where does financial illiteracy end and personal responsibility begin?
Personal debt burdens are at record highs and have become a major focal point of businesses and governments. Debt has become such a major issue in our society that even presidential candidates are basing they're election platforms on how to handle the crisis. Cancelling student debt, free college and other ideas are dominating the political landscape. This is not a political blog so we're not trying to decide who gets
help and how much. The more important questions are how did we get here and how do we avoid it in the future?
Stagnant wages combined with more expensive housing, education and healthcare are obviously major drivers of the increasing debt burden. Combine this with a severe lack of financial education and rampant financial illiteracy, and you could see how this problem has gotten out of control. While it's easy to blame all of the problems on these factors (and they do deserve a lot of blame), I recently read an article in the Wall Street Journal that made me question where financial illiteracy ends and personal responsibility begins. Not everyone has a wealth mindset, and it may not be polite to question someone's common sense, but it does play a role in our financial lives so it's worth discussing. Where does common sense come into play? And at what point does a lack of education become an inadequate excuse? If you don't know what I'm talking about, you've never been pulled over for speeding and told the cop you didn't know the speed limit. As they say "ignorance of law excuses no one".
The Wall Street Journal article was great reading about increasing debt burdens and how hard they are on people. I agree, and I feel for these people. But when the article began diving into details of certain people's finances, I have to admit I started to feel a little less bad for them.
Article: Angelo Young and Noelle Young of Laveen, Ariz., are going through their own economic downturn. The two-child couple earned just over $100,000 until 2017. They had a roughly $106,000 mortgage, about $97,000 in student-loan debt and $24,000 in car loans.
Me: Yikes. Ok, fine. I'm not going to be too hard on them for having car loans when they have $97k in student debt, but there was probably a better decision that could've been made somewhere.
Article: Then Ms. Young, 33, moved from a full-time to a part-time faculty position at a university because of its budget cuts. With income reduced to around $70,000, they still felt confident enough in their earning power to borrow $48,000 to finance two cars in 2017.
Me: Wait, What? SERIOUSLY?! They originally had $24k in car loans. Then they're income was reduced from $100k to $70k (which means on average they each earn $35k), and they thought this was the time to take out FORTY EIGHT THOUSAND DOLLARS in car loans?
Article: They rolled $13,000 of loan balances after trade-ins into loans for two modestly priced vehicles: a 2014 Hyundai Santa Fe and a new Chevrolet Cruze. The $1,070 monthly car payments were manageable until Mr. Young, 40, left his job working for the city after incurring several pay cuts.
Me: Ok. I can't even begin to figure out how a 2014 Sante Fe and a Chevy Cruze set them back $48k+, but I'm pretty sure that car salesman took his family out for steaks that night. Then they rolled $13k into their new loan which is never a good idea. And now they pay $1,040 PER MONTH for the exhilaration of driving a 2014 Hyundai and a Chevy Cruze.
First of all, despite my ranting I do feel sorry for these people. No one understands the power of compound interest better than the readers of this blog, and unfortunately it's just as powerful when it's debt as it is when
it's equity. Were these people financially illiterate? Yes, and that's likely not entirely their fault. Like most people they were probably never taught how money works. But a line is crossed when someone with over $121k of debt not including their mortgage and a decreasing income decides to take on additional car debt. We don't need a financial education to tell us that a lower income means we can handle less debt, not more. Even those without a financial education can improve their financial situation by thinking about their decisions a little harder and a little longer. At some point people need to use their common sense and not use ignorance as an excuse.
So how do we fix this problem? I'm convinced that if it doesn't become part of school curriculum, then people like us need to teach others what we already know. Send them an article or sit down with them and explain the basics. Urge them not to accept debt as part of their lives. A basic financial education would go a long way for many people.
The good news is that this article had a happy ending. The Youngs learned from their mistakes and Mr. Young said something very financially astute;
“Things we were taught could be assets aren’t really assets,” he said. “They’re liabilities.”
Amen. At least they learned a valuable lesson. Assets are things that make us wealthier while we sleep and liabilities makes us poorer. If we all knew that, no one would be talking about debt burdens, we'd all be sleeping better at night and getting wealthier in the process.