Wednesday, November 25, 2020

Online Shopping Behavioral Finance Blind Spots


As noted in a previous post, online shopping surged in September with a 43% increase from 2019 in online sales. Since March, online sales in the U.S. have increased in a wide variety of categories (e.g., clothing, anti-bacterial sprays and wipes, toilet paper, over-the-counter drugs, and non-perishable foods) as a result of stay-at-home orders and coronavirus fears.

A big unknown is whether shopping habits adopted during the pandemic will continue after it abates. In the meantime, online sales during the 2020 holiday season (November through January) are expected to grow between 25% and 35%. As part of these sales, marketers expect increases in purchases related to home improvements and decorating as people stay home more.

I recently attended a webinar about the behavioral finance aspects of online shopping sponsored by Next Gen Personal Finance. As a result, I gained new insights into techniques that online marketers use to attract online shoppers. Below are eight things that I learned and am passing along to help you become a savvy online shopper:

¨       Dark Patterns- A generic term for techniques used by websites and apps to trick users into doing things that they did not plan to do and making it difficult to undo the damage. Examples of dark patterns are getting consumers to inadvertently sign up for something, unexpected charges (e.g., handling fees and delivery charges) at the end of the online checkout process and adding items into an online shopping “cart” through the use of checkboxes or “opt-out” buttons.


¨       Use of Color- Website designers employ a variety of tricks to foster online purchases. One is using the same color in a sequence for clickable boxes to navigate a website. Website visitors get used to a color and keep on clicking. Colors, themselves, also send powerful messages. Red creates a sense of urgency and is often seen in clearance sales, black is used to market luxury goods, and blue is used, often by banks and businesses, to create a sense of trust and security.


¨       “Roach Motel”- A type of dark pattern where online users make an unintended purchase very easily and then find it very difficult to get out. An example is inadvertently purchasing a premium subscription for a product or service and then having to spend hours searching online or calling “800” numbers to try to reverse the transaction.


¨       Privacy Zuckering- Another dark pattern, named for Facebook CEO Mark Zuckerberg, where online users are tricked into publicly divulging more information about themselves than they intended. This is often done via fine print in the terms and conditions of a website that gives the merchant that you are doing business with to sell your personal data.


¨       Confirm Shaming- A dark pattern where users are guilted into some type of “opt-in’ decision by the wording of the option to decline a product or service. It is often used to get people to sign up for an online mailing list. Another use is language like “No thanks. I do not want unlimited one-day delivery” for people to decline an online shopping program.


¨       Forced Continuity- This dark pattern affects short-term “free trial” offers where a service comes to an end and a person’s credit card starts getting charged the full retail price for the service. Worse yet, the company charging a person’s credit card often does not make it easy to cancel the automatic renewal.


¨       Bait and Switch- This is a classic deceptive retail practice that has found new online applications as a dark pattern. Online users set out to do one thing but something different and unintended happens instead. This is often done by the use of pop-up windows or the placement of clickable buttons. A classic example is the huge public backlash when Microsoft used a digital bait and switch technique to get computer users to upgrade their operating system.


¨       Disguised Ads- This dark pattern is where advertisements are disguised as content or some type of website navigation so users are encouraged to click on them. Advertisements may look like a download button for information, for example, often with the words “start download” or “download here.”


The best defense against dark patterns is to be aware of them and to not let your guard down when making online purchasing decisions. Take the time to review the content and format of online shopping advertisements and web pages. The traditional “Black Friday” for holiday shopping is predicted to be replaced by a series of sales by many retailer both in stores and online.

However you plan to shop this holiday season, be a savvy shopper. Scrutinize all sales information carefully and be aware of the cleverly sly dark patterns that online sellers use to separate people from their money. As with all personal finance information, knowledge is power.


Wednesday, November 18, 2020

Take Advantage of COVID-19 Financial “Bounces”


Last week, I lost 3.2 pounds in 24 hours. My weight dropped from 122.4 pounds to 119.2 pounds overnight. No, it was not some sort of new miracle pill or diet. It was preparation for a colonoscopy and, without going into any gory details, the pounds came off quickly, much faster than if I had tried to lose weight slowly by reducing calories or increasing physical activity (I already walk 10,000+ steps a day).

In retrospect, I realized I had experienced a “weight bounce”; i.e. a big boost in results similar to the “bounces” that many politicians get in their approval rankings immediately after a national convention. Since my ideal weight is 122 pounds, I really did not need to lose any weight but now I have a “buffer” for occasional future calorie splurges, like pie on Thanksgiving.

It occurred to me that, as a result of COVID-19, some Americans have received “financial bounces” similar to my “weight bounce.” In other words, a quick boost that would otherwise take some time. There are basically three groups of people when it comes to COVID-19 financial impacts:

¨       Reduced income and struggling

¨       Stable income but anxious

¨       Increased income with opportunities

 People in the last two groups are fortunate to have jobs. They have continued income or even an increased income. An example of the latter is home improvement contractors in my Florida community. As entertainment and travel expenses dropped like a rock, many of my neighbors reallocated those dollars to 4 P’s (patios, pavers, pools, and palm trees), resulting in an upsurge in business income for service providers.

In addition to an increased income “bounce,” some people have experienced a reduced expenses “bounce.” If you are working from home, expenses for commuting, childcare, clothing, and/or meals eaten away from home have dropped off, resulting in the ability to save more and/or reduce debt faster than before.

Take advantage of the financial “bounces” in your life and maintain them when we get to “the other side” of COVID-19:

¨       Lock in a Higher Savings Rate- Sign up with your employer to have additional savings permanently deducted from your pay.

¨       Build a Bigger Buffer- Just like my three-pound weight buffer, build a larger savings buffer for resilience in future emergencies.

¨       Repay Debt Quickly- Use either the “snowball” or “avalanche” accelerated debt repayment method to dig out of debt more quickly.

¨       Extend Telecommuting Time- Ask your boss for some post-pandemic flexibility. Even one extra day per week working at home will significantly cut expenses.

¨       Make Prudent Home Improvements- Focus on interior and/or exterior changes that increase both the comfort and value of your home.

Thursday, November 12, 2020

Personal Finance Trends in the Age of COVID-19 (Part 3)


On August 26, I wrote a blog post about current events in the age of COVID-19. This was followed by a second post about additional COVID-19-related events on September 17. 

In preparation for my annual Personal Finance Year in Review webinar for the Military Families Learning Network on December 8, I have continued to closely track current events related to personal finance and the pandemic. 

Below are brief summaries of ten recent personal finance trends and events.

¨      K-Shaped Recovery Projections- Economists are increasingly discussing a two-tier recovery where those who have secure jobs or pensions and are relatively unscathed by COVID-19 will recover on an upward trajectory like the upper “arm” of a K. Those in the service sector, retail, and in other industries negatively impacted by the pandemic will be on a downward trajectory and see their prospects diminished.


¨      Long-Term Low Interest Rates- The Federal Reserve signaled interest rates near 0% at least through 2023 to help support economic recovery. This policy impacts savers (slim yields), homebuyers (attractive interest rates), life insurance buyers (higher premiums to offset low bond yields). Interest rates are so low that some money market funds (e.g., BlackRock, and Fidelity Investments) waived fees to keep yields positive.


¨      Rainy-Day Savings Plans- More than 20 large U.S. companies, including United Parcel Service (UPS) most recently, have developed so-called “sidecar” savings plans to help their workers save for emergencies within their 401(k) plan. Short-term savings deposits are made with after-tax dollar payroll deductions and typically do not earn an employer match like retirement plan deposits. Contributions come out tax-free when needed.


¨      Credit Card Changes- Credit card companies adjusted their rewards programs to reflect pandemic-induced spending shifts. With fewer people traveling and earning airline miles, rewards shifted to things like restaurant delivery, takeout, home improvement products, and streaming services such as Netflix and Disney+. Another industry change was a decrease in 0% interest credit card offers as card issuers seek to minimize risks.


¨      High Credit Scores- The average FICO credit score was 711 in July, the highest score on record. This was attributed to consumers stuck at home and spending less, borrowers paying down what they owe and not incurring new debt, and stimulus payments and moratoriums provided through the CARES Act. Borrowers may have missed payments but their lenders did not submit this information to credit bureaus.


¨      Surge in Life Insurance Sales- Many firms reported double-digit increases in life insurance policy sales relative to 2019 as the pandemic claimed the lives of people of all ages. This increase was associated with a heightened fear of death and greater awareness of financial risks associated with it. Interestingly, there were fewer death claims than expected as COVID-19 disproportionately killed people without life insurance.


¨      Social Security-Many unemployed older workers collected permanent actuarily reduced benefits earlier than planned to make ends meet following COVID-19-induced job losses. As a result, the Social Security trust fund is projected to run out of money in 2032 rather than 2036 before the pandemic. In addition, many employers chose not to defer the 6.2% payroll tax for Social Security into 2021 due to administrative cost concerns.


¨      Online Sales and Coupon Clipping- COVID-19 accelerated many trends that were already underway. As an example, digital coupon redemptions surpassed paper coupons for the first time in 2020. Marketers found it easier to target customers online and did not need the long planning timeline that newspaper inserts and circulars require. Online shopping also surged in September with a 43% increase from 2019 in online sales.


¨      Record-Breaking Trends- The National Bureau of Economic Research declared that the U.S. officially entered a recession in February. This ended a 128-month economic expansion, the longest on record since 1854! Other record-setting events reported in 2020 were the marriage rate at the lowest level on record and the U.S. birth rate at a 35-year low. Both records were attributed to economic uncertainty and strained finances.


¨      People “Voting with Their Feet”- Data were released in 2020 indicating that moves from high-tax states to low-tax states accelerated. One reason cited was 2017 federal income tax reform which limited the federal income tax deduction for state and local taxes. Another noteworthy trend was a 4% decrease in undergraduate enrollment at U.S. colleges and universities in Fall 2020, including a 16.1% decrease in first-year students.

Wednesday, November 4, 2020

Tax-Smart Gifting Strategies to Help Those in Need


As described in a recent webinar by Rutgers Cooperative Extension, there are two financial faces to the COVID-19 pandemic: people who are struggling with job losses, overdue bills, and/or increased expenses and those who are basically “financially unscathed” with continued income, reduced expenses (e.g., no commuting, childcare, and/or travel), and/or no investment losses (unless they panic and sell securities in a down market).

Toward the end of each year, interest in tax-advantaged philanthropy to help those in need often increases. There is some evidence that donors plan to give more this year in response to COVID-19 and social justice issues. Many charitable organizations are in desperate need of funds after their 2020 fund-raising events were cancelled.

A key point to remember is that how you give and what you give is as important, perhaps even more so, as the dollar amount involved. With a 2020 standard deduction of $12,400 for singles ($13,700 at age 65+) and $24,800 for married couples filing jointly ($27,400 if both spouses are age 65+), it is much harder for those who write checks to support charities to see a direct tax benefit as the standard deduction saves more in taxes than itemizing.

Below are three strategies to help those in need and also receive a tax benefit for your charitable contributions:

¨      Establish a Donor-Advised Fund (DAF)- I did this personally this year and it was super easy. First, you select a DAF custodian such as Schwab, Vanguard, Fidelity, or TIAA by reviewing their portfolio investment options and expenses. Next, select an asset allocation for your deposit and make a tax-deductible contribution.


Typically, you’ll want to contribute more than your standard deduction amount to gain the ability to itemize deductions, including the DAF deposit. This is often referred to as a “bunching” strategy where people plan to be able to itemize every few years or so.  Lastly, follow the custodian’s procedures to make grants to charities from your account at any time. The custodian makes sure the charity is tax-qualified and sends out a check.


¨      Donate Appreciated Securities- Consider gifting appreciated securities to charities instead of cash. For example, bonds or stock or mutual fund shares. Securities can be transferred directly to charities who accept them or placed within a DAF for greater flexibility as to the timing and recipients of charitable gifts.


Donors can claim the fair market value of the gift on their income tax return and avoid paying capital gains tax on the gifted amount. This can save a considerable amount of taxes if securities were held a long time and grew significantly. Charities also receive more than if donors sold shares and donated the after-tax proceeds.

¨      Qualified Charitable Contributions- Starting at age 70 ½, donors with traditional IRAs can donate up to $100,000 to qualified charitable organizations directly from their IRA(s). This is called a qualified charitable distribution (QCD). Withdrawals for charitable donations are not counted as taxable income and can be used to comply with required minimum distribution (RMD) tax rules for traditional IRAs that begin at age 72.


Charitable contributions must be sent directly from an IRA account custodian to a qualified charity in order to qualify for a QCD. Account owners cannot take possession of the money. All IRA distributions are reported to IRA account owners and the IRS on Form 1099-R and QCDs should not be included in taxable income.

There is one more way to give to qualified charities and save on income taxes for tax years beginning in 2020. There is a $300 deduction allowed for non-itemizers as a result of the CARES Act. This is often referred to as an “above the line” deduction because it is an adjustment made before determining adjusted gross income (AGI).

To summarize, it is still possible to receive tax benefits for charitable donations. Donating to charities is a win-win-win for all involved. Donors reduce their income taxes, charities receive desperately needed income, and clients of charities receive much needed support, especially during these challenging times.

There is still time to make arrangements for any of the charitable donation strategies listed above. Every small step that people take to help others this holiday season will make a difference.

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