THE FINANCIAL LITERACY DILEMMA

by Christopher A. Mattern, CFP®
FINANCIAL LITERACY STATISTICS
  • The majority of young adults receive no financial education before entering the workforce
  • 60% of adults admit to having no budget
  • Fewer than half of Americans spend less than they make or have savings for emergencies
  • Over one third of Americans pay only the minimum credit card balance
  • 76% of college students wish they had more help to prepare for their financial futures
  • 57% of college graduates plan to move back in with their parents
  • 62% of college graduates expect to leave school with an average student debt in excess of $27,000
  • More than 19% of American households have college debt
  • 85% of Americans are concerned about being prepared for retirement
  • The median retirement account balance is $3,000 for working-age households and only $12,000 for households approaching retirement
Sources: S&P Global Financial Literacy Survey; Douglas McCormick, Family Inc.

WHAT IS FINANCIAL LITERACY AND WHY IS IT A GROWING PROBLEM?

Financial literacy is the convergence of financial, credit, and debt management along with the knowledge that is necessary to make financially responsible decisions that are crucial to our everyday lives. It is something that we utilize on a daily basis, whether we realize it or not. However, the lack of knowledge and clarity when it comes to the subject of financial literacy is alarming. To the left, you can see some of the worrisome statistics pertaining to financial literacy in today’s world.

FINANCIAL LITERACY IS MORE IMPORTANT NOW THAN EVER BEFORE

Due to a number of societal trends, it is apparent that financial literacy is becoming more important to each and every one of us. Consumers are now tasked with taking on many more financial decisions than they once did. For example, many companies have shifted from retirement programs such as pensions to defined contribution plans (such as 401(k)s), where the employee bears the risk of life expectancy as well as investment performance. On the subject of life expectancy, simply put, people are living longer. The time between retirement and death has tripled over the past half century, so today’s generation is more at risk of outliving their retirement savings. Healthcare costs have handily outpaced inflation and long-term care is more likely to be required in the future.

Today’s youth also shouldn’t be banking on help from the government, as many government aid programs are unsustainable and may not be available in the future. Additionally, the investment and savings options available in today’s market are more complex than ever. Banks, brokerage firms, credit card companies, insurance companies, mortgage companies and other financial service firms are all competing for new assets, creating mass confusion for the consumer and furthering the need for education in these areas.

RCL’S PERSONAL FINANCIAL PLANNING FOR LIFE EVENTS
  • New Job
  • New Home
  • Marriage
  • Children
  • Divorce
  • Contemplating Retirement
  • Turning Age 65
  • Retirement
  • Grandchildren
  • Death of a Loved One
  • Loss of Job
  • Board Membership
  • Dramatic Change in Income



THE RISKS OF FINANCIAL ILLITERACY

The risks of being financially illiterate are real and can have a profound impact on a person’s life. Right off the bat, the inability to understand and assess financial situations handicaps anyone that is seeking to become financially secure. This is evidenced by factors such as slow savings rates, the potential for stock market panic, and increased potential of losses due to fraud. Financially illiterate people are prone to making costly financial errors, such as having high debt loads, having income that is not properly accounted for, having a gap in insurance coverage, having a lack of investment diversification, not properly utilizing tax-favored investments, not having an adequate emergency fund, and finally not having a clearly defined set of personal and financial goals.

 

5 TIPS FOR IMPROVING FINANCIAL LITERACY
  1. Become familiar and comfortable with your household finances
  2. Create a practical budget and stick to it
  3. Initiate a financial dialogue within your household and discuss it often
  4. Learn the difference between the good and bad types of debt
  5. Ask for expert advice: talking to an experienced advisor can help you understand how to create a comprehensive plan and appropriately budget, save, and invest


WHAT CAN BE DONE TO IMPROVE FINANCIAL LITERACY?

Given the risks outlined above, it is important to promote and improve financial literacy. To the left, you will find RCL’s “Life Events” list, which portrays times when it may be important to make changes to your financial plan. Below that list, you will find five tips which may help you improve financial literacy within your household.

We at RCL Advisors have also developed an all-encompassing curriculum for younger people to teach them a variety of financial planning subjects.  This curriculum, which includes an annual financial checklist, is geared toward helping the next generation make prudent financial decisions that will shape their futures. In addition, there is a government sponsored website, www.mymoney.gov, which outlines the five principles of basic money management: Earn, Borrow, Invest & Save, Spend, and Protect.

 

We would love the opportunity to speak with you and/or your family about any financial planning questions that you may have. Please contact your RCL Advisor to allow us to help.

Christopher A. Mattern is a Certified Financial Planner (CFP®) and Financial Consulting Manager at RCL Advisors, LLC

CONTACT US

RCL Advisors, LLC

60 East 42nd Street Suite 2400
New York, NY 10165
212-452-5900
www.rcladvisors.com