April is Financial Literacy Month! The purpose of Financial Literacy Month is to bring awareness to and promote the importance of establishing and maintaining financial healthy habits. Unfortunately, in our country, financial literacy has not been prioritized as an essential topic of learning in Public K-12 or higher education. Too many are left to fend for themselves when it comes to managing money.
“College graduates spent 16 years gaining skills that will help them command a higher salary; yet little or no time is spent helping them save, invest and grow their money.”
Vince Shorb, CEO, National Financial Educators Council
1. Personal Finance is 20% knowledge and 80% behavior
There’s a big misconception that personal finance is about math. Some people will shy away from financial topics because “they’re not a math person.” This could not be further from the reality. Avoiding personal finance because you’re not a math person, is like avoiding learning to drive because you’re not a car person. You don’t need to know how to rebuild an engine to get a license and become a safe driver.
Personal finance is much more about the habits and behaviors utilized with our limited resources. Some of these are so ingrained that you may not even see them as habits.
- Do you use cash or debit/credit cards?
- Do you have a written budget monthly or do you just pay bills as they come?
- How often do you check your financial accounts? Do you use an aggregator like Mint?
- How often do you check your credit score? Credit reports?
Many of our personal finance habits are learned when we’re children. In many ways, we model what we see from our parents and older siblings. If you grew up in a household of spenders or if you grew up in a frugal household, you’ll likely carry some of those same habits today. In order to change those habits, we have to have the requisite knowledge of how to properly manage our finances, but knowledge alone isn’t enough. Much like weight loss, knowing which foods are healthy and how to workout is only the first step. Making the behavior changes into consistent habits is what makes the difference.
2. Some of the most important financial decisions you make are when you’re young
Another reason financial literacy is so important is because there’s another big misconception: ‘We can deal with the financial stuff when we’re older.’ If you talk to just about anyone over the age of 50 about money, they will tell you they wish they had learned about managing their money when they were younger. The chief financial complaint of older Americans is that they didn’t start saving or investing early enough.
40% of Americans are counting on the lottery, sweepstakes, getting married, or an inheritance to fund their retirement
– Money Magazine
Money Management should be a required curriculum in Junior High, High School and College in every school in America. If the purpose of school is to train you to prepare you for the real world, it doesn’t get much more real that how you manage your money.
Decisions such as your level of completed education, financing higher education, choice of career, location, marriage, children, first home purchase are all decisions that can have a serious impact on your long-term finances and for many are decisions made while relatively young. Don’t make the mistake of waiting until you’re “all grown” up to take responsibility for your finances, you’re already making important financial decisions.
3. Companies are providing fewer guaranteed benefits and shifting risk to employees
We’ll spare you the history lesson, but companies used to guarantee retirement benefits in exchange for years of service. They’re called pensions and they are extremely rare today. Essentially, if you worked for a company for, say 25 years, the company would fund a percentage of your salary in retirement until death. It was completely managed and paid for by the employer.
46% of Americans have less than $10,000 saved for retirement.
– Employment Benefit Research Institute
Today, you are totally responsible for your own retirement. Which means you have to save enough money so that you live off your savings. If you participate in your employer’s 401(k), you might get some help from your employer in the form of a 401(k) match, but that’s optional. You choose what to invest in, how much to invest or whether to invest at all. You have to fund your own account and none of the investments are guaranteed, so all the risk and responsibility of funding your retirement is on your shoulders.
If that wasn’t depressing enough, the safety net of Social Security will likely not be enough to live on for anyone under the age of 50 today, if it exists at all. It is essential that we fund and properly invest early and often to manage that big responsibility.
4. Consumer debt is devastating wealth
Another reason it is vital to learn and master your personal finances is that it has never been easier in to spend money we don’t have. We live in a consumerism culture and our natural inclination is to acquire more stuff. In generations past, cash was the major option. If you wanted to purchase something that you didn’t have cash to purchase, you had to physically walk into a bank, convince the banker for a personal loan and fill out loads of paperwork, and/or put up collateral.
60% of Americans spend about equal to or more than their income.
– FINRA Investor Education Study
Today, in order to spend money you don’t have, you can use a piece of plastic in your wallet or swipe your phone. You may never have to physically walk into a bank. Financial products like credit cards, leasing, payday loans, student loans, interest-only mortgages, adjustable rate mortgages are all products created in the last 30 or so years which allow more and more people access to credit. The downside of having access to credit is that if not used responsibly, it reduces the ability to save and leads to crushing debt. We only have to look at the most recent economic recession of 2009 to see the impact of having too much debt.
From a financial standpoint, it’s not at all a rosy picture. There’s no sugarcoating the fact that 76% of US Citizens are living paycheck-to-paycheck. 20% of them earning more than $100K per year. That means more than 3 out of every 4 Americans are essentially broke. This is why financial literacy is essential in order to avoid the traps that many Americans find themselves in. Again, financial literacy is essential, but it’s just the first step. One has to use that knowledge to change their mindset and their behaviors in order to be truly successful. Finally, financial literacy is a continuous process, it’s not one course, it’s not one topic, it’s ongoing. We hope you take the first of many steps in that ongoing journey.
“Financial literacy is not an absolute state; it is a continuum of abilities that is subject to variables such as age, family, culture, and residence. Financial literacy refers to an evolving state of competency that enables each individual to respond effectively to ever-changing personal and economic circumstances.“