Teaching Children Financial Responsibility: Start Early

Would it surprise you to know that students graduating from high school enter college with little to no knowledge about their finances, how to budget, or save for their futures? The problem has become so severe that 40% of these students wind up going into debt in order to fund their social lives and 70% of these students wind up damaging their credit ratings shortly after college graduation.

Unfortunately, it seems as though this debt will not be going away anytime soon.  The average student loan debt for the class of 2016 increased by 6% from the previous year and the financial literacy rate in the U.S. has not improved over the past three years. While college enrollment and the number of college graduates has continued to increase, financial literacy lags among these young people at record lows. Where does this disconnect come from?

Few states offer personal finance or economics courses and even fewer states test students on the financial knowledge they have acquired. It therefore comes as no surprise that American students (and we can infer American adults) have one of the lowest levels of financial literacy when compared to other countries.  While the number of student loans has increased,

  • 44% of Americans don’t have enough cash to cover a $400 emergency
  • 43% of student loan borrowers are not making payments
  • 38% of U.S. households have credit card debt
  • 33% of American adults have $0 saved for retirement

Why does it matter? How is it affecting the economy?

Students are graduating with loans they can’t afford to pay back and with minimal financial knowledge in planning for their futures. According to Student Loan Hero, Americans have over $1.48 trillion in student loan debt, which is more than double the total U.S. credit card debt of $620 billion. This debt is becoming a major barrier to home ownership. 43% of student loan borrowers are not making payments and most of these individuals do not have any savings. A lack of sound financial knowledge will affect the economy as these millennials enter the labor force burdened with student loans.

As parents, we play a vital role in educating our children about the importance of personal finances.  In the Sherman household, we are teaching our children the importance of finances on a daily basis. Our 4 year old son is learning about savings by doing chores in return for an allowance, which he saves in his piggy bank. He is learning to save and spend his money wisely.

Parents can begin educating their children at home in order to increase the financial literacy of their kids. By demonstrating wise financial habits, parents can serve as role models for their kids. Talking in an age appropriate way to your children about the dangers of debt and the importance of saving a portion of any money they earn instills financial values and lessons your child can use throughout life.  You may find that using an allowance is a way that you can teach your kids about saving and spending appropriately. Since it has been shown that kids who manage their own money have been found to demonstrate better financial habits in the future, giving your kids the opportunity to spend and save their own allowance or money earned is a good way to prepare them for later on. Even a simple trip to the store can be used as an opportunity to start the conversation about the danger of credit cards and how they should only be used in an emergency.  Educating your kids at an early age will enable them to better learn and practice sound financial habits while under your watchful eye and cause them to be less likely to make irrational decisions once they are out on their own.

This issue is not only affecting students and young adults.  Many professionals with advanced degrees have spent countless hours studying and researching information in their particular field.  Despite all of the hours spent earning their degrees, many of these people have never taken a single course in financial education and are surprisingly not prepared to deal with the important financial decisions affecting their futures.  As a result, many extremely smart and successful people are making critical financial errors which can negatively impact the amount of money they have saved upon retirement.

Beginning in 2011, studies were conducted where participants were shown a computer generated rendering of what they might look like at their age of retirement.  They were then asked to make financial decisions about whether to spend their money today or save that money for the future. In each study, those individuals who were shown pictures of their future selves allocated more than twice as much money towards their retirement accounts than those who did not see the age-progressed images.  Seeing the images gave the participants a connection with their future selves that they did not possess before. As a result, their spending/saving behavior changed dramatically because “saving is like a choice between spending money today or giving it to a stranger years from now.”

The benefits of educating your children about the importance of personal finances are undeniable, and you’ll be able to set them up for a promising future and help them prepare for retirement. Visit us online for more information about how we can help improve your financial life.

Money in Cash? Make Sure you’re Getting the Best Rate

Sherman Wealth Management | Fee Only Fiduciary

While the stock market has been steadily climbing for the past few years, a surprising number of people are keeping a surprising amount of money in cash. And while everyone is going to have a certain amount of cash allocation, what’s even more surprising is how many people are losing out on maximizing the interest rates for those assets.

Advisors typically recommend holding 3%-5% of your assets in cash – for emergencies, short term savings goals, a new home or a vacation, or simply as a hedge against volatility.  Yet, according to the latest Capgemini World Wealth Report, high-net-worth Americans are currently holding more than 23% of their assets in cash.

Treasury yields are climbing

Why would investors prefer cash over a booming stock market? Studies, like this one, have shown that “cash on hand” – the balance of one’s checking and savings accounts – is a better predictor of happiness and life satisfaction than income or investments. Put simply, people like having “money in the bank.”

There’s no reason for that “money in the bank” to be earning zero though, particularly when there are many FDIC-insured, highly-rated, savings account options that may be yielding a higher interest rate on your savings than your current bank or investment firm’s savings options.

Short terms saving rates generally follow moves by the Federal Reserve and, as indicated by the chart to the right, short term interest rates, as reflected in short term Treasury yields, are rising. But is your bank raising your interest rates too or are they pocketing the difference and profiting? While the percentages seem small, there is actually a significant difference between earning .05% and 1.5%: the difference between earning $5 and $150 on a $10,000 savings account.

Put simply, if your cash is in a zero percent interest account, it’s no better than putting it under your mattress. You’re losing money, both in lost interest and because inflation can reduce the value of your savings.

Do you know if  your own savings account’s interest is keeping pace with rising interest rates? If not, check with your advisor to make sure you are maximizing your money’s earning power. If you’re not, consider shopping for a higher rate. Cash should be an asset class, but it shouldn’t earn zero.

If you’re not sure, we’re always available for a free consultation to see if you’re getting the best rates and you’re maximizing the earning power of your cash reserves.


Want to Get More “Financially Fit” in 2018? Set Savings Goals Now

One of the most important elements of a good financial plan is regular saving. Unfortunately, it is one of the biggest stumbling blocks as well, with 57% of Americans reporting they had less than $1000 in savings in a 2017 survey. To make matters worse, 1 in 3 American has no retirement account, and only 1 in 4 Americans has over $100,000 in their retirement account.

These are concerning figures, particularly now. As interest rates keep rising – short term treasuries at their highest in nine years – and the market continues its climbing streak, you’re missing out if you are not putting savings to work for you.

Why aren’t more people saving when, according to a recent you.gov survey, “saving more money” was the 4th most popular New Year’s resolution for 2018?

One factor our clients have cited that kept them from saving in the past is discouragement due to past failures. The solution is to make sure your goals are SMART goals: goals that are Specific, Measurable, Attainable, Relevant, and linked to a Timetable.

It is important to set Specific and Relevant immediate, short, and long-term savings goals that you can visualize – like a beach vacation, a bigger home, or a child’s graduation ceremony. Tying savings goals to images that align with your life and your values can make them more emotionally compelling and easier to keep in mind.

Equally critical is to make your goals Measurable and set a Timetable: how much you are planning to save each month, or by a certain date. Don’t set figures or dates that are impossible; make sure they are Attainable as well.

Just like physical fitness, financial fitness is best achieved by setting specific, achievable, and measurable goals. A defined goal, whether it’s “save 5% of each paycheck” or “add extra hours to save for a vacation,” gives you a much better shot at success rather than a simple “I should be saving more.”

A huge part of good financial planning is goal setting. A good financial planner can help you calculate the long-term benefits of saving more and on a regular sustainable basis. It’s particularly important that your financial planner is a fee-only Fiduciary: that means there will be no “additional charges” or investment recommendations with commissions for the broker that could throw off your savings calculations.

And if you’d like help defining financial goals and evaluating whether you are saving enough to achieve them, please feel free to contact me for a free introductory call. We are always on call to help you realize your highest financial potential.

403(b) Plans: The Flaws Teachers Should Know

Teachers 403b

It’s no secret that many teachers are underpaid, in spite of the vitally important work they do. I know first hand: my mother was a public school teacher and a single mom. While some teachers may have other assets and savings they can draw on, a great number of teachers will rely on the retirement plans commonly used by teachers, known as 403(b) plans, as a source of income once they retire.

This Is Money Teachers Will Need

In a recent series, The New York Times detailed many issues with the 403(b) plans so critical to a comfortable retirement for teachers. Their first piece, “Think Your Retirement Plan Is Bad? Talk to a Teacher” makes many of the same points we touched on previously in Teachers: Who is Managing Your 403(b)?

As the Times correctly points out: “Teachers in about a dozen states may not qualify for Social Security. And while public school teachers often are offered decent pensions, many of them do not work for the decades required to qualify for a full payout. And pension formulas are becoming less generous for newer recruits.”

Unlike 401(k) plans that are overseen and regulated by federal law based on the Employee Retirement Income Security Act (ERISA) of 1974, many 403(b) plans fall outside of ERISA oversight and protection.

Who Can Teachers Trust?

Instead of having access to a financial advisor who is a fiduciary, someone who exclusively – and always -must have the client’s best interests in mind, teachers are often presented with salespeople from insurance brokers who earn commissions for recommending certain products. As one teacher recounted in part two of the NYT series: “From the teacher’s standpoint, they really miss out getting quality advice,” said Mr. Bergeron, 27, who sold the plans for Axa Advisors’ retirement benefits group. “People who are in the schools pitching them and positioning themselves as retirement specialists are really there just to sell them one product.” (For more, see: An Investor’s Guide to the New Fiduciary Rule.)

Fee-only fiduciary advisors are advisors who only recommend investments that are the best for their clients, not ones that reward themselves. Fiduciary financial advisors aren’t trying to hit a quota or working for sales commissions on the products they recommend to you. Fiduciaries are committed to providing the best advice to investors – like teachers – looking to build a strong foundation. These advisors grow with you, not at your expense by profiting off the products they recommend to you.

Many of the millions of employees in this country have access to 401(k) plans through their employer that are approved and monitored by the employer in some way, ensuring at least some oversight of the plan itself. Unfortunately, public school teachers as well as some teachers working for nonprofits and religious institutions are easy prey for companies trying to sell high-cost products because their retirement plans often don’t have the same oversight. Given the loosely regulated industry, the insurance salespeople or “advisors” pitching to teachers can recommend investment products that best for their own pockets, not the plan owners’.

The Costs and Confusion

While 401(k) plans are not perfect either, as we have pointed out before, the majority of them offer more traditional investment options, such as mutual funds or stocks and bonds, making it easier to understand how your money is invested. In contrast, 403(b) plans are often held inside annuities, which can be confusing even for the most intelligent individual investors. Discussing Axa Advisors, a broker that often tries to sell annuities, The New York Times writes: “The most popular version of the Equi-Vest annuity has a total annual cost that can range from 1.81 to 2.63%, according to an analysis from Morningstar. In contrast, large 401(k) plans usually charge an annual fee of less than half a percent of assets, according to a May report by BrightScope using 2013 data.”

Even if teacher realizes that they are paying excessive costs for their retirement investments, they are often locked into these annuities and required to pay a penalty if they want to make changes. If a teacher wants to transfer their assets out of the Axa Equi-Vest annuity into their own IRA, for example, they would have to pay a 5% penalty on the portion of that withdrawal that had been contributed within the last six years.

One of — if not the biggest — advantage of many retirement plans is tax deferral, which allows these accounts to grow and compound over a long time horizon. That ability to grown and earn compound interest is obviously compromised when you are paying excessive fees year over year.

Teachers are one of our most important assets and deserve to be rewarded for their years of dedication to our country’s children, and therefore our country’s future. All too frequently, however, teachers not given access to solid, low-cost and efficient long-term investment options in their retirement plans. Nor are they given access to a financial advisor they can turn to with questions, knowing that they can trust the answers they are given.

We encourage teachers to spend some time finding out more about their 403(b) retirement fund managers. It’s vital to find out whether they are a fiduciary, how they make money (fee-based or fee-only), and how personalized their investment strategy is.  (For more, see: 6 Questions to Ask a Financial Advisor.)

This article was originally published on Investopedia.com


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