Chapter 11 - Family Resources & Economics
Since earliest human record, the family has been a group of persons committed to meeting one another's economic needs. This is a vital function of the modern family in our day. As newborns enter the family, they are fed and clothed, protected, and nurtured into childhood, adolescence, and adulthood. When they leave home they continue to receive economic support, even into the college experience.
How many times per month do your parents help you out financially? You'd be surprised to know that many students do receive financial help from family even after they marry, graduate college, and enter the workplace. In my own family I had two occasions when my parents helped me financially during my college experience. Other than that, I was completely on my own. It makes me happy that today's students have parental support.
In a study performed by College Parents of America in 2007, it was reported that "college students' finances were of extreme or great concern to nearly half" of the 1,727 parents surveyed. Other findings reported by parents indicated that cellphones were the preferred method of communication (College Parents of America, 2010, "Finances Top Survey List of Current College Parent Concerns," retrieved 4 January 2010 SOURCE , 1-3). The report stated:
"What are all those cell phone conversations about? As noted above, student finances are of paramount concern to those respondents among you who are current college parents, with that and health and safety issues topping a list of choices that also included academics, campus or community involvement opportunities, career planning and personal relationships. (p. 1)"
A more recent 2014 article published on the College Parents of America Website urged parents to teach their college-student children how to live on a budget while being a student (How-and Why- To Help Your College Student Create A Budget retrieved 1 July 2014 SOURCE) The article provides links to specific strategies to set up, live within, and maintain a flexible budget that will allow the student to eventually graduate and become capable of financial independence. Indeed, the same principles in this article can be applied to families and their needs for a good budgeting strategy.
So, parents not only continue to provide economic support, but they are also a social and emotional support to their college-aged children. Many have noted that among college students today, "adulthood" may not be the best word to describe them. They continue to be dependent upon their parents at some level into their late 20s and perhaps early 30s. The concept of "young adulthood" has been replaced by that of "emerging adulthood."
Emerging adulthood is the time in a late teen’s life when they transition into adult roles and adult attitudes. Decades ago, 18 year olds had many options of adult roles they could take on (military, volunteering, college, vocational training, manual-labor employment, marriage, etc.). Today these roles are not so easily transitioned into, because 68 percent of the jobs available to all US young adults, but especially available to young men are in the service sector of the economy (retrieved 11 June 2014 SOURCE ).
As I mentioned, I am happy to know that parents support their children through the college years. You see, in the U.S., colleges and universities are the gateways to financial security and opportunity; the higher the education the higher the income.
That's why it is so very important that children get to attend school and graduate with their high school diploma, attend vocational or academic higher education institutions and ultimately graduate? The answer is simply, there is more money with higher educational attainment. The College Board released a report called "Education Pays 2013: The benefits of Higher Education for Individuals and society" (Baum, S., Ma, J., & Payea, K. (2013; retrieved 1 July 2014 SOURCE Figure 1.1).
The report found that the difference between high school dropouts and graduates is about $8,100/year more for graduates or on a 35-year career in the labor force at least $283,500 more money earned by graduates. What would a 4-year Bachelor’s degree add per year? $19,400 per year for Bachelor’s grads compared to high school grads or $679,000 in 35 years of career work. A 4-year degree is financially well worth it. The lifetime earnings of 4-year college graduates is estimated to be about $1.65 million more than high school graduates will earn and nearly $2 million more than high school dropouts will earn in their lifetimes (Figure 1.2)
When students ask me how I feel about taking out student loans I explain the following to them. If you choose to go to college and forfeit full-time wages to become a full-time student you will lose about $126,000 of lost wages while in college. Plus it might cost you another $25,000 in student loans or expenses. So you could conclude that it cost you about $151,000 to earn a 4-year degree. Subtract that $151,000 from the extra $697,000 and you end up a $546,000 net increase in career earnings even accounting for missed wages and student loan expenses. The College Board also stated that "postsecondary education should pay off well enough for people to pay back their loans and not suffer a diminished standard of living (Page 8 of Baum, S., Ma, J., & Payea, K. (2013; retrieved 1 July 2014 SOURCE ).
There is a contradiction in values present in the US. On the one hand the country has a standard of living, food, abundance of goods and services, and other economic resources that it is often ranked among the wealthiest nations in the world. On the other hand, even though, the US has some of the best educational opportunities for average children to acquire a good public education. But, it lacks cultural motivations that translate across racial and ethnic lines in such a way that education become valued and pursued by average children as a way of opening doors and improving life chances for themselves and their families.
It is a paradox in the context of Weber’s life chances, because so many life chances are readily available to average people. Yet, they are refused or ignored by millions as this generation proves to be less educated than the previous one (see Stetser, M., and Stillwell, R. (2014). Public High School Four-Year On-Time Graduation Rates and Event Dropout Rates: School Years 2010–11 and 2011–12. First Look (NCES 2014-391). U.S. Department of Education. Washington, DC: National Center for Education Statistics. http://nces.ed.gov/pubsearch. Retrieved 11 June 2014 SOURCE ).
A somewhat controversial book was released in 2014 where Amy Chua & Jed Rubenfeld identified 8 US ethnic groups who do take advantage of the US culture and resources and who have shown economic gains over the last few decades (see The Triple Package: How Three Unlikely Traits Explain the Rise and Fall of Cultural Groups in America; Penguin Press, NY ISBN 978-1-59420-546-0). She and her husband (co-author and fellow Yale Law School Professor, Jed Rubenfeld) argue that each of these 8 ethnic groups collectively feel that they are superior to others; ; each has a past history that collectively lead them to feel an insecurity about their circumstances; and each promote and live by values of impulse control. They argue that when the US prospered after the 1950s, it too held these three triple values. Although Amy Chua’s books are often criticized, scholars take them seriously and eventually their claims and arguments are vindicated in academia.
Ethnic group cultural values do play an important indirect part in the upward movement of people in the US, but it is only part of the overall picture. Poor people get less quality of K-12 education than middle class and rich people; so they have financial hardships that prevents their access to the gateway to financial security. Many poor people experience discrimination which adds to their lower financial and educational status and undermines healthy and self-promoting lifestyles. Poorer people are more likely to be victimized by crime, commit crime, go hungry, cohabit and/or divorce, be abused, etc. Of most concern to me are the children who are raised in poorer families.
Children and Families in Poverty
Childhood in our day does not require children to contribute much to the family economy for most families. In our society, with all the privileges and economic affluence, there are still members of families, communities, and racial categories who go without, go hungry, and haven't the slightest notion of ever going to college. Today, many children grow up in poverty, even in the United States. A recent US Census report stated that US children make up 23.9 percent of the US population and 28.8 percent of them live near poverty (125% of official poverty threshold) and another 34.6 percent live in poverty (see Living in or near poverty in the US 1966-2012 CPS Hokayem, C. & Heggeness, M.L. (May 2014 P60-248); Figure 7 retrieved 1 July 2014 SOURCE ).
This reported stated that of all age groups, children are more likely to be in poverty What is poverty in the U.S.? The US has an official definition of being poor or in poverty. Poverty Line is the official measure of those whose incomes are less than three times a lower-cost food budget. This definition has been the U.S.'s official poverty definition since the 1930s, with only a few adjustments. Near Poverty is when one earns up to 25% above the poverty line. We would say that a person near poverty has more income than someone in poverty, but not more than 25 percent more. An official definition of how "poverty" is defined by the US Government is provided in this report:
"Following the Office of Management and Budget’s Statistical Policy Directive 14, the U.S. Census Bureau uses a set of dollar value thresholds that vary by family size and composition to determine who is in poverty. If a family’s total money income is less than the applicable threshold, then that family and every individual in it are considered in poverty. The official poverty thresholds are updated annually for inflation using the Consumer Price Index (CPI-U). The official poverty definition uses money income before taxes and tax credits and excludes capital gains and noncash benefits (such as SNAP benefits and housing assistance). The thresholds do not vary geographically(p.3)."
In other words, the government carefully selects the poverty line, then estimates how many families and individuals fall at or below it. In Table 1 below you can see the U.S. Health and Human Services 2014 poverty guidelines with estimates of near poverty levels. Most who qualify as living below poverty also qualify for state and federal welfare, which typically includes health care benefits, food assistance, housing and utility assistance, and some cash aid. Those near poverty may or may not qualify, depending upon current state and federal regulations. Absolute Poverty is the level of poverty where individuals and families cannot sustain food, shelter, warmth, and safety needs. Those below poverty are already in a bind. For example, the average home where I live in Utah costs way more than the average poor family could ever afford.
Table 1. U.S. Poverty Guidelines in 2014: Number of People in Family & Corresponding Poverty Line (Threshold)
|Family Size||Poverty Line|
U.S. Census data indicate that people have various levels of poverty by racial grouping. Look at Figure 1 to see the general upward trend in median income for all races especially from about 1995 and later. You can see the blue vertical shaded bars that represent the years of economic recession. Income declines during recessions But, notice the layers with Asians, Whites (non-Hispanics), Hispanics, then Blacks (data were not available for Native Americans). Asians had a median income of $68,636 contrasted to Blacks at $33,321 (That equals $35,515 more for Asians).
Inflation happens when the general cost of goods rises while the genera purchasing power of a country’s currency is declining. These dollars are multiplied by a number that converts them all to having the same buying power as 2012 dollars. That conversion is often calculated using a value called the Consumer Price Index (CPI) or the weighted average rise or fall of certain types of goods within an economy (such as medical care, food, and transportation). When income is adjusted to a standard value in a given year (say 2012), it is called controlling for (or adjusting for) inflation.
Figure 1. A Comparison of the US Median Household Income by Race and Hispanic 1967-2012*.*Retrieved 19 June 2014 from Figure 1 Real median household income by race and Hispanic origin: 1967 to 2012 SOURCE DeNavas-Walt, Carmen, Bernadette D. Proctor, and Jessica C. Smith, U.S. Census Bureau, Current Population Reports, P60-245, Income, Poverty, and Health Insurance Coverage in the United States: 2012, U.S. Government Printing Office, Washington, DC, 2013.
Figure 2 shows the number and percent in poverty in the US between 1959-2012. In 2012 there was 15.0 percent of the US population living in poverty. Between 1965 and 2012 the percent in poverty rose and fell below 11 and 15 percent. Notice the drop between1959 and 1979 when jobs were abundant and the economy was doing moderately well.
This is somewhat remarkable given the fact that 8 recessions occurred during this time frame and the fact that the US completely revised its welfare and poverty intervention laws in 1996 implementing Temporary Aid to Needy Families (TANF) in place of the old Aid to Families with Dependent Children (AFDC). Many lobbyist, policy makers, and lawmakers might look at this trend and see the steady pattern as having been a success, at least in terms of the percent of those in poverty not returning to its 1959 level of 23 percent. Many who actually live in poverty would not. It is difficult for analyst to define that as a success given that there are currently 46.5 million living in poverty.
Figure 2. Number and Percent of people living in Poverty in the US from 1959-2012*Retrieved 19 June 2014 from Figure 4 Number in Poverty and Poverty Rate: 1959 to 2012 SOURCE DeNavas-Walt, Carmen, Bernadette D. Proctor, and Jessica C. Smith, U.S. Census Bureau, Current Population Reports, P60-245, Income, Poverty, and Health Insurance Coverage in the United States: 2012, U.S. Government Printing Office, Washington, DC, 2013.
Being married is associated with lower poverty rates. A recent US report on poverty reported that there were only 6.9 percent of married couples in poverty, contrasted to 20.6 percent of single, never marrieds and 19.5 percent of separated and divorced persons (retrieved 1 July 2014 from http://quickfacts.census.gov/qfd/states/49000.html Figures 4 & 5).
Not all economic disadvantage results from our choices. In the U.S., non-whites, non-Asians, and non-males are more likely to be found in the lower layers. Figure 3 portrays what the layering of society might look like if the U.S. population were divided into three groups -- the top 10 percent wealthy, the next 20 percent upper class, and the remaining 70 percent of middle and lower classes.
The top 10 percent of our country owns the lion's share of all the wealth available to be owned in the U.S. They own as much as 100 times the average U.S. person's wealth. For a relative few, they make more in a year than most of us make in a lifetime. Theirs is the life of high levels of property, power, and prestige. The next 20 percent, which are upper-class people, hold the high-ranking jobs, run for elected office, and run the major corporations in CEO-level positions. These types of jobs pay more, require more education, require more abstract thought, and allow for more self-directed autonomy in their daily activities. The blue or largest category includes the remainder of us. We fall into some layer, whether it is upper middle class, middle class, working class, labor class, or poor.
Figure 3. Portrayal of United States Economic Layering© 2009 Ron J. Hammond, Ph.D.
In fact the growing gap between the wealthy and the poor fully supports the patterns portrayed in Figure 3 above. The US Census Bureau provided Census data between 1967 and 2012 indicating the percent share of the total US wealth obtained by the population and depicted in quintiles. Quintiles are groups of people in society divided in to 5 distinct subgroups, each representing 20 percent of the population. In this case the quintiles represent the poorest 20 percent; 2nd poorest 20 percent; middle 20 percent; 2nd richest 20 percent; and richest 20 percent of the US population for each year. Figure 4 shows the share of the total US income obtained by each quintile of the country’s richest on down to poorest 20 percentage groups.
It is obvious that the richest 20 percentile has seen a dramatic rise in the share of the total US wealth obtained since 1969. The lower 4 quintiles or 80 percent have each seen a steady decline over the last 4-5 decades.
Figure 4. Percent of Total US Wealth Obtained by 5 US Quintile Income Groups 1967-2012** retrieved 19 June 2014 from Historical Income Tables: Households, Table H-2. Share of Aggregate Income Received by Each Fifth and Top 5 Percent of Households, All Races: 1967 to 2012 SOURCE and Excel files in All Races Table H-2. Share of Aggregate Income Received by Each Fifth and Top 5 Percent of Households.
It is difficult for some to see the decline in the majority 80 percent of the population while the minority 20 percent experience a skyrocketing increase in their share of the total US income. There is little, we as individuals and family members can do to directly change the nature of this trend. But, what we can do is increase our position of economic stability by graduating with at least a 4-year college degree or more, by living within the means we have at our disposal, by investing wisely and saving, and by becoming perpetual students of sound financial principles.
Purchasing a Home
For those who can in our current economic conditions, buying a home is the major investment for most U.S. families. Even when interest rates are low, the cost of a home is extremely high. If you got a $100,000 home at 8 percent interest for 30 years, then you would pay $100,000 for the home and another $164,154 in mortgage interest. That totals $264,154 for a $100,000 home. If the home does not appreciate in value, this is a terrible investment.
There are strategies that can be used to minimize the overall cost of purchasing a home. You can save money and put a large down payment on the home. This will lower the initial cost of the amount financed. You can make an extra 1/12th of a house payment toward the principle of the loan every month. By the end of the year, you would have made a 13th payment all to lower the overall balance of the loan (principle). Another strategy is to take out a 15-year loan instead of a 30-year loan. In the loan above, that would mean making a monthly payment of $955.65 instead of $733.76. How might that benefit you? First, you'd pay off the loan in 15 not 30 years; and second, you'd save $91,626 in mortgage interest. You can ask your lender to give you the 10-, 15-, 20-, and 30-year loan payment schedule when you close on the loan.
One of the major U.S. financial problems has been the financing of established worth of the home into a second mortgage or home equity loan. Home equity is the value in the home that is higher than the amount still owned on the home loan. My neighbor lives in a $275,000 home and only owes $50,000. He refuses to get a loan against the value, because he wants to own his home outright. Some finance experts recommend doing the opposite -- borrow against your home and use the loan to invest and make wealth in the stock market. If you are a finance expert, that would likely work out. If not, that may be too risky to the family's economy. Debt can be very difficult to a family economy. When buying a home, the best strategy is to obtain professional help, carefully study the location of the home and surrounding area, and identifying the trends in home values in the area. Of course, buying a home when it is for sale at a lower value then selling it when the home has appreciated in value is ideal. For many, simply buying and remaining financially solvent so that the home can be livened in for a few decades is the goal.
Debt and Spending
It is important to remember that there are two opposing financial sectors of our economy: first is the credit sector that lends money, promoting the accumulation of more and more debt while focusing on monthly payments rather than prudent purchases. Second, is the financial investment and retirement industry that guides individuals and families in their investments so that their money will retain (if not grow) its value and so that when elderly investors will have a secure retirement and a financial basis to enjoy their lives. Both sectors use interest calculations. The credit sector arranges for consumers to pay them interest while the investment and retirement sector arranges for investors to be paid interest from their investments. Both sectors make their services available to any who qualify and desire to engage their services.
It is estimated that if a family has unpaid credit card balances, their average credit card balances totaled $15,252 in 2014. This is important because the U.S. has become a nation with liberal debt and debt incurring policies (retrieved 1 July 2014 from what is the Average American Credit card Balance? April 9 Mary Hiers SOURCE ).
Part of the problem is the concept a friend of mine calls "funny money." He describes funny money as money that isn't printed and handled and is therefore misunderstood. Many of us buy things with credit or debit cards that give us cash back or other rewards. It is also very common to have our paychecks electronically deposited in our banks or credit unions. Our bills are then electronically paid online or with automatic withdrawals. This is extremely convenient, yet it makes it so that we rarely touch "real money." To illustrate this, I took a fresh one-dollar bill and slowly began to tear it into small pieces in front of my class. They cringed, asked me to stop, and joked about turning me in to federal authorities. I held up the shredded bill and asked, "Why does this bother you so much?"
"You are wasting a dollar that can't ever be reused. It's a total loss," they complained. Then I hold up my credit card and ask, "Why can we spend $30-60 dollars on a credit card and not even flinch, yet get bent out of shape over a one-dollar bill?" I already know the answer. The dollar bill is tangible and touchable. The credit card works on small numbers, which show up as blips on electronic screens or numbers on paper receipts. It's funny money to many of us. We are heavily marketed to go into debt.
My wife and I used to keep a tally of all the credit card limits we were pre-approved for that came via mail solicitations -- over $140,000 in a 30-day period during the year 2012. The debt was there for the taking without one caution to me, the consumer. Very few of the companies that loan money ever warn consumers about the problems of getting into too much debt. Why would they tell you that if you make good money you can have what you want immediately and pay it back over the next 5-10 years with massive interest payments? Their ideal customer would run up a large balance of debt and make a minimum payment each month, thereby bringing in the most profits to the company. The wise consumer uses debt to his or her advantage.
Credit cards are not necessarily a bad thing. They facilitate travel and small transactions for the family. But, credit card balances or unpaid debt can be very burdensome to a budget. I have researched and taught family financial matters for years. I suggest three unique rules that I like to call the "Rules of Three" when it comes to family finances.
First Rule: save three months' worth of income and keep it in the bank. That means save enough to meet all your fixed debts (rent, mortgage, car, medical, insurance, etc.) so that you can keep your family afloat if you suffer a job loss or crisis.
Second Rule: have only one credit card with no bonus or rewards program. Keep a zero balance on it. Set your credit limit to what it might cost to pay three weeks' worth of bills (including your rent, mortgage, and car payments). I'm not suggesting that you never pay your bills with a credit card. I'm suggesting that if you use your card for transactions or travel and have a lower limit on it, you can more readily control your spending. Don't ever use your credit card for long-term debt. It should be a tool for short-term financial matters.
Third Rule: whenever there is a consumer item you really want (TV, cellphone, handheld, etc.), wait three full days before you buy it. I've had students disagree with me on this saying that some things go on sale and you will miss a good buy if you wait. My point is that if you haven't planned for it, saved for it, and budgeted for it, then a three-day cooling off period may help you prevent unwanted and unneeded debt. Keep in mind that if we are marketed to you with an approach of "hurry, sale ends soon," then most likely the marketing has triggered the use of our rational and emotional decision-making processes (limbic part of brain) and we might rush out and buy, feeling like we are actually being responsible purchasing agents -- even if we never really needed or wanted what the sale is selling.
Save for a consumer item for at least three weeks, three months, or three years. If you want or need a new kitchen appliance, save for three weeks and buy one within your budget. If you want a new computer or TV, save for three months and buy one within your budget. If you want a new car, save for three years and buy one within your budget. In preparation for buying a car, some find that it works to save as much as a car payment might be, but put the payment into your own savings account. At the end of three years, go buy a car you can afford. By the way, here is another three idea: buy a last-year's model new car in the third quarter of the year (especially August) and you typically will save thousands. Budget and plan using these "rules of three" principles. Do you budget?
Most couples don't have a monthly budget. It makes it very difficult to manage a family's finances without one, so I strongly suggest you find one. There are numerous free budgets online. I found 10 really easy formats of budgeting in one internet search for "free monthly budgets." The two main benefits of a monthly budget are to being able to know how much money you currently have in your funds and where you are spending it. If you haven't budgeted yet and want to start, ask your parents for help. Show them this practice budget and ask them what they recommend from their own experience. There is no "right" way to budget. It's just better to budget than to not.
To develop a budget, make a list of all your Fixed Expenses, which are monthly expenses that are set and do not depend upon your consumer choices. These typically include rent, mortgage payments, car payments, and insurance payments, to name a few. Now make a list of other things you spend your money on that relate to household matters. These fall under the definition of Variable Expenses, which are expenses that can change from month to month based on needs and wants and which are not fixed expenses. These typically include food, gasoline and car maintenance, dining out, pay-per-view, cold drinks, groceries, clothing, etc. If you want to budget, the next few tables will help you with the basics. Table 3 is simply the tracking sheet you can use to find out where you are spending your money.
In Table 2 you will need to record every purchase or expenditure you make. I know it sounds tedious, but you really need to track your spending in order to estimate a budget for how to spend in the future. Make sure you note what types of fun you spend money on. If you go to a movie once per week, that would be four visits per month and might require its own budget. If you golf, attend sporting events, or dance, you may find the spending is enough to justify a budget allocation in advance. After you've tracked your expenses, go to Table 4 and put them into the next month's budget.
Table 3 has hypothetical numbers placed in it to demonstrate how the budget works. It budgets $1,091 dollars per month. I am sure this is high for some and low for others, but bear with me and the point will emerge in the end. In the second month, you actually deduct what you spent from each of these categories. You don't have to exceed your total monthly income of monies (that's where savings comes in). I've put in some hypothetical expenditures in Table 4 so you can visualize what I mean by writing down your expenses.
Notice that three of these budget categories broke even. They are also the three fixed expenses. Notice also that three others had leftover monies. The "Fun" category was overspent by $40.00, which could be filled with leftovers from the other categories. When a category is overspent, you should decide if it requires more allocation (for example make Fun have $90.00 per month) or if you should control spending to keep it under the limit. After all the leftovers are calculated, add them into savings or some other category. This hypothetical month had $128.00 left over, and it could be rolled into the next month in case unexpected expenses show up.
Table 4 shows you another hypothetical budget with an increase in "Fun" that was taken from the food budget. Fundamentally, a budget tracks where you spend your money, how much you currently have, and how to strategize savings for future plans. The wise college student learns to budget sooner than later so that as family size increases so do their skills in budgeting. Microsoft has a number of free templates for family budgeting available.Table 2. Preparing for Your Budget by Tracking Your Spending Table 3. Your First Month’s Budget: Table 4. Your First Month’s Budget:
The "hedonistic treadmill" emerged as a concept in recent self-help books of financial matters. Hedonism is the pursuit of pleasure as the main goal of one's life, with pleasure being the core value of daily life. Many in the U.S. have fallen into the trap of seeking pleasure as the best goal and a purchase as the best way to acquire that pleasure. Thus, they get on a treadmill of purchasing, which cannot provide long-lasting pleasure in most cases and requires new and more varied purchases to renew that short-term pleasure over and over. The hedonistic treadmill would not be a major problem if one were very wealthy. But for the average middle-class person, the marketing pressures to buy, the patterns of seeing a purchase as a path to 'happiness," and the availability of easy-to-obtain credit make it very difficult to get off the treadmill. This pattern can be very destructive financially and can undermine the family system as a whole. Table 5 shows a list of financial best practices that can be very useful to follow for stability and security in the family.
Table 5. Strategies and Rules for Sound Family Financial Practices
- Beware of materialism (avoid the hedonistic treadmill).
- Use debt wisely (carefully controlled credit card use and secured loans for cars or mortgages).
- Guard your credit score (FICO).
- Have a 5-, 10-, 15-, and 20-year financial plan.
- Don't buy in a hurry (Rules of 3).
- Save for emergencies (3 months).
- Don't play the "extra money" game (money is real--- plastic, checks, cash, or electronic).
- Save, invest, and purchase (buy low and sell high, 401k).
- Become well versed in your guilt, shame, and fear issues about money (most resemble issues about sex, love, punishment, and food).
- Put your investments in hard-to-reach places (CDs, funds, bonds, etc.).
- Never fall for the something-for-nothing con game (something always costs something).
- Get expert help when uncertain (investor, banker, etc.).
- Treat your money with dignity and respect and it will respond in kind.
It surprises some people to hear that debt can be a good thing. It can be if debt is used wisely. Credit cards are a necessity for most and can be useful in building a strong credit score. To control credit card use is simple: spend with it very conservatively, pay your balance off every month, never spend up to your limit, and make sure others can't use your card. How well you use and manage your credit card now will influence how well you qualify for car and home loans later in your life.
Secured loans are loans that have some form of collateral so that the risk to the lender is minimized. Car loans and mortgages are examples of this type of loan. If the borrower can't pay the loan, then the car or home can be legally sold to make up for some of the lost loan value. Unsecured loans have no collateral associated with them and typically are given based on individual credit scores. These would include signature loans or personal loans and are much more risky to the lender.
Just a quick note on mortgages: some of my students have felt that the mortgage industry is doomed and that they have lost their chance to buy a home and have it work out for them in the long run. Even in today's volatile markets, homeowners have economic advantages that renters do not have. Mortgage interest can be deducted from taxes. Having a mortgage and paying your monthly payments on time is an effective way to build your credit score. Finally, in most states and communities, homeowners have more rights and privileges than renters.
Planning Financially for the Future
Guarding your credit score is crucial for your family's financial security. In the 1950s two researchers began a scoring system designed to provide a standardized credit score for everyone in the U.S. The FICO Score is the most common credit scoring system in the world and is named after Bill Fair and Earl Isaac -- Fair Isaac Corporation score or F I C O. Your credit score is comprised of your payment history, how your credit capacity compares to your usage (not too many unpaid balances), how long you've had credit, which types of credit you've had, and finally how many times your credit was checked (retrieved 1 July 2014 from SOURCE ).
You must become a manager of your credit score. The online www.about.com article "Top Five Money Mistakes College Students Make" has very useful information in it (retrieved 2 April 2010 from SOURCE ). Overdoing credit card debt, ignoring or ruining your credit score, not budgeting, and misusing student loan money are listed. Many other Internet-based articles point to the same mistakes and how easy they are to make for uneducated students who are offered numerous pre-approved credit cards as freshmen. There are many studies that demonstrate that misusing credit negatively impacts college students' overall lives and experiences (see for example, J. S. Xiao, 2007, "Academic Success and Well-Being of College Students: Behaviors Matter." Take Charge of America Institute Report, November 2007, p. 1-23).
Every family needs a 5-, 10-, 15-, and 20-year financial plan. For the most part, such a plan focuses on long-term goals while giving you guidelines to follow in the short term. Answer these simple questions: "What do we need/want to pay for in 5, 10, 15, and 20 years, and how do we need to prepare now to accomplish those dreams?" Buying a home, owning a home, planning for retirement, putting kids through college, life insurance coverage, starting a business, traveling the world, being debt free, and other goals might emerge in the planning process. Once you have these goals typed out for the next two decades, you can couch most of your budgeting, saving, and spending activities into them. Remember that the "Rules of Three" suggest not buying in a hurry, and that makes even more sense when you think about the nature of each purchase as it fits into the long-term plan.
It is not easy to save in the U.S. Most people don't save. In fact, many spend more than they earn and have a balance on their credit cards each month. Saving for three months may make the difference between staying afloat and going under if you lose a job, get sick, or have an unexpected crisis that cost too much money for a regular monthly income. Start small with $5-10 per week. Put the money in a savings account that is hard to get to. In other words, consider putting your savings in a credit union or bank separate from the one that you keep your checking account money in so that you have to go out of the way to get to your savings. If you save $10 per week for a year, you have $520.00 saved in just one year. In five years you would have saved $2,600.00. No matter what, don't take out your savings unless it is truly an emergency. Keep it there, let it build up, and take it out when nothing else can be done to pay an expense. Use your monthly budget to estimate how much a three-month savings would need to be.
There is no such thing as "extra money." I had a student tell me that she and her husband got some extra money back from an end-of-year bonus at work. I asked what they planned on doing with it and she replied, "We're still deciding. It will be something fun!" I mused over her response. I was teaching a senior-level family finance class and had seen her monthly budget. She had two bills that they made installment payments on that she could pay off with her unexpected windfall. But, and here is the main point, she and her husband felt stressed and under pressure and this money represented a gift of relief. In her own words, "We work very hard, and we deserve to do something fun with this."
All money is real money -- even credit card money. There is no such thing as extra money, because with a 20-year plan, a monthly budget, and clear-cut goals, any money (expected or unexpected) can be applied to a long-term goal or budget category. In fact, had this student and her husband planned for it, it could be applied to a fun category in the budget or split in half with some going to debt reduction and the rest to fun. They actually bought a high-end flat-screen TV but could not afford cable or satellite to watch on it. All money should be allocated and spent in the larger framework of the family finances.
There have been a number of studies on the "millionaire next door" phenomena that is common to the U.S. There are hundreds of thousands of average Americans who were very frugal with their money and have invested it in such a way that they gradually became millionaires. An LA Times news story on 13 March 2014 reported 9.63 million households worth more than $1 million (excluding Home value) in the US (retrieved 1 July 2014 from SOURCE Walter Hamilton Number of Millionaires in U.S. reaches a new high).
If you are middle class, you can increase your family's net worth by following a few basic principles. First, invest low and sell high. Second, consider real estate investments as a renter-landlord or owner-finance agent. Third, become a full-on, unabashed cheapskate. Don't ever pay full price for anything. Don't ever sell below the market value. Fourth, don't ever try to do the expert stuff by yourself. It is very easy to get an advisor, read a book, attend a seminar, or get professionals on your team. Many of my students take an elective finance class from the lower-division offerings in the Business Department. I've had one join the ranks of the U.S. millionaires, and he makes about $60,000.00 per year. To him, his family finance and investment hobby has opened numerous opportunities for his family and given them the freedom to do things they'd like to do. Some of us sabotage such successful efforts as these. Why?
Undermining Financial Stability
Entitlement is a feeling of wanting something for nothing, of being justified in having one's wants met, and/or of being excluded from the same rules that bind most of the members of society. You may benefit from knowing that the concept of "sense of entitlement" is often associated with addictive behaviors and unhealthy relationship patterns. Entitled people have difficulty discerning the difference between "what I want" and "what I need" when it comes to money. A flat-screen TV is owed to them if they want it, because they are special and their needs should be met regardless of the finances involved to acquire them. Entitled people feel that it is their right to have what they want. Many of us have feelings of entitlement in some areas of our lives, but when or if our pursuit of the things we want interferes with our financial security, moral and ethical propriety, or social responsibilities, this entitlement can become pathological.
In the U.S., many people feel entitled when it comes to consumer goods. They feel obligated to buy things that truly fall under the category of wants rather than needs. Many who lack enough resources will overspend in the process of acquiring things and then sometimes feel buyer's remorse (remember the treadmill?). It is a painful lesson to learn when debt suddenly becomes overbearing. One of my friends used to say, "Never finance a pizza." He meant that pizzas, movie rentals, new clothes, and other small-ticket items add up way too fast, and it is unwise to make many small purchases that land you with a pile of debt. Not having the family financial guidelines as listed in this chapter leaves one with no guidance, little direction, and a vulnerability to financial insecurity in the very aggressive marketplace-based society that ours has come to be.
Why is it that some human behaviors make so very little sense to a reasonable person? Why do people spend themselves into a financial hole? Why do they get sexually transmitted diseases or unwanted pregnancies that encumber their lives for decades? Why do people persist in getting into hurtful relationships? Why are so many of us unhealthy because of our eating patterns? The answer is simple -- we are human beings with choice and intelligence, but emotions play a significant role in how we think and feel our way through the many decisions we make each day. A few emotions are very caustic to our sense of self-value: Shame is a feeling of being flawed at our very cores; Guilt is a feeling of remorse for having done wrong in our actions or inactions; and Fear is a feeling of anxiety or apprehension over uncertainties in our lives.
Shame, guilt, and fear underlie many unhealthy financial decisions in our lives. I once witnessed a power struggle between a mother and son in a small-town grocery store. The mother refused to buy her son a certain brand of cold cereal. He insisted and parked his shoes right in front of her shopping cart. Emotions elevated, tempers flared, and eventually the mother slapped him across the face. I was proud of her for holding the line on her decision but disappointed that it came to violence. As I continued to act uninterested, the son cried, the mother bought the box of cereal, and I wished in the end I had chosen another store to shop in that day. Her guilt and perhaps shame lead to an unhealthy yielding to her son's feelings of entitlement.
Many of us who suffer guilt, shame, and fear medicate these feelings when we buy. We are not thinking rationally as much as feeling irrationally. Some people even become addicted to spending and are called "Shopaholics" because their spending habits interfere with their normal daily activities. When spending is obsessive or out of control, it is often because of suffering from caustic feelings and not responding to them in appropriate ways. I've had my finance students answer these four questions when it comes to understanding their own unhealthy spending habits: "Does more money make you feel better about yourself, more loved by others, or happier? Can you find the chains binding you to your shame and self-issues and sever them? Do you deserve success? Is spending like perfume that hides a guilt or shame odor?" Notice these are not budgeting and planning questions. They are based on understanding our feelings.
Figure 5 shows some of the emotionally driven unhealthy financial motivations that sometimes plague us. A metaphor that I've used with my students involves being thirsty but drinking from the wrong cup to quench that thirst. Many people eat when they are really thirsty. Others drink soda pop when they crave water. Some drink alcohol when they would probably benefit more from a sports drink with electrolytes. In the U.S. we are notorious for drinking from the wrong cup. We keep ourselves so busy and distracted that we struggle to identify what is truly going on and how best to solve it.Figure 5. Common Emotional Issues that Underlie Poor Financial Behaviors
When we misspend or manage our finances poorly or in destructive ways, we often have legitimate needs but are trying to meet them in the wrong way. Some people shop when they feel lonely. They might also spend money for cruises or fun but soon find that being with other people is not always the cure for loneliness and that happiness is a choice only they can make for themselves. Others spend to make up to themselves (or their own children) for neglectful, abusive, and traumatic childhood circumstances. Money in this case is used both to medicate the problem (with a cure that doesn't work) and to reinforce their shameful feelings of worthlessness. So if they misspend and mismanage their money, they simultaneously create problems that prove what they've felt all along -- they are not worthy of happiness or success.
There are those who put a tremendous amount of energy into looking good, appearing to be wealthy or privileged, or being more sophisticated than they truly are. One of my buddies who kept bankrupting finally realized his emotion-based pattern of financial self-destruction. He said, "I have a millionaire's taste and a janitor's income. I'm tired of suffering to prove something to others when I'm not that something." The medicating phenomenon in money mismanagement is similar in many way to the medicating phenomenon in drug and alcohol abuse. People who hurt try to distract themselves from it by getting a short-term high from their money or spending. They go to Vegas, buy something new, take friends and family out for diner, and do other activities that keep them from feeling whatever pain that hurts them.
I worked for hours one day trying to untangle a knot in my tow strap that I had used to tow a friend's car down the mountain. My friend watched me patiently and when I finally asked him for his pocket knife because I was just ready to cut the knot out and shorten the strap, he asked, "can I show you a trick?" He pushed the knot in onto itself and with the material in this strap it created slack enough to untie the knot. Because I did not understand what he knew, I was willing to cut the knot. People do this with money at times, especially when they are irrational in their thinking and entangled in an emotional issue. Trying to instantly solve a deeper emotional problem is not sustainable in the long run.
People with deep feelings of shame and worthlessness will often go out of their way to distract others from that part of their being. They dress, act, and live extremely unusual lives and hope that others will notice the more superficial aspects of their natures and not see the perceived flaws. "Look at me, but don't notice me" is a common theme among those who take on a persona (punk, emo, goody-two-shoes, etc.) that is more of a distraction than anything else. I see this commonly among celebrities who get caught doing outrageous things. I sometimes see it in my students who are so very fragile yet outwardly look extremely capable.
Trying to feel loved and needing to feel loved is by far one of the strongest human needs we have. I watched a set of grandparents in my neighborhood who recently file for bankruptcy. They mortgaged the equity in their home, spent their savings, and used all those funds trying to facilitate "great memories" with their children. Amusement parks all across the U.S. had better revenues thanks in part to their efforts. When the party ended, they found themselves broke and still alone. Their children and grandchildren had very busy lives and could not give Grandma and Grandpa the time.
If shame, guilt, or fear is interfering with your money management, there are self-help books and therapists who can help you work through it. Taking control of your money and how you manage it is best done now rather than later. Point number 10 back in Figure 5 repeats the theme of making your savings investments and other financial assets hard to reach. I have a millionaire friend who has a bank in Illinois. He never lived there, but he set up a savings account that can only be accessed over the course of three days. In other words, he can get money out of it only through a complicated and safe withdrawal process that he put into place on purpose. This keeps him from spontaneous purchases and spending.
There are very clever con men and women in the U.S. who will take your money from you with a smile on their faces and without remorse. The most common theme of their ploy is the quick cash, something-for-nothing, rare opportunity approach that makes you feel pressure to act now or you might miss the payoff. By far the most notable U.S. con man was Bernie Madoff (Born 1938 in Queens, NY). He was one of the most notorious con men, having conned millions form the country's elite class, who invested with him in order to get a huge and quick payoff on their money. Confidence Scams tend to exploit our greed, vanity, and ignorance as they promise quick profits, low risks, and certain outcomes. Confidence scams are as old as time and rarely ever produce the desired outcome for the investor. They are fundamentally unsecured loans with huge risks and will cost millions of dollars this year to naïve investors. There never has nor never will be a "something-for-nothing miracle investment."
The last two points in Figure 5 are very simple. Point 12, unless you are that genius who can invest and plan and predict stock markets, then hire a genius. Let the experts with high ratings (bonded) and a track record of proven success and references do what you cannot do for yourself. It costs money, but it typically pays more money in the end. That financial expert will help you assess your 5-, 10-, 15-, and 20-year goals and how best to achieve them. Finally point 13, treat your money with dignity and respect and it will respond in kind. Don't put your money in a humiliating role of debt, earning interests that works against you. Put your money in a dignified interest-earning place where you can buy low and sell high and show profit in the end. There are many self-help books on managing your money. I recommend that you get some and read them.
One final thought about money and spending it in a marriage or couple relationship: there is often a debate between spouses and partners about what is a "need" and what is just a "want." Many define a need as something important that demands their attention. A want to most is superfluous and not required. The trick of being united in your budget and spending choices is to work together, communicate about needs and wants, and yield to one another's wants at times, even if to you it only feels like a need. Unfortunately there is no universal standard of a true need versus a true want. It depends on each individual family member.
You might use these questions in distinguishing needs from wants: "Do we value owning things over doing things? Do we value doing things over owning things? Given our long-term goals, do we value investing in things more than owning or doing things?" and finally, "Do we value supporting people over all the rest?" Take the time to discuss and evaluate your points of view, then negotiate together on them as a healthy financial resources management strategy.
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Report on actual earnings of US College Graduates from Georgetown University What’s It Worth? LINK free pdf
2011 Article on how to get through college LINK
2013 Article on roadblocks to college success LINK
The Society for the Study of Emerging Adulthood is a great place to start your research if you are curious or would like to learn more about careers as researchers who teach about and study emerging adulthood issues in our day LINK
Try these family financial trade books or other books written by the same authors:
Rich on Any Income: The Easy Budgeting System That Fits in Your Checkbook James P. Christensen (Author), George D. Durrant (Author), Clint Combs (Author)
Ordinary People, Extraordinary Wealth: The 8 Secrets of How 5,000 Ordinary Americans Became Successful Investors--and How You Can Too by Ric Edelman (Author)
Rich Dad Poor Dad: What The Rich Teach Their Kids About Money That the Poor and Middle Class Do Not! by Robert T. Kiyosak
America's Cheapest Family Gets You Right on the Money: Your Guide to Living Better, Spending Less, and Cashing in on Your Dreams by Steve & Annette Economides (Authors)
Clark Howard's Living Large for the Long Haul: Consumer-Tested Ways to Overhaul Your Finances, Increase Your Savings, and Get Your Life Back on Track by Clark Howard (Author), Mark Meltzer (Author), Theo Thimou (Author)
The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness by Dave Ramsey (Author)
Try these informative websites:
Budget wise financial LINK
Schwab Moneywise LINK
WikiHow advice LINK
Merrick bank LINK
Forbes 2012 Article on Budgeting Software LINK