Financial Education Builds a More Stable Economy

For the fourth 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, we had the covid pandemic and the ensuing lockdowns. Now in 2022, we’re starting to feel the side effects of the medicine we gave our economy during the lockdowns.  

After economies all over the world were forced to shut down and trillions of dollars were packaged for relief, we’re seeing both supply-side and demand-side inflation.  Interest rates have been hiked at the fastest rate in decades to combat sustained inflation, the stock and bond markets are in disarray, and everyone is predicting a 2023 recession (if we aren’t already in one).  

While the cause is different this 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. Many professionals and billion-dollar companies have shown themselves to be mere weeks away from complete financial insolvency during the pandemic.  Relief packages for many industries were necessary to keep them from being completely washed out.  Restaurants, most owned as small businesses, can’t expect to weather months-long periods of demand destruction or labor cost spikes unaided.  However, massive corporations should be on a more stable footing.  

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. The U.S. taxpayers were on the hook for bailouts due to corporate mismanagement and short-sighted financial governance.  Too many corporations essentially live paycheck to paycheck.

Many factors converged during the pandemic to supercharge risky investing including, the lack of sports, quarantines, government relief checks, the internet, and more.  Not to say that risky investing didn’t exist before, but never on the scale we have seen lately.  12-year-olds with a Robinhood account YOLOing into stocks live on TikTok wasn’t a normal thing a few years ago.  Dave Portnoy of Barstool Sports picking ticker symbols out of a bag of Scrabble letters wasn’t watched and mirrored by millions of people before 2020.  These activities are part of the public consciousness partly due to access and democratization, but also due to lack of proper financial education.  If you don’t know it's wrong, it can feel like a “1 secret trick” to suddenly getting wealthy.  Investing and managing your finances prudently is boring.  Trying to teach people the right way during a free-money-fueled pandemic carnival is impossible because it doesn’t promise immediate upside.  

As precarious as risky stock investing can be, the real dangers of stunted financial literacy come from the low-lives who prey on people who just don’t know any better.  The amount of fraud, scamming, and financial theft has skyrocketed in the past couple of years because of the amount of money sloshing around the world.  When people have a lack of understanding, “too good to be true” doesn’t necessarily apply if it all seems like voodoo magic within some financial gobbledygook. When the inevitable downturn or rug pull happens, people can be ruined.  The people who have access to advisors, financial professionals, and other support are least likely to lose and most likely to be able to financially survive.  It is the people who can afford to lose the least, that end up losing most often.  

While investors are not to blame here for being the victims of fraud or misinformation, they could know better if we dedicate ourselves, our schools, and our culture to financial literacy. The widespread lack of financial literacy means that people like Grant Cardone or Kim Kardashian can leverage their position as media darlings to push unsuitable or borderline illegal investments to unsuspecting individuals (as both did during the pandemic).  “Gurus” the internet over can promise and promote ridiculous financial schemes to enrich themselves at the expense of others. Instagram and TikTok are 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.  

We Need A Cultural Shift

For a myriad of reasons (the potential for economic shock and job loss being two of the largest and most relevant), we need to build a culture that encourages, embraces, and reinforces 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 skills they need to budget, save, invest, and understand how our complex system of credit and lending works will change lives. Surveys repeatedly show that employees who have better financial literacy are more productive, have less stress, and stay with their employers longer.  

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 manage 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. We can’t afford to ignore the fact that more responsibility falls on the individual to secure their own financial future. 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. Gen Z is turning to a mix-bag of quality content through YouTube and TikTok.  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. 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.