True Financial Literacy Requires Understanding Systems

Via Naked Capitalism, I’ve discovered several articles about the uselessness of ‘consumer financial education’. I’ve been to various classes on ‘personal finance’, and I agree much of it is pretty useless.

At the same time, I think that being financially literate can make a big difference in one’s financial wealth.

After thinking about this for a while, I figured it out – the kind of ‘financial literacy’ which makes a difference is the kind which includes an understanding of how systems (the financial system, the political-economic system, etc.) work.

One of my tax instructors said that he knew of cases of families putting 80% of their income towards mortgage payments (this was during the peak of the housing bubble), and that they qualified for a mortgage because they had taken a class on making a budget. He said that, no matter what class you take, if you’re paying 80% of your income towards mortgage payments, you’re financially screwed.

I took college course on housing policy. An entire class was dedicated to explaining how primary and secondary mortgage markets work. And there was no explanation of the sophistamacated mortgage markets of the housing bubble – it took just that much time to describe the vanilla mortgage markets of the 1950s. During the class, I thought ‘everybody who takes out a mortgage should understand how these markets work’. Then I thought ‘this is news to most students in this class, and most students in this university, let alone most U.S. citizens, will never understand how even a vanilla secondary market works’. That was a scary thought.

During the housing bubble, my family sold off as much of its property in South Florida as it could, and would have sold it all off if certain people (not in my family, but still involved) hadn’t acted in bad faith AND believed the property ‘boom’ in Florida would go on forever. This choice, to sell high during the bubble, made a huge difference in the collective financial wealth of my family. It was a painful choice, since some family members have deep emotional ties to South Florida, but the consequences of having that property after the housing crash would have been much more painful.

Why did my family do it? My family has been in South Florida for over a hundred years, they know about Florida’s history of ‘sleazy’ property deals, and jokes about ‘beachfront property’ are almost like nursery rhymes. Though they didn’t know what was causing the housing bubble, they could feel that something was wrong with the property market, and that scared them into getting out. In other words, my family has some understanding of how systems work in South Florida.

Financial education which focuses on guidelines and to-do lists with almost no context is not terribly helpful. But financial education which explains systems is truly valuable. It’s not just valuable financially, it’s also valuable for psychologically.

Of course, if citizens understood the system better, they might try to change it.

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The Way I Approach Personal Finance Makes Me Weird

Society forges life templates for people. This is not necessarily a bad thing – it can help people collectively make good decisions – but sometimes the template is badly flawed. For example, the lifestyle template for pretty much the entire developed world (and parts of the developing world) is cumulatively ecologically destructive. Either this will change, or it will kill off most of the human race (which in itself would be a huge change).

In other cases, the harm is personal. For example, adherence to the relationship escalator causes a great deal of preventable drama.

Wait, I’m supposed to talk about personal finance.

Okay. The middle class template in many places, including the United States, is to get a college degree (which needs to be financed), buy a car, buy a house, and get enough assets to retire. This is the main point of middle-class asset accumulation.

What about me? I already have enough college education. I hope I never need to buy a car. I think have a less than 50% chance of ever buying a house, and I am most likely to buy a house if I can somehow buy with cash. I cannot see myself taking out a mortgage. And I’d rather work less hard and have plenty of free time than save for retirement (if people don’t stop killing the environment, the environment might not be capable of supporting billions of people by the time I could ‘retire’ anyway).

So why do I like to build savings? Simple – emergencies, small investments, and luxuries (such as travel). By ‘investment’, I don’t mean buying stocks, I mean being able to purchase stuff which will save me money or increase my income in the long run (such as a menstrual cup).

I am basing my personal finance goals based on my own assessment of my life, not car!house!retirement! This is not unlike forming one’s own relationship patterns instead of going on the relationship escalator. In fact, the default personal finance plan and the relationship escalator are closely intertwined – people are supposed to buy houses as (married) couples, not as single women (which is what my mom did), or with their brother (which is what my dad did), and they are supposed to plan retirement as a couple (instead of firewalling their finances, as my parents are doing).

Heh, it’s obvious who taught me how to approach personal finance.

I am debt free. I’d love to take ‘credit’ for this, but this is mainly because a) I attended public university in California and b) I was born to a family which could pay California public university tuition out of pocket.

The housing, student loan, and overall economic crises are making people rethink the template. While the endemic fraud which caused the crises is utterly repugnant, getting society to rethink the so-called ‘American Dream’ is a good thing. I wish it didn’t come with inflicting intense suffering on the 99%.

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the person who associated CC0
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