Who Needs a Financial Education? All of Us!
by Efin Advisor | April 28, 2009
Financial advisor Darrell J. Canby is not alone when he insists that today’s children need a financial education. The fact is we all do.
A lack of financial common sense led to the current financial crisis, Canby observes. “People bought homes they couldn’t afford, banks abandoned sound lending standards, politicians passed laws that encouraged financial recklessness and regulators failed to regulate,” he says.
A billion dollars used to seem like a lot of money. Now a trillion is the new billion, and our children will be left with a mountain of debt and all of the problems we haven’t solved. The least we can do is to provide them with the financial knowledge to do better.
What are the most valuable lessons to be learned?
Stay out of debt
“If Americans learn nothing else from the current financial crisis, it should be this: Don’t spend money you don’t have. This is priority number one.”
But will we learn this lesson? As of this month, the national debt is approaching $11.2 trillion, according to the National Debt Clock, and Congress has committed to trillions in new spending. Consumer debt, meanwhile, is approaching $2.6 trillion, according to the Federal Reserve.
Know what you owe
“To address your debt, begin by assessing how much you owe. Once you have a good reading of your outstanding debt, look at what you earn and compare the two. If what you earn doesn’t cover what you owe on your debt, plus the other living expenses, drastic changes may be necessary.”
Pay yourself an allowance
Just as children learn to control spending and save if they have an allowance, adults should consider restricting themselves to spending a set amount each week , says Canby.
To determine an appropriate allowance, figure out what you earn and subtract your fixed living expenses, such as your mortgage, your car, your utility bills and your grocery bills. Also, of course, calculate an amount to save each week and subtract that, too. Once you’ve also deducted your children’s allowances, feel free to spend what’s left.
Keep in mind, of course, that it’s perfectly acceptable to spend less than that amount. You can always save it for a week when you want to spend a little extra – or you may decide you don’t need to spend it at all and you can add it to your savings.
Invest now, but consider risk
When the economy is in a recession, investors often take refuge in defensive stocks, such as stocks for consumer staples. Demand for goods such as toilet paper and healthcare is “inelastic,” meaning that consumers will continue to purchase these goods even in the worst of times.
During an economic recovery, cyclical stocks, such as manufacturing and technology stocks, historically perform best, but only a true optimist would suggest that the economic recovery has begun. The recent market surge is a hopeful sign, but we’re likely to experience more market volatility in the coming months.
Some are also suggesting that investors invest defensively by keeping a greater percentage of investments in cash and bonds than usual, while acting aggressively with their stock holdings.
Which of these strategies will yield the biggest gains in coming months – or at least prevent deeper losses? No one knows. However, keep in mind that relying on any one type of investment to perform well is always risky. Diversification continues to be an important way to manage risk.
I don\’t think people will ever learn the lesson of not spending what you don\’t have. This is the exact reason that the great depression occurred, much like this current recession. People have short memories and are very shortsighted, so they will keep riding the high times when they occur.
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I personally find setting a budget for my family for every week is an incredibly useful tool. I am by no means strapped for cash, but it just makes good sense. Make sure you aren’t overspending and it keeps you always aware of how much money you have. Even the most successful bussinesses have budgets, so logically the most successful families would as well
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Why is basic economics not taught at the grade school level? I remember a course called Home Economics in middle school which seemed to have a gender bias for young women. Perhaps more men should take that class to understand the basic principles of saving, borrowing and budgeting finances for economic well-being.
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Has our economy become so complex that none of us can understand it anymore? If so, the job of government and of education should be to either outlaw or simplify financial products, especially investment products, so that ordinary people can make reasonable financial decisions. How can we be expected to understand concepts like Credit Default Swaps and Derivatives when the bankers themselves can\’t explain them? Fair disclosure should apply to these instruments so that everyone can be educated about the risks.
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Budgets are for children. We are all adults. We can responsibly manage our money without creating an allowance. I think as long as you have more than air between your ears, you can manage to control your spending and make sure you don\’t go broke. Just use basic common sense and things will work out alright.
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As much as columns like this are helpful, I think the key is teaching people about basic financial responsibility at an early age. Its not about allowances. Its about teaching people how to balance a checkbook, how to create a budget, and teaching smart investment tips from an early age. We should all have to take home economics in high school and we should all have to take something like “principles of home finance” in college. It would just make people so much better off
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Ever since money was invented, people have been looking for ever more complicated ways to push it around the system. The reason is simple. If Finance is made out to be very complicated, only a small number of people will understand how it works. The people who have that knowledge are in a very strong position. In the recent financial crisis, the people who ought to have been paying attention saw a wall of jargon and complexity and flinche and didn’t look any further. Education is crucial to both understanding financial instruments and getting a fair share of the economic pie.
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