May 24, 2022

Americans Say They Need a Finance Class

For all of Americans’ financial shortcomings, at least we recognize there is a problem.

More than 80 percent of adults believe states should require a personal finance class in high school and wish they’d taken one themselves, according to a March survey by the National Endowment for Financial Education (NEFE).

Rarely do we see that much agreement on anything, and it indicates people don’t always feel confident about the choices they are making. A famous questionnaire takes the measure of their insecurity: less than a third of people surveyed correctly answered three basic questions about interest rates, inflation, and investment risk.

Of course, people over 60 have more experience, and 92 percent of them think financial education is important. But 79 percent of 18- to 29-year-olds also feel strongly that a financial class should be required for a high school degree. And both men and women agree.

Unfortunately, there hasn’t been much agreement on whether financial education actually does much good. NEFE would like to put forward some new evidence that it does work.

NEFE asked four economists to do a meta-analysis of 76 studies in 33 countries that tested the effectiveness of a wide variety of financial lessons at all ages. In one study, elementary students exhibited more self control after hearing stories that helped them visualize the future. One story was about a girl who explored, through time travel, a choice between buying things now or saving up for a bike. The researchers in another study described workers as effectively “flipping a coin” to decide between a 401(k)-style or Roth retirement account. But after watching videos about the accounts’ different tax consequences, they answered more questions about the accounts correctly.

The researchers’ conclusion: “Financial education improves financial knowledge and financial behaviors.” …
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June 17, 2021

Workers Overestimate their Social Security

The U.S. Social Security Administration reported a few years ago that half of retirees get at least half of their income from their monthly checks. For lower-income retirees, the benefits constitute almost all of their income.

Yet Americans have only a vague understanding of how this crucial program works – one of many obstacles on the road to retirement. A new study by the University of Southern California’s Center for Economic and Social Research finds that workers are overly optimistic about their future benefits, which is one reason so many people don’t save enough for retirement.

Workers “would probably have fewer regrets after retirement” if they were better informed, the study concluded. And many retirees in the study have regrets. Roughly half wished they’d done a better job of planning.

The researchers’ focus was on working people ages 30 and over. In a survey, the workers were asked to pick the age they plan to start Social Security and to estimate their future monthly benefits. To get as good a number as possible, they were instructed to predict a range of benefits in today’s dollars and then assign subjective probabilities to the amounts within that range.

Their guesses were compared with more precise estimates, made by the researchers, who predicted each workers’ future earnings paths – based on characteristics like their age, gender, education, and past and current earnings – and put them into Social Security’s formula to calculate the expected benefits.

The subjective estimates made by every group analyzed – men, women, young, old, college degree or not – on average exceeded the researchers’ more accurate estimates, though to different degrees. For example, women were more likely than men to overshoot the reliable estimates. Interestingly, people who said they had “no idea” what their benefits would be came closer to the mark than anyone – having less confidence apparently offset the tendency toward overestimation.

Young adults, who aren’t naturally focused on retirement, overshot their benefits the most. This is not surprising but still unfortunate, because good decisions made early in a career – namely, how much to save in a 401(k) – will greatly improve financial security in retirement.

One explanation for workers’ widespread inaccuracy, the researchers found, is that they aren’t clear on how much their benefit would be reduced if they claim it before reaching Social Security’s full retirement age. …Learn More

October 22, 2020

Cognitive Decline Meets COVID-19 Scams

The federal government warns that older Americans are being targeted by a battery of financial scams, including telemarketers offering to do contact tracing – for a fee – or to reserve a slot for a future vaccine. Others are soliciting donations to charities purportedly helping people in need during the economic slowdown.

COVID-19 makes this a perilous time for people struggling with cognitive decline.

Few can escape a deterioration in their cognitive capacity as they age. It’s just a matter of degree and speed. But the faster it happens, the more damage it can do, the FINRA Investor Education Foundation concluded in a new study.

The study was based on surveys of more than 1,000 older residents in Chicago retirement communities and subsidized housing – average age, 80. The same people were periodically asked questions with varying degrees of difficulty about their general financial knowledge and investments and were asked to compare and calculate percentages.

The older people who either initially had less understanding of financial concepts or experienced a faster decline in their knowledge made poorer financial decisions in exercises that simulated real-world decisions.

This included a vulnerability to scams, which was assessed by asking the older people to agree or disagree with statements like this: “If a telemarketer calls me, I usually listen to what they have to say.” (Not recommended.) And this: “If something sounds too good to be true, it usually is” (Count on it.)

To prevent scams, older people – and their caregivers – need to anticipate the financial damage that cognitive decline can cause. …Learn More

September 29, 2020

How High School Finance Courses Fail

In more than 30 states, completing a personal finance course is required for a high school degree.

The requirement started gaining traction around the country in 2005, despite the long-running debate about whether the courses even work.

A new study gets at whether high school instruction is effective by asking a fresh question: do the finance classes make people feel better about their situation – and feeling better about one’s finances is an indication things are, in fact, improving.

This departs from past studies focused on objective measures like credit scores and past-due loans.

The researchers find that high school courses have generally been a positive development: adults who grew up in states that require the courses do, in fact, feel better about their finances compared to people from states lacking a requirement.

But what’s interesting in this study is that a group of disadvantaged Americans feel worse off for having taken the courses: high school graduates who didn’t go on to college. Rather than helping them manage their financial challenges, the classes are only making things worse.

Before examining the reason for this, consider how the researchers measured the feeling of well-being. They used recent data from a series of questions asked by the FINRA Investor Education Foundation: Do you feel you have control over your money? Could you afford an unexpected expense? Do you have a sense of achieving your financial goals?

Most important, FINRA asked, do you have the financial “freedom to make choices that allow a person to enjoy life”? FINRA’s survey was conducted in 2018, but this question is relevant in the COVID-19 recession. Enjoying life is essentially the flip side of having financial stress, which is currently very high among low-income workers without college degrees.

The researchers argue that adults with no more than a high school diploma who’d taken the personal finance classes feel worse, because the classes delivered a “harsh dose of reality” that can “make economically vulnerable people more aware of their precarious financial situation.” …Learn More

December 19, 2019

NFL Rookie Took Finance Class to Heart

Joejuan Williams, a rookie defensive back for the New England Patriots, has received a lot of attention for his practice of saving 90 percent of his game-day paychecks. He credits his frugality to a personal finance class at his Nashville, Tenn., high school.

“It completely changed my life,” Williams told The Boston Globe recently. “I’m going to sacrifice now for me to be happy later.”

Williams, having signed a $6.6 million contract this season, isn’t exactly living on the edge. But keep in mind that these sky-high earnings are often temporary for football players. When one considers that the average NFL career lasts about three years, Williams is just playing it smart.

But read on in the Globe article, and a more complex and touching explanation for Williams’ frugality seems to emerge – one that revolves around a childhood watching his single mother live paycheck to paycheck.

“I’ve been stingy with money ever since I was young just because I saw what my mom had to go through,” he told the Globe. He said that he has paid off his mother’s student loans and purchased a car for her.

Although he credits the influence of his personal finance class, psychologists say that adult financial behavior has deep roots in childhood experiences like Williams’. In fact, endless research papers have debunked the effectiveness of financial education. There are numerous reasons for this, including a widespread aversion to math. Human nature is another obstacle: people regularly sacrifice their long-term goals to whim – credit card spending is the classic example.

Williams is different. He has his eye on the future. He is focused on one long-term goal for himself – investing his savings for the future – and one goal for his mother.

“I’m going to give my mom a home,’’ he said. “That’s the only big purchase I have my eyes on.’’

Williams’ high school finance class clearly influenced him. But maybe the lessons stuck because he took them to heart.

Squared Away’s regular posts will return Dec. 31. …
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