An essay on financial literacy
Since founding Moneythink here at the University of Chicago, we’ve been talking incessantly about financial literacy and its importance to anyone who would listen. A good friend of many of the Moneythinkers here on campus, and an avid supporter of our cause, Jason Cigan compiled his thoughts on financial literacy in the essay below. It is certainly worth the read.
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Any assessment of the importance of financial education is likely an understatement. Nobody is above the need for it, just as nobody is below it. The elite, the homeless, and everyone in between can all stand to gain by learning more about how to manage their money and other resources.
Contrary to popular opinion, no amount of money is ever “enough” for one to live on without worry. This is a fundamental principle of finance. Millionaires and even billionaires still must carefully manage their wealth, lest they squander so much that their children, their great-great-grandchildren, or even they themselves, are not adequately provided for.
Financial well-being owes far more to prudence than to size of annual salary (though the two are certainly correlated). The concept of millionaires going broke sounds absurd at first, until one considers that sixty percent of NBA players, who on average earn multiple millions per year, go bankrupt within five years of retirement (source: http://sports.espn.go.com/espnmag/story?id=3469271). Great wealth brings the temptation to disregard one’s finances, but to do so can be a fatal error. The list of formerly wealthy celebrities gone broke is extensive: MC Hammer, Mike Tyson, Benedict Arnold, and even President Ulysses S. Grant, among thousands of others
The act of internalizing financial prudence requires far more than an understanding of basic principles. As such, even the keenest minds often fail to effectively manage their money. The great humorist Mark Twain, for one, displayed great awareness of the elasticity of supply when he quipped, “Buy land, they’re not making it anymore.” Wise words, no doubt, but they weren’t enough to keep him from outliving his means and watching his entire fortune dwindle away in his mid-life, a trend that forced him, despite his celebrity, to tour and lecture as a means of sustenance. Perhaps the circumstances of Twain, who insisted one should “never let schooling interfere with [one’s] education,” never went to high school, and grew up with little money to speak of, made it difficult for him to understand that a massive house decorated with bronze pillars was not a wise use of his considerable earnings.
As one of my favorite writers, Twain has taught me many things, and how not to manage my finances is one of them. Twain’s life was marked by bitterness, torment, and a good deal of buyer’s remorse; the latter is my ultimate guide for spending money: am I going to feel bad about purchasing this? But I, despite being primarily a literature student, learned even more about finance from my days as an intern at Edward Jones. I was taught that it is never too early to start saving and investing money. Consider this example, derived from a table I was shown on the job: Jack and Jill, who are both the same age, start investing early in their lives. Jack puts $1000 a year in a mutual fund every year for 20 years, starting when he is 20 years old, investing a total of $20,000. Jill put $1000 a year in a mutual fund from when she was 12 until she was 20, but stopped then after investing only $8000. At realistic interest rates, who has more money when both are 40 years old? The answer may surprise you: Jill does, despite having invested less than half the amount of money Jack did.
I opened a bank account and began investing as soon as I found this out–although I was at an age closer to when Jack started investing than when Jill did, unfortunately. Also, I made an effort to curb luxury spending, such as the money I put into my book collection and junk food. I realized that the fact that I had not been prudent with my money until then–and, frankly, could stand to be more prudent even now–should be an incentive, not a deterrent, to manage my finances more carefully. It is never too early or too late to think about money–whether one is five, fifteen, fifty, or even a hundred years old. The more money one saves early and midway through life, especially in the current recession, the earlier and more comfortably one can retire. There is no reason one should, like Mark Twain or so many professional athletes, be forced to work gruelingly late into one’s life to support oneself–or, worse still, fail to support oneself. Money isn’t everything in life–family, friendships, and relationships ought to take precedence–but it is a very important thing, something that, along with other material resources, everyone should be thinking about in every key life decision.
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Posted by Morgan. Essay written by Jason Cigan.