Why We Skip the Money Talk: Understanding the Gaps in Personal Finance Education
Personal finance is like the secret language of adulthood—they don’t teach it in school, but somehow, we’re expected to know it all. From managing cash flow to navigating debt and understanding credit scores, there’s a whole world of financial know-how that often gets overlooked in the classroom and in parenting. Let’s dive into why we as a society skip the money talk and explore essential aspects of personal finance that are often left out.
1. The Missing Money Lessons
When you think back to your life, did anyone ever sit you down and teach you how to manage your money? Chances are, the answer is no. Personal finance education is often brushed aside in favor of traditional subjects like math and science. While those are important, they don’t quite cover the real-world skills we need to thrive financially. At home, financial know-how is often gleaned from your parents, but they likely learned from their parents who don’t fully understand their finances either.
2. The Dreaded Infrequent Expenses
Imagine this: your car breaks down, and suddenly, you’re hit with a hefty repair bill. Infrequent expenses like these can throw a wrench in your budgeting plans if you’re not prepared. Unfortunately, we are rarely taught how to plan for these unexpected costs, leaving many of us scrambling when they inevitably arise. You might be shocked to hear this, but in my experience and research, this can account for 20-25% of your total expenses.
Are you setting aside 25% of your income for infrequent expenses? Did anyone ever teach you that you need to? No one taught me. I learned the hard way by seeking solutions for myself, my family, and my business – and it was definitely painful at times.
It’s worth also noting that infrequent expenses are expenses you can anticipate, such as car repairs, gifts, home maintenance, etc. When they happen they can feel emergent in the moment, but we know they will come up at some point. The ability to anticipate these costs differentiates them from emergency expenses. Don’t worry if it’s still not clear, I’ll cover emergency expenses in a minute.
3. Harmony in Money Matters with Your Spouse
Money can be a touchy subject, especially when you’re trying to sync up your financial goals with your partner’s. Whether it’s deciding on a budget, managing joint expenses, or navigating big financial decisions together, being on the same page with your spouse is crucial. Yet, we have not been taught the communication and collaboration skills needed for these money conversations. Furthermore, our parents may have only demonstrated to us what not to do in our relationship when managing money.
It’s more than communication and it’s complex enough that no one can keep it all their head. Typically one spouse/partner manages the household finances. This lack of collaboration doesn’t allow for the non-money manager in the relationship to have a clear understanding of where the money is going. This can lead to stress, tension, and disputes about money. Deciding with your partner where your money goes before you spend it can alleviate this stress. Then tracking it in a shared system will give you both financial transparency and a sense of partnership. The relief that comes with knowing where you stand with your money in real-time can be game-changing for couples.
4. The Debt Dilemma
Debt—it’s like that unwanted guest that just won’t leave. Many of us find ourselves juggling various debts, from student loans to credit card balances. Without proper guidance on debt management strategies, we may fall into the trap of accumulating more debt than we can handle.
Debt is three times harder to get out of than to get into. First, we have to quit overspending our income, then we have to reduce our expenses to pay off the principal balance. Next, we have to reduce our expenses again to pay off the interest. There are two common debt reduction strategies, the snowball and the avalanche. I teach a third, more efficient approach. Contact me and I’ll happily spread the gospel of my phased approach to debt reduction. Schedule a Complimentary 25-Minute Call
5. Decoding Credit Scores
Your credit score is like your financial report card—it can open doors or slam them shut. But do most of us understand how credit scores work and how to maintain a healthy one? That’s not something most of us learn in school, despite its importance in accessing loans, mortgages, and other financial opportunities. Credit scores have more to do with how you paid debt in the past than how credit-worthy you are. One of the biggest factors that most people overlook is credit card utilization rates. In short, it’s better to owe 20% of your total credit limit on 4 cards than 80% of your limit on one card. If you want to know more about credit scores, stay tuned. It’s coming in a future post.
6. Building an Emergency Fund
Emergency funds are like financial superheroes—they swoop in to save the day when unanticipated expenses strike. Yet, 33% of people making $100k/yr and 25% of people making $150k/year don’t have one. It’s important to build an emergency fund because life is unpredictable (and expensive). I don’t want my clients to be vulnerable to financial setbacks, so we prioritize setting this up as one of our highest priorities
7. Lifestyle Creep
As we earn more, it’s easy to fall into the trap of lifestyle creep—gradually increasing our spending to match our income. Having a system that tracks what you spend each month can help curb this behavior and give you a chance to catch it before the money is gone.
When talking about lifestyle creep, we also need to factor in inflation. When we do, suddenly our purchasing power isn’t what it used to be. Even worse, without a system to track what you’re spending you won’t notice you’ve overspent until after it happens and you can’t make adjustments. Understanding these concepts and creating a way to mitigate the effects of lifestyle creep and inflation is not something most of us are taught. This is where I can really help my clients. We catch these trends early and often with a system that gives every dollar a job so you know where it’s going before the money is spent.
Why the Silence on Personal Finance?
So, why exactly is personal finance education the elephant in the classroom? One reason is that schools are often focused on academic subjects deemed essential for standardized testing and college readiness. As a result, practical life skills like money management take a back seat.
Additionally, personal finance can be a complex and ever-evolving topic. On an academic level, it requires staying updated on financial trends, understanding economic factors, and adapting strategies to changing financial landscapes. But for most of us, it becomes a more emotional and nuanced conversation. To appropriately teach personal finance, we need to learn the fundamentals of household spending, but also goal setting, values, and family histories of money. For educators, this can be a daunting task, leading to personal finance education being overlooked or taught superficially.
Taking Charge of Your Financial Education
While as a society we may fall short in teaching personal finance, there are proactive steps you can take to become financially savvy:
- Self-Education: Take the initiative to educate yourself about personal finance through books, online resources, hiring a coach, and financial literacy courses.
- Cash Flow Mastery: Learn how to create and stick to a spending plan that accounts for regular expenses, infrequent expenses, and an emergency fund.
- Debt Management: Develop strategies to tackle debt systematically, such as prioritizing high-interest debts and exploring debt consolidation options.
- Credit Score Awareness: Monitor your credit score regularly and take steps to improve or maintain it, such as making timely payments, low utilization rates, and keeping credit cards paid in full when possible.
- Emergency Fund Building: Start building an emergency fund to cover at least three to six months of living expenses, providing a financial cushion for unexpected events.
- Lifestyle Awareness: Stay informed about inflation rates and avoid lifestyle creep by prioritizing mindful spending.
In conclusion, while our schools and families may not teach us personal finance, the responsibility lies with us to educate ourselves and take control of our financial futures. By understanding essential concepts like budgeting, debt management, credit scores, emergency funds, and inflation, we can navigate the complexities of personal finance with confidence and resilience.