I've always been a “why” person. “Why is it…?” “But why does that….?” “Why am I…?”... Why, why, why? So much so that I positively drove my parents nuts growing up. (Answering “I know.” to everything didn't help either. Sorry, guys.)
So, while trying to wade through the bullshit and banter of the final election debate the other night, my mind naturally wandered to “why”. Why are we talking about this issue? Why is it such a problem? Why hasn't anyone done anything about it yet? Why does he/she think that his/her proposal will fix it?
I think we can all agree that, to date, the majority of this election’s “substance” (if you can even call it that) has focused primarily on the who and the what. Who said this, who said that. Who hates whom. What is so-and-so going to say or do next. What will our country look like should he/she win.
Unfortunately, there hasn't been a whole lot of why in the debates (unless we’re talking about certain classified emails or so called locker room talk…). This is particularly true when it comes to the main topic of Wednesday night’s kerfuffle: the economy. Whether it's the crash of 2008, the Great Recession that followed, the widening wealth gap, minimum wage, the federal deficit, taxes, social security, or ballooning student loan debt, both sides are quick to blame the other, Wall Street greed, even immigration and foreign policy as causes.
But is there a larger issue at work here? A common thread that no one’s thought to point out yet? Something that could have lessened the magnitude of, perhaps even prevented some of these problems? A deficiency that can be quickly fixed, relatively speaking, and has the potential to create real, immediate change for the vast majority of Americans?
I think so. I think the WHY behind a lot of these issues is financial illiteracy.
Think about it. According to a recent study by the FINRA Foundation, nearly two-thirds of Americans can’t pass a basic financial literacy test. Two-thirds! How different would our country, our economy look if Americans had a better grasp on personal finance? If we weren't so held back by our involuntary investing ineptitude?
Let’s take a look.
Why did the market crash in 2008?
The short answer anyone will give you is “corporate-greed-driven subprime mortgage lending”. I know that's a mouthful, so here's the layman’s terms version: Too many people were approved for, even encouraged to take out loans for homes that they simply could not afford. That dynamic, coupled with some interesting securitizing practices on Wall Street, created an unprecedented domino effect in our economy.
But are the bankers really 100% to blame? Don't get me wrong, I in no way condone or defend those swindlers' actions, but it begs the question... Why didn't the borrowers stop and ask themselves “Can I actually afford this?” Because they didn't know any better. Their financial illiteracy made them place unquestioning trust in those skeezy mortgage lenders, many of whom were incentivized to capitalize on their ignorance.
Imagine if they hadn't been ignorant, though! If they had known how to calculate their own debt-to-income ratio, analyze their current and future cash flow, and evaluate whether or not taking on that large of a loan was a good idea! Or if they had better understood the implications of variable interest rate and balloon mortgages! Imagine how it all could have played out then.
Could we, as a nation, have lessened the blow, or even prevented getting ourselves into such a pickle if we all had simply understood money better? If Americans had been able to recognize that they were being hoodwinked, would they have paused and said “Wait a minute. This doesn’t sound right...”
I think there’s absolutely a case to be made.
Why has the wealth gap widened astronomically?
Throughout this election, there’s been a lot of pitting the lower and middle class against the wealthy. The 99% against the 1%. Main Street against Wall Street. And so far, the focus has primarily been on what to do about it. One candidate intends to redistribute wealth by taxing the rich. The other plans to lower corporate taxes so that, in theory, wealth can trickle down via reinvestment and jobs creation. But neither candidate has addressed why the wealth gap has gotten so out of control.
First, Americans lost their shirts in the crash, in part, because they didn’t understand asset allocation and diversification. Those in retirement or near retirement lost half of their nest eggs in a matter of days. They didn't know how to read their 401(k) statements well enough to realize that they were improperly allocated for their risk tolerance. There’s wealth gap problem numero uno - the inability to mitigate potentially catastrophic risks.
Wealth gap problem numero dos - an unequal rebound. Most finance professionals point to the Fed’s easy monetary policy and almost a decade of near-zero interest rates as drivers of wealth inequality. But what does that actually mean, and why has it allowed the rich to become richer while middle America remains stagnant? Because the wealthy understand how interest rates and compound interest work!
In a nutshell, low interest rates mean that money is “cheap”. Cheaper money means a higher relative return. And a higher relative return means more money made on every dollar invested. It really is that simple. And that's the kind of dynamic that companies and the wealthy have been able to exploit for the last seven years.
While the average American has been socking away money in non-yielding savings accounts, the wealthy have been investing heavily and maximizing their net returns. Using their money to make more money. That has allowed them to recover significantly faster and to a substantially greater degree from the crash than the average person.
Imagine if all Americans had been able to recognize that opportunity, and had known how to take advantage of it. Everyone could have ridden the wealth creation wave together instead of just the knowledgeable few at the top.
Why are we on the brink of a student loan crisis?
When it comes to student loans, most of the election chatter has revolved around making college more affordable and accessible for current and future students. But what about those who have already graduated? What's going to be done for them? And more importantly, why do millennials need help at all? Why is our generation so incredibly bogged down by student loans?
My honest opinion? Aside from not understanding loans and interest at a fundamental level, I think it’s because millennials aren't being realistic about their potential ROI, or return on investment.
Quick lesson: One key thing everyone should know about debt is that there’s good debt and bad debt. Most people are familiar with bad debt - credit card debt being the chief example. You rack up bad debt when you buy things you can't afford to pay for, now or in the future. Good debt, on the other hand, is used to pay for things that are likely to generate income for you down the line. Since college graduates statistically earn more money than non-degree holders, student loans are commonly lumped into the good debt category.
That categorization, however, is misleading. The harsh truth is that not all degrees and universities are created equal. For example, it probably doesn't make much financial sense for someone to go to a school that costs $50k per year when the degree they earn leads them into a $40k career. But it’s happening. A LOT. As college tuition costs skyrocket, students are graduating with high tens, sometimes hundreds of thousands in debt, then starting a career that pays them pennies on their invested dollars.
If students were able to run a simple ROI calculation before signing on the dotted line, would they still make the same decision? If the average salary per degree holder was listed next to each college major like calories are at fast food restaurants, would students choose the same degrees and alma maters? I doubt it. Or at least they would sincerely think twice.
Even other issues like taxes, the federal deficit, and minimum wage have financial illiteracy underpinnings.
Given how prevalent a topic financial literacy has been in the news lately, I'm frankly shocked that neither candidate has thought to mention it. In past elections, education and public schools have taken center stage. So why aren't the candidates addressing this big, green elephant in the room? Why isn't financial literacy a larger issue for them? How, if at all, do they intend to help the movement that I and many others have started and care so deeply about? Will they help middle America ReisUP and take control of their financial destiny, or is that entirely on us?
My hope is that, one day, personal finance becomes a required part of every high school and college curriculum. I imagine the future for all Americans would be brighter because of it. Until then, a girl can dream (and lobby her representative for change).
One thing for sure is that it’ll be interesting to see what happens to our economy during the next presidential term. Whoever wins is inheriting a fragile system, one that's fueled by the spending habits of the uneducated masses and controlled by the legal manipulations of a significantly more adept few.
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What do you think? Would we be in the same financial predicaments if financial literacy were higher prioritized? Sound off in the comments!