This post may contain affiliate links. Check out the disclosure page to learn more.
The current picture of American financial health is a bleak one. According to the latest data from the federal reserve, Americans hold over $999 Billion in credit card debt and $2.8 Trillion in consumer loan debt - with $1.17 trillion of that in auto loan debt alone. The average American family is living paycheck to paycheck, meaning that they are only one missed paycheck away from losing almost everything. This probably stems from the finding that only 32% of American households actually have a budget! It's insane that only 1 in 3 families tell their money where to go while the other 2 families are ruled by their paychecks.
Essentially, the only way to cure this financial sickness is through the spread of basic financial education. Getting this information out can be done through a variety of different methods. Whether it be through home education, reading, or formal schooling - this education is so badly needed as apparent in the picture painted above.
Ultimately, like anything else, financial education begins in the home - whether consciously or not. Think of getting cut-off on the freeway and then demonstrating your sign language to the perp all the while forgetting Jr in the back seat. Now, you've just unconsciously taught your kid the sign for "bird". Just like social skills, good (or bad) money practices are developed at a young age and are usually learned by following the examples of the heads of the household. Any habit or behavior learned early and reinforced often become one of the hardest to break. This presents a huge problem for people growing up in poor homes or homes led by someone intent on keeping up with the Jones'. Poverty is a vicious and hard to break cycle.
Picture this: a classic tail of two kids from opposite sides of the track. Darryl's mom works as a commodities broker in the city while his father is a patent attorney. Darryl has only one other sibling - an older sister who's just starting high school. Together, his family brings in about $320k a year. They live in a mortgaged 5,700 sq ft home with a pool. They've financed a BMW X6 for mom, Tesla Model S for dad, and a brand new Nissan Titan to haul the family's financed boat to the lake. The family hardly ever cooks at home so when cash gets low at the end of the month, they just make up the difference with their credit cards.
Darryl's best friend at school is Ava. Her dad owns a small pest control business and three rental homes. Ava's mom works part time at home as their business' office manager, property manager, accountant, scheduler, and marketer. With the business and the rentals, the family brings in about $75k. Ava, her parents, and her two brothers live in a 1,500 sq ft home that is 6 months from being paid off. The family has two vehicles paid in full... a pick-up truck that is used for the pest control business and a used SUV bought with cash to get the whole family around. The family hardly ever eats out and has, on average, about $600 left over after expenses that they are saving to buy more rental properties.
Out of the two friends, who is going to grow up the most financially literate? Clearly it's going to be Ava. Although her family earns far less than her pal's family, they are on track to reach a level of financial independence that Daryl's family can only dream of. Ava is learning to save, live below her means, accumulate assets and to only use debt when it is absolutely necessary. Daryl on the other hand is learning to borrow, spend, and borrow some more.
To the parents out there, lead by example. If you do not yet have children, get your financial picture in order before you do so the proper financial educating will be effortless and unconscious. For those of you planning to never have children, just be a good example. You never know who's watching!
What lessons have you picked up from the ones who've raised you? What are you going to do to improve your financial knowledge?