Category Archives: Personal Finance

Personal Finance Class

Jobs and Income Growth of Top Earners

Jobs and Income Growth of Top Earners and the Causes of Changing Income Inequality: Evidence from U.S. Tax Return Data

Jon Bakija
Williams College
November, 2010
Abstract:
This paper presents summary statistics on the occupations of taxpayers in the top percentile of the national income distribution and fractiles thereof, as well as the patterns of real income growth between 1979 and 2005 for top earners in each occupation, based on information reported on U.S. individual income tax returns. The data demonstrate that executives, managers, supervisors, and financial professionals account for about 60 percent of the top 0.1 percent of income earners in recent years, and can account for 70 percent of the increase in the share of national income going to the top 0.1 percent of the income distribution between 1979 and 2005.

Student-Loan Debt Surpasses Credit Cards

Consumers now owe more on their student loans than their credit cards.

Americans owe some $826.5 billion in revolving credit, according to June 2010 figures from the Federal Reserve. (Most of revolving credit is credit-card debt.) Student loans outstanding today — both federal and private — total some $829.785 billion, according to Mark Kantrowitz, publisher of FinAid.org and FastWeb.com.

“The growth in education debt outstanding is like cooking a lobster,” Mr. Kantrowitz says. “The increase in total student debt occurs slowly but steadily, so by the time you notice that the water is boiling, you’re already cooked.”

By his math, there is $605.6 billion in federal student loans outstanding and $167.8 billion in private student loans outstanding. He estimates that $300 billion in federal student loan debts have been incurred in the last four years.

Partially, this is a story about Americans paying down credit card debt. Some are seeking a new frugality, but many credit card companies are raising minimum monthly payments or cutting off new and existing lines that consumers in the past may have turned to during tough times. Revolving credit, the majority of which is credit card debt, reached a high in September 2008 of $975.7 billion, according to Fed data. A consumer who juggles both credit-card and student-loan debt is likely to pay of the credit-card first, as that debt tends to carry a higher interest rate.

In terms of volume, a person is likely to borrow more money to go to school today than, say, spend on necessities using a credit card during a patch of unemployment. Tuition at public and private four-year universities last year went as high as $26,000, with additional fees for housing and books not showing any signs of letting up either. It’s no surprise that many parents, reeling from the downturn, would turn to borrowing to make up the difference. With the cost of education increasing rapidly and the duration of unemployment increasing, perhaps the surprise is that this turning point didn’t hit earlier.

Student Loan Justice, a Washington State-based student loan advocacy group issued a statement on the student-loan eclipse, estimating that media coverage of credit cards exceeds coverage of student loans “by a factor of approximately 15-to-1 based on unscientific news surveys conducted since 2007.”

But student loan debt, in many ways, is different than credit-card debt. These loans typically can’t be discharged in bankruptcy. They have different repayment terms, some of which can catch some have heavy consequences for borrowers who miss payments and borrowers’ families.

Copyright 2008 Dow Jones & Company, Inc.

Americans’ credit scores drop

More Americans’ credit scores sink to new lows

NEW YORK – The credit scores of millions more Americans are sinking to new lows.

Figures provided by FICO Inc. show that 25.5 percent of consumers — nearly 43.4 million people — now have a credit score of 599 or below, marking them as poor risks for lenders. It’s unlikely they will be able to get credit cards, auto loans or mortgages under the tighter lending standards banks now use.

Because consumers relied so heavily on debt to fuel their spending in recent years, their restricted access to credit is one reason for the slow economic recovery.

“I don’t get paid for loan applications, I get paid for closings,” said Ritch Workman, a Melbourne, Fla., mortgage broker. “I have plenty of business, but I’m struggling to stay open.”

FICO’s latest analysis is based on consumer credit reports as of April. Its findings represent an increase of about 2.4 million people in the lowest credit score categories in the past two years. Before the Great Recession, scores on FICO’s 300-to-850 scale weren’t as volatile, said Andrew Jennings, chief research officer for FICO in Minneapolis. Historically, just 15 percent of the 170 million consumers with active credit accounts, or 25.5 million people, fell below 599, according to data posted on Myfico.com.

Read the rest here

Greater Fools – Financial Illiteracy

The New Yorker

Greater Fools

by James Surowiecki

The depth of our financial ignorance is startling. In recent years, Annamaria Lusardi, an economist at Dartmouth and the head of the Financial Literacy Center, has conducted extensive studies of what Americans know about finance. It’s depressing work. Almost half of those surveyed couldn’t answer two questions about inflation and interest rates correctly, and slightly more sophisticated topics baffle a majority of people. Many people don’t know the terms of their mortgage or the interest rate they’re paying. And, at a time when we’re borrowing more than ever, most Americans can’t explain what compound interest is.

Financial illiteracy isn’t new, but the consequences have become more severe, because people now have to take so much responsibility for their financial lives. Pensions have been replaced with 401(k)s; many workers have to buy their own health insurance; and so on. The financial marketplace, meanwhile, has become a dizzying emporium of choice and easy credit. The decisions are more numerous and complex than ever before. As Lusardi puts it, “It’s like we’ve opened a faucet, and told people they can draw as much water as they want, and it’s up to them to decide when they’ve had enough. But we haven’t given people the tools to decide how much is too much.” …

Default, Not Thrift, Pares U.S. Debt

WSJ Blogs Real Time Economics

By Mark Whitehouse

122%: U.S. household debt as a share of annual disposable income

U.S. consumers are paring down their debts faster than many economists had expected. To understand what that means, though, it helps to know how they’re doing it.

As of the end of March, the average U.S. household’s total mortgage, credit-card and other debt stood at 122% of annual disposable income, meaning it would take a bit more than 14 months to pay it all off if everyone stopped spending money on anything else. That sounds like a lot, but it’s better than it was before: At its peak in the first quarter of 2008, the debt-to-income ratio stood at 131%. Economists tend to see 100% as a reasonable level, so we’re almost a third of the way there.

The falling debt burden conjures up images of a nation seeking to repent after a decade of profligacy, conscientiously paying down mortgages and credit-card balances. That may be true in some cases, but it’s not the norm. In fact, people are making much more progress in shedding their debts by defaulting on mortgages and reneging on credit cards.

Since household debt hit its peak in early 2008, banks have charged off a total of about $210 billion in mortgage and consumer loans, including credit cards. If one assumes that investors suffered at least that much in losses on similar loans that banks packaged and sold as securities (a very conservative assumption), then the total — that is, the amount of debt consumers shed through defaults — comes to much more than $400 billion.

Problem is, that’s more than the concurrent decrease in household debts, which amounts to only $372 billion, according to the Federal Reserve. That means consumers, on average, aren’t paying down their debts at all. Rather, the defaulters account for the whole decline, while the rest have actually been building up more debt straight through the worst financial crisis and recession in decades. …

Read the whole article here .

How to Create a Personal Financial Statement

INC Magazine

If you own a small business or are self-employed, this guide will help you track income and expenses on a regular basis.

Business owners who are intimidated by financial analysis tend to fall into the second group—they act only when pushed. But that can be a mistake. Knowing one’s way around a financial statement is an important step in maturing as a business owner. A personal financial statement is also a helpful tool in helping you to understand the separation (and blurring of the line) between an individual’s assets and liabilities, and those associated with his or her business venture.

To read the rest CLICK HERE

20 Free Online Financial Courses

From Generation X Finance – 3/16/09

1. Fundamentals of Personal Financial Planning at UC Irvine

The course was created to help those who cannot afford extensive planning assistance better understand how to define and reach their financial goals. It provides basic understanding so informed decisions can be made. The course can also be seen as a reference for individual topics that are part of personal financial planning. This is a great introductory course to help anyone gain a better understanding of personal finance.

2. Financial Markets ECON 252 at Yale University

The course strives to offer understanding of the theory of finance and its relation to the history, strengths and imperfections of such institutions as banking, insurance, securities, futures, and other derivatives markets, and the future of these institutions over the next century. This course is packed full of video and audio of the lectures by Professor Robert Schiller.

3. Family Finance from Utah State

Upon completion of this course you should be able to: 1. Identify personal/family values and establish appropriate financial goals. 2. Develop financial plans that reflect your values and goals. 3. Begin implementation of your plans to meet short and long term financial goals. 4. Evaluate options for providing financial security throughout your life. 5. Recall and apply specific fact concerning various financial topics, tools, and services.

4. Money 101 at CNN Money

CNN Money has put together a casual course of money basics. The course is broken down into 23 different lessons from creating a budget to estate planning. While not affiliated with any specific educational institution, there is a lot of information that’s easy to navigate through.

5. Personal Finance: Debt and Borrowing at Open University

Debt is regularly featured in the news media, with stories about how much some people are borrowing, how some extraordinarily high rates of interest are being charged, or with questions about whether debt is becoming an intolerable burden for some households. This unit is going to explore some of these issues in detail. Section 1 looks at evidence on the level of debt in the UK before going on to examine some of the changing social and economic context. Section 2 explores the costs of having debt, and Section 3 considers the relationship between debt and household finances. Finally, Section 4 investigates the borrowing process, and suggests that gathering information and making informed decisions about taking on debt is an important part of financial capability. While offered by and referring to the UK, the concepts can be applied in the U.S. as well.

6. Introduction to Economics at Utah State

Introduction to Economics is designed to build an understanding of economic institutions, history, and principles. In addition, it will focus on relationship between private and public sectors of the U.S. economy. Also, it will analyze major economic institutions, such as property rights, markets, business organizations, labor unions, money and banking, trade, and taxation.

7. Investment Risk at Open University

A fair return on investment is defined as one that compensates the investor for the risk incurred in making the investment – neither more nor less. Conversely, an excess return is one that over-compensates the investor for the risk incurred. Investors want to avoid investments that pay less than a fair return, while borrowers want to avoid paying an excess return. Learn how to identify and manage different types of investment risk.

8. Investing in Your Future at Rutgers

This 11-unit home study course was developed by the Cooperative Extension system for beginning investors with small dollar amounts to invest at any one time. After exploring “the basics,” the course describes specific types of investments (e.g., stocks and bonds) in detail. You’ll begin to understand their characteristics, how they are purchased, and what it costs to purchase each investment. There are also units that focus specifically on tax-advantaged investments and investments that can be purchased with $1,000 or less.

9. Financial Security for All at Michigan State University

Financial Security for All has compiled in depth information to educate you on specific financial issues and strategies. Ranging from personal finance basics to estate planning, there are a number of resources here that can help you learn more about important financial issues that affect everyone.

10. Investments at MIT

The focus of this course is on financial theory and empirical evidence for making investment decisions. Topics include: portfolio theory; equilibrium models of security prices (including the capital asset pricing model and the arbitrage pricing theory); the empirical behavior of security prices; market efficiency; performance evaluation; and behavioral finance.

11. Taxes and Business Strategy at MIT

Traditional finance and other business courses analyze a broad spectrum of factors affecting business decision-making but typically give little systematic consideration to the role of taxes. In contrast, traditional tax accounting courses concentrate on administrative issues while ignoring the richness of the context in which tax factors operate. The objective of the course is to bridge this gap by providing a framework for recognizing tax planning opportunities and applying basic principles of tax strategy.

12. Entrepreneurial Finance at MIT

This class examines the elements of entrepreneurial finance, focusing on technology-based start-up ventures, and the early stages of company development. It addresses key questions which challenge all entrepreneurs: how much money can and should be raised; when should it be raised and from whom; what is a reasonable valuation of the company; and how funding should be structured. The subject aims to prepare students for these decisions, both as entrepreneurs and venture capitalists.

13. Economics at Carnegie Mellon University

The Introductory Economics course is a collection of online experiments and related on-line workbooks which can be used by individual learners or to supplement an instructor lead course. In each experiment a student is an active participant attempting to make deals with other traders in a market. After each experiment, the data the students generated is stored and the student will use this data to complete an online workbook. The workbook guides the student through the analysis and much of the economic theory needed to understand the related experiment. In these experiments the student is both a participant and an observer.

14. Finance Theory II at MIT

The objective of this course is to learn the financial tools needed to make good business decisions. The course presents the basic insights of corporate finance theory, but emphasizes the application of theory to real business decisions. Each session involves class discussion, some centered on lectures and others around business cases.

15. Behavioral Economics and Finance

This course surveys research which incorporates psychological evidence into economics. Topics include: prospect theory, biases in probabilistic judgment, self-control and mental accounting with implications for consumption and savings, fairness, altruism, and public goods contributions, financial market anomalies and theories, impact of markets, learning, and incentives, and memory, attention, categorization, and the thinking process.

16. Free Credit Education Webcasts

Money Management International has a collection of free online webcasts that cover topics on credit and debt. Each of these webcasts are relatively short and will allow you to digest the important topics in small pieces. Most webcasts run around 10 minutes in length and cover everything from credit scores to comparative shopping.

17. Principles of Macroeconomics at MIT

This course provides an overview of the following macroeconomic issues: the determination of output, employment, unemployment, interest rates, and inflation. Monetary and fiscal policies are discussed, as are public debt and international economic issues. This course also introduces basic models of macroeconomics and illustrates principles with the experience of the United States and other economies.

18. Principles of Microeconomics at MIT

This introductory course teaches the fundamentals of microeconomics. Topics include consumer theory, producer theory, the behavior of firms, market equilibrium, monopoly, and the role of the government in the economy.

19. Free Online Tax Course

Our home study online income tax course will teach you everything you need to know to become a tax professional. Our online income tax course will give you the skills you need to prepare tax returns professionally, even with no previous experience. If you want to earn extra income as a tax professional our online income tax course is for you. It makes learning tax preparation easy and fun!

20. Planning for a Secure Retirement at Purdue

The objective of this course is to help you with your planning for retirement. Each module provides information that can be valuable in answering the questions you need to consider as you make your plans. The modules include specific goals for the module, activities to complete, and sources for more information.

More Seniors Are Choosing Self-Employment

Viewpoint January 12, 2010 Business Week

Entrepreneurial activity is increasing among older Americans and falling among younger generations. Scott Shane examines the data

By Scott Shane

If you want to find America’s entrepreneurs, should you be searching places frequented by senior citizens? The answer, from several data sources, appears to be yes.

Contrary to the popular perception that entrepreneurship is a young person’s game, seniors are more likely than young people to operate their own businesses.

According to a June 2009 report by Dane Stangler of the Ewing Marion Kauffman Foundation: “In every single year from 1996 to 2007, Americans between the ages of 55 and 64 had a higher rate of entrepreneurial activity than those aged 20 to 34.” (more)

U.S. consumer credit down record amount

U.S. consumer credit down record amount in Nov

Jan. 8, 2010, 3:00 p.m. EST

By Greg Robb

WASHINGTON (MarketWatch) -U.S. consumers sharply reduced their debt in November, the Federal Reserve reported Friday. Total seasonally adjusted consumer debt fell $17.49 billion, or at a 8.5% annual rate, in November to $2.46 trillion. This is the record tenth straight monthly drop in consumer credit. Consumers have retrenched since the financial crisis hit in full force in September 2008. Credit has fallen in every month except January 2009. Economists surveyed by MarketWatch expected consumer credit to decline by $3.9 billion. In the subcategories, credit-card debt fell $13.7 billion, or 18.5%, to $874.0 billion. This is the record 14th straight monthly drop in credit card debt. Non-revolving credit, such as auto loans, personal loans and student loans fell $3.8 billion or 2.9% to $1.59 trillion.

Personal Savings Rate & Economic Cycles

The Fall and Rise of Personal Savings

Americans are beginning to save again, or so the media is reporting. The personal saving rate has jumped from 0.4% in 2007 to a whopping 6.9% in May. But what does that mean? Is it a good thing? And how long will it last?

The personal saving rate
“Personal saving rate” is an economic term for income that is not used immediately to buy goods and services. It’s money that consumers save for the future. (According to Wikipedia, it’s “personal disposable income minus personal consumption expenditure”.)

For decades, the personal saving rate hovered at about seven or eight percent. It would spike into the teens during times of economic turmoil, but then settle at seven or eight percent when things returned to normal. During the early 1990s, the personal saving rate began to drop. For the past ten years, it’s mostly been two percent. Or one percent. Or close to zero. …

From: Get Rich Slowly BLOG