Field Work

January 19, 2012

It’s common knowledge that women save less in their retirement plans than men do. This is a major problem, because they live longer, are more likely to require nursing home care, and need more money.

To learn why women save less, Karen Holden and Sara Kock at the University of Wisconsin, Madison, recently conducted focus groups with state employees and analyzed data for the Wisconsin Deferred Compensation Program. Similar to a 401k, the program for Wisconsin government workers also allows tax-deductible, voluntary contributions, though there is no employer match. Squared Away interviewed Holden about their findings.

Q: Do women save less, because they earn less?

Holden: Average lower earnings are a factor but more surprising is that, at any specific salary level, women contribute a lower percentage of their earnings than do men. Women on average contribute 6.28 percent of gross pay, compared with 7.03 percent for men. While lower pay and age differences accounted for some of that, being a woman led to lower contribution rates. …Learn More

On the Web

January 17, 2012

This blog’s mission is to explain financial behavior – why we do what we do. It is not to provide personal financial advice about what to do. The mere mention of a “Target Date Fund” was a conversation stopper for me.

No longer. The Center for Retirement Research, which sponsors Squared Away, explains them simply and clearly in a new booklet. The name is inscrutable but the concept isn’t. In fact, your employer’s target date fund, if it is well designed, should make investing easier, not more difficult.

Check out the booklet, “Why Target Date Funds?”, (along with brochures about how to decide when to claim Social Security and how to manage your money after retirement).Learn More

January 12, 2012

Squared Away keeps hammering away at this point in various ways, because it seems so central to our financial well-being: we can’t fully relate to our future selves, which makes it difficult to save money.

This is the psychologist’s take on what mainstream economists would call “discounting” the future – that is, the future is less important than what’s going on today. Buying a new pair of shoes or an ice cream cone is a lot more fun than saving money for a future utility bill or a distant retirement date.

In this humorous Ted video, London Business School professor Dan Goldstein explains that all humans are engaged in an “unequal battle” between our present self (the consumer) and our distant self (the saver).

“The future self doesn’t even have a lawyer present,” he said. Goldstein entertains as he proposes ways to intervene in our inner battle.Learn More

Field Work

December 15, 2011

New parents: you have been warned. Mainstream media have rolled out one horror story after another about college graduates and their parents burdened with $40,000, $50,000, even $100,000 in student loans.

Not everyone plans to pay for their children’s education. But those who do need to think early about saving, because college has become extremely expensive – tuition costs are rising much faster than inflation.

The good news is that figuring how much to save for college is not nearly as complex as planning for retirement. While retirement strategies fill hundreds of books and fuel vigorous academic debates, new parents can be reasonably certain about one major factor in calculating how much they’ll need: when the child will attend – age 18.

“There are a lot fewer moving parts” to calculating college costs, said New Orleans financial planner H. Jude Boudreaux, who has been thinking about this issue more since his daughter, Lucy, was born about 15 months ago. …Learn More

Field Work

December 8, 2011

Take a hard look at your holiday spending. A credit counseling agency in Virginia says it shouldn’t exceed 1.5 percent of your annual income.

How’s your budget doing? Click here to use the holiday planning calculator, courtesy of Clearpoint Credit Counseling Solutions, a non-profit agency in Richmond, Virginia.

The budget tells you how much you can spend and then divvies it up among gifts, parties, travel, food, and donations. There sure is a lot to spend your money on!

Clearpoint Holiday PlannerLearn More

Money Culture

December 6, 2011

The holidays have arrived, and our credit cards are getting a workout. Sheldon Garon, author of “Beyond Our Means: Why America Spends While the World Saves” (November 2011), maintains that gift shopping isn’t only about giving – it’s our civic duty, we’re told.

Squared Away interviewed the Princeton University historian about world savings rates and America’s “democratization of credit.”

Q: Americans have tightened their belts. How does our current 4 percent savings rate compare with the rest of the world?

Garon: The Chinese save at extraordinary rates, about 26%. But that’s something that happens with Asian economies just as they’re taking off. The Japanese and Korean economies did that too. The really interesting place is continental Europe. . . . The United States should be going down in its savings rates, because we’re an aging society. But the Europeans should be going down even farther, because they have more rapidly aging societies and very low birth rates. But the German, French, Austrian and Belgian savings rates are around 10 percent – Sweden has gone up to 13%.

Q: How did debt become culturally acceptable here?

Garon: Before the 1920s, it was no honor to be indebted. When installment buying became popular in the 1920s, that was seen as an acceptable form of debt. But we reached a new stage in the early 1990s, when society considered you stupid if you didn’t take on more debt. Why would you save up for something if you could borrow so easily?

What do you think of Garon’s take on U.S. financial culture?   Squared Away would like to hear your comments after you read the full interview. …Learn More

Research

December 1, 2011

What is it about the minimum payment on credit card statements that makes people act so crazy?

Two years ago, Neil Stewart, a psychologist at the University of Warwick in the United Kingdom, confirmed his own and some behavioral economists’ suspicions: when the minimum payment line was entirely deleted from statements, cardholders paid 70 percent more.

The holiday shopping season is in full swing, underscoring how important this initial finding was. Credit-card companies set their minimum payments extremely low, significantly increasing customers’ total payouts over the long term – paying the minimum causes interest costs to accumulate faster.

Stewart and his colleagues have now advanced his prior research by testing how card-carrying Americans and British would react to different levels of minimum payments. The result this time: the higher the minimum, the less people paid.

“We’re not entirely sure what’s going on in people’s heads,” said co-author Linda Salisbury, a professor in the Carroll School of Management at Boston College. The key, however, is a well-known psychological concept called “anchoring,” she said. …Learn More