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A Depressing Motivator (Gwen Moritz Editor’s Note)

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Last week I delivered the keynote speech to open the Economics & Personal Finance Education Conference presented by Economics Arkansas, one of my favorite nonprofit organizations. I’m not a professional speaker, but I couldn’t pass up the opportunity to talk about one of my nagging concerns: the financial illiteracy that surrounds us.

In that way, I told my audience of K-12 teachers from around the state, I was the opposite of the typical motivational speaker. Yes, I hoped to motivate them to grab opportunities to enhance the financial competence of the students who pass through their classrooms, but I did it by listing depressing example after depressing example of financial ignorance.

Chances are their students aren’t being taught good economics principles at home. Their parents very likely don’t understand money — and this is true even of parents who have adequate income. If parents don’t budget, don’t plan, don’t prioritize, then children don’t even know that they should — much less how to do it. Many families never discuss money with their children, even though money is a factor in virtually every facet of family life and the root of much household stress.

Here are some of the real-life examples that I described:

• A CPA asked me for advice on refinancing her house. She didn’t understand how an amortization worked. She didn’t know that she could pay her house off in less than 30 years by paying extra principal each month.

• A couple who both have advanced degrees are living in a house much bigger than they need because a real estate agent persuaded them that they needed to buy a more expensive house for the “tax advantages.” The only advantage, of course, is that you get to pay $1 in interest to save 30 or 35 cents in federal income tax.

• A health professional complained that a 40 percent tax rate meant someone earning $200,000 a year would owe $80,000 in federal income tax. I responded, “You know that’s not how a marginal tax rate works, right?” And she said, “I’m not a tax expert.” One need not be a tax expert to understand how a marginal tax rate works, but ignorance about taxes is rampant. Nearly half of Americans pay no federal income taxes, but they think they do — and they think they are paying a lot — because they think everything that comes out of their paycheck is income tax. They make no distinction between taxes and Social Security and Medicare.

• My brother’s fishing buddy had about $100,000 in his 401(k) before the stock market crashed in 2008. When it dropped below $50,000, he moved everything he had left into cash — and left it there because he’s now scared of stocks. If he hadn’t sold the stocks — or better yet, if he had bought more stocks when the market was at the bottom — he would have recovered everything he lost and more. Instead, he locked in his losses and sat out the rebound, growing less prepared for retirement with each passing year.

• Little Rock attorney Bill Watt told me about a financial literacy program for Little Rock Police Department recruits. They know that moonlighting as private security is a great way to make monthly payments on boats and motorcycles and other toys, but they don’t think about setting aside a quarter of it for income taxes. Before they know what happened, young officers are in a vicious cycle, having to work even more off-hours jobs to pay back taxes, current taxes and boat payments, leaving them with little time to enjoy their toys or their families.

• Another example of the monthly-payment mentality got the biggest response from the teachers: Little Rock attorney Gene Cauley, now in federal prison for stealing millions from his clients, was making monthly payments on a private jet that cost nearly $40 million. When he couldn’t make the payments anymore, well, his Gulfstream was repossessed.

Most Americans, of course, don’t have enough money for everything they need, much less expensive toys, so they have less room for financial error. Yet we ask them to be practically perfect with very little formal education or training in personal finance even as they are inundated with advertising that encourages spending and blurs the line between need and want.

It seems unreasonable to ask teachers to take on this challenge considering everything else they are expected to do in the classroom, yet I asked them to do it willingly because financial literacy can improve lives for generations to come.

Email Gwen Moritz, editor of Arkansas Business, at GMoritz@ABPG.com.

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