Personal Finance

Don't Be A Laughingstock: Stamping Out Financial Illiteracy -- Why It's Time to Take Action

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Being financially literate can lead directly to a more secure financial future. So why aren't more people getting educated on money management?

By Vaibhav Kadikar, Founder and CEO, CloseCross, a decentralized prediction market platform

Millennials—the generation of Americans born between the early 1980s and the mid-1990s—are the most educated generation to date. Today, over a third of Americans aged 25 to 34 have college degrees. The truth is that despite unprecedented levels of education when it comes to investing and personal finance, millennials are not well placed to make the most of it.

Without this foundational knowledge, their financial health is entering adulthood at a significant disadvantage. Millennials graduated into a miserable job market with a crushing burden of student debt. Those who had any savings saw it quickly disappear.  Though the markets have since amply recovered, the scars of the crash continue to resonate. Confidence in the stock market and levels of financial literacy have suffered in recent years, and investment rates lag significantly behind the overall rebound the market has made.

Much interesting and useful behavioral economics research has been done in recent years, examining the role of psychology in response to macroeconomic events like recessions. For instance, a recent study by University of California Berkeley economics professor Ulrike Malmendier, examining investor behavior, has shown that economic crises tend to have long-lasting effects on individuals.

People who were teenagers or adults during the Great Depression were less than half as likely than young adults during the post–World War II boom to invest money in stocks throughout their lives, with just 13% participating in the market. Experiencing economic events firsthand has a bigger impact on investing behavior than “historical” facts learned from summary information in books and other sources.

Still, concerns about a lack of financial savvy among young people are confirmed by different studies and surveys.  According to the Financial Industry Regulatory Authority, 63% of Americans are categorized as "financially illiterate", while a survey furnished by George Washington University stated only about 8% of the millennials polled had, what the researchers were comfortable calling, a high level of knowledge about personal finance.

Those who are less financially literate are found to be less likely to plan for retirement, less likely to accumulate wealth and less likely to participate in the stock market. In a world of ever more complex financial products, financial literacy is crucial for building relationships with the next generation of investors.

In today’s economy and business environment, a changing of the guard is taking place. There are new ways of making money and new ways people are spending it. From Monzo to Chime, 2018 saw a wave of alternative banks, known as ‘neo’ banks, become the darlings of the FinTech space. The persistent unpopularity of big banks has been a boon to the newcomers, and changing attitudes among financial regulators who have grown more comfortable with online banking have contributed further to their success.

At least 8 in 10 millennials manage their finances digitally, according to a recent survey held by Gallup. Young customers now expect efficient, informative applications to meet their needs in seconds and have no reservations about cashing a check or sending money on a phone. Digital innovation is rocking the financial industry — and millennials are all in.

Rise of the Armchair Investor

Investment opportunities have expanded beyond borders, permitting individuals to invest in a broad range of assets, and borrowing opportunities, both traditional and nontraditional, have multiplied.  From Robinhood to CloseCross, young adults today have access to ample investing opportunities and to a wide range of financial products even before entering the job market. Stories of basement bitcoin billionaires and armchair investors are enticing —however this new financial landscape means that individuals today have greater responsibility for their financial well-being and understanding than in the past.

Wise and timely saving and investment decisions can be key for financial security, while the consequences of financial mistakes can be dire. Despite being financially active, most young adults are ill-equipped to deal with ever-increasing financial responsibility.

Financial illiteracy is rampant, yet financial literacy is crucial for building relationships with the next generation of investors. No surprise then that Robinhood, a no-fee stock trading startup, chose a millennial-focused media company called MarketSnacks when looking to make its first acquisition.

MarketSnacks, a daily podcast and newsletter, focuses solely on finance, featuring a funny photo and humorous analysis on three to four news items each morning. The financial services industry has an opportunity to educate many millennials about emerging financial products and services and the goal should be to translate financial news to anyone, even if they don’t work on Wall Street.

Financial Responsibility 101

Promoting financial literacy and financial education among the young is of paramount importance. Policies aimed at improving financial literacy could help young people minimize the costs incurred in managing their debt and improve their financial cushion in case of an income shock or other emergencies, in addition to greatly enhancing their retirement security.

Starting this education in school provides an opportunity to shift future generations’ financial positions, giving them a solid base from which to make life’s important financial decisions. Evidence shows that financial behavior is formed around the age of seven suggesting that financial education should start young. Children's feelings about spending and saving can be measured from an early age and will likely influence their financial behavior as adults as well. The future of financial inclusion, therefore, lies in the hands of children and young adults.

There is a growing gulf between the amount of financial responsibility given to young individuals and their demonstrated ability to manage financial decisions and take advantage of financial opportunities. Hence, financial illiteracy remains a significant obstacle to both financial market efficiency and full participation by young people in the current financial environment.

By starting early, encouraging monetary responsibility and educating our youth about the range of investment opportunities available to them, we can take steps to ensure that this generation is the savviest yet, and give them the power to secure their own financial futures.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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