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Financial Literacy


While it doesn’t hurt to discuss investing with children at an earlier age, they can get real, hands-on experience with investing as a teenager. Like many other kids in the 1980s, I played the Stock Market Game in elementary school, and learned nothing about investing, but I learned that adults checked the newspaper every day and would fret over IBM being down an eighth. It wasn’t a great introduction to long-term investing; in fact, it was no introduction.

One private high school thinks it’s doing the right thing by giving its teenage students $100,000 to play the Stock Market Game using real money from other people, preparation for a life in a potentially lucrative career in money management, and if your annual earnings are in the mid-six figures, saving for the future is technically easy, even while living a flagrant lifestyle. That’s not a great way for middle-class or socio-economically-challenged teenagers to learn about managing their own money.

You don’t learn much about managing money if the money you’re managing isn’t scarce. There’s no scarcity when a private school raises $100,000 for you to play with.

And that’s why parents are often so keen on having their children begin working to earn money on their own. This is an important piece of experience to gain at a formative age, though I still believe that education is the most important goal for a teenager, and work should only be pursued to the extent that it doesn’t interfere with education. (Unfortunately, the realities of poverty reduce the importance of education in favor of earning money for the household, but otherwise, the priority of education over occupation as a teenager should hold true.) There are breaks from school that provide excellent opportunities for different types of work, and if any certain teenager shows no inclination towards extracurricular school activities, a job after school is a good alternative.

On my first day on the job at my first job during high school, I learned what others might consider an obvious lesson. After being hired, I was to start my first day at Radio Shack in central New Jersey with an orientation with a regional supervisor. I showed up in jeans in a tee-shirt and the manager sent me home. I should have known that there was some kind of expectation to wear something nicer, like slacks and a button-down shirt, but for some reason I didn’t make the connection. So I came back the next day with a better understanding of expectations for my appearance.

Today, I work from home in comfortable clothing, so after twenty years, I ended up getting my way. But the point is that working as a teenager can provide experiences and knowledge that help later in life when it comes to assimilation into a career culture.

One of those lessons is what to do with money you earn from that first job. I saved some of it, but I didn’t do what I should have done — invested a portion that wouldn’t be touched for years. I did save some that ended up helping me pay for college, but it was a small amount; I probably would have been better investing it for the longer term.

For hands-on experience dealing with money, parents can help their teenagers set up a variety of financial accounts. The variety is good. If someone has $2,000 to invest, it would be worthwhile to spread it around to various types of investments or savings vehicles.

1. A Roth IRA. Every teenager with a job should start a Roth IRA. You invest in a Roth IRA with after-tax income, and because it’s likely your marginal tax rate will never be as low as it is as a teenager earning income from a part-time job, a Roth IRA is a perfect vehicle for investing. the minimum investment to open a Roth IRA at Vanguard is $1,000 and at Fidelity is $2,500, so until income reaches that point, a high-yield savings account is a good choice.

Sometimes, you can get around the minimum by committing to a monthly automatic transfer from a savings or checking account, so this second choice might come in handy.

2. Savings and checking accounts. Some online banks offer higher interest rates than traditional brick-and-mortar banks, but with the money a teenager is earning from a part-time job, the purpose may not be growth but be learning the basic financial skills of using a savings and checking account. Getting an account in the teenager’s name is possible, but most likely, this would be an account co-signed by a parent.

3. An index mutual fund. Once the teenager has saved enough money to open a Roth IRA with a minimum investment, the teenager has to choose the investment. A Roth IRA isn’t an investment in itself, it’s an account for holding investments. An index mutual fund is a great first choice — and a portfolio comprised completely of index mutual funds is a good idea for adults, too. Index mutual funds are low-cost and do not attempt to beat the market — an expensive endeavor that has never been shown to work over moderate lengths of time.

In a recent article on CNN Money, a financial expert recommended a specific fund, Vanguard Star, to teenage investors. It’s fund that combines bonds and stocks — two investment types that teenagers should learn about to understand their purposes and differences. I tend to want to go with the Vanguard Total Stock Market index fund all the way, particularly if this is an investment that will remain untouched for many years — and that’s the purpose of teaching a teenager about investing.

4. Investing in a business. If the teenager has anything left over after the above goals, and after any spending needs that he or she might have, one interesting approach would be to give the teenager an opportunity to invest directly in a business. Unfortunately, this process creates an opportunity to take advantage of the young and impressionable.

Over the years, I’ve heard many cases where parents borrow money from their children to start a business destined to fail. You wouldn’t think that teenagers would have a hard time saying no to their parents, given the rebellious nature of adolescence. But when a parent appears to be in need, even the most angsty teens, if they’re in a position to help, want to trust their parents and reduce their struggling.

Asking a teenager to invest in a business is a dangerous proposal. It’s true that failure can teach a lesson as strong or even stronger than success, but the cost from a relationship perspective can be too high. So in order to give teenagers the experience of investing directly in a business, it might be a good idea to provide that teenager an opportunity to invest in their own business. The taste of entrepreneurship doesn’t isn’t good for every teenager, but they might only find out if running a business suits them if given the opportunity.

The plan with this option is to take some of the money earned from that part-time job during school or over school breaks and use a portion of the funds to set up some kind of business that aligns with the teenager’s passions and interests. If the teenager is interested in mowing neighbors’ lawns for money, have him invest in his own equipment. If she wants to house-sit, she should consider doing more than just offering services to friends and family. Invest in advertising and perhaps form a local organization that can dispatch anyone from a team of sitters.

What kinds of investments should teenagers make with the money they earn from jobs while in school?

Photo: Flickr/tefra

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Need more evidence that the financially disadvantaged are in a worse position to succeed in education and work than those without financial concerns? A new report published in the journal Science shows how financial constraints, particularly poverty, impede cognitive functioning.

I find one of the experiments interesting not only because of the results, but because the methodology involved visiting my local shopping mall. In fact, I may have even been asked to participate in the experiment on a recent shopping trip, but I generally ignore people with clipboards at malls asking me questions. This mall is a great location to find experiment subjects; the center is in the process of a renovation, bringing in “higher class” shops (because the businesses can pay higher rent, naturally).

Yet, the mall’s proximity to low-income communities provides one of the only locations in the area where you can find people of all social statuses going about their business. In other words, to complete this experiment and find a good mix of participants, the researcher from Princeton University had to get off campus and out of town.

The researchers’ hypothesis was that being poor prevents people from concentrating on the tasks and goals they need in order to get out of poverty. The concept sounds like it would be true. After all, we are aware that financial problems cause stress, and stress prevents success, but that’s not good enough for scientists — in order to determine what is true, you need to test hypotheses and measure the results. The results were surprising in the magnitude of the effect financial concerns have on cognitive ability.

In a series of experiments, the researchers found that pressing financial concerns had an immediate impact on the ability of low-income individuals to perform on common cognitive and logic tests. On average, a person preoccupied with money problems exhibited a drop in cognitive function similar to a 13-point dip in IQ, or the loss of an entire night’s sleep.

The results show that it’s not necessarily the fact of poverty that causes cognitive distress. It’s the concern about poverty. Low-income individuals who had no concern for their financial well-being were just as competent as they might be if they were not in poverty. In a sense, ignorance is bliss, and I’ve found this to be true in my own life. It’s much easier emotionally to avoid problems, like I avoided taking care of my accumulating speeding violations and like I avoided thinking about my increasing debt load in the years following college. I was protecting my sanity and my emotional functioning my pretending there were no problems and things would work themselves out.

It turns out I was most likely protecting my cognitive functioning, as well, although the idea that “things can work themselves out” might indicate my cognitive abilities were not at their highest levels.

My first assumption was that there’s a third-party variable standing in between concern for financial stability and cognitive functioning: stress. There seems to be something else at play, according to the experiments by Eldar Shafir, a psychologist at Princeton University.

The mental tax that poverty can put on the brain is distinct from stress, Shafir explained. Stress is a person’s response to various outside pressures that — according to studies of arousal and performance — can actually enhance a person’s functioning, he said. In the Science study, Shafir and his colleagues instead describe an immediate rather than chronic preoccupation with limited resources that can be a detriment to unrelated yet still important tasks.

“Stress itself doesn’t predict that people can’t perform well — they may do better up to a point,” Shafir said. “A person in poverty might be at the high part of the performance curve when it comes to a specific task and, in fact, we show that they do well on the problem at hand. But they don’t have leftover bandwidth to devote to other tasks. The poor are often highly effective at focusing on and dealing with pressing problems. It’s the other tasks where they perform poorly.”

And it’s been clear to me over the last several years writing about personal finance, change, and other topics of personal development that the lack of financial resources specifically — that is, not stress — created restraints on what people can focus on. You can’t plan for the retirement if your primary concern is getting through the day. You can’t achieve financial independence if you are stuck when trying to satisfy the lowest level of needs, like shelter and food.

The fallout of neglecting other areas of life may loom larger for a person just scraping by, Shafir said. Late fees tacked on to a forgotten rent payment, a job lost because of poor time-management —- these make a tight money situation worse. And as people get poorer, they tend to make difficult and often costly decisions that further perpetuate their hardship, Shafir said.

In a nutshell, this is why financial literacy doesn’t work. We as a society, or the middle-class or upper-middle-class segment of American society, seems to think that if only we could provide education about money management to the neediest communities, and if only they would take our advice and make better decisions, we would no longer have a problem with poverty.

Education, especially education pertaining to an idea like financial independence, is useless to someone who is dealing with day-to-day financial difficulties. There’s no cognitive capacity to consider the idea of saving even just one percent of income when every cent goes towards food for the children and there isn’t enough left for rent, so month after month you have to find a new place to live.

The larger topic of study for researchers is the scarcity of cognitive resources; that is, the human brain has a limited ability to process issues. Financial problems provide a convenient topic for use in experiments dealing with cognitive limitations.

“When you’re poor you can’t say, ‘I’ve had enough, I’m not going to be poor anymore.’ Or, ‘Forget it, I just won’t give my kids dinner, or pay rent this month.’ Poverty imposes a much stronger load that’s not optional and in very many cases is long lasting,” Shafir said. “It’s not a choice you’re making -— you’re just reduced to few options.

You can read more about the study or read the research directly in the journal Science.

Photo: Flickr

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Last week, I criticized the McDonald’s corporation for producing a website and a toolkit, aimed at their employees, designed to help those employees tackle the financial obstacles they are most likely to face. My first point was that financial literacy education hasn’t been proven to help the most needy, and in some studies, has been shown to be detrimental. My second point was that as far as financial literacy education goes, McDonald’s and the organizations that helped the company design the program don’t seem to understand some of the difficulties their audience faces.

I’ve also commented on the prevalence of financial literacy programs funded by the banking industry. In the example from McDonald’s, VISA was involved with the project to support its pay card — a debit card and account replacing paychecks and direct deposit. It might come as a surprise that I worked with a bank earlier this year to design and produce materials for a financial education series.

PNC is a regional bank, based in Pittsburgh, Pennsylvania, with branches prominent on the east coast of the United States. PNC Bank offers retail banking services: the usual checking, savings, money market accounts, consumer loans, and mortgages, all products offered by typical retail banks. Like many retail banks, PNC also offers asset management and business banking.

The bank, like the rest of the financial industry, benefits when more customers take advantage of their services. There may be some exceptions: banks only want enough depositors to satisfy regulatory requirements because they’d rather borrow from the government than from customers, and providing service to some customers can cost the banks money, for example. For the most part, the wider the pool of potential customers, the better. To widen that pool, banks want more customers to understand what they can offer, and one way to do that is through educational endeavors.

Banks can develop financial literacy resources and fill two needs. They can use education to increase their customer base and they can look like “good guys” doing it.

This project with PNC Bank, a financial education series in which I am participating, targets a different demographic than the McDonald’s attempt. In this particular instance, the reach of the McDonald’s campaign is much broader, and thanks to some ridiculous line items in the budget, has received wide media attention. PNC’s project, the PNC Achievement Sessions, will not receive such wide notoriety. It does, however, address some of the core problems faced by those who might already be customers of PNC or potential customers.

The target is definitely within a middle class demographic. The audience seems to be those already comfortable with the idea of working with the traditional financial industry and those who already know they need to do more to achieve their financial goals. This is not basic financial literacy, a concept that all too often fails in schools. The effort approaches consumer education with tools and resources helpful for handling more than just the basics of money.

Getting involved with the PNC Achievement Sessions

At the beginning of the year, I started working with PNC and their agency to develop the material for a new interactive website to fulfill their goal of consumer education. The project’s mission is for the audience “to have the knowledge and confidence to manage [their] money.”

The website would eventually become the PNC Achievement Sessions. Among the material developed were video scripts, and a few months ago, I spent two days in New York City with a production company taping the videos. Also involved in the project were Anna Newell Jones from And Then She Saved, David Ning from MoneyNing and Galia Gichon from Down to Earth Finance. Between the on-camera “talent,” the production company, and the agency for PNC, it was an incredibly professional team, and it was an enjoyable experience for me.

My contributions resulted in two videos and accompanying material. I handled two of the most complex topics in the series: getting the mortgage you want and credit score myths and facts. I can’t bear to watch myself, but reviews from family and friends have been very good. I’m still waiting for the Rotten Tomatoes review. Luckily, if you aren’t pleased with my work, PNC is taking suggestions for additions to the team for future sessions.

All six videos are presented alongside quizzes, static information, a challenge which can be shared through social media, and links to other resources, particularly those provided by the on-camera financial experts, all excellent writers.

Here is the full list of sessions available on PNC’s website today:

The videos are also available on YouTube, but the have the best effect when viewed within the context of the PNC Achievement Sessions website.

I’ve written so much about how the typical approaches to financial literacy fail. Does it make sense for me to participate in this type of consumer education? Yes.

Consumers are not being force-fed. When banks offer programs to elementary and secondary schools, they’re taking time away from the core curriculum. The students don’t want to be there. Banks are outsiders in the educational environment, and students will not be engaged in the material enough for any lessons to stick.

Efforts like the PNC Achievement Sessions are much different than financial literacy programs. Consumer education speaks to adults, and in particular, adults who seek the information out. They want to learn and feel invested in the information and the potential for improved financial situations.

The demographic is appropriate. When a family is concerned the most with fulfilling the lowest level of needs within Maslow’s Hierarchy of Needs, like food, water, and shelter, education becomes a much lower priority, if a priority at all. This is a tough audience to teach, because all lessons generate a response like, “That’s great, but right now I’m just trying to feed my family.” With kids working jobs to help the household just get by, there’s little time for anything that’s not a job, and that includes gaining practice with new skills that could lead to a better job sometime in the future.

On the other hand, consumer financial education like the PNC Achievement Sessions targets an audience that is ready and willing to move forward with their financial skills. They are eager to prioritize their future, because their present is relatively secure. An emergency fund, for example, is a pie-in-the-sky wish for a family barely living paycheck to paycheck, but for a household that is able or just about able to save money every month, the emergency fund seems like an achievable reality, as does investing for the future, buying a house, and eventually retiring.

All that being said, PNC is still a bank, and thus any material endeavor that costs the bank money, other than back-office operations, should do something to increase revenue for the company. Shareholders wouldn’t have it any other way.

There’s no mistaking that PNC, through creating the Achievement Sessions, would like the project to have several results other than the stated mission. First, the bank would like for its current customers to take better advantage of the services the bank provides. Second, PNC hopes the Achievement Sessions will bring new customers to the bank. Third, the company wants to increase awareness among the public of the PNC brand, and for it to be a positive recognition: education is a much better reason to be newsworthy than a scandal.

I do not personally have an account at PNC Bank, though there is a branch located in my local supermarket. I always encourage bank shoppers to look at fees and customer service. PNC does offer a free checking account that could be worth a look, so if you’re in the market for free checking from a branch and are located with a PNC branch within a convenient proximity, take a look.

Check out the PNC Achievement Sessions. I’d love to hear your feedback. I’m including one of the videos in this article, but I suggest viewing the bank’s website, watching more videos, taking the quizzes, and participating in the challenges. If you’re so inclined, offer suggestions to the bank for topics and experts to be featured in future sessions. If you have any feedback for me, please feel free to share it here.

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I had planned to write about McDonald’s ridiculous budgeting tips for employees when I first saw the news circulating through social media. I’m so far behind with my editorial plan that every last Consumerism Commentary reader has probably heard about this latest manifestation of corporate ignorance of reality by now. Writers of all stripes and social persuasions have already shared their two cents.

It’s almost not fair. Almost. I wrote about this same company recently because of one franchise’s desire to force the employees to receive pay via fee-riddled debit cards. McDonald’s is a significant employer in the United States, and let’s face it, the minimum-wage and close-to-minim-wage jobs in the fast food industry are opportunities for unskilled workers to eke out a living. This is an economic necessity. And the fact that a corporation is trying to instill financial values in its employees, albeit in a method that has no chance for success, can be lauded, I suppose.

McDonald’s efforts go beyond this budget. With the “help” of VISA Inc., McDonald’s has released an entire, bilingual fifteen-page PDF and accompanying website, the main marketing feature of which is, no surprise, the same VISA “pay card” that some employees will be required to use to receive their minimum-wage pay. Beyond the marketing, the website and PDF carry the typical personal finance advice: thinking about and setting goals, tracking spending and income, and designing a budget. Beyond arithmetic and understanding the social conventions of money for transactional purposes, these are the basic building blocks of financial literacy and the first steps towards building financial independence.

The program won’t be effective for the same reasons financial literacy programs, particularly those designed and funded by the financial industry, fail. That’s not to say the overall advice is incorrect or poorly presented. Lessons like these — not to mention articles on personal finance blogs — are not designed the same way those who most need the information would need to experience those lessons. If designers, writers, and advisers are looking to improve the potential for financial independence among the neediest, a group that includes families living in or near poverty, the financial literacy programs need to be designed to take advantage of how people actually learn and internalize behaviors and to address the realities of a hierarchy of needs.

I’ll get to more on the inefficacy of financial literacy in a future article. Hint: at the World Domination Summit I found myself accidentally announcing my next project. It deals directly with this problem, and now that I’ve announced my intentions, people seem to want to hold me accountable for moving forward. I’m fine with that.

Until actual evidence regarding behavioral cognition is addressed, it makes sense to evaluate programs that approach the problem, including the example budget from McDonald’s. The corporation has already responded to criticism by saying this budget was only intended as a sample, not a suggestion, description, or prescription. I don’t think that’s a good enough excuse. The budget signifies a misunderstanding of how people survive financially in poverty.

I’ve been much better over the last few years about eliminating fast food from my diet. But as I was driving back home from upstate New York a few nights ago, not having packed snacks for the road, I found myself growing hungry with about two hours remaining on the drive. I did what was convenient: I stopped at a rest stop fairly late at night and visited the only counter open: McDonald’s.

This isn’t the only time in my life I’ve opted for McDonald’s food. And I’ve noticed something in my indulgent visits over the years: The products are designed to function more like candy than food in terms of the emotional and chemical response to the dining experience, with the comparatively small burgers, the two-bite-sized chicken nuggets, the sugar, the salt. But I’ve also noticed, although I may be wrong, that most McDonald’s employees do not come from households living in poverty. The typical employee seems to be a young teenager with his first job, part-time, learning to work hard, but perhaps that observation is more a result of the neighborhoods I’ve been in. But in his or her family, at least one parents earns the bulk of the family’s income, and this fast food job is more about teaching responsibility and work-ethic than putting food on the table.

I’ve never worked in the fast food industry, but it looks like it can be frustrating, stressful, thankless, tedious, and manually laborious. Actually, it sounds like many other typically underpaid jobs, from non-profit work to the education industry, but it probably has the most in common with factory work of previous generations.

To return to the budget used an example in this VISA pay card advertisement with tips about financial literacy, the company could have provided a better example. But if most employees are students learning on-the-job responsibility rather than uneducated, unskilled laborers trying to feed a family, does it really matter? The problem is that by virtue of the need for this financial literacy endeavor, McDonald’s is assuming its employees are working there for primary household income. If the company is going to make that assumption, they ought to do it right for the benefit of that particular audience.

Here’s the original budget offered by McDonald’s, before the company responded to criticism and ineffectively shifted some numbers around.

  • It take guts to tell your employees they need a second job, and with that, still won’t be able to afford to heat their home.
  • $20 a month for health insurance is impossible. Working two part-time jobs, neither will likely offer employer-subsidized (or even employer-available) health insurance. Individual insurance costs at least $400 a month (in New Jersey — other states might have less expensive plans). There are two situations that are likely: kids working at McDonald’s still living with their parents can be covered under their parents’ insurance, so the expense is minimal, or someone in poverty will simply choose not to buy health insurance.
  • $600 for a mortgage or rent may be a good estimate in some areas of the country. I know it wouldn’t be sufficient in New York or New Jersey unless sharing an apartment with a group of people — which I did when I worked for a non-profit, getting my rent down to $350 per month. That particular living solution was unsustainable for the long-term, and I can only imagine how worse it could have been.
  • Child care and education have no place in this budget unless they fall under the “Other” category.
  • I suppose one of the biggest expenses for a family, food, is to be taken out of the “Monthly Spending Money.”

The title of this article states what should be obvious. What may not be obvious is the idea that companies that sell financial products, and in this case that class of companies is represented by VISA, are not the best distributors of basic financial knowledge. VISA is including this effort in its promotion for the company’s pay cards, the feature rolling out to McDonald’s franchises throughout the country. It’s questionable whether this system is a good replacement for paper checks, but only questionable if the employees don’t have bank accounts and must pay a fee to a check-cashing service each time they get paid, and not a good replacement for direct deposit if the employee qualifies for a free checking account.

Some McDonald’s employees, and many other households throughout the country, may have a difficult time finding a checking account that is free, and that’s a situation that must be improved within the industry before any bank or financial company can legitimately try to enter the most neediest communities with an intent to “teach positive financial behavior.”

I would say let’s just ignore McDonald’s attempts at educating its employees through good-intentioned lessons, but the company employees 1,800,000 according to their own marketing. That’s almost the entire population of Houston, Texas and a fairly big audience. Most will likely ignore the information, for better or worse.

What has been your reaction to the McDonald’s budget? Is this workable? Is it important that an example used in a financial literacy guide reflects a generalized reality?

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by Luke Landes

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