Financial Education: 4 Societal Phenomena That Negatively Impact Our Financial Wellbeing
We are a money-obsessed species and we have been at least since the advent of modern civilization. The current capitalo-materialistic culture exacerbates our lust for things and dependence on wealth accumulation to take our place in society and procure our needs and wants. In the absence of the ability to use force to extort and expropriate, money becomes the de-facto means to convince others to give us things we want and need. Money is our response to our forgotten reliance on nature to provide tomorrow’s bounty.
As the place of money rose in prominence, our dependence on it to signal and achieve more grew. The tool became a yardstick and a goal in itself. We don’t desire peace-of mind, we desire comforting purchases. We don’t aim for a place where we can feel safe, free and authentic but the most expensively listed house on the realtor’s list we can’t afford. We want to be rich or wealthy or earn a big income instead of achieving financial wellbeing, balance and sustainability — which might or might not translate into what society may deem as being rich. We ought to strive for an existence where we can contribute to our overall personal, family and community wellbeing and achievements of our higher aspirations, help reduce stress and live our most authentic self.
Yet, high levels of debt burdens, low savings, living paycheck-to-paycheck, unpreparedness for small emergencies or eminent retirement, or emotional decisions among large swaths of the population — especially of high-income — point to systemic problems. The solution however remains with the individual who has to learn to spot and deal with societal phenomena that are working against her. Below I am delineating four such causes that contribute to the precarious financial situation of the majority.
1. Equivocal Culture: Beliefs and attitudes towards money
In our shared culture, money is a nebulous concept, shrouded in mystery and taboo. We feel naked and confused just mentioning its name. Like a capricious agricultural-age deity, it seems to randomly pick winners and losers with little regard for logic or merit. We can’t do much in the way of attracting its good fortunes, we think, except through incomprehensible rituals and superstitions. Its treasures are hidden behind passphrase-protected cave doors or at the end of the rainbow, loots guarded by monsters, war-mongering killers and sea-faring pirates. We don’t discuss money affairs, even in private, of fear of being judged as impolite or worse.
We haven’t been taught to think about money in practical terms. For many of us, the idea that simply adopting few proven rules is sufficient to live a financially balanced life seems ludicrous. In our mind, it is often an either-or, now or never, all or nothing.
The point here is obviously not to make every discussion topic about money but instead to trivialize it enough to expose our beliefs and attitudes towards it. To resolve our hang ups. To define its place and purpose in our life. To share useful advice and proven bits of wisdom and to separate the wheat from the chaff. To learn from our and others’ experiences: the good decisions and the bad. To give our young the chance to be responsible for their own decisions and learn, so that when their time comes, and life throws them some punches, they can have something to fall back on.
For the spiritual among us, yes wealth is bestowed by a benevolent, caring and sustaining God (or universe.) This is actually one corrective belief to adopt: positivity and trust when putting our beliefs and hearts in the right place. Rather than contradicting the pragmatic approach to money management, this belief actually strengthens the commitment to following the means and taking proper actions to attain our aims.
So we ought to clean up our beliefs and attitudes and revisit our relationship with money. Have an “us talk” as if it was a person we want to seduce and attract. Do we want it right away with no sacrifices or long term investment? Do we believe in getting something for nothing? That the world is inherently built on a win-lose status? That being charitable is a reduction in wealth? That less money (and possessions) equals misery? That to be rich or financially free means stepping on others? That desiring it feels like entering a pact with the devil? That money will be the answer to all our problems? Does it remind us of our greedy uncle, scrooge aunt or broke father? The movie where money and happiness roads don’t cross? For what purpose do we want that extra cash or that item? Why are we afraid to ask for that raise?
Believe, really believe, that money management, like many other things take definite and common rules of thumbs to achieve and that those rules are quite few. Value deliberate planning and actions. Be aware of the decisions we make and the self-rationalizations that happen before and after. Possession of critical tools and awareness is a great leap towards long-term and overall wellbeing. Quite often, what stops us from realizing our financial freedom are hang-ups around that very same idea. Analyze, study them and commit to resolving them.
2. Lack of financial education
Financial literacy is the body of knowledge and skills employed by individuals to define their financial goals and make sensible and effective decisions in different life situations. These include household budgeting, investing, handling debt, and understanding of interest rates and risks.
For all the importance we attribute to money, most of us actually know very little about its ways and means. We lack basic skills to earn, manage and spend it. Research has confirmed that financial illiteracy is widespread around the world. The situation is worse in more disadvantaged groups and populations.
More recently, governments realized the impact of grasping basic money management practices on the wellbeing of their citizens. Studies show the direct link between financial education and healthy money behaviours. For example, poor spending habits and lack of long-term planning may lead to unsustainable debt burdens. Other spillover consequences like bankruptcy or house foreclosure, stress, and divorce are sometimes not very far behind. Financially immature individuals are more likely to fall prey to frauds, fads and herd behaviours (e.g. fear of missing out or FOMO.) On a societal level, poor decisions and behaviours made at individual level constitute a systemic risk to the fairness and stability of the economic system as a whole. Planning and literacy will not remove these risks but can reduce the likelihood of devastating mistakes and provide a balanced perspective.
Yet, formal training and education for both youth and adults are severely lacking. Programs and initiatives aimed at the schoolchildren are still sparse and don’t go beyond isolated workshops or camps. When they do happen they don’t sufficiently address the long-term learning needs of students. As opposed to other subjects, real-life skills like money management could have a tremendous impact on the person’s quality of life both in short and long terms and reflect in other areas of their existence. They are indeed used on practically a daily basis for the rest of their lives
Worse still, good money-related skills are rarely taught at home. Growing children and young adults often find themselves without a role model of healthy money behaviours, decisions and beliefs, which leaves them unprepared for adult life and prone to making repeated and costly errors. This is true for common life situations (e.g. proper use of financial products) as well as for cyclically infrequent events such as entering the job market, marriage, buying a first house or facing their first major economic recession.
This becomes more important as skills, behaviours and beliefs that impact our financial health are mostly hereditary. Learned attitudes and behaviours, both good and bad, are often inherited, perpetuating cycles of poverty and bad money practices from one generation to the next. In turn, as research shows, marginalized groups (women, elderly, youth and low-income) are shut down from basic financial services (e.g. owning a bank account) and are therefore kept away from an opportunity for organic financial training, exploration and integration. The increasing complexity and preponderance of financial services and products risks making societal gaps even more pronounced.
We should, therefore, voluntarily shoulder the burden of educating ourselves as well as people in our circle of influence. More importantly, we as adults are called upon to take the responsibility of training and arming our young with healthy financial behaviours and attitudes from an early age. The good news is that free and pertinent financial education resources have never been this easily available and widespread for the curious and serious inquirer. The second good news, as explained earlier, is that few high-impact skills, knowledge and goals are often sufficient to achieve a balanced and healthy financial situation.
3. Lack of core skills
Human resource professionals and recruiters often make the distinction between hard and soft skills in the determination of job requirements. Hard skills refer to knowledge and competencies directly applicable to the position (e.g. anatomy for a doctor.) Soft skills, on the other hand, are general personality traits, attitudes, and competencies that are valued and applicable across functions and industries, such as punctuality, organization and sociability. Often, it is these soft skills, past a certain minimum of technical expertise, that determine how successful and thriving a candidate can be and how likely they can advance in their career.
For all the benefits of hard money skills (numeracy, budgeting, and understanding of interest or exchange rates) these would not prove very useful unless complemented by other soft skills. Some of these behaviours and personality traits are so important that, even alone, they may save or doom us financially.
With only a minimum necessary amount of financial literacy, a person with good mix of personality traits and behaviours would be more likely to achieve their long term goals, freedom and wellbeing. On the other hand, no matter how advanced and meticulous our theoretical understanding of history of money, financial products and markets, access to latest apps or smartest advisors, if supporting traits and habits are lacking, we are less likely to act on our knowledge or achieve success.
When it comes to achieving financial wellbeing, few skills and personality traits are more important and relevant than others. We should also keep in mind that, more important than having any or all of them, just like balancing the five basics tastes in a dish, it is the mix of these competencies and how we consciously manage them that matters the most. A wise individual is he who works with his strengths and weaknesses to achieve her goals, in the same manner that an introvert can become a great leader if she leverages her strengths intelligently.
Here’s a list of some key skills that could have outsized impact on achieving our financial goals:
- Action-orientation: Being driven towards taking steps to realize ones objectives and act on plans, advice or acquired knowledge.
- Planning and Goal-setting: Setting meaningful and practical long and short term goals and dreams and delineating plans, steps and ways to achieve them. Having the ability to set priorities right and act accordingly.
- Persistence: Investment and financial health are a long-run game. They therefore require unwavering commitment and patience. Relentlessly following the small-steps over and over again while keeping an eye on long-term goals. Not getting discouraged or distracted by other non-priorities and emergencies.
- Entrepreneurship: Self-reliance, taking initiatives, not waiting on others’ permission or on perfect conditions. Willingness and ability to make mistakes and taking (calculated) risks, learn and grow.
- Consistency: Knowledge of strengths and weaknesses and aligning them with action plans. A process followed by a meticulous, patient and risk-averse person will not work for a more free, tentative and risk-liking person. But both can align their methods and strategies with their strengths.
- Street-smarts: Accumulated emotional intelligence and intentional experience to avoid scams and debilitating mistakes.
- Calmness: Ability to control or override emotional reactions. In the absence of which, devising strategies and fail-safes to ensure impulsive decisions and actions are minimized.
4. A Shifting Financial Landscape
A few generation back, people had limited choice when it came to their financial needs, dealing with fewer and simpler products and services: checking and savings accounts, client-facing branch staff, generic mortgage solutions. In less penetrated markets, and until very recently, the options were even less varied where people saved in cash, borrowed mainly from friends and family and invested in simple project schemes.
Today, with market liberalisation and integration, technology, innovation and changing demographics, consumers are faced with more complex and ever-evolving financial offerings and landscape. This makes it mandatory for consumers to not only have to master money management skills but also familiarize themselves with handling online banking on their apps, monitoring transactions, deciding between an infinite number of bank products, cards, schemes and features, evaluating costs, fees, terms and benefits, choosing the right insurance policies managing their investment portfolios, and deliberating on poorly understood innovations (e.g. Bitcoins.) The nature of products is also moving from the physical to an ethereal and cashless world.
At the same time, financial decisions made by individuals are getting more complex, consequential and harder to unpack. Life demands and goals have become aplenty compared to prior generations: from planning for and financing expensive higher education, to paying off those loans, to marriage, negotiating career changes, securing a house, saving for kid tuition before they are even born, more frequent travel, buying adequate health insurance and medical expenses and affording a longer retirement period due to expanding life expectancy. These and other life events now have huge financial repercussions and require careful and long term deliberation and deep understanding and discipline to get right. On the other hand the cost of life and the realm of necessities and must-haves have expanded as well. And even with the use of intermediaries and advisors, individuals still need to understand what is being offered and bear ultimate responsibility and risks for their decisions.
While costs for everything from healthcare to education have increased year after year, companies and governments have aggressively scaled back their social security programs and safety nets. As a result, there has been a widespread transfer of responsibility and risk from public and private sectors to the individual. For example, defined-benefit pension plans, where employees are guaranteed a monthly amount at retirement, are becoming a rarity and replaced by — in the best of cases — defined-contribution pension plans. More often, these plans are opt-in only at many workplaces making employees responsible for setting up their own retirement accounts or formally approaching their employers to collect it on their behalf. Studies have shown that enrollment and contribution to retirement accounts drops significantly as a result and most are dangerously unprepared for retirement. Similarly, parents are now called upon to pre-emptively save or borrow for exorbitant tuition fees from kindergarten to university as competitive demands rise and public school quality deteriorates.
Moreover, investment accounts are becoming more open and flexible making individuals fully responsible for, and exposed to, their own investment decisions (e.g. portfolio structure and selection.) Individuals are now fully responsible for making sure they have selected the right investment instruments and portfolios or hired competent advisors and managers to do so. In either case, they bear the full risks for the performance of their investments which often are unaware of.
Now more than ever, acquisition of financial knowledge, skills and healthy attitudes are imperative for individuals to navigate the explosion in complexity of the economic landscape, the shift of risks and responsibilities for financial decisions into the personal sphere, as well as the goal of achieving a financially healthy and balanced life.
