A Wish for Financial Literacy

There are many causes and reasons for the subprime mortgage mess and the ensuing real estate downturn. Many people in high ranking and powerful positions bear a great deal of responsibility and not a small amount of blame. But we should recognize that the best protection we have against financial problems is our own financial literacy. How many adjustable rate mortgage borrowers today wish they had better understood their mortgages before they signed on the dotted line? How many home equity borrowers wish they had realized how a downturn in the real estate market could lock them into their current homes when the home's value plunged below the amounts of their mortgages and home equity lines of credit? As the new year begins, let's try to improve financial literacy.

Understand loans before taking them out. Many people obsess over the nuances of investment strategies and the consequences of investing 22.56% of one's portfolio in foreign stocks, as opposed to 23.14%. But they casually sign adjustable rate mortgage loans with little or no understanding of how the monthly payments can balloon. Remember: a killer loan wrecks your finances far worse than a poor choice of investments. Study the terms of loans carefully before signing anything. If you don't understand, ask questions. If you're not sure you understand, don't take out the loan. Consider seeking help from a financial planner (preferably one that's fee only) or other financially literate person.

Recognize the need to save, because risk never dies. With Social Security, Medicare and the coverage of most people by health insurance, many of the historic reasons for saving have been reduced. Additional government programs, like disaster relief and flood insurance, further lessen the apparent need to save. And the government subsidies for the housing market (in the form of interest expense deductions, the implicit guarantee of Fannie Mae and Freddie Mac, the Federal Home Loan Bank System, the FHA, etc.) have boosted housing values, creating home equity that served as piggy banks in lieu of savings accounts and certificates of deposit. But the recent mortgage crisis and housing downturn teach that risk never dies, and that asset speculation is an inadequate substitute for saving. Having a pool of cash saved for emergencies and unexpected expenses covers a multitude of financial sins. The first and foremost element of financial literacy is to understand the need to save.

Teach your children how to handle money. The need for financial literacy begins as soon as kids grasp the essential concept of money. If they learn the habit of saving at an early age, they will be in your debt for the rest of their lives. For suggestions, see http://blogger.uncleleosden.com/2007/05/how-to-teach-child-to-manage-money-and.html.

Urge your local schools to teach personal finance. Since many parents don't know how to handle their finances, they can't teach their children very well. Personal finance could easily be taught in high school, or even middle school. Just covering the basics would go a long way to promoting badly needed financial literacy. If more people had said "no" to the really nasty and burdensome adjustable rate mortgages that are today wrecking the mortgage markets and driving real estate values down, we'd all be better off.

That's our wish for financial literacy. The rest is up to you. It's entirely fair and right to blame Wall Street and the government for the mistakes they've made. But protecting yourself starts at home.

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