Are You Financially Literate?

June 26, 2019
Share |

Financial literacy and understanding are a part of a huge epidemic in the United States. School teaches our children how to find shape angles, interpret Shakespeare, and research European history which is all extremely helpful to their education but the topic most schools neglect to teach is financial literacy. This has a major effect on the economy. Even though we have the world’s largest economy, most Americans are not skilled with their money.

College Debt

College debt from student loans has increased exponentially over the last 15 years and students are graduating owing an exorbitant amount of money which takes decades to pay off. Because of this debt, Millennials are struggling to make huge financial decisions like buying houses, cars, and having children because they simply cannot afford them. Parents never discussed the impact student loans have on their future thus it is a rude awakening when the student graduates and they owe tens of thousands of dollars. This debt has a spillover effect into the economy because these individuals are paying off their loans instead of spending money in the industry. When no one is out spending, companies go out of business which leads to fewer jobs on the market and so on. You see the trend.

Lack of Management

Because Americans were sheltered from financial lessons, they lack the proper skills on how to manage their finances. For example, a young professional lands a new job right out of college. They received their offer letter with their salary, benefits, retirement/pension plan, vacation days, etc. The individual is so excited to get the job offer that they accept the offer without looking at the finances. Is the pay worth the responsibility and how is it compared to similar jobs? How is the pension plan or the retirement plan? Should you open an IRA or ROTH IRA account as well as the company 401k? Will their salary be enough to cover basic expenses, student debt, and have enough spending money left over after each paycheck? These questions are crucial to examine in order to make sure you are financially sound.

Having responsibility over their finances with absolutely no guidance is a disaster in the making and it is a crisis that is occurring all around us. Because they were never taught how to manage their finances, they just don’t manage them at all. This carries over into credit card debt which will be discussed below.

Credit Card Debt

Credit cards became extremely popular in the early 2000s and the trends switched from carrying around cash to a piece of plastic. It’s easier to carry around a small piece of plastic than a wad of cash. Plus, you do not have to see your wallet shrinking as you spend your cash. Especially for teens and young adults, their card limit is more money than they have so it seems like such a great idea; you can purchase things you normally cannot afford.

Here is where the downfall comes into play: Teens and young adults are given these magically pieces of plastic that can give them anything without “spending” money. What parents and guardians fail to teach their kids is proper management and spending below your means not above them.

What happens next is the individual overspends and their bill is more than they have in their bank account. Now what? They pay the minimum balance but fail to realize that the interest rates for unpaid bills add up rapidly. Now their amount owed is way more than expected and they get caught up in this never-ending payment cycle of owing money on their credit card. This is a common mistake for many Americans, and they cannot get ahead of their payments.

According to multiple sources, the U.S. has racked up over $22 trillion in credit card debt [1]. A true epidemic, this type of debt is skyrocketing. In order to tackle this problem, Americans need to start at the source: the initial credit card. If parents and guardians teach their children how to manage their credit card and finances so they do not spend above their means. Advise them about the dangers of overspending and teach them about budgeting strategies for their money. A good piece of advice I was given from my parents was to only use your credit card for emergencies, gas, and online purchases. Although you do not have to limit yourself to the list I have but setting a general limit to what you can use the credit card for will force you to manage your finances and control you from overspending.

Now that we have discussed any debts an individual many have, let’s discuss saving methods for your finances.

Retirement Savings

Many young professionals were never educated on the importance of saving for retirement. They believe that they have years before they need to start saving for the day they are done working. Individuals in their 20s and 30s just started working so what is the point of saving when you just started out? Makes no sense, right? Wrong. Even if it is a small amount every paycheck, that money adds up quickly and could even allow to you retire early (check out our saving money article https://www.northernpeakfinancial.com/blog/why-you-should-care-about-saving-money). Many Millennials were never educated on the importance of retirement savings and yes, they are juggling college debt and credit card debt, but they should still put money aside for retirement.

Conclusion

Even with balancing a checkbook, financing a house, or the topics discussed in prior paragraphs, it is crucial to educate young individuals on the importance of financial literacy and managing their finances. If they manage their money correctly from the start, they have the ability to make smarter decisions about their spending habits. This will hopefully lower the chances of out-of-control debt and allow them to save more for important things such as a house, car, or retirement. Let’s make it a goal to help the younger generations become more financially literate and work towards reducing the amount of debt from consumers while increasing the amount saved.

[1]https://www.npr.org/2019/02/13/694199256/u-s-national-debt-hits-22-trillion-a-new-record-thats-predicted-to-fall