May 26, 2016
Array of Financial Products is Dizzying
Rather 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
May 19, 2016
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.
May 12, 2016
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.
The 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
April 14, 2016
Why Most Elderly Pay No Federal Tax
A March blog post pointing out that a large majority of America’s older population pay no federal income tax seemed to surprise some readers – particularly retirees who must send checks to the IRS at this time of year.
“[M]y annual tax liability is and will continue to be greater than when I was employed,” said one such retiree.
Readers’ comments are always welcome, and this time they’ve thrown a spotlight on a shortcoming of the article. It did not fully explore why most retirees – roughly two-thirds of 70 year olds – pay no federal income tax.
According to a Tax Policy Center report, “Why Some Tax Units Pay No Income Tax,” tax filers over age 65 are the largest single group to benefit from special provisions of the tax code designed to help various types of people. The elderly receiving tax preferences make up 44 percent of filers of all ages who are moved off the tax rolls by these tax breaks, said the Center, a joint effort of the Urban Institute and the Brookings Institution.
Of course, retirees pay all sorts of other taxes, including property tax and state sales and income taxes. But it’s essential for baby boomers to understand this federal income tax issue as they plan for retirement. …Learn More
April 5, 2016
Black Americans Give More to Relatives
Giving money to relatives.
Oprah has done it – in the form of a $490,000 house for her newly discovered sister. Former NFL cornerback Phillip Buchanon just wrote a book complaining about it. And Charles Barkley is characteristically blunt about it.
“When you continually come to me for money, that’s what ruins relationships,” Barkley explained on NBA TV. “I probably got $4-5 million I lent to friends and family I’ll never see again.”
No one is immune to a relative’s appeals for financial help. But this is a perennial and far more prevalent issue among black Americans – and not just the ultra-rich like Oprah and Barkley – according to Rourke O’Brien at the University of Wisconsin.
What O’Brien calls “informal assistance” exists, in part, because giving bestows non-monetary benefits on the givers as they foster emotional support and solidarity among their kin. But as a personal financial issue, the expectations and feelings of obligation are very challenging – and a topic of conversation in the black community.
One woman commenting online said she was looking for some useful advice about how “to be more comfortable with saying ‘no’ ” to her loved ones. …Learn More
March 31, 2016
401ks: an Employer-Employee Disconnect
A survey throws a new spotlight on the employer-employee disconnect over 401(k)s that has also been well-documented in research studies.
The survey of 1,000 employees reveals that workers lack confidence in their ability to navigate basic aspects of their retirement plans, while the 200 employers also surveyed have a more optimistic view of how workers are doing.
Consider the most basic question of how much to put away for retirement. Two-thirds of employers believe their workers know how much to save, while only one-third of employees feel they know, according to BlackRock. And while nearly two-thirds of employers believe the majority of workers save enough, a minority of workers does.
Most employers also believe their workers understand their investment options. Yet less than half of the workers say they do – and only 30 percent feel like they’ve made the right investment choices, according to the BlackRock survey. (Full disclosure: BlackRock is a corporate partner of the Center for Retirement Research at Boston College, which supports this blog).
Squared Away has written numerous blogs over the years about what academic research and other data reveal about the employer-employee relationship. Summaries of past articles continue on the next page, with links to the specific blogs mentioned: …Learn More
March 24, 2016
Americans Are on a Credit Card Binge
Rising levels of credit card debt are a good thing and a bad thing.
And they are definitely rising: during the final three months of 2015, Americans added $52.4 billion to what they owe on their credit cards, according to a new CardHub report based on Federal Reserve Board data.
For context, that is nearly as much as was added to cards in all of 2014.
Spending rises when consumers have jobs or get better jobs and when the economy is growing, as it is now, said Lowell Ricketts, an analyst with the Center for Household Financial Stability at the Federal Reserve Bank of St. Louis. With incomes increasing, he said, “they’re in a stronger position to make those investments like purchasing a new home or renovating their existing homes.” The surge in credit card debt indicates that people are using plastic to pay for things like the furniture for the new house.
The bad part is what happens to over-leveraged spenders when the economy suddenly turns down, which is what WalletHub analyst Jill Gonzalez is concerned about. “We are starting to get into scary territory here,” she said. The fourth-quarter binge “was much larger than usual.”
During all of 2015, credit card balances, net of payments, increased by nearly $71 billion, substantially higher than the $57.4 billion increase in 2014. Last year’s fourth-quarter binge was only part of the story, Gonzalez said. …Learn More