Broker Check


June 30, 2019


LFG Marketing | July 2019

Most of us don’t respond well to scolding. There’s something about a condescending attitude connected to a wagging finger that just rubs us the wrong way. But scolders can’t help themselves, especially if they think they’re right. Which is why Karen Hube of Barron’s is compelled to tell us:

Americans are lousy at personal finance.

Yawn. You’ve heard it all before, right? A good chunk of the population doesn’t save, can’t come up with $1,000 for an emergency and will never be able to retire, blah, blah, blah.

But that’s not you, is it? After all, you earn a good income, contribute to a retirement plan, and have a great credit score. You’re not the typical American household.

Well great. But it does not follow that you’re good at personal finance. Hube contends there is “an almost universal lack of financial literacy among Americans” – even among those with high incomes. Hube quotes Spuds Powell, the managing director of a Los Angeles wealth management firm:

“This is a much bigger problem than most people are aware of. I’m constantly amazed at how common it is for clients, even sophisticated ones, to be lacking in financial literacy.”

Making a lot of money is not proof that you are managing it well.

It’s natural to think there’s a correlation between high income and better financial management. But in truth, the only thing that distinguishes high-earners from the rest of the financially illiterate is their ability to pay for their mistakes.

And this illiteracy is not about obscure tax issues or unique investment opportunities. Rather it is ignorance regarding some of the most fundamental issues of personal finance. Like debt, particularly student loan debt.

The Student Loan Crisis

You’ve probably heard that there’s a student loan crisis in the United States; too many borrowers are in default or financially hamstrung by their educational debt. The problem is big enough to be a drag on the economy, and the US government, which holds the majority of student loan debt, has looked at options to sell off these loans, even at a discount, just to get rid of them.

So, it’s a little bit surprising to read the following headline

from a January 2018 report by Urban Wire:

“Affluent Households Owe the Most Student Debt”

Referencing a recent Survey of Consumer Finances for 2016, the study found that “most outstanding student debt is held by people with relatively high incomes.” Specifically, the top 25 percent of households by income ($81,140 or above in 2016), held about half of all outstanding education debt. The top 10 percent, those with incomes of $144,720 or higher, held 24 percent of the debt. These numbers reflected both young adults who borrowed for their own education, as well as parents or grandparents who borrowed to help children or grandchildren.

The authors of the report acknowledge these numbers “do not mean that most student loan borrowers are less well off than those without student debt... (but) most outstanding student debt is held by people with relatively high incomes.”

If you think there is a positive correlation between income and financial literacy, you might also conclude that student loans are a savvy strategy. That’s a tough position to justify.

Student loans are arguably one of the least desirable borrowing options, notwithstanding the typically low interest rates. Educational debt is very speculative; most students enter college with vague educational goals, and no assurance that the career that follows will produce enough income to make borrowing a profitable proposition. Further, student loans have few options for relief. They generally cannot be discharged in bankruptcy, forgiveness options limit employment choices, and other provisions, like forbearance, only prolong the financial agony instead of alleviating it.

Despite low interest rates, the large amount of debt and the corresponding monthly payments are a burden, even for graduates who earn substantial incomes; many of the financial milestones of adulthood, such as marriage, buying a home, or saving for retirement, are either delayed or foregone because of too much debt.

The fact that high-income families hold the most student-loan debt is not indicative of their financial literacy.

So why do so many wealthy American households use student loans? A plausible explanation: high-income households simply have enough money to absorb the consequences of their financial ignorance.

But as more students accumulate larger debts, even the institutions which directly benefit from student loans are recognizing that students need to be better educated about personal finance, and debt in particular.

Even Harvard Is Now Teaching Personal Finance

Here’s the opening sentence from a May 2019 Wall Street Journal article:

“Elite universities haven’t typically focused on personal finance. That is starting to change, thanks in part to rising debt levels for young Americans and growing anxiety about their economic futures.”

The article details personal finance workshops offered this spring to students at both Harvard and Princeton. When asked why there might be a need for instruction in financial basics, a postdoctoral research associate who participated in the Princeton’s Financial Literacy Day, said,

“We’re a generation that’s really shaped by some really poor macroeconomic decisions and it’s harder for us to think that there’s sort of exogenous progress in our lives and our livelihoods,”

Translation: Our generation is living with the repercussions of the poor economic decisions of our elders, and it’s hard to see how we will make financial progress in the future.

It might be normal for children to dismiss the wisdom of their parents, and blame them for their issues, but when prestigious universities feel the need to instruct their students on the ABCs of personal finance, it doesn’t suggest these future high earners – or their parents – have high financial intelligence.

Still Yawning? You Could Be Missing Out

Maybe you or your kids aren’t burdened by student loan debt. Even so, your financial literacy might be lacking. There’s a dieting maxim that says, “Everyone underestimates how fat they are, and how much they eat.” The same distortion can occur with our money: We overestimate how much we have, and how much we know. When it comes to self-assessment, we all have blind spots.

You may also be comfortable paying for your inefficiencies. But what are you missing by not getting smarter with your personal finances? What if you knew cost-efficient borrowing and repayment strategies, and how they could improve your monthly cash flow? Or how a different approach to risk management might allow your savings to produce better income in retirement? Boosting your financial literacy could yield substantial benefits.

Lifetime Financial Growth, LLC is an Agency of The Guardian Life Insurance Company of America® (Guardian), New York, NY. Securities products and advisory services offered through Park Avenue Securities LLC (PAS), member FINRA, SIPC. OSJ: 244 Blvd of the Allies, Pittsburgh, PA 15222 (412) 391-6700. PAS is an indirect, wholly-owned subsidiary of Guardian. This firm is not an affiliate or subsidiary of PAS. 2019-82022 EXP 06/2021