Tag Archives: finance

financial fragility

Quick question: If you were to face a $2,000 unexpected expense in the next month, could you get the funds you need?

Answer: (a) certainly able

(b) probably able

(c) probably not able

(d) certainty not able

If you answered (a), kudos! Answering (b) isn’t too bad, but (c) or (d) have me worried.

Nationally, 24.9% of respondents answered (a), 25.1% answered (b), 22.2% answered (c), and 27.9% answered (d). So almost exactly half of all respondents would have trouble meeting an unexpected financial expense (see the WSJ article that summarizes just how fragile US households are).  These findings are summarized in a report by the National Bureau of Economic Research based on a survey from 2009. I’ve heard that an unexpected financial crisis that would lead to someone filing for bankruptcy is small (less than $2000!).  This is depressing.

Why am I bringing this up on an OR blog? Well, I am also an OR educator who firmly believes that part of my job as an educator is to teach students how to be better citizens.  Good citizens, in my opinion, are savers (among other things).  I’m not alone: my PhD advisor frequently shared advice on saving for retirement and on reducing travel expenses.

I’m not sure OR students would necessarily avoid making financial mistakes that could lead to bankruptcy, even with high-paying jobs.  The researchers who wrote the aforementioned report find that:

  • 9.8% of respondents making more than $150K per year would certainly not be able to cope with an unexpected $2K expense, with an additional 4.7% probably not able to cope.
  • 10.8% of respondents making $100-150K per year would certainly not be able to cope, with an additional 12.9% probably not able to cope.
  • 11.3% of respondents with graduate education would certainly not able to cope, with an additional 11.6% probably not able to cope.

It could be worse. This is a list of respondents in various countries that would certainly not be able to cope:

  1. UK = 35.5%
  2. Portugal = 32.1%
  3. Germany = 28.9%
  4. USA = 27.9%
  5. Netherlands = 18.9%
  6. France = 18.8%
  7. Canada = 15.9%
  8. Italy = 9%

At the end of each semester, I tell students the seven things I want them to really learn from my class (see the blog post here), one of which is to “Do not live outside of your means, even on a graduate student stipend.” Maybe I should expand that bit of advice but not to the point of preaching.

How do you give financial advice to students?

Related posts on frugality:

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the Normal distribution? you’re kidding me?

I read The Black Swan last month (it was OK), in which the author (Nassim Nicholas Taleb) repeatedly chastises the financial industry for using the Normal distribution for modeling and forecasting. I read in disbelief, thinking that there was no way that financial experts would use tools that make such simplifying assumptions. After all, a) financial data is not normally distributed, and the Normal distribution does not have “fat” tails to allow for rare events. I was wrong. Naked Capitalism explains why the Normal assumption is bad for financial data better than I can.

I’m feeling just a little nervous, because I taught introductory probability and statistics to a cohort of undergraduate engineering students last semester. We briefly discussed when it is appropriate to use certain distributions, so I hope my students absorbed the important messages.