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Financial Literacy: How to Fail in America

A young man who was going into the military after college wrote a blog called “Financial Literacy: An Epic Fail in America,” prompted by his own experience of student loans. His loan payment was approximately half of his take-home pay. What was he supposed to do?

Like many Americans, he had never been exposed to the idea of financial literacy.

The average student debt of new attending physicians is $285k. The cost of student loans has doubled and it is still going up. There are so many people taking out these loans without understanding the math behind them. Without understanding the basics of financial literacy.

It is no exaggeration to say the “not understanding financial literacy” piece is the part that will haunt you years later.

Where does it all start?

Financial Literacy Goes to College…Or Not

Across America on bustling college campuses, the cycle of debt begins.

It is so maddening for someone who understands that the target audience is naive and walking into a trap.

The credit card companies are on college campuses giving out coupons for free pizza if only the student will sign up for a card. However, there is no free lunch for this young person who has not heard of the financial literacy concept.

Physician Wealth ServicesThat’s right, the credit card companies are encouraging young people who don’t have any financial literacy into taking on debt. These students usually have very little to no income. They probably have no way to pay.

It’s no big deal, just a credit card sign up for a stuffed crust pizza.

Sure, it’s no big deal, until it is a big deal. Until that student is buried in debt, which depending on their maturity level, will likely be shortly after receiving the card.

This is the same time they are taking out student debt.

Financial Literacy and Personal Responsibility

I don’t think you can blame the credit card company. They are a business to do business. They have no incentive to promote financial literacy.

What about Personal responsibility?

In this information age with the internet and Google, you might feel that it’s inexcusable to fall into a consumer debt trap. However, just because the information is out there, that doesn’t mean someone knows they need to search for it.

The story of your financial literacy or lack of it has familial and cultural roots. In most families, it is shrouded by silence.

If we could address the cultural end of financial literacy, our homes would have a transparent and ongoing discussion about handling money.

The way you make decisions and spend your money has roots in the childhood lessons you internalized regarding money. However, those messages may have been confusing or negative.

That leads us to another source for financial literacy.

Our schools are another place that could promote financial literacy.

Financial Literacy Ed

Our schools are teaching subjects that aren’t imperative to our health (financial stress-related illness and sometimes suicide) or success.

How to improve your mindset when paying down debt

On the other hand, Financial literacy is directly related to health and success.

In the United States, only 17 states are requiring personal finance to graduate for high school.

Surprisingly, personal finance is not offered in college, even though students are taking out huge loans there.

I propose schools have mandatory classes for topics such as budgeting, how debt works and the concept of high-interest rates. Really, these just scratch the surface of what a good curriculum should cover.

Financial Literacy and Life 101

How would financial education benefit you? It creates awareness, the knowledge that you need a plan–a road map to get you where you want to go financially speaking.

That place might be where an emergency and your bank account meet. The place you want to be is prepared.

The article Financial Literacy: An Epic Fail, stated 40% couldn’t scrape up $400 for an emergency.

That leads me to think if people can’t come up with $400 for emergencies, they are struggling with the daily stuff, how are they going to save for something as far away as retirement?

How Does Financial Literacy Impact Retirement?

In years past, people didn’t save for their own retirement. Older generations went to work for a company and received a guaranteed income after they stopped working.

Nowadays, that is not the case. The pension plans have gone away.

Today we have 401k or 403B with defined contributions. They are set up for the employee to contribute to their own retirement, which saves on taxes.

The problem is without financial literacy, people are saving for retirement but they don’t save enough.

When we look back at the example with a segment of the population who can’t figure out how to save $400, I wonder how will they actually wrap their mind around how much is needed for retirement?

The stats are really sad. The average American between the ages of 55-64 only has $104k saved, that comes out to $310 per month. That is poverty level and not near enough to sustain any quality of life.

We don’t know what the social security program will look like in the future. Eventually, something will have to change and social security will need to be restructured–the current numbers demand it.

A financial literacy program would be beneficial for helping people plan realistically for the future.

Finances and the Future

I’m already starting some early finance lessons with my son, Wyatt who is four years old. He has a little bank that has a place for spend, save, or share money.

When we to Disney on vacation, he was allowed to buy one toy. He had some money with him that he saved from Christmas and his birthdays. My part was talking to him about how much things cost.

I explained that if he bought something he would have to put off buying the train set he is saving for. He did buy something, but he didn’t go all out and wreck the train set budget.

He is learning early the value of planning ahead and not going into debt. That will be the most valuable lesson in the future.

Financial Literacy and Manipulation

Sometimes our emotions drive our financial decisions. We need to take a step back and clear our mind to achieve any sort of objectivity. We need to see clearly so we can make the best decision possible.

Why is that?

Because billions of dollars have been spent on understanding human psychology and how to manipulate the masses on behaviors that surround their purchases.

They’ve filmed people to see where their eye levels are, which is then used to analyze how shelving and placement of products should be organized.

Advertising means that the odds are stacked against us if we aren’t aware of the tactic and clear-headed. For example: “You didn’t save money buying something on sale if you weren’t planning on buying it in the first place”.

The exciting thing is our audience is young and eager to learn.

There is a lot to learn with financial literacy and how our emotions and advertising influences us is another piece to the puzzle.

True Financial Literacy

So, what do we mean by financial literacy? We are talking about the basics of making financial decisions around saving, making purchases and buying financial products.

In order to make those decisions, you have to have some knowledge.

Seventy-eight percent of financial planners strongly agree that financial literacy is a problem. However, only four out of ten are doing anything about it. I was surprised and disappointed that we weren’t in the minority.

I personally see education as the number one priority. I’ve had clients tell me their prior financial advisor thought they asked too many questions. 

financial literacy in america

I can’t imagine telling anyone who was paying for my services that they were asking too many questions.

The whole point is helping our clients understand the process and make better financial decisions. How can they possibly do that if they aren’t comfortable learning from me? They can’t learn if they dread my reaction to a question!

Only 57% of Americans can pass a basic four question financial literacy test. Are you one of them?

Physicians don’t have any formal financial training in finance and the numbers of financial planners engaging in behaviors to educate their clients were dismal.

The financial services industry spends $25 for every dollar to market products instead of teaching consumers. That means they would rather make a buck on a product, instead of teaching their clients a sustainable habit or block of knowledge!

Financial planners are in business to make money. The big house financial planners, for example, Merrill Lynch, don’t make the rules. They follow the old-style financial planning model, which falls short.

That business model doesn’t compensate a corporatized big house financial planner unless they are selling products. A fee-based planner has been incentivized to make money in a way that doesn’t support the client’s basic needs.

An example of this is selling insurance. The planner will push some whole life product, instead of term. What does the planner get out of this?

He will make 30 times more money selling these products!

If a physician was compensated on how many prescriptions he wrote, there would probably be more prescriptions written!

Since buying a product doesn’t equal to the education that has the client understanding how all the parts of a financial plan work together. 

However, this is about who you are protecting. Are you protecting your own interests or doing the job you are paid to do, which was protecting the client’s interests?

This is a serious question of your fiduciary role.

I think that being honest and truly helping our client become confident in their ability is both an ethical approach and financially viable. What do I mean by “being honest”?

It means letting the client know: Yes, you can handle your own money if you are armed with the right knowledge.

How is that financially viable for the planner? After all, you’ve just given your client the keys to freedom.

It’s viable because although your client may walk away, he walks away satisfied (and wealthy). Basically, getting a word of mouth referral is equal to a five-star review.

The Standard Global Financial Literacy Survey

The good news: The United States wasn’t on the bottom of the list. The bad news: We ranked 14th in the world! We were only slightly better than Botswana.

Why is that a problem?

We came out only slightly ahead of Botswana, but their economy is 1,127% smaller than ours!

Only 57% of adults were able to answer four basic questions. That means they had to get at least three out of the four questions right. These questions covered topics such as risk diversification, inflation, interest and compound interest:

First Question:

  • Suppose you have some money. Is it safer to put your money into one business or investment or multiple businesses or investments?

If you’ve been reading this blog for any length of time, you should know this answer! As the saying goes “Don’t put your eggs in one basket”. The answer is multiple businesses and diversify your investments.

Second Question:

  • Suppose over the next ten years the prices of things you buy doubles. Your income also doubles. Will you be able to buy less than you can buy today. The same as today or more than today?

In this question, it appears as if everything is keeping pace. The correct answer would be you can buy the same as today.

Third Question:

  • Suppose you need to borrow a $100. What is the lower amount to pay back? Your choices are: $105 or $100 plus 3%.

The lower amount you would pay back is $100 plus 3%.

Fourth Question:

  • Suppose you had $100 in a savings account. The bank adds 10% per year to the account. How much money would you have in the account after five years of not removing any money from the account?

Your choices are:

More than $150, exactly $150, or less than $150.

I am really hoping that you got at least three!

Don’t despair if you didn’t!  

Just keep reading this blog.

If there is anything we can create to help build your financial literacy or increase your financial acumen, email me at Ryan@financialresidency.com

Houses, Cars…and Loans! Oh My!

Have you ever heard the saying “You don’t know what you don’t know”?

Well, that applies here.

If you don’t know…you might get in over your head. Educating yourself is really beneficial before you sit down to sign a mortgage or car loan!

Three out of ten people who signed for a home loan could not perform a basic interest calculation for their loan payment.

Let’s say you are going to buy a car. You find the most beautiful Tesla. Your salesperson asks you what kind of payment you can afford.

Give yourself the freedom to fail with your financesStop right there!

Did you know this question is actually a sales trick?

Oh, they will get you into the payment you can afford, alright!

The loan will be amortized over a longer period of time, making the repayment higher. You will be paying more interest over the lifetime of the loan.

The same thing happens with home loans–over the course of 30 years!

People are signing up for large purchases, which seem to be everyday purchases, but they could turn into huge financial burdens.  

  • Leasing or buying a car
  • Renting or buying a house

But critical understanding extends to other areas:

  • Fixed or Adjustable Rate Mortgage
  • Health and Life insurance

It is so important to be aware of the details and how the process works. We are trying to promote a solid financial foundation, so you can save yourself money and heartache.

Have you worked with a financial planner? Did you have a positive experience? After subscribing to the show, share your thoughts in the Financial Residency Facebook Community.

Ryan Inman