I love money. I love everything about it. I bought some pretty good stuff. Got me a $300 pair of socks. Got a fur sink. An electric dog polisher. A gasoline-powered turtleneck sweater. And, of course, I bought some dumb stuff, too. — Steve Martin
The financial crises of 2007 showed me there were a few serious flaws in our nation’s economic system. Since then, we have all heard the headlines, “40% of Americans cannot afford an unexpected $400 expense or 50% of Americans have no net worth.”
Student loan debt in the United States surpasses 1.5 trillion dollars and affects over 44 million Americans.
It’s a “Jungle Out There” in the world of money is an understatement.
In response to the “noise” I was hearing, I started a financial coaching business, and my clients confirmed my suspicions were right. Most of my clients were spending more money than they were making, and they were spending small fortunes on unnecessary expenses.
I separate the country into three economic classes. The Trapped, The Treadmill and Freedom class. I normally work with the Treadmill class. You know, the folks that have jobs, own homes, cars and have kids, but may spend hundreds or thousands of dollars more than they make per year. Their assets equal their liabilities. They can’t figure out why they can’t save any money for retirement while sipping a latte on the way to eat dinner out with their family. These same families maxed out their credit cards and then reached out to their favorite lending institution and took out a personal loan to pay off the credit cards (not a horrible idea) but then ran up more debt on those same credit cards after they were paid off. That resulted in high credit card and personal loan debt! I have another client who rapidly cycled through several new cars, trading them at a loss and ending up with a car note that exceeded his car’s value by $20,000. Sadly, bankruptcy was the only option. Yes, he could keep the car!
Why is financial illiteracy the norm? Studies show we are uncomfortable talking about money, even with our partners. Some of us handle money with the emotional baggage of fear, embarrassment, judgement, and shame.
Economists decree wealth inequality exists in the United States. A laundry list of causes of wealth inequality usually follows this proclamation. I agree inequities exist in our economy, but I am always surprised that few of the academics mention the one item that amplifies wealth inequality. Financial Illiteracy.
I believe financial illiteracy is one of the biggest reasons Americans do not accumulate wealth. You cannot accumulate wealth if you pay large amounts of interest attached to credit card debt, car notes, personal loans and mortgages. The money you could save is going to financial institutions as interest on your debt where banks use the wonder of compound interest against you. Most consumers do not understand the concept of compound interest.
Is keeping the average consumer illiterate good for business? I believe our nation has created a culture of financial illiteracy to motivate consumers to misbehave in what I call the Consumer Industrial Complex. This is my description of our consumer materialistic society.
Is it difficult to sell overpriced automobiles, college educations and goods and services without offering easy credit? If the consumer does not understand how “too much” debt can reduce their chances to accumulate wealth, then it is easier to propose creative overpriced debt products.
Most of my financial coaching clients don’t use a budget or calculate their net worth. They don’t balance their check book nor examine their credit card statements. Further research shows that folks with low financial skills fall prey to predatory lending, further widening the wealth gap. What is predatory lending you ask? Pawn shops, “buy here, pay here” car lots, furniture/electronic “rent to own” stores and “cash checking” stores offer financial services to the under banked and trapped at nose bleed prices. What is a nose bleed price? Try 100% to 300% annual interest. These products widen the wealth gap.
I suggest a proper solution to wealth and income inequality is personal finance education. Unfortunately, our existing education system does not find teaching personal financial skills suitable for students preparing for college. Apparently our nation's student loan crisis is just a coincidence. Ironically, in another twist, the National Endowment for Financial Education decided to “retire” their High School Financial Planning Program (HSFPP) at the end of the 2021 academic year. I taught this curriculum in a high school math class and it was an exceptional experience for me and the students. We started one class with CNBC blaring the stock market reports from around the World. I paused and asked them questions about stocks and bonds. In another exercise, I set up a mock used car dealership and split the class into two groups, the sales staff and the customers. It was hilarious to see the transformation of normally shy students turn into confident negotiators. Customers negotiated the price of their selected virtual car. Then they signed an agreement as I calculated their payment. Afterward, several students begged me to go with them to the car lot as they were planning to buy a car.
(Pause) On a different day, a student took me to the side and asked me what foreclosure meant. The subject was being discussed at her dinner table at home.
This financial literacy course was very beneficial to the students. I believe the students would agree. It is also an opinion of mine that financially literate students become financially literate citizens. Financially literate citizens will demand sensible credit products and maybe even possibly demand their country act financially responsible!
Please support financial literacy education for all.