March 10, 2016


Financial Literacy ›

Is poor financial literacy the cause of our failing middle class?

Most Americans are struggling financially. Over 75 percent live paycheck to paycheck without an adequate emergency fund to see them through a job loss or a medical problem. 27 percent have no savings at all.

Many people blame these struggles on the economy. While it's true that wages in many sectors have remained stagnant while costs have continued to rise, the economy alone is not to blame for the financial struggles of the middle class. Too many Americans never learn key financial concepts that can get them through difficult times. With the current financial pressures that can lead people into debt, financial literacy is more important than ever.

Budgeting vs. Increased Ways to Spend Money

There are more ways than ever for a household to spend money. Just a few decades ago, air conditioners and laundry machines in single-family homes were uncommon. There were no cell phone, Internet, or cable bills. And, how about those miscellaneous monthly subscriptions that are charged automatically so you don’t even think about them. Vacations were road trips to a national park or the beach not flights to Europe or an expensive theme park.

At the same time, home economics courses have all but disappeared from public schools. Students aren't taught basic budgeting or personal finance skills. All too often these students enter their adult journey ill prepared and lacking a deep understanding of economics and finance at a time they need it the most. 

Without a lesson in budgeting and priorities, everything becomes a need and a must-have. 10 percent of an entry-level salary can quickly disappear by signing up for cable TV, the highest speed Internet service, an unlimited phone data package, and the latest streaming services. Add in student loans and rising household costs, and many people are in the red before they even think about saving for the future.

Time Value of Money vs. Debt Culture

Part of what forces budgeting to the backseat is that the time value of money is no longer widely taught. People simply don't understand that a dollar invested today can turn into two or three by the time they're ready to buy a house or retire. They also don't understand how credit card interest is doubling or tripling the cost of what they bought on credit, while the payments prevent them from putting money aside for the future.

While this type of spending behavior might have been frowned on in the past, it is part of modern culture. Credit cards are viewed as "free" money or a license to spend whatever credit limit the consumer could get approved for.

How to Turn These Trends Around

While taking on debt might have been somewhat sustainable during a time of slow inflation and regular wage increases, it's clear that these patterns must be reversed. In a time where the job market is less certain and job changes are more frequent, consumers must take a more active role in creating their own financial stability.

Federal Reserve Chairman Ben Bernanke alluded to this in a 2012 speech.  “Consumers who can make informed decisions about financial products and services not only serve their own best interests, but collectively, they also help promote broader economic stability.”

While political discussions over how to strengthen the economy are important, consumers need to be given the tools to take as much control over their financial lives as possible. No matter your age group, the intersection of economics and financial literacy is real.

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