Financial Education Blog

By Kate Beck

Most youth experience their first introduction to financial management at home. However, many low-income parents themselves struggling to make ends meet, or are ill-equipped to teach effective financial management skills to their children. Consumer Credit Counseling Service of Buffalo (CCCS), in conjunction with Child & Adolescent Treatment Services (CATS), has addressed this situation by launching a summer camp to teach economically disadvantaged youth the skills of money management.

Child & Adolescent Treatment Services is a non-profit children’s mental health agency that provides innovative, research based, preventative and treatment programs that strengthen the emotional health and safety of children in their homes, schools, and the community at large. The children they help range in age from toddlers to teens. Their programs and services make it possible for children to recover, regain hope, and become healthy, safe, and thriving adults.

Reaching about 110 students, the course will help students identify money issues and how they can create a realistic budget to reach small goals.  Topics include the basics of money, personal spending, budgeting, financial goals & priorities, banks, savings, and credit.

“CCCS of Buffalo takes great pride in providing programming that offers students sound financial basics.  We are committed to educating the future leaders of America so they will be better equipped to make responsible decisions in an ever changing and complex world,” said Paul C. Atkinson, President and CEO for CCCS of Buffalo, Inc. 

Findings from a survey conducted for the American Savings Education Council indicate that parents overestimate how much they know about finances and underestimate their role in teaching their children about money management. Furthermore, most parents believe that their child’s school should be responsible for teaching financial management. Many parents also feel that because their children do not fully understand the concept of money, they cannot effectively provide them with appropriate financial guidance. Therefore, an introduction to basic financial principles is a necessary component of financial literacy programs geared toward youth. Knowing the increasingly dire situation, CCCS of Buffalo has made financial literacy services for families a key priority.

Kate Beck is Director of Community Outreach for CCCS of Buffalo, Inc.

By Jeff Witherspoon

The current economic crisis has forced many Kansans to seek assistance for basic needs.   

Seeing this need, the mayor of Wichita, Kansas asked the local non-profit community for help and the Laid-Off Workers’ Center was established.  The Laid-Off Worker’s Center in Wichita is a collaboration of local non profits and is coordinated and operated by the United Way of the Plains.  Since the center opened in June of 2009, it has helped more than 4,400 people with a place to come for advice, and has paid out over $676,600 to help pay for rent and utilities to help those in need.  

Consumer Credit Counseling Service has been asked by the United Way of the Plains to play a large role in the center. CCCS is providing one-on-one counseling to its clients, as well as teaching a financial management course entitled, Eight Steps to Surviving Your Layoff.  

These classes assist displaced workers in developing a solid financial plan of action to work on while they are unemployed. The classes are used to inform the individuals on topics such as: how to contact their creditors and what to say to them, how to keep track of their expenses, and tips on how to save money in these tight times. This highly intense and personal service helps to ease the displaced worker’s fears and uncertainty about his or her current financial situation.

Since financial trouble is the leading cause of stress for the American population, these counseling sessions help to alleviate that stress and guide them to financial freedom. Individual counseling can provide valuable resources for clients to help them handle their financial situation, such as what other non-profit and government agencies may be able to do for them.

Beth Oaks, Vice President of the United Way of the Plains said, “CCCS is a critical component of the Laid -Off Workers Center. Without their valuable advice and classes, many people would not know what to do during their time of crisis”.

Jeff Witherspoon is Executive Director of Consumer Credit Counseling Service, Inc.

What follows is the fifth in a series of the most frequently asked questions of counselors in the NFCC’s Member Network.

Why does saving a little bit of money every month help out, when an unexpected car repair or two weeks unpaid layoff is certain to eat up whatever you saved?

The NFCC’s annual Financial Literacy Survey revealed a startling result – one-third of adults, or more than 68 million people, report that they have no savings.  These people have put themselves on a very slippery financial slope, as when the inevitable emergency comes along, they are left with poor resolution options.  Indeed, one in four say that if faced with an emergency, they would charge that expense to a credit card (25 percent) or take out a loan (29 percent), adding to their debt load with yet another bill to pay.

If this hits a little too close to home, do something about it.  Dedicate 10 percent of each paycheck to funding a rainy day account.  At the end of a year, you’ll have a little more than one-month’s income socked away, enough to sustain you through most emergency situations.  And there is no such thing as saving too much.

What follows is the fourth in a series of the most frequently asked questions of counselors in the NFCC’s Member Network.

How much should a 30-year-old be putting aside each month for retirement? 

The short answer is as much as you can.  Of course, if there’s matching money available from your employer (Considered a benefit, some employers will contribute to an employee’s retirement account, typically in proportion to the employee’s own contribuytion.), you’re throwing away free money if you don’t meet the requirements for the match.  Even if your employer isn’t in a position to offer a match, look out for your own future by contributing the maximum allowable amount to your retirement plan.  You can always cut back if you have to, but commit to this effort.  The sooner you start funding your retirement account, the more your money will grow.

By Pam Flaherty and Jennifer Tescher

When you need to borrow money to make a purchase or pay a bill, how do you decide what kind of loan to take?  Who do you to turn to?   Do you base your decision on the interest rate offered by the lender?  Or do you choose based on how much you have to pay back on a monthly basis (i.e., $300 per month)? 

Researchers Marianne Bertrand and Adair Morse from the University of Chicago explored this topic with customers, across 10 states- using payday loans – short-term, high-interest loans from cash advance stores.  When consumers were shown the APR of a typical payday loan (in many cases 443%) versus that of a credit card (in this case 16%), most consumers continued to make the same borrowing decisions. However, when they were shown examples of how much it would cost to borrow and pay back the same loan in 3 months, expressed in dollars - to the tune of $270 in fees –  the number of payday loans taken out by the group fell by 10 percent compared to the control group.  These findings demonstrate that it’s not just what you tell consumers at the time of a financial decision, but how that can have the biggest impact.

As millions of Americans struggle to recover from the economic crisis, financial educators and financial services companies are searching for new ways to raise financial awareness.  Among the experts, a consensus is emerging that a fundamental change is needed – one that redefines the concept of financial education, from increasing consumers’ knowledge to actually changing their behavior, or developing financial capability.

What is financial capability?  While there is no standard definition, the term generally means being able to cover your monthly expenses with your income, select and manage financial products and services, such as a credit card or a checking account, and plan ahead and save for the future.

The Financial Industry Regulatory Authority (FINRA) recently worked with the Treasury Department to conduct the first National Financial Capability Study.  Its findings show that many consumers across the country clearly lack these basic financial skills:

• The majority of Americans do not have a “rainy day” fund for unanticipated financial emergencies and are not adequately saving for college and retirement;

• More than one in five respondents use high-cost, alternative borrowing methods, such as payday loans and pawn shops; and

• Fewer than half (46 percent) correctly answered two basic questions about interest rates and inflation.

But improving financial capability is no easy task.  Research shows that people make financial decisions not just on their personal knowledge, but also on a host of other factors, including their personal biases and tendencies. These can range from the need for immediate gratification, which can make it very hard to manage a budget, to over-optimism, which can drive some people to keep buying lottery tickets, rather than save.

To identify the best ways to build financial capability, the Center for Financial Services Innovation (CFSI) studied financial education literature, interviewed experts and explored new approaches. The research was sponsored by the Citi Foundation, as part of its 10-year, $200 million commitment to support global financial education. CFSI’s analysis found that to improve financial capability, financial educators and financial services companies must focus on being:

• Relevant to consumers’ lives – addressing consumers’ specific concerns and financial situations in order to capture their attention and motivate change;

• Timely – coinciding with key life events or moments of decision;

• Actionable – enabling consumers to immediately put to use newly gained knowledge to improve their financial situation; and

• Ongoing – fostering long-term relationships with consumers to provide support, instill a sense of accountability and track progress.

The research also examined different ways for service providers to reach the public, from simply sharing information to directly engaging people for in-depth one-on-one coaching or counseling.  The research identified ways that technology—text alerts, personal financial management platforms and social media tools—could help to increase the scale, efficiency, and effectiveness of current approaches.

Experts have made a promising start at developing new approaches to improve financial capability and enhance consumers’ day to-day financial habits.  But much more needs to be done.  The financial services industry, non-profit organizations, funders and policymakers have to work together to move the process forward.  

The Obama Administration is helping make that happen. Last December, the Departments of Treasury and Education launched the National Financial Capability Challenge, designed to increase the financial knowledge and capability of high-school students nationwide. The Administration also recently announced plans to create a President’s Advisory Council on Financial Capability.

A concerted effort among government, education and business leaders will be key to making progress.  In the wake of the financial crisis, there has never been a greater need – or a greater opportunity – to help consumers develop financial capability, so they can help themselves make better financial choices.
 

Jennifer Tescher is the director of the Center for Financial Services Innovation, an affiliate of Shorebank Corp., Chicago. Pam Flaherty is the President and CEO of the Citi Foundation.

By John Ulzheimer

It’s the credit myth of the millennium…paying your bills on time equates to great credit scores. Unfortunately this is a current myth based on an old truth. Decades ago when banks made decisions based largely on relationships it was true that living up to your obligations was synonymous with having great credit. But in today’s really fast, really big and really automated banking environment decisions are made using analytic tools, like FICO credit scores.

Today’s credit challenge is so much about understanding what makes your credit scores tick. And while paying your bills on time is certainly a good start, you would be surprised to learn that a full 2/3rd of the points in your FICO scores have nothing at all to do with whether or not your check arrives by the due date. You might also be surprised to learn that 30% of the points in your scores are directly tied to the amount of debt you’re carrying at any given time. And the bulk of that 30% is heavily influenced by your credit card debt.

I use myself as an example to quantify the different impact of installment debt versus revolving credit card debt on FICO scores. I paid off a $284,000 mortgage in 2009, an installment debt. My FICO scores went up a whopping four points. But, when I charge two or three thousand dollars of credit card debt in any given month my scores dip between 15 and 20 points depending on the credit report in question. This is not at all atypical and it underscores the importance of maintaining little or no credit card debt.

Familiarize yourself with the term “revolving utilization.” Revolving utilization is the relationship between your credit card balances and your credit card limits, expressed as a percentage. If you’ve charged away half of your credit limits then you’re 50% utilized and your scores are suffering. According to FICO, the inventor of the credit score and my previous employer, the people in this country with the highest FICO scores have an average utilization of just 7%.

This is why it’s so important to get out of, and stay out of, credit card debt. It’s the single fastest way to improve, and then maintain, your credit scores. If you can pay down your credit card debt quickly, or over time, then your scores will improve as soon as the balances are updated on your credit reports.

Doing away with your credit card debt is smart for so many reasons. You’re not paying someone else 24.9% interest.

You’re putting your money somewhere it will work for you rather than for someone else. And now you know that you’re also significantly improving your single most important post-scholastic grade in existence, the FICO score. So, as you whittle away at that nasty credit card debt please let me be the first to welcome you to the land of FICO 800. The grass truly is greener over here.

John Ulzheimer is the President of Consumer Education for Credit.com, a Microblogger on Credit Scoring topics for the New York Times and a credit expert witness qualified and admitted to testify in both Federal and state courts. Learn more about John at http://johnulzheimer.com/aboutjohnulzheimer.asp

What follows is the third in a series of the most frequently asked questions of counselors in the NFCC’s Member Network.

How can a family break a paycheck to paycheck cycle on household expenses?

In recent years, in part due to credit being freely extended, many people built a lifestyle beyond what their income would support.  If you went to that party, you’re likely to still be suffering through a nasty financial hangover at least until you can get your debt obligations in line with your income. 

Start by reining in your spending.  Put an absolute freeze on all unnecessary expenditures. Also, explore ways to increase income while decreasing expenses.  And dedicate that found money to paying off debt. 

Start with the card that is doing you the most damage which is usually the card with the highest balance and highest interest rate.  Pay all creditors at least the minimum due each month, but power pay that account by putting all extra money toward it.  Seeing the balance go down will serve as motivation to keep going. 

Be committed to paying your living expenses first, things such as the rent or mortgage, utilities, food bill, insurance, medical needs, daycare, etc.  Next in line are any secured payments.  And finally, pay creditors.  If you pay in this order, even if you run out of money before every bill is paid, you’ve kept your home-life stable and the proverbial wolf from the door.

But don’t let this be the end of it.  Once you find yourself no longer living paycheck to paycheck, start putting money away for an emergency or for a bigger financial goal such as buying a car or a home.  Put 10 percent of your monthly income into savings.  At the end of a year, you’ll have a little over a month’s pay saved up, which can go a long way toward handling that emergency when (not if) it comes.

Believe it or not, 2010 is half over.  That means it’s time for a mid-year financial checkup. 

“We’re accustomed to physical check-ups which help us stay healthy.  We even take our vehicles into the shop for the once-over to improve their performance.  It only stands to reason that we should do the same for our finances,” said Gail Cunningham, spokesperson for the National Foundation for Credit Counseling (NFCC). 

The NFCC suggests that consumers review the following areas and take action where necessary:

• When was the last time you looked at your New Year’s Resolutions list?  Are you meeting the financial objectives you set for yourself six months ago?  If not, remind yourself of why you set those goals, and why implementing them will put you in a better financial situation. 
• Is your savings account growing?  Perhaps it doesn’t exist at all.  The absence of a savings account, or a poorly funded one, puts you and your family on a very slippery financial slope.  The people who have the hardest time saving are often the ones who most need a safety net in case of an unplanned expense or emergency. 
• Are you maximizing the potential interest on your savings?  Many banks and credit unions now offer interest on accounts that is remarkably high compared to standard rates for such accounts.  Shop sites such as www.checkingfinder.com  or www.bankrate.com to research the rates and terms.  You usually have to meet some minimum requirements such as a certain number of debits during the month, a direct deposit or draft from your account, and agree to receive your statements online rather than by mail, but the interest rate often makes jumping through these hoops very doable.  Always make sure that the financial institution where you deposit your money is FDIC or NCUA insured.
• Are you tracking your spending?  People work hard for their money, but spend it with abandon.  Even if you feel as though you have control of your spending, you won’t know for sure until you track it for at least 30 days.  Write down every cent you spend, and then put your spending into categories.  At this point you can make conscious decisions regarding how you want to spend moving forward.
• Have you ordered a copy of your credit report?  Your credit report is basically your credit reputation.  It is a reflection of who you’ve borrowed from in the past, and how you repaid them, and is the basis of your all-important credit score.  Since you can obtain your credit report free of charge from www.annualcreditreport.com, what are you waiting for?
• Are you financially organized?  This will keep you from overlooking bills and paying late, which results in late fees being added to your balance, negative marks on your credit report, and a lowered credit score.
• Have you updated your W-4?  You don’t want to underpay or overpay Uncle Sam, yet last year millions of people overpaid by thousands of dollars.   To determine the proper number of withholding allowances, go to www.irs.gov and type the words “withholding allowance” in the search box.  It will provide you with a simple worksheet.  Answer a few questions and you’ll have the correct number of allowances to withhold.  You are allowed to adjust your W-4 at any time during the year, and should do so whenever your situation changes for events such as a marriage, divorce, death, birth, etc.
• Are you prepared for 2010 holiday expenses?  Remember the old Holiday Accounts where everyone methodically deposited money throughout the year and then drew it out during December to pay cash for their purchases?  That idea is one that we should take out of the moth balls, dust off and put into practice.  Now is the time to establish your own personal Holiday Account.  Involve the entire family in finding an extra $20 per week and start making out your gift list, as you’ll have $500 to spend.  And the best gift of all will be the one that you give to yourself…a debt-free holiday.

“The good news is that it’s not too late to still make a difference in your financial health in 2010,” continued Cunningham.  “For instance, if you managed to save $1.00 per day for the rest of the year you’d have over $180 socked away.  That’s not much, but it may be more than you have now, and even more importantly, it will get you into the habit of saving.”

If you need help getting on track financially, reach out to an NFCC Member Agency.  To find the location closest to you, dial (800) 388-2227, or go online to www.DebtAdvice.org.  For assistance in Spanish, call (800) 682-9832.

What follows is the first in a series of the most frequently asked questions of counselors in the NFCC’s Member Network.

How can a family come up with a realistic budget or cash flow plan when paydays and bill due are not on same schedules?

Consider putting together a cash-flow calendar.  While it may sound intimidating, a cash-flow calendar is simply a regular calendar that shows when paychecks will arrive and the amount of that check instead of appointments, social commitments, and other events. This calendar should include everyone in the family who contributes to the household’s income.

Next, record when the bills are due, and which bills will be paid out of which checks.  If you find yourself coming up short some weeks, call your creditor and ask to have your due date changed.  You may meet with some resistance, but it can be done.  Changing your due date may mean that in the beginning there will be a gap period where you will have to pay some interest charges, but the overall benefit of knowing when money is coming and going out, as well as alleviating what had been a monthly scramble to meet your commitments will be worth it.

People whose incomes are not the same each month have a similar problem.  This occurs most often for people who have seasonal jobs or who are paid on commission.  When a big check comes in, they’ve usually lived so lean for so long that they can be tempted to splurge and spend their entire check.  It is human nature to want to reward one’s self, and there it nothing wrong with that.  But keep it in moderation – say $100 or less.