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EJ's Economic Edits - Economics of Financial Literacy

| April 25, 2017
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April is National Financial Literacy Month. To help celebrate, let us take a deeper look into: 1) defining what financial literacy is, and 2) the potential economic benefits to both individuals and the larger macro-economic environment.  Financial Literacy means that one understands how money works in the world, as well as how an individual can manage what he or she has earned. This is not a topic for adults only. It has just as much impact on children when introduced at a young age, an initiative that our firm proudly supports.  After all, habits in life that are learned in our youth have a strong tendency to carry through as we age.

Our government too is also concerned about our financial literacy. Understanding the value of a dollar is critical for a sustainable society to thrive over the long term. In fact, in 2010 as part of the Dodd-Frank Wall Street Reform and Consumer Project Act, the Consumer Financial Protection Bureau (CFPD) was created. This bureau works off a three prong approach to first empower consumers to make wise financial decisions, second to enforce against those companies that do not play fair and abuse the law and finally to educate, not only consumers, but companies and the responsible role they too should play in the whole process.

Society is bombarded by new complex financial products on a daily basis and it would be virtually impossible for the average educated individual to fully understand all of them.  Today individuals increasingly are faced with greater responsibility to make important financial decisions. One example that we see with almost every client is the effective management (or lack thereof) of a company sponsored retirement plan (e.g. a 401(k)). In most workplaces there is a lack of professional advice that is available to manage what is often an individual’s largest asset.  Add in all of the different options and programs for college savings, IRA choices and other alternatives, you might be forced to quit your day job just to stay educated on the host of programs and products available. (Editor’s note: This may not be a very financially literate thing to do).

Although challenging, we all know why it is important to be financially literate in our own lives.  By not having a clear understanding of the assets we gain (i.e. checking and retirement accounts), or the liabilities we must manage (i.e. credit cards, mortgages), we are causing unnecessary financial stress for ourselves and our families.  But what about at the macroeconomic level? According to past Federal Reserve Chairman Ben Bernanke, the real burden falls on the general public to be financially literate.  The Federal government can only do so much with its fiscal and monetary policy to keep the economy on track.  If the populous does not understand its motivation for action nor the policy objectives, their efforts will all be in vain.  Educating the public, according to Bernanke, is the key to maintaining a stable economic and financial system.

Would you like to test how financially literate you are?  Each year FINRA, the organization that is dedicated to investor protection through the regulation of broker dealers, puts out a short quiz to help gauge one’s financial capability and although on the rise, let us say we all have some work to do.  To take this short quiz to see where you stand, click here.

So what can we do to increase our own financial literacy? Although we all can’t be expected to be experts at everything we do in all areas of our financial lives, there are certain steps that we can take to improve it. At the core is education, both in school and at home. We encourage all of our clients to get this discussion started early with their children and spouses, incorporate budgets, track spending habits and have a solid understanding of one’s expenses. Today we live in an almost a cashless society that is dominated with debit and credit cards. These seemingly tools of convenience, make it difficult at times to fully understand the true financial impact of our purchasing decisions. Heard around my house often from my nine year old son is, “Dad, can’t we just put it on the card?” But who can blame him, when we arrive at the super market, fill up a cart full of groceries and simply swipe a card and off we go.

Another option is to seek out the professional advice from a trusted adviser. There are also some great resources that can help individuals determine the level of how much you need to know to make reasonable and educated decisions on money matters that do not cause long term negative effects to our own lives and potentially the overall economy. We need to understand the magnitude of our decisions and how they could have farther reaching effects outside just our own homes.  When you feel overwhelmed, a true financial planner can assist in looking at all areas of your financial life collectively. Remember not to be too critical of what you don’t know, there are always resources available, you just need to know where to look. Until next time, keep the faith.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

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