Hey, friends! This is our first of several posts about financial literacy in honor of Financial Literacy Month. Today, we feature Jack from Enwealthen. Jack blogs about investing, increasing your net worth and all things personal finance with a dose of entertainment and humor to boot.
You’re living paycheck to paycheck. You have no emergency savings. You pay the minimum payment on your $16,000 credit card debt. You have no retirement savings.
You are a typical American.
Financial literacy, or rather it’s lack, is one of the largest silent problems facing modern society.
And the growing gap between the richest and the poorest, the “haves” and the “have nots” has only been accelerating.
Financial Literacy, Have-Not Style
Considering the rapid growth, and complexity, of financial products available to the average consumer, it’s not surprising people feel overwhelmed. 401(k). IRA. HSA. 529. Roth. Cloverdell. 403(b). FSA. It’s an alphabet soup of terms and buzzwords, with new ones coming every year.
Worse, when the confused and overwhelmed are parents, it leaves the next generation another step behind, trying to catch up and understand financial topics without any parental guidance.
Add in the lack of financial literacy education in schools, and you end up with a whirlpool of ignorance, sucking the unprepared down to the depths of debt slavery.
*Note from Laurie: This treasure of a book is one of the first I ever read on personal finance: The Wealthy Barber, Updated 3rd Edition: Everyone’s Commonsense Guide to Becoming Financially Independent
How does this look in the modern world? According to a 2016 FINRA report
- 18% of Americans spend more than they earn
- 38% live paycheck to paycheck
- 50% have no emergency savings
- 26% use “non-bank” borrowing (e.g. high interest payday loans)
- 32% pay the minimum payment on their credit cards
And looking at the state of retirement, the Economic Policy Institute reports almost half of working age families have zero retirement savings.
On the debt front, things aren’t much better, with average credit card debt of over $16K!
According to the most recent US Census Bureau report, the median net worth of working age Americans excluding home equity is only $16K.
Adding insult to injury, all these financial mistakes end up reflected on your credit report – overdrawn accounts, missed payments, excessive debt – and ultimately a low credit score, raising your interest payments and compounding (as it were), the problem.
Then when you try to earn your way out of the problem by finding a better job, what do most employers do before you’re hired? A background check. And 47% of those include, you guessed it, a credit check, which can be used in hiring decisions in 40 of the 50 U.S. states.
Bad credit? No job offer. And the cycle continues.
“The number one problem in today’s generation and economy is the lack of financial literacy.” — Alan Greenspan
Basics of Financial Literacy
While studies on the state of financial literacy use many different methods to measure and report their findings, the fundamentals of financial literacy are simple.
Spend Less Than You Earn
The most fundamental concept of financial literacy and a solid financial footing, is to spend less than you earn and save the difference.
This savings will be the foundation of your financial house, enabling your emergency fund and your investments that will eventually become your retirement fund.
Start with $1, and increase it, every day, or every paycheck, until you’re saving at least 10% of your pay after taxes. Some people focused on financial independence and early retirement save over 50% of their pay.
You’re not a dummy, but you could benefit from this excellent book. 68% of reviewers gave it 5 stars: Personal Finance For Dummies
The more you save, the sooner you can stop working!
Invest What You Save
Once you have your money, it’s time to plant the seed of your first money tree.
Confused? Don’t know where to start? If you have access to a 401(k) via your employer, use it! If not, open an account with Vanguard and invest it in a low cost index fund, such as the Vanguard 500 Index Fund (VOO), just to get started.
Then start reading, about asset allocation, risk, real estate, tax sheltered accounts like IRAs, and alternative investments like peer to peer lending, and decide for yourself where you want to continue your investments.
You’ve planted the seed, now comes the fun part – you get to feed it, water it, and watch it grow!
Start Early And Never Stop
Time is a powerful force.
Nowhere is this more obvious than in investing and the power of compound interest.
Without getting into the math, by earning interest on your interest, every year your money will grow faster and faster.
The only better time was yesterday. And the worse time? Tomorrow.
And finally, expand your knowledge.
Did you know that I’m hosting a month-long interview series with the most influential money bloggers on the web for Financial Literacy Month? One question I ask every one of them is what books do they most recommend to teach fundamental financial literacy.
The most recommended book from these writers? The Millionaire Next Door.
The Millionaire Next Door: The Surprising Secrets of America’s Wealthy
The primary message is that anyone can become a millionaire if you save more than you spend, invest the difference, and let time and the magic of compound interest do the rest.
Read it. If you’ve already read it, read it again. You’ll be glad you did.
“There is a secret psychology of money […] A lack of money is not the problem, it is merely a symptom of what’s going on inside of you.” — T. Harv Eker
Secrets of the Millionaire Mind: Mastering the Inner Game of Wealth
Is Anyone Teaching Financial Literacy?
So how did we get to this state?
The Council for Economic Education conducts a biannual survey of the state of financial education in the US. Only 16 states have standardized testing of financial concepts, while 17 have a required personal finance course for high school students.
One of the questions I ask in my financial literacy series on Enwealthen is what financial literacy education did you receive in high school. Only 10% said they had a basic financial literacy course, with 20% recalling a subpar experience (e.g. balancing a checkbook, or comparison shopping). The overwhelming majority had received ZERO economic or personal finance education in high school.
Especially when a study from the National Financial Educators Council found the majority of recent high school graduates (18-24 y.o.) said money management was the high school level course which would benefit their personal lives the most.
For a quick overview of the scope and nature of the financial literacy problem, watch this short video from the CEE summarizing the 2016 Survey of the States.
How Can I Help Close The Financial Literacy Gap?
For parents, teach your kids. Talk about money decisions you make every day – paying bills, saving money, earning interest, dividend payments, or other investments.
With the rapid growth on homeschooling communities online, there’s an abundance of free or low cost educational information available online just a click away, whether it’s CEE or Dave Ramsey’s for-fee educational materials, or free resources like Khan Academy. You can also play games like the online Con ‘Em If You Can or board games like CashFlow for Kids.
If you’re already financially literate, share it with your community, whether it’s one on one sessions with friends or coworkers, or volunteering at your church, community center, or local school district to reach larger groups of people.
We’re all busy, so if this all sounds too much, start slow by giving the gift of financial literacy. Next birthday, holiday, or other gift giving opportunity for your friends or family make a present of a fundamental financial literacy book. Not sure which ones? Start with the ones most recommended during the recent financial literacy interview series on Enwealthen – Millionaire Next Door, Your Money Or Your Life, and Richest Man In Babylon.
I won’t go into the details of each book, but the message off each is powerful, practical, and a great first step on the road to financial literacy.
It’s Up To You
Financial literacy matters.
It’s the only thing between you and being a typical American – in debt, living paycheck to paycheck, with zero retirement savings.
You know the magnitude of the problem. You know what to do. Now I challenge you.
What are you going to do about it?
Jack shares his thoughts and advice about the simple steps to financial freedom at Enwealthen. Follow along by subscribing to the mailing list and following him on Twitter and Pinterest @enwealthen.
It does matter. I know their are parents out there that don’t have a handle on their money themselves. My wife and I were in that situation. We began to educate ourselves, by reading books and blogs to better understand personal fiance. Once we had a good understanding we involved our three children. Showing them our budget and the cost of our monthly expenses. Overtime we expanded the topics. They know more as teenagers about money then my wife and I in our 30s. It’s never to late to start.
That’s great, Brian!
I look forward to having kids more money savvy than I am!
All it takes is time and the commitment to get moving and keep moving.
That retirement savings number is so scary. Many people thought – as we did for years – that somehow retirement expenses will just take care of themselves. The truth is though that many, many people are really struggling financially in retirement.
You know the old saw about don’t believe anything you read and only half of what you see?
Part of me keeps hoping the sad state of people’s retirement savings is one of those things you shouldn’t believe, even though I know it’s true.
Hopefully financial literacy month will start to turn the tide!
In my conversations now-a-days, I’m trying to bring up personal finance more and more. I believe people are more open to chatting on these subjects.
That being said, people need to start taking action. $16,000 in credit card debt and making minimum payments is scary and not okay. This shouldn’t be the norm.
Right there with you, Erik! I was talking with a friend last week about kids and the cost of daycare / preschool which eventually morphed into financial literacy and how you teach children about money.
The opportunities are everywhere, plus it’s a great chance to get a new reader 🙂
Those statistics are alarming! Financial literacy is absolutely essential. And there is so much great information right at our fingertips. It doesn’t have to be overwhelming and confusing. I think if you’re just starting off – start small by spending 15 minutes each day learning (reading) and taking small steps to start on a better financial path (such as gathering bank statements, tracking spending for a week/month, etc).
That’s right, it just takes a little time and a lot of commitment to keep going no matter what.
As a relatively new parent of two, I understand how scarce and precious time is. But having children to educate only inspires me to do more!
I have never read The Millionaire Next Door – though I keep saying I will. Now I really will. Thank you for this post, Jack. I had my head in the financial sands for far too long. It’s so encouraging that even late-starters like me can transform our financial reality by subscribing to the basics of financial literacy. My husband and I have been focused on debt-reduction for almost 5 years, and we’re down to a small mortgage debt now – less than 2 years to go. We’ve got an emergency fund saved up (3-6 months of expenses), and we’re educating ourselves about investments – very basic for now. It’s not complicated – it’s hard to get started because it’s counter-cultural in this “buy-now-pay-later-because-you-deserve-it” era. But once you’ve started on the right path . . . Well, you already know : )
I know. It’s so hard to fight the flow of modern consumer culture. We’re indoctrinated at birth with the buy buy buy, now now now mindset, it takes a lot of will to break free from that mantra.
The beauty of it though I’d that once you start that path and begin to see the progress, it gives you the strength to carry on.
I think that’s why the Millionaire Next Door is such a highly recommended book – for so many people it was that first step towards realizing there is an alternative and anyone can do it.
You just have to want it.
Congrats on your success!
I have spent my life passionately trying to educate, teach and inspire others to take control of their own financial management. You either participate or abdicate. You at least need to learn enough to know whether the person you have abdicated to is doing a good job on your behalf.
Thanks so much for sharing.
Good point, Lisa.
Even if you do choose not to e an active participant in your finances, you still have to understand what your representative is doing in your name. There are many different types of financial advisors and representatives. Knowing the right ones to use is a challenge in itself!
Well shared. I caught on the personal finance band wagon late but like many others have said it’s never too late to start. It’s starting that matters
That’s right, getting started is the most important thing. Starting earlier just means to can stop sooner. But it’s never too late to start!
I’m thinking students can be taught at an early age with pretend money and a pretend budget, in schools.
Wouldn’t that be wonderful!
Comments are closed.