Last week, Amy had a piece in The Huffington Post exploring two of her favorite topics – The Sex Talk and The Money Talk. Check it out:

‘The Road From Ruin’: Sex Or Money? Which Is Harder To Talk About?

Sex or money? Condoms or internal rate of return? Which of these highly charged topics and terms would you prefer (or prefer not) to talk to your kids about? I naively thought it was the sex talk until I started watching my husband interact with my four step-kids, aged 17 through 22. Here was a highly intelligent and educated finance professional who could easily talk condoms, girl doctors, and the ramifications of poor choices – but got completely tongue-tied when it came to money.

There were lots of questions and lessons to convey on both topics, but why was it easier to have a discussion about sexual choices or uncertainty versus “where did all the cash go?” “Why don’t I trust you with your trust?” And “why don’t you give money to charity?” Why was a box of condoms a standard “gift” but not a primer in personal finance?

In “The Road from Ruin,” Matthew Bishop and Michael Green make the case that financial education is a cornerstone of positive change — that we must prepare young people to be better consumers and critics of financial products and policies. I would suggest, however, that we as a society are much more prepared to talk, teach, and influence young people about sex than we are money.

First, there are lots of sex toys, but not many money toys. Think back to the first time your parents decided it was time for “the talk” or your teacher wrote “sex education” on the blackboard. Usually there was a book, a movie, or stories that helped them work through the conversation. At a minimum, there was some thing for you to keep and refer to so the education could continue even after the red-faced awkward adult left the room. With money, that isn’t the case — rarely do kids get a couple thousand dollars to try in the market, and I promise a piggy bank isn’t nearly as interesting (or graphic) as a toy, a movie, or a book.

Second, communication is not so hard between the sheets, but when it comes to the topic of balance sheets, some of us are better communicators than others. When it comes to talking about preferences with your sexual partner, the definitions are pretty basic and we are encouraged to believe that “more is better.” Not so with finance. The majority of finance-speak is in the language of “50 year old white male-speak” which makes it not so interesting and not so understandable to your average teen. Our media makes sexual empowerment cool, but financial empowerment decidedly less so. When was the last time you saw an Abercrombie & Fitch ad sending subliminal messages about fiscal responsibility? Our research shows that while young people tend to be really comfortable sharing information about sex, they are embarrassed to talk about money with their friends (especially if they have it and their friends don’t).

Finally, we just don’t know what we don’t know. Let’s face it, by the time we reach 40 most of us have had much more direct experience with sex than financial planning, budgeting and education. In a world where knowledge is power and experience builds confidence, should it surprise anyone that people are more vocal and engaged on topics they know and love than those they just don’t understand?

So what can be done? Mostly, we need to start talking about money. Take it off the “taboo” list at the dinner table, in the classroom, and in the media. Next, we need to recognize that young people communicate in a whole new way (e.g. texting, Facebook, digital media). Thus, we need to teach financial principles in a tone and medium they can relate to. Make it engaging, not boring. At the end of the day, it’s important to remember that the onus is on us to “teach our children well” — about both sex AND money.

Here’s a link to the original article: http://www.huffingtonpost.com/amy-butte/the-road-from-ruin-sex-or_b_503109.html

Today at TILE we talked about the intense debate on health care going on in Washington, Wall Street, and homes and offices across the nation. Why is the cost of health care so important – and so controversial? What is driving the increasing costs of health care? Why might your point of view on the matter differ from your parents or your grandparents?

Health care is a big topic for two reasons: it personally impacts everyone (we all want to be healthy) and it impacts the economy (and our personal financial status). Today, health care spending represents about 16.2% of our Gross Domestic Product (GDP) which measures the output of goods and services in the economy. On a percentage basis, it may not sound too bad, but if you put it in the context of absolute numbers and growth trends it deserves a double (or triple) take. First, in 2008 the U.S. spent $2.3 trillion on health care – that’s $7,681 per person. Even though it wasn’t a direct bill to you or your parents, it means that a lot of energy, government spending and tax dollars across the economy are being directed to health care. Second, the increasing cost of health care is growing faster than our economy AND our population. For example, about ten years ago, the cost of health care was $1.2 trillion, or $4,295 per person. During this time GDP grew from $8.8 trillion to $14.4 trillion and the U.S. population grew from 277 to 305 million people. If we look at measures of how much different things have grown over that time, we see that in only 10 years, health care spending has grown at a rate of 7%, per capita (per person) spending at 6%, the population at 0.9%, and GDP at 5.1%. As you can see, growth in health care spending has outpaced everything else. Imagine what it will look like 10 years from now if nothing changes?

So why are health care costs growing so quickly? There are many factors. First, advances in technology and medicine mean that people are living longer. New techniques and treatments that increase lifespan are being discovered every day. Second, the cost of doing business and receiving medical services is getting more expensive. Sometimes there is less competition (hence the reason for increases in health insurance costs… at TILE our health insurance rates went up 30% this year!). Legal risk is increasing, too. Doctors, hospitals, pharmaceutical  companies and other providers are constantly being threatened with lawsuits – and as the cost of their insurance goes up, so does your cost. Government inefficiencies don’t help either, especially since nearly 50% of all health care expenditures are covered by the government.

The current debate on health care across the country highlights the fact that not everyone agrees on what should be done. Major reasons for disagreements include special interests and generational preferences (there are more factors, but these are two big ones to point out). Those that are benefiting from the growth in costs don’t want to see more efficiency in the system. For example, health insurance companies benefit from reduced competition and government inefficiencies. At the same time, older generations don’t want to see a reduction in their benefits. Many people (we will call them the “have’s,” since they are currently well-covered) are afraid that if more resources go to young people and those not currently receiving coverage (the “have not’s”) then there will be less available for them.

So what does this mean for the TILE community? Well, on a practical level, the current plan in Congress would let you stay on your parents’ plan until age 26 (versus 18 or after college). This gives you a lot more freedom in deciding what to do next – you don’t have to take a job just to get health care coverage. On an investing basis, you might want to consider speaking with your financial advisor and/or researching companies that could benefit from changes in health care trends. Is there a technology company that promises new efficiencies to the industry? A bio-tech company identifying cost effective ways to treat common ailments? What new medical treatments are you hearing about (or benefiting from)? From a policy basis, we at TILE would encourage you to pay attention. Current growth trends imply that health care, if not already something that impacts you, will become a bigger and bigger issue (and a bigger cost) for you in the future. It may be “out of sight, out of mind” today, but you can bet it won’t stay that way for long.

- Amy

Today at TILE we talked about some new ways in which parents, educators, and the folks in Washington D.C. are encouraging young people to learn about finance. For example, the Department of Education and Department of the Treasury just launched the National Financial Capability Challenge. Remember stretching, crunching, and jogging your way through the Presidential Physical Fitness Test? Well this program is kind of like that, except it’s designed to help high school students learn enough about personal finance take control of their financial futures. It challenges high school teachers and other educators to teach the basics of personal finance to their students, and rewards students, educators, schools, and states for their participation and their success. The goal is for 1 million students to take the Challenge Exam before mid-April. In order to reach that goal, they are encouraging educators to add financial education to their curriculum now (there are plenty of resources for educators on challenge.treas.gov), and just bring more attention to this often-neglected topic.

At TILE, we think this is great! Because we want to support this project and encourage everyone to find a way to participate (teach a class, encourage your teachers to enroll, or be supportive in your school), here are a few thoughts/ideas on how to TILEize the curriculum and make it even better:

- Connect finance to how you live your life. If you are an educator, try to focus on more than just definitions – young people learn the most when they can connect a concept with their everyday lives (if not everyday technology). For example, rather than just defining interest, give real life examples so that they can see the difference between products and time periods. If you are a student, ask your teacher to “make it real.”

- Ask TILE! In an effort to support the NFCC, we’re offering TILEized definitions and translations to the first 100 students or educators who reach out to us. If a question isn’t understandable or a definition doesn’t make sense, send us an email at ask@tilefinancial.com. We will TILEize it so it is more understandable and doesn’t feel like it comes from a textbook. As a start, we are including five of our “Daily Definitions” at the end of this post.

- Today at TILE. Feel free to go to our site (tilefinancial.com) and search through past blog posts to get ideas, share them with educators/students and supplement the learning. The Today at TILE blog is intended to represent questions and concepts that young adults are interested in – and to talk about them in a tone that’s understandable. And this is just between us… but many adults tell me that they’ve also learned things from reading the blog!

So what does The National Financial Capability Challenge mean for the TILE Community? It means that a broader audience is finally focused on the need to empower young adults with the information they need to make good financial choices in the future. (Which, as you can imagine, we’re really into!) It also reiterates the need for more and better communication among financial institutions, parents, educators and young adults. We encourage everyone to participate, to take the challenge, and to take us along for the ride!

- Amy

As promised, a few definitions we’ve cooked up recently:

• A CD is a Certificate of Deposit, which is basically a savings account with a higher interest rate. In return for the higher rate, you aren’t allowed to touch your money for a set period of time. In general, shorter periods of time (like three months) have lower interest rates, while the longer time periods have much higher ones.
• Debt is an amount owed to a person or organization for funds borrowed. For example, if you were to get a loan to pay for college, you are in debt and owe the bank however much you borrowed plus a pre-determined cost in the form of interest.
• A credit rating is like a grade given to a person, business, or even a country, that says how likely that person is to make payments on a loan as promised. Credit ratings for people are called credit scores and are maintained by credit bureaus like Experian and TransUnion. Credit rating agencies like Moody’s or Standard and Poor’s give ratings to companies and countries that tell investors how safe it is to buy their securities, like bonds or stocks.
• Sallie Mae is slang for the Student Loan Marketing Association, an agency that helps college students get loans.
• A mutual fund is a pool of securities (stocks, bonds, money market instruments, etc.) managed by an investment company or other professional and paid for by investors. Each share of a mutual fund contains a small piece of every different type of security in the fund (so when you buy a share of a mutual fund, you’re really buying a little piece of a stock from Company A, a little piece of a stock from Company B, a little piece of a government bond, and so on).

Today at TILE we talked about how quickly information spreads in the market and the impact one piece of news can have across seemingly unrelated markets. Why did concerns about Greek debt lead to a drop in the U.S. equity market this week? What is the relationship between markets (whether debt, equity, foreign exchange, or commodity markets) and across geographies? And why do markets seem to behave like dominoes, or a “wave” making its way along the shore?

Last week, the European debt market raised concerns about countries like Greece, Spain, Ireland, and Portugal defaulting on their debt (although Greece was the primary target of concern). As we’ve discussed in other blog posts, sovereign debt (the debt issued by a country versus an individual) is backed by the credit-worthiness of the whole country. Their credit-worthiness or rating is determined by how the funds will be used and the country’s ability to repay. At present, Greece has been issuing debt for the purpose of stimulating the economy (government projects, job creation, etc.), however some experts are concerned that this stimulation isn’t that stimulating and Greece will not be able to pay back their loans.

While this is common for still-developing countries in South America, Central America or Africa, it isn’t that common for a European nation – and particularly one that is a part of the eurozone. The eurozone was created so that individual countries in Europe could create economic advantages by banding together on economic policies (plus share a currency and interest rate policy). That being said, it isn’t clear if other members of the euro community will “back up” the euro by saving Greece from defaulting on its debt. It is kind of like micro-lending to small groups. If one member doesn’t repay her loan, then either the other members of the group must cover her responsibilities or risk the future reputation (and borrowing power) of the entire group. Another example might be a group project for school. If one team member doesn’t do his share, the rest of the team can either do his work or risk getting a really bad grade.

Beyond issues of responsibility, what happened last week (and what happens all the time) is a shift in investor expectations. Investors, particularly good investors, are constantly taking information about one piece of the market and using that to set expectations about other pieces of the market. How investors interpret information and set expectations determine how and why concerns about one country’s debt can spread like a wild fire across continents and markets.

While this isn’t a complete analysis, you can get an idea of how investors’ minds may roam: Concerns about Greece defaulting on its debt leads investors to question how this will impact the value of the euro; if investors think other countries are unwilling to back up the obligations, the value of the euro will change (for the worse) and there is a change in the foreign exchange market (the euro falls in value compared to other currencies like the U.S. dollar or Japanese yen). Furthermore, if Greece is not able to stimulate its economy fast enough, does that mean all of Europe is growing slower than expected? (This thought leads to the European equity market falling in value as investors reassess growth trends there in the future); if Europe is growing slower, then that could impact U.S. companies dependent on selling product in Europe (and the value of the U.S. equity market falls as investors reassess growth trends here in the future). And if Greece or any other eurozone country can default, then maybe other countries will also be defaulting (the value of other sovereign debt falls as investors sell “more risky” debt); this impacts the foreign currency market even more as investors swap sovereign debt in Europe for debt in the U.S. or Asia. Are you getting the picture? Just like a line of dominoes, the consequences of one action in the world market can continue and on and on…

So what does this mean for the TILE community? Mostly, it means that all investments are interconnected. Simply owning a U.S.-based company focused on green technology may not make you immune to changes in foreign exchange rates, consumer demand in other parts of the world, or general expectations about the market. For example, what if that green technology company sells its products mostly in Europe? The value of the sale changes with the value of the foreign exchange rate between dollars and euros, and suddenly demand is slowing because the unemployment rate is going up on another continent! When you set your own expectations for investments, or anything in life, you should recognize that we no longer live in a simple financial world and we may need a wet suit, at times, to deal with all the waves.

- Amy

Today at TILE we talked about what to do when the savings rate (the interest you earn when your money is in a savings account) is less than the inflation rate (the rate by which the cost of things keep rising). It is a dilemma that many investors, including the TILE community, are currently facing. Why is the savings interest rate so low? What is the relationship between inflation and savings? And what can you do to position yourself for the future?

In general, the rates you receive on savings deposits reflect the relationship between the amount the banks are charged to borrow funds and the rate at which they can lend the money.  For example, if it costs the bank 1% interest to borrow the funds and they can lend it out at a rate of 4%, their profit (or “spread”) will equal 3%. Try this: if the cost to borrow $100 from your parents is $1 and then you can find a friend who will pay you $4 for using that $100 over a period of time, your profit equals $3. When you account for the risk associated with a loan (will your friend really pay you back on time?), you arrive at the basic explanation for how banks make money.

If you went to the bank to make a deposit in a savings account today, you would probably find the average interest rate on that money to be well less than 2%. While not quite zero, it is definitely a different situation than in the early 90′s, when interest rates could be as high as 9%. So why are the rates so low right now? The government (in the U.S. and elsewhere), in an effort to get the economy moving, is trying to encourage lending by banks and spending by businesses/ consumers – more spending and lending leads to a growing economy. Thus, the bankers at The Federal Reserve have taken the Fed Funds rate (the rate at which banks can borrow from the government) to just 0.5%. This becomes the benchmark by which all other loans are made, and banks only pay you what the Fed says your money is worth. Imagine you were buying an iPod; if you knew the going rate for an iPod Shuffle was $100, there is no way you’d pay $250… right? Thus, based on what it wants to see in the economy, the Fed helps set the tone or the basis for savings rates and lending rates.

So, why is inflation important here? A common occurrence when spending increases is that prices also increase. The best example is what happens to popular holiday toys. If everyone wants the same toy, and the number of units is limited, then prices often go up. If the inflation rate is greater than the rate you earn on your savings, then the purchasing power of that money will be less in the future. For example, let’s say you were saving to buy a really special watch – you put $1,000 in the bank at an interest rate of 1%, so that a year later, you had $1,010 in the bank to spend. Now, over the last year, the price of the watch, impacted by inflation, grew from $1,200 to $1,400. Thus, your money is “worth” less in terms of what you can buy. This is the dilemma.

So what does this mean for the TILE Community? What are some options to consider if you want your money to at least keep up with the pace of inflation? Well, you could consider spending like crazy. But while that might make some companies and the government happy, it may not be the best thing for you long-term. It means you’ll have less savings to tap into in the future, which could make you vulnerable if the economy shifts to a deflationary trend (meaning prices actually fall in the future… so you are feeling kind of silly for spending $1,200 today on a watch that may cost just $1,000 a year from now). Another option to consider is finding investments with higher rates of return. Usually, this means investing in assets that are riskier in nature – greater return but also greater potential for loss. Examples of higher yielding instruments include corporate bonds, high yield bonds, equities, commodities, and other “less liquid” instruments which meaning they are hard to trade in for cash anytime you feel like it. But before you start trading, it is really important to understand your risk tolerance level (taking our Risk Assessment quiz can help with that!) and talk to your banker or advisor about their perspective.

These are complicated times and they bring tough financial decisions home to everyone. But you should know that really smart, experienced people are debating these questions all the time and they don’t have a crystal ball either. So when it comes to your own money, the best thing you can do is know your options… before you make the trade.

- Amy

Today at TILE we talked about the financial concepts that have unexpectedly made their way into the everyday thinking of the TILE Team. I asked the staff these questions: By spending more time around financial concepts and terms, did finance become less scary to you? More interesting? More important? Are you more conscious of certain behaviors? What was a big “Aha!” moment for you over the course of the last few weeks or months? Here’s what they said:

“Portfolio diversification matters… now that I understand it a little better.” The key message is that investing is not an “all or nothing” sport. Being a good investor doesn’t mean you have to be an expert stock picker or an expert market commentator. Rather, by taking a “spread it evenly” approach with your investments across multiple dimensions, it is possible to meet all of your investment objectives – including your preferred investment returns, personal likes/dislikes, or making socially responsible decisions. Most important, objectives and priorities differ from person to person, and that is a good thing because portfolios – like individual preferences – are very personal. For example, some people eat meat while others are vegetarians. Both have the same objective of fueling their bodies, yet what they choose to eat, when they choose to do it, and the cost associated with it all differ. And that’s okay.

“Futures and options are real… not just something I saw in Trading Places or Wall Street (the movie).” Most everyone at the office admitted that futures and options seemed really abstract and even meaningless (even up until a few weeks ago). Some even thought they had no real purpose other than as a means for bankers to make money. Well, that changed recently when Florida’s record low temperatures made front-page news. The freezing in the air led to concerns about orange crops freezing (and dying) in Florida. Would there be no orange juice this year? How expensive was it going to be? Why does Wall Street care about the weather in Florida? Basically, there are companies that are dependent on the cost of oranges (think Tropicana) and they budget costs for the year ahead. Often they buy futures as a “hedge” (meaning they would rather lock in a price today then be subject to the fluctuations in the future). So when a crop fails, does that mean their costs are going up? Does that mean their profits are going down? All of a sudden the connection was made between weather, oranges, the cost of orange juice, and how futures and options trade based on real world events. Talk about connect the dots!

“People act differently in real life than they do in simulations.” Earlier this year, the team started a friendly stock market competition using the MarketWatch Virtual Stock Exchange. While it helped bring terminology to life and some fun into the office, the takeaways weren’t who won or lost. Rather, people learned that playing with “imaginary” money is very different than investing your own portfolio – the bets are bigger and the time frame is shorter (think about how much more willing you would be to “bet the house” if you were gambling with Monopoly money). So, while trading simulators can be a fun way to learn, don’t mistake them for the real thing. There also seemed to be a consensus around investing in what you know and care about – there is more confidence, conviction, and understanding, which goes a long way. Maybe Mr. Buffet really is on to something?!

So what do these financial revelations by the TILE Team mean for the TILE Community? At the end of the day, it turns out that simply spending time around financial concepts can make a real difference in your confidence level as you talk about them with friends and family. Mastering the terminology, the excitement of learning new and empowering concepts, and just the desire to communicate more will all help you on your way to financial independence. TILE is here to help you make the connection between your financial life and your day-to-day life – and we look forward to hearing your own stories!

- Amy

Today at TILE we talked about lending on an international level. The devastating earthquake in Haiti raised two clear questions in our office. First, what can we do to help? But also, what was the economic situation in Haiti before the earthquake even hit? We know that Haiti was wracked with debt, but what does that mean? What is the difference between lending to a country and lending to an individual? What happens when a country defaults, or backs out, of its fiscal commitments? Are all countries able to raise money and attract investments equally, and if not, why not?

For the most part, countries go about getting a loan (or raising debt) the same way individual borrowers do. They decide how much they need, make a case to the potential lender, an outside agency assesses the risk, and terms are decided. Clearly, there are differences in the size of the loans (how much a country needs versus a local business), the types of lenders (a bank or credit union versus The World Bank, institutional investors, and other countries), the magnitude of risk, and the terms of the loan (such as the life span of the loan and amount of interest paid).

When a country doesn’t pay back its financial commitments, they don’t have to file for bankruptcy, but they will most likely find themselves in a legal battle on the international stage – and with a damaged reputation. Often it is in the interest of the country and the lenders to renegotiate the terms of, or restructure, the loan. For the country, it is better to say, “I can’t pay you right now, but I will pay you over a longer time frame.” For the lender, it is often better to accept a lower return on investment (or profit on the loan) by extending the time frame and/or accepting a lower interest rate. For example, if you lent a friend $1,000 and then found out they couldn’t pay, what would you do? Would you prefer to “restructure” that loan so that you received $800 or just accept that the money is gone? It’s better to get most of your money back rather than none. But regardless of the outcome of the restructuring, you probably won’t lend any more money to that person in the near future!

Key components of lending are motives and risks. Motives relate to understanding the need to raise money as well as the interest of the lenders to lend. What is the money going to be used for? Building bridges? Investing in new industries? Or something else? Why might it be a good decision to lend money? Most likely it is financial gain – the lender sees the potential to make money on the interest or the investment. Risk is the cornerstone of any financial transaction – it is a metric for the likelihood that everything will go according to plan. That is why each country (like companies and individuals) receives a credit rating (similar to a personal credit score) – the lower the risk, the higher the score. In addition, the terms of the loan represent the market’s view of that risk. Greater perceived risk usually means a higher interest rate (getting paid for taking a higher risk) and more stringent conditions. The same concepts apply when lending to individuals (how you are perceived/assessed if you go to take out a loan or apply for a credit card).

While attracting lenders is important to a country that is seeking to grow, so too is the ability to attract companies that want to build their businesses abroad. Most countries want businesses to invest in them – it is good for the economy – but if there is too much uncertainty when it comes to doing business in a country, companies will most likely find another place to go. Google’s recent announcement that it may stop doing business in China fits into this category. Google’s motives were to expand the brand and reach of the company. Its risks, like many international companies that expand globally, related to the expectation that international law and privacy protections would apply. Understanding all the risks, and costs, they still chose to move ahead.  Kind of like finding themselves in the position of dealing with a borrower that is “defaulting” on their loan, Google is calculating the costs (time, money, and people) if it gives up and moves on. Should they restructure? Go to court? Or do they just walk away – and send a really big signal to other companies who are considering investing in China?

So how does this relate to Haiti and what does it mean for the TILE Community? While a natural catastrophe is much different than other uncertainties, like government instability, the treatment of debt and prospect of investment is similar. First, it is very likely that Haiti’s debts will be forgiven and/or restructured. Second, it will need sustained investments and capital to rebuild its infrastructure. Admittedly, though the current outpouring of humanitarian aid is critical in the short-term, the long-term health of any country is long-term investment – something Haiti didn’t have much of even before the earthquake hit. In terms of the TILE community, we encourage you to consider our Causes when looking for ways to help the victims Both charity:water and ACCION have earthquake response efforts in Haiti. In addition, think about the difference between short-term and long-term investments. Are your financial actions, whether in Spending, Growing, or Giving, more like applying a band-aid, or are they really addressing the long-term roots of the problems you face?

- Amy