Hello friends, and welcome to another episode of Passive Real Estate Investing. I’m your host, Marco Santarelli. You know I love this quote from James W. Frick. He said, don’t tell me where your priorities are, show me where you spend your money, and I’ll tell you where they are. So today we’re going to talk about financial literacy and why financial literacy is so important. So first of all, what is financial literacy? Well, financial literacy is the education and understanding of various financial areas, including things such as managing your personal finances, money, borrowing, and very importantly, something I talk about all the time investing. But in the United States, in America, we spend literally billions of dollars helping our children master reading, writing, and arithmetic. And then we send them out into the world lacking the basic skills to prosper in life. Things such as understanding personal finance and economics. Did you know that in the US more than one in six students do not reach the baseline level of proficiency in financial literacy?
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Nearly a quarter of all millennials spend more than they earn, which is unbelievable to me. And 67% of generation Y have less than three months’ worth of emergency funds. And that’s scary because all you need is one car accident or medical emergency and you’re essentially bankrupt. So there are only seven states in the United States that require standardized testing today for personal finance education for high school graduation. And those seven States are Colorado, Georgia, Michigan, Missouri, Oregon, Texas, and Utah. So that means that 43 other States plus DC don’t have high school courses and testing requirements. So every two years, the council for economic education and we have a website, you can go and look this stuff up. It’s pretty interesting. So the CE or the council for economic education, they conduct a comprehensive look into the state of the K through 12 economic and financial education in the United States.
And they collect data from all 50 States and the district of Columbia. So in their most recent survey in 2018 they show that there has been little increase in economic education in recent years and no growth in personal financial education. So since 2016, not one single state has added personal finance to its K through 12 standards. Only 22 of those states require high school students to take a course in economics. Only 17 of those states require high school students to take a course in personal finance. And ever since 2014 there has been no change in the number of states requiring standardized testing of economic concepts of any kind. So the consequence of not addressing financial literacy in students graduating from college is really daunting amounts of credit card and student loan debt. Today, student loan debt in 2019 is higher than ever before. Americans own over 1.5 $6 trillion in student loan debt.
That’s trillion with a T, that means it’s one thousand five hundred and sixty billion dollars worth of student loan debt and that’s spread out amongst 44.7 million borrowers are almost 45 million student borrowers. If you do the math, that’s roughly $35,000 in student loan debt per graduate. Now for some of you that may not seem like a lot, but for someone just getting started to get out of school already underwater with student loan debt, something that needs to be repaid, accrues interest and is not dischargeable in bankruptcy. Not to suggest that they should be filing for bankruptcy, but something that cannot be discharged. It’s basically saddled on you is incredible. And take a look at student loan debt. If you look at student loan delinquency or default rates, which is by definition 90 days or more delinquent, it’s a whopping 11.4% of all those students that are in default or you know, 90 days or more late.
So that’s more than 10% of them. Trends in the United States right now show that financial literacy among individuals is actually declining, not getting better with only 37% of students answering correctly. Five questions that are posed by FINRA on the topic and FINRA is the financial organization that manages securities here in the United States, or at least they oversee them. They don’t manage them. So while at the same time that literacy among individuals is declining, financial literacy is actually even more important than it ever has been. As most people today are managing their own finances. They’re managing their own retirement accounts, they’re trading personal assets online. It’s so easy to get a Charles Schwab account or assure trade or E-Trade account. They’re carrying student loan debt, they’re carrying medical debt, they have credit card debt and people have mortgage debt. So that is the trend. Today’s just increasing amounts of debt.
Compounding the problems associated with financial illiteracy are trends that actually highlight the importance of making educated and informed decisions about finances. So the first thing is that consumers are actually taking on and shouldering more of their own financial decisions. Retirement planning is a prime example of this. It’s a major shift. You see, past generations, my parents and certainly my parent’s parents, they depended on pension plans to fund the bulk of their retirement lives. I still remember my grandfather today telling me about the whole story. You hear about getting a good job, working hard and staying with that employer. And then when it’s all said and done, you have this great pension. Well, ever since the employee retirement income security act of 1974 was enacted. It’s also known as an ERISA, the acronym for the employer retirement income security act. When ERISA was enacted in 1974 employers are not required to provide a retirement plan for you any longer.
So they had the option to but not required to. And so quickly, companies moved away from it. They backed away from providing retirement plans because it was not only a liability but very expensive for them. So today, pensions are more of a rarity than a norm, and employees are now being offered, as you know, the 401k plan that has limited options, limited returns, and surprise. You carry all the risk. It’s not the 401k or your employer. So that’s the first thing is that we as consumers are shouldering more of the financial decisions in our lives. And this is why financial literacy is so important. The second thing is that there is a lack of government aid. You know, a major source of retirement income for past generations was social security. But the amount that is paid by social security is certainly not enough. And it may not even be available by the time you retire, so don’t count on it.
The social security board of trustees reported not too long ago that by the year 2033, the social security trust fund that may actually be depleted. Yep, that’s right to deplete it a scary prospect for many people. And in my opinion, the social security program barely even acts as a safety net for basic survival, let alone a means to support oneself in retirement. I actually like what Robert Kiyosaki says about social security. He calls it. So social security, uh, thirdly is we are just living longer lifespans. We’re getting better healthcare and the ability to live longer lives. And we just see that decade after decade. So we’re simply living longer and that’s increasing the need for more money in retirement than all our prior generations did. Now, this does not sit well with increasing medical expenses, but the fact is is that if we’re going to live longer, we’re going to need more money and more income to live off of.
And that just means that we need to make better decisions for, um, budgeting for a longer lifespan. And in the fourth thing that highlights the importance of making educated and informed decisions about finances is that we are just being bombarded with more and more choices, particularly ever since ERISA was enacted, we’re finding that banks and brokerage firms, insurance companies, even credit card companies and mortgage companies, financial planners, and many other financial service companies are all competing for your dollar, the consumer’s investment dollar. And this is just creating noise and confusion out there. One of the many reasons I love real estate is because it’s a solid, understandable and reliable investment vehicle. And really that’s your way to combat all that noise and confusion out there with all these choices that are coming from these financial services companies. So you can see the trend here. It’s been going on for decades.
I’ve said for a long time that ignorance is expensive. I say that in pretty much all my presentations, but that can be clarified even further by stating that financial ignorance is expensive. That’s just being more specific. So consider this personal finance and economic education results in five great things. First, a better understanding of the US and world economy. Some of us have a basic understanding of it. Very few of us have a great understanding of it, but most of us don’t really have much of any understanding about the US economy or the world economy. And that might feel like it’s way out there. Far-reaching doesn’t apply to me, but the reality is as it does, whether directly or indirectly, it kind of sets the stage and sets the overall tone of where things are headed and how things might be performing. But the second thing is, is that there’s a greater propensity to save for retirement.
The better educated you are, the better off you know how to save and invest for your retirement with your earned income. The third thing is it reduces the amount of personal debt. You know there’s consumer debt and then there is investment debt or good quality debt. That’s okay. But when you have a lot of consumer debt or personal debt, when you understand the impact that has in the opportunity cost, it brings with it having a better financial education and economic education just results in better money management and less personal debt. Another benefit is an increased likelihood of having emergency savings. About 47% of the US population can’t even put together $400 in case of an emergency. And that’s pretty scary. So having about six months of living expenses put away that will allow you to weather through a storm for six months is a great thing to have.
It’ll help you to sleep better at night. And then the fifth thing is, along with that education comes less likelihood of using high-cost methods of borrowing. You know, a lot of people live off their credit cards and some of these credit cards can charge as much as 29% interest. So you don’t want to be living off credit and certainly not credit cards. So money management skills are more important than ever before to navigate the economic realities of the modern marketplace. Yet most States around the US still do not require high schools to offer personal finance classes. And in lieu of high school personal finance classes, most teens either learn from their own mistakes or they look to their parents for financial lessons. But unfortunately, not all parents are well equipped to serve as financial models for their children. So what can we do as parents to help solve the financial literacy crisis here in the US and probably even worldwide?
Well, we need to become more financially savvy and especially with today’s youth. See, as a parent, it’s good to create an open dialogue with your children. You know, when they ask about money or finances, use everyday examples, talk about the water bill or the electricity bill or budgeting for a trip or retirement or budgeting for a vacation or, um, a weekend trip or school supplies or, you know, saving up for a car, whatever it may be. Secondly, involve the family. When you involve the family and planning, you get participation. Understanding if your kids are hoping for a family vacation, great. Ask them to brainstorm ideas on how they can eliminate unnecessary expenses, whether it’s theirs or yours as parents, and start a small business maybe, but work towards a discuss it. Even if you don’t do anything towards it, at least you have an understanding and you get an education out of it.
A big one is just reading books. There are so many books on finance and even economics. And if that’s not a good option, maybe listen to audiobooks in the car. Um, you could easily purchase audiobooks on audible or wherever it may be and you can listen to those in the car to and from school to and from weekend trips, your kid’s soccer games, whatever it may be. Um, and then, of course, you know, you can play the games like cashflow and cashflow for kids if you have younger kids. But even as adults, cashflow teaches you so much. It’s a great game. Financial literacy really is an issue and it has broad implications and well, this may seem like an individual problem. It is actually much broader in nature. And more influential on the entire population than any of us has previously believed. See, just think back to the financial crisis of 2008 and this is a simple example.
You can see the financial impact that had on the entire economy and what was created from a lack of understanding of mortgage products and just gross speculation in real estate and even the stock market. So any improvement in financial literacy will have a profound impact on consumers and their ability to provide for their future. So financial ignorance is a problem that can be solved in our lifetimes if we commit to it. Financial literacy is a foundational element to achieve financial health and it needs to be included in the schools and at home and on the go. So being financially literate cannot guarantee future success, but the personal and national cost of being financially ignorant is immense. I believe it would be a mistake to wait and rely on our school system to educate our children and young adults on financial literacy. But we can help make that change.
But in the meantime, it is our responsibility to educate ourselves, our children. And really our fellow man and that’s why I love doing this podcast. So I’m hoping that I can reach more and more people to help achieve our overall mission of helping 1 million people create wealth and passive income through real estate and put them on the road to financial freedom. So with that, I’m going to sign off here. If you are listening to this for the first time, please remember to subscribe. If you haven’t already helped us spread the word, visit us on iTunes, leave us a rating and review if you don’t mind, I really appreciate that and I do read them. So thank you very much. Get your free strategy session with our investment counselors. If you’re thinking about real estate, let us just help map that out for you to get you to where you want to go from where you are today. And if you need a good primer, download our free report, the ultimate guide to passive real estate investing. It’s a download on our websites at passiverealestateinvesting.com or noradarealestate.com. Anyway, thanks for listening. We will see you on our next episode.
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