Contributor and Financial Coach
The average American is drowning in debt. From unpaid loans, mortgages, and credit cards, Americans are having more trouble than ever paying back the money they owe.
Current financial literacy in the United States is awful—not that that’s anything new. But it’s not as if people don’t know that saving money is important. Nor is it the case that Americans don’t have access to the financial tools they need to be successful.
So why is it that Americans can’t seem to escape a consumerist spending culture that traps them in debt? Why are Americans of nearly every generation eager to spend without first thinking of the consequences?
Below, let’s take a look at how Americans can stop having a money problem. As we will see, though important, financial literacy just won’t be enough. Before doing that, however, let’s take a look at what financial literacy is and why it hasn’t been working.
What Is Financial Literacy?
At its core, financial literacy is understanding money. People who are financially literate understand how to use money and to save money for their own economic gain.
Though this may seem to be a simple concept, many Americans are financially illiterate. With that in mind, however, it must be noted that America has some of the most advanced financial institutions in place—institutions you would think would encourage the average American to save money.
Access to checking accounts and savings accounts, for instance, isn’t hard to come by. So why is it that most Americans have next-to-nothing in savings? Why is it that it encourages Americans to spend more of their hard-earned money on unnecessary expenditures, even though conventional wisdom tells us to set money aside?
The answer isn’t so clear. What we do know is that Americans enjoy a consumerist culture. We like to “shop until we drop”—even those of us who don’t have the funds to do so.
From eating out to buying unnecessary games, outfits, and other materials, Americans have a problem that’s been created by having too much wealth. In fact, increased access to different forms of credit and loans has made it easier than ever for the average person to start purchasing things they cannot afford.
The end result? People find themselves drowning in debt that they have no way to pay back. Unfortunately, when this occurs, matters can quickly snowball out of control, and people find themselves drowning in debt before they even get started.
Perhaps increased financial literacy would go a long way to shifting American attitudes towards spending—but there’s no evidence of that yet. That’s due in part to the fact that an education in financial literacy does little to develop a true understanding of it.
This proves particularly true for the younger generation. Growing up, our understanding of money is limited—and even those who are successful can find themselves tens of thousands of dollars in student loan debt by the time they are twenty-five.
With this in mind, let’s look at a few ways that financial literacy falls short in promoting the type of healthy spending habits America needs. Then, we’ll look at a few new concepts that might be able to reverse America’s debt-crisis if properly used and combined with effective financial literacy.
Identifying the Problems
We’ve established that financial literacy alone is not enough. But why is this the case? Partly because of the following reasons:
1 – Financial Literacy Doesn’t Motivate
The main problem with financial literacy is that it fails to consider one’s financial or personal situation. Because of this, it cannot motivate people to make smarter spending choices.
In some ways, this is unavoidable. Motivation can be a tricky thing, and supplying resources doesn’t guarantee that people will be motivated to make better decisions.
Just think of it this way: imagine if you had the funds for a gym membership and access to a diet plan that you could follow to get in shape. Would you take advantage of it? Even if you would, do you know some people who wouldn’t?
The same holds true with financial literacy. Sometimes knowing and having access to resources just won’t be enough. On a surface level, we know that we shouldn’t spend more money than we have. We know that if we do, we’re going to be in dire financial straits—and yet we do it anyway.
It may be helpful to remember the old saying that you can lead a horse to water, but you can’t make him drink.
Ironically enough, this even proves true with poor people. In some cases, it’s especially true for poor people—because they’ve gotten poor through bad spending habits. Others, however, may be victims of their situation—and see little motivation to make wiser spending choices when they don’t think it will make any difference.
Because of this, learning to motivate individuals to make healthier financial decisions will require a dynamic approach. This approach should look to increase financial literacy while providing access to equal resources for all individuals. Just as importantly, however, it should make sure that those suffering from poverty understand that an economical use of the resources provided can change their financial situation.
2 – Experience Is the Best Teacher
Quick question: how many of you have had to learn a lesson the hard way?
I know I have.
The problem is that for many people, these hard lessons usually teach real-world economics. What this means is that even for those people who have had a good education, the true impact of making healthy financial decisions doesn’t hit until they’ve found themselves in debt.
Life often works this way—and to some degree, there’s no getting around it. While it’s true that financial literacy is not what it should be in the US, it’s also true that teaching finance doesn’t ensure that individuals will be financially literate.
Many people, for instance, don’t realize the true impact of their financial decisions until it’s too late. But it’s important to remember that these decisions don’t affect everyone equally.
Those living in poverty or near the poverty line are much more affected by bad spending habits. Consider, for example, the following scenario:
Caroline is the daughter of two well-respected attorneys. Her father even owns his own firm, servicing several major clients in the county. Her mother is a highly-respected member of a famous board of attorneys for a major local corporation.
Pete, on the other hand, comes from a family where the net household income is less than $15,000 a year. Through no fault of his own, he’s starting with a natural financial disadvantage. On the surface, this is easy enough to overcome, but in reality, Pete has very little room for error. Any errors on his part could lead to a lifetime of trying to make up for one bad financial mistake.
For example, imagine both Caroline and Pete manage to secure a credit card—Caroline’s with a much higher spending limit. Now, consider what would happen if they had both maxed out—and couldn’t pay.
In order to prevent Caroline’s credit from tanking, it’s likely that her parents would cover her bill. Caroline, now with an understanding of just how dire a situation her bad spending put her in, reverses course and decides to do better with her money.
Pete, on the other hand, proves unable to pay back his bill—even though it’s considerably smaller. Though he’s managed to get a decent job, he doesn’t have any excess money—especially now when he has to financially support his family, as well. The result? Pete ends up in a cycle of debt and ruined credit, making it much harder for him to recover. Additionally, this cycle negatively affects Pete’s mental health, leaving him feeling trapped.
As we can see, though both knew that their spending habits weren’t justified, Pete bears a much larger burden. This is the reality of the American consumer—with those who can’t afford to be hit being hit the hardest.
For this reason, several different organizations have come up with new concepts of raising people from poverty. These concepts include financial health and financial inclusion.
As we consider America’s debt crisis, let’s consider how these two concepts can supplement financial literacy to improve Americans’ spending habits.
What Is Financial Health?
If you’re wondering what financial health is, it may depend on to whom you speak. With several different organizations providing different definitions, it can be difficult pinpointing just what it is.
A relatively new term introduced in 2015, financial health refers to the overall financial well-being of an individual. Financial health is an important concept, as it takes into consideration the different circumstances that individuals may face.
This means, when thinking of financial health, the difference between Caroline and Pete’s situations would be considered. This allows for a more targeted strategy that offers better solutions to both involved.
Importantly, this also gives governments and other institutions a way to rethink traditional understandings of finance. Instead of thinking of blaming consumers for poor spending choices that put them into poverty, it would allow for the possibility that the consequences of bad habits don’t apply evenly across the income spectrum.
Now, this doesn’t excuse poor financial decision-making. Instead, it works to identify areas in which individuals from different income classes face different results for their poor decisions. This means understanding that consumerism is a problem across the board—but the poor are disproportionately affected. This also realizes the notion that some individuals are poor not because of their spending habits but because of situations largely beyond their control.
As you can see, this offers a much broader view and understanding of poverty. By having this greater understanding, institutions with power can better address the underlying causes of poverty in different communities.
And importantly, this can provide better motivation to those who are poor. This can be achieved through the process of financial inclusion.
What Is Financial Inclusion?
Financial inclusion uses the knowledge gained in financial health to try and find ways that the market can more readily accept a variety of individuals.
In other words, this allows individuals who have fallen on hard times to have access to the services they need to start building their lives.
To continue our example, Pete’s failure to pay his credit card will lock him out of enjoying many financial benefits. For instance, he may have trouble renting or buying a home, purchasing a car, and even getting a cell phone plan. With financial inclusion, businesses and the market would work to accommodate Pete and not deny him access to the very tools he needs to make a financial recovery.
In many ways, this approach would not penalize people for being poor. Importantly, it wouldn’t excuse bad decision making or make current credit scores and other determinants useless. Instead, it would offer a more acceptable approach into the market, giving those with the right desire and motivation a second chance to get their finances in order.
In this way, financial inclusion can help combat the debt crisis in America. Coupled with proper financial literacy, this approach can boost the overall financial health of individuals across the nation. The effect would be to cut down on poverty across the board, all while helping individuals encourage and develop better spending practices and financial habits.
The Bottom Line
America is facing a debt and spending crisis.
But are traditional methods enough to combat it? Is financial literacy by itself enough to stop a growing tide of debt from blanketing the nation?
It’s unlikely. Though financial literacy is an important first step in making sure that individuals are aware of financial resources and good spending habits, it’s not enough to encourage them to make the right decisions.
For this reason, a more inclusive and dynamic approach must be taken to help those living in poverty—and to prevent others from getting there. With an emphasis on financial health and financial inclusion, we can reduce the number of people living in poverty—as well as how long poor people stay poor.
James Brown | Contributor & Financial Coach
My goal as a financial coach is to empower my clients by aligning intentions with meaningful actions through proactive and tax-efficient planning, to help ensure they reduce economic vulnerability and build enough wealth to live their very best lives, now and in the future.
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