Building a Financial Future for Georgia Families

Presented by Jeanne HogarthConsumer & Community Affairs

Federal Reserve Boardto the Georgia Extension Association of

Family & Consumer Sciences9/5/2003

The analysis and conclusions are the work of the author and do not indicate concurrence of the Federal Reserve Board, the Federal Reserve Banks, or their staff. Marianne Hilgert & Chris Anguelov provided research assistance.

Checkbook Check -- Which one are you?

I keep a running tab of my balance, then check it religiously against the monthly statement

I write down what I spend, but give up on the math. Then I go by the statement

I figure if I still have checks, I’m probably fine. Then I find a nice drawer for the unopened statements to live in.

What does it take to build a financial future?

Economic knowledge When the Fed raises interest rates, what

happens to your credit card interest rate? To you savings account interest rate?

Consumer knowledge If you lease a car today and change your

mind tomorrow, can you take it back, since it’s within the 3-day cooling off period?

What does it take to build a financial future?

Stock market knowledge Over a 25 year period, which instrument

has performed better: stocks, bonds, treasury securities, or savings accounts?

Money management knowledge How does paying your bills late affect

your credit record? If you make only the minimum payment on your credit card, how long will it take you to pay it off?

There’s a lot to learn about money

Set goals Develop a budget Start saving Manage credit

wisely Protect your credit

rating

Get the best deal Take control Maximize your

benefits Learn more about

money

Set goals

Rich people plan for four generations. Poor people plan for Saturday night.

Gloria Steinem

Concrete, specific, measurable $5,000 in 5 years

$83/month or $21/week

Realistic Check & adjust

Goal-getter funds Do they do it?

Often or always plan and set goals for financial future36%

Goals

Develop a Budget

Annual income, twenty pounds; annual expenditure nineteen pounds: result, happiness.

Annual income, twenty pounds; annual expenditure twenty-one pounds: result, misery

Charles Dickens

Develop a budget

Track current spending Mental accounting Add in all expenses

bank fees, ATM fees, “bounce coverage” fees

Account management in an electronic era

Do they do it?

Use a spending plan or budget 46 %

Have recordkeeping system or track expenses 79 Pay all bills on time 88 Have checking account 89 Reconcile checkbook every month 75

Start saving

Stop smoking for three years and save enough money to buy an ox. Slogan of China’s 1995 anti-smoking

campaign

Save More Tomorrow program Save out of future raises

The humble Savings Bond I Bonds = 4.66%

Finding money for saving spend less, earn more, get more for

your dollar

Saving

Do they do it?

Have savings account 80%

Have emergency fund 63 Save or invest money out of each paycheck 49 Save for long-term goals 39 Have certificates of deposit

30

Families Who Saved

1995 1998 2001

All U.S. Households

55.2% 55.9% 59.2%

Low 31.6% 32.1% 30.0%

Moderate 43.4% 45.5% 53.4%

Middle 57.2% 56.1% 61.3%

U. Middle 66.8% 67.9% 72.0%

Investing: A Quiz

Who will have the bigger pot of money at retirement (assuming the same investment returns)?

a) Alan saves $2000/yr from 23-27 and then saves nothing till retirement at 65

b) George saves nothing till 35, and then saves $2000/yr from 35-65

Median Net Worth Distribution

1995 1998 2001

All U.S. Households

$66,400 $78,000 $86,100

Low $6,900 $6,300 $7,900

Moderate $38,700 $36,100 $37,200

Middle $53,600 $58,100 $62,500

U. Middle $87,800 $122,200 $141,500

Financial Assets in 2001(median value & percent holding)

Any Financial

Asset

Transaction Account

Retirement Account

Life Insurance

All U.S. Households

$28,000 93.1%

$4,000 90.9%

$29,000 52.2%

$10,000 28.0%

Low

$2,000 74.8%

$900

70.9%

$4,500 13.2%

$3,600 13.8%

Moderate $8,000 93.0%

$1,900 89.4%

$8,000 33.3%

$6,200 24.7%

Middle $17,100 98.3%

$2,900 96.1%

$13,600 52.8%

$7,000 25.6%

Financial Assets in 2001(median value & percent holding)

Savings Bonds

Stocks Mutual Funds

CDs

All U.S. Households

$1,000 16.7%

$20,000 21.3%

$35,000 17.7%

$15,000 15.7%

Low

$1,000

3.8%

$7,500

3.8%

$21,000

3.6%

$10,000

10%

Moderate $600 11.0%

$10,000 11.2%

$24,000 9.5%

$14,000 14.7%

Middle $500 14.1%

$7,000 16.4%

$24,000 15.7%

$13,000 17.4%

Investment “Advice”

October is one of the singularly most dangerous months to speculate in stocks.

Others are November, December, January, February, March, April, May, June, July, August, and September.

Mark Twain

Non-Financial Assets in 2001(median value & percent holding)

Any Non-Financial

Asset

Vehicle Home Business

All U.S. Households

$147,400 96.7%

$13,500 84.8%

$122,000 67.7%

$100,000 11.8%

Low

$24,900

85.3%

$5,300 56.8%

$65,000

40.6%

$56,300

2.5%

Moderate

$67,200 98.3%

$8,400 86.7%

$80,000 57.3%

$35,000 7.1%

Middle $115,000 99.8%

$12,600 91.6%

$95,000 66.0%

$61,700 8.8%

Manage credit wisely Shop, compare, negotiate

“1,200 cards” Re-fi car loans

Subprime credit card terms APR 18.9% Fees

Account set up $29 Program $95Participation $6/mo (72/yr) Annual $48Late payment $25 Over the limit $25

Initial charge $178

Minimum payments

$2,000 balance at 15% 2% minimum payment due

Min. payment only

$40 Level payments

Months to pay

246

79

Interest paid

$2,790

$1,158

Difference $1,632

Look for the Box

23

“Look for the Box” to Shop

24

Especially important with Sub-prime credit cards Secured credit cards

READ EVERYTHING!

Debt Held in 2001(median value & percent holding)

Any Debt Home Secured

Installment Credit Card

All U.S. Households

$38,000 75.1%

$70,000 44.6%

$9,700 45.2%

$1,900 44.4%

Low

$5,200 49.3%

$28,000 13.8%

$4,600 25.5%

$1,000 30.3%

Moderate

$11,500 70.2%

$40,000 27.0%

$6,600 43.2%

$1,200 44.5%

Middle $29,100 82.1%

$56,100 44.4%

$9,700 51.9%

$2,000 52.8%

Median Debt Payment/Income Ratio

1995 1998 2001

All U.S. Households

15.6% 18.1% 16.0%

Low 12.1% 26.4% 17.2%

Moderate 16.1% 17.8% 15.9%

Middle 15.1% 19.0% 16.9%

U. Middle 18.3% 19.2% 17.9%

% of Debtors with Debt Payment/Income Ratio Above 40%

1995 1998 2001

All U.S. Households

10.6% 12.8% 11.0%

Low 26.2% 28.2% 27.0%

Moderate 16.0% 17.2% 16.0%

Middle 8.1% 15.3% 11.7%

U. Middle 7.1% 8.6% 5.6%

Protect your credit rating

Why? Loans, employment, rentals, insurance

premiums Risk-based pricing

Pay bills on time 7% have some bills 60-days past due

low income 13%moderate income 12%middle income 8%

Get the best deal

Shop, compare, negotiate Know the “rules of the marketplace”

Electronic check conversion & float What do they know?

After signing a contract to buy a new car, you don’t have three days to change your mind.

18%

Maximize your benefits

“Don’t leave money on the table” What do they know?

The earlier you start saving for retirement, the more money you will have because the effects of compounding interest increase over time. 92%

Employers are not responsible for providing the majority of funds that you will need for retirement. 72

The Good, the Bad, and the Ugly

Low Medium High

Cash Flow

Saving

Investment

Credit

Learn more …. about money

What do they do? Read about money management 20%

Group environment classes, seminars

Individual print, Internet, media “on demand”

Combination

How do people learn?

“A lot” Most important

Experience 68% 48%

Friends & fam. 42 21

Media 36 11

Employer 21 5

H.S. course 19 5

Other course 17 5

How do people want to learn?

Media (TV/radio, magazines, newspapers) 71% Brochures/print materials 66 Video 64 Internet 56 School 53 Community courses 53

What we didn’t ask:

Learning from peers Employer-based programs Counseling & coaching Planning ahead -- wills & advance

directives How people sort through sources of info

Extension vs commercial information on (fill in the blank)

There’s a lot to learn about money

Set goals Develop a budget Start saving Manage credit

wisely Protect your credit

rating

Get the best deal Take control Maximize your

benefits Learn more about

money

How will we know if we’re making a difference?

Information is not education Need to change behaviors

Credit scores go up Savings rates go up Bankruptcies go down Self-anchoring measures

Subjective Measures of Making a Difference

Satisfaction with life and lifestyle Attitudes -- feel confident Feel prepared for events -- getting

married, home buying, having kids, taking vacations, college education, home repairs, car buying, retirement

It’s Not Just About a Financial Future

Try not to become a man of success but rather try to become a man of value.

Albert Einstein

5-Star Wisdom

Every gun that is fired, every warship launched . . . signifies, in a final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed. The world in arms is not spending money alone. It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children.

Dwight D. Eisenhower