Millennials: Managing a Steady Paycheck


As a 20-something working in downtown Chicago in the 1980s, I spent every dime of my disposable income – and then some – on beer and Thai food, vacations, clothes, and parking tickets.

Fast forward 30 years, and my niece and nephew in Chicagoland are now graduating college. It’s liberating to leave school for a full-time job and a substantial increase in one’s income after years of penury. It’s also so tempting to squander this money.

But young adults no longer have that luxury.

The financial demands Millennials will face over their lifetimes are shaping up as far more complex than they were for their baby boomer parents, whose primary worry was buying a house. …Learn More

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Financial Ed in Schools Sometimes Works

There’s little agreement on whether personal finance education in the schools is effective, but success with financial education mandates in Georgia, Idaho, and Texas indicates that it is.

A new study compared thousands of young adults in these states, which have fairly rigorous mandates, with states lacking personal finance education. This focus on states with very strong mandates departs from prior studies that lumped together numerous states with varying levels of mandates. The researchers also looked at whether behavior actually improved – credit scores and loan delinquencies – rather than simply testing students’ knowledge before and after they took the classes.

The three states studied have extensive financial education programs. Curricula in Georgia cover economics, financial institutions, saving, insurance, credit, and investing. Idaho requires a full semester of economics, with intensive personal financial instruction. In Texas, all high school students are required to delve into topics ranging from the rent-vs-buy decision and planning for retirement to personal bankruptcy.

The study assessed the impact of this education on credit scores once the students graduated high school and on whether they successfully avoided poor financial behaviors, such as falling into delinquency on their car loans. Young adults in Georgia, Idaho, and Texas were compared with young adults in the same state before the mandates, as well as people in other states with similar demographics but no mandates. …Learn More

rocker

Rewriting the American Dream

Americans once defined success mainly by whether they owned a house or were better off than their parents. Today, it’s a debt-free college education and a comfortable retirement.

U.S. adults feel that their top indicator of financial success is having enough money in the bank to retire (28 percent of adults), followed by sending their kids to college without having to borrow to pay for it (23 percent), according to a telephone survey sponsored by the American Institute of CPAs. Homeownership and upward mobility each came in at a distant 11 percent of the adults, age 18 and up, randomly surveyed by Harris Poll.

“No longer are homeownership and upward financial mobility the hallmarks of financial achievement,” said Ernie Almonte, chairman of the CPA Institute’s Financial Literacy Commission. “Americans have changed the benchmarks for their financial success.” …Learn More

The Real Minimum Wage – It’s Dropping

minimum wageThe federal minimum wage is $7.25 per hour, up from $1.60 in 1968. Yet it has eroded in terms of what it can buy.

Its value has fallen, because, despite more than a four-fold increase in the minimum wage over nearly a half century, it has not kept up with inflation.

The 1968 value, when translated into 2014 dollars, was $9.58 per hour, as shown in the chart (left) from the Center on Wage and Employment Dynamics at the University of California, Berkeley. In other words, today’s minimum wage, at $7.25, buys about 25 percent less than it did in 1968.

As the federal minimum wage has eroded, Sylvia Allegretto, the Center’s co-director, noted that numerous states and municipalities stepped in to raise their minimum wage last year. They include Arkansas, Delaware, Hawaii, Massachusetts, Rhode Island, and West Virginia, as well as Louisville, Kentucky, and San Jose, California. Others are kicking the idea around. …Learn More

New Books of Note

Several new books are pertinent to topics frequently covered by this blog. Three worth noting are about low-income savers, older workers, and small employers with retirement plans that are overdue for an upgrade.

Here are brief descriptions:

  • A Fragile Balance: Emergency Savings and Liquid Resources for Low-Income Consumers:”:

a fragile balanceFor low-wage workers in fast food, retail, and similar jobs, just finding enough money for living expenses is like squeezing blood from a turnip. Research shows that many want to save, and the absence of this backstop only increases their financial fragility. The default is often to resort to high-cost debt, which further confounds their ability to pay the bills, much less weather the next emergency such as a car repair.

Finding effective savings interventions to help low-wage workers may be the toughest personal finance challenge there is. It’s also the mission of the Center for Financial Security at the University of Wisconsin in Madison and its director, Michael Collins. In this volume, edited by Collins, leading researchers review various interventions and policies – from mortgage reserve accounts and impulse saving to programs that encourage low-income workers to save their tax refunds. [Watch for future blogs about specific findings in this volume.] …

Feature

TDFs Appeal to the Most Inexperienced

New research finds that the people most likely to benefit from target date funds are also the people inclined to invest their 401(k)s in them – unsophisticated investors.

Retirement and financial literacy researchers long ago established the pitfalls of our nation’s do-it-yourself system of retirement saving (i.e., people don’t save at all or don’t save enough, and investing is too complex for most people). Target date funds (TDFs) have become an increasingly popular solution to the investment piece of the problem in the wake of the Pension Protection Act of 2006, which allowed employers to use them as the default investment option in defined contribution savings plans.

TDFs place a 401(k) participant’s accumulated savings into a broadly diversified portfolio of stocks and bonds that shifts the asset mix as they age. When employees are young and retirement is a distant concept, TDFs invest heavily – as much as 90 percent – in stocks. As employees age, a growing share goes into more conservative bonds.

TDFs are now the primary default investment among employers that automatically enroll new employees into their savings plans. TDFs are a good option not only for inexperienced investors but also for more experienced investors who prefer to delegate the task of portfolio rebalancing to their fund manager. However, employees typically have the option of transferring out of the TDF and selecting other investments offered in their plan. …Learn More

Around 50, U.S. Workers’ Earnings Fall

Here’s a sobering thought: by the time most workers get into their 50s, their earnings are declining.

Although older workers don’t necessarily see smaller paychecks, their earnings are effectively shrinking, because they no longer keep up with inflation, according to a study charting the inflation-adjusted, or “real,” earnings of some 5 million U.S. workers over their lifetimes.

The first decade in the labor force, between ages 25 to 35, is crucial – that’s where the wage gains are concentrated, the researchers find. Real earnings plateau sometime between 35 and 45, and this plateau occurs earlier than previous research had indicated. By the time most people move into the oldest age group in the sample – 45 to 55 – their earnings are falling.

The chart below shows the percentage changes during three discrete decades in the labor force for people whose earnings are in the middle of all U.S. workers’ earnings. For the 45-55 age group, other data in the study pinpoint the earnings decline as actually beginning around 50.

Economists have been refining their analyses of lifetime earnings patterns for decades. The researchers’ methodology improves on past techniques and then applies it to an extremely robust data set: the Social Security Administration’s earnings records for U.S. workers from the 1970s through 2011.

When they looked at all workers, they found that earnings, adjusted for inflation, rise by 38 percent over a typical person’s lifetime. But these lifetime patterns vary dramatically by a worker’s income bracket. …Learn More

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