Last week, I was reading an article on Yahoo Finance and was shocked to learn this statistic. According to the Milken Institute, less than 40% of Americans are financially literate; however, a much higher percentage think they are. While this may seem to be an individual problem, the truth is that it causes significant issues up to the national level because the effects of poor financial decisions ripple out far beyond the person who first made them.
I am fairly confident in saying that our current President cannot read a balance sheet. And why should he when he has been in politics his entire life and most likely has never had to make payroll or seek help to borrow money to fund a business’s growth? He once criticized companies that were buying back their shares as corporate greed. Warren Buffet quickly corrected this misstatement.
As an illustration, let’s say someone was never taught about things like loan agreements, compounding interests, or return on investment. So, without that knowledge, they might, hypothetically, sign for a loan they don’t understand and can’t afford to repay. Then, when they can’t pay the loan back, their lack of understanding of financial obligations may make them feel entitled to demand others pay it back for them. This is happening with the student debt issue, which is politically charged at the moment.
This hypothetical situation could never happen in a real-life situation, right? This occurs much more frequently than most of us realize. This is exactly what is happening with a lawsuit where I currently provide litigation support as an expert witness. A husband and wife took out a multi-million-dollar loan that is now being litigated for lack of repayment. This person had no idea what they were signing and only signed the loan documents because their spouse requested this. In Retrospect, their life will never be the same, which can be blamed on the lack of education involving financial terms and obligations.
Financial literacy has a direct impact on all aspects of our economy, which is why we’re facing the following issues;
- Out-of-control government spending,
- High inflation,
- Twenty years of record high consumer debt and,
- Seventeen years of record low savings rate.
When people understand basic finance and how it can impact their daily lives, they better appreciate how money and the economy work and tend to make better financial decisions. This leads to greater economic stability, wealth accumulation, and opportunities. Now, extrapolate that out over your and your children’s lives, and you can see what impact this can have over a few generations.
The most powerful concept of understanding your finances involves compounding interest. To digress for a moment, I was the first in my family to attend college and obtain a degree. I even went a bit further and received an MBA. When I explained to my mother the numbers surrounding her mortgage and how much interest she paid over the life of the thirty-year loan she was paying, she refused to believe this. She had no idea how much interest she was paying. Her only concern at the time of origination involved the monthly payment. Could she afford to make this payment each month? She had no worries about the interest rate and how much interest she would be paying over the life of the loan.
You also see this with payday lenders who regularly charge their customers rates above 24 percent, yet this rate is hardly ever mentioned as a concern to the borrowers. They just need access to the money.
The interesting thing about applying for a mortgage is that this is the first time most families learn about a budget and its importance to their financial well-being. Realtors are the group that ends up teaching a lot of Americans about basic financial literacy.
For many people, sitting down with a realtor to figure out how much home they can afford is their first time considering a budget. That’s scary because a budget is the foundation of most financial literacy topics and plays a significant role in many different parts of our lives.
And in my home state of Texas, you do not need a college degree to obtain your real estate license. A person can get a sales license in approximately four weeks. I find this interesting for the following reasons. For most families, buying a house is the single largest financial transaction they have ever undertaken. Yet, the person advising them often has very little formal training in finance. Scary?
The positive impact of financial literacy is invaluable and profound, and while that impact starts with the individual, the ripple effect reaches far beyond them. That and the fear of being taken advantage of solidified my position as a lifelong student on the topic.
I am excited about this concept because of its impact on future generations. I am currently working with my nephew (a sophomore in high school), who recently moved in with us to escape the war in Ukraine. He seems genuinely interested in learning about stocks and other areas involving finance.
With more young people becoming financially literate, our families, businesses, communities, and even the nation (as a whole) become financially stronger and more resilient. Over time, that will lead to a better standard of living and more opportunities for everyone, and that’s the kind of understanding that will benefit us individually and as a society.
Prepared by Terry L. Stroud – September 2024
