By Kathryn Davis, CEO, BALANCE

Almost four-in-five American workers live paycheck to paycheck, nearly three-in-four are in debt, and one-in-four do not have any significant savings. Further, studies show that two-in-three Americans lack basic financial literacy. This deadly combination – of low financial literacy, poor finances and poor financial decision-making – precipitated the global financial crisis of 2007-2008 that sunk and severely debilitated many of America’s biggest financial institutions. On the bright side, the crisis showed us that financial education could go a long way toward mitigating various risks to America’s financial institutions and society as a whole.

A 2015 study by FINRA discovered that 63% of those surveyed could not pass a basic financial literacy test that covered everyday economic aspects, such as compound interest, inflation, mortgage payment, risk and diversification. Most Americans struggled to balance monthly income and expenses, and 54% had no rainy-day fund to cover three months of expenses to tide over layoffs, illnesses or other emergencies. 73% engaged in expensive non-bank borrowings such as auto-title or payday loans, and 48% paid minimum balances or defaulted on credit card payments, ballooning their debts.

The Underground seeks to mesh credit union philosophy with the modern marketplace. Won’t you join us?

So, what gives?

Google “financial literacy,” and you’ll find a wealth of articles that correlate financial literacy to increased savings and investment, greater participation in the stock market, reduced household poverty, and other positive economic benefits.

Millennials are better educated than earlier generations but getting an educational degree doesn’t make them financially capable. What’s needed is comprehensive financial education for all ages, ideally starting in elementary and middle school before parents hand credit cards or money to kids, and before bad financial habits kick in.

Broadly speaking, a financial education should include age-appropriate topics such as:

• Making a budget, and the importance of sticking to it
• Understanding compound interest; how it negatively impacts our loans and drives us deeper in debt; and positively impacts our investments and grows wealth
• The basics of banking services, inflation, and building a good credit score
• The importance of paying-off credit cards in full each month, and not carrying high-interest balances that drive them deeper into an unending cycle of debt
• Saving for a “rainy day” with at least three months of expenses to cover emergencies such as a job loss or an illness
• Saving for life’s major expenses such as a down-payment on a house, buying a car, saving for college, etc.
• A primer on equity and debt investments, low-cost index funds, average market returns, market cyclicality, fiduciary financial planning services, the downsides of commission-only investments, and the tremendous value of leaving it to the experts while knowing enough to not get taken for a ride.
• A primer on taxes, the tax benefits of retirement savings plans, matching company contributions, charitable contributions, etc.
• Practical lessons such as comparison shopping, savvy spending and holding off on instant gratification purchases.
• In addition, money should be discussed at the family dinner table so children grow up with fiscally prudent values.

Financial literacy and inclusion are key issues the Underground tackles. Interested in joining us?

Financial Literacy Mitigates Risks For Credit Unions

Financial literacy helps consumers stay out of debt, save more by living well within their means, earn higher credit scores, and make prudent investments that grow long-term wealth. It also reduces stress levels and promotes better physical and emotional health. Financially literate consumers exercise greater fiscal prudence, ask more questions, demand transparency, independently compare financial products and don’t get conned by nefarious schemes. Savvy consumers are also better prepared for emergencies, financial downturns and economic cycles.

When consumers save more, they have more to invest, are less likely to liquidate investments, and make good members for credit unions. A society of savers reduces a government’s burden to provide social services, and allows taxes to be used for education, healthcare, innovation and growth, which further strengthens the economy.

At the end of the day, financially savvy consumers significantly mitigate risks to the financial system, the nation and the world while setting the stage for robust growth.