Time to take money seriously, gals

Men and women tend to handle money differently, which is to say men are more likely to save, pay bills on time and live on less than they make. We can do better.

Let me tell you a story.

Once upon a time, there was a world-famous photographer. She earned a seven-figure salary from a top magazine in addition to the tens of thousands her photographs and books commanded.

Now, according to a lawsuit filed in New York last month, she is being sued for $24 million she had borrowed and, evidently, cannot repay. She is in jeopardy of losing her homes and even the rights to her own art, decades of work.

This is the true story of Annie Leibovitz, one of the most successful photographers in history.

It's unwise, I know, to generalize too much from any one person's predicament, especially an extreme one like Leibovitz's. But there's still far too much evidence that many ordinary women are handicapped when it comes to money. And it's not a price we can afford to pay.

The female financial gap

A survey (.pdf file) released last month by Financial Finesse, an employee-benefits company, is one example:
  • Only a third of women say they pay their credit cards in full each month, whereas two-thirds of men do.
  • About 74% of women say they pay their bills on time each month, compared with 90% of men.
  • Only half of women say they spend less than they earn each month, compared with 71% of men.
  • Only a third of women, compared with half of men, say they have an emergency fund sufficient to pay their bills for a few months.

Now, who knows how accurate this survey is. It's based on 3,500 men and women nationwide who wanted to take a financial education class, provided by Financial Finesse, and filled out the company's online questionnaire. It's self-selecting and self-reported.

Still, I'd wager that respondents were trying to appear somewhat financially adept and cast their answers on the rosier side of reality.

Or let's say they didn't and were trying to be as truthful as possible. Either way, the results for the women are pathetic, especially when you consider that most respondents earned between $60,000 and $75,000 a year.

Income is no guarantee of money smarts, I know (see poor Ms. Leibovitz above). But if the more financially successful women are still lagging behind in basic financial management, that worries me.

No, I'm more than worried. I'm furious.

It starts early

After reading the above study, I went looking for a clearer picture -- from someone, anyone -- of women's financial status circa 2009.

I'll spare you the regression analyses and give you the CliffsNotes version of my research (which is still in progress):

  • Women aren't taking themselves seriously as financial people.
  • Women's lack of financial skills and acumen is putting them in deep financial danger -- in the short and long term.

And it starts early: Recent surveys of teenagers by Charles Schwab and Capital One find that even in high school, girls are not as financially confident as boys.

That lack of skills and confidence hinders women as they mature: Young men are almost twice as likely as young women to have individual retirement accounts or other investment accounts -- 21% of men versus 13% of women, according to a 2009 Schwab survey of 23- to 28-year-old adults.

It gets worse

The point isn't to slam women for being dumb (or dumber than men, which is dubious). The point is that their lack of day-to-day money skills and planning is likely to add up to profound deficits over time:
  • Less than half of today's working women have access to a pension or retirement savings plan through their jobs. That's according to a June report by the Women's Institute for a Secure Retirement, a research and policy group in Washington, D.C.
  • Of those who have access to a retirement plan, 72% of female heads of households participate in their plan, compared with 80% of eligible men, according to a survey of 5,000 401k plan participants in 2007 by the Employee Benefits Research Institute.
  • And women who contributed to their 401k plans earned an average of only $57,000, compared with an average of $84,000 for men, according to a study by Hewitt Associates, a global human-resources company.

What does this all amount to? Let's just say that millions of women are on a collision course with poverty.

The combination of shortsighted spending and saving habits, plus generally lower salaries and less time in the work force (because of child rearing), means that many women's retirement benefits end up being about one-quarter the size of men's, according to the National Center for Women and Retirement Research. (Read more in "Why women fall behind in retirement.")

Nearly a third of women (29%) who are 65 and older are single and living close to the poverty line, according to the Social Security Administration.

Apparently, women aren't connecting the dots between their money habits now and where they are likely to end up in 10, 20, 30 or 40 years.

What will you do?

Clearly there are societal factors that need to change (equal pay for equal work would be nice).

But in the meantime, my fellow countrywomen, our financial well-being rests in our own hands. What are you going to do about it? A few ideas:

  • Talk about money. Talk about spending, about saving, about how you want the future to unfold. Don't be afraid to ask questions.
  • Learn. There are hundreds of financial resources -- Web sites, blogs, books -- many of them written in plain English. A new favorite of mine (short and easy to digest): money tips from DailyWorth.

Above all, get to know yourself as a financial person, and take that person seriously -- her fears, dreams and needs. If there's a money block in your way, get yourself a chisel (or a small grenade) and blast it out of your path.

5 downsides to 'cash for clunkers'

Automakers, car dealers and the White House are praising the rebate program. But the benefits may be less than advertised. And there may be hidden consequences.

The first $1 billion allocated to "cash for clunkers" rebates apparently helped boost car sales by more than 250,000 vehicles, bringing some much-needed cheer to depressed auto showrooms. So Congress added $2 billion to the program, which by extrapolation could increase sales by more than 750,000 units overall.

Carmakers are gleeful. And the Obama administration finally has some concrete evidence that extravagant government spending occasionally moves the needle.

But the buying spree, fueled by government rebates of up to $4,500, may not be quite the economic boost it appears to be on the surface. And there will probably be some of those pesky unintended consequences.

Here are a handful of reasons that cash for clunkers is likely to look a lot less successful when seen in the rearview mirror:

1. Some of those car purchases would have happened anyway. Analysis from car-research site Edmunds.com found that at least 100,000 car buyers put off a purchase earlier this year to take advantage of cash for clunkers, once they learned about it. So those sales would have happened even without the government giveaway.

And analysis of the steep discounts offered in 2001, after the 9/11 attacks, has shown that most buyers who took advantage of the sales simply moved up their planned purchase by a few months, creating a "payback" effect when sales dipped several months later. That's probably happening now.

"We have crammed three to four months of normal activity into just a few days," wrote Edmunds CEO Jeremy Anwyl in a Wall Street Journal op-ed.

If so, car sales could dip again this fall, slowing any momentum gained over the summer.

2. The used-car market might go haywire. Since clunkers that get traded in have to be destroyed, the program could take 750,000 vehicles out of the used-car market. That's about 5% of the market, according to kbb.com, or enough of a contraction to cause significant price hikes for used vehicles.

Kbb.com predicts there will even be a used-car bubble, with a shortage now leading used-car dealers to stock up on inventory. But when the clunker rebates end, dealers could end up with too many cars, causing prices to seesaw the other way.

A serpentine sales curve makes it much harder to manage a business and earn profits than a nice steady one.

3. The program could depress sales of other goods. Most consumers have only so much money to spend, especially in a recession. And while the rebates lower the cost of a new car, buyers are still adding a sizable new payment to their monthly budget.

Purdue University retail expert Richard Feinberg estimates that the average clunker-upgrader takes on an extra $400 in monthly car payments, which could divert $1.5 billion from elsewhere in the retail economy.

"After suffering from the worst holiday sales season since 1970," Feinberg says, "retailers will be facing an even more dismal 2009, in part because of the cash for clunkers program."

So the overall effect on the economy could be nothing more than a shift from one kind of retail spending to another.

4. Drivers could end up burning more gas. That's counterintuitive, since drivers must trade in their old car for one that gets significantly better mileage in order to get the rebate. But with a fresh ride in the driveway, buyers are likely to change their driving habits.

Surveys by research firm CNW Marketing Research have found that clunker-upgraders drove their old vehicle about 6,200 miles in 2008, barely half the typical annual mileage of 12,000. But most said they'd drive their new car more and take longer trips. CNW's math shows that if clunker-upgraders drive just 90% of the annual average mileage in the first year of ownership, they'll end up burning an extra 61 gallons of gas, even though they get better mileage. Multiply that by 750,000 vehicles, and cash for clunkers would result in an additional 46 million gallons of gas being burned.

As a consolation, the program will unambiguously cut down on greenhouse gas emissions, since today's cleaner engines more than make up for extra miles driven. CNW pegs the greenhouse-gas reduction due to clunker retirement at 92% or more.

5. Sticker prices could rise. For the past 18 months, there's been an oversupply of cars, since virtually all automakers failed to anticipate the sharp plunge in sales. The excess inventory has made it a buyer's market, with historic deals available on many models. But the automakers have curtailed production and whittled down their inventory, gradually bringing it in line with demand. Now, the sudden spike in demand generated by the clunker program has created unexpected shortages of some models.

That's the kind of problem the automakers don't mind, because it allows them to raise prices. As long as the clunker program is still in place, the government rebate will mask the increase for those who qualify.

But buyers who don't qualify for a clunker rebate will be more inclined to notice that prices are up and choice cars are harder to find. And the clunker rebates will end at some point, since the government can't subsidize car purchases forever. Or can it?

Big changes ahead for student loans

Proposed legislation would provide more federal loans to students and largely cut the private sector out of the lucrative market.

Private lenders are losing the battle over student loans. By this time next summer, they probably will be cut out of the lucrative student lending market, with a handful of them relegated to the role of simply servicing loans made by Uncle Sam.

On July 21, the House Committee on Education and Labor began marking up a bill, introduced by Rep. George Miller, D-Calif., that seeks to eliminate government-subsidized private student lending and replace it with direct loans to students through the Department of Education.

"This is the biggest change in federal loans for higher education since 1965, when the original program was created," says Terry Hartle, senior vice president at the American Council on Education.

Sallie Mae, NelNet, American Education Services/PHEAA and Great Lakes Education Loan Services have been awarded loan servicing contracts by the Department of Education. But even with such a contract, the bill means "we would be about half of our size," says Martha Holler, a spokeswoman for Sallie Mae.

Look for Congress to pass the direct lending plan sometime this fall. The Congressional Budget Office estimates it would save about $87 billion over the next 10 years.

"Among other things, the savings will be used to significantly boost Pell Grant scholarships (need-based grants given to low-income students), to keep interest rates low on need-based federal student loans for years to come, to simplify the FAFSA (Free Application for Federal Student Aid) form, to invest in strengthening community colleges," Rachel Racusen, the deputy communications director of the House Education and Labor Committee, said in an e-mail.

Lenders argue students will suffer

Lenders worry that the savings will be used to plug other budget gaps rather than to fund additional higher education financing. Already, Congress' plan dramatically would cut the level of Pell Grant entitlements envisioned in the Obama administration's proposal to address the issue of who should be in the student lending market. Under that plan, less than half the savings would have gone toward that grant measure, with the other money going toward other purposes.

Meanwhile, many lenders argue that with only direct lending, students would get less in the way of services. "We offer the ability to maintain the diversity needed to keep competition up and pressure on other lenders," says Christopher Chapman, CEO of Access Group, nonprofit student lender in Wilmington, Del. "We also provide the value-added services," such as financial education.

Banks have their own turf to protect. The legislation means not only lost profits for banks now, but also a tougher time courting young borrowers in the future. In the past, college loans provided lenders easy entrée to establish a relationship with a future customer.

An overhaul for schools

For schools, the legislation translates into a major overhaul of their lending programs. Only about a quarter of eligible schools participate in direct government lending.

"To implement the proposal, about 4,500 schools would have to convert lending systems," Sallie Mae's Holler says. "It's not like putting a different disk in their PC; the whole system has to be reworked."

Subscribe to: Posts (Atom)