Financial Literacy Matters

If we really take the time to examine the core reason behind our recent economic turmoil, we can see the reality of the situation is actually quite different from what the pundits say.  Most of the press coverage points the finger of blame at investment banking firms or government leaders who did not really understand the consequences of promoting mortgages for “everyone.”  We want to believe someone in Washington or New York should take the fall for billions in bad loan decisions.  The truth is, most of the blame falls squarely on us as American consumers.  The government had good intentions, they wanted to help people own homes, and wanted to spur on the economy by loosening up lending restrictions.  The bankers were happy because they made lots of money generating new loans and millions of re-finances.  And it all looked pretty good – right up until it didn’t…

To put it into a metaphorical context, who would you blame if someone had a drug problem – the dealer or the addict?  For some reason, we want to leave blameless millions of people who signed up for mortgages they really could not afford.  These people bit hard on the advice of mortgage brokers who told them no money down and a variable rate would be OK.  “Why rent” they said, “when you can own your own home for the same kind of payment.”  Sadly, many honest Americans are now learning the hard lessons they should have learned before the pain.  Interest rates went up and loan payments with them, hundreds of dollars at a time in most cases.  Additionally, home ownership comes with several other expenses not required from a renter and many people simply did not factor this in.  The result was a recipe for foreclosure. 

The real cause of this mortgage crisis is a complete lack of financial literacy education.   By the way, this cuts across socioeconomic levels as evidenced by the formerly “well off” people that over-extended themselves, thinking the value of their home could only go up.  A financially literate buyer would have been conscious of the fact that variable rate mortgages would likely go up.  They would have known that buying a house they could barely afford would be a problem if the economy turned down at all.  The financially literate person would have been more conservative, provided an ample down payment, and would have bought only as much house as they could afford in the down times.  So what do we do from here?  How do we ensure this does not happen again…and again.  The government will try to legislate changes to mortgage industry, Wall Street will apply new business rules in an attempt to maintain order, but lost in all of this retooling will be the need for financial literacy education – the very thing that would guarantee it WILL NOT happen again.

My suggestion is that we start by educating the generation of kids coming up now in a life skill they can really use.  Instead of focusing on teaching them subjects that will likely never get used, let’s teach them something every one of them will surely use.  Let’s use technology to reach them because they love to learn this way.  We can expose them in school to simulated environments where they learn by doing.  We have the ability to really make a difference by focusing them on the importance of financial literacy from their youth.  We have the ability to reverse our collective negative savings rate.  We have the ability to lower the escalating bankruptcies of college kids.  We allowed a couple of generations of home buyers loose without even the most basic training on how to buy a home responsibly.  We also let them loose without the understanding of how important saving for a rainy day and low consumer debt is to financial security.

This is what drove a group of us to build an online banking platform and corresponding system for schools called iThryv.  We want to ensure we do not produce another generation that makes financial decisions out of ignorance and illiteracy.  By partnering with schools, banks, parents and kids on one web based platform to handle money and promote financial literacy, we hope to empower the next generation and prevent an economic crisis like this from ever happening again.

Here are a few observations on how to better reach young people on the subject of responsible money handling.  Kids need to be taught a broader concept of what money is and the role it plays in our lives.  Instead of just allowing them to get a viewpoint that money is a method for acquiring fun, they need to be shown money has the ability to provide safety and can be used to earn more money.  They also need to learn the concept of discipline because simply understanding financial literacy does not guarantee they will actually practice it.  In most cases, people know the right things to do; they just do not have enough discipline to do them.  Young people learn best by participating in small-scale simulations.  They need to see, and experience what good decisions will bring them, and this must be hands-on so they retain the knowledge. 

If you are looking for additional resources on this topic, here is a list of websites that provide information and exercises on financial literacy: