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Tahira Hira and Adam Carroll Discuss Financial Literacy

posted on January 21, 2009 at 2:49 PM

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About Seventy percent of the U.S. Gross Domestic Product is generated from retail sales. But the last six months have seen a fall off in such sales.  Statistically, Americans appear to be saving more.  But those numbers are clouded by other actions. There is some evidence that people are selling assets to pay bills.

Unemployment has been rising and people have been pulling money from stock and bond funds to make ends meet.  Cutting back in the face of an economic downturn may be saving, but it is forced savings, not elective.  Still the recession could well be the teachable moment for those who are preaching the gospel of thrift.

Paul Yeager: The power of compound interest is one piece of knowledge that a financially literate person should have.  But what else should most people know?

·         How can they maximize the return on their savings and minimize their risk? 

·         What financial instruments must they understand? 

·         What are the best sources for such information? 

Here to help us sort through these questions are Adam Carroll, who we've just seen in that videotape story and also Dr. Tahira Hira, she's a professor of family economics and personal finance at Iowa State University and also a member of President Bush's Advisory Council on Financial Literacy and also both guests on the Iowa Journal before.  Welcome back to the program. 

Dr. Hira, I'd like you to put your professor hat back on, let's grade what Adam said.  What can you add to what he has just talked about?

Dr. Tahira Hira: Well, first of all I want to say that Adam has done a very good job of helping us understand managing money or being financially healthy is really not a rocket science, it's a very, very simple matter.  And I would just add a couple of things.  Number one, I think we all need to understand what our means are, I mean, how much money do I really have and how much am I spending.  And then, of course, the question comes what am I spending on. 

The very important part is to balance the income and expenses and when we say expenses that doesn't mean all the money that we are spending on today's needs, it also includes what I need to set aside for an emergency fund, unexpected circumstances, preparing for some things that may go wrong and furthermore the things that need a larger amount of money that can not come out from a monthly income.  So, that means you set aside some money for the long-term goals.  So, that all needs to be balancing with your income that you bring in. 

So, if we don't do that it doesn't matter how much money you make.  I mean, we put so much emphasis on the income and what I have.  What's very important is to turn around and start to put emphasis on what I'm spending and does that match with my income that I earn.  I have a sense that if we were to do that lots and lots of problems will go away.

Paul Yeager: Things could go away because you never know, a furnace could go out right now, we're in record cold temperatures across the state, that's an unexpected expense that could come up here.  But let's talk about the mindset right now of saving.  Say I did really well, I put money in my 401K or a Roth IRA but it just got beaten to smithereens in the last couple of months.  How do you change the mindset or tell someone you need to keep going down that path?

Adam Carroll: Well, there's a tremendous amount of fear right now, Paul, and people are pulling the money out of the market because they think that's a dangerous place for them to be.  At this point we've probably gotten about as low as it's going to go and the smart money is going back into the market as this point.  So, the idea behind continually investing could not be more paramount today than it ever has been.  The time to invest is now.

Paul Yeager: And not in coffee cans in your back yard but in the market.

Adam Carroll: Precisely.

Dr. Tahira Hira: When we set the money aside for retirement right then and there regardless of how the markets are performing we have an enormous amount of a return coming to us and that is in the form of the tax savings.  So, based on your marginal income tax when you put the money into a retirement account you are saving taxes right off the bat which could be 15% to 20%, 25%. 

Where else are you going to get that kind of return?  Or you can talk it in a different way like if you put a dollar in retirement and based on your income tax it could be that the government is paying you twenty cents and you're only putting eighty cents in there.  So, I don't think you want to leave that on the table and walk away. 

So, even if the market wasn't giving anything to you, you already are receiving a whole lot on it and if whatever that you earn on it is also going to be tax free.  So, I think in addition to what Paul has said I think we need to understand that part of saving into the retirement account.

Paul Yeager: And this is not a time to be pulling money out, to be taking expenses, that would almost be the worst thing to do, right?

Dr. Tahira Hira: Let me again bring an example.  We are so used to walking into retail shops when there's things that have decreased in prices.  So, prices of the stocks have fallen or other investments so this is the time to gather them because small amounts of money that you invest is going to give you the opportunity to bring more. 

I think personally I have faith in this country even though I have seen the worst, I still have a lot of faith in this country.  I am totally convinced that we will turn around.  I do believe that we need to be in the market at this point in time so that a small amount of money can buy you a whole lot more and then the value will go up.  And I just don't think that we can serve our country by not being able to do that.

Paul Yeager: Adam, Dr. Hira talked about it just a little bit in shifting some money, but what about paying down on your house right now?  Would that be a good investment if the market isn't what you would like and you're like, oh, I could knock off a couple of mortgage payments a couple of months a year, would that be a good idea to be doing right now?

Adam Carroll: There's a couple of schools of thought around that, Paul, and one is regardless of how much you send back into your mortgage company to pay down that mortgage they're going to ask for the same amount the following month.  And so my advice to people is if you're going to make an extra mortgage payment you're almost as well off paying down high interest credit card debt or paying off your car.

Paul Yeager: Say you're beyond that, though, say you've got those things taken care of, not everybody does but there are some people who have been responsible.  Would it still make sense to move forward on trying to pay off that house?

Adam Carroll: I would say they are okay to do that and it would be good advice to do that if they have set aside six to twelve months in a contingency fund in case someone loses their job or there is a medical emergency or, as you mentioned, a furnace goes out.  So, there are some basics, some elemental steps that people need to take.  If they have all of those in a row, they have fully funded their Roth IRA, they are contributing to their 401K, I say pay down your mortgage.

Paul Yeager: So, list some of those down again because I did interrupt you there once.  I want you to hit those again because those are very important.

Adam Carroll: Well, I think the first and most important thing is you get rid of high interest credit card and revolving debt.  Smart money to me is you don't have a car payment and I know there are a lot of people who would challenge me on that but I haven't had a car payment in six years and I love not having one.  I think you fully fund your Roth IRA every year.  You fully fund or as much as you can your 401K at least up to your company's match point.  And then you have a six to twelve month emergency fund in place at that point.  Then you might look at putting some money towards your mortgage.

Paul Yeager: Dr. Hira, I see you agreeing with that.  Are there other steps that we can do?

Dr. Tahira Hira: I think he listed them all well and I do believe I was shaking my head on not having a car payment.  I think we need to come to an understanding when we think that we have these things, are they really ours, and the car is never yours unless you have a clear title to that car.  And not having a car payment is a very important thing. 

I've never had a car payment -- I'm three times ahead of you in my lifetime, my third, fourth, fifth car, never had a car payment because it is a very high interest rate that you're paying.  We should buy a car that I can afford and save for it.  The way to do things is to save ahead for a thing that you want and then take the money to buy it and just learn to enjoy the pleasure that you get out of that.  And we have forgotten that. 

What we do is we say give it to me now whatever it means and just tell me what the payment is and the seller is saying I can minimize it, I can minimize it.  Well, the cost to you is very high.

Paul Yeager: I'm not blaming car companies but they make it well we can put you in this car whatever it is that you can pay we can do.  That's kind of dangerous.

Dr. Tahira Hira: Yeah, but my point is that it's easy to say that somebody else is responsible for my behavior.  I will say to you I am the only one responsible for my behavior.  I know who I am.  You can tell me anything you want, I don't want to believe it, I know the truth so you can tell me that you're going to put me in this fancy car but I know that's not the car I can afford. 

So, I think the very important lesson that we all need to learn may be the very difficult time that we are all experiencing in this country today it has a bright side to it and that is perhaps we will get in touch with the reality and that is to become realistic, become honest, become an honest person who I am rather than who somebody tells me I am or I need to be.

Paul Yeager: Adam, plug in a number for me if I walk into the car dealership and I walk in with an amortization table of well, if you're telling me 7% what's that really going to cost us if we lower than down to $100, $200, $300 a month?  How much longer are we going to have to pay for that car that's $20,000?

Adam Carroll: Well, I think what people need to do is they need to go in if they are car shopping and number one they have to get pre-approved and qualified through a credit union.  You're not necessarily going to get the best financing through a car company.  Number two, you want to find out, okay, they're going to put me in whatever payment I say but what does that mean over the long-term exactly as Dr. Hira mentioned.  There is a long-term cost to owning a car and it may be three times what the value of that car is over time. 

The bottom line is we have become a 24 easy monthly installment society.  We want immediate gratification, we want to buy something now when we get an immediate high and we're not willing to invest money over time or save money over time to go buy that.  And what I've found is that when you buy something and you literally own it as Dr. Hira mentioned, when you own that the high isn't temporary, it's forever, you own that and you know you own that and that's what I think we need to get back to.

Paul Yeager: Well, it's one thing with your house that might be three times the value when you bought it after that 30 years is done but that's a house.  A car is not going to last 30 years.  And so how do we break ...

Dr. Tahira Hira: Not only the car isn't going to last that long the very important lesson with cars is the minute you take your car off the lot the value drops dramatically and after one year it has even dropped furthermore down.  You can have a bundle of loan with you for that same car but the value has already dropped the minute you walked out.  

The sad part is that that is something that we do not understand.  So, the good thing is to, again, come back to the reality.  What is it that I can afford and what is it that is really mine.  You can have a crowd of things around you but if you don't have clear title on anything nothing is yours and that is the sad part.

Paul Yeager: What type of things that you've been telling us have you been working with or telling and talking about with your President's Advisory Council on Financial Literacy?  Are these different things?  Are there people who are like, what are you saying Dr. Hira?  How are you being met with some of these statements that you've made?

Dr. Tahira Hira: The council consists of about I think eleven or twelve members and all of them are non-academics other than myself but the amazing part is how much we think alike and we are saying the same things to people -- I will tell you the four or five things that we have sent out and somebody actually picked them up from the draft part and said, what should the Obama government be doing about this personal financial literacy ...

Paul Yeager: Obviously people are paying attention.

Dr. Tahira Hira: They said schools should be required to teach financial education from kindergarten through 12th grade.  College students should be required to take a course in financial literacy in order to receive federal student loans because people are borrowing thoughtlessly because it's available.  Employers should be receiving tax incentives to teach workers about money because we seem to not do the right thing because it is the right thing to do.  It's like give me something before I do anything so give them incentives. 

I have a philosophical concern about that but I guess if that's how we will do it fine.  Governments should create a resource center on its financial literacy Web site, which they have already which is by the Treasury Department and it's very simple, www.mymoney.gov and I highly recommend people to go to that site because there are very reliable sources there that we have put there for human resource professionals and employees. 

I think human resource professionals need to understand financial education so pass it to employees.  And last but not least is financial institutions should be required to provide every adult American with access to a debit card and access to a bank account.  We have lots of people in this nation who won't have access to the bank because then they are going to the sources which are very dangerous for them.

Paul Yeager: Real quickly, we're under about 90 seconds here, do you know if the advisory council will continue under the new administration?

Dr. Tahira Hira: Yes, the new administration -- first of all the council was appointed under an order from President Bush which gave them life for two years.  So, I think after our last meeting on January 6th we are convinced that we are going forward for the next year for sure.  During our last meeting there were two members of the Obama transition team who were sitting there which was very encouraging that they were wanting to be there.

Paul Yeager: Adam, you like the direction that council is going.  What other final tips can you give to people right now?

Adam Carroll: Teach your kids delayed gratification.  The young people in this country absolutely need to hear that.  They need to know that cash is king and they need to start saving.

Paul Yeager: Thirty seconds.

Dr. Tahira Hira: I would say that parents need to understand what they do and what their children do and they need to be good role models and, of course, they should be consciously helping their children understand the money values, it's very, very important.

Paul Yeager: I always love the discussion.  It's been good to have you back on the program, thank you so much.  Dr. Tahira Hira with Iowa State University, also a member of President Bush's Advisory Council on Financial Literacy and Adam Carroll, co-author of the book Winning the Money Game, a rulebook for achieving financial success for young people.  Thank you both for coming on tonight’s Iowa Journal.  

Tags: budgets economy education finance financial literacy Iowa literacy money


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