‘Help! I Need Some Money, Honey!’

How can CUs help members make prudent financial plans?

September 18, 2012

My 68-year old mother and her friend, Rachel, are currently enjoying a three-week adventure vacation to Peru.  They sleep in trees, paddle the Amazon, engage in llama races, and zip-line through the jungle.  Dear Old Dad and Rachel’s husband, Ted, stayed home—fortuitous for the ladies.

Last week Dad received a desperate communication.  Funds had run short.  Rachel’s account was spent; money needed to be transferred from Mom’s account to hers.   This required contacting Ted for an exchange of account numbers since that information wasn’t handy. 

Details were sketchy, but no one could make electronic transfers.  No one had ability to pay for purchases with a credit card.  No one had determined, evidently, how much money was required for the pursuit of rigorous leisure activities in a foreign country. 

One would suppose that watering llamas and wrestling pythons would be rather cost-efficient activities, but obviously, not so.  Snake repellent, too, is costly. 

When your members travel, do they know how to make purchases?  How would they handle a financial crisis?  Are they prepared for foreign payment systems?  Do you know if your payment systems complement those of foreign lands? 

What financial risks are inherent in travel?  What “mundane” financial risks exist at home? 

While you peruse this week’s research, consider financial assumptions consumers make and potential perils they may encounter.  What can “advance information” do to help all of us make prudent plans? 

Home sweet home

Although housing is not currently an issue for our tree-slumbering travelers, it is a topic prevalent in research findings this week. 

What are your assumptions about housing values in neighborhoods experiencing foreclosures?  See “Foreclosure Externalities: Some New Evidence” by the Federal Reserve Bank of Atlanta. 

Previous research indicates that foreclosures negatively affect sale prices of properties nearby, but “We find that while properties in virtually all stages of distress have statistically significant negative effects on nearby home values, the magnitudes are economically small, peak before the distressed properties complete the foreclosure process, and go to zero about a year after the bank sells the property.” 

Might this detailed report challenge your beliefs on the impact of foreclosures on housing values in your community and affect your vision of risk tolerance? 

Also note “The Devil’s in the Tail: Residential Mortgage Finance and the U.S. Treasury” for an examination of existing insurance policy proposals.  “The expected role of the federal government in the broader housing finance system is in dispute.  The expected role ranges from no role to insuring against only extreme or tail events to insuring against all losses.” 

It is generally agreed, however, that any public insurance should meet specific criteria to protect taxpayers. 

Property insurance is further explored in “Residual Market Property Plans: From Markets of Last Resort to Markets of First Choice-2012” by the Insurance Information Institute.  

“This year’s report…records the still-burgeoning growth in the residual market property insurers—with a massive total exposure to loss that is now approaching $900 billion—along with the still-precarious financial condition of some plans.” 

What is acceptable risk for property insurers?  “Many state-run residential property insurers have morphed from markets of last resort to become major insurance providers in their states… It is important to recognize that because most of these plans do not charge rates that reflect the true cost of risk, demand for the subsidized coverage they provide remains high.” 

The recession is reducing housing formation, according to “Household Formation and the Great Recession” from the Federal Reserve Bank of Cleveland. Younger consumers reside with their parents and tougher lending standards make it difficult for would-be home buyers.  

“The speed of the (housing) rebound will depend on the path of the aggregate economy, especially improvements in labor markets.”  While rebound will help the housing market, “When young adults start forming more households, it may have a stronger impact on the demand for rental properties than owner-occupied housing over the near term.” 

Have your members considered their “rent vs. buy” opportunities?  What is the level of risk they might take? 

The job scene: Vacations?

Take a broad view of the employment horizon at “The Employment Situation – August 2012” by the Bureau of Labor Statistics.  You’ll learn that the unemployment rate edged down in August to 8.1%, but “the number of long-term unemployed…was little changed at 5.0 million.  These individuals accounted for 40% of the unemployed.” 

Of course, health-care benefits are an important part of compensation.  Reportedly, it is to be expected that a shift of expense risk will occur from employer-sponsored health benefits to the employees, according to the “2012 Deloitte Survey of U.S. Employers.” 

“U.S. employers are concerned about continued rising health care costs; however, they are unaware of solutions that could improve the safety and quality of care, and simultaneously reduce cost.” 

Examine these survey results to see if your assumptions as an employer providing health benefits are accurate.  Strategies for benefits coverage and cost containment are explored.  Are you at risk? 

Pension plans, too, are important considerations.  See Prudential’s “Longevity Risk and Insurance Solutions for U.S. Corporate Pension Plans.”  Defined benefit pension plans have become unwieldy, and sponsors need to minimize risk.  Thus, “Defined contribution plans have now become the dominant retirement vehicle for most U.S. companies, shifting the investment and longevity risks to employees.”     

With the shift of various benefit risks to employees, are workers able to plan ahead for security?  Are consumers aware that they may be expected to be more self-sufficient? 

It is easy to assume that we are prepared as we go about our work days, enjoy vacations, or buy houses.  We may expect that to some degree, others will look out for our welfare, whether these entities are insurance companies, employers, or financial institutions. 

But, it is important that we don’t get caught up a tree in Peru without necessary resources to climb down.  Advance planning, consideration of the terrain, and vigilance—in essence, risk management-- may seem like drudgery, but we can’t rely on others to bail us out. 

Are you ready to ride the zip-line?

LORA BRAY is a research librarian in CUNA's business-to-business publishing department.