Money To Live

February 22, 2010

Learning to Budget

Filed under: Uncategorized — by moneytolive @ 4:04 am

A friend sent in a story that made me happy:

I thought you’d appreciate this story…  I’ve been thinking about personal finances help recently as I’m living with a person (with a disability) who is learning to live independently.  She needs “money to live”…and she definitely loves living it up but doesn’t have a lot, so she needs to budget 🙂  My house-mate receives a pension, and has a person to help her with the budgeting.  It reminds me of the world of written-down budgets, once-a-week-withdrawals, once-a-week-shopping, cash-only and forward planning.  I realised these are all things I manage with ease in my head rather than as an explicit activity, and I take it for granted that I can manage my money; but seeing them from the eyes of my house-mate, I am reminded that these are skills to be learnt and an important part of functioning independently with “money to live”.

This is so great because it sounds like the person who is learning to live independently has a great support structure. Someone is helping her with a budget *before* she has gotten into debt/trouble. She has an awesome roommate who can give good advice and also is a positive role model about money.

The more I work in the area of personal finance, the more I think that financial education is important at early stages of (financial) independence. It is easier to avoid debt in the first place than it is to dig out of a deep hole of bills. Some people learn about money management from their parents or older relatives, but many do not.

My AmeriCorps team is working on a fun project to make finances more accessible to a younger audience. I will be sure to post the result online when it is ready.


February 16, 2010

More on opting out

Filed under: Uncategorized — by moneytolive @ 4:10 pm
Despite the economic assumption that humans are rational, study after study shows – surprisingly? – that humans are not rational. A common example of our irrationality is in our hesitance to “opt.” Countries that have opt out policies (rather than opt in) for organ donation have much higher rates of organ donation. Businesses that have opt out policies for 401(k)s report higher employee contributions. etc.
As part of the process of licensing a car in Washington state, there is an opt out $5 park donation fee. Before paying $144 to title and register my car, I asked to see a breakdown of the costs. When I asked about the $5 donation, the nice man explained that Washington recently changed from an opt in donation policy to an opt out donation policy. He said that only about half of the people he sees ask to see their bill before paying, and I would guess that most of those people are donating $5 without knowing it.
In theory, I support many opt out policies, and I was pretty surprised to see that it almost slipped past me. I wanted there to be explicit disclosure of the policy, but then it would be more like an opt in policy.

February 8, 2010

Default Enrollment in retirement accounts

Filed under: Uncategorized — by moneytolive @ 1:17 am

A relative recently asked me about a 401(k). She is automatically enrolled at a 4% employee contribution. To cancel the contribution, she would have to set up an online account and change settings in her account, which I suspect would take less than 20 minutes.

For many people without a plan for retirement savings, the default option from an employer is a great way to start saving.

What is default enrollment?
Behavioral economics research shows that people are lazy and usually stick with the default option – on retirement accounts, organ donation, or just about anything. For retirement accounts, the idea is that if the default is to enroll, most people will not go to the bother of changing their account, and some retirement savings are better than no retirement savings. This type of enrollment is frequently called “opt-out” because you have to opt-out, not opt-in, as for many historical plans.

There are different flavors to the opt-out:
* Default enrollment at a fixed contribution amount (say 4%)
* Default enrollment in a regular increase (if you start at a 4%
contribution, next year it will bump up to 5%, the next year 6%, and
so on).
* Sometimes opting out is not an option. I was recently a victim of one of these retirement systems. It took 4 phone calls and three emails to figure things out — and every single person I talked to gave me a different piece of wrong information. No chance to opt out = I am subsidizing the State of Ohio pension fund.

What about an Employer Match?
If you get an employer match, fund at least up to the amount to capture the employer match. Do this even if you’re not sure you will be employed long enough for the amount to fully vest. Worst case is you get no vested amount. Maybe you’ll stick around longer than you thought, and maybe you’ll leave with a partial vestment.

Why you should contribute even without an employer match (maybe)
If you are maxing out your other retirement options (i.e., IRA), a 401(k) gives another avenue for tax-advantaged retirement savings.

February 2, 2010

Net worth by age and income

Filed under: Uncategorized — by moneytolive @ 5:07 pm

This is a neat online tool that shows the median net worth for your people of your age and also for people with your income.

I like this tool because it lets you know how your net worth compares to your peers. That is really what we humans care about – do we have more [—-] than the Joneses down the street? While most financial planners give clients a target number for retirement based on their income and lifestyle, another important number to aim for is average. As long as your net worth is not below average (median), you’ll probably do okay.

Have fun!

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