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Money Management

October 14, 2020 By Louis DeNicola

Will COVID Change Our Habits Permanently?

(Money Management) – The coronavirus pandemic has upended everyone’s life and led to some significant habit changes. The old (and ironically somewhat tired) personal finance advice of skipping a morning latte may be forced upon you if you no longer have a morning commute.

Such an impactful event also brings up questions of how people are coping and which new habits will stick when we no longer have to worry about the coronavirus. We talked to some experts to find out how COVID has changed us and what changes may be still to come.

FIGHT, FLIGHT, OR FREEZE

Looking back at how people initially responded to the coronavirus outbreak offers some insight into how a crisis can impact us.

“First and foremost, COVID is affecting our mental health by creating an initial stress response: fight, flight, and freeze,” says Dr. Alex Melkumian, founder of the Financial Psychology Center in Los Angeles.

Perhaps you’ve seen or experienced some of these responses. People “fighting” by updating their LinkedIn profile and jumping into a job hunt. Flight and freeze might look like avoiding the situation and putting off everything until the last minute. Although, a similar lack of response can come from optimism bias—the belief that everything will work out okay.

Of course, there’s more at play than an initial response, and people react differently depending on the situation. For example, after a layoff some people may avoid filing for unemployment due to shame or pride rather than a flight or freeze response.

Crisis responses have also played out in different ways on a large scale. If you think back to the early days of the pandemic (a lifetime ago), you’ll remember how panic-buying led to toilet paper shortages.

SOME FINANCIAL HABITS ARE ALREADY CHANGING

Over half-a-year in, people have had time to adjust, develop new routines, and implement changes. Some of these might not be habits, per se, but they can still have a long-term impact.

“A lot of what holds people back is that they think there’s all the time in the world to get it done,” says financial therapist Lindsay Bryan-Podvin. “When the reality hits… the fire burns to get things going.” Many of her clients are finally crossing things off their financial to-do list, such as getting life insurance or writing up a will.

A McKinsey & Co. survey from October 7, 2020, offers more insight into what types of financial habits may be changing:

  • Most people are cutting back on discretionary spending.
  • About 23% to 25% of people recently started using food or grocery delivery services for the first time, or are using them more often. Of those, over half plan to continue using these services after the coronavirus subsides.
  • A small group (12% to 13%) is trying curbside store and restaurant pickup for the first time, and about half of that group plans to continue using curbside pickup.
  • More than two-thirds of people are trying new shopping methods, brands, or stores. Many are “trading down” to find cheaper brands and retailers.
  • Since the pandemic, people are increasingly aware of how companies care for their employees’ safety (23%) and a company’s purpose or values (17%).
  • The increased use of social media, wellness apps, online streaming, and online fitness programs may continue post-pandemic. Topping the list of changes that may continue is an offline activity—regularly cooking.

Katherine Milkman, a professor at the University of Pennsylvania’s Wharton School, also recently shared some insights on what habits can be “sticky” in an interview on the Slate Gist podcast and article by Joe Pinsker in The Atlantic.

For example, it’s not hard to imagine someone developing a preference for a lower-cost brand or more convenient services. But washing your hands for 20 seconds might not stick when there’s no fear of a virus.

TRAUMAS MAY STAY WITH US

Specific habits aside, there could be a lasting impact on people’s relationship with their work and finances.

Even before the pandemic, the American Psychological Association’s annual Stress in America survey from 2019 found that most people listed work and money as one of their most significant sources of stress. The pandemic and resulting layoffs has only exacerbated those stressors.

“This is our Great Depression,” says Melkumian. “The level of anxiety and concern and worry could be exponential to where we were before. From a mental health standpoint, we’ll see an increase in financial trauma.”

There’s no single answer to how this plays out. The pandemic is affecting households in drastically different ways, and even those who are impacted in similar ways may have different responses.

“How much we’re going to be ruled by fear, caution, worry, anticipation, and doomsday scenarios is going to be part of our overall psychology and how we approach finance,” says Melkumian. “There may not be answers until we get there, but we need to beware of our psychology.”

He also draws the connection between financial stressors and the resulting impacts on how you may interact with your spouse or kids, and your overall wellbeing. “In turn, how does that affect your physical health? What happens to your family and identity as a provider and contributor?” Melkumian asks.

BUT THIS IS ALSO AN OPPORTUNITY FOR CHANGE

While the pandemic can cast a foreboding shadow over everything, if you can get out of crisis mode, it can also be a significant opportunity to rethink your life and the habits you want to change.

As Bryan-Podvin shared, some of her clients have done this by checking off some of their financial to-dos. She’s also observed a growing interest in making more drastic lifestyle changes. “They’re starting to consider what life would be like if they downsized housing and could retire earlier, or spend more money elsewhere,” she says. What might have been a daydream before has become a more realistic option.

“Obviously there’s a lot of uncertainty. We’re in a limbo pattern of not knowing when we can resume normal life,” says Melkumian. “But I’d love COVID to be the call to action to improve and increase our financial consciousness, awareness, and literacy.”

If you’re ready to start making some lasting financial changes, a free one-on-one counseling session is a great place to start. Our debt and budget experts are available 24/7 to help you discover resources, learn valuable skills, and begin realizing your goals.

Filed Under: media, Money Management Tagged With: financial management, financial psychology, financial psychotherapy, financial wellness, money relationship

September 21, 2020 By Lilian Yoffee

Know Your Money Culture

For millennials and Gen Z-ers, financial literacy is a germane topic as young adults grow into responsibility for their own economic decisions. Although managing personal finances is a critical aspect of independence many are, at first, daunted by the task—feeling ill-equipped for financial decisions and unsure of the best course of action. Often, people cite the lack of personal finance classes in high school as a principle source of their discomfort; but many factors beyond such external resources work together to influence financial behavior. One’s cultural narrative figures heavily, our cultural background affecting our financial decisions as much as our ideas and opinions. The cultural narrative is a primary source from which our thoughts and feelings about money originate.

As a Canadian with Japanese and Russian backgrounds, and having lived in Japan and Canada, I can proudly say that I am truly multi-cultural. Each of my diverse cultures has distinct values, passed from generation to generation, and as deeply ingrained in me as in my parents and grandparents. While some of these values share basic elements, others clash with one another— resulting in confusion and ambiguity over my decision-making. This process repeats every time a major issue arises to re-trigger conflicting mentalities, temporarily allowing my emotions to take over the decision making. On the surface, financial behaviors may seem to be detached from our cultural background but, in fact, cultural norms and beliefs affect our financial decisions in subconscious ways that cannot be explained merely quantitatively.

For example, the concept of investing has only recently begun to spread among the younger generation in Japan as an effective way to grow personal assets. Growing up in Japan I was never exposed to the notion of personal investment. Asked about Japanese openness to personal investment, Japan strategist at a Hong Kong-based brokerage firm, Nicholas Smith, stated, “Japan at the moment just doesn’t have the culture for it.”

The Japanese do not reject personal investing outright; but, unlike North Americans, investing simply isn’t the first line of accumulating wealth for many Japanese. It was only after I came to Canada that I heard people talking casually about investing in the course of daily conversations. This example demonstrates how differences in values between cultures affect what financial concepts and strategies dominate personal finance.

Here is another fascinating example. In 2018, Swiss researchers Brown, Henchoz, and Spycher surveyed over 700 secondary school students in the Swiss canton of Fribourg, on the border between French- and German-speaking regions, to investigate the effect of cultural background on financial literacy and attitudes. They found that German-speaking students had a higher level of financial literacy than French speakers, due to a significant disparity in their “embedded cultural differences.” They reported that “students in the German speaking region are more likely to receive pocket money at an early age and are more likely to have independent access to a bank account than students in the French speaking region.” Thus, in spite of geographical uniformity, the different German and French societal customs created major differences in the financial competency of the two populations.

As shown above, although economic education may play a role in young people’s personal financial literacy, cultural inclinations exert far more influence. We need to acknowledge that no one-size-fits-all approach will succeed in increasing financial literacy for millennials and Gen Z-ers. Both our culture and our own emotions contribute to our financial decision-making, and any instruction must be tailored to recognize and support differences among various ethno-cultural groups and individuals.

In addition to acknowledging your own cultural background, certain traits are labelled for different generations. For example, many claim—with good reason—that Gen Z-ers are tech-dependent. While growing up, using technology has been an integral part of daily routine. On the other hand, some claim that our wariness about the future may be a significant factor in our lack of financial knowledge. For millennials, the stereotypes range from a need for accommodation and flexibility to insistence on knowing the “why” of everything. Although such generalizations do not apply to everyone, nevertheless they may serve to plant certain ideas in our heads. Likewise, different perceptions and treatment of different generations play a large part in our financial conduct. Our own background might seem to be irrelevant in the topic of financial literacy, but it is important to recognize and appreciate all the elements responsible for our behavior to help us understand why we make—or resist making—certain economic decisions.

Our challenge is to respectfully acknowledge our personal and cultural heritage, embrace it, and use it to our advantage to make sound financial decisions. It begins with compassionate self-reflection. Many find the necessary internal examination easier with the help of a professional. Above all, knowledge is key and the ball is in our court.

For a free consultation about your best course to financial stability and health, call 818.600.2264

References

Brown, M., Henchoz, C., & Spycher, T. (2018). Culture and financial literacy: Evidence from a within-country language border. Journal of Economic Behavior & Organization, 150, 62–85. doi:10.1016/j.jebo.2018.03.011.

Generation Z Stereotypes: Debunking the Myths of Generation Z. (n.d.). Retrieved August 13, 2020, from https://www.npd.com/wps/portal/npd/us/news/tips-trends-takeaways/guide-to-gen-z-debunking-the-myths-of-our-youngest-generation/

Obe, M. (2017, August 28). In Japan, the lottery is out and investing is in. Nikkei Asian Review. https://asia.nikkei.com/Economy/In-Japan-the-lottery-is-out-and-investing-is-in.

Filed Under: blog, financial wellness, money and emotion, Money Management Tagged With: financial stability, making financial decisions, millennial, money

August 2, 2020 By Lance Cothern, CPA for DollarSprout

1 in 3 Americans Don’t Know How Much of Their Income Goes to Debt

(DollarSprout) – Our number one goal at DollarSprout is to help readers improve their financial lives, and we regularly partner with companies that share that same vision. If purchase or signup is made through our Partners’ links, we receive compensation for the referral. Here’s how we make money.

Debt is a four-letter word in many households. Some people don’t want to talk about it or face the debt they owe. Whether it’s because they’re ashamed of their debt or they don’t know how they’re going to pay it back, ignoring debt can become a significant problem.

If you’ve been ignoring your debt, you aren’t alone. But figuring out how much you owe can help you take control of your situation.

Why 1 in 3 Don’t Know About Their Debt

According to a recent study from Northwestern Mutual, more than one in three Americans don’t know how much of their monthly income goes toward paying off debt. To make matters worse, roughly one in five Americans don’t know how much debt they carry.

Debt may cause stress, anxiety, and physical illness.

When we’re faced with something we’re uncomfortable with, the first reaction to stress or fear is avoidance, according to Dr. Alex Melkumian, founder of the Financial Psychology Center in Los Angeles, California.

The Northwestern Mutual study found that 45% of Americans with debt feel anxious, 35% feel guilty, and 20% feel physically ill about their debt at least once a month.

Anxiety can become a self-fulfilling prophecy. If you’re anxious about your debt, you won’t feel motivated to tackle it. But the more you ignore it, the more anxious you may feel. This creates a negative feedback loop that can be hard to stop.

Anxiety can create physical symptoms such as muscle tension, shortness of breath, insomnia, and fatigue, Dr. Melkumian said. People with these symptoms may not be able to confront their debt as easily as others.

Large amounts of debt can cause a feeling of hopelessness.

Others may avoid their debt because the total amount owed is significant, and it will take a long time to pay it off. About 12% of people had no clue how long they’d be in debt, while 15% of people believed they’d be in debt for the rest of their lives.

“People think of their debt as scary by the time it accrues to a certain number,” Dr. Melkumian said.

This number varies by person, but the longer you feel you’ll be in debt ,the more hopeless you may feel about your situation.

Related: How to Pay Off Unexpected Medical Debt

Some people don’t check how much they owe because it’s not a pressing issue. They may feel like they have a good handle on their financial situation. They make their payments without any issues, but still can’t calculate how much of their income goes toward debt.

“I am one of those Americans who didn’t know how much debt they had,” said Steffa Mantilla, owner of the personal finance blog Money Tamer. “We would purchase everything based on the payments. If the car dealership or furniture store ran our credit and said we could afford it, we’d go forward. Over time, it adds up and you don’t realize that you have thousands of dollars leaving every month via monthly payments.”

To calculate the percentage that your monthly debt payments take up compared to your income, you have to know your combined debt and income numbers. These numbers aren’t readily available for people who aren’t tracking their payments regularly. They have to spend time researching and compiling this information to get the answer.

Related: Here’s How One Family Paid Off $120,000 to Become Debt Free

Why Knowing Your Debt is Helpful

While ignorance may feel like bliss, being oblivious about your debt won’t help improve your finances. Even if your monthly payments are under control, being aware of how much you owe and how much of your income goes toward paying off debt is important. It may motivate you to get out of debt faster.

“Knowing how much debt you have gives you clarity and the power of choice,” Dr. Melkumian said.

Being aware of your debt situation helps you gauge how much money is left to tackle your other financial priorities. This can include saving for retirement, paying for your child’s college education, or traveling abroad. The less you owe, the more you have available for other goals.

If you plan to apply for a mortgage, knowing your debt-to-income ratio is vital. Lenders require your debt-to-income ratio to be below a certain amount to qualify for various loan programs.

While the ideal goal is maintaining a debt-to-income ratio of less than 36%, a few mortgage programs allow ratios as high as 50%. If you know your debt-to-income ratio, you can figure out how large of a mortgage you may be able to get approved for based on your current income and debt levels.

Related: How to Get Your Spouse on Board with Paying Off Debt

How to Calculate Your Total Debt

You can calculate your total debt in two main ways. First, add up the balance you owe on each of your loans and lines of credit, including credit cards, student loans, car loans, mortgages, personal loans, and and any other outstanding debts.

The other way to calculate your total debt is to add up the monthly payments you make each month. This can help you answer the question of how much of your monthly income goes toward paying off debt. For most types of debt, use the minimum amount due each month.

When using the monthly payment method, calculating your mortgage payment is an exception. You can’t always add your full monthly mortgage payment. Most people have an escrow payment (used to pay homeowners insurance and property taxes) as part of their monthly payment.

To get the debt portion of your mortgage payment, consult your mortgage statement. Then, add the principal, interest, and private mortgage insurance (PMI), if applicable.

Once you know the total debt payments, divide it by your monthly income. This method gives you insight into how much of your income goes toward making your debt payments each month. Once you have this information, you can calculate your debt-to-income ratio.

Where to find your debt

Finding how much you owe can be problematic if you haven’t been tracking it in the past. First, decide what kind of system you want to use to track your debt.

“If you’re a paper and pencil person, then do that,” Dr. Melkumian said. “If you’re very high tech, then you can do your own spreadsheet.”

You can find your debt in a couple of ways. The first is to watch for all debt-related bills you get over the next month. Every time you get a bill emailed or sent to you, put it in a folder. At the end of the month, add up all of the debt.

Your credit reports can help you find your debt faster. You can visit AnnualCreditReport.com to get a copy of your credit report from Equifax, Experian, and TransUnion. The information may not be 100% up to date because it may not reflect your most recent payments, but it should be fairly accurate.

If your creditors don’t report a debt to one of the bureaus, then it won’t show on your credit report. That’s why you should double check this against the bills you receive and the payments you make.

How to calculate your debt-to-income ratio

Calculating your debt-to-income ratio is easy once you pull together the underlying numbers. There are two ratios you can calculate. The ratios use the same numbers for debt, which is your total monthly debt payments. However, they use different numbers for income.

The first debt-to-income ratio uses your gross income. Your gross income is all income you receive before taxes or other payroll deductions. For salaried individuals, this is your salary. For hourly individuals, it’s your hourly rate multiplied by the number of hours you work.

To calculate your debt-to-income ratio based on your gross income, divide your monthly debt payments by your gross income. You can use this debt-to-income calculator to do the math for you. This is the debt-to-income ratio most mortgage lenders use when calculating how much mortgage you can get approved for.

The other debt-to-income ratio uses your net income. While definitions may vary on exactly what to exclude from your gross income to get to your net income, the easiest way is to use your paycheck’s net amount as your net income.

This is the amount of money that’s actually deposited in your bank account on payday. However, many people have their healthcare premiums or 401(k) contributions taken out of their income. If that’s true in your case, you’ll add those back in for the sake of this ratio.

To calculate your debt-to-income ratio based on your net income, divide your monthly debt payments by your net income. This ratio is more useful for figuring out how much of your available income goes toward debt payments each month.

Finding Your Total Debt Can Be a Wake-Up Call

Figuring out exactly how much you owe can be an eye-opening experience. For some, it’s less than they thought. For others, it’s much more.

Regardless of what you find out, knowing your numbers gives you the power to change your situation for the better. Once you know where you stand, you can start getting out of debt. This may include creating a budget, starting a side hustle, or becoming more mindful of how you spend money.

Understanding your debt can motivate you to stick to a budget or cut back on spending. This may be the best wake-up call you can get. You can look to others for inspiration to see it’s possible to get out of consumer debt for good.

Filed Under: media, Money Management Tagged With: financial management, financial psychology, financial psychotherapy, financial wellness, money relationship

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