Posts Tagged "manage money"

Dominos falling

Financial Anxiety Amid Economic Growth

The economy keeps chugging along, unemployment has been bobbing at or below 5 percent all year, and wages have been creeping up.

Yet anxiety is rising, according to a newly released survey by Northwestern Mutual.  In February,
85 percent of Americans said they had “financial anxiety,” particularly about how they would pay for an unexpected emergency or medical bill.

And here’s how financial anxiety affects them:

  • Callout70 percent say it reduces their “happiness,” their mood, or their ability to pursue their dreams, passions, and interests.
  • 67 percent say it impairs their health.
  • 61 percent say it has a negative effect on their home life.
  • 51 percent say it has a negative effect on their social life.

For more than half, the most popular answer to how financial security would change their lives was: “Peace of mind that I never have to worry about day-to-day expenses.”

Northwestern Mutual summed things up by saying “the levels to which financial anxiety is impacting all corners of people’s lives is extraordinary.”

Pretty strong words for a typically cautious insurance company. Learn More

Middle class illustration

More Americans Are Upper Middle Class

Yes, income inequality has risen dramatically over the past 35 years. But something else has happened that might surprise you.

The size of the upper middle class is expanding, as Americans migrate up from the ranks of the middle class and poor, according to a new analysis from the Urban Institute.

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Economist Stephen J. Rose uncovered this finding by defining how much income families needed in 1979, just before inequality really took off, to be counted as rich, upper middle class, middle class, lower middle class, or poor. He anchored his class divisions largely around incomes relative to the federal poverty level. For example, he set the income floor for the upper middle class at five times the poverty level. He then used U.S. Census Bureau survey data to estimate the share of American families falling into each income tier in 1979 and in 2014, with incomes adjusted for inflation. …Learn More

Which direction to go?

401(k) Investment Options: Less is More

There’s plenty of evidence of the unfortunate consequences for employees overwhelmed by too many investment options in their 401(k) plans. Studies find that confused employees might not join the plan at all, select investment funds that are not well diversified, or throw up their hands and put an equal amount in each fund offered by their employer. And as employers add more options, the new funds often carry higher fees and produce lower returns.

A new study took the opposite tack, examining how employees reacted when one large U.S. employer reduced the number of investment options. The results were lower fees and less turnover, saving employees an average of $9,400 over a 20-year period. Further, their new portfolios were less risky.

The employer, a non-profit organization, cut the number of investment options roughly in half, from the 90 different funds initially in the plan.  The employer also simplified the plan by sorting employees’ choices into four groups:

  • 13 Target Date Funds (TDFs) with low fees and investments determined by an employee’s age;
  • 4 index funds invested in a money market, diversified U.S. stocks, diversified U.S. bonds, and diversified international stocks;
  • 32 mutual funds organized by risk level, from small-cap growth funds and REITs to balanced funds and Treasury bond funds;
  • A brokerage account with wide latitude to invest.

The researchers – Donald Keim and Olivia Mitchell at The Wharton School – analyzed the responses among those affected by the change, which was anyone who held at least one mutual fund eliminated during the plan streamlining.  Those affected who did not choose replacement funds were defaulted into a TDF appropriate for their age. …Learn More

Personal Finance Videos Hit the Basics

These personal finance videos are like sensible shoes: they won’t win any awards, but they can be useful.

Produced by the College of Financial Planning, the short videos demystify the fundamentals of personal finance that the planners who teach and take courses at the college rely on in their practices.

  • “Free Money” (above) features Dirk Pantone, a vice president and certified financial planner, interviewing Kristen MacKenzie, who teaches there, about 401(k)s, 403(b)s, 457(b)s and the employer match.
  • “Living on Borrowed Time,” has Pantone and MacKenzie discussing the difference between good debt and bad debt, both of which impact credit scores.
  • “The Road to Investing Your Assets” explains why low fees and portfolio diversification are so important.

There are 13 videos.  Other topics covered include retirement, taxes, and financial literacy. To watch other videos, click here. …Learn More

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Array of Financial Products is Dizzying

Timeline of financial products since the 1940sRather than put his money in a bank, my cousin, who’s in his mid-40s, makes loans in $25 increments on a peer-to-peer lending website.  He decides on the amount of risk he’s willing to take on – and the riskier the borrowers he chooses, the more he earns on his “savings.”

My cousin’s $25 investments illustrate how much our consumer finance market has evolved over several decades. We all embrace the convenience. Car loans are a more affordable way to buy a vehicle, Internet banking lets homebuyers get several mortgage quotes at once, and paying with cell phones is much easier than paying with cash or even credit cards.

But all this innovation has a downside. One example is the change from installment credit with fixed payments in the early 1960s to revolving credit, which lets consumers choose to pay a small required minimum – and increases the high credit-card interest that undisciplined borrowers pay. A recent and egregious innovation is companies that purchased lawsuit settlements from victims of lead paint poisoning for a fraction of their value.  Both innovations offer convenience in exchange for personal financial impacts that are either excessive or difficult to recognize.

A primary outcome of all this financial innovation is that U.S. households “in aggregate have taken on greater risk,” conclude professors at the Harvard Business School in their 2010 paper, “A Brief Postwar History of US Consumer Finance.”  Consumers now have an enormous amount of latitude – arguably too much latitude – to borrow, shift assets, save for retirement (or not), play the markets, or engage in peer-to-peer lending, they say.

As a result, risks pervade our investment portfolios, savings and retirement accounts, borrowing decisions, and how we purchase consumer goods.  And that’s the problem. …Learn More

Woman stretching

Quiz: Financial Well-being or Unease?

What does it mean to have a sense of financial well-being? Or what does it mean to have its opposite, financial uneasiness?

Based on in-depth interviews with dozens of people in focus groups, the federal Consumer Financial Protection Bureau has developed a financial well-being quiz. The quiz is the agency’s attempt to quantify a very subjective concept so that researchers can measure it and integrate this measure into their research, said Genevieve Melford, a senior research analyst for the CFPB.

“It’s about creating a tool that allows meaningful research and effective interventions that might help people,” she said.

We think regular people can also gain personal insight by taking a short version of the CFPB’s quiz on this blog. After taking the quiz, write down your score, and return to the blog to learn what it means.

Button linking to quiz
Learn More

Contingent Labor Force Growing Fast

Most workers quickly realize that the best solution to low earnings in a job with scant or non-existent benefits is to move on to something better.

But this is increasingly difficult to pull off, because technology and other powerful forces are reshaping the 21st century economy – and degrading the quality of the jobs that are available.  As companies seek to cut labor costs, technologies like scheduling software for retail and fast-food workers and platforms like Uber and Task Rabbit are making it easier to do.

Chart: Alternative WorkThe result has been a rapidly growing contingent labor force of temp-agency workers, freelancers, independent contractors, workers for contract companies, and on-call workers with unpredictable schedules, according to a recent study by prominent Harvard and Princeton economists.  They estimate that this contingent labor force has increased from 10 percent of all U.S. workers in 2005 to nearly 16 percent today.  Its growth effectively accounts for all of the net job gains over the past decade.

The transformation under way is so apparent that it has earned nicknames like the “gig,” “sharing,” or “on-demand” economy.  The resulting jobs are often touted as giving workers flexibility and the freedom to earn more money – and sometimes they do.  The researchers conducted their own survey of more than 3,800 contingent workers, and business consultants and computer engineers might be good examples of the independent contractors and freelancers who said in the survey that they prefer their arrangements to working for someone else. …Learn More

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