A Personal Finance Gratitude List

On Thanksgiving Day, people express gratitude for good things in their lives including family members, friends, financial security, and good health. It is also a great time to reflect on positive trends in the world of personal finance. Below are five recent events in the world of personal finance to be grateful for:

¨     Interest Rate Cuts- The Federal Reserve cut interest rates three times during 2019. This is good news for home buyers shopping for mortgages, anyone with variable interest rates on credit cards, home equity lines of credit, and other debts, and people who refinanced previously issued loans with higher interest rates.

¨     Stock Market Milestones- The Dow Jones Industrial Average index reached 28,000 on November 15 and all three major stock market indexes reached record highs on November 25. This is good news for the approximately half of Americans who own individual stocks or participate indirectly in the stock market via mutual funds and/or retirement savings plans.

¨     High Interest Savings Accounts- Robo-advisory firm Betterment launched a FDIC-protected savings account with a 2.69% yield in July 2019. Other fintech firms in the “non-bank bank” space include Wealthfront and SoFi. Funds are insured because they are deposited with multiple partner banks. These accounts are attractive to savers seeking lower fees and higher yields than brick and mortar banks offer.

¨     Equifax Settlement- Affected consumers were offered up to 10 years of free credit monitoring or up to $125 (depending upon the number of claims filed). In addition, starting in 2020, up to six free Equifax credit reports can be requested each year for seven years.

¨     Financial Planning Turn 50- The profession that holistically examines people’s finances and helps clients achieve their goals began with an exploratory meeting at a Chicago hotel in 1969. Today, 50 years later, about 85,000 certified financial planners nationwide help people manage their finances.

Have a happy and safe Thanksgiving weekend. Set a goal to learn one new thing each day about personal finance.

What is a Stock Market Index?

Earlier this week, I taught my Rutgers Personal Finance class about stocks, stock indexes, and index funds. You have probably heard the Dow Jones Industrial Average (a.k.a., “the Dow”) index reported during evening news broadcasts. The Dow is a price-weighted average of the value of 30 large U.S. companies. It was invented in 1896 by Charles Dow to report how well the stock market is doing and to show trends in market performance.

The Dow is just one of many indexes used to track stock market performance. There are also indexes for bonds. An index is an unmanaged collection of securities. The securities are changed periodically based on company performance and industry trends. Below are four commonly used domestic stock market indexes:

¨     Dow Jones Industrial Average- Tracks 30 large U.S. companies and widely reported by news media outlets.

¨     Standard & Poor’s 500- Tracks 500 large U.S. companies and widely used as a benchmark for U.S. stock market performance

¨     Russell 2000- Tracks small U.S. companies (a.k.a., small capitalization or “small cap” stocks).

¨     Wilshire 5000- Tracks virtually all listed stocks that are actively traded in the United States.

Investors can use stock indexes in two ways:

¨     Buy index funds- Index funds are mutual funds that track a particular stock (or bond) index. They buy all of the securities in an index, or a representative sample of it, and provide approximately the same performance.

¨     Benchmark investment performance- The earnings of actively managed (non-index) mutual funds and individual stocks can be compared to stock indexes for an objective gauge of returns relative to market trends.

Red Flags of Investment Fraud

This week, I taught my Rutgers students about investment frauds like Pyramid and Ponzi schemes. 

Each year, thousands of consumers lose billions of dollars to fraud. Con artists use chat rooms and social media to post “urgent” messages telling people to buy a particular stock. They also use telephones to take advantage of unsuspecting victims. The movies Boiler Room and The Wolf of Wall Street provide valuable insights into how unscrupulous operators steal victims’ money by peddling worthless or nonexistent securities. 

So how do you know if an investment is fraudulent? Below are five “red flags”:

¨      Future Predictions- Beware of marketers that guarantee an investment’s future return. With the exception of bonds, investment returns are unpredictable and the value of securities rises and falls with market trends.

¨      Quick Cash- Scam artists often promise fast, low-risk payoffs and compare their returns to low rates available on bank accounts or bonds. Their implication is that victims are “suckers” for settling for low returns and that they have a sure path to high returns in a short period of time.

¨      Obscure Origins- Background information about the origin and performance of fraudulent investments is misleading or not provided because marketers do not want consumers to be able to check out their claims.

¨      Immediate Response- Requiring an immediate response and deposit of funds is another hallmark of investment fraud. Urgency is important to swindlers so they get victims’ money fast before victims have time to become suspicious or contact others for advice.

¨      Recovery Attempts- Fraud victims’ names are widely circulated. If you have fallen prey to a previous scam, you could get a call promising to recover money that you have already lost. Of course, this “service” comes at a price. Be suspicious if people call and already know where you have invested before.

My Take-Aways From the Jump$tart National Educator Conference

Last week, I attended the 2019 Jump$tart National Educator Conference which contained inspirational messages and personal finance updates for personal finance teachers. Below are six of my key take-aways.

¨     Personal Finance is Constantly Changing- Unlike more “evergreen” school subjects, such as English and Math, Personal Finance content must constantly be updated for new tax laws, credit rules, financial products, and other changes. Students also need to learn that the decisions they make today have future consequences.

¨     Students Need to Be Prepared- Schools need to teach students skills to do jobs that don’t currently exist. Artificial Intelligence (AI) has the potential to deliver deeply personalized learning experiences but there are privacy concerns. Classes need to focus less on teaching specific content and more on “big picture thinking.”

¨     Keep Financial Education Simple- Prepare students for the unknown. Teach problem-solving and decision-making and boil down information into a set of core concepts that students can apply anytime, anywhere. Examples include “consult research before making big purchases” and “pay yourself first” to save money.

¨     Invest in Your Human Capital- Investments in human capital, such as courses, degrees, certification programs, and internships can help workers- at all ages- increase their earning potential. Self-commitment tools on computers and cell phones can help people stick to their plans.

¨     Change to Stay Relevant- About 40% of workers today won’t have relevant job skills in the next five years because they aren’t willing to learn new skills and change. Tasks and roles that you perform today may not be important tomorrow. Speed is the currency of change. To remain relevant, you cannot become complacent.

¨     Foster Creativity in Financial Education- A speaker stated “if teachers foster an environment of creativity, students will create.” Real world simulations that allow students to fail and learn from the experience were also recommended as an effective teaching method.