For the third time in two decades, most Americans are facing growing financial hardship due to another economic shock. In 2001 it was the Dotcom Bubble and 9/11. In 2008 it was the Housing Bubble. In 2020 it might feel like just about everything is going wrong, but the major offender is the Covid-19 pandemic. Economies all over the world were forced to shut down and jobs were erased by the millions here at home. While the cause is different from the last time, (and different from the time before that, too) the foundation of America’s household and corporate balance sheets are once more revealed to be built on shaky ground. When professionals and even billion-dollar companies are mere weeks away from complete financial insolvency without a steady stream of cash, something must change.
Take for example the U.S. airline industry. Over the past decade, the major airlines have collectively used the vast majority of their free cash flow (96% as reported by Bloomberg) not to invest in new equipment, pay down debt, or even pad their balance sheet. Instead, they bought back their stock which has greatly enriched shareholders but left the airlines at the mercy of COVID-induced demand changes. Now, the U.S. taxpayers are on the hook for bailouts due to more corporate mismanagement.
Even more egregious, we have Grant Cardone, a self-proclaimed “#1 Sales Trainer” and "real estate guru". He is being sued for misleading investors and promising returns he couldn’t produce. For years, he has been sucking in money from novice investors who believe they could be one of the success stories and quit the rat race. Unfortunately, some promises are too good to be true. When Grant chose to court small investors to raise money, he implied that he wanted to give a piece to the little guy. In this case, the little guy should have been wary because if Grant was as big of a player as he led people to believe, he would have had large institutional investors waiting in the wings to scoop up these deals. Instead, he and many others are preying on regular people who just want a ticket to a better life.
While his investors are not to blame here, Grant’s victims could have known better. The widespread lack of financial literacy means that people like Grant can promise and promote ridiculous financial schemes to enrich themselves at the expense of others. Instagram is full of examples of savvy fraudsters taking advantage of naive and hopeful people who are just trying to make some extra money. These “gurus” depend on the fact that their audience doesn’t have the knowledge to see through their real estate, day trading, or cryptocurrency schemes.
For a myriad of reasons (the potential for economic shock and job loss being two of the largest), we need to build a culture that encourages, embraces, and actively teaches proper financial literacy. At a minimum, we should be teaching people about the unforced errors in their everyday finances. In the mildest scenario, someone might simply overspend or get bitten by a nasty credit card interest rate. In the worst case, they could fall victim to fraud and lose everything. In either situation, and everything in between, teaching our students and adults how to master their monetary lives can transform how our country’s economy will run bit by bit. Imagine if a decade ago, instead of cascading mortgage defaults we had a mild recession because homeowners knew the risks of adjustable-rate mortgages and how to calculate the appropriate amount of income to spend on housing. Imagine further, a world where our leaders themselves knew that their constituents not only paid attention to the country’s finances but understood how they should work.
This isn’t an impossible world to imagine. Can we expect everyone to get a degree in economics or finance? Definitely not. What we can do is impart basic principles of financial literacy to high school and college students and reinforce that knowledge in the workforce. 21 states offer some form of financial literacy as a mandatory part of the high school curriculum, but only 6 of those states commit to a stand-alone course on financial literacy. The other 15 incorporate basic financial lessons into another course. Top-tier universities are starting to pick up the slack, but for every university offering basic financial literacy courses, there are many more that do not. For those individuals who don’t go to a top-tier school, or don’t go at all, they are left even further behind. Simply teaching students the tools they need to budget, save, invest, and understand how our complex system of credit and lending works will change lives. Surveys repeatedly show that financially literate individuals are more likely to save for retirement and less likely to have credit card debt. When these individuals do take on debt, they are more likely to pay it off quickly and less likely to use high-interest lending options.
We are failing to prepare our students for this real-world responsibility. Worse still, we are shaming them when they don’t know how to avoid financial challenges properly. These underprepared students turn into underprepared young adults entering the working world. Most employers take no responsibility to offer financial literacy lessons to their employees either. If we wait long enough, these young adults today will repeat history and be the same underprepared retirees who have worked their whole lives and have little to show for it. Just last week, Marketwatch quoted Teresa Ghilarducci, Professor of Economics at The New School for Social Research, who said that roughly half of all Americans 55 or older may retire in or near poverty because of the damage from the COVID recession. We can’t afford to ignore that fact more responsibility falls on the individual to secure their financial future due to pensions disappearing and social security being benefits changing. Now is the time to think ahead and arm the next generation with the financial tools to succeed in today’s complex world.
It is no surprise that over the last decade private institutions have tried to fill the vacuum left by our formal educational institutions. Young Millennials had to seek out and pay for courses on "adulting" to get a taste of these important life skills. If we give people the tools to understand and manage their finances well, fewer people will be in a precarious position when a crisis hits. Lessons on the proper use of credit, and how to save, invest, and budget aren’t magic, but they might as well be when you realize how much they change people’s lives. Properly managing your money isn’t necessarily going to make you rich (although it certainly can), but what it will do is make it more likely that you will have a safety net when life doesn’t go exactly as you planned.
We owe every single person the opportunity to understand and capably manage their own financial lives and it needs to start now. While we are in the middle of the current crisis, we should be preparing for the next one. There’s an abundance of excellent organizations like Junior Achievement or the National Endowment for Financial Education (NEFE) which offer focused financial education curriculum available for students, teachers, and employers right now. We have the resources available, but we need to have the will to act. This won’t happen by accident; we need to demand these changes in our communities, schools, and workplaces.
The best time to plant this tree was during the last financial crisis. The second-best time is right now.
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