Chapter 2

Avoiding Personal Finance Nonsense

Many personal finance reports are published with advice that may not provide the best guidance. In an effort to avoid buzzwords and troubling phrases, consider these suggestions:

  • determine who conducted the research; a company may sponsor a study that lacks the rigor of academic or government researchers.
  • be wary of research that reports feelings or predictions rather than actual behaviors and actions of respondents.
  • consider the number of people in the study and how the respondents were selected.
  • avoid generalizations that about a certain age group, such as Millennials, Baby Boomers, or Generation X.

Don’t revise your money management activities based on some survey or research report. If your current actions are working, then you are on the correct path.

For additional information on avoiding personal finance nonsense, click here.

Teaching Suggestions

  • Have students conduct online research to locate a recent personal finance study to evaluate the validity of the advice offered in the report.
  • Have students create a video presentation reporting both valid and nonsense personal finance advice.

Discussion Questions 

  1. What problems could occur if a person uses inappropriate financial advice?
  2. In addition to the suggestions in the article, what actions might a person take to determine the validity of personal finance advice?
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Financial Planning for a Career Change

When considering a career change, the following financial suggestions are offered:

  • have an appropriate amount of savings for unexpected expenses during the transition.
  • create a budget to live frugally; cut living costs to be prepared for sudden expenses.
  • reassess your investment portfolio to reduce risk exposure and possibly eliminate fees.
  • seek advice from a financial advisor.
  • determine how a career switch might impact your ability to save.

For additional information on financial advice when changing careers, click here.

Teaching Suggestions

  • Have students talk to a person who recently changed jobs to obtain information about their experiences.
  • Have students create a video presentation with suggested actions when planning to change careers.

Discussion Questions 

  1. What relationship exists between a person’s career choice and money management activities?
  2. Describe additional financial planning actions that might be appropriate when considering a career change.
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Anchoring Your Personal Finance Decisions

To spend less and save more, consider an “anchoring” system.  One example of an anchor is the price of an item to determine if that is an appropriate amount of money to spend for the item.

Anchors prevent shoppers from being overwhelmed by the many choices, prices, and features.  You can create your own anchors by:

  • setting the maximum price you are willing to spend for an item.
  • considering the value of an item in relation to the number of hours you have to work to pay for it.
  • comparing the cost in relation to another item. If you buy coffee costing $2.50 a cup and want a sweater costing $50, view the sweater as costing 20 cups of coffee. Your “coffee” anchor will help you determine how valuable the sweater is to you.

When buying a home, you may be encouraged to look at properties outside your price range.  Anchoring yourself at a price limit will avoid overspending, make you feel more in control, and encourage wiser financial decisions.

For additional information on financial anchoring, click here.

Teaching Suggestions

  • Have students talk to several people to obtain information about how they determine the price they are willing to pay for an item.
  • Have students create a video presentation that demonstrates various anchoring methods.

Discussion Questions 

  1. How might anchoring help improve personal financial literacy and money management activities?
  2. Describe anchors people might used to determine the price they would be willing to pay for an item.
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Financial Regrets

Most people would like to be able to go back and do some things differently related to their personal finances. A study by bankrate.com revealed that 76 percent of those surveyed have at least one financial regret. The largest concern, over half (56 percent), involved not starting to save sooner for retirement, an emergency fund, or their children’s education.  Other financial regrets reported in the study include: living above one’s means; taking on too much credit card debt; and the burden of student loans.

A recommended action to address these financial regrets include breaking down large goals into smaller, easier ones can help put individuals on a path to success. A “save-first” mindset instead of “spend-first” is also suggested. In addition, consider opening an online savings account with higher returns, and set up direct deposits for regular saving.

For additional information on financial regrets, click here.

Teaching Suggestions

  • Have students conduct online research to determine various financial regrets of people in different age categories and life situations.
  • Have students conduct an interview with a person about actions that might be taken to avoid financial regrets.

Discussion Questions 

  1. What factors might create situations that result in a financial regret?
  2. Describe possible financial regrets and corrective actions a person might take.
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Where to Keep Your Emergency Fund

While having an emergency fund is vital, putting this money in a low-yield checking account is not recommended. A certificate of deposit (CD) also may not be appropriate since your funds may be locked-up when the money is needed. For safe storage of your funds along with quick access and a better return, consider these alternatives:

  • High-yield savings account. These financial products are offered by banks to attract new savers. These accounts have high liquidity and are covered by federal deposit insurance; although, interest earned is taxable. Most high-yield savings accounts are available through online banks. Also be aware of fees, minimum balances, or a required minimum length of investment.
  • Money market fund. Usually offered by investment companies, these financial products are similar to high-yield savings accounts but do not have federal deposit insurance. However, they are protected by Securities Investor Protection Corporation (SIPC) insurance, usually covering amounts up to $1 million for investors.
  • Treasury bills and bonds. These debt instruments of the U.S. Treasury have a maturity ranging from 90 days to 30 years. While considered very safe, an investor may lose money if sold before it matures.
  • Ultra-short term bonds. For a higher yield with a bit more risk, consider ultra-short term bond exchange-traded funds (bond ETFs).  These funds invest in corporate bonds, which are not guaranteed.  However, it is possible to find funds that invest only in highly-rated bonds.

In each situation, be sure to consider the tax implications of earnings from these savings and investment products.

For additional information on emergency funds, click here.

Teaching Suggestions

  • Have students create a list of unexpected situations that might require accessing money from a person’s emergency fund.
  • Have students talk to others to determine where they keep money for emergencies.

Discussion Questions 

  1. What factors might a person consider when selecting a savings instrument for storing money for emergencies?
  2. Describe actions a person might take to have more funds available for an emergency fund?
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Bank Accounts Everyone Should Have

While a savings account and a checking account provide the foundation for managing finances, several other accounts should be considered.  Since all most people don’t put all their financial documents in one drawer, all your money shouldn’t be in one account. The various recommended accounts include:

  • Emergency savings for funds when you face financial difficulties that cannot be resolved in others ways. An amount equal to 6 to 12 months of living expenses is often recommended.  Consider storing these funds in an “out of sight, out of mind” location, such as with an online bank account.
  • Regular savings for short-term needs, such as home repairs, vacation, auto maintenance, or new furniture. Be sure to have a goal and plan for these funds.
  • Household checking account for paying current bills. All income is deposited in this account with automatic transfers for regular bills and amounts to various savings accounts. Extra funds in this account can go to the regular savings fund.
  • Spouse checking accounts to pay expenses for which each person has responsibility as well as work-related costs.
  • Health savings account (HSA) for tax-free payments of medical-related expenses. HSAs are especially of value with high-deductible insurance plans.
  • The extra fund involves the “fun money” leftover after all bills are paid, savings is under control, and all accounts have a balance at an appropriate level. This money is the reward for spending wisely.

If all your accounts are at the same financial institution, using the online dashboard will allow you monitor your balances.  Or, if you use different banks, websites or apps such as Mint.com can be used to view your overall financial situation.

For additional information on needed bank accounts, click here.

Teaching Suggestions

  • Have students design a personal plan for the various bank accounts they will use to to monitor their spending and saving.
  • Have students talk to others about methods used to monitor spending and to maintain an appropriate level of saving.

Discussion Questions 

  1. What are the benefits and drawbacks of the system discussed in this article?
  2. Describe actions to monitor spending and saving using online banking and apps.

 

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Motivation for Saving

While you might think that saving for college, retirement, or buying home are the reasons Americans save, according to a recent survey, travel was reported as the top priority.  In a study of 2,500 adult Americans representing varied demographic, geographic, economic, and social groups, 45 percent of respondents set aside money for traveling.  This was especially true among younger respondents, who prefer travel experiences over savings to buy a home.

After travel, the main priorities for saving by Americans are:

  • for an emergency fund (37 percent)
  • for retirement (30 percent)
  • to buy a house (21 percent)
  • to buy a car, truck or motorcycle (20 percent)

For additional information on saving priorities, check out these two resources:

Article #1

Article #2

Teaching Suggestions

  • Have students conduct a survey among people they know to determine the main reasons for saving.
  • Have students talk to others to obtain ideas for building a person’s savings account.

 Discussion Questions 

  1. What do you believe are reasons people prefer saving for travel over other financial goals?
  2. Describe other actions that might be taken to motivate people to build their savings?
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U.S. Financial Health Pulse

Despite a strong economy, millions of Americans face financial struggles. These difficulties include lower household net worth, increased loan defaults, and high levels of credit card debt. These are the findings in the recent report, U.S. Financial Health Pulse, published by the Center for Financial Services Innovation (CFSI), in partnership with Omidyar Network, the Metlife Foundation, and AARP. 

The report assesses various financial health indicators that include income, bill payment, spending, saving, debt load, insurance, retirement planning and credit scores. When combined, these factors provide a composite view of the spending, saving, borrowing, and financial planning activities of Americans.

Some of the findings of the 2018 baseline report include:

  • 17 percent of American are viewed as financially vulnerable, 55 percent financially coping, and 28 percent financially healthy.
  • 47 percent of respondents reported spending that equals or exceeds their income.
  • 36 percent are unable to pay all of their bills on time.
  • 30 percent say they have more debt than is manageable.

U.S. Financial Health Pulse is intended to guide financial institutions, government agencies, and community organization in developing educational programs and financial products to better serve the needs of Americans. This study will be conducted each year to determine changes in America’s financial health.

For additional information on U.S. Financial Health Pulse and to view the report, click here.

Teaching Suggestions

  • Have students talk to friends to determine which of the financial health indicators they believe to be most important.
  • Have students create a survey instrument to measure various financial health indicators.

 Discussion Questions 

  1. What are the benefits of measuring financial health in our society?
  2. Describe actions that might be taken by business, government, and community organizations to address the financial difficulties faced by people.
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Holiday Spending Spreadsheet

The joy of the holiday season can be overpowered with shopping stress and financial difficulties. To avoid this situation, consider this approach:

  1. In mid-to-late November, create a spreadsheet to manage your holiday spending. Categories might include gifts for family and friends, donations to charity, holiday meals along with other items such as shipping, wrapping paper, decorations, parties, and travel.
  2. Enter realistic amounts that you are able to spend for the various people on your gift list and for the other categories.
  3. Monitor your actual spending, attempting to stay within your budget.
  4. Based on this year’s experiences, adjust categories and amounts for the 2019 holiday season.

The spreadsheet might include columns for name/item, budgeted amount, actual amount, difference, and notes for future reference.  Starting earlier in the year, consider   setting aside holiday money to avoid taking away funds from your normal budget. You might also consider using credit card and other reward points for gifts.

For additional information on a holiday spending spreadsheet, click here.

Teaching Suggestions

  • Have students create a spreadsheet that might be used to monitor holiday spending.
  • Have students talk to others to obtain ideas for not overspending during the holiday season.

Discussion Questions 

  1. How would you make use of a spreadsheet for holiday spending?
  2. Describe actions that might be taken to monitor and control holiday spending.
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Receipt Savings Trick

It’s possible to add $500 or $1,000 to your savings with a simple action. Clark.com suggests using store receipts to save for the future. Many retailers display a “You Saved” amount on a receipt for items on sale and store discounts. By putting this amount in a savings account you can avoid spending the “saved” money on other items.

Collecting receipts in an envelope or box, or scanning them to an app, can also help analyze buying habits to make wiser purchases in the future and not make as many trips to the store. This action can result in an extra amount each month added to your savings. This money can be added to your emergency fund or retirement account.

For additional information on the receipt savings trick, click here.

Teaching Suggestions

  • Have students locate examples of receipts that show “amount saved.”
  • Have students talk to others to obtain ideas for methods for building a person’s savings account.

Discussion Questions 

  1. What do you believe are the benefits and drawbacks of using this system?
  2. Describe other actions that might be taken to motivate you and others to build your savings?
Categories: Chapter 2, Chapter 4, Chapter 6, Purchasing Strategies, Savings | Tags: | Leave a comment

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