Economics Is The Allocation Of Scarce Resources…

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I teach a course at the University of Vermont through the Grossman School of Business titled Personal Finance and Investing. Few colleges have ever offered a course like this. People ask me, “What is this, how to balance a checkbook?” Hardly. Personal Finance is taught so infrequently because it is considered “trade school,” not sufficiently rigorous for the “Academy.”

But personal finance is something that twenty year-olds and even forty to sixty year-olds know very little about. Studies have found that 38% of Americans do not pay off their credit cards in full each month. Fifty percent of Americans have no retirement plan, and 56% of Americans say they have less than $1,000 in checking or savings combined. A lot of people are never going to retire or be awfully poor in their retirement years. They could have benefitted from a little Personal Finance Wisdom.

So here is my end of semester Words of Wisdom to the sixty students in the course. Those of you who have this down, good for you – you have passed the course. The rest of you, take note.

1. Have a budget. Most of us are not compulsive enough to have a line by line annual budget. That’s OK, experiment with what works for you. Online services like Mint or Digit might be the answer. Or try writing down what you spend every dollar on the next month. It will be eye opening.

2. Build an emergency fund. Walk into most auto dealerships for servicing and you will probably walk out with a bill of at least $200. An accident or illness can easily throw your finances out of whack. Try to keep at least three months worth of expenses in a safe and secure savings account.

3. Save…Save…and Save More. The goal is 15% of your gross income into your retirement account every year. Some of this might come from your paycheck and some from an employer match, if you are so lucky. But in any case, “take care of what is difficult while it is still easy.” If you can save 15% of your gross (even 10%) in your twenties and continue this through your sixties, you are going to have a very, very comfortable retirement.

4. Pay off your credit card monthly. Borrowing at 15% and 25% is equivalent to pawn shop lending but this is what credit cards charge. Don’t let this happen to you. And as a sidebar, try to keep your credit card usage to less than 30% of your credit card limit. Charging more than this often negatively affects your FICO score.

5. Monitor your credit score. Learn what FICO is and how it’s figured. Sign up for to check your credit any time. It is free.

6. Buy a house when you can afford it. Owning a home and paying off the mortgage over time (“forced savings”) has been and will most probably continue to be your best single investment.

7. Cover yourself with insurance. Obviously get home and auto coverage but look into Life Insurance earlier than later. Ask specifically for Term. A healthy, non-smoking twenty year old can get $100,000 of term life insurance for about $10 a month. Amazingly cheap.

Personal Finance isn’t rocket science but there is a lot of slip between cup and lip. The theory is easy, putting it into practice is hard!

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So What’s In Your Wallet?...

I am guessing $4,200 in crisp greenbacks. Statistically I am right but in reality I know I am way off the mark. Let’s do the math. Divide the value of all the dollars in circulation by the U.S. population (man, woman and child) and the result is that everyone should be walking around with $4,200 in their pocket.

But we aren’t. So what’s the explanation? First, not all dollars are circulating anywhere near us. Approximately 70% of all U.S. currency is physically held outside the U.S. As you might imagine many bricks of dollars are stuffed inside hard sided briefcases passed in the dead of the night for the purchase of who knows what illicit good. But many other dollars are used for perfectly legal transactions and some countries actually use the dollar as their national currency (Ecuador and El Salvador are two).

Why were the original greenbacks green? Because green wasthe hardest color for early photographers to copy.

A second reason we are not carrying that much cash is we are using less of it. Fewer than half of all retail transactions today in the U.S. are done in cash. And some countries are moving much faster than us. It is estimated that 80% of retail transactions in Sweden are now done online either with credit cards, debit cards or mobile devices. Culture plays a big part in this however. Notice below how Germans and especially Italians still favor wads of cash in their pocket.

Many shops in Sweden (and Denmark, Norway and Belgium too) don’t even take cash. Everything has to be settled electronically. The same for banks. It is estimated that half the branches of the largest banks in Sweden no longer have cash on hand. Cash is costly, you have to have vaults and pay people to deliver the stuff and people to count the stuff and of course there is the security issue of cash getting stolen.

Here in the U.S. a drumbeat is building calling for the elimination of the largest denomination bill, the $100. The drumbeat is still faint but it is getting louder. Kenneth Rogoff the Harvard economist has a new book out “The Curse of Cash”, in which he argues that eliminating the $100 bill would improve tax collection, cut down on illegal immigration (illegals often get paid in cash) and make monetary policy more effective. In countries with negative interest rates for instance, there is always the option of just keeping stacks of bills in your drawer. Without cash, aggressive easing strategies by Central Banks might lead more quickly to increased investment and spending.

There are downsides however to a cashless society. The elderly are not as comfortable with high tech gizmos. They favor cash. Sparsely populated rural areas might find transacting without cash difficult. Finally, and this may be the biggest issue, privacy is a concern. Identity theft and electronic scamming become more of a concern in a cashless society. Transactions using cash are elegantly anonymous and straight forward.

One of the biggest arguments for retiring the $100 bill is, when was the last time you used a $100 bill? When you did I bet you felt like a criminal. The bill was examined closely, the color-shifting ink and the security thread were viewed against the light and the paper was felt for authenticity. You were guilty until proven innocent in this transaction. A cashless society will certainly change many of our ways. How can we say “Cash is King” if cash is no more?