Saturday, June 20, 2015

Happy Father's Day ... Financial Advice for All Ages, but Especially for New Graduates Entering Adulthood and the Workforce

Happy Father's Day to my fellow Dads out there.

As for me, I had a great Dad, and my knowledge and appreciation of him grows with each day and year since his death in 1974. There seems to be something about getting older that makes us appreciate more and more what we once took for granted. Maybe that's maturity.

In any event, this year's graduation season has ended, and now the real world beckons our new crop of graduates and young adults to tackle the world's problems and make the planet a better place for one and all. Their time has come.

But if today's graduates are in any way similar to us now over-the-hill people, they'll soon learn that they aren't knowledgeable enough about the tendencies and behaviors of people, including themselves. They will soon come to know that they don't even know what they are now sure that they do know. As one of my favorite sayings puts it, 'The greatest enemy of knowledge is not ignorance. It's the illusion of knowledge.'

I know that 'not knowing what I didn't know' was true for me. I now know that I really never did and still don't know much at all, but knowledge of that 'widespread ignorance' is somehow comforting and makes me more capable of handling life's many obstacles along the way. And so it is always about learning and 'growing up.' Ignorance can be bliss if coupled with an open mind and a thirst for knowledge.

This continuous learning and 'growing up' process is equally applicable to acquiring a better understanding of the critical factors ahead during adulthood with respect to financial literacy and related life lessons, including a solid and lifelong pursuit of knowledge about basic financial understanding, planning, saving and investing.

For instance, how many of our youngsters, or even oldsters, have internalized the simple fact that it's not the down payment or the monthly payments that matter most? The lower the down payment and longer the term of the loan, the greater the debt obligation. It's really that simple. So low monthly payments and no money down sales gimmicks are just that --- gimmicks. We the People need to know that, and the earlier we learn it, the better life will be.

But learning the life lesson won't be easy. In fact, government policies often enable and encourage irresponsible individual behavior in indebtedness related to large purchases. And the big ticket sellers and lenders out there are aligned with government and very much in favor of people borrowing excessively for long periods of time.

As an example of what happens when unaffordable demand is created and satisfied, at least temporarily, Low-Down Mortgages Picking Up --- to Chagrin of Some provides a timely analysis. The article predicts a possible replay of the recent housing debacle and describes what happens to prices when homes become more 'affordable' and demand grows due to low-money down government backed loans. Haven't we seen this movie before?

And low-money down home loans are similar to auto loans in one important respect --- the buyer is 'underwater' immediately after taking transaction costs into consideration. With immediately 'underwater' homes, there are the ~6% selling commission costs along with the out-of-pocket transaction and moving costs to acknowledge. With cars it's the immediacy of the decreased value of the 'day old used car' and insurance. Thus, when our new grads buy both homes and cars, they immediately owe more than they own. Done deal.

And then for our new graduates there are the repayment obligations related to student loans, credit cards and such to consider. In other words, there are lots of ways for the financially illiterate grads to get in over their financial heads without even realizing it at the time. And neither government nor the smiling 'helpful' sales people are there to help the buyers -- they are there to help themselves.

Knowledge is power, so let's encourage our youngsters and oldsters alike to acquire more knowledge about the way things really work in the 'real world.'  By so doing the world will become a better place, and we'll feel better for having made our small personal contribution to that happy outcome.

The Financial Advice I Wish I Had Gotten at Graduation is full of common sense guidance for today's unknowing young adults about to enter the world of work and adulthood:

"For everyone, the memories of life after college are a mix of excitement and trepidation about what is coming next. . . . Realizing now how important a time that was to think about finances, my first wish would have been for some advice!

As a major in economics, I knew . . . not much about how to manage my (little) money. . . .

The advice I wish I had received after graduating from college and graduate school is about the importance of planning for the future—for retirement, for buying a house and so on. I have always been a saver, even during the grueling low-income period in graduate school, but saving equated to what was left over each year without any specific target to achieve. It took me a while to figure out that my savings were either too little or not allocated properly.

Had I planned to buy a home, I would have been able to buy it sooner and a more suitable house as well. But an early start in saving for retirement is where I could have benefited the most. My retirement is likely to be as long as my working career. I sincerely hope that is true and a lot of savings will be necessary to support those post-employment years—and that cannot be achieved by leaving things to chance.

In my case, three things were needed.

First, I had to figure out how much to save in order to retire at a target date. That required calculations, not just relying on the gut feeling about saving I had used after college and graduate school.

Second, I needed a proper allocation of those savings. It was inefficient to save without taking advantage of tax-favored vehicles, such as Supplementary Retirement Accounts and IRAs, or to invest in managed funds that generated dividends and charged high fees.

Third, I needed a system to keep myself on track and to evaluate how well I was doing. Even though I came late to understanding these future-planning requirements, the changes are paying off. Empirically, it turns out that those who plan for retirement end up with about three times the wealth of those who do not plan.

One of the keynote speakers at our financial-literacy seminar series said that it is very hard to support a 30-year retirement with a 40-year working career. It will be even worse if retirement is extended (longevity keeps increasing) while the working years when one can contribute to retirement savings get shorter. The latter can happen because of graduate school, repaying student loans and the failure to think about contributing to a retirement account. . . .

Annamaria Lusardi is the Denit Trust Chair of Economics and Accountancy at the George Washington University School of Business, where she focuses on financial literacy, personal finance and macroeconomics."

Summing Up

If you know any young graduates, or even any young people, it would be a good idea to pass along the foregoing advice.

{And since this is Father's Day weekend, let's be sexist and point out that males generally are more familiar with financial matters than are females. That said, however, the Dads really don't know much about this stuff either. They just aren't as lacking in financial knowledge, aka ignorant, as are the Moms. For proof of this relative male supremacy with respect to financial knowledge and literacy, please see Women, Especially, Are Failing Financial Literacy. And since women live longer, that knowledge discrepancy in the end just makes a bad situation even worse.}

The sad truth is that individuals of all ages and both sexes are ill prepared to take good care of their financial lives. This is especially true when it matters most --- when they leave school and enter the workforce.

Accordingly, everybody would be well advised to make a concerted effort to become knowledgeable financially --- and to start that effort as early as possible.

It isn't that hard, and in time it will prove to have been more than worth the time and effort. It will be a great investment.

In other words, achieving financial literacy will make a tremendous difference to our individual and family's financial health and well being.

That's my take.


Thanks. Bob.

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