NEWS: The economy is one of the top concerns of Americans this election year and April is Financial Literacy Month.
WHAT IT MEANS TO YOU: “Economy” to most people means how they individually, or as a family, are doing financially. The more financially literate you are, the better you’ll do financially and the better your “economy” will be.
Do you like lottery scratch tickets? I’ll say this upfront – I do. The purpose of this column is not to shame anyone who likes them, too. Maybe that’s you. For the purposes of the point I’ll eventually get to, let’s say you buy a $5 scratch ticket every week. Sometimes you don’t win anything. Sometimes you win $5 or $10. Even $20 or $50. If you’re lucky, you’ve won more than once or twice. Let’s say that your dream, for purposes of the eventual point, is to win $50,000 (or more!), so you can buy a new car, pay off your credit cards, have a downpayment for a house, or something like that.
I bet if that’s you, there’s someone in your life who loves to smugly tell you how low the odds of winning are. How if you put that $5 a week “in the bank” or “toward your credit cards” you’d be making a better financial decision that would more likely lead to you reaching your financial goals.
If this has happened to you, have you sat down and done the math to find out if spending $5 a week on a scratch ticket (or Megabucks or Powerball) is a waste of money. To determine if you’d be better off financially if you put that money in the bank or added it to a credit card payment?
If you have, that means you’ve taken a step toward comprehending financial risk.
We’ve discussed financial literacy in this column many times, including the fact that survey after survey shows that consumers fall short when it comes to comprehending financial risk. It’s the area where U.S. consumers get the lowest grades, no matter their income, gender or ethnicity.
You may think comprehending financial risk means dealing with investments and that type of thing. If you’re like me, your brain immediately says, “Uff. Ugh. This doesn’t have much to do with my financial life. See ya!”
In actuality, financial risk, as defined by the 2023 TIAA Institute-GFLEC Personal Finance Index is “understanding that the expected outcome in a given scenario depends on the range of possible outcomes, the financial implication associated with each outcome, and the likelihood of each outcome occurring.”
In other words, comprehending financial risk is simply determining how financially sound your money habits and decisions are, given your financial situation, and what the outcomes of decisions will be.
National studies, including the every-three-year FINRA National Financial Capability Study and the 2023 TIAA Institute-GFLEC Personal Finance Index link lack of knowledge about comprehending financial risk to financial hardship. It makes sense, right? If you don’t know how to think through decisions on spending and other money use – how risky a decision is and how likely the hoped-for outcome will be as compared to another one — you’re not getting the best bang for your buck.
Let’s take the example of the $5 scratch ticket. If you buy one a week, that’s $260 a year. When assessing risk, don’t add in how much money you’ve won, or could win. There’s no guarantee you’ll win anything in 52 weeks of playing scratch tickets, though the odds are you will. The risk is that you’ll lose $260.
Now add $5 to what you’re paying on your credit cards. Will that make a significant dent in your credit card debt. If you are able to save $260 over the course of a year, would that help you financially?
Can you afford to lose $5 a week, or $260 a year, for the pleasure of the scratch and the anticipation of possibly winning?
Despite what your smug, anti-scratch ticket friend says, there’s no wrong answer. The answer is up to you and your budget. You assess the risk and determine if you can afford to lose $5 a week, or if you can’t. If using it toward debt, or having that amount in savings will benefit you, or if spending it has a negative impact on your ability to pay bills or save money, then it’s not worth the risk.
Here’s a different type of example, a paraphrase of one that the personal finance index survey uses:
There’s a 50% chance Malik will have to pay $1,000 for an engine repair for his car in the next six months. There’s a 10% chance he’ll need to get a new air conditioning system for his house, which will cost $4,000. If he doesn’t have the money for either, which issue poses the greatest financial risk?
The car repair does, because even though it costs less, the chances of him needing it are greater. He’d be smart to scrape up $1,000 and get his car fixed than save the money for a new air conditioner.
The index doesn’t go into it, but comprehending the risk also goes beyond the odds and dollar figures. If Malik’s car breaks down, it can lead to a domino effect of other expenses, including him possibly losing his job for lack of transportation. If he lives in New Hampshire, or somewhere else where it’s not summer all year round and public transportation isn’t always efficient, where it exists, a working car is much more of a necessity than working AC. That also adds to the understanding of the risk.
Speaking of cars, here’s another example. Let’s say that Ashley has a crummy car, too. The past couple years she’s been paying an average of $5,000 a year in car repairs, though she hasn’t had car payments because she’s had it for so long.
She’s managed to save $3,000 for a downpayment on a new car (despite the constant repair bills). She’s found one she likes for $28,000. The loan she’s qualified for means a monthly payment of $483. That’s more than the $416 average a month she’s paying for car repairs.
It’s up to Ashley to determine whether buying the new car is more of a financial risk than continuing with the old one. How much will her insurance premiums go up? (Even though she lives in one of the few states that doesn’t require car insurance, she’s savvy enough about comprehending risk to know that paying a premium is a better financial bet than hoping she doesn’t get into an accident).
How much more will the yearly registration fee be?
Ashley is getting a hybrid, so will be paying less for gas. How does that factor in?
Understanding financial risk, even for much more mundane money decisions than buying a new car, helps you save money every day.
It’s easy to gripe about inflation and the economy, but what are you doing to understand and mitigate your daily financial risk? Upping your financial literacy overall will help you find ways to do that.
The 2023 PF study found that:
- Financial literacy is strongly related to inflation-induced changes in individual personal finances. For instance, employed adults with very low financial literacy were more than four times as likely to stop saving for retirement in 2022 because of inflation’s impact on their finances than those with a very high level of financial literacy.
- Those with a very low level of financial literacy are more than four times as likely to have difficulty making ends meet in a typical month; nearly three times as likely to be debt-constrained; three times more likely to be financially fragile; more than four times as likely to lack emergency savings sufficient to cover one month of living expenses; more than three times as likely to spend 10 hours or more a week on issues and problems related to personal finances.
- Across all genders, populations and generations, those with relatively high financial literacy typically show a double-digit increase in financial well-being indicators compared with those with relatively low financial literacy.
Inflation is going to rise and fall, no matter who is president. It depends on all sorts of factors. You can’t control it, or the economy in general. But you can have more control over your own personal economy simply by understanding the outcomes of your financial decisions. Good luck on the scratch tickets!
Scam of the Month
Bangor, Maine, police this week said that they got a report of a state resident who received a phone call from a guy who identified himself as Sgt. Ed Potter, of the Bangor Police Department.
The caller told the person that they missed jury duty and had to pay a $3,000 fine via CoinStar – the online cryptocurrency company, not the change machine. The caller had learned personal information about the person, too, through their social media accounts and the internet. This made the call seem more legitimate. The scammer even went the extra mile, creating a voicemail identifying themselves as Sgt. Ed Potter for when the person called back.
In February, another Maine resident was scammed to the tune of $9,000 with the same ploy.
This scam has been around for a while in a lot of forms. In fact, the New Hampshire District of the U.S. Court has a post on its website from 2016 alerting state residents about it:
“The scammer is phoning potential victims, telling them that a warrant has been issued for their arrest for failing to report for jury duty and directing them to report to an address in Manchester to pay a fine. This is not how this court communicates with jurors. If you receive such a call, you should report it to the U.S. Marshal’s Office for the District of New Hampshire; if you have any concerns about whether the call relates to your obligations as a potential juror in this court, please call our Jury Administrator.”
Over the eight years since that was posted, of course scammers have become more sophisticated in their techniques and their asks. But you’re more sophisticated, too, right? Just a refresher on the best way to avoid scams and what to do if you get a call, text or email that may be a scam:
- Do not call (or text or email) the number that called or texted (or reply to the email address). Look up the actual agency and call their number. For instance, in the case cited above, you’d call the Bangor Police Department’s non-emergency number, not call back the person who called you.
- If the call is from law enforcement, but references the IRS, the court system, or any other agency or business, call that agency or business using their legitimate business number.
- A real law enforcement officer is not going to call you and ask you to pay for something. Ever.
- No government agency is going to have you pay a fine in cryptocurrency. It is not a thing. Also, never ever ever get cashier’s checks, gift cards or buy bitcoin or cryptocurrency at the request of a stranger, even if it seems like they’re from a legitimate business.
- If you think a call is legitimate because they seem to know a lot about you, keep in mind that details of your life you aren’t even aware of are public because of your social media presence.
- If someone calls and says they’re from a legitimate business and that there is a problem with your account, hang up and call the business using its real phone number – similar to the law enforcement issue. Again, do not call the number that called you.
- Any time you get a call, text or email regarding an “issue” with your bank account, call or visit your bank. Again, call your bank’s real number, the one on your mobile app, the website or your statement. If the communication is by email or text, AGAIN, DO NOT call the number on the email or text, call the real number for the bank or business.
- If someone tells you to lie to your bank, that’s a huge red flag. Never lie to your bank about anything having to do with your money or the accounts they hold, especially at a stranger’s request.
- Never ever ever ever share your screen with someone on the phone (unless you’re at work and it’s your employer’s IT department for something to do with your job).
- Don’t let anyone on the phone rush you into making financial decisions or into “solving” a financial or technical problem that involves money accounts.
- Don’t be afraid to be rude or hang up.
Keep in mind that anyone can get scammed. Click here to read the “Anatomy of a Scam” column I wrote last year. If you believe you’ve been scammed, or someone has attempted to scam you, call the agency represented by the scam. In the case of this month’s scam the month, for instance, it would be the Bangor Police Department.
New Hampshire residents can report scams to:
- New Hampshire Attorney General Consumer and Antitrust Bureau.
- New Hampshire Attorney General consumer protection hotline at 1-888-468-4454.
- Federal Trade Commission’s online scam reporting page.
For resources on identifying scams, were to find information, and how to report scams, visit the Consumer Financial Protection Bureau’s consumer tools scam and fraud page.
Got questions about money and personal finance? Maureen Milliken can be reached at mmilliken@manchesterinklink.com