Ask Carrie: Financial Literacy—A Powerful Tool for Social Justice in 2020 and Beyond
Dear Readers,
Today I’m departing from my usual format to share with you my greatest wish for the new year and the next decade: that as a nation we will come together to unleash the tremendous power of financial literacy.
When asked about financial literacy, most people think of a classroom with lessons in budgeting, credit and debt, and perhaps even an introduction to investing. And they’re right—a financial literacy course can teach all of that.
But there’s so much more. At its core, financial literacy is about extending equal opportunities to all, regardless of socioeconomic background. It’s about breaking down the barriers between the haves and the have-nots. It’s a powerful tool for social justice that can arm people of all economic backgrounds with the knowledge, skill, and training they need to thrive in an increasingly complicated and competitive world.
Think, for example, about the student who grows up believing that college is off the table because it’s too expensive. Or the young worker who’s denied a job because of a poor credit report. Or the woman who’s stuck in an abusive relationship because her husband controls the family money.
These are just a few examples of the insidious ways in which a lack of financial literacy can undermine a person’s full potential. And by extension these examples also illustrate the opposite—the life-changing power that can come when an individual knows that they have the skills and knowledge they need to make the best decisions for themselves and their loved ones.
Financial Literacy and College Access
I was discouraged to hear from the organization Prosperity Now that a significant percentage of low-income families have decided that college is not a possibility by the time their child is only three years old.
I can’t help but compare this child’s opportunities to those of the child from an affluent family who at the same age is being groomed for entrance into a prestigious preschool that will then act as a launching pad to an elite education. The doors of opportunity open up for one child, and slam shut for the other. The disparity is striking and unacceptable.
According to a study by finaid.org, at least 1.7 million students fail to file the FAFSA financial aid form each year because they incorrectly believe themselves to be ineligible. Others get in over their heads with debt, not understanding the size or timeframe for the payments. And in the worst case of all, almost 4 million students a year drop out of school without graduating, saddled with debt without a degree.
Financial Literacy and Workforce Readiness
Did you know that a poor credit report can prevent you from getting a job, getting a promotion, or even keeping the job you currently have? In fact, more and more employers are using credit history in background checks, which can have an outsized effect on hiring practices and advancement.
Under recent changes, the Department of Defense will now continuously monitor the financial status of service members with security clearances. Poor credit, carrying too much debt, uncorrected mistakes on a credit report, or bankruptcies, can jeopardize security clearances, ability to deploy, or promotions for those in the military.
Financial Literacy and Domestic Abuse
According to the National Network to End Domestic Violence (NNEDV), financial abuse occurs in 99 percent of domestic abuse cases. Think about it; for abusers, money is power. If you strip your partner of access to money, you also strip them of their ability to care for themselves or make decisions in their own best interests.
The NNEDV also reports that victims find it difficult to leave an abusive relationship for the same reason. Because they have become dependent on the perpetrator, they can lack the resources, knowledge, and confidence to break the cycle.
Financial abuse can be overt or subtle, taking many forms ranging from forbidding the victim to work, to controlling all of the money and paying the victim an “allowance,” to running up large debts on joint accounts, to outright theft. Certainly financial literacy isn’t a cure for such a potentially devastating and complicated array of crimes, but it does represent a powerful tool in self-protection, and a path to a better future.
Common Threads
Several threads connect these three examples.
First, they all demonstrate that financial literacy can mean the difference between opportunity and adversity. A bright child who is denied an education, a qualified worker who is denied a job, or a person stuck in an abusive relationship simply won’t have as many choices available to improve their lives.
Second, financial literacy means access, not necessarily to money, but to the vital information we all need to succeed in the modern world—whether that’s in school, or the workplace, or our private lives. A child who hasn’t been exposed to the basics of money management at home or in school is at a distinct disadvantage when they enter the real world of paying for college, getting a job, or leading an independent life.
Third, the ultimate value of financial literacy is not just in knowing the mechanics of how to buy a car or buy a house, but in understanding how to approach a financial situation. I liken it to the value of a liberal arts education in that a financial education will teach you how to think, how to access a situation, put it into context, and weigh your options. It will help you adopt an analytical mindset regardless of the situation you face.
Taken together, these benefits roll up to perhaps the most important advantage of all: having the confidence you will need throughout your life to establish priorities, set goals, and make smart financial and personal decisions that support those values.
A Look to the Future
As I survey the ever growing and maturing universe of financial education, I’m optimistic. I’ve personally been involved with financial literacy programs for over 20 years, and feel that we are at a tipping point.
First, we’re making progress in our schools. North Carolina is now the 20th state to require financial literacy for high school students, also requiring teacher training.
Powerful organizations including the Securities Industry and Financial Markets Association (SIFMA) Foundation and The Global Financial Literacy Excellence Center (GFLEC), DonorsChoose, and the Jump$tart Coalition for Personal Financial Literacy have all made major contributions to advancing financial literacy and reaching increasing numbers of people.
I am particularly proud of our collaborative program Money Matters: Make It Count, offered through Boys & Girls Clubs of America. Since the program’s inception in 2004, over one million teens in over 1,300 clubs across the country have been introduced not only to basic financial concepts, but also to the practical realities of dealing with credit and debt and paying for college.
Taken together, these and other innovative and effective programs in our schools, workplaces, and communities are adding up to a critical mass. After 20 years, I can finally say that as a nation we are coming to understand that an investment in financial literacy is an investment in each other and ourselves.
As we face a new decade, we all deserve nothing less.
Related: How Penny Pinchin’ Stay-At-Home Mom Tracie Fobes Paid off $37k in Debt in Two Years—Here Are Her Top Tips to Getting out of Debt
Parade Daily
Celebrity interviews, recipes and health tips delivered to your inbox.
Have a personal finance question? Email us at [email protected]. Carrie cannot respond to questions directly, but your topic may be considered for a future article. For more updates, follow Carrie on LinkedIn, Twitter and Facebook.
Disclosures:
The Charles Schwab Foundation is a 501(c)(3) nonprofit, private foundation that is not part of Charles Schwab & Co., Inc., or its parent company, The Charles Schwab Corporation.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers are obtained from what are considered reliable sources. However, their accuracy, completeness or reliability cannot be guaranteed.
COPYRIGHT 2018 CHARLES SCHWAB & CO., INC. MEMBER SIPC. (0120-9U2E)
Does personal finance still work in our changing economy?
Don’t buy a car you can’t afford. Save 10 percent of your income for retirement. And, for crying out loud, stop throwing away money on lattes.
We’ve heard it all before.
Traditional personal finance advice is often tossed around in blanket statements. While the advice is sound in theory, the way we actually deal with money is much more complicated.
Our changing economy has made this a more common reality. Consumer spending is increasing and unemployment rates are low, but wage growth has been slow, some people have given up the job search and income inequality is still very much a thing. With a financial system so drastically changing — and seemingly for the worse — what can we do about money?
“I’m interested in the causes and consequences of inequality, particularly from a labor market perspective,” said Kate Bahn, director of labor market policy and an economist at the Washington Center for Equitable Growth, a research organization. Dr. Bahn argued there’s not enough emphasis on the larger structural barriers that make people’s financial lives difficult. Personal finance might further de-emphasize these barriers, she said. “Maybe that’s why I’m so frustrated.”
There is, for example, a concept called labor monopsony, which is what happens when a single hiring entity controls the work force. “So employers will take advantage and pay workers less because there’s nowhere else to go,” Dr. Bahn said. “It’s geographically remote areas where there may be only one big employer, and there’s no other company to work for, so that company can pay whatever they want because workers can’t say, ‘Screw this,’ and go somewhere else.”
Dr. Bahn’s argument is that personal finance is necessary, but not sufficient. It’s put forth as a solution when policy is what’s really needed, she said, and places priority on personal choice over issues that are, unfortunately, out of most people’s control.
Others say that personal finance remains helpful because it is a way to share information that people are often discouraged from seeking. “People have criticized financial education, saying it doesn’t work because people are still making mistakes,” said Billy Hensley, president and C.E.O. at National Endowment for Financial Education, a private nonprofit. “Education can’t help access jobs, but it can help people navigate the system as it exists.”
But it’s hard to measure the effectiveness of personal finance because so much of it is, well, personal. Rachel Schneider, a researcher and co-author of “The Financial Diaries: How American Families Cope in a World of Uncertainty,” wanted to look at how people handle money in the real world. She and her co-author, Jonathan Morduch, a researcher and professor at N.Y.U., worked with over 200 families for a year, gathering information on every dollar that went in and out of their homes.
“A huge finding was the level of volatility people experience in their financial lives over the course of a year,” Ms. Schneider said. Although she expected to find income volatility year to year, it was surprising to see how widely income varied within the year, too. A subject could be above the poverty line for the year over all, but that same person could fall below the poverty line in any given month.
“This has a huge impact on how people deal with money,” Ms. Schneider said. “The economy has been growing and the unemployment rate is relatively low and declining, yet we’re not seeing that growth and prosperity getting distributed down to the bottom.” While Ms. Schneider agrees that financial education is necessary and can be useful, she also worries that overemphasizing it as a solution to financial challenges shifts responsibility away from our economy’s major players, like banks that offer subprime predatory loans or companies that take advantage of workers.
One thing proponents and critics of financial education seem to agree on, however, is that if we’re going to help people navigate this existing system, the way we talk about money has to evolve. With that in mind, here are some new ways we can think about personal finance.
Saving is a habit, not an objective
“If your budget is dramatically different one month to the next, then a whole bunch of standard financial advice does not apply to you,” Ms. Schneider said. Most financial advice starts with making a monthly budget, but many people manage their money on a daily basis, asking what they can afford today. This makes traditional savings approaches difficult.
Traditional personal finance advice focuses on saving a lump sum, like eight months’ worth of living expenses, or $1,000 for an emergency fund. But that can be hard to plan when you have an income that fluctuates wildly. It’s better to think of saving as a habit rather than an objective, especially when you have a variable income.
“It’s very easy to fixate on a savings amount as a goal,” Ms. Schneider said. “Those benchmarks give you a goal to work toward, but it’s like trying to get in 10,000 steps on your Fitbit. You’re supposed to walk every day, it’s not like you reach 10,000 steps and then you stop walking.” For example, instead of thinking of your savings as a $5,000 goal, approach it as a habit of saving $100 a week.
Ms. Schneider’s research also found that once some savers reached their objective, they did everything they could to keep that amount intact — which sounds great, but can backfire. Even if savers had an emergency, they would pay for it with a loan or put the expense on a high-interest credit card just to maintain their savings. “It’s demoralizing for people when they have to break their savings,” Ms. Schneider said. “The data supports that people are more likely to continue saving if they think of their savings as an ongoing behavior rather than a one-time objective.”
Debt relief options are more important than ever
“The rising debt burden is a problem we should pay close attention to,” Ms. Schneider said. And it’s not just student loans, but also credit card debt, car loans, mortgage debt and, of course, medical debt. In 2018, Americans borrowed $88 billion to pay for health care.
Traditional personal finance advises people to pay off debt before making any other major financial decisions, sometimes even including investing for their retirement, but that may not be realistic for many people who are faced with years of paying off a student loan. This is why some experts now follow the 5 percent rule: If the interest rate on your debt is 5 percent or higher, focus on paying it off; but if it’s lower, invest while you pay it off because you’ll get a better return over time.
Debtors should also be familiar with opportunities for relief. Federal student loan borrowers, for example, may have forgiveness options. There are also income-driven repaymentplans, with which you can extend the life of your loan in exchange for a smaller monthly payment. Keep in mind, you’ll pay more over time, but for those who struggle to afford rent, the relief may be just what they need to get back on their feet. Some private student lenders and credit card companies also offer relief options. You can call and ask if they have any hardship payment plans. Typically, you have to qualify for these plans, and qualifications might include job loss, unemployment, divorce or family emergencies. The lender or issuer may lower your monthly payment and may also agree to a smaller interest rate or to waive your fees over a short time.
There’s also deferment and forbearance, which is sort of like hitting the pause button on your loan. With deferment and forbearance, you take a break from your monthly loan payments, and your interest is deferred or accumulated during that period. Refinancing or consolidation can also help people lower their debt, but be careful because many companies take advantage of consumers.
Refinancing is when you pay off one loan with another loan, and consolidation works the same way, but groups all of your debt into one, new loan. Either option can make sense if the new loan has better terms — namely, a lower interest rate. The Department of Education offers federal loan consolidation, but the interest rate won’t be lower. Keep in mind, if you refinance your public student loan or consolidate with a private lender, you lose those federal relief options. To see if refinancing makes financial sense, plug your numbers into a refinancing calculator. NerdWallet’s calculators are easy to use and the company has both a mortgage refinancing calculator and a student loan refinancing calculator.
The 10 percent rule is too much — And not enough
Traditional personal finance advises people to save 10 percent of their income for retirement. The problem is that it’s both unrealistic for many people but also not enough to fully fund a retirement.
People are living longer, fewer of them have access to a 401(k) and Social Security benefits are decreasing. This is why most experts now agree that 10 percent is not enough. Retirement calculatorscan be a helpful way to figure out how much you need to save based on these factors, but it can also be discouraging to see how much you should have saved, depending on your age.
Most Americans don’t have nearly the amount they should for emergencies or for retirement, and it would be easy to believe this is because they just don’t know the importance of retirement savings. But that’s not true — according to Ms. Schneider and Mr. Morduch’s data, people are very aware of how much they need to save for retirement. They simply need that money now.
“What we’re seeing when people cash out their retirement plans, or borrow from them, or fail to save for an emergency is not a lack of knowledge or awareness, but the result of people genuinely needing to spend the money today,” Ms. Schneider said.
The other issue is 401(k) leakage. Many people cash out their retirement plans or borrow from them to make ends meet. At a personal finance workshop, I once met an attendee who saved as much as she could to get a 401(k) match, but then stretched her finances so thin she couldn’t pay her bills or make her debt payments. Her intentions were good — she was only following traditional finance advice she had read. But this resulted in accrued interest and late payments, and she became discouraged from saving at all.
One way to combat this problem, Ms. Schneider said, is to encourage people to save for an emergency while they save for retirement. It can be helpful to remember that while your 401(k) match is an outstanding perk, you need a financial safety net, too. Retirement advice varies, depending on your age, but treating it as a habit and looking into individual retirement account options if you don’t have an employer 401(k) is a good place to start.
Beware of predatory financial services
Predatory financial services often operate under the guise of giving people solid financial advice. For example, I was recently driving around a different city and tuned in to a radio show dispensing financial advice. The host told listeners to cut back on retirement savings and instead invest in real estate. I couldn’t believe what I was hearing — most people don’t have nearly enough saved for retirement, and this personal finance expert was asking them to save less and put more of their eggs in one basket. It didn’t take long for me to realize this wasn’t a financial advice show at all, but a long commercial for a real estate investing course. After that spot, another show advised listeners to take out a reverse mortgage on their home. Again, the show was publicized as financial advice, not a commercial.
Dr. Bahn said that the best policies for change are the ones that give more power to workers and consumers. “We need to audit banks and employers and small business lenders to make sure they’re not engaging in discriminatory practices,” she said. Pay transparency and recent bans on asking about salary history are other policies that are meant to empower workers and tear down longstanding structural barriers.
In an era when banks and corporations seem to have more protection than people have, it’s difficult to offer practical advice on how to navigate the system and sometimes seems unfair to do so. Dr. Hensley said that policymakers and advocacy organizations are part of the solution, but contends that education is, too. In a system in which so much is seemingly out of our hands, it can take a lot of effort to feel financially empowered. The financial shame that’s implied in so much blanket money advice makes the process only more overwhelming.
“Financial education should not be, ‘Do it this exact way, or you’re a failure,’” Dr. Hensley said. “We need to humanize the topic.”
c.2020 The New York Times Company
South America Is in a Quandary. Just Like the United States.
CAMBRIDGE, Mass. — South America is falling apart. The popular rebellion in Chile — a country often held up as an example of success predicated on good behavior — is only the most extreme instance of a discontent that is either breaking out or simmering in almost every South American nation. The struggle between the right and the left has intensified. But so far nothing that contributes to socially inclusive economic growth has resulted from these protests. What does it all mean? And how do South America’s troubles mirror the United States’ own?
The triggers of upheaval in the region have often been unremarkable — a rise in fuel prices or bus fares — but they tap into deeper sources of frustration. Millions of working people feel abandoned by the self-serving and corrupt elites that run their countries. Having witnessed spurts of economic growth and opportunity, these disempowered millions see no prospect of advance. They have now discovered that they can find power in social media and on the streets. None of that is unique to South America. It’s when we begin to look for causes and solutions that a more challenging narrative emerges.
In recent decades South America has oscillated between two failed strategies of economic development. In a part of the world rich in natural resources, one strategy has used the wealth of the land — agriculture, ranching and mining — to subsidize urban consumption without enhancing the skills and productivity of workers. While this approach has democratized the economy on the demand side, it breaks down when commodity prices fall. And it is incapable of creating a lasting foundation for socially inclusive economic growth because it bets on the easy riches of nature rather than on the products of the human intellect.
Another strategy does whatever the people in power think necessary to please the financial markets, beginning with fiscal discipline, in the hope of provoking a wave of foreign and domestic investment. The wave never arrives, or if it arrives, fails to last. Most recently, Mauricio Macri in Argentina and Jair Bolsonaro in Brazil called on the spirits of capital. But the spirits failed to come.
No country gets rich by following a blueprint recommended by the great powers of the day, who want the latecomers to wait patiently in line, resigned to their lot in the world division of labor. Rebellion against the formulas prescribed by those powers is not always rewarded; obedience is invariably punished. To rise, a country must not only be ready to adopt institutions and policies defying those formulas, it must also equip itself with the practical means by which to sustain its defiance. Yes, fiscal realism is indispensable but not for the reasons invoked by the peddlers of a false orthodoxy: so that nations and their governments are not beholden to the whims and interests of high finance and can dare to be bold in opening development trajectories based on the democratization of opportunities and capabilities.
If these two strategies fail, what works? Mobilize national resources to build the country undeterred by dogmas about what government and private enterprise can do; both can do, especially together, much more than we suppose. Think of this part of what works as a war economy without a war. And innovate in the organization of markets so that more people can access more markets in more ways and acquire the means to become more productive.
Sound radical and far-fetched? Consider the United States in the first half of the 19th century: Alexander Hamilton’s plan to build the country from above could not have been so successful if agriculture and finance had failed to be democratized. In those two sectors, and despite the fearsome incubus of African slavery, Americans didn’t just regulate markets or attenuate their inequalities by progressive taxation and social spending. They reinvented the market economy and innovated in the institutions and laws that shape the basic distribution of economic advantage.
Today, such an effort, in South America and in the United States, needs a different focus. There is a new vanguard of production, founded on science and technology and marked by permanent innovation. This knowledge economy remains confined, everywhere in the world, to fringes that exclude the vast majority of workers and businesses, with far-reaching consequences for economic slowdown and inequality. Denial of the most advanced practice of production to most people and businesses in even the richest countries has slowed growth. The chasm between the advanced and backward parts of the economy has generated an inequality too severe for progressive taxation and redistributive social spending to correct.
Deepening and disseminating the knowledge economy is today’s road to greater and more inclusive prosperity. The United States and South America got off that road. It’s just that Americans were much richer than South Americans when they got off. Nevertheless, they share different versions of the same quandary and the same illusions.
A political as well as an economic failure lie behind South America’s unhappiness. The national path has to be discovered and developed experimentally. To organize it, South Americans require the right kind of democracy: one that raises the level of popular engagement in political life, resolves political impasse quickly (for example, by early elections) and uses federalism to combine decisive initiative by the central government with a chance for the states to diverge from the main road taken by the country and to try out alternative models of the national future.
That is not the democracy that the South American republics copied from the United States. South America can no longer afford constitutional arrangements that associate, as the United States Constitution does, the fragmentation of power, necessary to freedom, with the slowing down of politics, which inhibits structural change. Such low-energy democracy needs crisis, in the form of war or ruin, to make transformation possible. South Americans shouldn’t need a world war or a 1930s-style economic collapse, as Franklin Roosevelt did, to get something done.
The troubles of South America seem all too familiar. To overcome them, however, requires a new direction in the economy, in politics and in thought. Citizens of the United States, take note: This story is also about you.
Roberto Mangabeira Unger, who teaches at Harvard, served as minister for strategic affairs in the administrations of Presidents Luiz Inácio Lula da Silva and Dilma Rousseff of Brazil.
The Times is committed to publishing a diversity of letters to the editor. We’d like to hear what you think about this or any of our articles. Here are some tips. And here’s our email: letters@nytimes.com.
Follow The New York Times Opinion section on Facebook, Twitter (@NYTopinion) and Instagram.
No comments:
Post a Comment