   
• File for Social Security benefits three months before you plan to start taking them. To get an estimate of how much you will receive, create an online account at https://www.ssa.gov/myaccount/.
  

• Create an estimated retirement budget. Calculate your household expenses today and project what they will be after retirement. For example, commuting costs will disappear but travel and entertainment expenses might increase.
  

• Add up your retirement savings accounts (e.g., IRA, 401(k), taxable accounts) and multiply the total by 4% (.04) to determine the amount to withdraw annually from these accounts to last about 30 years.
  

• Compare estimated retirement expenses with anticipated income from Social Security, a pension, 4% investment withdrawals, and/or other income. If you have a shortfall, working longer, downsizing, or adjusting lifestyle expenses.
  

• Organize your financial records, including an inventory of documents and where they are kept (e.g., wallet, home files, safe deposit box). Consider making “soft copies” (e.g., scanned documents on a flash drive or in a cloud server).
  

• Take advantage of available cost-saving opportunities such as senior discounts on purchases and entertainment costs (e.g., movie tickets) and income and/or property tax reductions.

 

The Ace Your Retirement web site is a good starting point for people who want a retirement savings action plan. For more impact, it can be combined with the Ballpark Estimate, which helps people determine how much they need to save to support their desired lifestyle.  Both resources provide a personalized action plan to help users ace retirement.