Wednesday, November 22, 2017

Behavioral Economics and Financial Decision-Making

Happy Thanksgiving! Let's give thanks for all the "nudges" that we have available to help us manage our money better and live more fulfilling lives.

Human beings often make decisions based on mental shortcuts and emotions instead of logical, straightforward thinking. Behavioral economics (finance) is a field of study that combines personal finance with psychology and sociology to study human decision-making. Studies have found that behavioral economics principles can be used to encourage people to adopt positive financial practices. For example, the way that financial decisions are framed (e.g., as a gain or a loss) can affect the decisions that people make.

In addition, people can be “nudged” to do the right thing (e.g., save for retirement). An example is automatic enrollment in employer 401(k) plans where workers are defaulted into a retirement savings account unless they proactively opt out. There are also examples of non-financial public policy “nudges.” For example, in some countries, people are defaulted into donating their organs when they die, unless they opt out. People have also been “nudged” into making healthier food choices in experiments about where foods are placed in a supermarket.

Are you being “nudged” to make wise financial decisions? Were you auto-enrolled to save for retirement by your employer or have you signed auto-escalation paperwork to automatically increase your retirement plan savings every time your income increases? If so, you are putting behavioral economics principles on your side. Inertia is a powerful force and workers who are “nudged” to save usually continue to do so. Even small “nudges” can make a big difference in your future financial well-being.

Friday, November 17, 2017

FinCon Nuggets That You Can Use

Last month, I attended FinCon, a conference that attracted about 1,700 personal finance content creators (e.g., authors, bloggers, podcasters). Below are three take-aways that resonated with me and might be useful to you:


¨     Author/speaker Farnoosh Torabi stated “Making more money is not a goal but an obligation.” By this she meant that, when people earn more money, they can give more back to others. Studies have found that women, especially, do this. A state of “enoughness” is a privileged place. When people achieve this state of financial well-being in their life, they have opportunities to make an impact on others.


¨     Author/speaker David Bach gave away free copies of an updated version of his book The Automatic Millionnaire. In this book, he uses the phrase “Latte Factor” as a metaphor for small expenses that add up over time. “It is not about taking away someone’s coffee,” he noted. Why pay attention to small expenses? The answer is very simple, Bach noted. “If you don’t save any money, you won’t have any money.”


¨     A reporter for a large city newspaper noted, in a small group discussion, that it is not yet known who hacked Equifax. There are some experts who believe that the stolen data will be used more for espionage purposes with high profile individuals than for identity theft of ordinary consumers. Time will tell. In the meantime, all we can do is be vigilant: check credit reports regularly, consider freezing our credit, carefully review bank and health care provider statements, and file federal and/or state income tax returns early during tax season.

Friday, November 10, 2017

How to Be a Proactive Health Care Consumer

Many American families spend a lot of money on health care. At the 2017, Financial Planning Association (FPA) meeting, a speaker noted “The only option that we (consumers) have to control health care costs is to be better health care consumers.”

What to do? Below are some suggested patient empowerment strategies:


  • Always verify the insurance status of a new doctor (or one that you haven’t seen recently). Ask “Is the doctor in network with [Name of Insurance Company]?,” not “Do you take my insurance?”
  • Be prepared for appointments. Write down key information about your medical history including types and dates of surgeries and types of medication taken and their dosage.
  • Write down questions that you want answered in advance.
  • Get answers in laymen’s terms- not medical jargon.
  • Ask what a doctor wants to learn from a specific medical test.
  • Ask if there is a less expensive location to get a test done (e.g., non-hospital based labs or physical therapy).
  • If medication is ordered, ask about the side effects.
  • Ask what you can do to improve the situation (e.g., change of diet and exercise).
  • Enlist advocates for your care when you are ill.
  • Don’t miss key enrollment and plan selection deadlines such as an employer’s open enrollment period. For 2017, Affordable Care Act coverage enrollment and plan selection dates are November 1- December 15 (see and Medicare enrollment and plan selection dates are October 15- December 7.

Wednesday, November 1, 2017

Unprepared and Unproductive: My Day as an “Unbanked” Consumer

According to the Center for Financial Services Innovation (CFSI), 138 million American adults are struggling with their financial health. Many are unbanked (they don’t have a bank account) or underbanked (they have a bank account but supplement it with alternative financial services). For a few hours last month, I walked in their shoes as part of FinX, a real-time, hands-on simulation held in conjunction with the FinCon conference in Dallas.


The best way to describe FinX (short for Consumer Financial Experience) is that it resembles the format of the television show “The Apprentice.” However, all of the tasks involved banking services. Participants work in teams in a large city and have about two hours to complete a series of activities including cashing a payroll check and a personal check, buying a general purpose reloadable (GPR) card, completing a money transfer, inquiring about $500 loan costs from a bank and an alternative financial services vendor, and visiting a pawn shop.


As my team completed various FinX tasks, we briefly experienced the challenges that un/underbanked consumers face and the real-life constraints and obstacles that they encounter on a daily basis. For example, I was unable to cash the payroll check in four locations and the Western Union system was down in a supermarket that sells money orders. After over an hour spend standing in various lines with real consumers performing their typical banking tasks, my teammates and I had little to show for our effort.


In addition to the unproductive use of our time, another key insight was the cost of financial services for un/under banked individuals. To cash a $15 check at one bank without an account there cost $8 or 53% of the face amount! Money orders cost $5 each. The payroll check was unable to be cashed at the same bank from which it was issued due to a procedure called “positive pay.” This is a fraud detection tool that matches a check presented for payment against a list of checks previously authorized and issued by a company. Our check did not have a match on file.


The distance between several financial institutions was substantial, further exacerbating the challenges that un/underbanked people face. Walking (which we did) takes time and busses or Ubers/cabs cost money that limited-income consumers can ill afford. When all the FinX teams got back to the hotel, we debriefed the activity and what we had learned and observed.


Participants discussed the following topics: the high cost of banking fees, high minimum balance requirements (one bank required a $1,500 balance for free checking), problems with fee disclosure (e.g.,  a menu of services and prices), the fact that major banks don’t make relatively small dollar (e.g., $500) loans, inconsistent allocation of policies by bank personnel, the inability to transfer money to people living within the same zip code, and concerns about personal safety if people leave an alternative financial services institution carrying a wad of cash. The FinX simulation also showed that a continuing series of obstacles and crises reduce the amount of “mental bandwith” that people have to make wise financial decisions.


FinX was a visceral experience and frustrating for me and my team because we lacked control over both our money and our time. The key take-away for me is that it is very expensive for people with limited resources and options to access and use banking services. So what comes next? Obviously, some solutions involve structural changes within the banking industry itself. Others may require legislation and public policy changes. Another option is for consumers to simply take maximum advantage of reasonably priced, low-fee bank products that already exist.


In my home state of New Jersey, financial institutions are required to provide a low-cost, low minimum balance Consumer Checking Account. Unfortunately, many people who can benefit from this account don’t know about it. It is barely marketed and rarely discussed by mainstream financial media. I am now motivated to discuss this product at every opportunity that I can get. As a result of FinX, I know how costly and frustrating it is to be un/underbanked. Lack of access to banking services at a reasonable cost is a threat to America’s financial health and financial health matters!

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