Class Discussion: When do you think you’ll retire?

Posted on October 3, 2011 by ajkeown

It would great to retire at a young age, an age where you can still be active and look forward to a long, financially comfortable retirement. Although the standard age of retirement varies widely throughout the world, it generally falls between age 50 and 70.  In many European countries, workers retire at a younger age than they do in the United States.  For example, according to Wikipedia’s entry for retirement, while only 34% of Italy’s population is employed between ages 50 and 55, that percentage jumps to 66% still working in the United States.  Still, most young people expect to retire early – after all, young people tend to be optimistic about their financial future.

In Chapter 1, and again in Chapter 16 we discuss retirement planning.  But as the recent ABC News video “The New Normal: Delaying Retirement” points out, many of today’s baby boomers are having to put off retirement as a result of the recent difficult economic times.  One of the problems that many potential retirees run into is that they were planning on using the value of their home as a source of income for retirement.   That might have been a good plan until the recent downturn in the housing market resulting in the fact that houses simply haven’t grown in value and in some cases have even lost some of their value.

Discussion Questions:

  1. Look at your parents and grandparents, when do you think they will retire?  If they are retired, are they experiencing financial strains?  Be prepared to discuss these questions in class.
  2. At what age would you like to retire?  How do you realistically see your retirement?  How long do you expect to live?  Be prepared to discuss these questions in class.
  3. When do you expect to begin saving for retirement, and do you have a plan for that yet?  Be prepared to discuss these questions in class.
Posted in Ch. 1, Financial Planning Process, Ch.16, Retirement Planning, Ch.18, Financial Life Events | Tagged , , , , | Leave a comment

Class Discussion: How the Downturn in the Economy Has Changed American Lives

Posted on September 25, 2011 by ajkeown

Everyone has felt the impact of the recent downturn in the economy.  If you haven’t lost your job, you probably know someone who has or someone who is afraid they will.  In addition, your investment or your parents’ investments along with the value of their retirement plans have dropped along with the stock market.  Retirees who rely on income from CDs now have to live with annual returns below 1% – and given the recent drop in the stock market, they may be the lucky ones.  So, how else has life in America changed?

To answer that question the Census Bureau sends out an annual survey called the “American Community Survey” to 4.4 million people.  This is a comprehensive survey that gathers information on income and benefits, health insurance, education, where you live and how much you pay for essentials as well as several other areas of interest.  Some of the survey results are summarized in a recent USA Today article titled, “Recession Changes the American Way of Life.”  A few of the interesting things the survey found:

  • People seem to be getting married later in life these days
  • Fewer people are actually getting married
  • There is a decline in the divorce rate
  • More households are shared with “other relatives”
  • Foreclosures have increased
  • Carpooling has declined
  • More households now do not own a car
  • Private school enrollment has declined

Clearly the downturn in the economy has had a deep impact on the American lifestyle.  Before you read the article think about how your life has been impacted by this downturn in the economy.

Discussion questions:

  1. In 2006 the average age for men and women to get married was 26.7 and 25.9 respectively; by 2010 it had risen to 28.7 for men and 26.7 for women.  Why do you think people are getting married later in life?  Do you think it is financial, social, or a bit of both?  Be prepared to discuss your opinion in class.
  2. Why do you think divorces have declined by about 7% since 2008?  Be prepared to discuss your opinion in class.
  3. Why do you think there has been a decline in the number of people carpooling?  (Hint: Look at the USA Today article.)  Be prepared to discuss your opinion in class.
Posted in Ch. 1, Financial Planning Process, Ch. 2, Measuring Financial Health and Making a Plan, Ch.18, Financial Life Events | Tagged , , , | Leave a comment

Student Exercise: A Closer Look at Credit Unions

Posted on September 25, 2011 by ajkeown

The Wall Street Journal recently carried an article titled “Credit Unions: a Cheaper Banking Option.”  This article deals with the fact that credit unions typically have lower rates on loans and often have better deals on savings and checking accounts than other banking institutions.   Even though that may be the case, in today’s world of super low interest rates, it’s close to impossible to earn much of anything in the way of interest on a checking or savings account.

So how does the credit union compare with your local corner bank?  Not only does the credit union pay a bit more on your savings account, with an average of 0.75%  at the credit union versus 0.42%  at the bank on a one-year CD, they also tend to have lower charges for their services.   For example, the out of network ATM charge averages 99 cents at the credit union, while averaging $1.41 at the bank.

Discussion questions:

  1. Call up your local credit union and ask what rate they are charging on new auto loans and on home equity lines.  Now call up a local bank and ask the same question.  Are these numbers the same, which is cheaper, why do you think that is the case?  Be prepared to discuss this in class.
  2. What qualifications do you need to become a member of your local credit union?
  3. Find at least one credit union that you can join.
Posted in Ch. 5, Cash Management, Ch. 8, Home and Auto | Tagged , , , , | Leave a comment

Podcast Class Assignment: Understanding Operation Twist

Posted on September 25, 2011 by ajkeown

A lot has been happening lately in the economy.  Last week the Federal Reserve announced they were going to launch something called Operation Twist.  The Fed, worried about unemployment, is trying to lower long-term interest rates, hoping that this action will encourage people and businesses to borrow and spend.  Right now, short-term rates are pretty close to zero, but the Fed is worried about long-term rates and wants to lower those long-term rates – that’s because mortgage and loan rates are often tied to long term rates.  If mortgage rates drop, people who might not have qualified for a loan before may now – after all, as interest rates go down so does the interest on a mortgage, which in turn lowers your PITI and helps you qualify for a loan.

National Public Radio (NPR) put together a podcast, “Fed’s ‘Operation Twist,’ Explained in 4 Easy Steps” that does a great job at explaining what the Fed is up to.  It’s only about 4 ½ minutes long, so take a listen.

Discussion questions:

  1. How will lowering long-term interest rates help the housing market?
  2. Why is it so important to our economic recovery efforts to get the housing market back to life?
  3. What is happening in your area in housing – prices of homes, home sales, and foreclosures?  Be prepared to discuss this in class.
Posted in Ch. 8, Home and Auto, Ch.11, Investment Basics, Ch.14, Investing in Bonds, Heads Up | Tagged , , , | Leave a comment

Teaching Tip: Explaining the Beginning of the Financial Crisis

Posted on September 11, 2011 by ajkeown

The financial crisis that began with the downfall of Bear Sterns in 2009, which led to the death of Lehman Brothers, which in turn led to the stock market crash followed by the recession is complicated to say the least and difficult to simplify and bring down to a level that all students can understand.  I have found one way to do this and to keep the students’ attention is through a three-part video series from The Wall Street Journal titled “The End of Wall Street.”  Each of the videos is about seven to nine minutes long so they provide a short break during the class lecture and at the same time help to explain a very complicated event.  I use them in three successive classes.  I play the video in the middle of the lecture and find that this invigorates the class a bit.

The first video, “What Happened,” looks at the problems caused by “easy money” — low interest rates and increased borrowing, and the circumstances that caused the housing bubble to inflate and then burst.  The second video, “Why It Happened,” takes a look at all the different participants in the bubble, home owners,  investors, corporate boards, fund managers and mortgage lenders.   It examines the roles they all played as they helped fuel the bubble, and as they created hard-to-understand derivatives that in turn caused great damage.  The final video, “What Happens Next,” looks at the $700-billion bailout, and all of the uncertainty that lies ahead.

This video series is based upon the book, The Wall Street Journal Guide to the End of Wall Street as We Know It by Dave Kansas of The Wall Street Journal, and, if you’re interested, there is an excerpt from the book available from NPR.  You can also provide your students a “listening” assignment – send them to the NPR interview with Dave Kansas – it lasts just over 4 years.

 

Posted in Ch.12, Securities Markets, Ch.13, Investing In Stocks, Teaching Tips | Tagged , | Leave a comment

Student Exercise: A Look at Apparel Spending

Posted on September 11, 2011 by ajkeown

Do you ever wish you could quickly and easily see all of your financial information? As we discussed in Chapter 2, Mint.com does a great job of putting all of your balances and transactions together in one place providing you with your entire financial picture.  In fact, Mint.com does even more.  For example, it gives you an idea of what other Mint.com users are spending in different consumer categories such as apparel.

In an article titled “Fashionable Finances, How Much Are Mint Users Dishing Out to Look Good?” it is reported that between July 2010 and June 2011, Mint.com users spent between 15-23 percent of their discretionary funds on clothing.  Moreover, it is not surprising that the amount of money spent on clothing differs dramatically in different areas of the country.  For example, the really big fashion spenders can be found in Manhattan in New York where they spend on average, $362 per month on clothes, which amounts to 21 percent of their discretionary income.  They also shop more frequently, with an average of 2.9 clothes shopping transactions per month.  Interestingly, the number two location for dollars spent is on the other side of the country in San Francisco, CA where 20 percent, with $308 per month goes toward apparel.  The least frequent shoppers live in Tucson, AZ where they spend an average of $131, or 17 percent of their discretionary income on 1.8 shopping transactions per month.

What was the national average?  It was $161 per month on apparel, with 1.9 clothes shopping transactions per month, and an average amount spent per transaction of $84.

Discussion Questions

  1. How much do you think you spend per month on your clothes?  Do you keep track of your spending on clothes?
  2. If you had to cut down on spending, would you limit spending on entertainment, eating out, or clothes?
  3. Why do you think the differences around the country are so large?

 

Posted in Ch. 2, Measuring Financial Health and Making a Plan, Personal Finance In The News | Tagged , , | Leave a comment

Personal Finance in the News: Health Care Law Being Challenged

Posted on August 23, 2011 by ajkeown

Since President Obama signed into law the Affordable Care Act in March 2010, this act has stirred up a good deal of debate.  For example, in January 2011, almost immediately after the Republicans took control of the House of Representatives, the Republicans voted unanimously, along with three House Democrats to repeal the law.  Of course, with the Democrats controlling Congress and President Obama in the White House, it went nowhere, ending up as a symbolic vote.

In addition, it has been challenged in the courts by more than two dozen states as being unconstitutional.  Initially, these challenges were unsuccessful, but in August 2011, a federal appeals court in Atlanta struck down the mandate requiring Americans to buy health insurance or face a fine or tax.

What does all this mean?  It means that the Supreme Court is likely to decide on the constitutionality of this law, but the question is when.  Normally, cases accepted after January are heard in the next term, which would mean the ruling would take place after the election next year.  However, given the importance of this case coupled with the need for state governments and insurance companies to meet some of the provisions to be implemented in 2014, it is possible that the Supreme Court will hear the case by January 2012 and make a decision in the late spring.  Complicating all this is the fact that the Democrats and Republicans both feel that this has the potential to impact the coming election.

Discussion Questions:

1.  According to the August 17, 2011 Wall Street Journal article, “2012 Looms Over Health-Law Review,” an early decision on the law could benefit Republicans.  Why?

Posted in Ch. 9, Life and Health Insurance, Teaching Tips | Tagged , , | Leave a comment

Teaching Tip: The New Health Care Law

Posted on August 23, 2011 by ajkeown

If you’re using the 5th edition of Personal Finance, Turning Money into Wealth, there has been a significant change in the law since the book was published – the passage of the Affordable Care Act.  One easy way to bring it into the classroom is to send your students to the link provided by the government at HealthCare.gov which gives an overview of the law and a year-by-year summary of the implementation the law.   The White House also has a website that also provides a summary of the new law.  In addition, a short summary of the new law is provided below which you can cut and paste, and then email to your students.

In March 2010, President Obama signed into law into law the new health care bill that commonly goes by the name the Affordable Care Act, the provisions of which are provided on the government’s website.  This act is implemented over time, with portions of the new law being effective immediately, and with the final portions of the law being going into effect in 2018.

The different measures in the law can be classified as:

  • Providing New Consumer Protections
  • Improving Quality and Lowering Costs
  • Increasing Access to Affordable Care
  • Holding Insurance Companies Accountable

However, even though the Affordable Care Act enacts major changes in health care, your interaction with the U.S. medical system will remain more or less the same — you’ll pay a private insurance company, they’ll reimburse your doctors for care.  In addition, while there was much talk of a public health insurance option; there isn’t one, instead, you’ll still deal with one of many insurance companies. In effect, this bill tinkers with the way the current system works, rather than scrapping it and replacing it with a new one.

Still, it does some important things that may affect you.  For example, one provision that takes effect in 2014 prohibits insurance companies from denying coverage to those with preexisting health conditions. In addition, employers with more than 50 workers would be required to offer insurance, those that don’t would face a fine of $2,000 per employee.  There are other reforms to the insurance market, allowing children to stay on their parent’s insurance policy until they turn 26, keeping insurance companies from dropping people who get sick, and restricting annual and lifetime limits on what your insurer will pay.  In addition, for seniors, it works at closing the gap in Medicare prescription drug coverage, known as the “donut hole.”

Discussion questions:

  1. Why did the government decide to reform health care?
  2. Identify some of the provisions aimed at lowering costs.
  3. Are you glad the Affordable Care Act was passed? Why or why not?
Posted in Ch. 9, Life and Health Insurance, Teaching Tips | Tagged , , | Leave a comment

Mortgage Rates Drop and Refinancing Jumps

Posted on August 16, 2011 by ajkeown

As the stock market bounced up and down, the rates on new home mortgages fell.  According to Federal Home Loan Mortgage Corporation, also known as Freddie Mac, last week 15-year fixed rate mortgages (15-yr FRM) fell to 3.50%, which is a record low, down from 4.69% just two years earlier.   In fact, all mortgage rates were close to their record lows with 30-year fixed rate (30-yr FRM) loans dropping to 4.32%, down from  5.22% two years prior; 5-year adjustable rate mortgages (5/1-yr ARM) dropping to 3.13%, down from 4.80% two years ago; and 1-year adjustable rates mortgages (1-yr ARM) dropping to 2.89%, all the way down from 4.82% two years earlier.

Does it make sense to refinance?  It does if your current  rate is much higher than the prevailing rate, and according to the USA Today article of August 13th, “Mortgage Rates Reach Record Lows, Sparking Refinancings,” more that 63% of all homeowners have mortgages that carry an interest rate above 5%.  The problem faced by many of those who would like to refinance is that most banks limit the amount of the home mortgage to 80% of the value of the home, and many homeowners don’t have enough equity in their home to allow them to refinance.  In fact, about 46% of homeowners with mortgages have less than 20% equity in their homes.

When homeowners can refinance, what type of mortgage are they drawn to?  The answer is — mortgages with shorter terms.  In the first quarter of 2011, 34 percent of homeowners with 30-year mortgages refinanced with 15 or 20 year mortgages.  By simply refinancing at the lower rate they were able to keep their payments at the same level, lower the maturity of their mortgage, to 15 or 20 years instead of 30, and therefore pay off their mortgage much earlier.

Discussion questions:

  1. If you or your parents have a mortgage, do you know what its maturity is and whether it is a fixed or variable rate mortgage?
  2. If you were to take out a $150,000 mortgage today at the rates listed in Freddie Mac’s most recent Weekly Primary Mortgage Market Survey, ignoring any points, what would your monthly payments be under each of these mortgages?
  3. Take a look at the average monthly interest rate since 1980, how high were rates then?  What has happened to rates, and why do you think that might have happened?
Posted in Ch. 8, Home and Auto, Personal Finance In The News | Tagged , , , | Leave a comment

How Long Do You Think You’ll Work?

Posted on August 13, 2011 by ajkeown

In the SmartMoney.com blog, Encore, there is an August 10th, 2011 article about retirement by Alicia Munnell, the director of the Center for Retirement Research at Boston College.  The article titled “8 Reasons Older People Are Working Longer” examines the recent trend of older Americans staying in the work force.

First, let’s take a look at what’s happening.  What Ms. Munnell finds is that since 1990 a higher percentage of men in the age categories 55 to 64 and over 65 are active participants in the labor force.  In fact, if you look at the “Workforce Participation” chart from 1880 to the present, you’ll see that while the percent of men over 55 in the workforce declined dramatically between 1880 and 1990, since then it has actually increased.

Why is this the case?  First, let’s look at the probable causes for the dramatic drop-off of the older-age male workforce between 1880 and 1990.  Much of the decline was a result of Civil War pensions; the initiation of Social Security during the Great Depression and its expansion in 1972; an increasing number of employer pensions; and the existence of Medicare.  All of these factors made it easier to leave the workforce and still continue to support yourself.

But why has the percentage of men over 55 in the workforce increased in recent years?  Munnell cites many reasons but one of the primary reasons is the decline in companies offering traditional pension plans.  The recent trend has been to move to defined contribution plans, for example, 401(k) plans, where your retirement income is based upon how much money you contribute and how you invest that money.  In addition, just the fact that men are living longer and are healthier has led to an increase in the retirement age.

So how do you decide when to retire?  There are definite pros and cons to early retirement; in fact, money-zine.com lists a number of them in “Best Time to Retire.”  But it’s definitely a tough question.  In Ch. 16 we focus on retirement and the important issue of how to come up with the funds for your retirement.  In effect, how to put a plan in place that will provide you with the kind of retirement you’ve dreamed of – and that brings us back to Principle 2: Nothing Happens Without a Plan.

Discussion questions:

  1. When do you see yourself retiring?
  2. When do you expect your parents to retire?
  3. What are some of the other reasons that might explain the uptrend in how long men work?
  4. What are some benefits of retiring later in life?
Posted in Ch.16, Retirement Planning, Personal Finance In The News | Tagged , | Leave a comment