Your Real Cost of Living

Few people strive to be just average. But when it comes to inflation, some folks would jump at the chance. In late 2007, consumer prices were up an average of 2.8% nationwide over the preceding 12 months. That's not much. So why is it so painful every time you go to the grocery store? Probably it's because your personal consumer price index diverges from the national average.

For starters, you're not national. Like real estate, most shopping is local and prices vary by region. For instance, the cost of living in Houston and Galveston is flat compared with a year ago. But across the Gulf of Mexico in the Miami-Fort Lauderdale area, prices are up almost 4%.

More From Kiplinger's Personal Finance: • Track the Cost of Living in Your Metro Area • Calculate Your Cost of Living • Best Cities for Every Stage of Your Life

Nor can you possibly be average, statistically. That's because the official consumer price index reflects an array of households simultaneously. Both renters and homeowners figure in the overall cost of housing, both drinkers and teetotalers in the cost of food and beverages, both the sick and the healthy in the cost of medical care.

Furthermore, the feds use extensive surveys to weight the importance of items in their CPI basket of consumer goods. Spend more than average on items whose prices are rising faster than average, and your personal inflation rate could soar.

For example, we'll make an educated guess that your personal inflation rate is well above average if you have a son or daughter in college. For one thing, the CPI assumes that only about 3% of spending goes to education. For another, college-cost inflation has been running around 5% to 8% a year, more than double the average inflation rate in recent years. The double whammy of devoting a bigger-than-average share of your spending to an expense that is rising at an above-average pace could push your personal inflation rate into double digits.

Critics say bureaucrats understate the CPI by assuming shoppers will sub cheaper items for pricier ones, and by adjusting price hikes downward to reflect quality improvements in what we buy.

Food for thought. When you get right down to it, not even the average is average. Food and beverage prices are rising at a 4.4% annual rate. But dairy prices are up 13% (and 26% for a gallon of whole milk alone), thanks to price supports and brisk exports of powdered milk.

Meanwhile, meat prices are up 6%, and bakery products are up 4.6% because corn is being converted into ethanol instead of animal feed, muffins and sweetener. "We haven't seen an increase of this magnitude in grocery prices since 1990," says Bureau of Labor Statistics economist Patrick Jackman.

The news isn't all bad. Apparel prices are falling. Ladies, your clothes are about 3% cheaper than they were a year ago. Technology prices are down nearly 15%; computers are down 10%. Couch potatoes, rejoice: TV markdowns are running 25%.

Ways to save. Still, if you're buying groceries and gas more often than flat-screen TVs, you'll feel the pinch. Fortunately, you can fight some trends. Buying gas with a credit card that rebates part of the cost will lessen the sting of a 9% hike in prices since late 2006; Kiplinger's likes the BP Rewards Visa.

With the cost of health insurance up nearly 12%, shedding pounds or chucking cigarettes may yield financial rewards. Your boss -- like 48% of those surveyed by Hewitt Associates -- may cut you a break on premiums if you take a health-risk appraisal or pledge to live healthier.

Got kids in college? This semester, don't buy textbooks. Rent them instead from discounters such as BookRenter.com or Chegg.com. Textbook prices are up 9% from a year ago, so shaving your tab there might get you a little closer to Raverage."

Copyrighted, Kiplinger Washington Editors, Inc.

Eight Sure-Fire Ways to Sock Away $100

Let the economic pundits argue whether or not we're in a recession.

Either way, consumers are cutting back on spending.

Along with this comes a desire to save money as well. But how? If you have a few hours to spare you can find ways to put $100 or more back into your pocket.

The money may not show up instantly, but the time and effort to create the savings is minimal. By year's end you will have saved a nice chunk of change. In some cases, your savings will keep piling up well after that.

Here are eight actions to add $100 or more to your savings:

1. Wash With Cold Water

Many people don't realize that the major cost of running a washing machine is the electricity it takes to heat the water. This accounts for 85% to 90% of the energy used.

Set your washing machine to run a cold wash/cold rinse cycle instead of a hot wash/cold rinse. This should have little impact on how clean your clothes get since washing machines and detergents have advanced enough that only the dirtiest and greasiest clothes now need a hot wash to get clean.

While a hot wash/cold rinse setting will cost about $100 to $150 a year if you do a load of laundry a day, the same number of loads with a cold wash/cold rinse setting will cost about $10 a year.

That's $100 in savings, and can be much more if you have children and do frequent wash loads. Best of all, it takes a split second to turn the knob on your washing machine to receive this savings.

2. Drink More Water

Many people have grown accustomed to having some type of flavor in their drinks -- whether that be soda, fruit juice, an energy drink or something similar.

While only drinking water (of the nonbottled variety) would be the ideal way to save the most money, there is about as much chance of that happening as you never eating another snack.

But even reducing the amount you drink can save quite a bit of money over time.

Instead of saying that you can no longer have the drinks you like, a simple way to reduce the amount you consume is to make a point of drinking three glasses of water a day.

The water will reduce your cravings for your usual drink, although not eliminate it, since you'll find you're just less thirsty during the day.

If you can cut out three drinks a week that usually cost $1, you have saved over $150 a year for the minute or so it takes to fill three glasses of water each day.

3. Compare Prices

The Internet has leveled the playing field when shopping for such things as auto insurance and homeowners insurance.

All it takes is a few minutes of inputting information to see if you can get a better deal. Since it's such a competitive field, you can often save hundreds a year -- especially if you haven't checked prices recently.

You can take this a step further depending on how dedicated you want to be by price comparing all your major purchases through sites such as PriceGrabber or Shopping.com and save hundreds more.

4. Use Coupons

Many people scoff at coupons because of the time it takes to gather and organize them.

Then there's the obvious nerdiness factor.

Truth is, even if you aren't the coupon-clipping type, you can still save quite a bit with them.

All it takes is five minutes to look at the ones that come with the Sunday paper, in the daily mail and any others that you happen across.

Cut out only those for the products that you already use and will purchase again and don't bother with any others. It only takes $2 each week in coupon savings to save more than $100 a year. When you think of all the coupons that go beyond groceries (pizza, oil change, haircut, etc.) it should be easy to save much more than this with little time or effort.

5. Start Haggling

While most people don't take the time to do it, virtually all the services you currently pay for are negotiable, including your cable TV, gym membership, phone bill and Internet service. While asking for a better deal may not work with all of these all of the time, you will get a discount a lot more times than you probably imagine.

All it takes is a 10-minute call to each service. If you can negotiate a $10 a month discount on each, that comes to $480 a year in savings for a few phone calls. It will probably end up being a lot more.

6. Get a Lower Credit Card Rate

While you're on the phone, be sure to make a call to your credit card company if you currently carry a balance on your credit card.

Many people don't realize that all it takes to lower your credit card interest rate in many cases is a simple phone call asking. A 2002 study found that over half the people who had good credit and called their credit card company to get a better interest rate were able to do so with the average person reducing the rate by one-third.

If you have a $5000 balance at 21% interest and were able to knock that down to 14%, you would save $350 a year. The 15-minute call will also knock years off the time it would take to pay the debt off.

7. Sell Stuff

You have a lot more stuff stored in your house than you will ever need or use.

A quick check of your closets, basement, garage and other nooks and crannies should produce boxes of stuff that you own, but no longer have any use for.

Instead of keeping them in perpetual storage, sell it all. You can do it online through sites like eBay or Craigslist, or have a garage sale and get rid of it all at once.

The basic guideline: If you haven't used something for the last year, you will probably never use it again.

Selling all this will keep your house less cluttered and will also bring in well over $100 in most cases.

8. Refinance Your Home

With interest rates at the lowest level in years, it's time to see if refinancing your home loan (or any outstanding loan you have) is worthwhile.

Knocking off a point can save thousands of dollars over the lifetime of the loan.

Even if you have a nonconforming loan -- or jumbo loan -- which made it difficult to refinance in the past, this soon may no longer be the case.

As part of the economic stimulus package that President Bush says he will sign into law this week, conforming loans that are backed by the Federal Housing Administration will increase to a $729,750 limit from $417,000.

Since nonconforming loans usually carry a higher interest rate, this will allow some with jumbo loans to refinance into a conforming loan.

While the difference in interest rates vary, a conforming loan can be a full percentage point less expensive since it is backed by the government.

A jumbo 30-year fixed loan that was 6.75% before the law, for example, would have a payment of $3,892 a month. Once enacted, the buyer would be able to obtain the same loan of $600,000 at an interest rate of 5.75%.

The monthly payment would be $3,502 which would save the borrower $390 a month, or $4,680 a year.

While refinancing is a bit more complicated than the other saving methods and will take a bit more time to complete all the necessary work, the amount saved per year is huge and thus well worth the effort.

Note: To make the savings last, you need to set the money aside that you save after completing the above tasks.

If you merely congratulate yourself for saving money, but don't separate the money into another account, it will likely be spent on other things and the savings will never materialize.

Copyrighted, TheStreet.Com. All rights reserved.

A Midlife Money Checkup

Where did the time go?

Just yesterday your financial life was all about scrambling to make rent, learning what a 401(k) was and lobbying to get out of the cubicle and into an office. Now you're pushing 45 or 50, you've got a mortgage and college tuition bills, and you're the boss of a crop of ambitious 22-year-olds.

Face it, you've reached middle age.

Sure, you have a long road ahead - three or four decades or more. But when it comes to your finances, you're not a kid anymore.

"Back in your twenties, you probably thought turning 50 was far in the future," says Mari Adam, a financial adviser in Boca Raton, Fla. "Guess what? Your future is starting now."

Will that future work out the way you want? Hard to say, but you'd be wise to see how you're doing so far. That means conducting a head-to-toe money checkup that covers everything from investing to insurance.

Once you know the state of your financial health, you should find it easier to get in shape and then stay on track toward your goals, whether they include early retirement, career changes or starting a business.

How do you take this test? Ask yourself the same questions that a financial planner would pose. Your answers will lead you to your diagnosis and, if you find ills, a cure. Get started.

1. Are you saving enough for retirement?

When you're just starting to save and invest, this question is hard to answer with any precision. Who knows how much money you'll need in retirement when those days are eons away? Now that you're in your forties or fifties, it's easier to make an educated guess.

You have a 401(k) balance or other plans you can check on (if you can bear to look today). And you probably know how long you want to keep working and have an idea of what you want to do afterward - travel, launch a second career, kick back. You still have time to refine your goals. But as retirement draws closer, you can't put off creating a concrete savings target and measuring your progress.

One way to look at this is to come up with the Big Number. As a rule of thumb, figure you'll live on 80% of your pre-retirement income when you stop working. So if you make $100,000, that's a retirement income of $80,000. If you assume you have no pension and that you'll collect $20,000 a year from Social Security (get an actual estimate at ssa.gov), the remaining $60,000 will come out of your savings.

The standard financial planning advice is that you can safely withdraw up to 4% of your assets in the first year of retirement. You then increase that amount each year to match inflation. So in this example you'll need to amass $1.5 million by the time you quit ($60,000 divided by 0.04, if you're keeping track at home).

Work up your own Big Number and an annual savings goal with our retirement calculators. You can also use the worksheet to the right to see where you should be by now. Whether you're on target or behind, remember to keep saving. It may seem hard to buy when the market is stumbling, but think of it as a 10%-off sale on stocks you have to buy anyway.

2. Is your portfolio properly diversified?

In just the first weeks of this year, the stock market has slid some 8% and recession talk has reached fever pitch. That's especially worrisome for midlife investors. You've lived through bear markets before - 1987, 1990, 2000-02 - but now you have more money on the line and a tighter portfolio-building schedule to meet.

At times like this, you want to make sure you have a mix you can live with. So check on your investments but don't chicken out. As long as you are properly diversified, you can ride out this market downturn too. Retirement may seem close, but your investing time horizon is still decades long.

While boomers should have a sizable stake in bonds and cash to cushion risk, stocks should continue to be the linchpin of your portfolio. Yes, stocks can often deliver sharp losses, but they remain your best bet for outpacing inflation.

By your late forties, a sound asset mix, according to planners at T. Rowe Price, is 83% stocks and 17% bonds. Gradually shift so that by age 65 you have a 60/40 mix. For maximum diversification, your equity stake should include large-caps, small-caps and foreign stocks. To create your own allocation, use the tools at morningstar.com.

3. Are your investments in the right accounts?

If you've been stashing away money for 15 or 20 years or more, you've probably built up savings in both tax-deferred plans, such as a 401(k) or an IRA, and taxable accounts. Now you need to consider what's called asset location - that is, putting investments that trigger a high annual tax bill in tax-deferred accounts and keeping more tax-efficient ones outside your plans.

A study by Vanguard found that effective asset location can improve your after-tax returns by as much as 10% over 10 years. Investments that throw off a lot of income are tax-inefficient. Prime examples: bond, real estate or high-dividend stock funds. If the payouts are in the form of interest or short-term capital gains, you'll owe taxes at a rate as high as 35% on the money.

Growth stock and index funds are tax-efficient. They tend to generate few short-term payouts, while any long-term gains would typically be taxed at a 15% rate. Municipal bond funds are also low (or no) tax, and the case for owning them is quite strong now

4. Have you taken on too much debt?

You've become an expert juggler - what with the mortgage, college tuition and monthly bills. But in that financial scramble, you may have lost track of just how much you owe, especially if you keep tapping your home equity for spending money.

Sure, some debt makes sense - taking out a loan to buy that house in the first place, for one. But too much debt can cripple your finances, especially if you carry credit-card balances. The worst scenario would be to head into retirement with mushrooming interest payments and only a fixed income to pay them off.

Use these four guidelines to see if you're in over your head:

• 28%: Devote no more than this amount of your monthly pretax income to your mortgage.
• 75%: By age 45, limit your home loans to this portion of your home's value, says Phil Dyer, a financial adviser in Towson, Md.
• 36%: Spend no more than this much of your pretax income on all debts, including your mortgage and credit cards.
• 3 months: Set aside three months' worth of living expenses for emergencies. In tough times, six is even better.

5. Is your estate plan in order?

For better or for worse, life has grown more complicated, what with a spouse, kids, a former spouse, free-spending kids, health worries. You've worked hard to protect your family. But if you die or become incapacitated, what will happen? That depends on how well you've handled estate planning.

You probably have a will - by age 50, two out of three Americans do. But that's only a start. When did you last update it? And did you complete other essential paperwork? Probably not.

"You want to be sure your kids and spouse will be taken care of," says Robert Armstrong, president of the American Academy of Estate Planning Attorneys in San Diego. "And you don't want all your money going to your ex-spouse or, worse, her no-good second husband, which all too often is what ends up happening."

Here's what you need:

• A will: In it you need to designate a guardian for your children if they're younger than 18, as well as a financial guardian for the money they'll inherit (or a trustee if you set up a trust). "You may want to choose different people for these tasks, since they call for different skills," says Bill Knox, a financial adviser with Regent Atlantic in Chatham, N.J. "A guardian must be willing and able to raise your child, while the trustee should be good with money management."
• Beneficiaries: Name them for your 401(k), IRA and investment accounts. Your will may state that all your money goes to your spouse, but that won't override the beneficiary documents if you've listed someone else.
• Durable power of attorney: With this document, you give a trusted friend or family member the legal right to manage your affairs if you are disabled.
• Health-care proxy: Also known as a living will, this document enables a family member to direct your medical care if you can't do so yourself.
• Living trust: Consider this alternative to a will if you live in a state with slow-moving or costly probate courts. With a living trust, your estate can bypass probate.
• Trusts for your children: In most states, your kids will control any money put in their name at age 18 or 21. Putting their assets in a trust allows you to dictate when they collect or make sure they use the funds for college, not a convertible.

6. Are you expecting an inheritance?

A quarter of households have received at least one inheritance, according to AARP. The median amount: $49,000. As a boomer, you may see even more. The most affluent boomers (the top 40% by income) get two-thirds of all inheritance dollars, the AARP study found.

"If you are in line to receive a sizable inheritance, consider the impact on your financial plan," says Ross Levin, a financial adviser in Edina, Minn. First talk to your parents. If they say they hope to leave you money and you feel confident that they've accounted for long-term health-care costs, work this sum into your own plans.

"The amount may be enough to live on while transitioning to a more flexible career or you may be able to help your own kids with a down payment," says Levin. Or suggest that your parents look ahead to the next generation and help your children with college. If they pay tuition bills directly, that doesn't count against the annual gift-tax-exemption limits.

7. Do you have enough insurance?

You're pushing 50 (or more), but hey, you still feel like you're 40. There's no denying statistics, though, and the numbers show that the odds of developing serious medical conditions rise as you get older. If you delay purchasing or updating certain policies, you may find that coverage has become unaffordable or impossible to get.

Check your protection against this list:

• Life: Back in the '80s and '90s, you did the right thing by taking out life insurance to protect your family. They'll still depend on you for another 10 years or more, but is your old coverage generous enough to replace the fatter paycheck you're bringing home today? (Conversely, if you've built up enough assets, you might not need it.) To calculate how much insurance is right for you now, fill out the online worksheet from the Life and Health Insurance Foundation for Education. If you need to buy more, term is almost always your best choice. Compared with a whole life policy, you can purchase more coverage for fewer dollars, and rates have been dropping steadily in recent years. Compare premiums at insure.com or accuquote.com.
• Disability: You are far more likely to have a temporary disability than to die prematurely. But few people purchase disability coverage on their own, since annual premiums are typically 1% to 3% of your income. Still, if you don't have a group policy at work - or if you think your next job might not provide it - talk to two or three independent insurance agents to compare policies (the Web isn't much help here).
• Homeowners: You've expanded the family room, redesigned the kitchen and turned the basement into a home theater, all while home prices have been skyrocketing around you (at least they were). When is the last time you compared the value of your home with your homeowners coverage? You may need a bigger policy.
• Liability: You could be sued for millions if someone slips on your sidewalk or gets rear-ended by your car. As a highly paid professional, you're a more alluring lawsuit target than you were as a penniless 25-year-old. And you have more to lose. That's why in your peak earning years you need umbrella liability coverage, which provides added protection on top of your auto and homeowners insurance. Most people buy a $1 million policy.

8. What do you want to do next?

Call it a midlife crisis or call it sensible planning. But after 20-plus years in the work force, you may be a little restless. In a recent Money Magazine survey, 43% of boomers said the idea of a new job was appealing. Among young boomers, 50% said so.

"Now's the time to ask yourself," says financial planner Sheryl Garrett of Shawnee Mission, Kans., "do you want to keep doing what you're doing for the rest of your life?" You still have plenty of time to build a new career or launch a business, but you don't want to jeopardize your family's security by trying out random ventures.

Your first step should be a career assessment, says Mike Haubrich, a financial adviser in Racine, Wis. Ask yourself: Am I happy? Have I advanced as far as I hoped? What are the prospects for my industry? Maybe you'll decide you're satisfied where you are. If so, keep acquiring new skills and network regularly to stay competitive.

Or you may decide you want to switch jobs. Trouble is, an economic slowdown might be the worst time to look for work. So use this time to lay the financial groundwork:

• Save more. It takes cash to cultivate your career: for training and college courses, for networking events and to pay expenses during a transition. Says Haubrich: "You have to invest in your career just as you do with your portfolio."
• Budget. If you're leaving a corporate job to go solo, price individual health insurance before you leap. Or see if you can switch to your spouse's coverage. Figure out your monthly expenses so you know how much you need to earn. Trim your debt while you still have a steady paycheck.
• Do research. Know the value of the retirement benefits you're giving up, including a 401(k) match and a pension. A traditional pension is worth 20% to 30% in higher pay.

9. Are you staying healthy?

Your health isn't something you'd expect to review in a financial checkup. But what could have a greater impact on your retirement security? Your physical condition will dictate everything from your medical bills to how long you can work - in a recent McKinsey & Co. survey, 40% of retirees said they'd left the job earlier than planned largely because of health problems.

Unfortunately, the health outlook for boomers is far from bright. Despite a youth that spanned Jane Fonda workouts, spin classes and yoga, many are in poorer health than their parents, says Olivia Mitchell, head of the Pension Research Council at the Wharton School of Business. In a recent national health survey, many early boomers (those who are now in their mid-fifties to mid-sixties) reported difficulty walking one block or climbing a flight of stairs.

So what does it take to stay in shape? Just four healthy habits can help you live 14 years longer on average, according to a recent Cambridge University study: eating plenty of fruits and vegetables, regular exercise, moderate drinking and not smoking.

As longevity expert Laura Carstensen points out, if you maintain your health, you have nothing to fear from getting older. You'll actually leader a richer and more satisfying life.

Love Your Money. It Will Love You Back

We need to talk.

It's about your finances. How do you feel things are working out between you? Are your needs being met?

If you long for a more fulfilling relationship with your money, remember this simple truth: When your money doesn't feel appreciated, it won't appreciate for you in return.

You pin your hopes and dreams on your ability to pay for them. So it's certainly worth your while to evaluate your finances and commit to building a long-term alliance that's healthy, fulfilling and prosperous. In other words: Give your money a little R-E-S-P-E-C-T, and it'll reward you exponentially.

"You demonstrate respect and appreciation for money the same way you would anything else you value in your life," says Barbara Stanny, author of Secrets of Six-Figure Women. "If you want it to last, you've got to take care of it. Throw it around carelessly or ignore it completely, and guess what's going to happen?"

There when you need it

One of the top qualities people value in any relationship is loyalty. Treat your money well and it'll be around when you need it most. Here are three ways to love your money so it will love you back:

1. Don't squander its potential. Peter Pumpkin Eater kept his wife in a pumpkin shell. But your money deserves much better. This means putting your cash some place it can earn more money for you. Don't demean it by locking it up in a pitiful savings account. On average, traditional bank savings accounts pay 0.4% on deposits, according to Bankrate.com.

Instead, for your short-term savings, consider a high-yield online savings account or money-market mutual fund. Currently, you can find these paying in the 3% or 4% range.

CDs also make fine choices, but they require commitment. So-called certificates of deposit tie up your money for a fixed amount of time, from a few months to a few years. You pick your time frame and lock in a rate for the period. For example, on average, one-year CDs currently yield 3.66%, according to Bankrate.com.

No-interest checking is so old fashioned. Instead, give your money more opportunity to shine with an interest-bearing online checking account through such reputable companies as Everbank, Charles Schwab, E*Trade and ING Direct. They currently pay between 2.25% and 3.25%.

2. Show your sensitive side. Abusing your money, spending unwisely and being oblivious to your bad habits are surefire ways to doom your financial relationship.

But too often we're careless and insensitive in less obvious ways. Little things matter, and you want to do everything you can to make sure your money saves its love only for you -- and doesn't spread it around to others like Uncle Sam, your bank or credit-card company. Here are a few ways to make sure you keep more of your money:

• Don't overpay Uncle Sam when it comes to taxes.
• Pay off your credit card balances in full each month so you don't waste big bucks on high interest charges.
• Re-shop your car insurance.
• Get a rewards credit card that gives you free cash, travel or merchandise.
• Take advantage of lender incentives to lower your student loan rates.
• Know how to use your credit wisely, to avoid sabotaging your credit score.

3. Plan for a future together. No doubt you dream about your future, and no doubt that future involves growing old together with your money. That means you need to invest for the long haul.

When you're in your twenties and thirties, the place to show your money a good time is in the stock market. And the best way for beginners to jump in is through mutual funds that invest in several different stocks. On average, since 1926, stocks have returned 10% annually (7% after inflation), according to Ibbotson Associates. That's tough to beat elsewhere.

Sure, you'll have your ups and downs. But just as any relationship grows by small acts of love, so will your money grow. Contributing little amounts of money steadily over a long period of time can add up to big bucks. For example, if a 20-year-old saved just $100 a month in a fund earning 10% annually, he'd have nearly $1 million by the time he turned 65. And if he increased his contributions as his paychecks increased, his money could grow to $1.5 million or $2 million.

Now that's loving you back.

Copyrighted, Kiplinger Washington Editors, Inc.

Financial Literacy 101

As a middle school teacher in Washington, D.C., Tarik Cranston, 29, was able to sock away only $20 to $30 each month after paying for rent, food, and other expenses. Buying a home—his dream—seemed impossible.

But after hearing about free financial education classes offered by DC Saves, part of the national America Saves campaign, he signed up. There, Cranston learned how to make a budget, set goals, and put money into an interest-bearing savings account. When he started tracking where his money was going, he realized that little expenses, like his cigarette habit, added up quickly. Now, he cooks at home more, brings his lunch to work, drives less, and no longer smokes—and he saves $300 a month.

Financial educators say experiences like Cranston's demonstrate the importance of financial literacy, the lack of which has been blamed in part for this country's recent mortgage crisis. "There are probably millions...of households who have gotten themselves into mortgage products they never should have gotten themselves into. Most of them didn't understand what they were agreeing to do," says Alan Blinder, economics professor at Princeton University.

The current credit crunch, along with consumers' burgeoning debt loads, has led to a flurry of programs and initiatives aimed at promoting financial education, including the first President's Advisory Council on Financial Literacy, launched by the White House in January.

"We don't know any less than our grandparents—we just need to know a lot more now," says Dan Iannicola, deputy assistant secretary at the Treasury Department and federal coordinator for the president's council. Self-directed retirement accounts, easy access to credit, and complicated mortgage options all make the financial world difficult to navigate without some kind of education, experts say.

Research suggests that most Americans have extremely low levels of financial literacy. The Jump$tart Coalition for Financial Literacy tests 12th graders every two years by asking them practical money questions and consistently records an average score of 50 to 55 percent. Other research shows that about 3 in 4 workers don't know how much money they need to save for a comfortable retirement, and only about half of respondents in one study were able to correctly answer two simple questions about interest rates and inflation.

"The persistent finding is how pervasive financial illiteracy is," says Annamaria Lusardi, a professor of economics at Dartmouth College. She adds that the problem is widespread across all demographics, although it is especially acute among women, African-Americans, Hispanics, and those with low education levels.

It matters, says Lusardi, because research also shows that people who understand basic financial principles are better at retirement planning, accumulating wealth, and avoiding debt. In fact, she found that people who develop financial plans accumulate from 10 to 15 percent more wealth than those who don't, even after taking into consideration income and education levels.

To encourage savings and planning, dozens of private and public-sector initiatives target kids as well as adults. The National Endowment for Financial Education, for example, distributes a curriculum for high school students that covers budgeting, debt, insurance, career choices, and other financial decisions, reaching more than 800,000 kids a year. "It's important to give them a base understanding," says Ted Beck, chief executive of NEFE and member of the President's Advisory Council.

While the financial industry often points to financial education as the solution to consumers' debt problems, others are more skeptical, and for good reason—research suggests many of the lessons are not having their intended effect. "The very disappointing result...is that people exposed to financial education don't do any better," Lusardi says. One study followed up with graduates five years after they took a respected personal finance course; it found it had an insignificant impact on their behavior. There are a few exceptions: The lessons from an interactive stock market game appear to stay with students, Lusardi says.

One key, says Elizabeth Coit, executive director of the Networks Financial Institute at Indiana State University, is teaching the basic ideas of goal-setting and delaying gratification at a young age, and then constantly reinforcing those messages. Forty states now include some amount of personal finance education in their education standards, and seven states require high school students to take a personal finance course, according to the National Council on Economic Education.

Some experts suggest it is the financial industry itself that needs to change. Disclosures, for example, should be written in plain English so people can understand them, Blinder says. He also offers two other ideas: First, the mortgage industry could be penalized for selling products to people that don't make sense for them, just as stockbrokers are now under suitability standards. Second, banks could be required to keep a certain percentage of the mortgages they originate on their own books instead of selling them to third parties so they have an incentive to screen borrowers more carefully.

As it stands now, says Terry Connolly, dean of Golden Gate University's business school, "you really have a very severe differential between the extraordinarily sophisticated and highly leveraged instruments that are fine when traded between knowledgeable institutions. But when you apply them to everyday people...you have enormous trouble."

Financial educator Tischelle George says many kids would benefit from just learning the basics. When George went to college, she quickly ran up credit card debt after signing up for a card in exchange for a free T-shirt. No one had explained to her that she should pay off the balance each month to avoid interest and fees, or that taking out a cash advance was expensive. "I was just doing all the wrong things," she says. "I wished someone had taught me about this."

Her own experience led her to develop a financial literacy program, Mind Your Money, in which she teaches preteens and teenagers at Brooklyn, N.Y., public libraries. She covers basic concepts including how to choose a bank with low or no fees, how to write a check, and how credit and debit cards differ.

Cranston, the middle school teacher, demonstrates that small changes in financial behavior can pay off. He is now close to his goal of saving enough to go to the Dominican Republic with his fiancée this summer. In the next three to four years, he plans to buy a home. He says that if he was still saving only $20 to $30 a month, neither of those dreams would come true. Says Cranston: "It wasn't until after the class that I became aware of how much more money I could really save."

Copyrighted, U.S.News & World Report, L.P. All rights reserved.

Eight Ways to Cut Back Without Sacrificing

When times are tight—as they are now for many Americans facing declining home values, depressed stocks, and tighter credit markets—cutting back on indulgences can seem inevitable. But it might not be. U.S. News asked budgeting experts for advice on how to make ends meet during tough times without sacrificing too many of life's pleasures. Here are their top tips.

Take bubble baths. If soaking in hot water doesn't cheer you up, find out what does, because it could stop you from wasteful splurges after a bad day. "Especially in times like these, it's very important for people...to find other ways [than shopping] to make themselves feel better, whether it's tantric methods, meditation, Chinese balls, or bubble baths—just do what will not break the bank," says Ken McDonnell, program director at the American Savings Education Council.

Host movie night. Going to the movies, especially if you're a popcorn fan, can easily cost $40 for two people. Instead, suggests Faye Griffiths-Smith, community leader for the American Association of Family and Consumer Sciences, rent a movie and invite friends over to watch.

Learn to cook. Not only does eating at restaurants add up, but so too does buying lunch. If you cook dinner at home, you can bring in leftovers to work the next day or take a few minutes to pack a sandwich. If mornings are always rushed, then try packing it at night before bed, suggests Jean Austin, family and consumer science educator for the Maryland Cooperative Extension Service. And when you shop for your ingredients, make sure you have a snack first. Going to the grocery store hungry often leads to impulse buys, Austin warns.

Use the library. Your taxes are paying for it, so take advantage of the free books and movies. Austin says that even her small library in Maryland's rural Kent County offers DVDs, audio books, and free Internet service.

Drink at home. Whether your beverage of choice is green tea, espresso, or beer, it's much cheaper when consumed in the comfort of your own kitchen. Going to a bar with friends can easily cost $50, McDonnell says. Instead, pick up a six-pack and hang out at a friend's house. The social interaction will cheer you up without the hefty bar tab.

Use your savings. If you squirreled away three to six months of emergency savings in advance of being forced to tighten your budget due to a job loss or other unfortunate event, now is the time to use it. "Everybody should be contributing to their own emergency savings fund where it's earning interest," says Austin, so when times are tight, the money can go toward monthly bills and even some small indulgences.

Decide what you really want. Most people can cut 10 percent of their spending within 10 minutes, says Ramit Sethi, author of the I Will Teach You to Be Rich blog. Just write down your major spending categories, such as food and loan payments, and then guess what percentage is going to each category. Make a second list with what you want the percentages to be, and then make a third list describing what they actually are. If the reality doesn't match up with your ideal, then adjust your spending.

Dress in layers. Turning your thermostat down a few degrees and wearing a sweatshirt to stay warm can save on monthly heating costs, says McDonnell, which adds up over time. Just don't skimp on your monthly mortgage or rent payment, or if you need to adjust the payment schedule, contact your lender. Keeping your home should be a top priority.

Copyrighted, U.S.News & World Report, L.P. All rights reserved.

What Watching TV Can Teach You About Money????

It's no secret that you can learn something about the way money works by watching television programs like "Power Lunch," on CNBC, and "Money for Breakfast," on FOX Business. But for those of us who don't read stock quotes and fund prospectuses for fun, watching those shows can feel like work. Sometimes, you want to just sit back and watch Andy and Barney outwit some small-town crooks and not think too hard.

Fortunately, if you want to enjoy a fun sitcom or a trashy reality show and still learn how to make money, you can. You just have to watch them with a slightly different mind-set.

If you really think about your favorite TV programs, you can pick up almost as many financial lessons as you could by watching Maria Bartiromo on CNBC.

Don't believe us? Then read about the money lessons in these eight classics.

The show: "The Cosby Show"

Channel: TV Land

What you can learn: See what family life can be like when both parents work hard to become successful, affluent professionals. The family goes through the trials of daily life while putting family first -- and managing to laugh, hug and drop lots of clever one-liners.

Money quote: In this famous dialogue from the pilot episode, Theo tells his dad that he doesn't aspire to make a lot of money like his parents. He wants to make just enough, like regular people. And so using Monopoly money, Cliff offers a classic lesson in economics.

Cliff: So how much do you expect to make a week for "regular people"?

Theo: $250.

Cliff: (pointing to the bed) Sit down. I will give you $300 a week. $1,200 a month. (Cliff hands the money to Theo)

Theo: I'll take it!

Cliff: And I will take $350 for taxes.

Theo: Whoa!

Cliff: Oh, yeah. See, the government goes for the regular people first. So, how much does that leave you with?

Theo: $850.

Cliff: OK, now you'll need an apartment because you are NOT living here. Now an apartment in Manhattan will run you at least $400 a month. (Cliff takes $400)

Theo: I'll live in New Jersey. (Theo takes back $200)

Cliff: Now you'll need a car. (Cliff takes $300)

Theo: I'll drive a motorbike. (Theo takes back $100)

Cliff: You're gonna need a helmet. (Cliff takes $50) Now figure $100 a month for clothes and shoes.

Theo: Figure $200. I wanna look GOOD.

Cliff: So, how much does that leave you with?

Theo: $200. So, no problem.

Cliff: There IS a problem! You haven't EATEN yet! (Cliff takes $100)

Theo: I can get by on bologna and cereal. (Theo takes back his $100) So I've got everything under control PLUS $200 left for the month.

Cliff: You plan to have a girlfriend?

Theo: For sure.

(Cliff takes the remaining $200)

Cliff: (pointing at Theo's empty hand): Regular people.

The show: "Ugly Betty"

Channel: ABC

What you can learn: It may not be "The Office," but it is life in an office, albeit one at a fashion magazine called Mode, and throughout the series money is often a subtext of the show. In some cases, the show provides a subtle look at the class system: Betty Suarez is the sweet heroine of modest means, who is beautiful despite not being one of the beautiful people.

Many individual episodes, however, often feature slices of life revolving around finances. For instance, in the first season, Betty has to organize the finances of her publisher boss, Daniel, which leads to her eventually learning that some of her co-workers have falsified expenses; Daniel is yelled at by his father, Bradford Meade, who still owns the magazine, and gets his company credit card cut off for a week; Wilhelmina, the magazine's assistant editor, uses her company credit card expense account for a "butt lift." And on it goes.

Money quote: "A job is not about making friends. It's about making money and stealing office supplies. By the way, we're out of coffee filters." -- Hilda, Betty's older sister

The show: "The Simpsons"

Channel: FOX

What you can learn: You thought it was a cartoon, but if the animation were distilled into one oil painting hanging in an art gallery, the title might read: "A Fool and His Money."

Over the years, Homer Simpson has lost his family's life savings, become a grifter, been audited by the IRS, accepted a loan from his bartender Moe (who we learn is also a loan shark), and given up work for eight days so he can be the second person in line to get some football tickets.

And who can forget the time that, after attending a seminar where they learned to be smart shoppers, Homer took his family on an expensive trip to Tokyo? While there, they lost all their money.

Money quote: "Bart! With $10,000, we'd be millionaires! We could buy all kinds of useful things, like love!" -- Homer Simpson

The show: "The Colbert Report"

Channel: Comedy Central

What you can learn: Jim Cramer and Suze Orman? Mere pretenders, compared with the financial wizardry of Stephen Colbert, who has his finger on the pulse on Main Street America more than any other financial guru on television. Oh, sure, you'll hear political commentary on "The Colbert Report," but there's also a wealth of monetary advice that admittedly, if followed, will get you followed by sheriffs and IRS agents.

Colbert's regular segments include "Bears & Balls," in which finance-related questions are asked, and he provides answers ("Buy gas. It's a sure-fire commodity with no risk except for the sure risk of fire.") Then there's Colbert Platinum, in which the host thoughtfully showcases outlandishly pricey products that only the superrich can afford. But that's OK. As Colbert points out, these segments are for billionaires. Cash-strapped millionaires should change the channel.

Want More Banking and Budgeting Tips? Visit our Credit Report Center

Plus, Colbert promotes the idea of being entrepreneurial, always hawking products based around his name. He encourages his viewers to buy wrist bracelets for a counterfeit cause like sore wrists, but the very real money goes toward helping worthy causes, most recently sending $170,000 to the Yellow Ribbon Fund to help injured soldiers and their families.

Money quote: "Saving the planet appeals to the wealthy -- because they own so much of it."

The show: "Sex and the City"

Channel: TBS

What you can learn: Carrie Bradshaw, Samantha Jones, Charlotte York and Miranda Hobbes are all living in the corporate world -- "Desperate Housewives" this is not. Financial lessons abound, particularly when following Carrie, who has trouble with the "living within your means" guideline.

Money quote: In one episode, Carrie learns she may lose her apartment, is turned down for a bank loan and realizes that during her lifetime, she has spent a grand total of $40,000 on shoes.

Carrie: I've spent $40,000 on shoes, and I have no place to live. I will literally be the old woman who lived in her shoes!

The show: "Two and a Half Men"

Channel: CBS

What you can learn: Money is always haunting the Harper brothers. Alan is a chiropractor, but has his finances tied up in alimony payments and child support. Charlie is a musician, but not the kind who makes platinum albums; he writes ad jingles. After Alan's second divorce, he makes the wry observation that, "In my entire life, my dog is the only person I've slept in the same bed with that didn't sue me for alimony."

Money quote: The best example may be the episode in the first season where Charlie realizes he's spending far more than he's earning. In a heartfelt moment, he discusses his plight with his housekeeper, Berta, who is surprisingly supportive, reassuring him:

Berta: Well, you don't have to worry about paying me this week, Charlie.

Charlie: Thank you, Berta.

Berta: I'll just take this espresso maker and be on my way. Call me when things pick up.

The show: "The Office"

Channel: NBC

What you can learn: Michael Scott, the Scranton, Pa., branch manager of paper company Dunder Mifflin, is a case study for how not to manage one's finances professionally and personally.

For instance, in the one-hour episode titled "Money," Michael is deeply in debt, thanks to his penchant for making extravagant and unnecessary purchases, from a Porsche to bass fishing equipment and an $80 magic kit, which he planned to use to entertain potential clients. In the same episode, Michael takes on a second job as a telemarketer to bring in extra cash.

Even what Michael did in his youth, before he joined Dundler Mifflin, is a financial cautionary tale. As a young man, he admirably put aside money for his education while working at an Arby's restaurant. But his plans to go to college were destroyed when he lost his entire savings in a pyramid scheme.

Money quote: "Yes, money has been a little bit tight lately. But, at the end of my life, when I'm sitting on my yacht, am I going to be thinking about how much money I have? No. I'm going to be thinking about how many friends I have. And my children. And my comedy albums. I mean, I have a yacht, so I obviously did pretty well, money-wise." -- Michael Scott

The show: "The Apprentice"

Channel: NBC

What you can learn: In real life, just as on the show, there are co-workers who will demoralize their team and who will be happy to sell your soul if it means currying favor with the boss, who you will hate. Yet there will be other staff members who you will take a bullet for, or even risk hearing, "you're fired," if it means protecting your workplace pal. If nothing else, by watching the show, you can experience what it would be like to work for The Donald -- Trump, that is -- whose shoes are probably worth more than your mortgage.

Money quote: "I take solace in the fact that I have a higher IQ than the other 15 contestants, which just goes to show you that there's little correlation between IQ and success in lemonade sales."-- David Gould, who may have been a little frustrated about being the first contestant to be fired in the first episode of the first season of "The Apprentice."

Copyrighted, Bankrate.com. All rights reserved.