Why financial illiteracy hurts everyone
So what do you write for your first post on a website that is filled with bloggers who have much more investing experience that you do and have been recognized throughout the rest of the personal-finance blogging community and the media at large? As I racked my brain for a topic that I felt authoritative about, as well as one that was interesting, I decided upon a constant wonder of mine: How the widespread epidemic of financial illiteracy hurts everyone.
These guys will be in charge of your pension
As a teacher, I see students every day who I know will soon become adults that have no real grasp on how to manage their personal finances. I’m not talking about grade seven students, I mean the upperclassmen who will soon be out in the adult work handling fairly large sums of money. I’ve written before on the inadequacies of our current education system in terms of producing financially-literate students. Perhaps I’ll address the subject at length here another day, but for now, I want to explore the point that these students won’t just go out into the world and harm their own well-being (they will most certainly do that though), but they will indirectly hurt me as well.
A silent disease
So how does a person not knowing the difference between a stock and a bond hurt everyone else in society? Like any epidemic, the effects of financial illiteracy are widespread and vary greatly. First and foremost, on a large scale, every capitalistic society relies on the efficient distribution of resources. Supply and demand only works if consumers understand exactly what they are demanding and how much they should be willing to pay for it. When people do not understand how to best ration the money they receive from their labor, they make illogical (re: dumb) decisions with their money that distort the market for the rest of us. For example, if everyone drove vehicles that were more fuel-efficient the demand on gasoline would be much less and everyone would experience lower gas prices. Undoubtedly there are many people out there that need certain types of trucks and other fuel-intensive vehicles, but there are many more who simply buy them for reasons that make no real sense and this distorts the most efficient market for the rest of society, as well as costing them quite a bit of money in the long run.
Duh… He said taxes were bad – I like him
The second way that society as a whole suffers from this epidemic is due to the fact that we live in a democracy. We are responsible for choosing the political leaders that set the fiscal policy for our country (or at least they, in turn, pick someone that determines financial policy). If we are not sure what the real consequences of rising interest rates are, how are we supposed to elect someone that will choose the best path for us to follow? More and more, all government policy is predicated on sound bites instead of truly informative approaches. How often do we hear things like, “He only cares about the 1%,” or, “She is for big government and that’s bad for the economy.” Those two statements mean very little without some context to put it in. Sometimes government involvement can be great for the economy (that one was a little tough for this conservative boy to admit) and if anyone thinks that there is a single politician out there who is not intensely worried about the now-infamous “1%” in their country, then they are kidding themselves. Learning basic financial principles would allow our political leaders to actually have real debates because they would realize that they could reach voters this way. Right now, they have seen time after time that the best way to swing voters is to produce a snappy quip like the ones above because the majority of people don’t care about something like the long-term effects of raising the income tax versus consumer taxes.
Your dollars at work
The most direct way that I can see (and here is where my admittedly conservative bias will shine through) that the financial illiteracy of those around me hurts my own situation, is through the over-taxation I experience due to a strained social safety net. Now I’m not quite the hardcore conservative you might see on TV that is in favor of axing healthcare or anything like that but seriously stop and think about the problems we could solve simply by teaching people how to take care of themselves. I believe that there should definitely be a social safety net and I love that we have a great one in Canada, I just think the less we all use it, the better off everyone is.
The best example is probably the mortgage crisis that took place in the USA and throughout many other parts of the world. While the banks certainly deserve their fair share of the blame in regards to giving out sub-prime mortgages, people that properly understood cash-flow percentages and how rising interest rates work would never have signed on to those dotted lines. This would have prevented all kinds of money from coming out of their pocket.
Teach a man to fish…
By showing people how essential saving a portion of their income is to help fund their future needs, we could eliminate much of the old age poverty that plagues our country. If a person knows this information and decides to buy a luxury they don’t really need instead of saving for their own retirement, isn’t this a freedom we should allow instead of taking taxes from everyone at relative gunpoint? The fact that we feel we need to protect these people from themselves means that the government must get involved on a large scale. When the government gets involved on a large scale there are inevitably inefficiencies in the system and vast personnel hiring that would never have to be done if people simply knew how to take care of themselves and then either chose to take one path or the other.
Whenever someone declares bankruptcy because they didn’t understand how quickly credit card debt can compound against them, or because they didn’t understand the mechanics of a student loan (woo-hoo… my cheque came in, beers all around), this directly takes money out of society’s collective pocket. When people build homes that are too big or buy vehicles that are too costly they hurt themselves and then eventually they hurt everyone else as well.
Then again, some of those Gordon Gekko-types out there single-handily do more damage to the economy than anyone or two-person who think dividends only occur in the board game Monopoly. Maybe there is such a thing as too financially literate?