Tax season is a time for financial reckoning; An opportunity to understand where you money goes and to consider how you manage it. But for a lot of people, it just seems too complicated, even scary. An accounting professor at Radford University says that has to change because understanding your personal finances can make a huge different to your pocketbook over time.
Mike Chatham is an Associate Professor at Radford University who teaches a course on personal finance. You might think "Hey, it’s easy for people in his field to understand how to manage their money." But, it can be difficult even for them
“Even faculty colleagues, seeing that there is $700,000 in their Traditional IRA, and not realizing, there’s not really $700,000 there, there’s $700,000 before taxes," Chatham notes. "Once they take it out there’ll be considerably less than $700,000 to use.”"
It’s confusing because there are two flavors of ‘individual retirement accounts,’ IRAs for short.
The traditional lets you skip paying taxes at first on money you contribute, but you pay when you go to retire years later. With what’s called a Roth IRA, it’s the opposite. And if you’re saving for retirement, you have to choose one or the other. “Those kinds of decisions can make hundreds of thousands of dollars of difference over the years,” Chatham says
The right choice is not the same for everyone and no one is saying its easy. According to CNBC, 97 percent of people across the country who took its financial literacy test, failed. The numbers are about the same for other, similar tests.
Chatham points out that “one of the questions people failed on a fairly frequent basis was, which loan should you pay off-- the high interest loan or the high balance loan. In other words, you could pay off the $100,000 loan that’s at 3% interest or the $4,000 loan that’s at 8%. Most people were saying you pay off the big loans first. Well, that is backwards.”
Financial illiteracy is a nationwide problem, but Virginia is one of a minority of states that actually requires high schools to teach personal finance. However, on the college level, when kids are starting to get more hands-on experience with money such classes are largely absent. The one Chatham teaches, is an elective, not eligible for core credit.
That’s why he believes more of us should take matters into your own hands. He suggests we all learn how to use something called an amortization schedule, so we can understand what’s going on with any loans we take out. And yes, there will be math. “Once you build one you can use it you can use it for all loans, whether it be an auto loan, a school loan, a home loan, whatever it might be.
As if the math isn’t scary enough for most people, the language here is well, off-putting; the root word of amortization, is the word ‘mort,’ Latin for death. And it refers to how long it will take you to kill off – well pay off, your loan.
“Basically, an amortization schedule just means as you pay off a loan, what happens to the principle ( the amount you owe) over time and how much of each payment is between principle and interest” and how that is changing over time.
Chatham says learning how to make and use one of these can make a huge difference that most people aren’t aware of. “I just did my taxes the other day and I didn’t have to wait for my 1098 from my bank on my home loan, because I already have and amortization schedule," Chatham said. "Plus, a lot of times, banks make errors and if you don’t do an amortization schedule, I use Excel, you’re just at their mercy. It’s like you just have to trust them unless you have something to check.”
Chatham says he’s caught errors by banks thanks to his own amortization schedules and, that there are several available on line and tutorials on how to use them.
Here are 3 links with tutorials on spread sheets:
