Free Financial Advice Goes Online

The summer slowdown might be a good opportunity for some readers to jump start a long-overdue review of their personal finances.

This summer and fall, the National Association of Personal Financial Advisors is throwing out a lifeline.  NAPFA selects members from its national roster of fee-only advisers to give free financial advice online.  In mid-June, advisers in Vermont, North Carolina, and Georgia answered questions from participants.

NAPFA’s next session is this Thursday, July 19, with three more sessions scheduled for August, September, and October.  Click here to find out how to participate.

Another free resource is a new website with a comprehensive program to help individuals put together a financial plan.  Developed by the Financial Security Project, an initiative of Boston College’s Center for Retirement Research, which sponsors this blog, the website has tools based on solid academic research.  Personal financial information entered into the website is confidential.

To read a prior blog post about the site, click here.  Since it’s still operating as a beta test site, users are welcome to send in their comments for how to improve it.

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Businessman amongst a crowd

How Can Debt Enhance Self-Esteem?

The media went crazy last month over research determining that debt – whether college loans or credit cards – is a major source of self-esteem for young adults.

Judging by the tone of these articles, the reporters were so flabbergasted that they didn’t think to ask the logical follow-up question: Why? Credit cards aren’t inherently bad, though they can get people who abuse them in trouble. But equating self-esteem with debt seems to turn the notion of financial judgment on its head.

So Squared Away consulted therapist Dave Jetson and financial planner Rick Kahler, both of Rapids City, South Dakota. They often work together with clients on their financial issues but offered different explanations for this puzzling phenomenon.

Because debt is increasingly required to get a college education, Kahler said it may benefit from the glow of what an education represents. Debt has become a mark of being “smart enough to get through college.”

Jetson sees a dramatic cultural shift that is influencing today’s young adults. This shift coincides with shrinking economic opportunity for many college graduates. …
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Chart: U.S. Credit Card Balances

Credit Card Act Increased Payoffs

Government policies often seek to alter human behavior: a 2009 tax credit for first-time homebuyers, for example, encouraged more people to buy houses.

Now research has determined that the first federal update since 1968 to the interest rate disclosures on credit card statements has changed card users’ behavior for the better.

The Credit Card Accountability, Responsibility and Disclosure Act of 2009 (CARD) increased the number of users who pay off their bills each month, from about 60 percent prior to the act, to between 64 and 69 percent currently, concluded Cornell University doctoral student Lauren Jones, Ohio State University professor Cäezilia Loibl, and Cornell professor Sharon Tennyson.

They also found that the size of card holders’ payments, relative to their debt levels, increased, and that fewer card users are paying only the minimum. Their findings, though somewhat mixed, provide support for the increasingly popular notion that more precision and clarity in financial-product disclosures can be effective.

Their research controlled for the effects of the Great Recession and its aftermath, when consumers slashed their debt; in other words, card holders improved their behavior on top of the belt tightening forced upon them by lower wages, unemployment and other recessionary impacts. A previous report also suggested that other provisions of the CARD Act that made it more difficult for college students to obtain credit cards have curbed card use on campus.

However, Jones cautioned against being complacent about CARD’s impacts, because they are “positive and significant” only for a subset of credit card users. …
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money in a tin

Public Perplexed About Annuities

Sales of annuities are slow, because most retirees simply don’t know how to assess their value, new research concludes.

Many of the nation’s top retirement experts agree that annuities are the best solution for retirees struggling with the best way to invest and spend a lifetime of savings.

Annuities have a singular benefit: they guarantee monthly income, no matter how long the retiree lives – something a savings account can’t always do. This constant, pre-determined stream of income has the added advantage of preventing financial mistakes as the elderly lose cognitive capacity, according to Harvard economist David Laibson. Smart Money magazine has dubbed annuities “dementia insurance.”

Yet sales of fixed and variable annuities have been largely flat over the past decade. This “annuity puzzle” has befuddled the academy for years.

Research by the Financial Literacy Center, a joint effort by George Washington University, the Wharton School, and the Rand Corporation, concluded that most people avoid annuities – they “stick to the status quo” – because they don’t understand how they work.

“How can they make these decisions if they don’t understand what a good decision is?” said a Rand senior economist and one of the paper’s co-authors, Arie Kapteyn. “We have to do something about the fact that people have to make these decisions” about managing their retirement wealth. … Learn More

Fourth of July Quiz

Just over two-thirds of Americans were able to answer the questions below correctly. Given their “simplicity,” Annamaria Lusardi and Olivia Mitchell called the results “discouragingly low” in their 2011 research published by the National Bureau of Economic research.

Women did worse than men: 59 percent of women got it right, compared with 71 percent of men.

Take the test to see how you do.

1. Suppose you had $100 in a savings account and the interest rate was 2 percent per year. After five years, how much do you think you would have in the account if you left the money to grow?
a. More than $102
b. Exactly $102
c. Less than $102
d. Do not know
e. Refuse to answer

2. Imagine that the interest rate on your savings account was 1 percent per year and inflation was 2 percent per year. After one year, how much would you be able to buy with the money in this account?
a. More than today
b. Exactly the same
c. Less than today
d. Do not know
e. Refuse to answer

To see the answers, click “Learn more” below. And happy Fourth of July!Learn More

Edited Volume of Research – and More

Resources that may interest Squared Away readers keep coming over the transom. Check out new federal guidelines on what to ask a financial adviser or broker, an edited volume of academic research on financial literacy and behavior, iPhone investment apps, or a summer financial thriller.

On Interviewing Financial Advisers:
Is hiring a financial adviser or broker daunting? How do you know you can trust him or her? These are complex issues, but the U.S. Department of Labor has just released a list of questions that provide a good start to your search. And click here for more such questions, based on research by Boston University law professor Tamar Frankel.

On Financial Behavior Research:
Douglas Lamdin, an economics professor at the University of Maryland Baltimore County, compiled an edited volume of research papers about financial education and behavior, “Consumer Knowledge and Financial Decisions.” The table of contents sorts issues by age groups, starting with “Cognitive Development and Children’s Understanding of Personal Finance” and ending with “Financial Preparedness for Long-Term care Needs in Old Age.” …Learn More

Employers Try New 401(k) Strategy

Employees apathetic about their 401(k)s are not saving enough. Some employers are bringing in reinforcements to push, cajole, or entice them.

Employers and employees share the blame for the low rate of retirement savings nationwide, consultants say, but the common practice of employers handing their new workers a 401(k) sign-up form and investment materials from the mutual fund manager clearly isn’t working. A few employers are trying a different tack.

One such initiative, by the Foundation for Financial Wellness in Colorado, trains and certifies CPAs, estate planning attorneys and financial advisers to educate its clients’ employees. NASA was the foundation’s first client, and they now include hospitals, city governments, oil companies, unions and churches, said Brent Hines, founder.

The foundation’s educators “are unbiased and don’t have a dog in the fight,” Hines said. “We’re not the 401(k) provider, and we don’t have the bias of wanting to put more money into your 401(k) or invest in a product.”

Separately, a program to educate credit union employees is expanding from four pilot states to an additional six and Washington, DC. And the American Nurses Association recently teamed up with a non-profit to train 10 nurses in five initial states to run workshops; to date, more than 700 nurses have gone through the financial workshops.Learn More

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