Toni Vallee asks her class about the secret to financial success. Good jobs and education are important, her students answer. So, too, are talent, luck and perhaps even physical beauty, they say.
Those arent the responses shes looking for.
What makes people financially successful, Vallee said, are discipline and the ability to delay gratification.
Its an insightful moment for the mostly moderate-income women in her session on basic budgeting. But it also could be considered an instructive lesson for a spend-happy society as a whole.
Five years into an economic recovery, many Americans arent feeling good about their progress, with the gap apparently widening between rich and poor. Jobs explain part of the discrepancy — people with college degrees have a much lower unemployment rate, for example — but so might differences in financial literacy or understanding.
Money doesnt come with instructions, and theres no doubt that the world has become more complex financially. But there is also plenty of evidence that Americans havent learned the basics. Some people rack up big credit-card balances or spend too much on assets that depreciate, namely cars and trucks.
Others pay too much in banking fees, leave themselves vulnerable to fraud, fail to participate in retirement accounts and invest too cautiously, parking money in low-yielding deposit accounts while avoiding the stock market entirely.
Consequences of low financial literacy include paying too much in fees or interest, leaving matching funds on the table in retirement plans, not using available tax breaks, retiring with inadequate assets and failing to meet basic goals such as homeownership.
Arizonans appear even more vulnerable, reflecting below-average personal incomes in the state and other factors.
If theres one worrisome symptom, its the widespread inability of many individuals to build up an emergency or rainy-day fund. Sometimes, thats the result of a failure to delay instant gratification. Financial advisers once recommended socking away enough cash to meet three months worth of expenses in a pinch. But many now suggest six months or even a years worth because of the longer time it now takes to find employment.
A meaningful savings account means you have the resources to absorb the shocks of life, said Vallee, a retired IBM sales manager and Fountain Hills resident who now teaches financial-literacy classes as a volunteer for the YWCA. It makes the hard times easier to get through.
No wonder the tough economy of the past half-dozen years has been so challenging. The Financial Regulatory Industry Authority, or FINRA, asked 1,000 Americans if they could scrape together $2,000 within a month to meet an emergency. Roughly two in five respondents, 39 percent, said they probably or definitely could not.
Conversely, a study last year of millionaires by Capgemini and RBC Wealth Management found that wealthy households had fully recovered from the recession a couple of years ago, partly because they kept meaningful holdings in stocks and real estate. When those markets bounced back, so did their net worth. A poor understanding of riskier assets like the stock market, now hovering at record highs, is one factor that holds back many Americans.
Nearly 46 percent of Arizonas households are in a persistent state of financial insecurity, said the Corporation for Enterprise Development, a group that works to alleviate poverty, in a study released in January. The states rank of 41st was brought down by a high proportion of unbanked residents, those with subprime credit scores, a high proportion of student-loan defaults and other issues.
While Arizonas poverty rate is fifth worst in the nation, poor people arent the only ones at risk, according to the non-profit. One in four Arizona households earning middle-class incomes between roughly $54,000 and $91,000 also lack three months of savings in the bank, the group reported.
So, enter the importance of something as basic of budgeting — tracking expenses and income every month. Its an exercise that Americans routinely ignore.
Guadalupe resident Petra Estrada, a student in Vallees YWCA class, is getting the message.
I have a booklet at home where I write down all my bills, she said. It lets me know almost exactly how much I can spend or how much over I will be.
Estrada also wants to learn more about credit-card terms and usage, and one day she would like to be a homeowner.
Americans express frustration about their lack of money acumen. In a poll conducted by the National Foundation for Credit Counseling, four in 10 respondents graded themselves a C, D or F for financial literacy.
Young adults are less confident and seniors the most confident, according to a separate poll by Bank of America.
Partly, frustration reflects the fact that the world has become more complex financially. Decades ago, savers plunked their money into plain-vanilla passbook savings accounts, and they bought homes with one type of loan — a 30-year fixed-rate mortgage. Many workers had pensions that took care of their retirement-planning needs. Nobody felt the need to manage debit cards, online accounts, 401(k) plans or credit scores; they didnt exist. Few people worried about identity theft. Insurance and income taxes were simpler.
The world has changed, but money-oriented education hasnt kept pace. In the Bank of America survey, 71 percent of respondents agreed that the Internet has made it easier to learn about personal-finance topics and to do the basic research. But the demands and responsibilities also have increased, with 42 percent of people in the poll admitting to feeling overwhelmed by the amount of financial information available.
Its not rocket science, but its hard, said Vallee, referring to budgeting, saving, dealing with debt and other topics taught in the YWCAs four-week course. The earlier you get started, the better off youll be.
Most Americans dont receive formal personal-finance instruction at an early age, if at all, even though its a topic they will apply in varying degrees throughout their lives.
Budgeting would help me, but they dont talk about this at my high school, said LJ Abad of Gilbert, a 17-year-old student and the only male who showed up for Vallees small class one day recently. Its usually the opposite, getting you to think about consumerism.
There has been some progress, with Arizona now requiring some personal-finance instruction in the schools and federal regulators tightening credit-card availability for college students a few years ago. Groups such as Junior Achievement of Arizona also are active, helping to illustrate basic financial interactions and decisions for middle- and high-school students.
They come here to apply the lessons theyve been learning in class, said Abby Slaughter, a coordinator at Junior Achievements Tempe facility, where students engage in role-playing in classroom modules set up as banks, grocery stores, auto dealerships and other commercial establishments.
We teach about interest, taxes and other concepts, Slaughter said. A lot of light bulbs go on.
Ray Himmelberg, a senior regional human-resources director for Walmart in Phoenix, volunteers at Junior Achievement, helping guide students through the exercises and checking their assignments. He considers it an important way to help youngsters gain a better appreciation for the free-enterprise system and how to survive it.
Kids will say, Now I see why my dad works two jobs, Himmelberg said. You see those moments.
What to know, when
Certain financial topics are more relevant at specific ages. Some examples:
Teens: Kids should start learning about banking, saving, taxes and the economy by the time they become adolescents, if not younger.
Focus also should be on privacy, identity theft and sharing too much information on Facebook and other social-media sites. where youngsters likely are active. Teens might not have loans but might have credit reports in their names. These can be checked for free at annualcreditreport.com.
Young adults: Americans generally start to accumulate assets, and sizable debts, in their 20s and early 30s. These people need to learn how to use credit cards and stay on top of student-loan payments.
People entering the workforce should become familiar with benefits and retirement accounts such as 401(k) plans, for which an early investment start is high advisable. Some young adults become homeowners, with all that entails.
Adults in the middle: People in their late 30s and 40s can expand on their financial assets, perhaps becoming more venturesome as investors or branching into related areas such as rental real estate. With more assets to protect, and perhaps family dependents, insurance becomes more important.
Middle-age adults might need to juggle priorities, such as saving for a childs college education and maybe even having a parent move in.
Pre-retirees: People in their 50s and early 60s typically are at their peak earning years, but financial obligations also could be growing, such as college costs for kids. Retirement comes into focus, so its wise to learn about Social Security and consider strategies such as delaying payments to receive higher benefits.
Workforce 401(k) plans and Individual Retirement Accounts remain priorities, with people 50 and older allowed to contribute more money to such programs. This also is a prime age to investigate long-term care insurance.
Seniors: People in their mid-60s and up must demonstrate an ability to live within their means. Credit might be an option, but loans could be harder to obtain without job income. If budgets are tight, products like reverse mortgages could be an answer.
Although wills, powers of attorney and trusts can be wise at any age, estate planning becomes essential for older people. Seniors might be more financially knowledgeable than younger adults, but they too must beware stumbles such as falling victim to scams.
— Russ Wiles
Money basics: How much do you know?
Try your hand at the following 10 financial-literacy questions. The first five are from a quiz developed by the Financial Industry Regulatory Authority. The second five are from a test prepared by the JumpStart Coalition.
1. Suppose you have $100 in a savings account earning 2 percent interest a year. After five years, how much would you have?
A) More than $102.
B) Exactly $102.
C) Less than $102.
2. Imagine that the interest rate on your savings account is 1 percent a year and inflation is 2 percent a year. After a year, would the money in the account buy more than today, the same or less?
3. When interest rates rise, what typically happens to bond prices?
A) They rise.
B) They fall.
C) They stay the same.
4. A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage but the total interest over the life of the loan will be less.
True or false?
5. Buying a single companys stock usually provides a safer return than a stock mutual fund.
True or false?
6. Take-home pay from your job is less than the total amount you earn. Which of the following best describes what is taken out?
A) Social Security and Medicare contributions.
B) Income tax, property tax, and Medicare and Social Security contributions.
C) Income tax, Social Security and Medicare contributions.
D) Income tax, sales tax and Social Security contributions.
7. A couple receive money as baby gifts and want to put it away for their childs college education. Which of the following tends to have the highest growth over periods of 18 years or longer?
A) Checking accounts.
C) Government savings bonds.
D) Bank savings accounts.
8. If you are behind on your debt payments and go to a responsible credit-counseling service, what help can they give you?
A) They can cancel and cut up all your credit cards without your permission.
B) They can get the federal government to apply your income taxes to pay off your debts.
C) They can work with those who loaned you money to set up a payment schedule you can meet.
D) They can force those who loaned you money to forgive all your debts.
9. If your credit card is stolen and the thief runs up a debt of $1,000 but you notify the card issuer after you discover it missing, what is the maximum amount you can be forced to pay under federal law?
10. If you cause an accident, which type of automobile insurance would cover damage to your own car?
1. A. Compounding, or earning interest on interest, would result in more than $102. 2. C. This question illustrates the potential purchasing-power loss on low-yielding savings accounts. 3. B. Bond prices move in the opposite direction of interest rates. 4. True. Shorter loans typically require bigger monthly payments but result in lower interest expense. 5. False. A single stock wouldnt be diversified, thus more risky. 6. C. Sales and property taxes arent deducted from paychecks. 7. B. A portfolio of stocks would be expected to outpace the other conservative investments over many years. 8. C. Responsible credit counselors try to work with lenders to come up with payment solutions. 9. D. The legal maximum is $50, though some credit-card companies will absorb all fraud losses. 10. D. Comprehensive insurance generally pays for damage not resulting directly from an accident.
Watch the video
See how a financial company mixed in basketball to teach Valley students about money basics during a presentation at US Airways Arena in downtown Phoenix. Go to business.azcentral.com.
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