Why is financial literacy so important?
In New Evidence on the Financial Knowledge and Characteristics of Investors, researchers from the Financial Industry Regulatory Authority (FINRA) and the Global Financial Literacy Excellence Center (GFLEC) at the George Washington University School of Business find today’s investors are at risk of falling behind in financial literacy. In recent years and decades, the number of defined benefit programs has been in decline in favor of defined contributions plans such as 401Ks, leaving investors with greater responsibility for their own financial futures.
But alarmingly, the study of 15,000 Americans ages 25-65 found that investors in general had difficulty understanding issues such as how bond prices are impacted by changing interest rates or how owning an individual security would be more risky than exposure to a diversified portfolio. Those surveyed were also uncertain as to how inflation would impact their investing. In general, the research holds that “knowledge of basic financial concepts was alarmingly low.”
Clint Haynes, CFP®, founder and president at NextGen Wealth in Kansas City, Missouri believes the solution to the challenge of financial literacy is something society has got to begin addressing at a much earlier stage. The sooner individuals are provided with financial insight, the better.
“Financial literacy [at an early age] is important because the financial decisions you make in your younger years can have such a major impact. Like when you’re getting married, starting a family and even beyond,” says Haynes. “If you don't understand how to properly budget and get into credit card debt, it can have a major impact on your well-being and comfort level for years to come. The better you understand the financial decisions you make earlier in life, the better prepared you will be for the financial decisions that you will need to make later in life.”
The importance of education
Jake Guttman is founder and CEO of Rosevest Financial in Phoenix, Arizona. In terms of his own financial education, Guttman got an early start as he is the son of a financial planner himself. Though clearly recognizing he has been given a leg up relative to others, at the same time, he is in a position to more clearly recognize the benefits of such early exposure.
“Do you talk about finances at the dinner table?” asks Guttman. “When I started to shadow my father in his practice, this was almost always the question posed to new clients. I quickly realized that for most, they didn’t have the quirky benefit of growing up the son of a financial planner. The more that we asked these questions, the more often we got the expected ‘No, I never thought to.’”
“The literacy problem starts at the dinner table but is exacerbated by the lack of financial education given to those who will soon be in the workforce,” continued Guttman. “Teaching our children, the foundations of financial literacy is critical in creating a more fiscally educated future for our country and our families. If a child doesn’t understand why they should save their allowance, and their parents have the same behaviors for their paychecks, can we expect this child to learn the ‘healthy’ way of doing things? Creating financially responsible citizens starts in our homes, where we have to be strong influences for the young and impressionable eyes that are watching.”
Financial literacy for teens and beyond
Yet another executive with deep insight into the issues of financial literacy is William J. Connington III, a wealth advisor at Connington Wealth Management Group LLC in Fairfield, NJ. With three children ages, 16, 20 and 23, Connington has seen “up close” what he views as a lack of financial literacy being provided to students in schools and colleges. To Connington’ s thinking, while of course the schools need to teach trigonometry, calculus, and literature, they need to meanwhile step up with instruction into basic finance and economics.
In particular, “Kids need a basic understanding of how financial markets, mortgages, credit cards, checking, and savings accounts work,” says Connington. “Young teenage and adults should be taught from a young age about money and how having it or not having it will affect their ability to achieve a happy financial life and achieve their financial goals.”
Connington explains that he recently sat down with his oldest. Having received a credit card, the two discussed at length key concepts such as the interest rate, the credit limit and the overall payment terms. They also explored issues such as the way zero interest for 12 months could suddenly shift into a high interest situation if the borrowed sum isn’t paid off over the credit period.
“We also discussed income, fixed expenses, and how that all leads to discretionary income and how federal and state taxes and a special friend called state unemployment insurance works,” says Connington. “As we all know from being in the business for a long time, time value of money, retirement assets, and saving for retirement are things that should be started as soon as young people enter the workforce. Most do not want to have that conversation because to them retirement is so far away, but when you break it down you can show them how saving now will be better for them when they do decide to get married, have a family and buy a house.”
Overall, says Connington, “It Is important that educators as well as parents begin to provide better education on finances so that [these next generations] can better understand how to fund their financial goals and dreams. These are all basic financial concepts that are not being taught or emphasized in schools, and it makes me wonder how the future for these young men and woman will turn out if we do nothing.”
These are three executives sharing why the feel financial literacy is an issue that needs to be addressed. What additional ideas do you have to share?