Week #5: “Thinking Money: the psychology behind our best and worst financial decisions”
How do we balance the natural desire to buy things and enjoy life with the need to save and invest for the future? This documentary takes a deep look at the psychology behind the decisions we make about our money and our future. It explores the conflict between the emotional and the rational parts of the brain.
In the early 50s, financial life was much simpler. Credit cards didn’t exist and the financial market was just starting to develop. Nowadays, Americans have more than 700 billion dollars in credit card debt. Additionally, half of Americans invest in market which increases our financial stress. Today, we live in a consumer society, each time buying more and more products. On average, we like to spend more than we like to save, which makes us incapable to react when having an economic breakdown.
A study conducted by Annamaria Lusardi, founder of GFLEC, shows that more than 40% of families couldn’t deal with an unexpected economic problem. This can be explained by the fact that many Americans don’t save at all, they spend all their money on daily wants and needs.
Spending gives more pleasure than saving. Studies demonstrate that the brain is happier when we spend more money. The documentary suggests we need to change the way we think. Unfortunately, it’s very difficult to change how the brain works in adults, because their brain is already developed. However, we took from the research showcased in this documentary that we can help kids transform their brains by teaching them to save money. Then they won’t face the same problems adults are facing in the actuality. Kids are very vulnerable to all environments, pre-teens is a great time to influence their values and life skills building.
Is there any way to change how our brain works? The research in the documentary proves that the long term solution is to make saving “sexier”. But, how do we do that? The solution is that we need to nudge ourselves in saving more. With the technological developments, we can make it even easier. Apps such as Stick, Piggy Mojo and Hello Wallet help adults save money for their goals. This approach should be made available also for kids. Earn & Learn’s apps and games in development offer exactly such a solution.
We must learn to visualize our goals, be more consciousness consumers and worry more about how to finance our debt. We need to embrace the information revolution by making financial knowledge more accessible. Finally, we need to have a better balance between spending and saving by forging a compromise between our rational and emotional parts of our brain, and to nudge ourselves to do what we should with our money. If this is true for adults, it is only easier to instill in children through creative play.
By: Daniela Gomez
Based on the documentary Thinking Money produced by Rocket Media Grouo in association with the FINRA Imvestor Education Foundation and Maryland Public Television.
Week #4: The importance of financial education for youth
Report on Financial Education for Youth. The Role of Schools.
April 2014. OECD
In the last years, both advanced and emerging economies have become more concerned about the level of financial literacy of their citizens. In consequence, financial literacy is now an important element of economic and financial stability all around the world. In 2013, G20 leaders supported the OECD principles on National Strategies for Financial Education, recognizing the importance of financial education for youth.
With the technological advances, youth have access to financial services from a young age. Before youth can have accounts with access to online payment facilities or to use mobile phones with payment options, it is important that kids from an early age begin to develop financial habits and learn the appropriate financial skills that can help them boost entrepreneurship and provide them with additional tools in case they will experience personal financial crisis.
It is also important for kids to be financially literate before they engage in major financial transactions and contracts. For example, young people (between the age of 18) and their parents face one of their most important financial decisions: whether or not to invest in college or higher education. On the other hand, the role of schools is very important to increase the financial competencies of the youth. Schools have the resources to advance financial literacy as well as the potential to reach out to parents and communities to provide a wider knowledge of financial habits.
Recognizing the importance of financial literacy for youth and the distinctive potential of school programs, an increasing number of countries started delivering financial education in schools. OECD surveys reveal that over 40 countries have introduced some form of financial education in schools. However, most countries highlight that the introduction of financial education in schools is challenging due to the limited commitment, insufficient expertise as well as the lack of materials, sources and time.
Why financial education for youth by parents?
While financial education concerns all ages, the education of younger generations on financial issues has become more important since they will likely tolerate more financial risks and be faced with increasingly complex and sophisticated financial products than their parents. Thus, many countries are looking to add this issue to their national agendas. However, parents play the most important and crucial role in preparing their children for life-time of challenges. So, why not spend time on preparing your children for handling money? Surely, that will affect every aspect of their life. And as we see from the report, the school systems may need to catch up to deliver edquate education. Meanwhile, your children can be learning best financial habits from you. Zillionmom newsletters can give you ideas on some activities, to get you started.
- Report on Financial Education for Youth. The Role of Schools. April 2014. OECD
By: Daniela Gomez
Week #3: SHOULD FINANCIAL INSTITUTIONS FIGHT FINANCIAL ILLITERACY?
Global Financial Summit in DC: Financial Services Rountable included talks on corporate responsibility
Enterprises constantly look at their current business platform and the possibilities and opportunities for business growth. This involves talking about prospects of global growth, within its challenges and opportunities. The summit made emphasis in three topics: emerging markets, emerging technologies and the need to harmonize the legislation arround global financial services.
For instance, emerging markets present many challenges and opportunities, as extending one’s business to another country involves a completely different regulatory environment. Additionally, there are different threats with cyber technology and cyber-attacks affecting companies across the world. At last, one of the biggest concerns that multinational companies faces is that there is no harmonized international regulation system on financial services, which is a fundamental key of growth and development.
We are going to focus our review on the role of emerging markets, and the philanthropy impact on them. At first, Peter Kaldes, head of “Global Cities” (a global philanthropy program developed by JPMorgan & Chase), talked about philanthropy in emerging markets. Also, Kathy Calvin, CEO of the UN Foundation, talked about the value of financial industry philanthropy in emerging markets.
In first place, Peter Kaldes introduces JPMorgan program and its desire to support economic growth. Partnered with Brookings Institute, Global Cities Initiative helps economies around the world to expand their trade and their foreign direct investment. Global trade has tripled since 1950 and 46% of US GDP is driven by exports. However, only 2% of jobs created between 1990 and 2008 were in the tradable sector. Why isn’t U.S trading more? For instance, emerging markets know that they need to access foreign markets to grow, but U.S hasn’t followed this path in reciprocity. The explanation is that only between 1% and 5% of U.S firms export.
With that in mind, JPMorgan decided to launch the Global Cities initiative (GCI), to make a positive impact in the cities around the world. After the global financial crisis in 2008, countries needed to figure a new way to recover. With GCI, emerging markets were given tools to become more globally competitive. Launch in 2012, GCI is a five year effort to help cities and businesses growth through these three pillar approach: research, strong leaders and global engagement strategies. In first place, GCI provides data to cities on the local sales and investors, as well as other economic indicators. With its second pillar, GCI fosters discussions on policy ideas and practices through forums and roundtables. Each of the cities studied in this initiatives behaved in a different way, but what brought them together was that their main focus is to globalize their economic development. At last, with global engagement strategies, JPMorgan helps cities make their trade plans. Up to this point, 12 out of 41 cities already accomplished their goals in terms of trade.
Additionally, Kathy Calvin, one of the leading global philantrophers, encouraged different sectors of the economy to come together and fight poverty. The problems of the world should not only be priority on governments, charity and foundations, she emphazised. The financial sector should be involved. Until now, the corporate sector didn’t have a leading role on philantrophy, however that is changing. We should combine the greatest strength of the privarte sector with the greatest needs of the public sector. The active role of non-profit organizations combined with businesses will help to change the world from poverty to prosperity. One of the ways to help the world is to focus on woman and girls, the reason is that this part of the population faces the biggest barriers in terms of their access to financial services. Two years ago the UN Foundation worked with the Exxon mobil Foundation in a report on how to empower women in the area of economics. They found out that there are different ways to help and it depends on location, women’s age and cultural differences.
In my opinion, the base of growth is education, this is the key for any economy to develop in a sustainable way. The only way to fight against poverty is enriching educational opprtunities in our countries. Kids from all over the world should receive education as one of the basic human rights. With that said, financial education is also an important topic. We need to reinforce financial knowledge to kids through games (their favourite pass time), so they don’t face the same barriers regarding financial services as their parents did.
By: Daniela Gomez
Week #2: HOW “COLLEGE MONEY”-SMART SHOULD YOU FIFTH GRADER BE?
Seminar Review: “Student Loan Debt: Is There a Crisis”
A discussion of Student Debt Landscape by Beth Akers and Alvaro Mezza.
In this occasion the workshop was held by two speakers, Alvaro Mezza and Beth Akers. Alvaro Mezza is an economist who works in the Federal Reserve Board at the Consumer Finance Section in the Research & Statistics Department. His work focuses on student loans and on this occasion he talked about his paper: “Overview of the Student Loan Market and Predictors of Student Loan Delinquencies”. In addition, Beth Akers is a fellow in the Brookings Institution’s Brown Center on Education Policy. She is an expert on the economics of education. Her featured paper was “Is a Student Loan Crisis on the Horizon?”
These two intellectuals give their different perspectives on student loan debt. For instance, Alvaro indicates that each time the loans are more expensive due to the increase in the cost of the tuition and enrollment. College is becoming more expensive but the wages don’t increase in the same proportion, making it even more difficult to pay all the student loan debt. On the other hand, Beth Akers suggests that such statement is not true, and a substantial increase in student debt doesn’t exist. Her investigation demonstrates that the increase in earnings does pay for the increase in debt incurred. Also, the monthly payment has been almost the same or has even decreased over the past two decades. Borrowers consistently spent 3% or 4% of their monthly income on student loan payments since 1992 showing that is not true that borrowers struggle with high debt. Next, we will take a deeper look at these different points of view.
Overview of the Student Loan Market and Predictors of Student Loan Delinquencies:
Nowadays, the United States student loan debt is over $1.2 trillion, including more than 41 million borrowers with an average debt of over $26,000. This significant amount is getting bigger and bigger due to the increase of the cost of the tuition and enrollment. This increase in tuition reduces the return of the investment and makes it even more difficult to pay the debt.
Alvaro’s investigation also emphasizes the sharp economic contraction of 2008. During this period, the rates on the students loans were getting each time higher. Loans were given to low credit scoring students which needed to pay higher interest rates due to the high risk of not paying back. During the global financial crisis, countries entered in a period of austerity, characterized by the lack of jobs. Due to this, students with large amounts of debt couldn’t even pay because they had no jobs. However, in these days, there has been a significant reduce in student loan delinquency rates due to the improvement of credit quality and labor market.
Is a Student Loan Crisis on the Horizon?
With the substantial increase in college tuition and student debt levels, as well as a weak economy, the fear of a student debt crisis is due to a large quantity of borrowers unable to repay their loans. However, Beth Akers conducted a study that analyses more than two decades of data showing that the reality of student loans may not be as dramatic as many people think.
The survey conducted by the Federal Reserve related to consumer finances (SCF) shows that the increase in earnings received over the course of 2.4 years would pay for the increase in debt incurred. Also, the monthly payment has been almost the same or it has even decreased over the past two decades. The graphic below shows that the median borrower has consistently spent 3% or 4% of their monthly income on student loan payments since 1992, and the mean payment to income ratio has fallen significantly, from 15% to 7%. All these data suggest that is not true that borrowers struggle with high debt.
Why talk about student debt to your 5 year old?
In a few years the now kindergarteners will be facing one of the most important choices in their life: which career to choose. When this happen, we want them to be sure that their decision is the best for them. Colleges and universities can be very expensive, following the cost scale, which normally leads to student loans. We want kids to have the knowledge of how the system works and know their best options. You might have heard of someone ending up in bankruptcy over poorly planned college payment plan. We don’t want that to happen to future generations, we want them to have the best education without generating an unpayable debt. This topic may be boring and quite technical for a 5 year old, but with a game that shows various scenarios of career path and education costs and loans, she can get a better idea of how her decisions may affect her future.
– Daniela Gomez
- Akers, Beth & Chingos, Matthew. 2014. “Is a Student Loan Crisis on the Horizon?” Brown Center on Education Policy at Brookings Institute.
- Mezza, Alvaro. 2014. “Overview of the Student Loan Market and Predictors of Student Loan Delinquencies”.
Week #1: Social Security and Retirement Policy –
why talk about this to your kids?
Seminar Review: “Trying the impossible – Financing 30 year retirements with 40 year careers”
A discussion of Social Security and Retirement Policy by John Shoven.
The speaker of this seminar, John Shoven, is the director of the Stanford Institute for Economic Policy Research and the Charles R. Schwab Professor of Economics at Stanford. He specializes in public finance and corporate finance. His books include “The Real Deal: The History and Future of Social Security” and “The Evolving Pension System”.
On this occasion, Mr. Shoven talked about an investigation he did on 2013 called “Does It Pay to Delay Social Security?” Mr. Shoven emphasizes the need to adjust retirement institutions for longer lifetimes due to the increase of the length of remaining life. Studies show that the percentage of living longer has increase dramatically to over 60% in just two generations. With the advances in technology and sciences, now people have options to look and feel younger. In addition, the exercise and healthy food habits help increase the mortality age. Now, people have 40% more chance in reaching the age of 90. Nowadays, people retire at the age of 62 (female) and 64 (male). When they reach that age, they face an important decision: when to claim Social Security benefits. While most of the individuals claim it immediately, the speaker recommends that the claiming may and should be delayed until people get to the age of 70. The reason Mr. Shoven gives is that as Social Security benefits are paid as a life annuity, delayed claiming reduces the expected length of time over which benefits are received. That in mind, the individuals who claim later, receive larger monthly payments and the increase in monthly benefit payments for life. The chart display below shows the advantage (extra percentage you get) for waiting. For example, if you decide that instead of claiming at age of 62, you wait until you are 70, you get an extra payment of 76%. Another instance: if you decide to claim at 70 (defer to) instead of 64 (defer from), you get additional 52.31% in your monthly benefit.
The gains from delay have increased dramatically since the early 1960s, when delay was first shown as an option. The increase of the gains is attributed to three main factors. In first place, life expectancy has increased considerably. Secondly, changes to Social Security’s rules have made delay more advantageous. Third, real interest rates have fallen to almost zero. The expectations are that the gains from delay continue to increase in the future as a result of improvements in mortality.
The terms for delaying Social Security have not always been this attractive. Prior to 1956, all individuals had to claim Social Security at age 65, the normal retirement age. In the future, further improvements in mortality are likely to make delaying even more beneficial. However, in terms of evidence, it is not clear why we do not see more claiming delays. One possibility is that individuals do not fully understand Social Security’s rules, or that they underestimate their own life expectancy.
Finally, I wanted to relate this investigation to our main focus: financial literacy for kids. At first I thought it has no correlation at all, because a kid has many years (60% of their lifetime) before retiring so why should they worry? But then I just thought that this idea can be transmitted to kids so they don’t make the same mistakes as elderly people are making. Instead, start knowing how Social Security and Retirement Policy works so they can get the most benefits of it in the future. We will include this kind of topics in the board games and apps that Earn and Learn Enterprises develops: there will be some possible scenarios where kids need to choose their retirement plan and see how much money they can get by choosing different options.
By: Daniela Gomez