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The President’s Advisory Council on Financial Literacy, in their 2008 Annual Report, defined personal financial literacy as “the ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial well-being.” So close to the financial crisis, which many countries around the world have braved, financial literacy should be on the rise with people looking to understand how to save money and utilize it wisely.
The reality, however, is unsettling. According to statistics provided by the FINRA (Financial Industry Regulatory Authority) Investor Foundation, 56 percent of people in the U.S. did not have emergency funds in 2012. The US Department of Education estimates that student loan debt exceeds $1.1 trillion. The Employment Benefit Research Institute, in an independent research, found that 46 percent of Americans have less than $10,000 saved for retirement.
The statistics paint a grim picture of a financially illiterate populace struggling to come to terms with their methods of spending and financial planning. Helen Rake is a Certified Financial Planner from St. Augustine, Florida, and has over 16 years of experience working in the financial sector. According to Rake, the problem with financial illiteracy is a systemic and cultural one.
“We’ve gotten so used to debt in this country and spending money that we do not have that it has become very easy to slip into debt,” said Rake. “Debt is readily available to young people, more readily than it was before. Credit cards should be avoided unless you are really responsible with your money. I suppose the most important thing is to be honest with yourself.”
Rake advised that if you choose to attain credit services, do so with services that have spending limits or that require payments to be made before further credit can be allowed. This will limit the amount of debt you can fall into by credit card bills. The Credit CARD Act has already put certain norms in place to keep college students from falling into early debt. The Act states that no person under the age of 21 can receive credit card approvals unless they have an adult co-signer, and proof that they receive sufficient income to handle the bills of a credit card.
Responsible repayment is an integral part of credit and student loans. Another issue we are facing is that parents are not showing a good example of how to handle money.
“How can any child learn responsibility from a parent who is knee deep in debt? We grow up in a culture where debt is acceptable. While the availability of debt does offer certain incentives and short-term opportunities, it makes planning for the future more difficult,” noted Rake.
It is also important to differentiate between certain connotations of financial literacy which are exploited by larger concerns for selfish reasons. An article in the Columbia Journalism Review titled “The problem with financial literacy as a fix” states the importance of moving away from thinking that financial problems are caused by financially illiterate and irresponsible consumers and not the convoluted complexity of the modern financial system or predatory lending. In fact, these global problems regarding finances should serve to bolster our own responsibility and knowledge.
The question to ask now is how to improve financial literacy. Rake said that the solution is to start small and target middle schoolers and high school freshmen, and educate them regarding the basics of the financial system. This would mean informing young adults of the essential elements of debt, banking, investment and savings.
“We have to start considering the future of the next generation and inform them regarding the problems that we have faced in order to allow them to learn and not make the same mistakes again,” said Rake.
Information can be imparted through standardized curriculum (some of which is already in place) or financial institutions. Business concerns can also hold seminars for students to understand how the financial system functions, and the best way to take advantage of it.
