Credit: A Building Block for Building Wealth

 

I recently participated in an Experian #creditchat titled Building Wealth, Not Just Credit: How Credit Fits into Long-Term Financial Success. Its purpose was to explore how credit can be used as a building block for wealth accumulation over time.

Below are the seven questions that were asked and my responses:

What does “building wealth” mean to you, and how does credit play a role in that journey?

Building wealth means gradually increasing your net worth over time by increasing assets, reducing debts, or both. Wealth-building is slow in your 20s/30s but is impressive as investments grow. A good analogy is the progression of prizes on the Who Wants to Be a Millionaire? game show.

 

When you think about credit beyond approval/denial, what role does it play in long-term wealth creation?

Credit provides leverage to use OPM (other people’s money) to buy appreciating assets. Case Example #1: A mortgage. Most people need to borrow money to buy a home that increases in value over time. Case Example #2: Student loans to build human capital to earn a good income.

 

What’s are common myths about credit that actually holds people back financially?

Myth: “Checking my credit score hurts it.” Checking your own credit is a soft inquiry and doesn’t affect your score at all. Not checking your credit history can let errors linger for years. Myth: “I should avoid credit cards entirely.” Actually, avoiding them can hurt your credit history. Responsible use (small charges, paid in full) builds a positive track record.

 

What role does financial education play in helping consumers use credit as a wealth-building tool?

A substantial body of research shows that financial knowledge and skills influence financial decisions that help shape wealth outcomes. Examples of financial education impact include higher credit scores, fewer defaults, and higher savings

 

How can building credit early impact financial success later in life?

Good credit helps people qualify for loans and perhaps a job and lower insurance premiums. Also, it is difficult to travel for business without a credit card, which could hinder your career. Finally, lower interest associated with good credit can save tens or even hundreds of thousands of dollars over time

 

How can having access to credit at the right time influence wealth-building opportunities?

Many wealth-building opportunities are time-sensitive. Credit allows people to act when opportunities appear. Also, credit can accelerate compound interest. The earlier someone acquires an appreciating asset, the longer it has to grow.

 

What is one piece of advice about handling credit for your younger self?

Build a positive credit history by making payments on time and in full and keeping balances low.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

My Final Quarterly Webinar Summary of 2024

 As 2024 winds down next week, it’s time for my final quarterly summary of take-aways from recent personal finance classes, conferences, and webinars that I attended. Below are some “nuggets” that you might find useful in your personal financial planning:

Offense and Defense- Financial offense involves earning money from one or more sources (e.g., paycheck, interest). Financial defense is spending what you earn with a plan. Just like football teams, offense and defense are both very important to achieve financial well-being. 

Couple Finances- One study found that 43% of couples merge all their money, 34% have a joint account for shared expenses only, and 23% keep all their money separate. There is no one “right” way for couples to set up financial accounts but many experts do advise paying bills in proportion to each spouse’s income in proportion to total household income.

Working Past Age 70- Benefits of continued work include: increased Social Security (if earnings replace low-earning years from young adulthood), increased retirement plan savings, the “still working exception” for required minimum distributions (RMDs), continued access to employer benefits, and fewer years to support yourself without a paycheck in later life. Pitfalls are possibly triggering a Medicare sign-up penalty and premium surcharges called IRMAA.

Retirement Challenges- Five issues in later life are longevity (outliving savings), stock and bond market volatility, inflation (reduced purchasing power), cognitive decline, and sequence of return risk. The latter is when an investment downturn occurs early in retirement, people need to sell shares for living expenses, and funds are no longer available for a rebound. Also, with tax-deferred retirement plans subject to RMDs, savers are “in a partnership with the IRS.”

Diagnostic Tools- Useful documents to understand an individual or couple’s finances for planning purposes are net worth and cash flow calculations, saving and investment account statements, and income tax returns. Investors should also review their portfolio (e.g., asset allocation weights and investment performance) “for 2-3 hours every 2-3 years.”

Emerging Adulthood- Many adult children are still on “the family payroll” with only 45% of young adults age 18-34 completely financially independent from their parents. Sometimes, subsidies total thousands of dollars that parents could have saved for retirement. For example, a transfer of $8,000 to adult children over the course of a year for rent, auto insurance, cell phone, etc. could have funded the maximum 2024 IRA contribution for a worker age 50+.

Prenup Analogy- A prenuptial agreement, a legally binding contact between soon-to-be married individuals, is similar to an auto insurance policy. You are planning for the possibility of an accident (i.e., divorce), but want to do everything possible to avoid it. Every married couple has a prenup: one they prepare themselves or decisions made according to state law.

AFCPE 2024: Ten Take-Aways and a Barbservation

I recently returned home from the 2024 Symposium of my professional “home,” the Association for Financial Counseling and Planning Education® or AFCPE®. This conference serves an amazing mix of researchers, practitioners, and educators whose work positively impacts the financial wellness of U.S. families. 

Below are my key take-aways from #AFCPE2024 and a Barbservation:

 

Motivational Techniques- These approaches can be used for positive changes or for fraud. Reciprocity is where you get something (e.g., a free meal) and feel pressure to return the favor. Social proof is when you are told about others who have done something that you are being asked to do. In addition, people who agree to small things are often asked to agree to something bigger. Fraudsters keep getting better at developing strategies that nudge consumers to part with their money.

 

Student Loans- The Saving on Valuable Education (SAVE) program that replaced a program called REPAYE is frozen with no new enrollments as a result of a court injunction. Borrowers were placed in an interest-free forbearance. Lawsuits were brought against SAVE because it costs a lot of money to forgive debt and this was not approved by Congress. Public Service Loan Forgiveness (PSLF) was approved by Congress but could always be undone in the future.

 

Fraud and Scams- Classic strategies (e.g., “pump and dump”) are being used with modern technologies to reach victims with pitches that prey on emotions (e.g., greed, fear, and fear of missing out or FOMO). Scarcity (“this product is only open to the first 100 investors”) is another common ploy. Everyone, regardless of education, can be a fraud victim during a moment of vulnerability.

 

High-Income Households- AFCPE members were advised not to ignore this demographic as more than half of Americans earning $100,000+ a year live paycheck-to-paycheck. Financial challenges of high-income households include lifestyle inflation, social pressure, family and community obligations, over-leveraging debt, and complex financial planning needs.

 

Gig Workers- This term includes freelancers and self-employed individuals. There are about 63 million U.S. gig workers in 2024 or 38% of the total workforce. One in five makes six figures. Gig workers should avoid comingling personal and business expenses, set aside money for taxes, and track jobs that provide 1099 forms for income reporting so they know if they are missing any 1099s at tax time. Hallmarks of a maturing business include registration with a state Secretary of State, a business bank account, good credit, 3-6 months of bank statements, and a business plan.

 

Financial Abuse- Abusive relationships often develop gradually and the key driver is control.  Indicators of economic abuse include: threatening harm, controlling or sabotaging a victim’s work, and limiting a victim’s future career growth (e.g., taking classes). The reason that people stay in abusive relationships is often similar to those who don’t heed warnings to evacuate during storms: they don’t know where to go and/or lack the ability to move pets and possessions.

Artificial Intelligence (AI)- The better an AI prompt, the more useful the output. Positive uses of AI in financial education include automated financial advisors, fraud detection, personalized financial products, and the creation of quizzes, discussion questions, rubrics, and templates. Negative aspects of AI include privacy invasion, biased decision-making, authoritative erroneous output called hallucinations, over-reliance on automation, and erosion of skills.

 

Veterans Benefits- VA benefits are all about Veterans- not their spouse or children. Debunked myths included “My VA disability benefit will continue for my spouse after my death,” “I will be able to go to a VA long-term facility,” and “I get free life insurance from the VA.” The VA will pay up to $2,000 toward burial expenses for a service-connected death and up to $978 for a non-service connected death. This is not automatic, however, and government paperwork is required.

 

Financial Well-Being- Becoming financially secure is hard and many people feel like they should be doing better. Shame is common as evidenced by a majority of engaged couples who do not disclose debt to each other. Achieving financial well-being is a behavioral problem, not a knowledge problem. Symposium attendees were advised to consider taking a periodic "financial health day” to focus on finances and to encourage their clients to do the same. 

 

Powerful Presentations- Presentations about personal finance (or any other topic) should have a strong opening with a statistic, quote, story, demonstration, or question. Likewise, the end of a presentation should be equally strong with a call to action. In other words, So What? Now What? How can audience members apply the presentation content to their life or work?

 

I close with a personal Barbservation.

 

In informal conversations with dozens of attendees and in some questions asked of speakers, there was a strong undercurrent of worry, anxiety, concern, and/or dread about the incoming administration and potential federal agency leadership appointees. The Symposium attracts a number of government employees (e.g., Securities and Exchange Commission (SEC), Consumer Financial Protection Bureau (CFPB), U.S. Department of Defense, U.S. Department of Agriculture, and U.S. Department of Veterans Affairs) as well as financial education entrepreneurs like me (full disclosure) who work on federally-funded projects.

 

Yes, people are worried about the potential loss of their government-funded jobs but equally as important, the loss of the valuable services that their agencies provide to ordinary Americans. Below are some examples.

 

Will billionaire cost cutters understand, or care about, the financial education and counseling services that Personal Financial Managers (PFMs) provide to service members on military installations worldwide? 

Or the valuable professional development training that OneOp provides for military service providers? 

Or the financial education delivered by Cooperative Extension educators who help individuals and families across the U.S. improve their financial well-being? 

Or the preventive financial education and regulatory enforcement programs provided by the SEC and CFPB that help combat fraud?  

I certainly do hope so, but recent news headlines have me feeling uneasy and apprehensive too.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

 

Take-Aways From a Back-to-School Virtual Conference

Each year in August, Next Gen Personal Finance holds an all-day Back-to-School Virtual Conference for financial educators. I recently attended part of this program to learn about topics related to my work for clients. I firmly believe that, when you are well versed on current events, you enhance your credibility with clients and students. 

Below are six of my content take-aways:

Generative AI Prompts- Users need to “poke and prod” prompts for generative AI programs (e.g., ChatGPT, Bing, and Gemini) to get what they want. The more detail, the better. For example “Explain AI to a 10-year old in 60 words or less” versus “Explain AI.” Be very specific. Examples: “Write your response in narrative form instead of a bulleted list” and “The tone should be casual and exciting.” Use AI output as a tool but make the final product your own.

 

Frictionless Spending- Due to increased use of financial technology (fintech) tools, the processes of spending and borrowing money have become much more seamless and hassle-free. While this is good from a convenience standpoint (i.e., quick transactions with minimal steps and obstacles), fintech tools can also enable overspending and overborrowing.

 

Dark Patterns- These are deceptive user interfaces on websites that trick people into doing things that they didn’t plan to do such as signing up for recurring payments, buying something, or sharing personal information. Three common places where dark patterns are used are online shopping, gaming apps (e.g., paying money to get to the next level of a game), and social media. For example, ads that pop up for items that you were just searching for online.

 

Confirm Shaming- This dark pattern method words the option to decline an offer in such a way that website visitors feel ashamed to proceed. Example: “So you really don’t want to save money?” Other dark patterns include making it very difficult to cancel a service or subscription that was so easy to sign up for (e.g., requiring a phone call) and “bait and switch” dark patterns that try to get consumers to upgrade when a low cost product or service is “unavailable.”

 

Inflation Rate- Good news! The U.S. inflation rate fell below 3% for the first time since 2021. Specifically, the consumer price index rose 2.9% from July 2023 to July 2024 according to the U.S. Bureau of Labor Statistics. While the increase in prices for goods and services has slowed considerably from mid-2022, we are not experiencing deflation (i.e., a sustained decrease in prices). Therefore, Americans cannot expect prices to go back to where they were in 2019.

 

Vehicle Purchases- The average price of a new vehicle is slightly under $50,000 and 96-month (8-year) car loans are becoming increasingly available. A longer loan term (e.g., 7 or 8 years vs. 4 or 5 years) reduces monthly vehicle loan payments but increases the total interest paid. According to a 2024 J.D. Power study, Toyota is the most reliable mass market brand followed by Buick (ranked second) and Chevrolet and Mini (both tied for third).

 

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

Take-Aways from #AFCPE2023- Part II

 

As I noted last week, I slowly made my way since last December through over a dozen video recordings of presentations made at the 2023 Association for Financial Counseling and Planning Education (AFCPE) Symposium.

Below is another very eclectic summary of key take-aways from recorded presentations on topics of personal interest:

 

Debt Repayment Acceleration- The best way to pay off debt quickly is a “rollover method” where extra payments on debt get shifted from one creditor to another as debts are repaid. The free Utah State University PowerPay program is a great resource to create a debt reduction calendar. There are four PowerPay payoff methods to apply extra payments to: highest interest rate first, shortest term first, lowest balance first, and in the order that debts are entered.

 

Estate Planning- About 60% of the U.S. population dies without a will. In that case, state-specific intestacy laws apply. One reason for a lack of wills is that people come to a standstill over who to name as a guardian for minor children. If a guardian or executor does not want to serve, they can decline at the outset or in the middle of estate administration. Step-children are not considered children unless the creator of a will defines them as such.

 

Insolvent Estates- This is where a deceased person’s debts exceed their assets (i.e., a negative net worth). Every state has a law that states “here’s who gets paid first” (e.g., 1. Attorney, 2. Payor of funeral expenses, 3. Executor, 4. Taxes, 5. Medicaid, 6. Recent medical bills, and 7. Everybody else (credit cards, old medical debt, loans, etc.). In estates with limited assets, entities on the bottom, like credit cards, don’t get paid and there is no money for heirs.

 

Scams- Experts estimate that only 15% of scams are actually reported. Fraud is rampant and some businesses, with the same structure as legitimate corporations, actually exist solely to perpetuate scams. Scammers collects bits of information about people, put it together, and compile in within data bases to be used for fraudulent transactions. Scammers know how the human brain works and how to put people in a state of fear or greed and apply time pressure.

 

Professional Uses of AI- The session began with a quote (“If you don’t like change, you’ll like irrelevance even less) and noted that AI is already part of our lives. Think virtual assistants like Siri and Alexa and autofill in Microsoft Word). Professionals should not use generative AI platforms like ChatGPT unless they have expertise to verify the accuracy of the output and AI output should always be considered a first draft. AI prompts need to be very specific, such as including a word count and level of understanding (e.g., “explain ChatGPT to a 10-year old”).

 

Cryptocurrency- Almost a third of investors, especially young adults, own cryptocurrency. Disadvantages include the following: 1. Use for illegal activities and scams, 2. Fees can be expensive, 3. Regulatory risk (it is possible that countries could outlaw its use), 4. Price volatility (there have been bubbles resulting in big losses), 5. Security risk (crypto miners could be hacked), and 6. No government (e.g., FDIC or SIPC in the U.S.) protection.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

Take-Aways from #AFCPE2023- Part I

 

One of the great features of the annual Association for Financial Counseling and Planning Education (AFCPE) Symposium is that AFCPE now makes video recordings of all of the breakout sessions and makes them available to attendees for a year. Gone are the days when you need to choose one session from among three topics of interest and miss the other two.

 

During the past eight months, I have slowly made my way through parts of the 2023 Symposium that I missed and was interested in, including a general session about poverty in America when my flight was abruptly moved up (without my consent) and I had to leave early. In this post and the next, I will provide a very eclectic summary of my key take-aways from the “rest of the Symposium”:

 

Poverty in America- One in nine (38 million) Americans live below the poverty line and one in eighteen live in “deep poverty.” Key reasons why poverty persists are the job market and housing market, which is brutal for poor people. Also, the U.S. does a poor job of connecting people to programs they need and it subsidizes affluence instead of poverty. Example: The amount provided by mortgage interest deductions is three times that of housing subsidies.

 

Veterans Benefits- Many military Veterans do not receive benefits earned for service to our country. The three top reasons why disability claims are denied by the Department of Veterans Affairs (VA) are: 1. Not enough supporting medical evidence, 2. Failure to attend a scheduled medical exam, and 3. A disability is not connected to military service. No taxes are owed on VA disability compensation and Veterans can receive both VA and Social Security disability.

 

Financial Education- “Just in time” financial education that is tied to an upcoming decision or event is more effective than generic interventions. Other principles of effective financial education are 1. Knowing the target audience receiving services, 2. Providing actionable, relevant, and timely information, 3. Building on learners’ motivation, and 4. Making it easy for people to make good decisions and follow through on information and skills that they learn.

 

Family Caregivers- Caregiving can happen suddenly and caregivers can be caught off guard both emotionally and financially. Many caregivers have no idea what to expect and there are not a lot of institutional supports. Family caregivers spend, on average, $7,000 annually out of pocket. Additional opportunity costs include decreased work hours, passed up promotions, or leaving a job completely. One study estimated $304,000 in lost lifetime wages and benefits.

 

Financial Fraud- The top scam category in 2022 was imposter scams. Financial scam impacts are both financial and non-financial (e.g., PTSD, anxiety, depression). Scams often capitalize on unverifiable information and pressure people to make quick decisions. Protective factors against scams include prior experience with scams (experience is a great teacher), knowledge of scam methods (a benefit of financial education!) and bouncing ideas off of others for feedback. Social isolation, on the other hand, increases people’s vulnerability for fraud.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

Highlights of Recent Webinars: First Quarter 2024

 

Every quarter, I like to review and summarize my notes from webinars I attended during the last three months. Below are some interesting tidbits from recent programs that I attended:

Future Self Thinking- Many people often think of their “future self” (who they will be decades in the future) as a stranger. As a result, they don’t think about the consequences of doing something now because their actions are affecting another person rather than themselves personally.

 

Required Minimum Distributions (RMDs)- Only IRAs and 403(b) plans (for school and non-profit sector employees) can be aggregated to calculate RMDs. All other tax-deferred plans, like 401(k)s and the thrift savings plan (TSP), must have RMDs calculated separately.

 

Saving Money on College Expenses- Suggested strategies include going to community college first, living at home with parents, going to a public college in your home state, applying for scholarships, buying used textbooks or renting textbooks, and getting a job at a college.

 

“Loud Budgeting”- This is where people (mostly young adults) post videos, primarily on TikTok, about ways they are reducing expenses and saving money. In many cases, they are repackaging “tried and true” strategies from the past but are doing so to appeal to a new generation.

 

ChatGPT- This program, developed by Open AI, is the most popular large learning model (LLM). It is trained on a massive data set of text, pulls information from multiple sources, and consolidates it to create brand new content in response to prompts by users.

 

Financial Trauma- The textbook definition is any negative experience that affects how people handle money (e.g., saving and credit). The trauma can be “little t” (relatively minor) or “Big T” (a major event). Financial advisors should always remember that people are the expert of their life.

 

Roth Conversions- It is best to move money from a pre-tax account to a Roth account in low-taxable income years, during stock market downturns, and/or in small increments over time. When you do a Roth conversion, you are front-loading taxes to avoid taxes at higher rates later.

 

A Dollar Too Much- RMDs often push older taxpayers into a higher marginal tax bracket. Just one extra dollar in income can trigger tax on Social Security benefits, higher Medicare premiums, and the 3.8% net investment income tax.

 

IRMAA Medicare Surcharge- The income-related monthly adjustment amount (IRMAA) is an extra amount that high-earning retirees pay for Medicare coverage. Currently about 7% of retirees pay IRMAA and there are five IRMAA income thresholds beyond the standard Medicare premium. IRMAA is based on income earned two years earlier (e.g., 2022 for 2024) and can be avoided by lowering adjusted gross income or making an appeal to Medicare based on life events.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

Useful Information from Recent Webinars- Part 3

During the past two months, I summarized information from various recent webinars that might be useful to others. Below are seven more information tidbits in my final installment:

Back-Door IRAs- This is where people who earn too much income to qualify for a Roth IRA contribution put money into a non-deductible traditional IRA because there are no income limits for non-deductible traditional IRAs. They then convert the traditional IRA balance to a Roth IRA within a short time. The converted amount, plus any pro-rated earnings for the short time money is in the traditional IRA, are taxed at ordinary income tax rates.

 

Super Savers- It is unlikely that people who saved for retirement for decades in tax-deferred plans will die without leaving some money in an IRA, 401(k), or other tax-deferred asset. This speaks to the importance of beneficiary planning, especially for non-spouse beneficiaries who must withdraw all money from an inherited account within 10 years after the owner’s death.

 

Financial Education Mandates- By mid-June 2023, 22 states passed laws that require graduating students to take a personal finance course. Financial literacy is one of few topics today that has bipartisan support, as evidenced by state legislature voting and bills signed by Republican and Democratic state governors. There is little cost as schools generally reallocate existing teachers and free curricula and teacher professional development are widely available.

 

Financial Trauma- This was defined as the cumulative harm to a person’s wealth-building capability and relationship with money over time. As a result of financial trauma, many people feel shame about their finances. Financial educators and others in helping roles were advised to “meet people where they are” without any judgment and to use empathy by connecting to the emotions than underpin people’s lived experiences. Start with “What can I help you with?”

 

Estate Planning Triggers- The following events often increase interest in estate planning: birth/adoption of a child or grandchild, marriage, divorce, illness/disability, a large debt, a large change in the value of assets, purchase of a major asset (e.g., house), a major life or career change, receipt of an inheritance, and a required change in a guardian, executor, or trustee.

 

Gen Z Investing- A high school-age webinar presenter spoke about opening a Roth IRA at age 14 with earned income and the early compound interest gained by starting to save for retirement almost a decade earlier vs. waiting until college graduation. She also recommended a “set it and forget it” approach by combining a target date mutual fund with automatic deposits.

 

Portfolio Rebalancing- Left alone, an investment portfolio can go wildly off track, especially during stock market peaks and dips. Rebalancing is recommended and it is easier to rebalance regularly than wait for long periods of time. Rebalancing can be done by selling overweighted assets (do this within tax-deferred accounts) or with new cash deposits to underweighted assets.

 

Financial knowledge is power. I hope that you found these information tidbits useful.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

Useful Information from 2022 Webinars- Part 2

As I noted in a previous post, I periodically summarize notes taken from various webinars that I think might be useful to others. Below are seven information tidbits that caught my eye:

Defensive Investing- Financial markets were volatile in 2022 and, for a while, “there was no (good) place to hide.” Stocks and cryptocurrencies experienced big drops in value, bond prices decreased when interest rates rose, and cash assets were eroded by high inflation. What to do? Successful investors ride through down markets, stick with a disciplined long-term plan, and  control two things: fees (e.g., low expense ratios) and how they react to market downturns.

 

Tax Planning- Until 12/31/25, taxes are “on sale.” Nobody has a crystal ball, but we know that tax rates will rise starting in 2026 when the Tax Cuts and Jobs Act expires. There are only two ways to reduce taxes: 1. Make less income and 2. When the government lowers tax rates. The highest marginal tax rate was once 91% in the years before President Reagan vs. 37% today.

 

Budget Culture- This term was used on a webinar to describe “rules” that there is one right way to manage money and a strong belief in discipline and will power. With this mindset, it is easy to blame and shame people who are “under-performing.” The dominant voices in personal finance advocacy are white, male, and middle class with privilege. Wealth accumulation and money management strategies that “worked for them” often do not work for others.

 

Financial Education- Personal finances classes can be a “great equalizer” for income and asset disparities and should be available everywhere and not by ZIP code. It can completely change a student’s life. One student on a Next Gen Personal Finance webinar stated, “We only get one life- why wouldn’t you want to take a course to make it the best it can be?”

 

RMD Insights- Required minimum distribution (RMD) divisors grow by almost a factor of 1 every year after starting at 27.4 at age 72 under the 2022 revised Uniform Lifetime Table. Each year thereafter, retirees will withdraw a larger percentage of their tax-deferred assets. Experts recommend consolidating accounts to reduce the chance of errors. The tax penalty for incorrect withdrawals is now 25% of the amount that should have been taken out but was not (and 10% if paid promptly).

 

Work in Retirement- A speaker at the 2022 Retirement Summit sponsored by the Employee Benefit Research Institute (EBRI) noted that 1 in 3 retirees have experience working after retiring from a primary career. Their primary reasons are that work is rewarding and provides additional income for discretionary and unexpected expenses.

 

Effective Tax Rate- This is the percentage of income that someone pays in taxes. The formula to calculate it is Effective Tax Rate = Total Tax ÷ Taxable Income. Someone’s effective tax rate is useful to determine tax withholding or estimated taxes for investments, pensions, and Social Security. Their marginal tax rate (tax on last dollar earned) is useful for financial planning.

 

Financial knowledge is power. I hope that you found these information tidbits useful.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

Ten Trending Topics in Financial Education

Today, I presented a general session program for financial educators and researchers at an online professional conference. My chosen topic was Ten Trending Topics in Financial Education. Below is a brief description of the ten trends that I discussed:

Inflation- The U.S. had an ascending 5% inflation rate (CPI) in May 2021 and a descending 5% CPI in March 2023 and many higher inflation rates in between. Inflation-induced price hikes on goods and services are like a regressive sales tax and hurt those with low incomes the most.

 

Interest Rates- Between March 2022 and May 2023, the Federal Reserve raised interest rates 10 times in an effort to decrease inflation by slowly increasing the cost of borrowing. The goal is a so-called “soft landing” (i.e., not slowing the economy too much to avoid a recession).

 

Savings Rates and Higher APYs- U.S. households are currently saving a lower percentage of income than they were pre-COVID. The savings rate was 9.1% in January 2020 and 5.1% in March 2023. Due to Federal Reserve interest hikes, annual percentage yields range from 3.75% to 4.5%, on average, for online savings and money market accounts.

 

Increasing Debt Loads- The average credit card balance was $5,805 at year-end 2022 and the average credit card interest rate in April 2023 was 24.2%. In addition, 72- and 84-month car loans are more common and 16.8% of new car buyers now have monthly payments of $1,000+.

 

Online Gambling- Online gambling in all forms (sports betting, casinos, poker, etc.) is on the rise and legalized sports betting has spread nationwide. As of January 2023, mobile sports bets are legal in 26 states with three states pending. Young males are especially attracted to this.

 

ChatGPT and AI- Financial practitioners are experimenting with ways to use AI platforms (e.g., ChatGPT) to enhance productivity. AI output often contains mistakes and should only be considered as a “rough first draft” for review and editing by a subject matter expert.

 

Cryptocurrencies- About 16% of Americans say that they have ever invested in or traded cryptocurrencies This has led to greater income tax scrutiny and calls for more government oversight by the SEC and/or CFTC after 2022 collapses of crypto lenders and exchanges.

 

Increased State Financial Education Mandates- As of April 2023, 18 states have passed laws mandating a semester-long financial education course prior to graduation. This means that more young adults will enter college, careers, or the military with personal finance knowledge.

 

Different Types of FIRE- Different paths to Financial Independence, Retire Early (FIRE) have emerged in recent years. In addition to Traditional FIRE, there is Fat, Lean, Barista, and Coast FIRE, all in recognition of alternative paths to aggressively saving 25x annual living expenses.

 

More Attention to Asset Decumulation- Baby boomers were “guinea pigs” for voluntary self-directed retirement savings accounts and the decline of pensions. Many are now scrambling to figure out how to create a retirement “paycheck” for life using accumulated savings. Asset decumulation is a “hot” topic for financial advisors, researchers, and fintech developers.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

 

My Ten Key Take-Aways From the 2022 AFCPE Symposium

Attendees at the same professional conference have different take aways depending on their lifestyle, job responsibilities, subject matter knowledge/skill set, and other personal characteristics. We all filter new information through these lenses. When information comes at a “teachable moment,” interest in, and attention to, a presentation dramatically increases.

Below are my ten key take-aways from the 2022 AFCPE Symposium:

 

AFC Certification Milestone- The AFCPE accredited financial counselor (AFC®) certification began in 1992 and celebrated its 30^th anniversary. There are 3,000 AFCs and 1,600 candidates and the AFC® (along with the CFP®) is one of only 10 accredited professional designations in a personal finance space with about 200 certification acronyms. A job analysis is conducted every five years to make sure the AFC® is in synch with the work of real life financial practitioners.

 

Financial Atomic Habits- Self-improvement is like compound interest…it grows over time. Never underestimate the power of small, daily improvements and try to get 1% better every day. Goals provide direction and must be achieved to succeed. Habits, on the other hand, are skill-based and focus on processes; i.e., systems that move people forward. The four stages of a habit are cue, craving, response, and reward. Habit stacking ties a new habit to an existing one.

 

Women and Money- The documentary film, Savvy, by director Robin Hauser and her follow-up discussion provided a powerful look at the state of women’s finances. There is disturbing evidence that young women are abdicating financial decisions to others and, when investing, are not necessarily understanding it. Also, women recover more slowly from divorce than men do. Hauser stated that all women need to keep on top of their finances and have a way to earn money.

 

Financial Podcasts- A team of Cooperative Extension educators shared their podcasting experiences. Not surprisingly, their listenership metrics improved following podcast promotional efforts. They also recommended using fun and flashy titles to attract listeners. An example given was “I’ve Got the Power” for a podcast about the use of powers of attorney in estate planning. Resources and additional information beyond broadcast content can be shared in podcast show notes.

 

Social Media Practices- A participant in a networking chat recommended concentrating on three social media platforms and using them well. This includes frequently posting content that is valuable to others. Video presentations can be especially effective in financial education. People want to physically see things being done rather than having them explained (e.g., budgeting by allocating money to different expense categories). It makes them think “I can do this too.”

 

Bias and Stereotypes- If you have a brain, you have biases. Nobody escapes them and there can be a fine line between stereotyping and dehumanizing others. It is much easier to reduce stereotypes when you have personal connections with a diverse group of people. Also, if you have a proactive strategy to mitigate biases, you can use your conscious mind to overcome your unconscious mind so you slow down and think about a situation.

 

National Financial Capability Study- Results of the 2021 NFCS were compared with earlier waves of this triennial study. There was a decrease in financial knowledge, compared to the first (2009) wave, and higher financial knowledge was associated with increased financial capability. Like earlier NFCS waves, there were disparities among subgroups. There was also evidence that younger investors were more likely to invest in complex investment products (e.g., options, margin trades, and cryptocurrency) than older investors, but there is a disconnect between their actions and knowledge.

 

Success Traits- Keynote speaker Ryan Law stated that change is hard because people need to create new pathways in their brain, The place to start is to write down a change you want to make; i.e., begin with the end in mind. Five steps to be successful are 1. Get specific (define what success will look like), 2. Identify a strong “why” for making a change, 3. Take tiny steps (so you think “I can do this”), 4. Use implementation intentions, and 5. Use support and tracking data. A good analogy for change is hammering away at a rock. As a result of many incisions over time, it will eventually break.

 

Useful Tidbits- Three other content nuggets stood out: 1. Some students take out loans for more than they need to provide money to give back to their family, 2. For every negative interaction with someone, it takes five positive interactions to counteract it, and 3. Change and opportunity both happen in life; it is what people do with both of these challenges that counts. This advice for practitioners also stood out: “meet people (clients) where they are, but don’t leave them there.”

 

My Most Teachable Moment- The most impactful session for me was “Are Your Clients Leaving Cash on the Table?” about maximizing VA benefit compensation. At the same exact time of the workshop, my husband (who has left a lot on the table) was accessing VA benefits for the first time in the 50 years since his military discharge. After decades of using my work-based benefits, he contacted the VA to get hearing aids. It was very interesting to learn about Veteran Service Officers or VSOs that help VA benefit claimants, disability ratings, and that “many scars from service are not visible.”

 

Those are my ten key take-aways from #afcpe2022. What are yours? Let’s keep the summary conversation going.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.