Jim Simon: Financial literacy is America’s Achilles’ heel

My Nov. 7, 2017, inaugural column for The Dispatch, “Civics education in schools needs reboot,” noted there are “loud” and “quiet” crises. An example of the latter is the decline in civic literacy, or basic knowledge of how our government works.

Another and equivalent crisis in the quiet category is financial literacy. For years, numerous polls and studies have revealed how little millions of Americans know about the basics of personal finance and investing.

A 2015 study of more than 27,000 people by the FINRA Foundation estimated nearly two-thirds of Americans could not pass a basic, five-question quiz covering credit, interest, diversification in investing, and inflation. Disturbingly, the percentage of those who passed had fallen from 42 percent in 2009 during the financial crisis.

Results of a survey of six age groups released in January by the National Financial Educators Council estimated that lack of knowledge of personal finance cost America more than $280 billion in 2017.

To compound the issue, we’re living in a consumer-driven society in which spending, especially for immediate gratification, is far more emphasized than saving and investing. The proof: the U.S. household savings rate decreased to 2.90 percent last November, the lowest rate since just before the Great Recession and near the record low of 1.90 percent in July 2005.

 

At a time when the millennial generation, the largest demographic group in history, enters its prime years of spending, saving and investing, it’s critical for that generation, as well as all Americans, to improve their financial literacy, especially before the next recession arrives.

How can poor financial literacy, an Achillles’ heel, be turned into a personal and national strength?

‒ As with physical fitness, financial health begins with good habits, and good habits begin in the home. Surveys have clearly shown that students who talk to their parents about money matters were more financially literate than those who did not. Parents must serve as models for disciplined spending and savings, educating their children along the way about the long-term value of such habits. Instead of lavishing their young with holiday or birthday gifts, they could open a savings account for them and make the first contribution to them to spark a savings mentality. Parents lacking financial literacy can access many online programs, including one offered by the American Bankers Association via its “Teach Children to Save Day” every April.

‒ Making saving as automatic as possible is the best way to build wealth and remove much of the temptation to make impulse buys. Those with little margin for savings can invest spare change through micro-investing apps such as Acorns. Those belonging to 401(k) plans or who have Roth IRAs should have the largest contributions possible deducted from their paychecks after accounting for the payment of truly necessary monthly expenses.

‒ Just as making civics classes mandatory in the classroom can develop more-informed voters, so too can requiring students to master a class in personal finance enable financial literacy before adulthood. Online courses in financial literacy could be customized for different grade levels for secondary schools. Many financial institutions that sponsor and promote financial-literacy programs could collaborate with teachers, quasi-governmental bodies, Junior Achievement, and other organizations to design such courses. A good governmental resource to build such courses can be found at https://www.mymoney.gov, which focuses on “The Five Principles” of Earn, Save & Invest, Protect, Spend and Borrow.

‒ Financial institutions also can educate young investors by sponsoring and promoting social events featuring crowd-sharing tips. Nothing motivates young people more than peer recommendations, and informal, free events featuring financially savvy young adults as ambassadors for financial literacy could be an effective grassroots-based tool. A good opening topic for an informal discussion could be credit scores, which many millennials are extremely interested in building and protecting.

Not coincidentally, April is “Financial Literacy Month,” the time when tax filings are due, 401(k) plans for the previous year must be established and funded and when many Americans receive tax refunds. Given the impact of the tax-cut bill and the opportunity some have for increasing savings in 2018, we have an ideal opportunity to reverse the trend of financial illiteracy and strengthen our financial future.

Jim Simon, is a central Ohio resident and former chief communications off􏰀icer of several corporations.

Reference

Jim Simon: Financial literacy is America’s Achilles’ heel – Opinion ( – The Columbus Dispatch – Columbus, OH, Thursday, 2/1/2018.

Copyright © 2018 Jim Simon

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