Would Increased Financial Literacy Lead to Self-Sufficiency?
Growing up, I was often told by Gen Xers and Baby Boomers about economics and other classes that taught life skills. They were taught about how to write a check, file their taxes, and even how to balance a budget. These days, our educational system seems to be trading such skills for more math, more science, and more arts. While I agree that everyone should take some arts, math, and science, we should have never discarded financial literacy.
I’m sure there will be naysayers who claim that we shouldn’t have to revert back to these “older ways of doing things.” But why should we change so much that it starts to become regressive, especially in a day and age where credit is more important than ever?
More savings translates to less debt
We all know that we should save money wherever we can and try to avoid debt. So why do so many people have such a hard time with it? First of all, we’re often told that we must have good credit. People often think this means that you have to carry balances all the time on credit cards and rack up interest. That’s a boldfaced lie — you just need to make sure you let transactions post and pay off your balances by the due date.
You certainly could allow interest to accrue by paying only the minimum payments, but you should pay your total balance if you can. In fact, I’ll bet that part of the problem for some is that they will pay the minimum payments and then tell themselves, “Hey! I’ve got this extra money leftover. I could buy something else!” In reality, they will spend more in the long run and then demand things like rent control because they didn’t budget properly. Eventually, their bills pile up and they feel like they’re drowning in debt.
This is where even somewhat decent savings have a major impact. If you were to save just $50 per month, you would have $600 saved up in one year. Many can afford to put $100 per month away for double the savings. All it takes is a little budgeting, which is far easier to do in high school when you don’t have a car payment, rent, or even a cell phone bill.
Basic financial math inspire youth to save
Part of financial literacy is understanding debt and how interest rates can make it worse. However, the more positive side of interest comes with understanding some of the most basic financial products and investments. Instead, today’s youth are more frightened by investments and “big banks” pining to take away everyone’s money. No more shoeboxes under the bed just waiting to be stolen by that dastardly roommate that gave you a bad feeling!
It’s simple to understand how basic interest works. You have your principal (starting point), your interest rate, the way it compounds, and then the length of the loan. So $100 in an account that bears 2 percent interest per year, compounding monthly, earns you roughly 17¢ per month for a while. A conservative estimate is about $2 per year.
That doesn’t sound like much, but if you had $1,000 in savings — and didn’t put anything else in it or take anything out — you’d have $20 in a year for doing absolutely nothing. Younger folks that realize that something like that is a real thing and not some gimmick, they get inspired to see how big they can get that “something for nothing” money. In fact, it’s not even something for nothing! That’s right: Your money is being lent to other individuals and businesses, which is why you get paid interest in the first place. In other words, you gave the bank a loan and it pays you a little interest as a courtesy.
Financial literacy plus discipline leads to better consumers
Remember before how I mentioned that savings leads to less debt? It turns out that when people are provided with the proper financial knowledge and are inspired by those they look up to, they can actually become better consumers. Imagine what our country would look like if people didn’t rack up so much credit card debt. What if we had younger generations negotiating better wages because they had the money in savings to quit for a few months as they found a better job? It all starts with a little know-how.
Part of being a better consumer is actually saving for retirement so they’re not working until they die. Eventually, people figure out about retirement accounts and they have a little more perspective in their lives. If youth get even a little excited about interest, imagine how excited they would get when they found out about tax-free growth in Roth 401(k)s and Roth IRAs!
Self-sufficiency is key to real economic progress
The goal of programs like SNAP is to eventually get people to a point where they can comfortably pay for food on their own. However, a lot of people seem to think that such programs are there for prolonged support. Remember when the government shutdown earlier this year and people were scared about potentially not receiving SNAP benefits? If we want to get to the point where it would be easier for communities to help the smaller handfuls of people who maybe had a medical bill pop up and can’t afford food, we need to invest in financial literacy now.
It could take decades before seeing this kind of self-sufficiency. But it won’t start until financial literacy is common knowledge again. This isn’t something I think would be possible to do at the federal level. But that should stop you from demanding your local school board to bring it back. Not everyone is cut out for heavier course loads of science and math. However, everyone should know how to get their own finances in order.
With these basic financial skills, people can once again get excited about savings goals. Perhaps many would think twice before throwing money they don’t actually have at something. In any case, quite a few people who get themselves into debilitating amounts of debt weren’t taught to save, how to understand their tax filings, or even how to write a check. It all starts with a little know how.
