Maybe a little controversy here today, eh? Tackling an unfriendly topic for many. Stir the pot just a smidge, let loose on wild Wednesday! Ahahaha. You be the judge…
Have we failed at financially educating our nation?
My answer to this question is a resounding fuck YES!
I was having a conversation with someone the other day, and they were harping on what a disparate and unfair world we live in. Inequality is only getting worse, the wealth gap keeps growing, the rich getting richer and the poor getting poorer. Doom and gloom for everyone and their mother. Then they got into how we fix everything – the redistribution of wealth, a millionaire tax, or universal basic living income.
And I stopped them right there.
Because I think most of the time, we miss the big picture. We’re trying to find answers without addressing the root cause of the problems. In my opinion, we need to get back to basics and face the music collectively:
- Americans have a spending problem and don’t know how to live within their means. Duh! Translation: most people in this country are financially illiterate.
So, who is responsible for these failings? What would happen if this country got with the program and put an emphasis on financial literacy and understanding compound interest at a very young age?
I think the simple answer is we are responsible. All of us.
For some reason I haven’t been able to figure out yet, we don’t teach kids one of the most important aspects of life in school: financial literacy. Yet it is one of the few disciplines that will touch almost every aspect of your life. How to manage money directly correlates with how well you accumulate long term wealth.
But why is this? Is it because money is taboo in our country? It’s easier just to brush it under the rug and ignore it. Is this a cultural failing, systemic or social?
I think it might be some combination of all three. But even to say that is a gross oversimplification of a complex issue.
Getting back to the public perception of answers, you can redistribute wealth all you want. Tax the millionaires. But if people can’t stop spending, redistributing and reallocating wealth won’t help at all. People simply adjust their spending to the level of their income. They don’t save/invest. So giving the middle class more money is only going to bump up the poverty line. You are not accomplishing what you think you are.
Plus, I would further argue that the people who benefit the most from stimulus checks are actually the wealthy, not the direct stimulus recipients. Sure, short term someone can pay their rent or other bills with that gift, but they are putting that money back into the economy to prop it up. The real winner is the person who owns real estate or paper assets and benefits long-term from that person’s short-term spending.
You cannot spend your way to wealth by buying things. If you aren’t accumulating appreciating assets, then you aren’t going to make it in the long haul.
Unfortunately, living within your means has become a skillset in America.
Here’s my big problem with a universal basic income or wealth redistribution. If you give a financially illiterate person money, they are going to spend it. And most likely, they will not spend it well. The problem isn’t the income, it’s the knowledge.
I think lotto winners are a prime example of doling out lump sums to people that don’t have the financial knowledge to invest. On average, only a few years later all the money is spent, and they find themselves in the exact same perilous financial situation as before.
We are obsessed in this country with amounts – how much you either have or don’t have. Throw more money at a problem and that is the answer. This is the politically acceptable practice even though the data shows this doesn’t solve anything. The amount of money is not the determinate, it’s the choices made with that money that make the difference.
Plus, once you set a universal basic income, my gut says that inflation will simply rise to make it almost inconsequential again. The economy adjusts to these exterior nuances. Let me be clear that I am not against it per se, but I don’t think it is going to work out how the advocates propose it will. The world is much more complex than people like to admit.
Now, someone might argue, no Q-FI poverty is the problem. These people don’t have enough money so we have to give it to them. Look at the statistics!
I would counter, no, look at the frugal nuts in FI. They have found a way to live on a pittance. How can they do that, and others can’t? Strip away all the privilege and other blinding factors and it comes down to knowledge (yes, I am oversimplifying this and making vast assumptions for a 1300 word article). They know how because they either had the access to this financial knowledge or they taught themselves life hacks, where the best deals are, geo-arbitrage, etc. Trust me, they sure as hell didn’t learn it in the classroom.
So, if people can sustain themselves on very little income, and I’m talking necessity here. This is needs not wants. So, don’t go down the rabbit hole of sure you can do that, but your life would suck. Because that’s on you. You can still live a pretty damn fulfilling life with low income and not a ton of physical assets.
Then what can we do?
That’s the magic question. How do we start to address this monetary plague? And yes, it is a fucking plague. It affects everyone. This isn’t a rich vs poor line that is drawn in the sand. Financial literacy is killing this nation one debt and frivolous purchase at a time, whether you are low income or high income.
And it is even further mind blowing to me that we live in the richest country in the world yet still have a poverty problem. How is that even possible? I think this clarifies that money isn’t the answer, because our country has tons of it. Do you redistribute it? Like I talk about above, I don’t think that solves the underlying problem.
We have a financial knowledge crisis, yet no one wants to call it that.
To me, this is where FI comes in. Is it the answer, hell no! That’s not what I’m saying at all. But what it does do, is inspire and teach good basic financial habits. So, how can you bring the fundamental financial habits of FI to the masses?
I don’t know. But I think there is ever expanding room for improvement. And improvement is what we need.
Financial independence could be the sexy part of financial literacy. Hahaha. Educate kids on freedom and options, show them there is a way out of the normal grind with compound interest and the dreams just might begin to shift. Wealth doesn’t have to be about buying things, showing off, or living in the largest house. It can be deeper than that, more fulfilling… more profound.
Yet, I’m not sure on how we begin.
Schools seem like the easiest answer. Start young and educate the masses on how the world really works. But again, how do you get a divided world to agree and even start to implement? (Don’t get me started on half the shit that is taught in schools is worthless – that’s a rant for another day).
So that’s my question to you, help me understand how do we begin? Tell me what you think…
Because I’m stumped.
-Q-FI
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P.S. What is your answer to the problem of financial literacy? How did you learn about finance? Who taught you?
One of the best financial quotes I ever read was from a young footballer kid who had some zillion dollar deal and pissed it all away. He said, “if you redistributed all the money to everyone equally, the rich people would have it all back within 3 years.”
I found it powerful a) because it’s true and fundamentally addresses your topic here or financial literacy and b) because he acknowledges his own lack of it, presumably now aware as a result of being destitute. But it was a brave and important thing for him to say in a national interview.
I agree, there’s no magic bullet here, but I think it ought to be taught in school, but it never will. Illiteracy breeds illiteracy and things continue. I believe the FI community is doing a solid job at chipping away and giving some larger awareness to the issue and, more importantly, giving tools to help resolve it. I just try my best to impact my little sphere of influence as we all do.
That’s a good quote.
I think I’m just tired of seeing, throw money at this, throw money at that. Oh, it didn’t work, so throw more money at it. And money isn’t the problem, it’s the fundamentals.
But you’re right in your last point, just try to influence and educate in the small sphere that you have. Really, that’s all you can control.
Thanks for chiming in Mr. Fate!
Do you really think it is an education problem, or is it really a behavioral problem? How many people are truly ignorant about the fact that what you buy in credit will have to be paid back with interest? How many people are so dim witted they don’t realize that if you spend more than you earn you will go deeper in debt? How many smokers don’t realize smoking is bad for their health? Knowledge doesn’t impart patience or willpower or deferred gratification. If knowledge controlled behavior there would be no smoking, no addicts, no alcoholics and no crime. I agree it is a problem, but I think the solution is money savvy parents modeling money behavior to their kids. It certainly worked for my wife and me, and seems to be working for our grown kids.
Ah Steveark, like usual, we disagree again. Hahahaha. I do believe it is education and not behavioral. Sure, the person who buys on credit might not be ignorant they have to pay it back with interest, but they don’t know how much interest that is, or even know how interest works. If they did and had the knowledge, then they wouldn’t take it out in the first place.
I would also take the opposite stance on your point about smoking, addicts and alcoholics. If knowledge didn’t matter and it was only about behavior then everyone would be a smoker, addict or alcoholic. You would only behave in ways that feel good. The chemical dependency would always win. However, the only way people get sober is from knowledge not behavior. Trust me, you can’t act your way into sobriety. You’ll always lose in the long run. You have got put in the time, find the knowledge, go to meetings, learn about psychology, dissect the hidden fears of why you act the way you do.
So the real question, is it the chicken or the egg? Hahaha.
Both good points. For me, financial health has many parallels to physical health.
Knowledge is necessary but not sufficient.
I work in finance with many very knowledgeable high-earners who still overspend. We work with clients across the spectrum that includes other high-income very high spenders and medium income folks who save like crazy.
Self-discipline is also necessary but not sufficient. I’ve seen people have the self-discipline of being good savers, but lack the foundational knowledge to make even close to reasonable investment choices.
I think it really does have to be both.
I also think we may have some unreasonable expectations about what people want. My filter is crazy different from my siblings. I’ve spent some real time with them on budgeting and explaining FI, but they prefer their own “optimize for the near term” choices.
Derek Sivers said “If more information was the answer, we’d all be billionaires with perfect abs”
As you keep reading, you’ll see my viewpoint shift on this to favoring a person’s environment mattering more. We emulate the behaviors of those around us. Knowledge alone won’t make you change. It can be helpful, but not the determining factor in and of itself as you mention – “knowledge is necessary but not sufficient.”
Good analogy to physical health. I can see that one.
That’s a good point that people may want very different things financially – spending in the near term vs saving long term. Those that want to accumulate physical possessions vs those that want more freedom of time.
You mention self discipline, but I’d go even farther and propose some issues are psychological. My parents use an advisor and AUM model. I’ve tried to have them switch to fee only, because the that 1% is a lot of money for not much advice, but they are fearful (my opinion) to change. The conversation always goest to “maybe next year we’ll look at that.” And that’s fine. It’s their money. But it’s hard to watch when I know they could be spending that fee on other things in their retirement – travel or other stuff that might make them happy.
Overall though, I still think some kind of basic financial education should be mandatory in elementary schools all the way up to high schools. I’m not saying it will solve the problem, but I think it would at least give people the basics. Our friggin’ system is capitalism for crying out loud!
Hahaha – love that Sivers quote.
There was one FI couple, can’t remember what the blog name, but their side hustle was teaching finance as part of a marriage course. It was pre-marital counselling offered through a religious organization if memory serves me correctly. Basically they helped engaged couples figure out their household finances before they tied the knot. I thought this was a super interesting way to spend your time after reaching FI, not to mention a way to pay it forward.
In Ontario we have started to do this: http://edu.gov.on.ca/eng/parents/financial.html
It’s a new program so time will tell if it works.
You know, any kind of financial education that someone will offer to people is great. That’s awesome what that couple does, and in my opinion, a very necessary step if you’re going to get married. Gotta get that financial house in order first! Hahaha.
That was a cool link. Thanks for sharing. I wish the US would do something like that program. Very much needed here in the states.
You’re blazing away at these posts Veronica. You’re going to be all caught up pretty soon. Hahaha.
We’re in lockdown. Got time on my hands. “Nuff said.
I know how that goes. Hang in there.