Sunday, November 11, 2007

A reply: Why Isn’t There Universal Personal Financial Education?

Why Isn’t There Universal Personal Financial Education?

I think that there's something else here to consider Tim. And I think that it's the fact that we can't all save 10% or 20% of our income.

Picture a world where everyone saved just 10% of what they made and lived completely within their means. And I mean everyone. What happens?

Nothing... in a literal sense. If everyone has money and nobody needs it (b/c they don't borrow, they live within their means), then who pays out the interest? I mean, maybe a mortgage or an education might be funded in the first generation, but after that, everyone would just be able to gift their money down, so who's paying interest in a world where nobody is borrowing money...

So have I got you thinking here?

So what do you do to get ahead in this world? Well you run out and borrow tons of money, then you start building businesses and paying it back. Of course, so do other people, so the interest rates move up, but only to some equilibrium point.

Of course, now these high-rollers either go broke or make it big and at some point they stop, b/c they need to do something with their money. So the wealth gets shifted down or around and everyone but the businessmen are saving their pennies and living "risk-free". Well at some point, people in the middle (not broke or rich) are bound to say "Heck, I want a bigger car, so I'm just going to save 5% instead of 10% what do I need all of this money for."

And this is where we get "keeping up with the Joneses". Eventually the people in the middle all fight to be like the rich guys and the other people in the middle and then everything just churns at a higher rate.

Is it good or bad? Well short-term we produce more (don't know that this holds longer term), but people living check to check are definitely the lifeblood of the economy. These are the grunts who need to show up each day or they won't make the rent, these are the producers. For the rich to be "independently" wealthy, they need to leverage all of these grunts. Our stock dividends are built on the back of these people.

If the grunts all had enough money that they didn't need to go back to work, then they probably wouldn't. And of course, stuff would stop. The economy, to some extent, is driven by consumables. Now admitedly, we've created a lot of consumables in our "disposable society", but even under the cruft, we still need food and new shelters and medecines and condoms and tools and replacement parts, etc.

We PF bloggers are wrecking the curve, we're trying to to break the paycheque to paycheque lifestyle. But what we do simply does not scale infinitely.

So this:
in the end we need stupid people to make money off of so you and I are the reason there is no universal financial education
is basically correct, but it ignores two "big-picture" issues.

#1. More knowledgeable citizens are capable of making more fiscally responsible decisions. If the populace in general had a better understanding of monetary issues, our government would be held to a much higher standard. As it stands right now, I can't trust most people to understand an RRSP let alone understand the vast implications of inflation, the central banking system and just government spending in general.

#2. Productivity Lost to Overhead
If you consider many banks, insurance cos and mutual fund salesmen as useless overhead, then increased financial knowledge would lead to overall increases in productivity. Instead of selling unnecessary contract, these people could build more roads or research new products.

End of the day, I figure that Canadian Dream would agree with me that it would be nice to provide more people with the personal finance knowledge that they need. Of course, the very people suffering from this lack of knowledge are the people that don't know what they're missing. And of course, it will never become part of the public school system, b/c the voters don't know that it should be there.

Of course, as always, YMMV.

1 comment:

Canadian Dream said...

Gates,

I agree somewhat with your points. I have to disagree that we can't all save 10% of our income, but I would point out that gets increasing hard as you go down in household income. So for those at $25,000/year or less might find it almost very hard to do.

Thanks for the reply,
Tim