March 2014

Post Recession: Strugglers vs Thrivers

The Federal Reserve Bank of St. Louis, based on its analysis of data from the Survey of Consumer Finances, estimates that the recession has ended for only about one-quarter of the U.S. population – the thrivers, who have paid down their debts and restored their savings.  That would leave three out of four Americans who are still struggling. Squared Away interviewed Ray Boshara, director of the Center for Household Financial Stability at the bank; Bill Emmons, senior economic adviser; and Bryan Noeth, policy analyst, for their insights into why most Americans’ net worth – their assets minus debts – hasn’t recovered.

Q: You distinguish “thrivers” from “strugglers.” Who are these two groups?

Boshara: The thrivers versus strugglers construct is a simple way to make the point that some demographically defined groups are doing better, on average, than others in terms of net worth – what you save, own, and owe, or your entire balance sheet. We found that age, race, ethnicity and education levels are pretty strong predictors of who lost wealth and who’s recovered wealth over the past few years, as well as over a longer period of time.

Q: Describe the typical thrivers.

Emmons: Whites and Asians with a college degree who are over 40 – that’s the typical thriver. Remember, this is a construct, and it’s not 100 percent foolproof.  But you would tend to say these groups are more likely to have outcomes consistent with recovering.

Q: How about the typical strugglers?

Emmons: By age – they’re younger – and they’re African-American or Latino. They also do not have a college degree, and they have too much debt. They’re the other three-fourths of the population. They are not holding enough liquid assets, so they’re just one paycheck away from a crisis. They do not have a diversified portfolio and aren’t benefitting from the stock market gains. They’ve got too much in the house, which has declined in value.

Q: What have you learned about young adults and their wealth – or lack of it?

Emmons: It jumps off the page in our analysis: It doesn’t matter if you’re white or college educated.  If you’re young, you’re vulnerable, and you’ve made the same portfolio mistakes as people with less education: low levels of liquid assets, too much in the house, an issue that is related to portfolio diversification, and more leverage. …Learn More

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Do Incentives Create Lax Loan Standards?

The answer to the above question is definitely “yes,” according to new research by professors Sumit Agarwal at the National University of Singapore and Itzhak Ben-David at Ohio State.

They examined 30,000 small business loans made in 2004 and 2005 to compare the loans made by salaried bank officers with those made by officers working under a commission system.  The commissioned lenders were paid 80 percent of their former salary, plus commissions based on the number of loans they originated, their dollar amount, and how quickly they were approved.

Not surprisingly, the researchers found that commissioned officers, responding to these incentives, originated 31 percent more loans and the dollar amounts per loan were nearly 15 percent greater – they were also often larger than what their clients had requested. …Learn More

Group of young adults jumping

Money Habits Set Millennials Apart

Millennials, now in their 20s or early 30s, are ethnically more diverse and better educated than any previous generation.  They also demonstrate different financial behaviors that may partly reflect new trends in society and in technology.

Millennials’ financial struggles are a natural consequence of being new entrants to the labor force. Two-thirds of them earn less than $50,000 annually, and they are more likely than Generation X (now mostly in their 40s) to spend more than they earn, according to the FINRA Investor Education Foundation’s newly released survey of some 25,000 adults of all ages.

But FINRA’s survey provides clues to the financial habits that may set Millennials apart from previous generations:

Chart: Millenials and Their Student Loan Debt

  • More than one in three has taken on debt for college.  The share rises to half of Millennials who are either full-time or part-time students.
  • Millennials are slightly more likely than prior generations to be offered financial education and to participate in it. Millennial men have higher financial literacy than their female peers, but this gender gap has shrunk from prior generations. This improvement still might not offset the greater need for financial capability, due to their higher student debt levels. …

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Seniors Describe Their Lives in Poverty

About 15 percent of Americans age 65 and over are poor, according to the federal government’s alternative definition of poverty, known as the Supplemental Poverty Measure, a yardstick that takes into account seniors’ out-of-pocket medical expenses, as well as income and tax effects not included in the standard measure of poverty.

A compelling new video profiles poor older Americans who live in Baltimore, rural West Virginia, and Los Angeles. In the video, produced by the Kaiser Family Foundation, a non-profit research and policy organization focused on health care, the seniors identify rising rents and medical expenses as major explanations of financial hardship, which can mean lacking enough money for food.

Squared Away also has interviewed seniors living in a Boston housing complex for low-income seniors. To hear their stories, click here. Learn More

Stress illustration

Stressed Out About Money?

If so, you have a lot of company.

Fully 71 percent of adults identified money concerns as their single biggest source of stress in 2013, according to the American Psychological Association’s annual Stress in America report, derived from surveys by Harris Interactive. The good news is that this money-stress indicator has declined from 76 percent in 2010, in the wake of the Great Recession.

But the runner-up sources of stress are also closely related to money: work caused stress in 69 percent of adults surveyed, and “the economy” was identified by 59 percent.

Women are slightly more stressed than men.  Could it be because women earn less, on average? On the other hand, more men than women still have responsibility for being the primary breadwinner. …Learn More

Students Take Charge of College Loans

Tatiana Andrade (standing), an ambassador for American Student Assistance, hosts a Jeopardy match to educate classmates about their student debt.

College students usually plan on repaying their loans after graduation, when they’ve landed a full-time job.  Freshman Tatiana Andrade is making payments while she’s still in school.

Andrade is already $14,500 in debt.  She’s on track to owe some $60,000 when she completes her four-year degree at Stonehill College outside Boston, even though her parents are sharing the cost.  To chip away at her debt, she pays off between $100 and $150 per month from her earnings in a part-time job.

Andrade is among a slim but growing minority of students and recent graduates becoming proactive to get control of their student debt – before it controls them. She advises classmates to do the same as Stonehill College’s ambassador for the non-profit American Student Assistance (ASA), which has a program and website – SALT – aimed at educating and counseling students on strategies to minimize how much they borrow and to manage their loan payments.

Making loan payments today minimizes the total amount she’ll pay in the future for three reasons. Loans paid immediately carry a lower interest rate than loans that permit her to defer payment until after graduation.  She’s cutting down the total amount she’ll have to pay back after graduation.  She said she also avoided a loan-origination fee required on deferred loans equal to 4 percent of the loan.

“Every dollar counts,” she said. Waiting until graduation “is the worst thing you can do.” …Learn More

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Delay Retiring: A ‘Smart’ Decision

If postponing retirement can improve one’s financial security in old age, why do so many people rush to retire when they reach age 62?

Much research has explored the financial and health reasons that explain why so few people choose to retire later.  Taking a different tack, a new study found that individuals with higher cognition foresee a higher probability of working longer.

There were two steps to this research.

First, participants in an Internet survey were asked if they planned to continue working full-time after age 62 and, separately, if they expected to work past 65.  Participants were between the ages of 45 and 61.

Next, the researchers measured each survey participant’s “crystallized intelligence,” which is the wisdom acquired with age.  This type of intelligence helps to compensate for declining “fluid intelligence” – the ability to think quickly – which peaks in young adulthood.  To measure their crystallized intelligence, participants took a standard psychology test in which they are shown pictures – perhaps a goat, maracas, a sextant (an astronomical instrument) – and asked to name them. …Learn More

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