A shocking forty three percent of Americans are not financially literate, but think they are, according to research by the Milken Institute.
While this may seem to be an individual problem, the truth is that it actually causes significant problems all the way up to the national level because the effects of poor financial decisions ripple out far beyond the person who first made them.
Think about it like this—let’s say someone was never taught about things like loan agreements, compounding interests, or return on investment. So, without that knowledge, they might, hypothetically, sign for a loan they don’t understand and can’t afford, to buy something that may not have any objective financial value. Then, when they can’t pay the loan back, their lack of financial literacy may make them feel entitled to demand others pay it back for them.
This is purely a hypothetical situation that could never happen though, right?
Financial literacy has a direct impact on all aspects of our economy which is why we’re facing out of control government spending, and as a result, crippling inflation, not to mention a 15 year record high consumer debt and a 17 years record low savings rate.
But when people are financially literate, they not only understand how money and the economy works, they also tend to make better financial decisions. This leads to greater financial stability, wealth accumulation, and opportunities. Now extrapolate that out over a few generations. If a family improves their financial situation by twenty percent over a lifetime, imagine how much better off their children will be. Now imagine those children improving their own financial situations by twenty percent over their lifetimes, followed by the next generation. And this cycle can repeat from now until the end of humanity. If you understand the concept of compounding, it’s easy to see how powerful this can be.
It puts families in a better position to afford a quality education, invest for retirement, or even start a business. Not to mention the added peace of mind that comes from being financially stable and the fact that it can enable them to afford better healthcare to live longer, happier, and more productive lives.
Here’s a perfect real-world example that anyone can understand—everyone is told they need to go to college in order to be successful, and the unfortunate reality for most people is that going to college requires taking out an often substantial loan. People generally just take this at face value, sign for the loan, and get locked into monthly payments for the next decade or more.
But is that the right choice? There’s not a simple yes or no answer.
To accurately answer this question requires an understanding of several aspects of financial literacy. You have to understand loan agreements, interest rates, compounding interest, income, budgeting, and return on investment. The latter is especially important because so many young adults lock themselves into loans for degrees that won’t help them get a job that can produce the income they need to pay off their loans. They’re painting themselves into a corner. But if they were financially literate, they could evaluate the situation, see if it will work, and make a decision that’s based on real data instead of hopes and dreams.
Homeownership is another area we can use as an example. We’ve all heard “Your home is your biggest asset,” but while it will tend to appreciate in value, it’s technically not an asset. A property you’re renting out, if it’s profitable, would be an asset, but your home that you live in is a liability. And many people make the mistake of buying the most expensive home they can possibly afford, because hey, it’s an ‘asset,’ right? This often puts an undue burden on their budget, and that can be catastrophic in a downturn—especially when home prices decline, making it nearly impossible for the homeowner to sell it.
Seemingly smart and widely accepted financial decisions can often be dangerous too. Staying with the topic of homeownership, a common myth is that it’s wise to pay off your mortgage faster, but the truth is that sometimes it may be wise, but it could just as easily be a poor decision.
While paying off your mortgage faster means you will pay less interest over the life of the loan, it also means that you’re reallocating money away from investing for your retirement, so there is an opportunity cost. And that is even more significant when you factor in inflation and compounding. In many cases, it’s a better choice to continue making your normal payments, which stay at a fixed cost while the value of the dollar decreases, and instead, invest the additional money into an asset that will appreciate and/or produce positive cashflow.
As you can see, there is no one-size-fits-all answer when it comes to many financial literacy topics because there are numerous variables that need to be evaluated to determine the ideal decision for that individual and their unique situation. This is exactly why it’s so important to teach these principles in a way that people can understand exactly how to apply them to their lives.
The interesting thing about this is that one of the groups that ends up teaching a lot of Americans about financial literacy is actually Realtors. For many people, sitting down with a Realtor to figure out how much home they can afford is their first time they’ve even thought about a budget. That’s scary because a budget is the foundation of every other financial literacy topic and it plays a significant role in so many other parts of our lives.
The positive impact of financial literacy is incalculable and profound, and while that impact starts with the individual, the ripple effect reaches far beyond them.
I’ve seen this first hand, growing up with an entrepreneurial mindset and then a career as a dentist, before a crisis in my own life forced me to restructure everything. My daughter was blindsided by leukemia, epilepsy, and late stage liver failure, and while I was making great income running a successful dental practice, I immediately realized that wasn’t going to help us because in order to properly support my daughter through this challenge, I would have to take time away from my practice, which meant no income.
So I sold my practice, invested the proceeds into real estate, and spent the next year, as I think any parent would, doing everything in my power to help my daughter overcome this. (She did, and has since gone on to become a happy, healthy, and productive adult!)
But jumping back a bit…when holidays that year rolled around, I sent out our usual Christmas cards with a family letter sharing the news of what was going on with my daughter and that I had recently sold my dental practice. Understandably, a lot of people were concerned and reached out to offer support, but a lot also reached out asking how I was now supporting myself after having sold my practice. Once they heard that it was through real estate, many wanted to learn how to do what I was now doing. This initially led to me sharing my knowledge, but quickly turned into more formal coaching, and then eventually, the mastermind group and investing community, Freedom Founders, which I run today.
While even back then, I knew a lot more than the average person on financial topics, I soon saw how much I still did not know because as I got involved in larger and more complex real estate deals, I uncovered multiple layers that I had never even considered before. I saw that financial literacy goes far deeper than most people realize, and in many cases, the right decision is based on an ever-changing set of variables. In other words, the perfect answer in one scenario may be the worst answer in another scenario.
That solidified my position as a lifelong student on the topic.
Unfortunately, there wasn’t a lot of good material on the topic back then, and there were only a handful of what you would consider “experts” by today’s standards, and the only way to learn from them was to go to their conferences or buy their books. The instant, on-demand access to information we enjoy today simply didn’t exist back then. Today, we have access to all of the world’s information with no more effort than a few keystrokes.
And the public education system has also begun working to bring this vital knowledge to future generations because of the impact it has not only on the individual, but also on families, communities, and the nation. Recently, I, along with thirteen financial experts and educators, was asked by the Florida Department of Education to help craft and guide the new curriculum for Florida’s new financial literacy program that Governor Ron DeSantis signed into law earlier this year.
This is what I’m most excited about because of the impact it will have on future generations.
With more young people becoming more financially literate, we will see our families, businesses, communities, and even the nation as a whole become financially stronger and more resilient. Over time, that will lead to a better standard of living and more opportunities for everyone, and that’s the kind of legacy I want to leave behind.
