“The number one problem in today’s generation and economy is the lack of financial literacy.” —Alan Greenspan
In 2004, Congress designated April as Financial Literacy Month in an effort to highlight the importance of financial literacy for all Americans, especially young adults. It is an opportunity for all of us to reflect on our financial awareness and understanding, review our personal finances, and pledge to invest in ourselves by becoming more financially educated citizens.
To be sure, financial literacy is a life skill that is not a “nice to know” but, rather, a “need to know.” Unfortunately, many individuals don’t have the knowledge of basic financial concepts that’s needed to make informed choices and lead financially responsible lives.
As a lifelong student of finance, financial literacy is a topic that I feel very strongly about. I have also witnessed and heard the horror stories of people ending up in dire straits due to a lack of literacy. These statistics tell the sobering story:
- More than 50 percent of Americans live paycheck to paycheck. This number rose to 63 percent in 2020 when COVID hit.
- 69 percent of Americans had less than $1,000 saved at the end of 2019; 45 percent had nothing saved at all.
- 21 percent of Americans don’t save any of their annual income. Younger people, in particular, are having a harder time socking away money.
- Americans hold a total of $1 trillion in credit card debt with an average interest rate of 15.99 percent. Lower consumer spending helped shave off more than $80 billion in debt last year, but the average household balance remains high, at more than $8,000.
While there are many underlying causes driving these statistics, basic financial education can be quite potent in mitigating some of this monetary damage.
So, What Did 2020 Teach Us?
In January 2020, the unemployment rate in the U.S. was as low as 3.6 percent, the economy was firing on all cylinders, and the stock market was reaching record highs. And then COVID-19 hit, exposing the fragility of household finances. Survey data has shown that financial resilience was strongly associated with financial literacy. Those with less education and lower incomes were also at higher risk of being financially fragile. These are precisely the groups that have been hit the hardest by the COVID-19 crisis.
Research also shows that higher financial literacy is associated with better financial outcomes, such as more efficient saving, better debt management, and planning for retirement. Furthermore, differences in financial literacy may amplify wealth inequality, a difference that early interventions may help reduce.
Thus, as we build back the post-COVID economy, it is important to commit to financial education to build a more financially resilient, equitable, and secure future for ourselves, for our future generations, and for the country.
Start ‘Em Young
A mere 17 states in the U.S. mandate personal finance as a required course in school, even as students are challenged with complex subjects like calculus and chemistry. Indeed, many high school graduates know more about the Pythagorean theorem than they do about credit scores! But the truth of the matter is that financial habits (just like table manners) are best reinforced early. And schools should be playing a vital role in helping raise financially responsible adults. So, let’s all take the time to speak to school administrations, PTAs, and students themselves about the importance of financial literacy education in schools.
Indeed, we all have a role to play in the financial habits of young citizens, many of whom get their money sense from the adults around them. So, it’s very important to lead by example and to include children and young adults in financial conversations. When their parents budget, save, and spend wisely, their children learn to do so as well. When children aren’t taught how to handle small amounts of money, on the other hand, they will likely make costly mistakes when they handle larger amounts of money in the future.
There are many approaches to teaching young people about finance, but the hands-on methods are often the most effective. Encourage your clients with children to use activities like lemonade stands, piggy banks, chores, and grocery shopping expeditions to teach about earning, saving, spending, and budgeting.
Personally speaking as a parent, raising financially literate children is an important goal for me. Failing to do so is like building a home without a proper foundation—one strong Nor’easter and the house can come collapsing down, and we will be left picking up the rubble. Putting off financial education until we have the finances is like putting off joining the gym until we are fit for a rigorous workout. So, my plea to all the readers of this post is to invest in the financial education of yourself and your loved ones—even before you invest in the markets.
An Ounce of Financial Education, a Pound of Financial Repair
As a society, we are failing our more vulnerable populations by not investing in education that will help them secure a better financial future. To be sure, financial ignorance carries significant costs: according to a survey conducted by the National Financial Educators Council, lack of knowledge of personal finances cost Americans a total of more than $415 billion in 2020.
Consumers who fail to understand the concept of interest compounding spend more on transaction fees, run up bigger debts, and incur higher interest rates on loans. They also end up borrowing more and saving less. They are vulnerable to financial distress when an economic crisis hits. They are more likely to seek financial assistance from friends, family, and the government. Getting their house in order could be a tedious and painful process and require drastic lifestyle choices. But the good news is this: an ounce of financial education is truly worth a pound of financial repair.
Authored by the Investment Research team at Commonwealth Financial Network.
© 2022 Commonwealth Financial Network®