Develop Your Financial Literacy

Should we teach financial literacy skills to students of any age — teens, adult learners, etc.? Two well-known financial writers — Matt Levine and Felix Salmon — think it’s a waste of time and rife with conflicts when taught by the financial services industry. I agree.

Here’s a priceless snippet from Levine quoting a paper cited in Salmon’s article.

The purest possible mechanism of “financial literacy” is (1) a banker comes to your school, (2) the banker tells you that to have a good life you need to start depositing money in the bank, (3) your teacher nods approvingly, (4) you believe them and deposit money in the bank and (5) the bank steals it. Here is an incredible anecdote that Salmon quotes from Lauren Willis of Loyola Law School:

To teach children about the banking system, a U.S. primary school walked its students to a local bank where each opened a savings account into which each deposited $5. Implicit in this activity is the message that the bank is trustworthy. Another bank then acquired that bank and charged all low balance accountholders a monthly maintenance fee that wiped out the children’s savings. The children may have learned a more important lesson about the financial sector than the school intended.

If financial literacy classes are ineffective, what is the solution for those not comfortable with their personal finance skills?

Below are my suggestions on how to become financially savvy throughout life. Some of these lessons you may learn the hard way and others may come naturally but the sooner you learn them, the better off your long-term net worth will be.

1. Be wary of the financial services industry.

The anecdote above speaks volumes. The financial services industry is fee-driven — e.g., out-of-network ATMs, monthly maintenance, overdrafts, late payments, mutual fund sales loads and expense ratios, administrative expenses, financial advisory services, variable annuities — and it’s a zero sum game. Every dollar of their fee income is a transfer of wealth from you to them.

Understand the fees you pay and minimize them. Easy to say but harder to do as most of the fees are well-hidden. However, if you don’t pay attention, they’ll take a substantial bite out of your lifetime net worth and you’ll never even know.

Don’t be the reason bankers wear bespoke suits, walk on marble floors, and hang expensive artwork on their walls.

2. Always be saving.

Create a sustainable savings mindset:

• Be tax- and cost-efficient. All the acronyms — 401Ks, IRAs, HSAs, ESPPs, and 529s — are good choices.
• Sh*t happens. Have 3 to 6 months of living expenses saved in an emergency fund. Until you reach that level, restrain discretionary spending. Start now if you’re short.
• When you get a windfall — e.g., tax refund, work bonus, birthday gift, inheritance, pandemic stimulus check – save it.
• If you’re tempted to spend money that’s in your checking account, transfer it to a savings account and use mental accounting buckets for your various savings goals (house, vacation, college, wedding, etc.) if that works for you. Make it inconvenient to move the money back.
• Use payroll deductions to automatically save — you won’t see the money and you won’t miss it.
• Lastly, shovel money into a Roth IRA every year you qualify.

3. Long-term planning is an unnatural act.

I’m no neuroscientist but it’s pretty clear that human brains have not evolved to prioritize long-term planning. We live in the here and now and there are lots of sensible survival reasons to do so.

However, if you want to be prepared for future emergencies, embrace new opportunities, and achieve a financially successful retirement, you need a long-term focus. If necessary, trick your brain to ensure this gets the required attention (see #2). There are no do-overs when it comes to saving for retirement.

4. Manage your spending.

Develop a rhythm that you can sustain for a lifetime:

• Track your total spending — know how much you spend each month and if you’re on target.
• Live within your means — all the time, not just when it’s convenient.
• Pay your bills on time and in full.
• Avoid credit cards entirely if you can’t/don’t pay them in full every month.
• Restrain social spending. Peer pressure, FOMO, and YOLO create powerful spending pressures. Keep those wolves at bay or they’ll eat you alive.
• Lastly, don’t let your spending grow proportionally with your income or you’ll never get off the hedonic treadmill. Springsteen sang his version of this:

  Poor man wants to be rich
  Rich man wants to be king
  And a king ain’t satisfied
  Until he rules everything.

5. Fear debt.

Debt makes you financially fragile so avoid it whenever possible.

• Don’t borrow for anything other than education, a car, a home, and true emergencies. If you can’t pay in full for furniture, vacations, weddings, engagement rings, honeymoons, gifts, or other purchases, hold off until after you’ve saved the money to purchase them and pay in full.
• Don’t co-sign for anyone else’s financial obligations unless you have no choice. You’re committing yourself to take full responsibility for the repayment of the debt.
• Don’t over-borrow for your education or your kids’. Student loans are dangerous as you may spend your whole life being shackled by the debt. Your teenage kids won’t understand this commitment so be the guardrails they think they don’t need.
• There’s more to a loan than just the lowest rate. For example, mortgages have fees such as points and closing costs, student loans offer differing re-payment options, car leases have hidden trap doors, and lenders vary in their levels of customer service and flexibility. Fully understand what you’re committing to.

6. Being debt-free is financially resilient.

We can’t fully control how our life will unfold and don’t know our future career trajectory, income, medical expenses, nor our departure date from this earth. That’s a lot of unpredictability to manage but you can be sure there will be some challenging moments.

To embrace uncertainty, be financially resilient. What’s the best way to do that? Avoid debt (see #5) and maximize savings (#2) to have a cushion. And, keep developing professionally so you always have options to earn a living. When the inevitable setbacks happen, be in a position to bounce back.

7. There are no free lunches.

High investment returns never come without high risk. That’s as sure as the law of gravity. Steer clear of any investment opportunity that sounds too good to be true. Surely it is.

8. Teach your children well.

Even with your imperfect financial skills, your kids can learn a lot from you so don’t make money a taboo topic in your household. I have more suggestions about children here.

9. Align with your partner.

When you’re in a relationship, these lessons are doubly true. Have some occasional conversations to make sure you’re on the same page. It won’t be the most romantic part of your week but it will pay dividends later.

When you learn these lessons, you’ll be the Wolf of Wall Street.