The Importance of Financial Education

People will often bring up the issue that our children do not get much in the way of financial education in our school system, and it is true that our school curriculum doesn’t concern itself much with practical affairs, including matters of personal finance.

There’s no question as to the value of at least a basic understanding of how to manage one’s financial affairs, as this topic pervades everyone’s life and plays a meaningful role in whatever access we achieve or fail to achieve.

This is all left up to learning from practical experience, which boils down to people learning the hard way, through making mistakes. Ideally, some of these mistakes could be avoided, and even when we learn lessons from them, we don’t always heed the lessons.

The Importance of Financial EducationSome people are better at managing money than others, and this ends up coming down to the quality of one’s disposition more than anything. Some of us are just naturally wiser than others, some are just more disciplined than others, and some seek more understanding than others do.

There is actually a great deal of financial education that goes on in our society, although it’s not necessarily of the best quality. As it turns out, this form of education is the biggest obstacle to achieving financial balance and success, because it is completely focused on consumption.

If you’re trying to sell something to someone, you are certainly going to prefer that you get the sale now, rather than later or not at all, and whether the persuasion that is used is in the best interests of those you are trying to sell or not isn’t really important.

We are bombarded with this sort of education each and every day, through various channels, but that’s not even where most of the power of these ads come from. The biggest thing here is how much consumerism has penetrated our culture, and we have been persuaded en masse to not only accept this behavior, but see it as a necessary function of living.

This blurs the line between essential and non-essential spending, and most of our spending falls well within what should be considered discretionary. However, unless we use discretion, we can’t say that a certain act is one that we fully considered and controlled.

It is almost as if we are members of a cult, one huge cult that envelopes the overwhelming majority of us, being driven to spend and spend a lot. From our vantage point, we usually do not realize how much of our lives are actually driven by following the direction of the group, as we just see this as tending to our needs, because we’ve been taught that these things, at the level we can afford, does consist of actual needs.

What We Really Need to Learn

In cultures that are less commercially influenced, or due to the nature of the culture may be less prone to it because commercialism hasn’t quite penetrated it to the same degree, people may be seen as spending less and saving more. Commercialism has taken over more and more with each passing year and there is much to do in order to gain enough perspective to at least be thinking more rationally about the choices that we make that influence our finances.

There is a fair bit of talk that we hear about how we need to save more money, but this does tend to focus on the saving part and not on the spending less part. People of course can’t save if they don’t spend less, or if they spend all of their money as fast as they make it, as is often the case.

There are even those who spend more than they make, using credit to make up the difference, but taking in less than we spend is just not going to end well. People destroy their credit this way, which does serve as a natural barrier to spending more than we afford since lenders won’t lend to us in this state, but we still tend to overspend, right up to the limits of our capacity.

Overspending can even be considered a disease, a psychological disorder, and it is very pervasive. Many people grow out of this to some degree as they age, and actually may end up doing the right things later in life, but the many years of lost opportunities can take their toll and make remedying things out of reach.

If you need to set aside your whole salary in order to save enough for retirement, this just isn’t going to be possible, but we can see ourselves in this situation when we don’t start early enough.

While saving for retirement is a major issue for a lot of people, it is not the only one, and there are a lot of other reasons to save. We may not even be consciously aware of these needs though, the need for instance to use our own money instead of racking up our credit cards, or waiting until we can actually afford something to buy it.

In many cases, we should not even be buying the things that we would save up for, not that we couldn’t save up the money, but because there may be a better use of the money. If we spend our money buying everything we can, it doesn’t matter that much whether we paid extra in interest to get it sooner, if we end up spending all we make anyway or close to it.

This is really what we need to learn, to set aside our emotions and put more weight on rational deliberation when it comes to how we are going to be spending our money. If we actually can afford something without sacrificing our needs down the road as well, then that’s a good choice, but if it involves paying a bigger price and taking away from our overall happiness, it may not be.

It Really Is About Long-Term Happiness

People buy things generally because it makes them happy. Being happy is not just a legitimate goal, it’s actually the end goal of everything, at the pinnacle of our goal pyramid. How we may define happiness can be another matter, but this will always come out to what we really want to achieve, the sum total of what we get out of what we do.

Economists use the model of rationality, and part of this is the rationality of seeking maximum happiness overall. The word “utility” is commonly used, which basically means the same thing, as the object of this utility is how it furthers our happiness or satisfaction in life.

While there are people who do act against their self-interests intentionally, in other words acting irrationally, people will generally act rational in the moment at least. They will buy something because they will derive a certain degree of satisfaction and one that is decided to be of a sufficient magnitude to justify the purpose.

The actual disconnect with rationality mostly occurs at the temporal level, where we may be more satisfied now but end up bringing down our overall satisfaction over time by the action.

As an example, let’s say that we have enough money to live a very modest lifestyle for the rest of our lives. Instead of choosing that, we choose a lavish one, which will certainly be enjoyed at a level beyond the mundane one, but will result in our running out of money too soon.

If we spend twice as much as we should, halfway through, we’re going to go broke and be living on the street and begging for food. The additional pain that is caused by this can be considerably greater in total than the additional pleasure we got from living it up more.

If we can come to a better understanding that everything comes with its opportunity costs, and we need to consider what else we could be doing with our money other than spending it now on certain things, then we’ve learned the most fundamental lesson of personal financial education, the need to always maintain an overall perspective and consider how decisions will affect our overall sum of happiness during our lives.

How We May Make This View More Transparent

It is not enough to teach kids some of the basics such as how to create a budget, how to manage their credit, how to set aside money for the future, and so on, as knowing these things and having the resolve to execute the plan properly can be two different things altogether.

It would be better though, to be sure, if we did look to provide people with more education along these lines, as people are pretty much left to their own resources to go out and learn these things, and many never learn all of this properly.

This issue is very much one of motivation, or a lack of sufficient motivation to be more specific. Those who have enough may do fairly well, and those who do not will struggle no matter how much you teach them about what they should be doing.

The desire for instant gratification can be a very strong one, and one that those selling their goods and services to us take full advantage of. When we believe that we are entitled to all this, and worse, that it is needed, that everyone needs to live in a nice house with a new car and lots of toys, and plenty of vacations, as well as all of the other things that come with the good life, we will be very prone to seeking out a so called better life than we should now and risk paying too big of a price for this later in life.

The secret, in addition to things like budgeting skills, is to have people come to a better realization about the long-term effects of our decisions and focus not just on the present but on the future as well.

In a real sense, the personal financial education that we do provide to people is too basic and doesn’t really address the actual source of the problem that is sought to be solved, which is people’s lack of discipline with their spending.

We may actually think that we are being pretty disciplined, setting a little aside perhaps, amounts that we can see our way clear with when all of our perceived needs are taken care of first.

We need to prioritize the future more in these decisions, as well as being willing to re-examine some of our beliefs about what our needs really are. We do have basic needs, somewhere to live, enough to eat, transportation, basic clothing, and so on, but the actual threshold is well below where we may think it is, and much more of our spending is actually discretionary and even highly so.

From the actual basics, we can then decide what portion of our income that we’re choosing to spend now and how much to set aside, based upon what is best for both the present and the future. Once we’ve learned this lesson, and action what is learned by way of these ongoing self-examinations, we will be finally in a position to make the right decisions and truly ensure that we are acting in our long-term interests.

John Miller


John’s sensible advice on all matters related to personal finance will have you examining your own life and tweaking it to achieve your financial goals better.

Contact John:

Topics of interest: News & updates from the Securities and Exchange Commission, Stock Markets, Bonds, Loans & more.