One common complaint I receive from clients and participants of my financial education seminars is that they do not receive formal education in Money Management or as I would rather call it Personal Financial Management.
A good curriculum in Personal Financial Management should include the study of the economy, financial markets, personal budgeting, personal balance sheet, personal protection, asset protection, credit and debt management, retirement planning, social security, Medicare, Medicaid, tax planning, and important legal documents.
In 2011 I proposed to the leadership of Millennia Atlantic University the addition of this class to the Bachelor of Science in Business Administration curriculum, and it has been taught since 2012. MAU is one of very few four-year colleges that require students to take a Personal Financial Management class. This article describes the minimum knowledge that every person should have to increase his or her chances for financial success.
To manage your finances, you should have a general knowledge of the economy and the financial system of the United States. Understanding the cyclic nature of the economy and the indicators that show in which direction the economy has moved, where it stands and where it is headed, is vital in making financial decisions. The fact that the economy is cyclic, and that crisis repeats needs to be understood; knowing the consequences of a crisis will allow for due preparation for hard times or perhaps to take advantage of opportunities.
Before you establish any financial goal, you should know where you stand currently. This is described in your personal balance sheet. Figuring out how much you have and how much you owe, and your net worth should be done every year. The monthly budget allows you to understand how much comes in and out: Income versus expenses; do you have money left at the end of the month or month left at the end of the money? Are you spending too much on desires rather than needs? Just by doing this exercise you will identify savings opportunities and spaces for improvement.
Personal protection is the most sub estimated financial item. Many people do not realize that this is an important financial tool that allows protection in case of unexpected events such as sickness, disability, or death, providing financial support in difficult times. Also protecting your main assets such as your home and car should be considered as well as the personal liability protection in case you cause damage to third parties.
Credit is the main force that drives consumer consumption and the US economy. To realize how important it is, just ask yourself how many homes and cars would be sold without credit? It is also a double-edged sword for a great portion of the American population because it leads to debt. The consumer debt rose to $14.6 trillion in 2020. Understanding the importance of credit and having an excellent credit report as well as how to manage, reduce and eliminate your debt should be taught not only in school but at home as well.
In the American tradition retirement is that time where you become free and enjoy life the most. Today it has become a period of financial stress and hard work for many. As pension plans cease to exist due to their unsustainability, employer sponsor plans (like the 401(k)) become crucial for those who have access to them. However, many people miss the opportunity and do not fund them appropriately nor consider additional options. Not to mention the independent worker that neither has access to these plans nor has knowledge of their existence. Teaching our youth this before they get out to the workforce is a necessity.
Social Security, Medicaid and Medicare are the central pillars of the American welfare system. They provide social insurance in the form of protection in case of death or disability, income in retirement, and health care for the elderly and the needy. Social Security pension benefits represent 33% of the income of the elderly. Fifty percent of married couples and 70% of unmarried individuals receive 50% of their income from social security. It is of paramount importance for you to understand how your pension is calculated and the requirements to receive it.
The US tax system is overly complex and ever changing. Paying taxes is necessary for the wellbeing of all. But paying more of the fair share is painful. Knowing how the system works and the things you can do to avoid taxes will make a difference in net worth of hundreds of thousands for most and millions for some. Learning about the tax system is vital and keeping up with it is crucial.
Every person should be aware of the legal documents that are important to have to transfer assets efficiently, delegate crucial financial and health care decisions when incapacitated and provide advance directives for medical care when entering the final stages of life.
Making financial decisions without an understanding of how the system works will not yield the best results. Financial education is not only necessary, it is indispensable, but our formal education system is failing at providing it. It could be the missing link necessary to round up financially savvy professionals.
We will address each of the financial subjects mentioned in this article in a series of subsequent pieces to be published in the coming weeks.
About The Author:
Pedro Chacin is an engineer (University of Michigan) with a Master of Business Administration (MBA) from Texas A&M University; he has more than 38 years of professional experience, the first 23 years in the oil and technology sectors, the last 15 years in the financial services sector, and for 12 years as a university professor of Economics and Finance.