Financial Literacy and Adults

Ray’s Take: Can you explain what risk diversification is? Can you identify the effects of inflation? Do you know how to calculate interest? If you answered yes to these three questions, you are better off than 43 percent of Americans and a whopping two-thirds of the world’s population, according to Maggie McGrath in an article written for Forbes Magazine about the results from the first-ever S&P Global FinLit Survey.


Also, according to this survey, only one-third of the world’s population is financially literate. The U.S. was ranked a dismal 14th in financial literacy compared to all other countries in the world.


By definition, financial literacy is the ability to understand how money works in the world. This means knowing how someone earns and makes money, how to manage it, how to invest it and how to donate it to help others.


We have a financial literacy problem in America. Former Federal Reserve Chairman Ben Bernanke, said, “Widespread problems like the subprime mortgage market and the resulting rash of foreclosures and bankruptcies illustrate just how serious this lack of financial education has become in today’s world.”


“Financial ignorance carries significant costs. Consumers who fail to understand the concept of interest compounding spend more on transaction fees, run up bigger debts, and incur higher interest rates on loans. They also end up borrowing more and saving less money,” said the authors who compiled the S&P FinLit Survey.


When it comes to money and your finances you can never stop learning. There are always new trends, products and situations where you need to spend time researching and educating yourself.


There are lots of resources available to help you improve your financial literacy. You don’t necessarily need to attend a class or join an online course. Read as much as you can. You can go “old school” with The Wall Street Journal or Barron’s. Or you can go global with The Economist. Always remember that there’s someone on the other side of every transaction who may or may not have your best interest at heart.


Dana’s Take: Rather than facing financial realities and learning how to manage money, some people prefer to spend as if they were their financial “dream self.”


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Name SearchWatch Service'>Peter Walsh’s book, It’s All Too Much, he says that we often keep possessions that reflect our “dream selves.” For instance, my “dream self” throws big outdoor parties, so I must keep a dozen tiki torches. Since I have not accomplished this, I should grieve that they represent a dream not realized and get rid of them.


Similarly, I think we make financial choices based on our dream selves and not in the reality of our actual paycheck. This is called aspirational spending. Financial education can help people get where they want to go.


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Weigh Your Options For Long-Term Care

Ray’s Take: As of August 2017, the oldest person alive was a 117–year-old woman named a class="learn" style="color: #7d0200; text-decoration: underline;" href="htp://" rel='

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Name SearchWatch Service'>Violet Brown from Jamaica. And when I scrolled through the list of the top 100 oldest people alive, only three were men. I’ll let you try and make sense of that.


It’s just a fact that we are living much longer than our ancestors. Laura Carstensen, Ph.D., director of Stanford University’s Center on Longevity, said, “The good news is we are living longer. The bad news is … we are living longer. Thanks to advances in science and technology, we have added more years to our life expectancy in the past century than in all of human evolution to this point. It’s a success that’s viewed with a mixture of pride, doubt and – if your job is calculating risk for a health insurance company – dread.”


But living longer can place an unexpected burden on you and your family if you haven’t planned ahead. Many people are seeing this trend and opting to purchase long-term care insurance policies to protect their spouse, children or other family members from being financially responsible for managing their care in the event they need daily assistance because of old age, an unexpected accident or disability.


Long-term care insurance helps provide care beyond a pre-determined period. Generally, long-term care covers services and support not covered by your health insurance, Medicaid or Medicare. This includes personal care and things to assist with daily living. In most cases, you are reimbursed a daily amount (up to a pre-selected limit).


In my experience, I have found that investing in the companies selling the products to support long-term care can be more beneficial to your overall financial plan than purchasing the actual policies. For some, alleviating the anxiety of the risk through insurance can be worth every penny. But for others, it’s important to pass along their portfolio to their heirs and shift the risk of long-term care to an insurance company. It’s a personal decision, but should be evaluated with an independent party.


Dana’s Take: Most of us are hopeful that our children will take care of us until we draw our final breath. But in reality, the number of adult children who can be full-time caregivers is shrinking.


My aunt turns 99 years old this year. She still cooks and her children take her to appointments.


Some of our other family members live in lovely life-care communities. They have great food, lots of activities and caregivers on-site for all stages of life.


Both have been great options. Look at your budget and figure out what’s best for you. We can’t know what will happen tomorrow, so it’s always good to have a plan.


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New 529 Plans Buy Education Options

Ray’s Take: Did you know that back in 1870 you could attend Harvard for a mere $150 per year, and for half that amount, you could attend Brown University? According to Best Colleges, college costs began to rise in the 1970s at a rate much higher than inflation, and this hasn’t slowed down.


If you have children or even your own desire for a higher education, the price of college tuition this day and age can be staggering and downright depressing. Many Americans find themselves wondering where they will come up with the funds to pay for it without incurring large amounts of debt.


In the 1990s, 529 plans were introduced to help parents save for increasing higher education costs. Last year, the Tax Cuts and Jobs Act had some interesting news for parents. For the first time, 529 plans are eligible to be used for K-12 private school tuition. This simple change will have a significant impact on how a large number of Americans will approach their strategy for education funding.


Families with children in private or parochial schools will be able to tap their college savings plans to pay for up to $10,000 in private school tuition. Before using this approach, consider what’s most important to you – K-12 education or college.


Either way, money buys options, and the sooner you start the better off you will be.


The new tax for custodial accounts for kids under 18 is pretty unfriendly, but there is still a place for them since they have flexible terms for distribution. For example, if your child needed a car while at college, you’re out of luck with the 529s but a custodial account could be used for the purchase.


Also, if there are leftover custodial savings, this could be used to help your college graduate start off with some money in the bank. Leftover 529 funds are much more complicated.


Consult with a trusted financial adviser before considering these savings options.


Dana’s Take: With a child in college now, we have experienced planning and saving for college expenses. Now, we are learning about add-on expenses that were not included in the budget. Did you know if a student doesn’t like their grade in a college class, they can retake it at a community college and try to improve their grade? Further, a whole new category of student has emerged since our college days, known as a “super senior,” a college senior who returns for a second year.


Fortunately, with part-time and summer jobs, students can build an emergency fund to cover all these extra expenses. Students can research the costs of retaking classes, summer travel and even funding a “super senior” year. Students can even start building their college emergency fund while still in high school.


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Buying a Second Home

Ray’s Take: Buying a second home for personal use or as an investment has become one of the fastest-growing trends in the U.S. According to the National Association of Realtors, more than 30 million Americans are expected to enter the second home market in the next decade.


You may think since you’ve been through the homebuying process before, that the second time around should be a piece of cake. Think again. Typically, second home loans require a better credit score and more money down. Lenders will be looking carefully at your finances to see if you can actually afford to pay two mortgages. They will want to make sure your debt does not exceed 40 percent of your gross income.


Also, be prepared for a higher mortgage rate to the tune of one-quarter to half a point. You will probably not get as competitive of a rate as you did on your first mortgage.


Buying a second home can actually be more expensive than you think. Make sure to review your overall budget with a second mortgage in mind. You always need to maintain a healthy emergency fund if an accident or job loss forces you to float two mortgages at the same time.


In addition to the mortgage, don’t forget about all the additional expenses that come with owning another home. This includes utilities, property taxes, maintenance fees, general upkeep and insurance.


For many second homeowners, renters can help offset a lot of expenses. One good thing about buying a second home is that it can actually help you out on your taxes if you live in it more than 14 days per year. You can deduct your real estate taxes and mortgage interest, as long as your combined mortgages don’t exceed a million dollars. If you rent it out for more than 14 days, you will have to report the income to the IRS, but you can deduct some expenses too.


Always consult with your financial adviser before considering purchasing a second home.


Dana’s Take: Ray and I have debated the idea of buying or renting a second home, versus staying in a hotel. Ray favors hotels and does not want to buy a second home, as one home gives us enough headaches. He is open to renting a second place someday, but even that could be problematic when you don’t live there permanently.


Today, with Airbnb and HomeAway, more vacation homes offer long-term rentals. Some people rent their places for a minimum of two weeks, and a hotel in London now offers rooms for months to world travelers.


The hotel option usually wins because of the flexibility. But I wonder if someday people all over the globe will move away from short-term rentals.


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Teaching Your Kids About Money

Ray’s Take: Did you know that only 17 states require high school students to take a course in personal finance? Unfortunately, financial literacy is often left out of the American education system and it’s up to parents and guardians to teach kids everything they need to know about finances.

Teaching your children financial literacy skills should start early and it’s one of the greatest gifts you can give your children. Many adults I work with who struggle financially do so because they were not taught basic financial skills growing up or were raised by adults who did not demonstrate responsible spending or saving habits.

“It’s actually easy to teach kids about money,” says Jayne A. Pearl, an Amherst, Massachusetts-based author of “Kids and Money: Giving Them the Savvy to Succeed Financially.” “Turn your day-to-day activities into learning experiences. Trips to the bank, store or the ATM machine can be a perfect opening for a discussion about your values and how you use money. When children are very young, you can work money concepts into your child’s imaginary games, like playing pretend store or restaurant.”

Teaching your kids the difference between wants and needs is a great place to start. Even the youngest children can differentiate between a want and a need. You need food and clothing, but you want a toy. You shouldn’t buy something you want unless you have taken care of your needs. Even we as adults forget this basic money management skill.

You can also help your children develop financial muscles by not purchasing every item they request. Even more powerful is demonstrating this skill in front of your children by avoiding impulse purchases yourself. When my kids saw something they wanted, they would ask me to “loan” them enough money to buy it on the spot and take it out of their savings account later. I would offer to take them to the bank to get the money out first. By the time we got to the bank, the craving usually passed.

Remember that teaching children about money can’t be accomplished in one conversation. It will take years and years for them to understand all the money management concepts. So start your journey early and never stop.

Dana’s Take: The best way I learned about money as a teen was by earning a paycheck.

Most teenagers today do not work for a paycheck. After-school sports, homework and exotic vacations seem to have taken the place of a “J.O.B.” Babysitting and cutting the grass are about as rare as a pop song with no explicit lyrics.

Ray and I are guilty as any parents of letting teen privilege get in the way of our kids’ employment. Maybe this year, a job will be that exotic “summer experience” they were seeking.

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