It’s time to increase financial literacy
I have counseled a number of families over the years regarding their financial status. Generally, the meetings are the result of an unexpected event that has upset the family’s financial apple cart or a realization that the path taken has resulted in less than favorable circumstances.
In the first instance, the unexpected event can be a medical emergency, change in family situation, a car repair or something of that nature. In the second instance, the realization comes when the family is no longer able to “rob Peter to pay Paul.” These are definitely different situations; however, there is a common thread. In every case but one that I can remember, none of the families were able to provide me with a complete spending plan, details of their loans, their retirement objective or anything along those lines. It’s surprising to me that as a society we seem to be winging it especially when it comes to personal finance.
A case in point, overdraft protection or courtesy pay (a curious name for this particular product). Most banks – not Generations – offer everyone with a checking account a $300 line of credit, with no underwriting and no interest rate disclosures. Then, for every check that bounces, the typical NSF fee is paid; however, the customer can draw their account negative $300. When a deposit is made, the negativity is eliminated. This sounds great except that many customers find themselves trapped once they use the service. They use the “line” at least once a month and find it impossible to stop using it. The result, a loan yielding over 120% interest (assuming a minimum $30 overdraft fee assessed monthly and a consistent $300 overdraft balance). Not one person that I have spoken with about their courtesy pay knows the annual cost of this service. Unfortunately, those affected are the same families that can ill afford it.
At Generations, we may pay an overdraft and charge a fee, but the customer is asked to cover the overdraft the same day. If there is a need for an overdraft line, we can provide that separately, with the proper disclosures and underwriting, with an APR less than 18%. The difference? Let’s say that a family uses their $300 courtesy pay line each month (which is the majority of those using the service). The annual cost? $360 (using a $30 overdraft fee). With Generations, the customer with a consistent $300 line of credit balance pays interest monthly of $54 annually.
I also find that many don’t know how to adjust their tax withholding and have significant federal refunds as a result. Think about it for a minute. Do you remember a single class provided anywhere ever to explain basic taxation? I realize that most are really not interested in being able to quote the tax code, but shouldn’t we be provided the basics of federal taxation? It accounts for no less than 15% of our annual income (including income, social security and Medicare taxes). In one instance (of many), I found that an annual refund of $3,000+ was received year after year. What do you suppose was done with they money each year? Debt was paid down (and later that year, the debt was reacquired), new televisions bought and so on. I walked the couple through their tax return and explained how to estimate their annual taxes. Then, we adjusted their withholding with Form W-4. The result, over $300 per month in their pocket to help them establish a spending plan. Most of their problems were solved with this immediate increase in their cash flow.
The lack of basic financial literacy is such a important matter that the terribly written Dodd-Frank Act requires the Consumer Financial Protection Bureau (CFPB) to proactively address the matter with new programs and educational material. While I am not a proponent of the federal government being involved in such activities, I have to say that the CFPB has created some decent material on their website. But, as expected with any government program, there’s an amazing contradiction between the goals of one when compared to another. The CFPB financial literacy material advocates developing a spending plan, which requires that money be saved in a consistent manner. Then, with all of the federal and state support programs, families are dropped if their savings exceed absurdly low levels. As a result, families struggle to get out of the system – even turning down higher paying jobs.
With the elimination of nearly all defined pension plans over the years, it is incumbent upon every person to know quite a bit about saving for retirement. This training should begin in about fifth grade and continue through college. But, more often than not, the families I counsel are ill prepared for the future. And, many that are attempting to save for their future are sucked into investing their money in securities they don’t understand and often taking on unnecessary risks. I also find that many don’t understand Social Security – talk about an efficient and wasteful federal program (What is the value of 15% of your annual compensation placed aside if it earns 5% per year? Try the math; it will make you weep.).
The bottom line is that we need a consistent, often repeated set of financial literacy classes taught in our schools. In the meantime, the Generations team will do our best to help families make good financial decisions.