A Holiday Financial Literacy Lesson
I’m Andy Temte and welcome to the Saturday Morning Muse! Start to your weekend with me by exploring topics that span leadership, business management, education, and other musings designed to support your journey of personal and professional continuous improvement. Today is December 7, 2024.
It’s that time of year when we spend, spend, spend on holiday gifts for family and friends. According to The Conference Board, the average US consumer is expected to spend $1,063 this season on holiday-related items and $677 on gifts for others. When adjusted for inflation, holiday spending is at or near all-time highs. However, the most disturbing statistic is that a large proportion of shoppers are still paying off the debt they accumulated in 2023 to purchase holiday gifts.
At the risk of being labeled as a grinch, we need to have a conversation in this country about our relationship with spending, debt, and investing for the future. Yes, it feels wonderful to be able to provide gifts for family and friends, but at what cost? The short-term joy of seeing the surprise on a child’s face or the smile of gratitude from a friend can be followed by months of regret and financial hardship during the following year as oversized credit card balances are wrestled back into control.
In the worst case scenarios, debt piles up from excess spending and credit card payments become unmanageable, forcing a financial reckoning that can lead to bankruptcy. Even in the best of cases, mounting credit card debt and excess spending leads to interpersonal tension and arguments between spouses and partners. According to the National Institutes of Health, two of the top five sources of relationship stress are related to money.
It should come as no surprise that we have a collective challenge with financial literacy in the US, but the scale of the problem is shocking. According to the Global Financial Literacy Excellence Center, American’s scored an average of 48 percent on a financial literacy test. Yes, folks—that’s a solid F. Oh, and the news gets worse. In that same study, women trailed men by 10 percentage points, there were significant gaps based on race, and young adults (Gen Z) had the worst performance of any age group, scoring an abysmal 37 percent on average.
So what should we do? I’ll save the big picture, long-term solutions for another Muse. Here, I’ll focus on simple things everyone can do right now to begin a journey of continuous improvement toward financial literacy and financial freedom.
Ask Why? Develop the self-discipline to take a quick time out before making the final decision to purchase a gift, go out to dinner, or splurge on something self-indulgent. “Why?” is a simple but powerful tool for any continuous improvement practice. Instead of pressing the buy now button on that new pair of fancy shoes, ask yourself “do I really need these?” “What are my alternatives? Is there a less expensive substitute?” When out to dinner with friends, question your menu choice. “Do I need steak or do I go with the chicken dish instead?” Saving $5 or $10 here and there might not seem like much, but, the power of compounding is real.
Change Your Relationship with Credit. Far too many consumers carry a balance on their credit cards from month-to-month. According to Bankrate, 50 percent of credit card holders carry a balance that’s subject to interest rate charges. Since the average credit card interest rate is 24.61 percent, even small credit card balances can result in significant interest rate charges. A $1,000 credit card balance results in roughly $20 in interest charges. That translates to roughly $240 that this hypothetical cardholder is paying for the privilege of carrying a $1,000 balance—snark and sarcasm intended. As of October 2023, the average person spends $156 per week on groceries, so carrying that credit card balance represents a little over a week and a half of groceries. Which would you rather do, eat or pay money you’ll never get back to a big bank? The bottom line with credit cards is that they should be used primarily as a source of intra-month working capital that gets paid back in full when due. Credit cards should only be used as a tool to borrow in emergency situations.
Start Learning about Money. Carve out 30 minutes per week to learn something about money and investing. If you’re a reader, visit the personal finance section of Investopedia. This free website overs quick lessons on a variety of topics that are unbiased and fairly straightforward. If you like podcasts, check out NPR’s Planet Money or sample a few options from Investopedia’s listing of the Top 10 Personal Finance Podcasts. The important point here is to get started NOW and be persistent. In a future Muse, we’re going to talk about the power of habits. Make learning about personal finance a habit that you don’t break. Again, the power of compounding is real and before you know it, things that at first felt foreign and unapproachable become topics that are familiar. Soon, you’ll be a source of information and knowledge for other folks in your orbit—you’ll be setting a wonderful example.
Start Saving and Investing. The first step in the journey of saving and investing is to make your first deposit and then develop the self-discipline to make additional deposits based on a strict schedule. It’s incredibly easy to convince yourself that you’ll make a deposit next week and then next week turn into the week after, and so on. My advice is to take advantage of the wonderful technology that exists in 2024 for saving and investing. Open a savings account at your local bank and set up an auto-draft out of checking for a small but meaningful amount each week or each month. Treat this account as your emergency fallback fund for rainy days. I’ll reserve a future Muse to expand on this subject, but you should avoid any investment that makes you nervous or that you don’t know anything about. You know that cocky guy in your friend group who’s telling everyone to invest in crypto? Yea, don’t listen to him. Start on the safer side of things first and then move forward from there.
So let’s stop here. Again, we’ll talk more about money and investing in future Muses, but the four steps above are things that nearly everyone can do. Yes, the scale might be different depending on personal circumstances, but these are steps everyone can take. In terms of skills needed to turn this list into reality, all you need is self-discipline, courage, persistence, and curiosity.
