Fiscal Literacy Needed to Avoid Poverty Traps, by Fred Banyon

banyon_smIn Arizona, the governor recently signed legislation requiring that high school students pass a civics exam before they graduate. It’s the same test the U.S. Immigration and Naturalization Service gives to prospective citizens. As one state senator explained, “a minimal understanding of American civics is of real value.”

Don’t stop there! Students in Arizona and everywhere also should meet a financial literacy requirement.

We have graduates who cannot balance a checkbook and don’t realize the power of saving. To some, it’s more important to have nice stuff than prepare for the future. A survey commissioned by Bankrate found more than half of Millennials are afraid to invest. Unspent money sits in accounts, where it’s not much more productive than in a mattress.

There’s a crisis when people cannot recognize the importance of, or proper options for, investing to earn for a house, car, their children or retirement or deal with the complexity of those transactions.

There’s a patriotic value in knowing civic matters, but youth also need to understand basic financial challenges. Teaching basic market and investment principles should be a major educational objective.

It’s not just something to quiz students about during senior year. Financial literacy should run throughout the K-12 learning process.

The dearth of budgeting, investment and savings acumen in the United States, especially among those living in our inner cities, is a real problem. People understand problems regarding employment and public services, but financial illiteracy is less noticeable. How can one really accumulate wealth without knowing how to manage money?

Without a plan, earnings will likely just be filtered back into society through consumption, ignoring the concept of ownership found in stocks, bonds and real estate. Without budgeting, saving and investing, money just gets spent. It can lead to living beyond one’s means. That’s a poverty trap!

Without a sound grip on finances, it’s possible for someone to fall into poverty traps. Avoiding them starts with budgeting.

I recently discussed financial literacy with Jack Ablin, the chief investment officer of BMO Capital in Chicago. He noted there’s a difference between wealth and high salaries. People can make a good wage and be cash-rich, but they can also be asset-poor with little to show for it.

It’s not right to hate on people for what they drive or which designer they wear, but an expensive ride with nothing invested for the future is something to be pitied instead of envied.

How can one become financially literate?

Start by sticking to a monthly budget. Knowing what’s coming and going from one’s pocket is key to eliminating bad habits and keeping up good ones. Having an emergency fund of six month’s salary is also smart.

Use cash for groceries and personal care items. Pay off credit card balances promptly, and make sure there are reward points on the cards (and use those points). Participate in a 401(K) retirement plan and take advantage of employer-matched contributions. Consider a personal Roth IRA.

When I advise people about financial literacy, I also suggest a “6/10 routine,” in which one spends six hours each month studying financial news and setting aside ten percent of earnings for saving and investing.

It’s not wise to carry balances on credit cards. Pay them off! Be careful about short-term teaser rates because they can be poverty traps if rates rise and balances accumulate.

After setting up a retirement plan, don’t tap into it. Plans allow for hardship withdrawals, but a six-day Caribbean cruise isn’t a hardship.

Don’t try to keep up with the Joneses. A Rolex and a Timex tell the same time. Buying a house is the American dream, but it shouldn’t be attempted until one is 100-percent ready. Eating out is fun, but restaurant meals can add up. Spend prudently — five dollars a day at Starbucks totals $1,825 a year!

Financial security and stability is a personal matter, but it can and should be taught. Discipline can be gained through financial literacy.

Creating and maintaining one’s own financial security requires sophistication, education and a stable salary — but discipline is key. That’s why instilling financial literacy in our students is so important. After all, as the old saying warns: “A fool and his money are soon parted.”

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Fred Banyon, a financial literacy advocate, is a stockbroker with American Trust Investment Services in Chicago. Comments may be sent to [email protected].

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