Financial Literacy – Everyone wants more resources.

Everyone says they want to increase their wealth for retirement – or something.  Why do some people succeed so much better than others who have similar incomes, family sizes and other influences on their abilities to improve their resources? 

By J. David Lewis

A year ago, I was selected for the NAPFA National Board of Directors (National Association of Personal Financial Advisors).  I chose the Board of Trustees for NAPFA Consumer Education Foundation as a work area.  Its mission is to “educate consumers about basic financial matters and to help them identify financial services that are in their best interest.”  Our slogan is “Turning Americans into Confident & Proactive Financial Decision Makers.”  In a “monthly board call” we were asked to read Financial Literacy: What Works?  How Could it be More Effective? By William G. Gale and Ruth Levine (October 2010).

It is a pretty academic paper that reviews numerous studies from the 1990s to 2010, for better public and private policies to improve people’s financial lives. The paper notes;  “In a recent consumer study, 21 percent of individuals surveyed – including 38 percent of those with income below $25,000 – reported that winning the lottery was “the most practical strategy for accumulating several hundred thousand dollars” of wealth for their own retirement. In addition, 16 percent thought that winning the lottery was the best retirement strategy for all Americans, not just themselves (Consumer Federation of America and The Financial Planning Association, 2006).”

The categories of studies reviewed include Workplace Financial Education, School-Based Financial Education, Credit and Mortgage Counseling, Community-Based Financial Education and The Effects of Planning on Wealth.  Although many of the programs within these categories may seem promising, few have proven themselves statistically successful.  Companies that make a “big deal” of their 401(k) tend to actually improve participation a little.  There was some evidence this 401(k) education may also motivate saving outside retirement plans.  However, the best results seem tied to automatically enrolling employees into default 401(k) portfolios.  It seems employees look at a list of investments, fear making a “wrong” decision and don’t do anything, when any decisions they could make within the 401(k) would be better than forgoing these opportunities to accumulate wealth seamlessly.  An automatic “kick start” for financial decisions gets them on a better path.

From my reading of the paper, I didn’t feel School-Based Financial Education was very successful.  I speculate that students are just not ready to consider these issues.  Credit and Mortgage Counseling seems to have some impact, possibly because people participating are motivated by financial problems they realize they must solve.  Frankly, I was a bit confused with the discussion on Community-Based Financial Education.

It was reassuring to read that Planning on Wealth seems to have high correlation to wealth accumulation.  Whether with the help of a professional or through self study; disciplined people find ways to overcome indecision.  The paper focuses on getting people started saving – particularly saving for retirement.  With 29 years in Resource Advisory Services I think there is one more element for financial wellbeing the paper did not describe.

There is more to money than money®.  Since entering this profession, I have believed the important number to watch is net worth – the total of all assets less the total of all debts.  Net worth should be increasing.  There are two ways – increase assets and/or reduce debts.  To know whether you are making progress, net worth should be calculated regularly.  Anyone should be able to do it and every three months is about right.  Like weight control, you get on the scales to check progress.

The composition of total assets is also significant.  Liquid assets, like checking and savings accounts, are for routine day-to-day household operations.  The home with its furnishing, plus cars, recreation equipment and other amenities are a class of assets that defines lifestyle – hopefully comfortable. However, lifestyle assets compete with investments, which are held for future spending – retirement or whatever.  We need all three classes.  If we expect to live comfortably in retirement, investments should grow large enough to sustain the lifestyle we need for comfort – whatever that is.

Debt means you bought something you did not have cash to buy.  It commits future income to something that presumably improves your lifestyle now.  If debt is not paid off around retirement time, paying it will compete for investment resources to sustain your lifestyle.

Balance is important.  In my experience, regularly following just a few numbers seems to have considerable influence on wealth management and accumulation.  Are total assets growing?  Are investments a larger part of the total than they were in the past?  Are debts decreasing along a path toward zero?  This discipline is the step that provides knowledge about whether planning has improved behavior.  Many people can do it.  It is the discipline to do it that is the problem, which probably explains most of the differences in financial success for people with similar circumstances.

Contact J. David Lewis directly with or share your thoughts on this topic below. He founded Resource Advisory Services in 1985.  National Association of Personal Financial Advisors (NAPFA) was formed only a few years before. Lewis became a NAPFA-Registered Financial Advisor in 1986.  He is a passionate advocate for fiduciary, fee-only financial planning and has been associated with financial services since childhood in a banking family. 


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