Being Financially Illiterate Is Costing You - Literally

Graphic credit: Bernadette Berdychowski

The opinions reflected in this OpEd are those of the author and do not necessarily reflect the opinions of staff, faculty and students of The King's College.

Let me be honest: at 20 years old, I never had a credit card before.

I didn’t know what the difference between a stock and a bond was, and there was no way I could explain to you the ins and outs of an ETF. For many college-aged students, none of these things may seem like a “big deal.” In fact, some 76 percent of millennials lack basic financial literacy knowledge, according to a 2017 report by financial literacy non-profit Next Gen Personal Finance.

But, what’s the problem? Well, put simply - you could be costing yourself hundreds of thousands of dollars by not investing now. As the economy verges on a recession, it is more important than ever to understand the market basics and prepare accordingly - or risk suffering the consequences later.

Sure, financial jargon and complicated market concepts may seem convoluted (and, if I’m honest, some are) - but adults my age can be (and are) missing out on huge returns due to their lack of education. In fact, one of the vital financial literacy concepts my peers seem to be ignorant of is the magic of compounding interest.

“Many people don’t respect the power of compounding interest, but if you are in your 20s, this is something you have to respect,” Jeff Rose, certified financial advisor (CFA), told Forbes this month in a video. And Rose is right. In fact, Rose explains if you were to invest $300 every month from age 20 to 60 with an 8 percent return, you would have over $1 million in your account - that’s compared to only $440,445 if you waited until you were 30 years old to start investing.

I don’t know about you, but that is the kind of money that makes me pay attention - not to mention that many analysts estimate my generation will need over $1 million for retirement given that Social Security is due to wane by 2034. “I would plan on you having to fund all of your retirement through savings and your 401(k),” Robert Powell, writer for Retirement Daily, told TheStreet this month.

Still, in the endlessly entertaining, Instagram-scrolling world my peers and I live it, it’s easy for my generation (millennials verging on Gen Z) to brush aside the responsibilities of understanding and managing their finances these days - largely because there is a lot of ignorance about how important it really is. Forbes reported in 2018 that some 33 percent of adults had $0 saved for retirement, and that 43 percent of student loan borrowers are not paying back their loans.

While knowing the ins and outs of risk diversification or 401(k) plans may not be on every 21 year-old’s mind, failing to plan for their future or budget for loan payments certainly affects their day to day life. Yet, these statistics still don’t seem to be enough to shake the education system or young adults awake. And the sheer lack of financial literacy at younger ages is verging on tragic.

A couple of months ago, I took to the streets (Wall Street, to be exact) to interview passers-by about their basic financial literacy. Stopping strangers in the Financial District seemed like the best place to find the financially educated - but I was sadly mistaken. Of the some-odd dozen people I questioned with a quick financial literacy quiz, only a couple people (aged late-teens to mid-40s) could answer even half of the questions I posed. Several people thought that oil was a bond and not a commodity - and even more had no clue what the difference between a stock and a bond was. One 20-something proverbial “Wall Street bro” (complete with a Patagonia vest) even asked me not to use his interview as it would “hurt his brand” and expose his lack of knowledge to his investment bank job superiors.

As I soon learned, two-thirds of American adults can’t pass a basic financial literacy test, according to a 2016 National Capability Study by the FINRA Foundation. And up until about a year ago, I was one of these financially inept.

But even apart from understanding compounding interest or retirement planning is the market itself. If you’ve happened to pick up a business newspaper or glance at Twitter headlines recently, you may have noticed that there is talk of a nasty recession coming.

According to Morgan Stanley economists back in November, there is a 15 percent chance of a recession in 2019 - which then doubles for 2020. And although this may not seem scary to the average college student, recent shocks in the stock market, uncertainty over the U.S.-China trade war and rising interest rates all pose challenges for the next phase of the market - which will likely last you until you’re in your 30s.  

From where I sit, the biggest problem with financial literacy is simply that young adults don’t know what they’re missing out on. By not understanding how much they are actually losing every year they do not invest, young adults are putting themselves in an increasingly difficult position for the future - especially given that disappearing Social Security benefits and the ever-looming threat of a recession could jeopardize their funds.

But, what can you do?

Well, educate yourself. Unfortunately, as of last year, only five states have a personal finance requirement in high school, and higher education provides little more opportunity for non-finance majors. But there are plenty of ways to increase your financial literacy - whether that be picking a couple business publications to read, signing up for newsletters or Apple News alerts and even using the internet to search terms. Still, from what I’ve experienced personally and with my peers, learning how to invest seems like a lot of effort. But thanks to various apps like Acorns or Robinhood and online exchanges, it’s now possible to invest as little as pennies in the stock market.

I’m inclined to agree with Rose - “It doesn’t matter where you start, just that you do,” Rose told Forbes in a video.

Granted, talk of the financial literacy crisis is nothing new. And I probably can’t convince you to start putting money aside for investing when there are dozens of bars or concerts you’d rather go to. But with looming recession fears and an increasingly volatile market, it’s becoming even more evident: educate yourself, or feel the burn 10 years down the road.