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American Financial Education Needs An Overhaul, and 5 Tips For Retirement Planning

December 5, 2011 · 33 comments

in Personal Finance

Ok, so the first half of the title of this article is probably not earth shattering at all.  Whereas the United States tries to ensure that Americans graduate high school being able to read and write, the schools do an abysmal job at ensuring that graduates know how to save and manage household finances.

The feeling that Americans are not sufficiently educated in personal finance was driven home by an article on CNN.com which states that 25 percent of middle class Americans feel they will HAVE to work until the age of 80.  (In total, 75 percent of middle class Americans plan on working through retirement, including the 25 percent that will have no choice but to work.) What was just as surprising to me is nearly one third of people in their 60’s have less than $25,000 saved toward retirement.

How can this be?

Considering that the average life expectancy in the United States is around 78 years old, a quarter of the middle class figures they will have to work 2 years longer than they will live.  What about those that earn less than the middle class, will any of them be able to retire ever?

Maybe we need to redefine middle class?  Although it is difficult to find a perfect definition of middle class, it is generally based on income, not net worth.   Regardless of how much someone makes, it is ultimately how much money they have that really matters.  If I make $175,000, I may be considered ‘upper middle class’.  However, if I spend everything I make on fancy dinners or elder care for a disabled parent, am I really upper middle class if I have ten grand in the bank and  a big mortgage?

Regardless of statistics and definitions, something needs to be done to educate people at a young age that saving is important, and necessary. When I was a kid, I always heard and read that I should not expect Social Security to be around long enough for me to count on in my retirement. Funny thing though, nobody ever really explained was Social Security was, I just knew it may be gone one day.  I am glad I got the message though because I did start saving for retirement with my very first paycheck out of college.

Maybe Personal Finance needs to be part of the standardized testing in schools and also topics on the ACT and SAT. Since test scores seem to be what drives a lot of public school curriculum, maybe including personal finance in the testing would ensure that all kids would get at least the basics of finance before they enter adulthood.  It seems that kids from all economic classes seem to have smart phones and designer clothes, which makes no sense if their families are not able to save for the future.  I am very concerned that the priorities of the younger generation are more about having things and figuring that the future will somehow take care of itself.  Big news: the future comes faster than you think, and YOU need to figure out how you want to live.

It Is Never Too Late To Start Saving

Even though it can seem difficult to squeeze more money out of your paycheck every week, it can be done.  Take a moment and picture what you want for retirement.  Now, think about what you think is likely to happen in retirement based on what you have now and your saving/spending habits.  Are the two pictures different?  If so, then do what you can do RIGHT NOW to help bridge the gap between your dreams and what reality looks like by taking the following steps:

  1. Know what you want.  You can’t just generically say “I want to retire and have a home in multiple climates”.  Do you know how much homes cost where you want to ultimately live?  Do you want to retire healthy?  (If so, then get your health in order now, and do what you can to maintain your health.)
  2. Map out a plan.  You will never find your destination without a plan.  If your dream retirement is to travel a month of the year, then try to forecast the incremental cost of that travel.  Then, make sure you will have enough saved to make that dream come true.  Or, maybe you want to retire at 50.  You can’t just go spending blindly year after year and expect your dream to just magically come true.  There are many financial calculators out there that can help you predict how much money you will need to start saving now to attain a certain amount of money.  Take advantage of the information available to you so you can make educated decisions.
  3. End the excuses.  Everyone likes a comfortable life, and some people easily earn enough to live comfortably.  However, most people need to sacrifice some in order to save.  Create an aggressive savings plan (mentioned above) and live each day with your plan in mind.  If you hit a wall and say “I can’t possibly save any more than I already am”, then solve that problem instead of throwing your hands up in defeat.  Maybe you need a second income?  Maybe you really don’t need that second car.  Only you know what the answer is, but don’t default to an easy answer, which is ‘it can’t be done’.  If you want something bad enough, you can make it happen. Almost every problem has a solution, and if your problem is that you don’ t have enough money, then fix it.
  4. Educate yourself.  Tax rules change all the time, as does the economy.  Learn what investment vehicles are available out there and invest based on what you are comfortable with, and also take your age into consideration.  Is there an employee stock purchase plan available to you but you don’t participate because you don’t understand it?  Then learn!!!  Don’t let ignorance stop you from maximizing the money you make and having enough to retire comfortably.  If you feel you cannot manage your savings on your own, then hire a financial advisor.  (Don’t just find someone out of the phone book. Talk to friends and family and see if anyone is recommended.)
  5. Alter your spending habits.  Unfortunately, many people feel that you have to spend money to have a great time.  I have actually found the opposite.  I would much rather spend an afternoon hiking through the woods than going to the movies.  I derive most of my enjoyment in life by interacting with others rather than going to events and such.  In other words, some of the simplest things in life can be the most rewarding.  Unfortunately, I think society is losing touch with ‘simplicity’  as electronics and image seem to have become a priority for many.
Basically, you can’t expect to be 57 years old one day and suddenly expect to be able to quit work the next day and travel the world. (Or even just reduce your hours to part time.)  Retirement can last for many years of your life, and you need to plan for it as early as possible.  As I mentioned above, it isn’t just about money either.  It is about health, mobility, money and more.  If you head into your early 60’s at 400 pounds and have a penchant for fried chicken everyday, you can’t just automatically expect that weight to melt right off and have the ability to do anything you want.  However, it doesn’t mean that you can’t make a change that very day, and commit to it.  Live is a wonderful journey.  It is great to live in the moment and enjoy things around you.  However, you have to make sure you commit time, money, and energy for enjoying tomorrow as well!
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{ 30 comments… read them below or add one }

Niki December 5, 2011 at 7:07 am

I completely agree. I wish I had been taught about saving/retirement planning in school, although I could see why it’s left to the parents. But that obviously is not working either.

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Kris @ Everyday Tips December 6, 2011 at 8:07 am

I think so many parents need the education themselves unfortunately. I know when I was in high school, the only business/finance related subject offered was bookkeeping. It wasn’t until college I had a class, and that was because I chose to major in Finance. Yet it seems so obvious that it should be an educational requirement since it is such a big part of life.

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Roshawn @ Watson Inc December 5, 2011 at 8:27 am

Kris,
First let me say thanks for the new stats and for alerting me of this article!

I think you hit the nail on the head; it’s a problem with financial education. I completely agree that people who make high incomes can be just as broke as those who make low incomes. What you do with your money counts a lot. Thanks for a great article!

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Kris @ Everyday Tips December 6, 2011 at 8:09 am

I found article both fascinating and depressing. I wonder what makes some people think that saving can wait yet others watch their money so closely. I think some of it is education and experience, but I think there is more to it.

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Little House December 5, 2011 at 9:46 am

I proposed a finance class last summer for a summer program. The school listed it in their catalog and not ONE person signed up for it. *sigh* Instead, I ended up teaching Everyday Alegebra to middle school students and squeezed in a bit of personal finance. 😉 I’m definitely not the best role model when it comes to PF, but I know the rules about saving; spend less than you earn and save the rest! Now if only I could start following that motto!

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Kris December 5, 2011 at 4:10 pm

That is a shame Little House. I wonder if it was a summer course and people only go to summer school for courses they are forced to take?

Nobody is the perfect role model for anything- you are doing a lot of things right!!!

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MoneyCone December 5, 2011 at 10:05 am

It is never too late to start saving (Excellent point Kris!). One of my biggest regrets is that I didn’t start contributing to IRAs when I started my first job. But I decided to double up and max out IRAs and even opened a spousal IRA which I’m should be maxing out for this tax year.

There are avenues even if you start late. You just have to keep looking and start saving.

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Kris December 5, 2011 at 4:01 pm

See MC, you are making up for it though, and you are still very young! It is just good to have that mindset of saving, because then it might also reduce the impulse for people to spend.

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Miss T @ Prairie Eco-Thrifter December 5, 2011 at 1:26 pm

I like how you talk about knowing what you want. This is so important because it requires planning ahead of time. What I find difficult is deciding on what I want. There are just so many things I want to do.

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Kris December 5, 2011 at 3:57 pm

It can be hard to know what you want for sure. For me, I need to find out where my kids all end up. Then I will buy a house in each city. 🙂

But seriously, my goal is to have the ability to travel when I want and also be able to hopefully handle medical issues and such. You never know what life will throw at you.

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101 Centavos December 7, 2011 at 8:56 pm

Reminds of that great scene in Good Will Hunting, where the psychiatrist asks the title character a simple question “What do you want?” For all his brilliance, Will couldn’t answer.

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Kris December 8, 2011 at 9:56 am

I loved Good Will Hunting. Although I do hate the scene where Robin Williams screams 100 times “it’s not your fault…”.

I think Will didn’t know what was possible, which probably limited what he was capable of wanting.

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First Gen American December 5, 2011 at 3:16 pm

I think it’s not only the ignorance of personal finance that is a problem but Americans’ sense of entitlement to a certain standard of living regardless of income. It’s also pretty sad that most forces around us, banks, home shows, realtors, etc…all encourage you to take buy the biggest house you can afford. That’s a lot of times a person’s largest expense and it can really make or break your budget plan.

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retirebyforty@retireby40.org December 5, 2011 at 3:25 pm

I agree with this. People in other countries live a lot simpler and have more safety net than Americans. It tough to keep up with the Jones and we are spending ourselves into a corner. Everywhere you turn, someone is encouraging you to spend money. It’s hard to save in this environment.

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Kris December 5, 2011 at 3:44 pm

Very true Joe. Companies are all in for their own best interest, encouraging consumers to borrow as much as possible.

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Kris December 5, 2011 at 3:56 pm

All very good points Sandy. It is a combination of thinking ‘there is always tomorrow’ with lack of knowledge and the need to always have the best I suppose. However, if teaching people young how important saving truly is, the mindset of having to ‘have it all’ may subside somewhat.

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Jenna, Adaptu Community Manager December 5, 2011 at 4:03 pm

Thanks for sharing this CNN article with us. I’m definitely hoping on retiring before 65.

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Kris December 5, 2011 at 4:28 pm

Oh I am sure you will be able to Jenna, if not sooner!

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Krantcents December 5, 2011 at 5:03 pm

I taught personal finance in high school. Students must practice what they learn otherwise they will forget it. It is a little like language in that respect. It helps a great deal if the parents support their children regarding personal finance skills.

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Kris @ Everyday Tips December 6, 2011 at 8:11 am

Parents are a huge part of it for sure. It seems like it can go either way from the home front though. Parents that are too miserly can send kids in the other other direction and the kids feel like they have been set free from spending jail as adults. Parents that spend like crazy set a bad example that you can buy what you want without consequences.
I think parents need to be open with kids about financial issues and make them part of the process if possible.

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Well Heeled Blog December 5, 2011 at 9:24 pm

In addition to personal decisions, I think there needs to be systemic changes to help people along. For example, studies have shown that companies who use “opt-out” instead of “opt-in” participation for 401K plans have a much bigger portion of their workforce enrolled in retirement plans. One little change can make a big difference.

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Kris @ Everyday Tips December 6, 2011 at 8:12 am

You are so right Well Heeled. Think about these people in their 60s that have less than 25k in retirement. Had they opted in early on in their career, they would be so much better off, and I bet there may not have been much of a change in their standard of living either.

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Eric December 6, 2011 at 4:39 pm

I have seen that with my friends. Those who are automatically enrolled in their 401(k) participate (though few know where the money is going). Those who have to do work to enroll often don’t sign up. I always yell at them to fix it, some do.

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Eric December 6, 2011 at 4:38 pm

You are right on. It is sad to see how many people are in such bad shape as they approach their “golden years.” I know that I am doing the right things today, but it is hard to know what to do to fix the entire system.

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Kris December 8, 2011 at 9:57 am

We have to keep our fingers crossed that there isn’t a horrible financial collapse too. Financial calculators predicted my investments would do way better than they have, that is for sure. That is why it is so important to put away as much as you can!

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Joe Plemon December 7, 2011 at 9:03 pm

Yes, the stats from the CNN article are depressing, but help is available for those who seek it. Dave Ramsey’s Financial Peace University (FPU) class has helped millions of people get their finances under control. I have been fortunate enough to lead FPU several times in our church and have personally witnessed hundreds of families make huge changes in their family finances. Also, a few of us bought the FPU curriculum for our local high school and it is now being taught to every senior. We won’t solve all of the overwhelming personal finance issues in our nation, but we can help some people if we reach out and try.

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Kris December 8, 2011 at 9:55 am

Joe, you have impacted so many people- you should sleep good at night! It just goes to show that one person can make a difference. Now we just more people to get involved as you said.

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Financial God December 10, 2011 at 6:38 pm

We need to be saving more for our futures and to build the capital needed to make the future a bright one. It’s too bad that financial education is still in such a poor state, but it is improving over time. For that though you can thank bloggers and other private actors, and definitely not the local high school!

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Marks@ Car Insurance December 11, 2011 at 2:23 pm

Americans study all of the essential things in school, algebra, science, history, languages and the arts. However, many people wonder why there may be a lack of financial management classes to learn basic financial planning strategies. Many students don’t know the first thing about retirement, savings, credit cards, debt or even basic budgeting strategies.

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Penny Stock Blog May 22, 2012 at 7:24 pm

I would agree totally with the notion that its a lack of financial education that is the cause of some many problems. Buying a home is one example I do not think the housing bubble would have occured to such a severe degree if the buyers had a more in depth knowledge of the dangers of being over leveraged. Its always a great risk to take on far more debt than one can handle always.

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