Study Examines How Students' Financial Behavior Is Formed, and How It Affects Their Future

By Beckie Supiano (July 8, 2009)

For most traditional-age students, beginning college marks a new level of financial independence. It’s a time when key financial habits are formed, but relatively little is known about how that happens or what impact those habits have on a student’s future. A new longitudinal study aims to find out.

The study, "Arizona Pathways to Life Success for University Students," is following a group of 2,098 University of Arizona freshmen from the start of college onward to see how financial attitudes and behaviors developed in early adulthood relate to overall well-being and success.

The sample of students, all of whom began college in the fall of 2007, is fairly representative of their overall class, though women, in-state students, and minority groups are slightly overrepresented, and the group’s average GPA is slightly higher than that of their peers.

If the project receives enough financial support, it will continue until the students are in their 40s, says Soyeon Shim, a University of Arizona professor of family and consumer sciences, and the study’s lead investigator. That would enable the researchers to trace connections between the participants’ financial attitudes and behaviors and their overall well-being until they reach an age where most of their large financial decisions have been made.

One hypothesis the researchers plan to test is whether the financial relationships students have with their parents predict their financial relationship with a romantic partner later in life, she says. The study is interdisciplinary, bringing together insights from consumer sciences and developmental psychology.

“Money plays a central role in every aspect of what kids do,” Ms. Shim says, “and yet we haven’t spent time thinking about what this means.”

The first set of data was collected in the spring of 2008, during the students’ second semester. At that time, the students had an average credit-card debt of $169, average educational debt of $2,046, and average other debt of $512.

The research focused largely on the students’ financial habits and how they formed—finding that parental teaching was particularly important.

The researchers created a statistical model to assess how parental teaching, work experience, and high-school financial-literacy courses affected students' behavior. They found that parental teaching had a greater impact on students’ financial relationships with their parents, their own satisfaction with their financial behaviors, and their financial behaviors themselves than did the other two combined.

“Parents have a wonderful role to play in helping kids in this transitional time,” says Joyce Serido, an assistant research scientist and the study’s project manager. In fact, the researchers are encouraging the university to include a session in freshman orientation for parents on talking with their children about money.

The finding about parents is an encouraging one, Ms. Serido says, because their skills can be improved. And, she says, the research does not show a strong connection between parents’ income and students’ financial behavior. “It’s not about how much money you have, it’s how you manage it.”

But the findings aren’t all bad for students who don’t get good financial training at home, since having a job and taking financial-literacy courses do help, Ms. Serido says. “The more ways you get the good message, the more likely you’ll get results.”

Handling Money

On average, students in the survey reported that they had a “moderate understanding” of finances. They also reported having more financial knowledge than their peers. And when given a set of 15 true-or-false financial questions, they answered an average of 59 percent correctly.

The survey asked students about how they budget, borrow, save money, and pay bills. Based on the students’ responses, their behaviors were grouped into “positive” or “risky” categories. Risky financial behaviors included not paying bills on time, maxing out credit cards, and taking out payday loans. More than 70 percent of respondents reported engaging in at least one risky behavior in the last six months, and students who engaged in one risky behavior were more likely to engage in others. In particular, those who didn’t pay bills on time were more likely to not make full payments on credit cards, and those who maxed out their credit cards were more likely to take out a payday loan.

When it came to handling financial difficulties, the study found that 82 percent of the students used nonrisky strategies like cutting back spending on entertainment and food to cope with short-term money problems. Eighteen percent of students reported using a strategy the researchers deemed risky, such as reducing their course load, taking out a payday loan, or using one credit card to pay off another.

Over all, student respondents reported moderately high levels of well-being in their relationships with their friends and parents, health, academics and finances, but those who engaged in risky financial behaviors reported lower average levels than the rest of the sample. Only 73 percent of students who reported a risky financial behavior in the last six months said they were very likely to graduate from college, compared with 89 percent of those who did not engage in such behaviors.

Next Steps

Originally, the researchers planned to wait until the students’ senior year to collect their next round of data. But then the recession hit, and they realized they had an unexpected opportunity to measure its impact. An additional survey was given to some of the students in the spring of 2009, and those results should be released in the fall.

Also this fall, the researches will have a group of 100 of the students take a financial-education course to see whether that affects their behavior. All of the 2,000 students who can be reached will participate in a follow-up survey during their senior year.

Based on the first round of findings, the researchers suggest that parents should be better informed about how financial literacy and the example they set at home can contribute to their children’s success. They also advocate having financial-literacy programs in high schools focus on how money management affects overall well-being. And they suggest that high schoolers work as a way to learn financial lessons, though they caution that if teens work too much it can hurt their academic performance.

Support for the study comes from the National Endowment for Financial Education in partnership with the University of Arizona and the Take Charge America Institute for Consumer Financial Education and Research.

Source: http://chronicle.com/article/Study-Examines-Students/47358

The Biggest Losers (of Debt): How a Family Shed $106,000 in Debt

Photo: Jeff Holmquist
Russell and Kathy Hildebrandt of New Richmond, Wis., won an award for successfully tackling $106,000 in credit card and personal debt through thrifty spending, a second job and bit-by-bit payments on their credit card balances. They're shown outside their home surrounded by their three children, 14-year-old twins Heidi (left) and Holly, and 3-year-old Joey.

Meet the Hildebrandts; their frugal ways lost debt, won an award. Five years ago, the Hildebrandt family of New Richmond, Wis., was juggling more than $100,000 in credit card and personal debt. Through frugality, determination and hard work, they are now -- other than a mortgage -- debt-free.

At the time, Russell and Kandy Hildebrandts' credit card balances totaled about $89,000, and they owed $17,000 to a family member. While they were current on all the payments, the card companies had begun raising their interest rates, adding hundreds to their minimum monthly payments. Kandy acknowledges that they presented a higher credit risk, given how their balances had ballooned. Even so, with the bump in the required payments, covering the monthly payments was a struggle. "We had to change," Kandy says.

Change they did. For their debt-fighting prowess, the Hildebrandts were on Tuesday night named the winners of the Professional Achievement and Counseling Excellence (PACE) 2009 Graduate Client of the Year Award. This national award, given by the National Foundation for Credit Counseling, recognizes the hard work and commitment they demonstrated in repaying their debts, and their willingness to become effective managers of their money and change their lifestyle. (Disclosure: CreditCards.com Senior Reporter Connie Prater served as a judge in the awards.)

Slow Decline Into Debt

Not that the Hildebrandts' lifestyle was lavish. The couple, along with their twin daughters, Heidi and Holly, lived in a rented 1,000 square foot townhome. Vacations consisted of visits to extended family members in the Midwest. Russell was a chemist with a Twin Cities-based environmental testing laboratory; Kandy was a stay-at-home mom and home-schooled their daughters.

While the Hildebrandts weren't living extravagantly, they also weren't frugal, Kandy notes. They purchased most items, such as clothes for the girls, new. In addition, they had medical expenses related to Russell's diabetes and several miscarriages that Kandy suffered. At the same time, they remained committed to tithing, or giving 10 percent of their income to their church. The accumulation of day-to-day expenses left the family going a bit more into debt each year.

Bankruptcy? No Thanks

Several family friends recommended that they file for bankruptcy. That was out of the question, Russell says. "We were committed to paying off our debts." They also resolved to continue to tithe and home-school their daughters.

To get started, Kandy met with Linda Humburg, a manager with FamilyMeans Consumer Credit Counseling Service (CCCS) in Stillwater, Minn. Linda reviewed their finances, and developed a five-year debt management plan. While the schedule was daunting, the Hildebrandts signed on. "If we didn't make it, we knew that we would go out trying," Russell says.
Several steps were key to making the plan work. Kandy and Russell eliminated discretionary spending. Kandy began buying generic food and frequenting thrift stores for clothing purchases. They stopped exchanging Christmas and birthday gifts with each other and their relatives.
Even with the drastic cutbacks, the Hildebrandts couldn't cover the $2,000 they were sending to CCCS each month to be distributed to their creditors. At that time, the sum amounted to about half of Russell's take-home pay. So Russell took on a second job cleaning a local grocery store several nights a week from midnight to 4:30 a.m. He would arrive home from his day job, eat dinner, catch a few hours of sleep and head to work. After his shift, he would go back home, sleep a few more hours and then get up for his day job.

Slow Progress

The first two years were particularly tough. Russell's work schedule was grueling, while Kandy managed just about everything at home on her own. Moreover, while their credit card balances were going down, the drop wasn't yet noticeable. For about a year, the Hildebrandts made do with one car, until they received a used van from Kandy's family.

Even so, "they didn't let anything deter them from progress," Humburg says. "If the money wasn't available, they simply did without." Equally, important the Hildebrandts kept their goal -- becoming debt-free -- in mind.

After the first few years, the Hildebrandts' efforts finally seemed to be bearing fruit. Their card balances were coming down, and some were getting paid off. As one card reached zero, CCCS would apply the money that had gone to it to the remaining balances. As a result, those cards would get paid off even more quickly.

About this time, Kandy became pregnant with Joey, who's now 3. While recognizing that a new child would mean additional expenses, the couple was thrilled. "The joy he brought to a negative, grinding situation was the light we needed," she says.

Dream Home Appears

By the fall of 2008, the Hildebrandts had one year to go on the payment plan. Russell even started daydreaming about a new home when he saw a three-bedroom rambler for sale in New Richmond. It had all that they were looking for, including a large yard and a separate bedroom for Joey. Russell let a real estate agent know that they liked the house, but added that the family would have to pay off their debts before taking on a mortgage.
Several months later the agent called and asked if the Hildebrandts would be interested in a rent-to-own agreement. The current owner of the house had some health concerns and was eager to move. The monthly rent would be $1,000, which included $200 to be escrowed for closing costs. They could manage it.

Earlier this year, the owner wanted to accelerate the sale process. In April, using the tax credit for first-time home buyers, the Hildebrandts were able to swing the purchase and pay off the remaining balances on their credit cards about six months ahead of schedule.
Now, the Hildebrandts are content in their new home and free of debt, other than their mortgage. Russell has been able to quit his second job and spend more time with his family -- and catch up on sleep.

Frugal Habits Stick

Several things haven't changed, however. Kandy remains a dedicated bargain hunter. Shopping online, she found eight bar stools for their kitchen island and basement family room for $24; at a yard sale, she bought a $2 desk for the girls. The Hildebrandts "had to completely rethink how they spent and what was a need versus a want," Humburg says.

Both Russell and Kandy say that while bankruptcy might have seemed like an easier option at the outset, it would not have been as satisfying. They wouldn't have learned to take control over their money and spending. What's more, with a bankruptcy on their credit record, they wouldn't have been able to purchase a house when they did.
Their advice to others? "Get out of debt," Kandy says. "It's a chokehold."

Source: Yahoo Finance (Sept. 19, 09)

Econonomic and Social Cost of Divorce?

Divorce has resulted in economic and social costs to individuals, families, neighborhoods, and communities, as well as to government. The economic costs of divorce can be categorized into direct personal costs to the couple and costs to the community (state and government). Direct personal costs include personal loss of income, legal fees, divorce filing fee, divorce education class, housing, and lost productivity at workplace (e.g. stress, sick time). In addition, divorcees need to pay for child alimony and child support. To the extent that divorce contributes to the health problems such as anxiety, mental strain, high blood pressure, heart disease, diabetes or cancer. To get treatment due to the consequences of marital dissolution on health problems, it will incur costs to divorcees. Marital dissolution also causes poor financial management behaviors among couple for instance excessive debt which can lead towards non-business bankruptcy (personal or household).

On top of that, the economic consequences of divorce also involve costs to the community. Schramm (2006) revealed that most of the direct costs to the state and government come from the administrative costs of the state and government program such as Medicaid, Child Care, Temporary Assistance for Needy Families (TANF), Children’s Health Insurance Program (CHIP), Medicaid, Utility rate assistance, Child support enforcement, courts, Food stamps, Lower Income Home Energy Assistance Program (LIHEAP), and Women, Infant and Children Program (WIP).

Of course there are social costs due to the marital dissolution. Children are deprived of two parents. Single parents have more complicated lives because they need to raise their children without assistance from partner. In addition, divorce also increased levels of anger, stress, depression, hostility, anxiety, and somatic complaints (stomachaches, loss of appetite, sleeplessness, and lack of concentration). Furthermore, social costs include diminished relationship quality between parent-child.

Marital dissolution may affect parental well-being which influences parenting behavior, child-rearing practices, and the quality of parent-child interaction. For example, it may affects parenting practices by reducing affective support, inconsistent discipline, and lowering levels of supportiveness (Fox & Suzanne, n.d). Moreover, marital dissolution has been associated with specific child outcomes such as more impulsive and anti social behaviors.

I'm in the worst shape of my life

New Credit Card Law

On August 20th, 2009, many provisions of the new credit card law took effect to help you, the consumer, better understand the workings of your credit card. The new law contains the biggest changes the credit card industry has seen in decades. Below are several highlights from the new law that may be important to you.

Limited interest rate hikes:

Interest rate hikes have become more controlled and will only be allowed under certain circumstances (such as the end of a promotional rate). Due to this change, credit card companies must give at least 45 days’ advance notice before changing the rate on your card. Universal default (raising your interest rate based on your payment record with other forms of unrelated credit such as a utility company) will also end.

More time to make your payment:

You will now be given a “reasonable amount of time” to make your monthly payments. This means that your payment will be due at least 21 days after your bill is mailed. Credit card companies will no longer be able to set early morning or unreasonable deadlines for payments. Deadlines before 5pm on the payment due date will be illegal. Also, payments that are due on a weekend, holiday or any day the company is closed for business will not be subject to a late fee.

Limits on over-limit fees:

You as the consumer have the right to decide if you want to pay over-limit fees or not. This does not mean you can argue over the charge. What it does mean is that you will be given the option of receiving over-limit fees and allowing yourself to purchase something that exceeds your credit card limit. If you choose not to receive these fees, any transactions exceeding your credit limit will be denied.

Minimum Payments:

Credit card companies are now required to let you know the consequences of making only the minimum payment each month. They will have to tell you how long it will take to pay off the entire balance if you only make that minimum payment. They must also tell you how much you will have to pay each month to pay off your credit card in 12, 24 or 36 months, including interest. Remember, the more you charge, the more you have to pay off in the end!

These are just a few of the highlights to the new law. To read the law in its entirety, click on the following link:
http://www.creditcards.com/credit-card-news/assets/credit-card-act.pdf

Does your Balance Sheet balance?

Author: Craig Hertel
Greene County Extension Education Director
ISU Extension


Are you making financial progress? How much are you worth? Can you meet your short-term obligations? The simple answer is to compare what you own and owe from year to year.

One of the important financial tools to measure these items is a form called a balance sheet. It is a snapshot of finances in a moment of time. For personal finance, a well-designed and constructed balance sheet taken the same day each year is essential. A balance sheet is also sometimes called a net worth statement or a financial statement (not to be confused with the plural term financial statements meaning the coordinated accumulation of income statement, balance sheet, cash flow statement, and change in owner’s equity). A balance sheet lists the assets on the left side, and who has claim to those assets on the right side. Those claims are known as liabilities (debt) and the residual is called net worth or owner’s equity.

One way to look at a balance sheet is the book-ends of the cash flow & income statement. The first date gives a point of reference on financial position in a given point of time. The second book-end wraps up the period. Done correctly, it can be the ultimate test of whether one improved or went backwards financially.

There are five tricks in preparation:

1.Do it! The most important point is to be disciplined to prepare this document at minimum each year, preferably on the same date.

2.Completeness. This is especially true on the liabilities side. Have they all been noted? Have accruals been prepared?

3.Valuations. A conservative approach is to value your assets at the old accounting principle called “lower of cost or market”. The ultimate approach is to have a two column asset side – conservative market on one side, and investment amount or tax basis for the other column.

4.Coordination.For accuracy, the asset valuations, and liability amounts should be coordinated with your bank statement, credit card purchases, assets purchased, accrued interest, etc. Where personal income tax accounting is on a “cash accounting basis”, balance sheets are most accurate when they are constructed with accrual bookkeeping thinking.

5.Contingent taxes. When asset values rise, it is easy to over-estimate your net worth if you forget contingent income taxes that would be due upon sale. Even with death, those 401K type of instruments will have income taxes due on the earnings.

After the balance sheet is prepared, verified to be correct, then the analysis begins. That is the subject of a subsequent article.

Financial Crisis