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Americans fall short in financial literacy

The following column from John Lueken, CapWealth Executive Vice President and Chief Investment Strategist, was posted by The Tennessean on April 15, 2019.

John Lueken, CapWealth’s Executive Vice President and Chief Investment Strategist

We teach our children to wear seat belts, to eat vegetables and to wash their hands, but do we spend enough time educating them on the dangers of too much debt or the wonders of compound interest? Do we have real conversations about the long-term financial impact of student loans and high-interest credit card debt?

According to the 2015 Standard & Poor’s Global Financial Literacy Survey, the answer is no. While the U.S. is the world’s largest economy, America is ranked 14th when it comes to the percentage of adults who are considered financially literate (57 percent). To put that into perspective, at 57 percent America is slightly ahead of Botswana — an economy that is 1,127 percent smaller!

Researchers also found that only 37 percent of Americans were able to answer simple questions about inflation, compound interest and diversification. That was down from 42 percent in 2009. While scary in its own right, this also comes at a time when Americans are increasingly charged with taking responsibility for their financial future.

Parents can — and should — help their children get started on the right foot financially by discussing the most important financial decisions a young person will make.

Student debt

College loans are the first time many young people will take on debt. Far too often, the burden of student debt is discussed (or realized) long after the debt has been incurred, and that burden is often carried around for many years after college is over — decades for some.

Student loans are now the second-highest household liability (after home mortgages), and student debt is the most common form of consumer debt to become delinquent, or to be reported to the credit bureau as past due.  Since average college debt per student has more than doubled over the past decade, this can have serious ramifications.

Saving early for retirement

With student loan debt taking priority over retirement savings, Americans are falling further behind in saving for retirement — and we are way behind to begin with. According to a 2018 study by Northwestern Mutual, the median retirement savings for Americans between ages 55 and 64 is $120,000. Invested in an inflation-adjusted annuity, that would provide a mere $320 per month in retirement income.

By not starting to save for retirement early, young adults are missing out on the power of compounding interest. We often use the hypothetical example of a young girl who was able to save all her birthday and babysitting money from the age of 14 to 23 ($3,000 per year). Earning 10 percent interest per year on that initial $30,000 investment (never investing another dollar), she would have $1,110,447 by the age of 55. By contrast, a young man who started saving at 24 and invested $3,000 every year until he was 55, earning 10 percent interest every year, would have $663,755.

Credit cards

Compounding interest also works in the favor of banks and lending institutions, and many young people are too easily lured into high-interest credit cards with the promise of greater purchasing power. In today’s impatient, “I need it now” society, young people could benefit from learning about the value of delayed gratification and deferring large purchases to when they can actually afford them before finding themselves overwhelmed by credit card debt.

Unfortunately, parents can’t depend on the schools to start these discussions. According to the Council for Economic Education, only a third of high school students are required to take a course in personal finance and only five states require a semester-long, standalone personal finance course.

Early education around simple financial concepts (credit scores, budgeting, personal balance sheets, compound interest) could dramatically improve the financial decisions of the next generation and help them avoid the common pitfalls of bad credit and high-interest loans.

For more insights, ask your financial adviser or industry professional for their best tips for building a strong financial base for your children and family.

John Lueken is the executive vice president and chief investment strategist at CapWealth.

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