Although we hear a lot in the news about global warming as a risk to future generations, there is also a more immediate hazard to our children and grandchildren -- the lack of financial literacy.
It's not their fault. Financial literacy is rarely part of the curriculum at school. Students' first exposure to consumer credit is often at college orientation, where banks offer free pizza in exchange for signing up for a credit card.
In addition, parents often don't like to talk to their children about family finances. This may be especially true for Japanese American families who were held in concentration camps during WWII. For many, the memory is still fresh how banks froze their accounts when they were down and helpless. Even though they had money in the bank, many families could not pay their mortgages and taxes, and consequently lost their homes, businesses, cars and property. The lingering suspicion and distrust of financial institutions has filtered down, even to generations who weren't personally imprisoned and victimized.
We're now entering a time when financial illiteracy is dangerous, because predatory financial practices are on the rise. When students graduate from college, they are immediately handicapped with an average $37,000 in student loans.¹ Student debt is greater than credit card debt or auto loans, totaling over $1.5 trillion.² Already, 10.7% of the loans are in default. Compare this to France, where the tuition is normally around $200 a year at public universities.³
The parents' generation likely grew up believing in the American Dream -- if you got a good education, worked hard, and managed your money well, the chances were good that you would advance financially, and be a success. Back in 1940, there was a 92% chance that children would earn more than their parents. The economy was growing strongly, and benefited the upper, middle and working classes alike.⁴
Things have changed. By the time we got to 1985, the odds were down to a 50-50 chance that children would earn more than their parents. Today, it's much lower than 50%. Is it because we're poorer as a nation? Not at all -- we actually have much more wealth. Between 1980 and today, the average Gross Domestic Product per capita grew five times as high.⁵
The real reason for the growing income gap is that nearly 70% of the income gains from 1980 to now have gone to the top 1% of the wealthy. The inequality in wealth is even sharper. Today, the top 10% of the population owns 77% of all the wealth in the U.S. On the flip side, who owns most of the debt? -- the bottom 40% of Americans.⁶
Magnifying the risk for future generations is the claw-back of the safety nets that have protected the health and retirement incomes of most people. President Trump's latest budget proposes a $550 billion cut to Social Security and Medicare, as well as a $1.5 trillion cut to Medicaid (Medi-Cal in California). Trump plans to eliminate Medicaid by 2021, replacing it with fixed block grants.
How can future generations protect themselves against this onslaught? One way is to overcome complacency, become involved with the community, and work towards positive social change.
The other is to minimize financial mistakes. It's no accident that the top 1% of the wealthy own half of the stocks and bonds, and over half of Americans have zero invested in the market.⁷ The wealthy know that when inflation is averaging 4% per year, putting all your money in the bank guarantees an annual loss of purchasing power. Because younger people have time on their side, they can weather market fluctuations, and can take advantage of the power of compounding that investing offers.
When Trump became president, one of the first things he did was to kill the Fidiciary Rule, which stipulated that any investment advisor helping a client with retirement has to act in the client's best interest. Overturning the Fiduciary rule gave the green light to predatory financial institutions and "advisors," and has cost investors about $17 billion a year in higher fees, commissions and bad advice.⁸ Advise your children to work with a team of fiduciaries -- a CPA, attorney, Certified Financial Planner™, and Registered Investment Advisor. These professionals will help your child create a roadmap for success, provide them with the education they need, and guide them through life's changes.
¹ Bloomberg Data 2018 ⁵ The World Bank
² Forbes 6/13/2018 ⁶ Edward N. Wolff, NYU
³ www.valuecolleges.com ⁷ Money 12/19/2017
⁴ New York Times 12/8/2016 ⁸ Investment News 9/5/2018
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