Financial Literacy

• A high school course
• Popular finance author
• Your parents
• Online blogs
• Somewhere else

Since few high schools and colleges teach much about money management and investing, how have you ever been exposed to a systematic plan for making financial decisions? Sadly, many people cobble together a few ideas and muddle along in financial struggle their whole lives. I also come across high-income earners with no idea how to manage their money so they get themselves into more serious financial troubles. Extra money doesn’t cure bad financial habits, it exacerbates them.

Like anything, some people have an aptitude and interest in financial planning while many don’t want to be bothered. Either way, it is like brushing your teeth: It is a task that you must routinely perform or face painful and expensive consequences.

Start your financial literacy effort in small steps, and then continue to improve upon it. As much as I know about money and investing, I still pay to learn new methods and approaches to determine if it is something that I want to incorporate into my money management practice. Beware: Although, money management theories and practices are free all over the internet, sometimes you get what you pay for. Was it a short article written by a general freelance writer or a thorough report written by a business millionaire, professor, or financial educator?

How might you know if you have an adequate level of financial literacy?

1. Are your financial goals on track?
2. Are your debts shrinking or growing?
3. Do your investment accounts have positive returns?
4. Can you afford the maintenance and upkeep of the items that you own?
5. Are you setting aside money for large expected purchases?

The more difficult it is for you to positively answer these questions, the more likely you need to add a little more to your financial literacy.

At age 50 you are in the fourth quarter of your earning career and too many at this age have no notable retirement savings. This is a red-alert financial emergency situation. According to Owen Murray, Director of Investments at Horizon Advisors, “Building a nest egg is like losing weight, there are no shortcuts. People have to spend less and save more.” The likely obstacle to beginning or saving more is probably a mental one.

Peak earning years are around age 45-54, and after age 50, you’ll be lucky if you have 15 years remaining to save (health and age can limit career options over age 60). With zero in savings, some at age 50 would need to save nearly 60% of their income to comfortably retire at the typical age of 65.

Let’s look at some retirement math. In order to withdraw $18,000 a year from your retirement account for the rest of your life, at that point you’ll likely need a balance 25 times that amount, or $450,000. That is a lot to accrue in just 15 years, a savings rate of $30,000 per year. The average person making $55,000 a year will likely have difficulty achieving this. But, however difficult it may be, the alternative is far worse – retiring without adequate savings.

What do you do in an emergency? Drop everything and focus on the problem. In this case, it may mean drastically downsizing and making severe cutbacks in your lifestyle to create the savings necessary to retire. If you’re unwilling to take these drastic measures – exactly how well do you think you’ll handle the downsizing in retirement with only social security as your income, after Medicare and medical deductions? Have you looked up how much your social security income is estimated to be and by what age?

There are a few critical financial tasks for a successful retirement:

1. All debts are extinguished. This means no student loans, mortgages, or credit card balances.
2. You have mapped out how much money you’ll need. This is covered by social security, any pension, plus a sustainable withdrawal rate of your retirement assets. A sustainable rate starting point is 4% of the account balance per year.
3. Expected medical expenses are covered. Paying for prescriptions and medical care is becoming more expensive and will take a larger and larger share of your income.

So if you are nearing age 50 with little to no retirement savings, now is the time to get into emergency mode and do something about it – as if your hair were on fire.

A colleague has a side business where he takes in cash from customers all over the country. Since banks consider this activity “too high risk,” they’ve closed a couple of his accounts. A very large bank just closed his most recent account without warning. This bank has been keeping $36,000 of his money from him for 7 weeks while they “investigate.” He told me he was going to talk to a lawyer about getting his money returned.

I replied, “I’m afraid it is not your money at all. The moment you give a penny to a bank, it is theirs to do with as they please. Legally, it is no longer your money; you are an unsecured creditor. They decide if and when to repay your deposit/loan after they take as long as they desire to investigate.” He replied, “Wow, that’s terrifying. I did not know that. I won’t leave that much money in a bank in the future.”

After the 2008 financial crisis, Central Bankers examined how they could avoid the expense of bailing out failing banks in the future. They came up with a solution, nicknamed, a “Bail In” as opposed to a government Bail Out. This is where depositors have a percentage of their money taken from them and handed to the equity in the bank to raise capital. For example, if you had $20,000 in your savings account and the bail in was for 15% then $3,000 of your savings is taken from you and handed to the equity investors of the bank (mainly to make up for losses on failing loans).

There have been bank bail-ins already in: Denmark, Austria, Cyprus, Portugal, and Greece. The European Union setup the rules for bank bail-ins and the G20 nations passed a joint resolution (including the U.S.) in November 2014. The resolution states that, “all bank deposits are now part of the capital structure,” meaning deposits are a lower-priority creditor to the bank.

But in the U.S., aren’t depositors protected by F.D.I.C. insurance up to $250,000 per account? Yes, these accounts are insured by the federal government. However, the F.D.I.C. only has $54B to insure over $6T in deposits, less than 1% of the money in a worse-case scenario. So it is insured, but that insurance is HIGHLY underfunded. The failure of one large bank could blow-out the entire F.D.I.C. fund many times over.

So, the summary of all of this is:

1. Any money you deposit with a bank is no longer yours; you are an unsecured creditor to the bank.
2. Your bank deposits are is insured up to $250,000 per account, but the insurance may not be there in a big recession or financial crisis.
3. There is a possibility that a portion of your bank deposits may be taken as part of a bank-bail in in case your bank suffers too many losses. Of course, the money taken will never be returned to you.

When you follow what everyone else is doing with their money – beware!

Really? Why?

Let’s take a look. According to the Economic Policy Institute in 2016:

1. The median amount of retirement savings for all families is $5,000. Note that just under half of American families have no retirement savings at all, the few super-savers pull the average up.
2. Among those families that actually have any retirement savings, their median amount is $60,000.
3. For one more reference point: just before entering retirement, when families have the most retirement savings, the median for those with retirement savings is only $163,000.

Let’s take a look at this $163,000; is it enough money to retire on? A common withdrawal rate for retirement accounts, such that you won’t run out of money, is 4% per year. If this 4% withdrawal rate were applied to the $163,000, then your nest egg would give you an additional $6,500 per year, before taxes. This is how much you would be able to add to your social security income: just $541 per month. This small amount of income would likely make for a rough retirement. And this is why you do not want to spend like everyone else spends their money. Because then you’ll be forced to endure a rough retirement like everyone else, on a very low level of fixed income.

According to Bankrate’s annual survey on “What is your greatest financial regret?”

The number one regret for respondents was “Not saving for retirement early enough.” Out of all the possibly problems people have with money, the most painful was not saving enough for retirement. So what do you think is critically important for you to start doing today? Start your retirement savings rate at 15% of your income and slowly increase that rate as your income increases over time.

A contractor’s work crew was doing some repairs on my house, and since I work from home, I heard the conversations of the workers all day. Their focus was on fishing, concerts, and their next tattoo while they struggled to feed their children and stay current on their rent. These tradesmen were not kids in their teens and twenties but were in their mid-to-late 30s.

As I was helping one of them jump-start their car, because he couldn’t afford a new battery, I asked him how he prioritizes his spending. I have mentioned before, the most difficult question in money management is how you go about calculating what you can afford. He replied, “When I have money then I spend it. That is it. If I have an extra $100, I get a new tattoo but I also buy one for my girlfriend so she won’t get mad that I spent money.”

Over the next few days, I asked a few questions and learned that:

• None of them have any savings or a retirement accounts
• Most were touch and go about making rent each month
• Way too much of their income went to bars, alcohol, cigarettes, and lottery tickets
• The mention of the word “investing” returned blank stares to me

There is nothing the matter with spending money on a Starbucks coffee and case of beer for the weekend. But when you have trouble making rent, every single month, it may be time for a financial intervention.

When I had to front extra money to the contractor beyond supplies to provide some advances to his crew, I remembered the saying (I believe from Robert Kiyosaki), “Those who cannot manage their money work for people who do manage their money.” This was solidified with their stories about struggle, inconvenience, and victimhood because they were so financially strapped. I offered some casual advice at opportune moments, but my impression is that it was so outside of their way of thinking and living, that it simply didn’t make any sense to them. As in, “Sure, I’ll save money when someone gives me a million dollars – haha!”

As I see it, nearly every aspect of your life depends upon money. So your skill level of money management and discipline will determine whether your life is a continual financial struggle or making progress toward financial stability.