Financial Education in 2012 and Beyond:

Preparing Students for a “New Normal”

Barbara O’Neill, Ph.D., CFP® Professor II and Extension Specialist in

Financial Resource Management Rutgers University

oneill@aesop.rutgers.edu

Presentation Topics

• Description of financial capability

• “New Normal” financial realities

• 10 “New Normal” financial skills for students

• YOUR personal & professional “New Normal”

• Adjusting financially to “broken promises”

Financial Educators Build Financial Capability

What is Financial Capability? • New buzz word that is replacing “financial literacy”

• It is not just what you know but what you do with what you know (i.e., focuses on behavior)

– Financial literacy is the ability to understand personal finance concepts

– Financial capability refers to an individual's ability to make informed judgments and effective decisions about the use and management of their money

• President's Advisory Council on Financial Capability renamed in January 2010

• National Financial Capability Challenge

– http://www.challenge.treas.gov/

FINRA Financial Capability Study (2009)

• Four key components

– Making Ends Meet

– Planning Ahead

– Managing Financial Products

– Financial Knowledge and Decision-Making

• Study Results:

http://www.finrafoundation.org/web/groups/foundation/@foundation/documents/foundation/p120535.pdf

Key Survey Findings (N =1,488)

• 49% reported difficulty keeping up with monthly expenses (14% very difficult; 35% somewhat difficult)

• 23% reported occasionally overdrawing checking account

• 16% were late with a mortgage payment at least once in last two years

• Only 49% had an emergency fund of 3 months expenses

• 23% used high-cost “alternative” borrowing methods (e.g., payday loans and pawn shops)

New Normal Analogy The “New

Normal” and the Trump Plaza Hotel (Atlantic City, NJ)

What is the “New Normal”?

• A constellation of economic events coming together – Projected to linger throughout much of the 2010s decade – Rebounds: 2017 for labor market? 2021 for housing

market?

• Puts a “framework” on recent events – People like to identify patterns to make sense of them

• Some NN trends will have long-lasting impact (e.g., questions about employee benefit sustainability)

Don’t Get Too Comfortable, Though (Things Will Change….Again)

Characteristics of the “New Normal” An extended period of:

• Slow U.S. economic growth

• Low single-digit average annual stock returns

• Stubbornly high unemployment levels

• Precarious job security (public and private sector)

• Struggling housing market

• Tightened credit standards

• Increased precautionary household savings and debt repayment

• Decreased household spending

Why a New Normal?

We didn’t just have a perfect storm…

…We had a perfect TORNADO!!!

Recent Financial Shocks • Recession/Shrinking economy (GDP) • Collapsed and merged investment banks • Bank failures and government takeovers • Increasing cost of basic necessities

• Mortgage defaults and high foreclosure rates

• Declining home values

• High unemployment rates

• Bear market/stock market volatility

• Increased poverty rates and rich-poor “wealth gaps”

• “The Paradox of Thrift”

The “Paradox of Thrift” (Economic Term) What’s good for individuals (saving more and spending

less) is bad for the economy when everyone does it.

Four Common Aftermaths of Financial Crises • Deep and prolonged asset market collapses

– Housing prices – Stock market indices

• Profound declines in output (deleveraging)

• High unemployment (in both public and private sector)

• Explosion in government debt as tax revenues decline

Reinhart & Rogoff (economists):

– The Aftermath of Financial Crises (NBER Paper) http://www.nber.org/papers/w14656

Many People Have Lost Their “Penthouse”

• Unemployment

• Under-employment

• Involuntary “retirement”

• Wage freezes

• Furloughs

• Higher employee benefit payroll deductions (pay cut)

• Employee benefit cuts

• An eerie feeling that promised benefits are “unsustainable”

For Some, the Dream of Upward Mobility Appears to be Slipping Away

Many People Feel “Stuck” • Millennials can’t start careers

– “Idleness rate” for Americans <24 has increased steadily since 2007 (those neither in work or school)

– Lowest % of employed young people in 60 years! – Risk of a “lost generation” (Harvard labor economist Lawrence Katz)

• Boomers can’t end careers – Working longer than intended due to 401(k) and housing

value losses – Higher employment-to population rate than December 2006

for 55+ age group (37.6%) – ONLY age group to increase labor force participation during

the economic slowdown

But, the Financial Recovery is 3 Years Old • End of the “Great Recession” declared in June 2009…but

it doesn’t feel like it

• Weaknesses: home prices, job recovery, slow GDP growth, disposable incomes, personal spending, household debt/deleveraging

• Strengths: U.S. exports (weaker dollar & emerging markets)

• Remember, “recovery” doesn’t necessarily mean that things are good; it just means that things are improving

– Economy growing (slowly) rather than shrinking

– Number of jobs rising (slowly) rather than falling

What Needs to Change?

• Economists say it will take strong, sustained job growth to reignite household spending

• Recoveries are generally driven by housing and consumers

• Unfortunately, it often takes economies a long time to recover

• Reinhart & Rogoff study of past financial crises: it often takes at least a decade to recover

“New Normal” Financial Skills

1.“The Basics” (e.g., planning, expense tracking, emergency funds, goal-setting with personal targets)

– Planning increases control and success, reduces stress

2. Entrepreneurship (more self-employed workers predicted; up to 40% of U.S. workers by 2020)

3. Budgeting for Variable Incomes (“cash flow calendar” with surplus and deficit months)

4. Health-Wealth Relationships (cost of poor health practices and health care decision-making)

More “New Normal” Skills

5. Self-Funding Retirement Savings

– NN Reality: Less generous employer/government supports

6. Investment Savvy (understanding historical performance of stocks and real rate of return)

7. Understanding the Time Value of Money

– Students have 5-6 decades of compound interest

– Many people under-estimate its awesome power

Still More “New Normal” Skills 8. Insurance Savvy

– New decisions (e.g., high-deductible health insurance, HSAs, new health care law provisions)

9. Student Debt ROI – Debt from Student Loans is Crippling a Generation – http://blog.nj.com/njv_guest_blog/2012/04/debt_from_student_loans_is_cri.html

10. Human Capital Investments – Increases resilience in tough times; education never ends

To read more about “New Normal” financial planning, see the article by O’Neill in the 2010 issue of the Journal of Consumer Education: http://www.cefe.illinois.edu/JCE/archives/

Prudent Steps Everyone Can Take • Borrow less and pay off what you owe

• Build an emergency “war chest”

• Prepare a spending plan

• Become a penny-pincher

– Frugality is fashionable

– Coupons, groupons, employer discounts, consignment shops, simply asking for a price break where none is posted

• Invest in high quality companies

• Invest in yourself; try learn something new every day

So Welcome to the “New Normal” New economic patterns

have been evolving in the wake of the financial crisis:

• Slow economic growth

• High unemployment

• Decreased employee benefits

• Flat or decreasing wages

• Lots of uncertainty on the horizon (e.g., taxes, inflation, Social Security, health care)

In times of crisis and uncertainty, knowledge is power!

What is YOUR “New Normal,” Personally and Professionally?

What is YOUR “New Normal,” Personally and Professionally?

Examples: Pay freeze, layoffs, job uncertainty, benefit cuts; less support staff; increased payroll deductions

Examples: Difficulty paying bills; more fights with spouse about money; home value down; low interest being earned on savings

Examples: Good family cooperation to reduce expenses; less “mindless” (impulse) spending; better bargains when shopping

Examples: Learned new job skills; unproductive people were terminated; Led a major team project

Key Themes During Past Few Years Peggy Noonan reply to question from Maria Bartiromo about “game-changing events during 2011” on Wall Street Journal Report, 1/1/12

“The fall of structures that we’ve come to rely on” and “Lots of insecurity”

Workers can’t even count on income and benefits promised in their CURRENT labor contract, not to mention promises made years ago when they were first hired.

What’s Happening?

Era of Broken Promises • Terminated pensions

• Suspended 401(k) matches

• Salary cuts and freezes

• Furloughs

• Benefit cuts

• Pension COLA cuts

• Other

New York Governor Andrew Cuomo, 12/16/11 interview about streamlining government, including New York pension benefit tiers:

“the whole system was designed at a different time and a different place and it needs serious reorganization.”

Evidence of Broken Promises

• Work longer

• “Retire” while working

• Accelerate debt repayment

• Consider career changes and/or freelancing

• Consider investing more aggressively

• Spend less and shop savvy

• Investigate new benefit alternatives

What to Do When Your Income/Benefits are Cut

• Standard Strategy #1- Retire at a planned age with less money than anticipated due to NN events and risk running out of money due to benefit cutbacks, increased health care costs, longevity, etc.

• Standard Strategy #2- Retire later and risk “waiting too long” (e.g., after age 65-70) so that death, health “issues,” widowhood, etc. hinder planned retirement lifestyle and/or quality of life.

• New Strategy #3- Keep working BUT use money that had been going into savings (i.e., suspend or reduce 401(k) or 403(b) contributions) to begin enjoying “retirement activities” NOW without actually retiring. https://www2.troweprice.com/iws/wps/wcm/connect/d2edab0046d7abf0a87eb899d35c25cc/04779-23_P1.pdf?MOD=AJPERES&CACHEID=d2edab0046d7abf0a87eb899d35c25cc (Fahlund, C. Delaying Retirement, But Not Your Retirement Dreams)

“Retire” While Working

• Public sector employment benefits are generally not as attractive as they once were – Newer tier hires often have lower benefit tiers

• Option #1: Changing jobs could lead to better benefits; less stress

• Option #2: Aggressively demonstrate value to current employer (to earn a promotion)

• Option #3: Freelance for additional income or to replace lost income due to benefit plan changes – Increased health insurance cost-sharing – Increased pension plan contributions

Consider Career Changes and/or Freelancing

• Explore benefit options that you might not

have considered previously – Example: High-deductible health insurance

• Do a cost-benefit analysis of alternatives – Premium savings from high-deductible plan vs.

amount of out-of-pocket payment

• Attend benefit fairs/seminars and ask questions

Investigate New Benefit Alternatives

• Changes to Social Security

– More needs-based? Older age? Lower benefits?

• Changes to Medicare

– More needs-based? Older age? Lower benefits?

• New health care law and aftermath

• Consider using very conservative benefit estimates for financial planning purposes

• Assume that you can’t count on promised benefits?

Keep an Eye on Government Benefits

Major Take-Away: Focus on What You CAN Control

CAN’T Control • Speed of economic recovery

• Financial markets

• Labor market/unemployment rate

• Housing market

• Employee benefit cutbacks

• Political environment

• Actions of lawmakers

CAN Control • Healthy lifestyle

• Spending habits

• Saving habits

• Investment expenses

• Human capital investments

• How you spend your time

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How to Build Financial Capability?

• Realistic content (e.g., urban versus rural)

• Age-appropriate content

• Interactive and “hands on” learning

• Multiple methods and approaches

• Meaningful stories, role models, and activities

• Fun (e.g., games, skits, etc.)

Questions and Comments?

Barbara O'Neill, Ph.D., CFP®, CRPC

Extension Specialist in Financial Resource Management and Professor II Rutgers University Phone: 732-932-9155 Extension 250

E-mail: oneill@aesop.rutgers.edu

Internet: http://njaes.rutgers.edu/money2000/

Twitter: http://twitter.com/moneytalk1