While I won't oppose such an idea, I think that this will not have as great an effect on poverty as she might hope becaues:
- To be able to save, you must have enough money to eat, pay rent, and pay for clothing. If you're making below the national poverty level, it's quite likely that you'll have trouble saving.
- Most people are surprisingly bad investors. Many folks I know either aren't interested in the subject of financial planning (in which case, they'll get Cs or Ds) in the class, or even when they know what the right thing to do is, they're not emotionally capable of doing it. I have a very smart and intelligent friend who can't bring himself to buy I-bonds, because the electronic product is too intangible.
- Financial planning is suprisingly hard! Even people like me take more than an hour to rebalance a relatively simple portfolio. If you're short on time, or don't enjoy it, you're simply not likely to do it.
This idea was proposed in Gene Sperling's book , and I think it has a lot of merit. The chances of it happening in our pro-wealthy Republican Congress, Senate, and White House are effectively nil. But the reason I'm pissed at Democrats as well is that not one of the forty-something senators in the Senate have had the guts to even propose something like this. If the Democrats continue not proposing and trying to get through such good ideas, they're going to keep losing elections.
10 comments:
"Most people are surprisingly bad investors."
Ok, but that's because they weren't raised to think about it. I'm pretty sure most people are just thrown into the deep end, and left to thrash around while they slowly drown financially.
In fact, the people that I know who were raised in families where there was some wealth and investment knowledge are doing fairly well with their finances, on average. The rest of the people that I know are at a loss. This is anecdotal and subjective and hence doesn't really mean anything... It would be interesting to see a study on this.
But my feeling is that we have to give people a chance. People need to talk about it and be familiar with the concepts. That means introducing them to these concepts at an early age.
You could also say that most folks are pretty bad at algebra. But that's no reason not to teach algebra. It could be argued that teaching some fundamental financial concepts is as important to our nation than teaching algebra. I'm not even talking about teaching people to invest, I'm talking about stuff like: how to manage credit card usage, results of studies comparing managed mutual funds with index funds, how a mortgage works, etc.
Further, I think that joining up financial education with math education could give students more motivation to study math. People are sort of naturally interested in money.
I realize that you said "I won't oppose such an idea," but I had to chime in again to strengthen my point.
"a national savings plan that's matched at lower to middle income levels"
I haven't read the book - how does Sperling propose to match the funds?
As you've said already, people are incredibly stupid about saving. I don't want to go stat-hunting at the moment, but there are plenty of people who do not take advantage of matching 401(k) plans. Throwing away free money! And this is because they "haven't got around to it", not because they're dead broke. Some people just need to have their heads smacked a bit...
But then what about the low-income people who can barely put aside two nickels? Won't they feel there's no point? Does Sperling address this? (Again I think this is a matter of education - people need to understand how savings work, it needs to be demoed how a specific plan of action can change their lives.)
You would think that it's because most people aren't educated. I don't know how much time you've spent trying to educate folks at work about finances, but having spent plenty of time trying to do so, let me talk about a few cases:
1.After lecturing a colleague about the evils of credit card debt, and successfully getting her to setup a 401(k) plan, she spent her bonus on a new motorcycle instead of paying down her credit card debt.
2.After spending an hour discussing the benefits of an early exercise of stock options in generating long term capital gains, a colleague decided that asking his dad for money to exercise his options would make him seem too financially savvy and create all sorts of issues.
3.Despite my explanation of how much his wrap account was costing him, a colleague decided to have his sister's friend invest his money for him, despite the fact that he knew nothing about finances, and wasn't really qualified to evaluate the guy.
I did have a few successes, including a lady who thanked me for saving her literally hundreds of thousands of dollars in taxes by telling her to early exercise. But even in such cases, the folks involved never pursued further advice from someone who had already saved them a lot of money. And this is at a company that offers free financial classes to anyone (and our employees aren't dummies) who was willing to fill in a form on an internal web page!
I disagree that people are naturally interested in money. As a fresh graduate in Computer Science, I was more interested in my work than in money. It wasn't until a colleague told me that I was severely underpaid that I began to care about compensation. (I turned out to be 30% underpaid, according to the market)
Sperling proposes to match the funds by simply repealing the Bush tax cuts. Already, there's a little known provision in the tax code where if you make below $25,000 your contributions to a retirement generate tax savings at a dollar for dollar level (or close to it). A quick search on low incoming savings plans draws lots of results from academia showing that a matching plan coupled with access to good savings vehicles has great potential to increase the savings rate among low income people. For people at the poverty line, it's not just about education --- they couldn't save without some form of help. You can talk until you're blue about compound interest in those cases, and it won't make a lick of difference if the next penny has to go towards food on the table.
If you think about it, the 401(k) plan is topsy-turvy. If you're making $20,000, the income tax shelter doesn't do anything for you. You're probably paying $0 in income taxes anyway. But if you're making $500,000 a year, that tax shelter is a 40% benefit! But you would have saved even without that tax shelter, so it didn't do anything to encourage overall savings.
If you haven't read Gene Sperling's book, you should. It is a great piece, and my review didn't do it justice.
On whether people are interested in money:
I don't know how much time you've spent trying to educate folks at work about finances
Absolutely none. Did those people come to you for advice, or did you volunteer it?
I've found that people do not want to talk about money; it's almost as bad as talking about their sex lives. Maybe worse.
the folks involved never pursued further advice from someone who had already saved them a lot of money
I think that's pretty weird. Maybe they're afraid to impose? Maybe they feel it's too personal? If they've already talked to you about it, you'd think the walls were down.
I disagree that people are naturally interested in money.
Probably this is a semantics issue. Children are interested in getting toys and candy. Their parents are interested in getting a nice car, a big house, and a vacation in the Bahamas. Ergo, they are all interested in money.
What they are not interested in, is math. That, I think, is what you mean. Heck look at all the people stupidly investing in get-rich-quick schemes. Look at people buying lottery tickets. Look at all the best-sellers about money and finances. I think people really are interested, overall.
But I do agree that there are some people who are anti-interested in money and finances (I wish I could find some survey that rates attitudes of people towards money but I'm not finding one). I was among this class of people at one point, and I still have friends who think this way.
I was raised to think of money as not worth pursuing (a life of poverty was considered extremely virtuous and thus desirable), money was beneath me, and generally bad. At some point I connected the dots between money and what I really wanted to do, and then I became extremely interested in money.
I am pretty sure that my early irrational attitude towards money was due to my parents' religious teachings combined with a certain intellectual snobbishness towards business and finances. It could be that the heavy influence of religion in American society accounts for the weird attitudes people have towards money. BTW, I've been reading some Maugham lately, and he seemed to depict Americans as completely obsessed with money (this was back in the early 1900s though).
On retirement plans:
For people at the poverty line, it's not just about education --- they couldn't save without some form of help.
Not only monetary help, but help with the process - filling out forms and so on. One of those studies you pointed to said "up to 25 percent of eligible families are not applying for the EITC, according to studies by the General Accounting Office." This must be due to some combination of ignorance and despair.
If you think about it, the 401(k) plan is topsy-turvy.
I completely agree, it's a joke. Another joke is the SS wage cap. When your salary gets sufficiently bloated they stop taking out the money.
Here's another joke: if your company has a 401(k) plan, you can contribute $15K to it. If it doesn't, then you can only contribute $4K to a traditional IRA. Why are you allowed to contribute so much more if you have the privilege of working at a company with numerous benefits? That's weird!
I'm putting the Sperling book on my to-read list... sounds interesting.
On financial education:
I just have to post this link from TIAA-CREF from 2001 and some quotes:
When it comes to educating kids about financial matters, how much do parents really know and are they stepping up to the plate? A new survey released today finds parents overestimate how much they know about finances and underestimate the role they can play in teaching their children about money management.
...
Yet, many of their actions and behaviors contradict this self-assessment...When asked where they would put or advise their child to put $5,000 to save for education or some other long-term goal, 55 percent do not identify specific long-term investment vehicles such as mutual funds or stocks that historically offer higher rates of return. Instead, more than 1 out of 3 parents cite low-yielding certificates of deposit (CDs), savings accounts, and savings bonds.
...
Thirty-eight percent of parents feel it is exclusively their duty to teach financial education to their children, 61 percent feel it is the responsibility of both the parents and the child’s school, and less than 1 percent feel it is strictly the school’s responsibility. In addition, when asked to specifically describe what they have done to teach their kids about financial matters: 56 percent of parents can name only one example; 31 percent cite two examples; and 8 percent say "nothing" or "don’t know." Ironically, 81 percent of parents who feel they do a fair or poor job of managing their money still consider themselves effective in giving their kids financial advice.
Yeah, maybe we're fighting a losing battle.
Did those people come to you for advice, or did you volunteer it?
I've had both. Some come to me via my blog, and some were lucky enough to be there when I was explaining something to someone else.
I've found that people do not want to talk about money; it's almost as bad as talking about their sex lives. Maybe worse.
That's true. I was fortunate to grow up in a household where my parents' fortunes went up and down with the business, so they were forced to talk to us about finances. When times were good, we'd had the flat to ourselves. When times were tough, we'd all be moved into one bedroom while the other got rented out. Our parents would tell us when we couldn't afford something.
Years later, when I was out on a trip and asked someone else how much they'd paid to charter a boat, my friend Scarlet remarked that I was the only one who'd bring up money with total strangers, and till that point I hadn't realized that my discussion of money matters with total strangers was remarkable.
Before that, I had the fortune of moving to a different desk at work. A senior engineer inherited my desk, and found a paystub I had accidentally left there. He looked at it and then told me that I was underpaid. So while I haven't suffered too badly from discussing my finances, I'd found that being somewhat open about it brought about surprising benefits.
I think people buy lottery tickets to express their hope of becoming wealthy. I don't think they're seriously expecting to win it. Unfortunately, hope is not a plan.
Our parents would tell us when we couldn't afford something.
Same here. However, I did not grow up feeling deprived. It was only later that I realized that I had been :-)
my friend Scarlet remarked that I was the only one who'd bring up money with total strangers
I've had friends get a bit put off by my money comments. I kind of learned it's considered impolite by some.
I've had both. Some come to me via my blog
If one would like to have a more private discussion with you via e-mail, would that be possible?
Practical financial education would have a large positive impact. Just like any subject there would be a bell curve; some would excel while others just won’t ever get it. The ones that do gain a solid grasp of real world money lessons would have a positive affect on the economy.
Young adults that received and implemented the lessons they learned in a financial education course would be future employers, have disposable income and ultimately be less of a strain on our system. All of which would help our economy and those that did not grasp the financial lessons they were taught.
Vince Shorb creator of the ‘Financially Free by 30 - Home Study Course for Young Adults’
I think Vince is full of it, of course, and I think that he has a conflict of interest. Those who are likely to "get it" will get it even without a formal mandantory financial education. All this does is to create another set of classes that school teachers are not prepared to teach and will probably teach poorly. (How can they be expected to, when even financially wealthy Googlers I know don't always understand what I tell them?)
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