Financial Literacy is About More Than Just Credit Cards

Any time you hear or see the words “financial literacy” it seems the topic immediately turns to credit cards: blaming banks and credit card companies for the woes of consumers.

Financial literacy is about more than just credit cards, credit card debt and how credit card companies prey upon poor, helpless individuals. Financial literacy is about education. It is about providing the necessary tools to make informed decisions when it comes to each individual’s personal financial situation.

Case in point: a recent survey by the business consulting firm Hewitt & Associates analyzed the behavior of 170 thousand 401(k) participants. The participants had one thing in common: they left their jobs and had to make decisions about what to do with the money invested.

The good news is that they had managed to establish a balance in their 401(k) retirement accounts in the first place -- an example of financial literacy -- however, the findings of the survey were more than startling, they were downright scary. Of the participants surveyed, 46% cashed out of the plan. That means they closed out their accounts, took the money, not knowing or caring about the ramifications of that decision. The following is the breakdown for each age group as it relates to cashing out accounts:
• 20-29 60%
• 30-39 47%
• 40-49 43%
• 50-59 34%
• 60-65 31%
• 65+ 31%
As good as this sounds -- and I am sure they were very excited with their new ‘cash windfall’ –doing so creates a series of problems.

First and foremost, the whole concept of establishing a 401(k) retirement account is to save money for retirement. By setting up an account early in life, one takes advantage of the two most important variables of investing/saving: TIME and COMPOUND INTEREST. In addition, there is also the advantage of tax-deferred growth.

Here is an example of what could be lost by cashing in a 401 (k) account. If the employee is in his/her 20’s with a balance of $5,000, leaving the money in the account at an earned average of 8% over 40 years will grow the balance to about $108,600. If the employee is in his/her 30’s with a balance of $10,000, leaving the money in the account at an earned average of 8% over 30 years will grow the balance to around $100,600.

By cashing out, participants not only abandon the basic concept of a retirement account, but are also subject to high tax penalties (up to 30% or more). This means the $5,000 yields only about $3,500 cash in pocket and the $10,000 around a mere $7,000. Spend the full amount prior to tax-time, and one can end up with a large tax debt due. In essence, one gives up $100,000 in future financial security for $7,000 or less.

There is no reason why people who have established a 401(k) retirement account should cash out the accounts when they leave employers and subject themselves to senseless taxation and compromised financial futures, only to start all over again when they begin their future positions.

This is a clear example of why financial literacy is about more than just credit cards. Financial literacy is about EDUCATION. Not just a formal school education is needed, but also life skills and workplace education.
Financial literacy must embody a holistic approach to personal financial planning to ensure that individuals can and will make well-informed monetary decisions. It is not just about credit cards. STOP focusing on credit cards! We need to think bigger picture.

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All of a Sudden, Americans Decide to Spend Less

It’s called living within your means.

A recent Los Angeles Times Article entitled, “Drop in Debt May Hamper Recovery” [September 9, 2009 by Jim Puzzanghera and Jerry Hirsch] stated that Americans owed $21.6 billion less, yes billion, in July. The $21.6 billion decrease was the largest decrease since the Federal Reserve began keeping records in 1943.

This figure was – get this – over 400% more than ‘analysts’ predicted. I have to ask, “What were the analysts analyzing that they would actually miss their estimate by that much?”

The article makes numerous points about how people are “skittish” about where and what direction the economy is going, and that people do not want to take on further debt. This data is a double edge sword as it relates to returning the United States economic condition to the once vibrant and positive environment to which we had all become accustomed. The fear is that the decreasing debt and increased savings will keep the economy from growing at the rapid pace is enjoyed prior to the recession, yet personal fiscal responsibility will benefit everyone in the long run.

The information, as I interpret it, reveals that people are being conservative; people are scared, and rightfully so. My God, look at what has happened to this country and its economic state over the last year: astronomical unemployment, increased bankruptcies and a foreclosure problem that seems to never go away. Americans have a reason to be concerned.

However, there is another school of thought that I would like to throw out there. Maybe, just maybe, this country is returning to an age old concept called, “Living within your means.” Wow! What a marvel concept that is. Because for so many months and years this country has been out of control with its spending. Why do you think that consumer debt had reached over $960 billion dollars? Because Americans made a conscious decision that if they wanted something, even if they didn’t need it, they were going to do whatever it took to acquire it. Which in most cases meant, charging it or as I like to say, “Borrowing money you don’t have.”

This could not be more evident than with the current housing crisis. People were buying houses that they couldn’t afford with loans they didn’t understand from loan officers who were “Taking while the taking is good.” Then, those same people had to furnish those houses, so they went out and purchased everything they needed with money they didn’t have. Now look where they are. All for what--to pursue the ‘American Dream’? In the famous words of Dr. Phil McGraw, “And how did that work out for ya?”

In a recent Yahoo Finance article, Mortimer Zuckerman said, ““The paycheck has returned as the primary source of spending.” I could not agree with him more.

Isn’t it sad though that a financial crisis the magnitude of the current recession, which is being compared to the great depression, had to come along and severely impact the lives of millions and millions of Americans for us to learn our lesson and finally decide that “keeping up with Joneses” does not lead to the smartest financial decisions.

We can only hope that this crisis will now be the lesson that will be shared with young adults to help them understand the importance of taking personal responsibility for their financial future.