An “F” in Finance?
Why Young People Need a Crash Course in Financial Literacy
(and 10 Lessons They MUST Learn)
Is America failing finance? It appears many of us are…and very few others are anywhere near the Honor Roll. A 2013 survey conducted by the National Foundation for Credit Counseling found that 40 percent of Americans would give themselves a grade of C, D, or F when rating their personal finance knowledge. The same survey found that 39 percent of adults in the United States report that they have no savings.
In the aftermath of the financial crisis that left many Americans reeling, the reality is still bleak: Instead of living the American Dream, many are living paycheck to paycheck. John Vento says all of this is why the need for personal finance education has never been greater.
“Part of the reason the 2008 financial crisis had such a widespread reach is that many Americans simply didn’t have the financial literacy to protect themselves in such a crisis,” says Vento, president of his New York City-based Certified Public Accounting firm, John J. Vento, CPA, P.C., and the Certified Financial PlanningTM firm of Comprehensive Wealth Management, Ltd., as well as the author of Financial Independence (Getting to Point X): An Advisor’s Guide to Comprehensive Wealth Management (Wiley, 2013, ISBN: 978-1-1184-6021-4, $40.00, www.ventocpa.com). “They lacked the firm understanding of fundamental financial concepts and strategies and the ability to manage money responsibly.”
Vento fears that a lack of knowledge persists, and worse yet, that it is being passed down to the next generation.
“Many young people look to their parents for guidance on money issues,” he notes. “Unfortunately, many parents lack a strong understanding of financial matters, and as a result, they miss opportunities for saving, lending, and basic financial services. We need to break this cycle—and one way to do so is to make financial literacy an educational focus in high schools, colleges, and universities.”
April is Financial Literacy Month, and in order to spread the word Vento will partner with members of Congress from the Financial and Economic Literacy Caucus* (See below for more information) to speak at high schools and universities in the New York City area. His immediate goal is to educate children and young adults on the importance of becoming financially literate before they enter the workforce. But a broader goal is to make financial literacy an educational requirement in the nation’s schools.
“I truly believe the most dangerous threat to our nation and its citizens is a lack of financial literacy,” says Vento. “Americans still struggle to make wise financial decisions because these concepts are not a focus in our education system. So when we reach adulthood, it’s either sink or swim—and too often we make bad financial decisions and suffer the consequences later in life.
“Our educational system devotes a considerable amount of attention to teaching students about the dangers of drinking and driving, using drugs, and practicing safe sex,” he adds. “But, unfortunately, the topic of financial literacy is largely ignored. Throughout our lives, we will encounter many questions and problems relating to money, but every one of them will fall, in some way, under one or more of the following 10 financial literacy lessons.”
Below Vento outlines the lessons that a comprehensive financial literacy curriculum should include. This curriculum should be a core component of the requirements to graduate, so that students will be better prepared to deal with the financial realities of life. This lesson plan can be used by educators in high schools and colleges throughout the country.
Lesson 1: Live within your means. “Living within your means” is living on less than your take-home salary and any other resources you receive, such as income from an annuity or a trust. Living within your means does not mean existing from paycheck to paycheck. Living within your means does not mean living on credit or on loans. Living within your means does not mean turning to parents or friends to pay the tab when you cannot quite meet the rent or need to buy a new computer. It means not only figuring out how to pay for your needs and wants, but budgeting your income so that you still have a little money left over.
“The single most important step any individual must take to become financially independent is to commit to living within his or her means,” says Vento. “In addition to living within your means, if you are ever going to get to Point X, you must also save money. Therefore, ‘living within your means’ includes not only such necessities as shelter, food, utilities, and clothing, but also payment into your personal savings. Ideally, that payment should be 10 percent or more of your gross pay.”
Lesson 2: Understand taxes. The average American family pays more than one-third of its income in federal, state, and local income taxes—and even more in property taxes, excise taxes, sales taxes, and other hidden taxes, such as taxes on cigarettes, liquor, and certain luxuries. In other words, for just about everyone, taxes are our biggest personal expense, by far.
“In order to reach Point X, it is imperative that you understand the basics of our tax system, and that you practice careful and strategic tax preparation and planning so your personal tax burden does not deplete your income unnecessarily, and your wealth accumulates quickly and safely,” explains Vento. “Tax laws are incredibly complicated, and there is no reason for you to read up on or understand the virtually infinite ins and outs of the often-arcane U.S. Tax Code. Most people do need help from professional tax advisors to benefit from tax strategies; however, you should have enough basic knowledge about taxes and the tax system to ask the right questions and find the appropriate help to suit your own unique financial and tax needs.”
Lesson 3: Determine your financial position. Determining your financial position does not mean simply knowing your annual salary or identifying how much you take home in every paycheck—although that is definitely part of it.
“In order to live within your means, you must have a precise understanding of your financial assets, liabilities, and net worth by preparing a Statement of Financial Position,” notes Vento. “You also need to know—and to track on a regular basis—where all your personal funds are coming from and going to: This is your Statement of Cash Flow. Finally, after taking a careful look at your current financial position, you must determine your financial goals, whether for five years, ten years, or throughout your retirement years. Only then can you realistically budget for the future—and of course, reach Point X.”
Lesson 4: Manage debt. For many people, debt is a scary concept, although it need not be. The fact is there is good debt and there is bad debt. Understanding the difference between bad debt and good debt is imperative to becoming financially literate and financially independent. Basically, good debt is money that people borrow for purchases and situations that, in the long term, will help them amass wealth and ultimately reach Point X. Some examples of good debt include student loans, business loans, certain investment asset loans, and some personal-use asset loans (such as an affordable home mortgage). In contrast, bad debt is money that people borrow (usually on a credit card) for the purchase of nonessential expenditures as well as many personal-use assets.
“When you do not use debt properly, that can lead to significant financial hardship and can prevent you from ever becoming financially independent,” says Vento. “However, when you use debt to leverage yourself in the pursuit of accumulating wealth, it can be a very powerful tool.”
Lesson 5: Insure your health and life. Even a sound, carefully planned investment strategy can fall apart if you have not prepared properly for unforeseen problems concerning health and life. If you or a member of your family is hit with a prolonged illness, a severe injury, a disability, or death (especially of the primary wage earner), the planning and investing you have so carefully developed can quickly disintegrate.
“Health insurance and life insurance help protect you and your family from the unexpected,” explains Vento. “The premiums you pay will provide you with the peace of mind that comes with knowing that your assets and family will be protected, if and when the unexpected happens. Having the right kinds of health and life insurance at the appropriate stages of life is as important as the insurance itself. Your particular situation will determine what type of insurance you need, what kind of policy or policies will work best for you, and the amount of coverage you should carry.”
Lesson 6: Protect your property with insurance. Protecting your property by implementing the proper risk management strategies is critical to achieving and maintaining your financial independence. The type and extent of insurance you need will change throughout your lifetime, as will the types of assets and the extent of wealth you have accumulated. The three major personal property risk management issues include homeowner’s insurance, automobile insurance, and umbrella liability insurance.
“You should consult with your property liability insurance agent or broker to fully evaluate your needs so that you can determine proper coverage to meet those needs,” asserts Vento. “It is critically important to remember you should always secure your new insurance coverage before you drop your old policy. You never want to leave yourself unprotected without proper coverage in between policies. Obtaining the proper homeowner’s, auto, boat, and personal umbrella liability coverage can provide you with the peace of mind of knowing you and your property will be protected. Being unprepared for the unexpected can rob you and your family of your pursuit of financial independence.”
Lesson 7: Pay for college. Many people, parents especially, worry about covering the ever-growing expense of getting a college education. Of course, it’s possible to get academic or athletic scholarships or grants. But most young people will need additional funds either from their parents’ savings or through student loans.
“With the skyrocketing cost of college, it’s important that you start planning early,” says Vento. “Parents and rising college students should take advantage of college savings programs such as Internal Revenue Code Section 529 plans, Coverdell Education Savings Accounts, savings bonds, financial aid (such as federal grants, loans, and scholarships), as well as education tax deductions and credits. Understanding how scholarships, government grants, and student loans can help is essential.”
Lesson 8: Plan for retirement. Everyone should be planning financially for retirement, regardless of how old or young they are. Especially given that people coming into retirement are facing concerns that retirees did not face 20 or 30 years ago, including living longer and supporting themselves throughout turbulent financial times.
“The longer you wait to start saving for retirement, the harder it will be to accumulate the amount you need to be financially independent,” says Vento. “Remember, one of the most valuable investment assets you have is time; the more years you save the greater your chance of financial success. By far the easiest way to do this is by contributing to your employer’s retirement plan, or if that is not available, to an individual retirement account (IRA). Implement a retirement saving strategy that allocates a specific dollar amount or percentage—I recommend at least 10 percent—of your salary every pay period. Therefore, you are paying yourself first, as though saving for retirement is your number one required expense. In fact, saving for retirement is not an expense because it adds to your investable assets, but treating it as such is of utmost importance to your success.”
Lesson 9: Manage your investments. The rewards of proper investing can be very generous when investors adopt an investment discipline that allows them to purchase quality investments and then allows those investments to take their course. This may have been best said by Warren Buffett, the primary shareholder, chairman, and CEO of Berkshire Hathaway who is also considered by many to be the most successful investor of the 20th century.
“It is critically important that you select an investment model that you are willing to stay with, even in the worst of markets,” notes Vento. “The appropriate investment plan for you should be the one that provides you with the highest potential rate of return in the long run that is within your risk tolerance.”
Lesson 10: Preserve your estate. If you do not take the necessary steps to preserve your estate, unintended beneficiaries may take a significant amount of your estate instead. These unintended beneficiaries include the federal and state governments, the state administrator, attorneys, and perhaps even relatives you have not spoken to in decades. The money you may spend today on a qualified estate attorney may save your estate significant dollars in both estate taxes and administrative costs down the road.
“Estate planning, which I should stress is not just for the wealthy, can give you peace of mind by assuring your family’s financial security will continue even after your death,” says Vento. “It can significantly reduce estate taxes, administrative costs, and assure that your loved ones will be taken care of. It allows you to dispose of your assets as you see fit, with consideration given to your heirs’ individual needs.”
“It is critically important that people of all ages understand these 10 lessons and work within them productively—that they become financially literate,” he concludes. “But if we help younger generations avoid the bad habits that have crept into the way so many Americans manage their finances today, we really have a great opportunity to set them up for a brighter future. And when they are more prosperous, the economy as a whole will be more prosperous.”