A crisis of financial illiteracy
by Don Kuehn
It ought to be pretty clear that you are responsible for your own retirement and other financial decisions. Nobody is going to ride to your rescue. Whether it's in a 403(b) or 401(k) account, a college fund for your kids, your personal investment portfolio, managing debt or working your way out of a pattern of excessive spending—it's all on you.
In an era of frequent job changes, layoffs and cutbacks, way too many young Americans are "flying by the seat of their pants" when it comes to budgeting, money management and investing.
- Sixty percent of 18- to 34 year-olds do not keep a budget.
- Twenty-somethings hold an average debt of about $45,000.
- Millions approach retirement with little money saved. The average 401(k) balance for people near retirement is a paltry $64,000.
Why is this a big deal? Because it will have a trickle-down effect on society as a whole. Excessive debt and a low FICO credit score can lock you out of some jobs. Debt can force some to drop out of school (the average debt load of 2010 college grads was more than $25,000). A generation unable to acquire new job skills means workers who can't compete on the world stage and who rely more on social programs to survive. People forced to pursue jobs simply because they pay enough to service their debt may lead to an era where we don't have enough social workers, artists, musicians or (egad!) teachers.
It's never too early (or too late) to teach children about the importance of earning money, saving, making responsible spending decisions and using credit responsibly. Several organizations and resources exist to help reverse this national trend of illiteracy. Among them are the Jump$tart Coalition, the Council for Economic Education (CEE), and Practical Money Skills for Life (www.practicalmoneyskills.com), which has good information for teachers (no one's going to know if you go to these sites to broaden your own knowledge base rather than to find material for your classroom).
Nearly every survey on the topic shows that parents, not the schools, have the greatest influence on a child's understanding of money matters. Unfortunately, there is also compelling evidence that parents don't know too much about the subject either. The average American has more than $8,000 in credit card debt alone.
The parents' instinct to give their children just about anything they want or need is really detrimental to kids learning to be financially independent. As one expert notes: "The reason kids on college campuses don't know anything about money is because they have no skin in the game. Their parents are still paying (for everything). ..." That lack of knowledge is going to be very costly on graduation day and beyond.
CEE reports that students from states that require a financial education course (only 13 states do) have the highest reported financial literacy and are more likely to display positive behaviors. For example, they are more likely to save and less likely to max out their credit cards. They are less likely to make late payments and more likely to pay off credit cards in full each month. They are more likely to take average financial risks and less likely to become compulsive buyers.
Among the reasons I write these columns is because this crisis of financial illiteracy is not limited to millennials, to Gen Xers or to kids. AFT members lead lives filled with satisfactions and distractions. We focus on careers, on children, on making ends meet. Unfortunately, too many of us are "seat-of-the-pants" financial planners. Investing? Why bother, you say? The stock markets are just a big casino where the "house" always wins and the little guy always loses. Wrong.
We wander from paycheck to paycheck; we charge too much on credit cards instead of paying cash or saving before making major purchases. We have no concept of what a FICO score is or how it can affect so many aspects of our lives—from getting a job to renting an apartment or buying a car or house. Few have a smart budget plan or know how they are going to pay for retirement.
Annamaria Lusardi is the Denit Trust professor of economics and accountancy at the George Washington University School of Business. She makes a compelling comparison between financial and physical well-being:
"On the surface, there are striking similarities between decisions about health and decisions about finance. Both affect important aspects of our life and both have consequences. Both require collecting information, evaluating alternatives, and taking some risk. But while financial decisions and health decisions are both difficult, it seems health has received a lot more of our attention. For example, there is normally a greater sense of urgency around health-related issues. This may be because the effects of being ill are visible, often painful, and easy to identify with. But the financial crisis has had some very visible and painful effects too, so there is no reason that we shouldn't give the same level of urgency to our financial well-being.
"In health as in finance ... it is critically important to ask questions, to discuss objectives in detail, and to exercise a good deal of caution. ...
"There are dangers of focusing on a single aspect of one's health or one's finances. Tending to retirement savings without dealing first with high credit card debt is perhaps analogous to treating high blood pressure while ignoring a lung tumor."
We are a nation of financial illiterates. A population that doesn't grasp the basics of how their finances work is vulnerable to all kinds of economic snake oil, whether peddled by financial "advisers" or by politicians.
It's your money. You need to understand it. You've got to become financially literate. And you need to teach your children the values that will help them be financially responsible citizens in the future.
Don Kuehn is a retired AFT senior national representative. For specific advice relative to your personal situation, consult competent legal, tax or financial counsel. Comments and questions can be sent to firstname.lastname@example.org.