The U.S.: The Massive Failure in Financial Education

We have a major crisis in this country. Major. Its not just healthcare, its not just immigration and its not just jobs.

Its personal finance and personal money management.

With an educational background in the economic space and having been in the investment management industry throughout the majority of the last decade, following market conditions is a must.

GoBankingRates conducted a survey in 2015, and found that 62% had less than a $1,000 in savings. Again, the same poll was conducted in 2016 and found that a sobering 69% — nearly 7 in 10 Americans had less than $1,000 in savings!

Breakdown

The breakdown of the study discovered that:

Data Source: GoBankingRates, 2016.
  1. 34% of Americans having next to nothing their bank accounts.
  2. 35% of Americans have at least $1,000 or less.
  3. 11% have between $1,000 and $4,999
  4. 4% have between $5,000 and $9,999
  5. 15% have more than $10,000

Think this problem is only geared towards the lower-income brackets? Think again.

Although it is true that lower-income individuals have a harder time saving, the problem continues to persist in higher-income brackets.

The report also illustrated further sobering statistics of individuals:

  1. 29% of adults earning more than $150,000 per year, and
  2. 44% of adults earning between $100,000 and $149,999

who have less than a $1,000 saved!

Which illustrates a deeper issue — spending habits and “the American culture”.

Recent surveys have also pointed out that Americans, even with extra income have a hard time actually putting away that extra income into savings accounts and even then, it is pointed out that the temptation to spend that extra income persists.

For the readers, pointing to Millennials as being a major source to these statistics, the problem actually continues across multiple generations. From seniors aged 65 and up to young millennials between the ages of 18 to 24, where anywhere between 62% to 72% of Americans had less than a $1,000 in savings according to USA Today.

One unexpected expense, whether it be a car repair, medical, insurance, etc. could be an expense that could plunge you to financial ruins and into poverty.

Analysis

Yes, it is true that the standard of living in today’s world is high and wages have not been able to compensate for this rise.

This is a fact that has been occurring on the economic landscape for almost three decades, but when this problem is occurring across even the higher income brackets, brackets within the 6-figure range— then it begins to raise into question our American mentality of how much is too much and the need to live beyond our means.

Really, the question is and the question we all asked ourselves out of the financial crisis is the need to live beyond our means.

Still, nearly a decade after the crisis, we are back to our poor spending/saving habits.

Thought

Habits play a major issue, and there have been societal shifts that make the conditions ripe for extra spending.

We are in fact moving towards a cash-less society, where it makes the act of swiping and tapping your phone that much more convenient. This is where credit card companies and the old financial institutions (think of JPMorgan Chase and Bank of America) are really playing to people’s temptations.

Credit cards are now offering more points on certain transactions, more now than ever; more points with travel rewards; more cash back on this versus that all to entice consumers.

The reality is: We have to spend more to gain less than half of that amount we spent to receive those points (i.e. cash).

Here is an example. Chase has a Sapphire Reserve Card meant for travelers, where they tell their customers that in order to receive the 50,000 bonus points (which equates to $500), you must spend $4,000 within the first three months of attaining the card.

Already we see a problem: Spending $1,333 per month for 3 months only to get $500. Great! We have $500 in travelling points, but…we just spent $4,000? Is this really worth the trade-off?

We also have another problem that co-exists with poor habits and that is…Education.

Role of Education in Personal Finances

Financial education in the United States has been a massive failure, assuming any education exists at all.

Left to the very few, hopefully the professionals working in the industry, who find topics such as: interest rates, bonds, time value of money, compounding, stock investments, etc. very interesting to learn more about. The mass public views these topics as a big headache filled with fancy jargon and thus participating in saving and/or investing does not happen at all.

What can we do?

Educational institutions have taken note of these poor statistics and have taken strong action to combat it. Certain universities, such as the University of California, Irvine are now providing financial literacy week-long getaways that cater to lower-income neighborhoods where students in their high school years could understand some of the financial language and financially plan their future utilizing the basic rationale of budgeting.

A worthwhile endeavor, but a thought remains to be seen on whether or not it should begin at an earlier stage in life.

Making Financial Education More Fun

The financial industry needs to change and providing financial education needs to be re-invented and brought out to engage the mass public; to dispel the fancy financial jargon used by the industry and to breakdown these “complex-sounding” financial terms.

Reconditioning of the youth about saving money needs to begin from the moment they begin their formal school education at 5 years old (think of the proverbial piggy bank).

Once that seed is planted in their heads, they will think about whether or not to actually spend that money. The educational system could incorporate these thought processes to really ask kids if buying this or that, is really a want versus a need.

Technology could really come into play here.

As a caveat, financial technological startups have started to take note, where micro-investing apps such as Acorns have been working to invest spare change from your day-to-day transactions and re-direct it towards investing just so you would not have to think about it. You could be a market investor with as little as $5!

Final Thought

But more needs to happen.

Poor habits stem from a lack of education about a certain topic. Personal finance is no exception here. We could start from broader concepts to re-define and re-invent financial literacy.

The fundamental concept of: A dollar today is more powerful than a dollar tomorrow is a powerful concept that needs to be understood.

Hopefully as technology continues to evolve, we could prepare the upcoming generation to buck these disturbing trends. Trends that plunge us into debt and poverty and having unexpected “life” expenses take us down a financial disaster.

The masses will be better off for it, the financial services industry will be better off (because there will be more investors) and may be, just may be we could begin to make a dent towards the ever-increasing rate of stress, anxiety and depression where financial insecurities play a leading role and even the demise of relationships and marriages.

We all have a responsibility and a role to play here. It is in the best interest of everyone.