I was recently invited to participate in a panel on financial literacy that was organized by the United Athletes Foundation (UAF) and the STAR EMBA program at the GW School of Business. It was held at the New York Stock Exchange, and it was good to go back to NYSE a second time. I had accepted the invitation without giving much thought to who would be in attendance at the event. A few days before the event (which was held April 29, 2011), I was given the list of the panel participants: Robert Marcham (moderator), Annamaria Lusardi, Ray Lewis, Rushia Brown, Chuck Lewis, Bill Imada, Sam and Char McNabb, and Gordon Brown. I had not heard of these financial literacy experts before and wondered whether they were academics as well (please, remember that I was born in Italy, so I do not know very much about American football or basketball). So, it was not until I arrived at NYSE that Friday that I discovered that Ray Lewis was THE Ray Lewis of the Baltimore Ravens, Sam and Char McNabb were the parents of THE Donovan McNabb, and Rushia Brown was THE Rushia Brown. There I was sitting on a podium to the right of superstar Ray Lewis, speaking to an audience of athletes and their families as well as the President of the UAL, Reggie Howard. Oh boy, I was in deep trouble!
I was the first on the panel to speak. I talked about the troubling state of financial literacy in the population, of the divide between those who know and those who do not know, of the sharp contrast between the complexity of financial markets and the very low level of financial knowledge that most people have. I spoke of the dire consequences of the lack of financial literacy; it is those who are less financially literate who pay more for financial services, who are more likely to engage in high cost mortgages and to default on them, and who are less likely to take advantage of the financial markets or to accumulate wealth. In the same way in which skills, practice, and experience help athletes to score and avoid faulty steps, financial literacy empowers people to take advantage of the opportunities offered by financial markets and to avoid scams or running into financial trouble. I also spoke of the difficulties that athletes may face in managing their finances and taking care of themselves, their families, and their communities both because of the peculiarity of their short careers, the increased complexity of financial markets that everybody is facing, and, of course, their fame.
Ray Lewis spoke next. He simply blew everyone away. He spoke of what financial literacy means to him, and the problems he has faced. He reflected on the grim statistics we had heard from the moderator that more than 70% of NFL players are bankrupt, unemployed, or divorced a few years after retiring. He talked about how many young athletes are ill informed about investing and managing their money and the problems that result. And he spoke of the need for athletes to be worry-free when on the field practicing or playing—absolutely nothing should distract from the focus on the game. He spoke with a passion and an intensity I have not seen in any person. I have a Ph.D. in economics and am myself passionate about financial literacy, but I could not have articulated the case for financial literacy the way Ray Lewis did.
Sam and Char McNabb spoke of the continuous worries that parents of athletes have about their children. From the anticipation of who will be drafted to the journey through the games, injuries, victories, and losses, they spoke of the desire to protect their son from making bad financial decisions, but the difficulty they face in knowing where to turn for advice. It was when Char McNabb spoke that I realized that about half of the audience were mothers of athletes. She asked them to raise their hands, and so many hands went up! I cannot begin to tell you how appealing it was to see that it is their mothers who the athletes brought to this event; it is them they turn to, whom they trust. I developed an instant affinity for these football players! And when the speaking was finished and I watched the mothers posing for a group photo, I could clearly see where the determination of these athletes comes from!
Sitting among these extraordinary people, I started to dream. What if these athletes became the champions for financial literacy? What if they spoke to students and told them how important it is to become financially literate. Students would listen to them; they look up to athletes. Imagine if we could organize a competition among schools, and the students who got a perfect score on a financial literacy test would get to spend an hour with, say, Ray Lewis or Reggie Howard, to listen to the stories of how they trained to win a game and why they care about financial literacy. Imagine if one of these players decided to become a spokesperson for financial literacy. Imagine…
As I hope I have conveyed, this was not my usual financial literacy conference, and not my typical audience. But it was a special day, and it illustrated how profound and widespread financial illiteracy is and how severe the problems associated with it are. And everybody can be affected by it, even the superstars we watch on TV. At the close of the panel, I got a warm handshake from Ray Lewis; he said he enjoyed my talk. It was . . . priceless!
You can look at some of the photoes of the event on our Facebook. Here is the link: http://www.facebook.com/media/set/?set=a.174503175936844.49893.119369231450239&saved
About Business & Finance empowers people to make the most of their financial lives. Whether you want to plan a family budget, make the most of your savings.
The Workplace Financial Fitness Toolkit
On April 12, 2011, we launched the Workplace Financial Fitness Toolkit. With the support of the New York Stock Exchange (NYSE) Foundation, Punam Keller, from the Tuck School of Business, and I have designed a customized workplace financial fitness program using an innovative and practical approach based on well-established financial literacy and marketing principles. Every employer interested in starting a financial education program can use this toolkit.
Lack of financial literacy in the United States is well documented—the research tells us that most people lack basic financial knowledge and are not well equipped to deal with complex financial decisions. As a result, many individuals have difficulty making sound financial decisions. Remedying this problem is terribly complicated, one reason being that individuals have different needs, different preferences, and face different economic circumstances.
The workplace is an ideal venue to provide tools to facilitate financial decision-making. The goal in developing the toolkit is to provide a checklist of recommended financial fitness action items along with marketing materials to encourage employees to improve their financial fitness.
In essence we have developed two toolkits: an Employer Customization Toolkit and an Employee Customization Toolkit. The Employer Customization Toolkit contains (1) the Employer Checklist, (2) motivational information about the importance of every employer providing or facilitating 10 key steps to financial fitness, and (3) additional materials to help employers with implementation of the financial fitness recommendations. The recommendations are divided into three stages: basic, intermediate, and advanced. Employers who currently offer financial fitness assistance can use the Employee Customization Kit to motivate employees to participate in the financial fitness programs offered.
The Employee Customization Toolkit is designed to empower employees to improve their own financial fitness. The Employee Customization Toolkit contains (1) the Employee Checklist, (2) motivational information on the importance of every employee improving aspects of their financial fitness, and (3) implementation guidelines for each recommendation. Like the Employer Customization Toolkit, the employee toolkit allows individuals to customize or select the fitness recommendations that suit their needs.
Developing the program was a challenging task. But we very much benefitted from the guidance of Michelle Greene, the VP, Head of Corporate Responsibility, executive director of the NYSE Foundation and a champion of financial literacy. We also assembled a team of experts to help us in this work. We benefitted from the insights of academics like Robert Clark (North Carolina State University College of Management) and Eric Johnson (Columbia Business School), financial literacy leaders like Carrie Schwab-Pomeratz and Michael Townsend from the Schwab Foundation and Ted Beck from the National Endowment from Financial Education (Carrie and Ted also serve on President Obama’s Council on Financial Capability), Janet Parker from the Society for Human Resource Management (a former member of President Bush’s Council on Financial Literacy), and Jennifer Wayman from Olgivy PR Worldwide (one of the creators of the The Heart Truth, an award-winning national awareness campaign about women and heart disease with its signature Red Dress symbol).
On April 12, not only did we launch the program but we also rang the opening bell at NYSE, an experience I will never forget. And yes, we took a lot of pictures which are now posted on the FLC’s Facebook page. You can also watch a video of the opening bell ceremony (did I say it was memorable?).
http://www.facebook.com/pages/Financial-Literacy-Center/119369231450239
http://www.nyse.com/events/1302515608944.html
We hope many companies will embrace the Workplace Financial Fitness Toolkit and customize it to meet their goals of assisting employees in the attainment of financial independence and security. The program can be found here:
http://nyse.nyx.com/financial-fitness-kit
Lack of financial literacy in the United States is well documented—the research tells us that most people lack basic financial knowledge and are not well equipped to deal with complex financial decisions. As a result, many individuals have difficulty making sound financial decisions. Remedying this problem is terribly complicated, one reason being that individuals have different needs, different preferences, and face different economic circumstances.
The workplace is an ideal venue to provide tools to facilitate financial decision-making. The goal in developing the toolkit is to provide a checklist of recommended financial fitness action items along with marketing materials to encourage employees to improve their financial fitness.
In essence we have developed two toolkits: an Employer Customization Toolkit and an Employee Customization Toolkit. The Employer Customization Toolkit contains (1) the Employer Checklist, (2) motivational information about the importance of every employer providing or facilitating 10 key steps to financial fitness, and (3) additional materials to help employers with implementation of the financial fitness recommendations. The recommendations are divided into three stages: basic, intermediate, and advanced. Employers who currently offer financial fitness assistance can use the Employee Customization Kit to motivate employees to participate in the financial fitness programs offered.
The Employee Customization Toolkit is designed to empower employees to improve their own financial fitness. The Employee Customization Toolkit contains (1) the Employee Checklist, (2) motivational information on the importance of every employee improving aspects of their financial fitness, and (3) implementation guidelines for each recommendation. Like the Employer Customization Toolkit, the employee toolkit allows individuals to customize or select the fitness recommendations that suit their needs.
Developing the program was a challenging task. But we very much benefitted from the guidance of Michelle Greene, the VP, Head of Corporate Responsibility, executive director of the NYSE Foundation and a champion of financial literacy. We also assembled a team of experts to help us in this work. We benefitted from the insights of academics like Robert Clark (North Carolina State University College of Management) and Eric Johnson (Columbia Business School), financial literacy leaders like Carrie Schwab-Pomeratz and Michael Townsend from the Schwab Foundation and Ted Beck from the National Endowment from Financial Education (Carrie and Ted also serve on President Obama’s Council on Financial Capability), Janet Parker from the Society for Human Resource Management (a former member of President Bush’s Council on Financial Literacy), and Jennifer Wayman from Olgivy PR Worldwide (one of the creators of the The Heart Truth, an award-winning national awareness campaign about women and heart disease with its signature Red Dress symbol).
On April 12, not only did we launch the program but we also rang the opening bell at NYSE, an experience I will never forget. And yes, we took a lot of pictures which are now posted on the FLC’s Facebook page. You can also watch a video of the opening bell ceremony (did I say it was memorable?).
http://www.facebook.com/pages/Financial-Literacy-Center/119369231450239
http://www.nyse.com/events/1302515608944.html
We hope many companies will embrace the Workplace Financial Fitness Toolkit and customize it to meet their goals of assisting employees in the attainment of financial independence and security. The program can be found here:
http://nyse.nyx.com/financial-fitness-kit
Celebrating Financial Literacy Month
April has been declared Financial Literacy Month and we, at the Financial Literacy Center, celebrate it by meeting with our team members to present preliminary results from the 19 projects the teams are doing in year 2. The research teams are tailoring educational materials for people at various stages of their lives: young workers, mid-career workers, those approaching retirement, and retirees. They are also targeting underserved populations such as low-income, young, and disabled workers, all of whom are particularly vulnerable during periods of financial turbulence.
The second year activities cover a range of topics, including:
• How automatic enrollment in pension plans can improve savings
• How to increase the use of the government’s key tax-time savings policies, particularly the Saver’s Credit targeted to lower-income households
• How financial advisors help their clients decide when to claim Social Security benefits and whether this advice is based on client attributes
• How to develop an effective curricula to teach financial literacy to pre-service K-8 teachers and adult learners
• How to improve access to financial services for legal immigrants
• Whether additional disclosure would be valuable in helping people anticipate and plan for health care expenses in retirement
• Whether an intensive online “financial bootcamp” for women is effective in modifying behavior.
We held our meeting at Harvard Law School and I am grateful to Howell Jackson for hosting the workshop in the elegant rooms of HLS. But the New England weather did its April fool’s trick: rather than warm spring weather, we got several inches of snow today. (Note to self: move closer to the equator!)
You can read more about our projects at: http://www.rand.org/labor/centers/financial-literacy/projects.html
And you can see a picture of all of us on Facebook!
The second year activities cover a range of topics, including:
• How automatic enrollment in pension plans can improve savings
• How to increase the use of the government’s key tax-time savings policies, particularly the Saver’s Credit targeted to lower-income households
• How financial advisors help their clients decide when to claim Social Security benefits and whether this advice is based on client attributes
• How to develop an effective curricula to teach financial literacy to pre-service K-8 teachers and adult learners
• How to improve access to financial services for legal immigrants
• Whether additional disclosure would be valuable in helping people anticipate and plan for health care expenses in retirement
• Whether an intensive online “financial bootcamp” for women is effective in modifying behavior.
We held our meeting at Harvard Law School and I am grateful to Howell Jackson for hosting the workshop in the elegant rooms of HLS. But the New England weather did its April fool’s trick: rather than warm spring weather, we got several inches of snow today. (Note to self: move closer to the equator!)
You can read more about our projects at: http://www.rand.org/labor/centers/financial-literacy/projects.html
And you can see a picture of all of us on Facebook!
Small Business Financing Options: A Brief Introduction
Financial assets are often what determine if a small business start up succeeds or fails and it is for that reason it is important to understand the options available to entrepreneurs. Even if all sources options are available for cash, it is critical that a close and in depth comparison is conducted to help reduce interest paid or shares forfeited and risk.
The most common and sought out financing option is the use of commercial bank loans. Bank loans are often the preferred option of getting cash because they do require business owners to turn over any equity or control to others. Loans, depending on the size can take many years to pay off and are not available for everyone. In fact many businesses and start ups do not have access to loans due to the amount of financing needed, bad credit and/or too much risk involved.
The second option entrepreneurs should consider is getting investors (the first option if business owners do not mind giving up some control). If large amounts of financing are needed this may be the only option. There is little risk involved as the investors money becomes the companies money in exchange for shares or part ownership, this means when the company profits they profit and when it loses they lose. The issue is actually finding investors. There are two main types of investing parties for start ups and small business, angel investors and venture capitalists. Angel investors often invest smaller amounts in higher risk companies while venture capitalists are much more risk avoidant and often invest higher amounts and only target established and high growth companies.
Less desirable options include home equity loans and financing through credit cards. Home equity loans, although a cost effective substitute for business loans (they often have lower interest rates), pose a high risk because they require the borrower to use the equity of their home as collateral. Credit cards are often used for cash advances when smaller amounts of capital are needed, the issue with using credit cards is the interest can building leading to thousands of dollars owed leading to bad debt. In most cases both options should only be considered as a last resort and in low risk situations.
The safest method of small business financing is your national and regional governments. Each year millions of dollars are placed aside to provide grants and low interest loans to start ups and small business helping entrepreneurs get the financing needed with little risk and interest paid while stimulating the economy.
It is important to weigh all the options and risks, ask yourself what amount is actually needed and if the risk is worth it. For small fees, financial planners can help entrepreneurs choose the right option.
Financial fragility
I mentioned in my previous blog post the importance of having a buffer stock of savings. I would like to continue to discuss what individuals actually have or can rely on in case they are hit by a shock. This is part of a new research project, which is joint work with Peter Tufano of Harvard Business School and Daniel Schneider, a sociologist who is finishing his Ph.D. at Princeton University.
We engaged the market research firm TNS Global and collaborated with them to design a new survey that was fielded in June–September 2009. Specifically, we ask respondents: “How confident are you that you could come up with $2,000 if an unexpected need arose within the next month?” Respondents could reply:
• I am certain I could come up with the full $2,000
• I could probably come up with $2,000
• I could probably not come up with $2,000
• I am certain I could not come up with $2,000
Because we are dealing with an unexpected event in the future, it is important to ask about confidence rather than ask a yes or no question. The $2,000 figure reflects the order of magnitude of the cost of a major car repair, a large co-payment on a medical expense, legal expenses, or a home repair.
The news is not good: The capacity to cope with financial emergencies is very limited. Half of Americans report that they would probably or certainly be unable to cope with such an emergency. More specifically: 24.9% of respondents reported being certainly able to cope; 25.1% probably able to cope; 22.2% probably unable to cope; and 27.9% certainly unable to cope.
The capacity to cope with a financial emergency is not only generally limited but also varies significantly with the economic and demographic characteristics of individuals and their households. While those with higher income and greater educational attainment report greater capacity to cope, a large proportion of individuals with middle-class incomes report they are certainly not or probably not able to cope. Moreover, even among those with some higher education, more than half reply that they would be certainly or probably not able to cope. In other words, while inability to cope is severe among the less educated and low-income groups, it is not limited to the poor or to a small group of the population. Similarly, while financial fragility is more pronounced among the young, many older respondents, who are presumably close to retirement and at a point in life when their wealth accumulation should be at its peak, report anticipating difficulty in coping with a financial a shock. And women and families with children are less likely to be able to cope with shocks.
The financial crisis is a clear contributor to financial fragility, although not the only one. Those who suffered wealth losses, particularly large losses in excess of 30%, report greater inability to cope. This may explain why even some wealthy people anticipate potential inability to cope with a shock—likely due to lowered wealth in conjunction with high fixed costs and inflexible commitments The unemployed are also much more financially fragile, with just about one-third reporting they would certainly or probably be able to cope and 41.2% reporting they would certainly be unable to cope.
This is a worrisome finding as it shows that individuals and the economy are fragile to shocks. Many policies have so far focused on promoting asset building for the long run. It may be useful to start considering the short run as well.
I am presenting this work at the Brookings Institution this week, and I will keep discussing more findings and the potential implications of this work. Please send me your comments, too.
The Huffington Post featured this paper on their web and asked to share your story. Here is the link:
http://www.huffingtonpost.com/2011/03/17/could-you-come-up-with-20_n_837225.html
We engaged the market research firm TNS Global and collaborated with them to design a new survey that was fielded in June–September 2009. Specifically, we ask respondents: “How confident are you that you could come up with $2,000 if an unexpected need arose within the next month?” Respondents could reply:
• I am certain I could come up with the full $2,000
• I could probably come up with $2,000
• I could probably not come up with $2,000
• I am certain I could not come up with $2,000
Because we are dealing with an unexpected event in the future, it is important to ask about confidence rather than ask a yes or no question. The $2,000 figure reflects the order of magnitude of the cost of a major car repair, a large co-payment on a medical expense, legal expenses, or a home repair.
The news is not good: The capacity to cope with financial emergencies is very limited. Half of Americans report that they would probably or certainly be unable to cope with such an emergency. More specifically: 24.9% of respondents reported being certainly able to cope; 25.1% probably able to cope; 22.2% probably unable to cope; and 27.9% certainly unable to cope.
The capacity to cope with a financial emergency is not only generally limited but also varies significantly with the economic and demographic characteristics of individuals and their households. While those with higher income and greater educational attainment report greater capacity to cope, a large proportion of individuals with middle-class incomes report they are certainly not or probably not able to cope. Moreover, even among those with some higher education, more than half reply that they would be certainly or probably not able to cope. In other words, while inability to cope is severe among the less educated and low-income groups, it is not limited to the poor or to a small group of the population. Similarly, while financial fragility is more pronounced among the young, many older respondents, who are presumably close to retirement and at a point in life when their wealth accumulation should be at its peak, report anticipating difficulty in coping with a financial a shock. And women and families with children are less likely to be able to cope with shocks.
The financial crisis is a clear contributor to financial fragility, although not the only one. Those who suffered wealth losses, particularly large losses in excess of 30%, report greater inability to cope. This may explain why even some wealthy people anticipate potential inability to cope with a shock—likely due to lowered wealth in conjunction with high fixed costs and inflexible commitments The unemployed are also much more financially fragile, with just about one-third reporting they would certainly or probably be able to cope and 41.2% reporting they would certainly be unable to cope.
This is a worrisome finding as it shows that individuals and the economy are fragile to shocks. Many policies have so far focused on promoting asset building for the long run. It may be useful to start considering the short run as well.
I am presenting this work at the Brookings Institution this week, and I will keep discussing more findings and the potential implications of this work. Please send me your comments, too.
The Huffington Post featured this paper on their web and asked to share your story. Here is the link:
http://www.huffingtonpost.com/2011/03/17/could-you-come-up-with-20_n_837225.html
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