TIME Personal Finance

Americans Are Taking on Debt at Scary High Rates

People walk along Broadway on December 2, 2013 in New York City.
Spencer Platt—Getty Images People walk along Broadway on December 2, 2013 in New York City.

Overall debt levels rose at the fastest rates seen since 2007, according to a new study by the Federal Reserve of New York

Americans are known risk-takers when it comes to their personal finances. While consumer spending has traditionally been one of the great engines of the U.S. economy, it also helped get the country into the Great Recession. So after five years of economic turmoil we’ve presumably become a little better at keeping track of our debts, right?

Not really. Data released Tuesday by the Federal Reserve Bank of New York show that at $11.52 trillion, overall consumer debt is higher than it has been since 2011. And more unsettling, debt is rising at rapid levels. Americans’ debt—that includes mortgages, auto loans, student loans and credit card debt—increased by 2.1%, or $241 billion in the last three months of 2013, the greatest margin of increase since the third quarter of 2007, shortly before the U.S. spiraled into recession.

And on an individual level, many Americans are in a precarious financial position. According to a survey released Tuesday by the financial monitor Bankrate.com, 28% of Americans have more credit card debt today than they have in a savings fund. That means that if one quarter of Americans even wanted to use their savings to pay off their debts at this moment, they wouldn’t be able to. Just 51% of Americans have more emergency savings than credit card debt, the lowest percentage since Bankrate begin tracking the issue in 2011. According to the Federal Reserve, overall credit debt increased by $11 billion in the fourth quarter of 2013 to $683 billion, the highest levels since 2011.

That data is part of a disheartening series of figures that show Americans haven’t become much better at keeping track of their personal finances since the recession began in 2008, when homeowners’ risky mortgages and freewheeling interbank lending brought the financial system to its knees. “This is not moving in the right direction,” says Greg McBride, chief financial analyst at Bankrate.com. “American consumers are not showing improvement in these areas. ”

And despite consumers’ iffy savings records, banks are loosening up their credit card limits to levels not seen since the depth of the recession. Banks are increasingly comfortable with high credit lines. Total aggregate credit card limits have increased to $2.91 trillion, the highest levels since the third quarter of 2009, putting banks at increased risk if borrowers default on their debts.

All that does not mean we are on the road to a second recession. In fact, the increase in household debt could also have a lot to do with increased consumer confidence in the economy, which grew at 3.2 percent in the last quarter of 2013. And debt helps drive economic growth as consumers spend more money on the assurance they’ll make it back later. Overall debt levels are still lower than they were when the recession hit, even if they are increasing rapidly; consumer debt remains 9.1% below its 2008 peak of $12.68 trillion, according to the Federal Reserve.

Carl Richards, a financial planner and director of investor education at BAM Advisor Services thinks that one explanation for Americans’ willingness to take on more debt could be the relative improvement of the economy over the past year, when the workforce added 2.2 million jobs over the course of the year. For consumers with extra money in their wallets, taking on more debt in anticipation of a bonus or a raise may not seem so risky. But that could be a big mistake. “We’ve already forgotten 2008 and 2009, and now we’re projecting into the indefinite future and we’re spending based on as if it had already happened,” says Richards. “Our default setting is optimistic, and maybe overly optimistic.”

If consumers aren’t on steady financial ground, it could put Americans at greater risk if the economy doesn’t improve at a fast enough rate. And it doesn’t help that Americans are not very good savers. “People aren’t making substantive progress on emergency savings,” says McBride, referring to Americans’ weak personal savings-to-debt ratio. “Americans have made some progress on debt repayment… but (savings) continues to be the Achilles heel of financial security. And it was never a strong point to begin with.”

The good news may be that many Americans are at least aware of their financially precarious situation. A monthly survey by Bankrate shows that Americans are less comfortable with their levels of savings than they have been in a year. Overall sense of financial security among Americans has fallen as well. Unfortunately, that partly reflects stagnant wages and increasing economic inequality. But it also reflects an awareness among Americans that they should be doing better. Americans “realize they need a lot more than they have, and they realize the progress is slow-going,” McBride says.

TIME Personal Finance

Capital One Wants To Visit You At Home

Bank's new credit card contract reserves the right to pay a "personal visit" to cardholders

“Hello, it’s Capital One, can I come in? I brought lemonade!”

That’s something credit card customers of the Capital One bank are worrying they might hear on their front doorsteps. The credit card issuer said in a recent contract update to cardholders that it can contact customers “in any manner we choose.”

That includes calls, emails, texts, faxes or a “personal visit,” reports the Los Angeles Times. The company has also reserved the right to suppress its caller ID and identify itself however it wants, a tactic known as spoof calling.

Capital One said that, despite the legal language, it doesn’t typically pay home visits to its customers. “Capital One does not visit our cardholders, nor do we send debt collectors to their homes or work,” the company spokeswoman said.

The bank told the L.A. Times it might occasionally “as a last resort” visit a customer’s home to repossess costly goods involved in credit promotions. But the spokesperson added that Capital One is “reviewing this language” in its contracts.

[LAT]

TIME Financial Education

The Economy is Big News–So Why not Teach it?

School
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With the economy on the front page most days the past six years, you might think economics and personal finance would be a prominent subject in our schools. Yet less than half of states require an economics course in high school and little more than a third require one in personal finance, according to a new survey.

The long trend is mildly positive. For the first time, all 50 states and the District of Columbia include economics in their K-12 education standards, meaning they have guidelines for those schools that want to offer such a course. Meanwhile, more states are offering and requiring personal finance courses.

These are the chief findings in the Council for Economic Education’s 2014 Survey of the States report, out today. The CEE, which surveys each state every two years, is a strong advocate for financial education and believes that requiring school courses in economics and personal finance is an important path to progress.

“A more financially capable population can result in a larger and more efficient market for financial products, greater participation in asset building and greater financial stability,” Richard Ketchum, Chairman of the FINRA Investor Education Foundation, states in the report. “It is therefore in everyone’s interest that action be taken to improve the financial capability of all Americans.”

Ketchum notes that young people are entering adulthood saddled with debt: 36% of Millennials have student loans outstanding and 55% say they might not be able to repay this debt. Only a third have emergency savings while about the same share have unpaid medical bills. Nearly half carry a balance on their credit cards.

Financial education in schools is seen as one way to bring such numbers down over time. But first we have to bring up the numbers of states and schools that offer or require such coursework. The sobering numbers related to economic education are especially troubling because virtually every family in America was touched by economic troubles during and since the Great Recession.

While every state is on board with economic standards, just 24 require that an economic course be offered. That’s down one since the last survey. The number of states requiring that an economics course be taken in high school remains constant at 22. These numbers argue that the states are taking a pass on the mother of all teachable moments.

The news is a little better on the personal finance front. Now 18 states require that high schools offer a course, up from 14; and 16 states require personal finance instruction, up from 13 in the last survey. It’s not clear why there’s been more progress in personal finance. In part, the states that have embraced economic education are now picking up on the need for personal finance too. Another explanation is that while the hardships of the past half-decade may be better understood through an economics course, it’s better understanding of personal finance that will allow families to manage their way through tough times.

Despite the progress, these courses remain a tough sell at the state level—and that is where the battle lines are drawn. Unlike in the U.K. and other regions with a federal mandate for financial education, state authorities call the shots in America. They must be convinced one at a time, and they have been slow to respond.

TIME Personal Finance

Knowing Your Net Worth Can Help You Plan

Calculating your net value will help you plan your future more productively.
David Emmite—Getty Images Calculating your net value will help you plan your future more productively.

Calculating your net worth is easy, and a valuable exercise. Here's how.

Your boss doesn’t know your value, right? But do you even know it? Most people have never taken the time to figure their net worth even though it’s a fairly simple calculation. Why not take stock now? The New Year is still full of promise.

Your net worth is what you’d have left after selling everything, paying the bills and settling all debts. Think of it as your liquidation value. The number is of keen interest to heirs trying to understand what will be theirs. But it’s useful for you as well. Calculated annually, your net worth provides the clearest picture of whether you are getting ahead. It helps gauge when you might retire and gives a roadmap to where you are losing or gaining value. That makes it easier to adjust and meet your goals.

Say, for example, your goal is to retire with $1 million. But during the worst two years of the recession your net worth—your total liquid value—went from $380,000 to $250,000. You’d understand right away that you need to adjust. Net worth hits home in a more visceral way than, say, looking only at a 401(k) statement that provides only part of the picture.

To figure your net worth you need two sheets of paper, one of them labeled assets and the other labeled liabilities. You want to add all assets and subtract all liabilities, reducing your life thus far to a single number. You can find online calculators to help. You can also see how you stack up against people your age and at your income level. For example, the median 55-year-old has a net worth of $180,125; the median net worth of households earning $75,000 a year is $301,475, according to Nielsen Claritas.

Start with assets, including retirement savings, checking and savings account balances, bonds or annuities, the total value of any stock holdings, your home and automobiles. To really fine-tune the figure include artwork, jewelry, furniture and other possessions that for most people do not move the needle a great deal. Put a value on each of these things and add them.

On the liabilities sheet, list all credit card balances, personal loans, student loans, auto loans and mortgages. Then add those and subtract it from the figure you got on the assets sheet. Voila. You now know what you are worth on paper. Watching this number from year to year shows how new debts and all spending subtract from your net worth, while general thrift, retired debts, and investments that rise pad your net worth.

The figure is not perfect. Figuring your net worth is especially difficult if you own a small business, which may be difficult to value. If you are young and in a great career your net worth might be negative—but that’s okay. Once those college loans are paid off and you get a few raises that can turn around quickly. Likewise, if your net worth takes a dip because the stock market or housing market fell, that’s not so terrible assuming you can hold on for the recovery. But it’s always good to know where you stand.

TIME Personal Finance

Millennials Put Their Surprising Stamp on the American Dream

Millennials seek travel and self-employment as part of their American dream.
Roberto Westbrook—Getty Images/Image Source Millennials seek travel and self-employment as part of their American dream.

Shaped by the times, Millennials dream about travel and self employment--and staying far off the corporate ladder.

Every generation puts its stamp on the American Dream. But none have re-engineered the term quite like Millennials, who mostly want to travel and not work slavishly for the man.

The American Dream has been part of our culture since the 1930s, and has at times referred to home ownership, a good job, retirement security, or each generation doing better than the last. Now comes a new young adult population to say it means none of that; the dream is really about day-to-day control of your life.

In a new poll, 38% of Millennials say travel is part of the American Dream, exceeding the 28% who name secure retirement. They identify the dream of home ownership at a far lower rate than Gen X and baby boomers. Meanwhile, 26% of Millennials cite self-employment as part of the dream—more than Gen X (23%) and older boomers (16%), according to MassMutual’s third biennial study The 2013 State of the American Family.

These attitudes make a lot of sense in the context of the era that Millennials have come of age. Home ownership? Many of them saw the foreclosure crisis up close. A good job? The rate of 16- to 24-year-olds out of school and out of work is unusually high at 15%. Many college graduates have taken jobs that don’t require a degree.

What about retirement security? Again, this generation has seen the retirement hopes of its parents fade with lackluster investment results and crumbling pensions. It seems the Great Recession left its mark. As a group, Millennials prize job mobility, flexible schedules, any work that is more interesting than punching a keyboard, and the ability to travel and be with friends. Millennials (11%) are far more likely than boomers (3%) to identify close friends as part of their family. To an extent, they are starting to get what they want at the office.

Many find this new worldview troubling. If a recent Millennial-focused Rolling Stone article championing a socialist agenda is anywhere near correct, the worriers may have a point. The author is looking for the second coming of Karl Marx “to grow old in a just, fair society, rather than the economic hellhole our parents have handed us.” He wants guaranteed jobs, government-supplied minimum income, real estate confiscation and more.

The argument is absurd and grossly overstated. But it points up how different the landscape is for young adults today, and the growing level of frustration that has emerged since the recession. A true American Dream has to feel attainable, and many Millennials aren’t feeling they can attain much more than a day-to-day lifestyle that suits them.

They aren’t alone, by the way. Some 45% of older boomers agree that the American Dream is slipping away—up from 30% two years ago. Boomers still cling to the old American Dream of financial independence (80%) and home ownership (78%). But for a broad swath of the population those dreams too are starting to feel elusive.

TIME Career Strategies

Global Internships: The New Key to Getting a Job

Job seekers on their way to meet employers at the 25th Annual CUNY big Apple Job and Internship Fair at the Jacob Javits Convention Center on April 26, 2013 in New York City.
Spencer Platt / Getty Images

As if paying for college wasn't enough, now students are paying to get a high-value internship that will give them an edge in the job market.

The debate over the value of college that billionaire Peter Thiel sparked three years ago hasn’t gone away. Yet most adults continue to place a high priority on saving for college, and a growing number of families are doubling down on education—paying for high-value internships on top of a degree.

Youth unemployment remains high—about 13% globally. Thiel and others argue that it’s foolish to go into debt for a diploma when so few appropriate jobs are available for graduates. Better to start a small business or learn a trade.

Statistics say otherwise. The Pew Research Center found that a typical adult with a bachelor’s degree will earn $1.42 million over 40 years—$650,000 more than someone with only a high school degree. The cost of college and lost income while in school narrows the gap slightly, to $550,000. Pew also found that adults with a college degree fared better in the Great Recession.

There is no denying that crushing student loans may bear on graduates for years, and that those who go into debt but fail to graduate are especially hard pressed. But for most people education works, and the good news is that through online courses the price will come down markedly over the next decade, and may even become free.

So it’s no surprise to see parents and young people continuing to place a high priority on higher education and the pre- or post-graduate internships that boost employment prospects. Among families that have saved anything for college, 85% say it is one of their top three priorities and 60% will save more this year than they saved last year, according to a Fidelity Investments survey. They are saving monthly (81%), or earmarking their tax refund (37%) or a bonus or pay raise (36%), and redirecting funds that had been used for day care or another expiring expense (29%).

On top of this, families have begun budgeting for global internships, a trend that universities and a cottage industry of placement firms has furthered. “The data show that international internships are highly regarded by employers,” says David Lloyd, founder of the Intern Group, which has placed young adults from 80 countries in positions around the world. “The kids who will be successful today are those that take themselves out of their comfort zone and develop a global mindset.”

This means going beyond simple study abroad programs to employment in a foreign country that will build a young person’s contacts and context, Lloyd says. Such programs are especially popular in the U.S., where more than a third of Intern Group alumni reside. Lloyd says that 88% of those who take part in his firm’s programs find work at a graduate level job within three months and that 95% say the program was good for their career.

These internships start at around $3,500 for a six-week program. Some last six months and are more expensive. But, says Lloyd, “employers worldwide prize graduates with global experience and international cultural awareness.” The right internship gives graduates a decided edge.

Hilton Hotels is among companies that prize internships, and at the 2014 World Economic Forum in Davos announced an Open Doors campaign to help 1 million young people “reach their full potential” over the next five years through global apprenticeship and other programs. “These are a huge deal,” says Jennifer Silberman, vice president of corporate responsibility at Hilton Worldwide. “Young people are at a competitive disadvantage if they don’t get this kind of experience.”

Indeed, McKinsey found that half of college graduates are not sure that their education improved their job prospects and that 39% of employers say entry-level jobs go unfilled because young people don’t have the required job skills. An apprenticeship, says Silberman, “lets us identify high-potential workers and fast-track them.” The travel industry is projected to create 73 million jobs the next 10 years, and most of them have career potential, she says, adding that it’s not unusual for an apprentice to be offered a full-time job and then get their first promotion within six months.

You don’t necessarily need a college degree to become a concierge or housekeeping manager, which is kind of the argument Thiel and others make against going into debt to go to college. But even in the services-heavy travel industry there are lots of marketing, technology and management jobs that require higher education—and where a high-value internship really helps.

TIME Personal Finance

The Richie Rich Effect: Kids Cash In On Improving Economy

A new study shows children are receiving larger allowances from their parents.
Jamie Grill—Getty Images A new study shows children are receiving larger allowances from their parents.

In this economy? Well, yeah

Your kids are demanding a raise, and you’re probably going to give it to them.

So says a new study that shows children are receiving increasingly large allowances from their parents, partly as a result of the improving economy, it seems.

While the percentage of parents giving an allowance of up to $10 a week fell from 77.3 percent in 2011 to 68.4 percent in 2013, the percentage of parents giving between $11-$20 or between $21-$30 jumped sharply, according to an annual Parents, Kids & Money survey, Reuters reports.

And some kids seem to be rolling in dough. Four percent of parents gave between $41 and $50 a week in 2013, nearly quadruple the number from the 2011 survey—and more than one percent of parents are handing out between $91 and $100 a week.

So are your kids getting above or below average allowances? A 2012 survey by the American Institute of CPA’s shows eldest children received an average of $16.25 each week.

The allowance increase could partially be attributable to families feeling more stable in the post-recession years, or it could be that kids are paying for more things they need, like clothing, for example, Reuters reports.

Others suggest there might be a social factor at play. Humorist Dan Zevin told Reuters his son had been influenced by what his friends had been given. “The only thing that matters to your kid is what Richie Rich’s parents are giving down the street,” he said.

Just hope the kids don’t ask for a bonus.

[Reuters]

TIME Personal Finance

Nearly Half of America Lives Paycheck-to-Paycheck

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The economic picture is looking brighter these days. The federal government announced Thursday that economic growth had picked up to its fastest pace in two years, while employment growth over the past five months has averaged a healthy 185,000 new jobs. But as evidenced by a report out Thursday from the Corporation for Enterprise Development, nearly half of Americans are living in a state of “persistent economic security,” that makes it “difficult to look beyond immediate needs and plan for a more secure future.”

In other words, too many of us are living paycheck to paycheck. The CFED calls these folks “liquid asset poor,” and its report finds that 44% of Americans are living with less than $5,887 in savings for a family of four. The plight of these folks is compounded by the fact that the recession ravaged many Americans’ credit scores to the point that now 56% percent of us have subprime credit. That means that if emergencies arise, many Americans are forced to resort to high-interest debt from credit cards or payday loans.

And this financial insecurity isn’t just affected the lower classes. According to the CFED, one-quarter of middle-class households also fall into the category of “liquid asset poor.” Geographically, most of the economically insecure are clustered in the South and West, with Georgia, Mississippi, Alabama, Nevada, and Arkansas being the states with the highest percentage of financially insecure.

TIME Retirement

The Problem With President Obama’s ‘MyRA’ Savings Accounts

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Expanding savings opportunities makes sense. But a big issue is whether people have the means to use them.

To better enable Americans to save for retirement, President Obama said he would order a new “starter” savings plan called MyRA geared at low-income households. It’s a fine idea. But as with any personal savings account, you must be able to fund it for it to matter. That may be the biggest problem with the program.

Little is known about these new accounts. They would function like a Roth IRA, allowing savers to put in after-tax money that would then grow tax-free. They’d be available through your employer to anyone who does not have an individual retirement account or work for a company that offers a traditional pension or 401(k) plan. That comes to about 39 million households.

The big advantage is that you could open a MyRA with as little as $25 and make contributions of as little as $5, creating a regular savings opportunity that most low-income households have never had. Typically, plan administrators require $1,000 or more to open an account. MyRAs would also benefit from a no-fee structure that does not eat away at savings.

Your MyRA would also enjoy a government guarantee against loss of principal. The downside is that your money would be funneled into low-yielding Treasury securities and have little potential to grow enough to make a big dent in your personal retirement savings crisis—or that of the nation as a whole—until you have accumulated enough to roll it into a regular IRA where you might benefit from investments with greater growth potential.

Offering low-income households a place to save doesn’t really fix the big problem: they still must have the money and the discipline to take advantage. More than half of workers have less than $25,000 in savings and 28% has less than $1,000 in savings, reports the Employee Benefits Research Institute. And with the MyRA, you could take money out anytime without penalty. That would be awfully tempting the first time money gets tight.

The retirement savings plan represents an important first step,” says Ai-Jen Poo, director of the National Domestic Worker’s Alliance. Still, she says, “Most Americans are not able to plan for their futures because they are trying to deal with their most immediate needs, like paying their rent and keeping their lights on.”

The new accounts call to mind the so-called “catch-up” provision enabling savers past age 50 to put away an extra $5,500 in their 401(k) each year. That’s a fine idea too, but since its adoption in 2001 only the relatively well to do have used it. Let’s face it: Not many folks have an extra $5,500 lying around.

Only 13% of those eligible have made the extra contributions, according to an analysis of data provided by Fidelity Investments. That’s largely because regardless of age almost no one even contributes the maximum $17,500—already a lot of money to take out of your budget each year. For the vast majority, the extra $5,500 has proven to be irrelevant, concludes the Center for Retirement Research at Boston College.

So let’s not pretend that MyRAs will save our collective retirement dreams. They give more people more opportunity to save, and you cannot argue with that. But for these accounts to make a real difference, the folks they are meant to help most will need extraordinary willpower.

MONEY Banking

What Does the Bank of the Future Look Like?

Illustration: Stephan Walter Besides being able to chat with reps online, you should be able to instant-message with your bank via your phone soon too. Also, watch for ATMs with videochat capabilities.

Instant service, contactless payments and directed coupons may all be part of your banking in the upcoming years.

Here’s what you can expect from banks of the future:

You’ll get instant service. Besides being able to chat with reps online, says Alex Matjanec of MyBank Tracker.com, you should be able to instant-message with your bank via your phone soon too. Also, watch for ATMs with videochat capabilities (Bank of America is now trotting this out).

You won’t need a debit card. Despite PayPal, Google, and Square’s attempts at digital wallets — which allow you to pay for purchases with a smartphone –“contactless” payment hasn’t yet hit critical mass. Customers will be more likely to adopt it when their banks offer it, says Monahan.

Your storefront bank will go 2.0. Traditional banks will offer one set of terms for online-only customers — higher rates, fewer fees — and another for those who want to go into a branch, predicts MoneyRates.com’s Richard Barrington. Fifth Third has already launched web-only accounts with better terms.

Your bank will play personal shopper. With every debit, your financial institution is creating a picture of your tastes. Now that banks can get in touch via your smartphone, expect them to start texting you deals from “partners” on products you’re likely to buy, says Ajai Nagarkatte of financial services association and research firm BAI.

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