As we embark on a new school year, it seems appropriate to tune our September blogging activities into related educational themes. Take financial literacy, for example. What does it really mean, and how do we instill it in our children … or, to challenge conventional thinking, should we?
Financial Literacy: A Quick Take
A quick Google search yields any number of posts, columns and resource centers offering basic introductions to financial literacy and related subjects. To name a few, there’s the American Institute of CPAs® Financial Literacy website, as well as the Community forum at Mint.com, either of which can help you familiarize your children with the essentials of earning, saving, spending and investing. We also highly recommend William J. Bernstein’s excellent Kindle booklet, “If You Can: How Millennials Can Get Rich Slowly.” It could well be the best $0.99 investment made by or for a young adult embarking on the road to financial independence.
Another edgy, but powerful resource is Ramit Sethi’s I Will Teach You to be Rich, created by a young entrepreneur, for young entrepreneurs. There are gems of financial insights found here, but be forewarned: Sethi pulls no punches and his narrative can be salty!
An Overdose of Reality?
On the flip side of the coin, many others share gloomy statistics indicating that despite every effort, Americans of all ages have got a long way to go before receiving even a tarnished gold star on our financial literacy.
It’s not hard to find those who question how much – or if – increased financial literacy helps families build wealth. Some propose that a little knowledge may be more dangerous than none at all. If a dose of literacy instills a false sense of security in one’s investment skills, it can lead to an overdose of confidence (one of the behavioral foibles we covered in July–August), which can result in excessive, expensive trading and other investment mistakes.
For example, DALBAR’s 2014 Quantitative Analysis of Investor Behavior (QAIB) press release speaks volumes in its bleak, eight-word title: “2014 DALBAR QAIB Highlights Futility of Investor Education.” Or, for the ultimate curmudgeonly take on the subject, consider Jason Zweig’s May 2013 post, “Financial Literacy Month Is So Over.”
Teach Your Children Well
Call me an eternal optimist, but even in the face of daunting statistics, I’m not yet ready to give up the ghost on financial literacy. Like investing, the tenets of financial literacy are relatively simple, such as:
- Avoid debt, unnecessary costs and excessive spending.
- Understand basic financial principles like compound interest and the relationships between risk and reward.
- Perhaps most important, learn how to spot and avert the most common behavioral mistakes that lead to poor financial choices, such as Sunken Costs, Confirmation Bias, and the particularly pernicious Herd Mentality.
Simple, yes. But not easy. It’s hard to accept and adopt good financial habits. It can be tempting instead to charge that unaffordable expense; postpone saving for retirement because it seems so distant; and, as Sethi points out in “The 5 Groups to Blame for our financial illiteracy,” blame others for our own money mistakes. No wonder the statistics are often disheartening.
It doesn’t have to be that way. Sethi concludes, “Do you need to be the Iron Chef to cook a grilled-cheese sandwich? No, and once you make your first meal, it’ll be easier to cook the next most complicated thing. The single most important factor to getting rich is getting started, not being the smartest person in the room.”
So what are you waiting for? Give us a call if we can help.
For more information or to set up a consultation, contact Pathway Financial Planning at or email email@example.com.