The severity of this downturn is still sinking in, and as it becomes increasingly clear that we’re a long way from real recovery, the global financial education movement gathers momentum. The thinking in many parts of the world: Poor individual financial choices made the crisis worse and if we are to avoid a repeat meltdown, ordinary folks must better understand how to handle their money.
According to the Organisation for Economic Co-operation and Development (OECD), more than 20 nations are now incorporating financial lessons into K-12 school curricula. In a 2009 report, the OECD noted:
“The origin of the current crisis is rooted in housing price bubbles that were fed by providing overextended consumers with access to credit. Financially literate consumers, it is argued, would have been more cautious in taking on credit they couldn’t afford.”
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Certainly, other factors were in play as well – like lax regulation and hyper aggressive mortgage brokers. Still, a more financially astute public might have been smarter about borrowing. The OECD draws a picture of the problem:
“In Australia, only 28% of respondents can calculate compound interest, and in the United States, the figure is even lower, at 18% among adults in the baby boom generation. Moreover, consumers rarely practice basic financial skills, such as budgeting, developing a regular savings plan, or planning for retirement.”
We’ve known or at least suspected all this for a few years. Sharpening the focus today is a deeper understanding that this recession isn’t going away quietly. Consider:
- Wages are going down. The New York Times reports that since the recession officially ended in June 2009 inflation-adjusted median household income in the U.S. has fallen at twice the rate as it did during the downturn.
- The stock market is dead. True, 401(k) balances hit a record average balance of $75,000 this year. But nearly a quarter of those accounts have outstanding loans against them and much of the gain has been through contribution, not investment return. Stocks have been dead money for a decade.
- Savers have a new mindset. People have shifted from “recovery” to “discovery,” according to a new report from The Principal, a 401(k) plan administrator. More are accepting that an economic rebound is still years off and that they need to ramp up saving now; they are seeking advice in bigger waves.
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So the time is right for a bigger financial education push. At the recent Nantucket Project, a big ideas summit, financial literacy was front and center. Mellody Hobson, president of Ariel Investments, was most eloquent on the subject. Young girls, especially, grow up with rescue fantasies, she said. But there is no hero to save individuals who can’t budget and save. She has adopted a Judy Collins quote as her guiding principal: “Live your life as if no one is coming.” It applies to economic security as surely as it applies to Prince Charming.