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NJBTEA New Normal Presentation-05-12
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Similar to NJBTEA New Normal Presentation-05-12
NJBTEA New Normal Presentation-05-12
- 1. Financial Education in 2012 and Beyond: Preparing Students for a “New Normal” Barbara O’Neill, Ph.D., CFP® Professor II and Extension Specialist in Financial Resource Management Rutgers University [email protected]
- 2. Presentation Topics • Descriptionof financial capability • “New Normal” financial realities • 10 “New Normal” financial skills for students • YOUR personal & professional “New Normal” • Adjusting financially to “broken promises”
- 3. Financial Educators BuildFinancial Capability
- 4. What is FinancialCapability? • New buzz word that is replacing “financial literacy” • It is not just what you know but what you do with what you know (i.e., focuses on behavior) – Financial literacy is the ability to understand personal finance concepts – Financial capability refers to an individual's ability to make informed judgments and effective decisions about the use and management of their money • President's Advisory Council on Financial Capability renamed in January 2010 • National Financial Capability Challenge – http://www.challenge.treas.gov/
- 5. FINRA Financial CapabilityStudy (2009) • Four key components – Making Ends Meet – Planning Ahead – Managing Financial Products – Financial Knowledge and Decision-Making • Study Results: http://www.finrafoundation.org/web/groups/foundation/ @foundation/documents/foundation/p120535.pdf
- 6. Key Survey Findings(N =1,488) • 49% reported difficulty keeping up with monthly expenses (14% very difficult; 35% somewhat difficult) • 23% reported occasionally overdrawing checking account • 16% were late with a mortgage payment at least once in last two years • Only 49% had an emergency fund of 3 months expenses • 23% used high-cost “alternative” borrowing methods (e.g., payday loans and pawn shops)
- 7. New Normal Analogy The“New Normal” and the Trump Plaza Hotel (Atlantic City, NJ)
- 8. What is the“New Normal”? • A constellation of economic events coming together – Projected to linger throughout much of the 2010s decade – Rebounds: 2017 for labor market? 2021 for housing market? • Puts a “framework” on recent events – People like to identify patterns to make sense of them • Some NN trends will have long-lasting impact (e.g., questions about employee benefit sustainability)
- 9. Don’t Get TooComfortable, Though (Things Will Change….Again)
- 10. Characteristics of the“New Normal” An extended period of: • Slow U.S. economic growth • Low single-digit average annual stock returns • Stubbornly high unemployment levels • Precarious job security (public and private sector) • Struggling housing market • Tightened credit standards • Increased precautionary household savings and debt repayment • Decreased household spending
- 11. Why a NewNormal? We didn’t just have a perfect storm… …We had a perfect TORNADO!!!
- 12. Recent Financial Shocks • Recession/Shrinking economy (GDP) • Collapsed and merged investment banks • Bank failures and government takeovers • Increasing cost of basic necessities • Mortgage defaults and high foreclosure rates • Declining home values • High unemployment rates • Bear market/stock market volatility • Increased poverty rates and rich-poor “wealth gaps” • “The Paradox of Thrift”
- 13. The “Paradox ofThrift” (Economic Term) What’s good for individuals (saving more and spending less) is bad for the economy when everyone does it.
- 14. Four Common Aftermathsof Financial Crises • Deep and prolonged asset market collapses – Housing prices – Stock market indices • Profound declines in output (deleveraging) • High unemployment (in both public and private sector) • Explosion in government debt as tax revenues decline Reinhart & Rogoff (economists): – The Aftermath of Financial Crises (NBER Paper) http://www.nber.org/papers/w14656
- 15. Many People HaveLost Their “Penthouse” • Unemployment • Under-employment • Involuntary “retirement” • Wage freezes • Furloughs • Higher employee benefit payroll deductions (pay cut) • Employee benefit cuts • An eerie feeling that promised benefits are “unsustainable”
- 16. For Some, theDream of Upward Mobility Appears to be Slipping Away
- 17. Many People Feel“Stuck” • Millennials can’t start careers – “Idleness rate” for Americans <24 has increased steadily since 2007 (those neither in work or school) – Lowest % of employed young people in 60 years! – Risk of a “lost generation” (Harvard labor economist Lawrence Katz) • Boomers can’t end careers – Working longer than intended due to 401(k) and housing value losses – Higher employment-to population rate than December 2006 for 55+ age group (37.6%) – ONLY age group to increase labor force participation during the economic slowdown
- 18. But, the FinancialRecovery is 3 Years Old • End of the “Great Recession” declared in June 2009…but it doesn’t feel like it • Weaknesses: home prices, job recovery, slow GDP growth, disposable incomes, personal spending, household debt/deleveraging • Strengths: U.S. exports (weaker dollar & emerging markets) • Remember, “recovery” doesn’t necessarily mean that things are good; it just means that things are improving – Economy growing (slowly) rather than shrinking – Number of jobs rising (slowly) rather than falling
- 19. What Needs toChange? • Economists say it will take strong, sustained job growth to reignite household spending • Recoveries are generally driven by housing and consumers • Unfortunately, it often takes economies a long time to recover • Reinhart & Rogoff study of past financial crises: it often takes at least a decade to recover
- 20. “New Normal” FinancialSkills 1. “The Basics” (e.g., planning, expense tracking, emergency funds, goal-setting with personal targets) – Planning increases control and success, reduces stress 2. Entrepreneurship (more self-employed workers predicted; up to 40% of U.S. workers by 2020) 3. Budgeting for Variable Incomes (“cash flow calendar” with surplus and deficit months) 4. Health-Wealth Relationships (cost of poor health practices and health care decision-making)
- 21. More “New Normal”Skills 5. Self-Funding Retirement Savings – NN Reality: Less generous employer/government supports 6. Investment Savvy (understanding historical performance of stocks and real rate of return) 7. Understanding the Time Value of Money – Students have 5-6 decades of compound interest – Many people under-estimate its awesome power
- 22. Still More “NewNormal” Skills 8. Insurance Savvy – New decisions (e.g., high-deductible health insurance, HSAs, new health care law provisions) 9. Student Debt ROI – Debt from Student Loans is Crippling a Generation – http://blog.nj.com/njv_guest_blog/2012/04/debt_from_student_loans_is_cri.html 10. Human Capital Investments – Increases resilience in tough times; education never ends To read more about “New Normal” financial planning, see the article by O’Neill in the 2010 issue of the Journal of Consumer Education: http://www.cefe.illinois.edu/JCE/archives/
- 23. Prudent Steps EveryoneCan Take • Borrow less and pay off what you owe • Build an emergency “war chest” • Prepare a spending plan • Become a penny-pincher – Frugality is fashionable – Coupons, groupons, employer discounts, consignment shops, simply asking for a price break where none is posted • Invest in high quality companies • Invest in yourself; try learn something new every day
- 24. So Welcome tothe “New Normal” New economic patterns have been evolving in the wake of the financial crisis: In times of crisis and uncertainty, • Slow economic growth knowledge is • High unemployment power! • Decreased employee benefits • Flat or decreasing wages • Lots of uncertainty on the horizon (e.g., taxes, inflation, Social Security, health care)
- 25. What is YOUR“New Normal,” Personally and Professionally?
- 26. What is YOUR“New Normal,” Personally and Professionally? Examples: Good family Examples: Difficulty paying cooperation to reduce bills; more fights with spouse expenses; less “mindless” about money; home value (impulse) spending; better down; low interest being bargains when shopping earned on savings Examples: Learned new job Examples: Pay freeze, skills; unproductive people layoffs, job uncertainty, were terminated; Led a benefit cuts; less support major team project staff; increased payroll deductions
- 27. Key Themes DuringPast Few Years Peggy Noonan reply to question from Maria Bartiromo about “game-changing events during 2011” on Wall Street Journal Report, 1/1/12 “The fall of structures that we’ve come to rely on” and “Lots of insecurity”
- 28. What’s Happening? Workers can’teven count on income and benefits promised in their CURRENT labor contract, not to mention promises made years ago when they were first hired.
- 29. Era of BrokenPromises • Terminated pensions • Suspended 401(k) matches • Salary cuts and freezes • Furloughs • Benefit cuts • Pension COLA cuts • Other
- 30. Evidence of BrokenPromises New York Governor Andrew Cuomo, 12/16/11 interview about streamlining government, including New York pension benefit tiers: “the whole system was designed at a different time and a different place and it needs serious reorganization.”
- 31. What to DoWhen Your Income/Benefits are Cut • Work longer • “Retire” while working • Accelerate debt repayment • Consider career changes and/or freelancing • Consider investing more aggressively • Spend less and shop savvy • Investigate new benefit alternatives
- 32. “Retire” While Working •Standard Strategy #1- Retire at a planned age with less money than anticipated due to NN events and risk running out of money due to benefit cutbacks, increased health care costs, longevity, etc. • Standard Strategy #2- Retire later and risk “waiting too long” (e.g., after age 65-70) so that death, health “issues,” widowhood, etc. hinder planned retirement lifestyle and/or quality of life. • New Strategy #3- Keep working BUT use money that had been going into savings (i.e., suspend or reduce 401(k) or 403(b) contributions) to begin enjoying “retirement activities” NOW without actually retiring. https://www2.troweprice.com/iws/wps/wcm/connect/d2edab0046d7abf0a87eb899d3 5c25cc/04779- 23_P1.pdf?MOD=AJPERES&CACHEID=d2edab0046d7abf0a87eb899d35c25cc (Fahlund, C. Delaying Retirement, But Not Your Retirement Dreams)
- 33. Consider Career Changesand/or Freelancing • Public sector employment benefits are generally not as attractive as they once were – Newer tier hires often have lower benefit tiers • Option #1: Changing jobs could lead to better benefits; less stress • Option #2: Aggressively demonstrate value to current employer (to earn a promotion) • Option #3: Freelance for additional income or to replace lost income due to benefit plan changes – Increased health insurance cost-sharing – Increased pension plan contributions
- 34. Investigate New BenefitAlternatives • Explore benefit options that you might not have considered previously – Example: High-deductible health insurance • Do a cost-benefit analysis of alternatives – Premium savings from high-deductible plan vs. amount of out-of-pocket payment • Attend benefit fairs/seminars and ask questions
- 35. Keep an Eyeon Government Benefits • Changes to Social Security – More needs-based? Older age? Lower benefits? • Changes to Medicare – More needs-based? Older age? Lower benefits? • New health care law and aftermath • Consider using very conservative benefit estimates for financial planning purposes • Assume that you can’t count on promised benefits?
- 36. Major Take-Away: Focus on What You CAN Control CAN’T Control CAN Control • Speed of economic recovery • Healthy lifestyle • Financial markets • Spending habits • Labor market/unemployment • Saving habits rate • Investment expenses • Housing market • Human capital • Employee benefit cutbacks investments • Political environment • How you spend your time • Actions of lawmakers
- 37. How to BuildFinancial Capability? • Realistic content (e.g., urban versus rural) • Age-appropriate content • Interactive and “hands on” learning • Multiple methods and approaches • Meaningful stories, role models, and activities • Fun (e.g., games, skits, etc.) 37
- 38. Questions and Comments? BarbaraO'Neill, Ph.D., CFP®, CRPC Extension Specialist in Financial Resource Management and Professor II Rutgers University Phone: 732-932-9155 Extension 250 E-mail: [email protected] Internet: http://njaes.rutgers.edu/money2000/ Twitter: http://twitter.com/moneytalk1