Financial Education or The Lack thereof in The United States
A former client of mine loved the expression “You cannot cure stupid.” This was not meant necessarily as a demeaning comment, the context in which it was used was to define mistakes made by individuals in his employ. For example, stupid decisions were usually made by individuals who lacked the intellectual capacity to make an intelligent decision. Ignorant decisions were usually made by those lacking information or lacking all of the facts. In other words some individuals do not have the mental acuity to make good decisions while others make uninformed decisions. My client believed management should be able to know the difference in employees and use them according to their ability. Not a bad philosophy in my opinion.
Now, what does any of this have to do with finance and education? I believe the current financial crisis in our country is due in part to the same two terms, stupid or ignorant. According to Forbes Magazine, consumer debt is currently at a seasonally adjusted rate of slightly over 2 Trillion. Yes, that is a T for Trillion, so you can add 12 zeros to the end of the two. I have been told it would take around 30 years to count to one trillion. I have no intention of finding out. Revolving credit card debt averages slightly over $9,000 per household in the United States. Fortunately my wife and I do not carry any credit card debt so we skew the average slightly. Is all of this debt due to stupidity or to ignorance or a combination of both?
Having reached the age of maturity and growing weary of hauling laptop computers through airports, I took up instructing at a local 4 year institution a few years ago. My classes are primarily freshman and sophomores and one of our projects involves determining payments and amortization schedules. The project is straightforward and includes calculating payments for one used and one new vehicle at different interest rates and time periods. We also include taking the difference in the two payments and investing in a savings account paying a fixed rate for five years. The purpose of this exercise is to help students understand the power of interest over time and dollar amounts and to show how investing on a regular basis can increase ones wealth at a surprising rate. The sad part of this exercise includes comments from students such as: What do you mean by taking the difference in two payments? What is a payment? Do I add the down payment into the amount financed” Why do I care about interest if I can afford the payment? The list goes on. Naturally, not all students have such a lack of knowledge regarding money and interest but the vast majority has no idea how the real world operates. I might add that over 90% of my students own at least one credit card and over 60% are not employed while in school. Let me see; credit cards, no income, college student, entertainment, clothes, food and all the other necessities of a normal young adult. Where does the money come from and when if ever will it be repaid?
Although we cannot assign blame to any one person, issue or circumstance we can do something to help the next generation of adults before they become victims of consumerism. As adults we owe it to ourselves to help cure this problem. Who will be burdened with this debt in the future? All of us because those who default or simply cannot pay will force the debt to be written off or declare bankruptcy. The young people of today will be responsible for paying the social security of those currently in their 40’s and 50’s and they need to be gainfully employed without the specter of overwhelming debt.
What can we do in addition to wringing our hands and singing the blues? Demand of your legislators that basic finance be taught no later than the 10th grade in high school. Demand of your legislators to stop the ease with which credit cards are issued by financial institutions and so called credit card repairers! More importantly we all owe it to ourselves and to the younger generation to learn the pain associated with the yoke of heavy debt. Credit cards can be very useful tools for traveling, avoiding carrying large amounts of cash and for identification but they are not and should not be meant to satisfy our need for immediate gratification. Basic understanding of personal finances should not be brain surgery.