Get a financial education

Only 19% of Americans in a recent EBRI study could correctly identify the age at which they become eligible for Social Security benefits. Only 37%, in a Washington State survey, knew that bond prices fall as interest rates go up. And most surprisingly, only 61% knew that stocks returned more than bonds over a 40 year period.

 

The simple fact is Americans are basically clueless when it comes to money. There should be a big incentive for each of us to get educated - money sticks to people who know what to do with it. It flees from those that don't. The cost of ignorance is very real. Yet that doesn't seem to have sunk in for most people.

 

Bankrate.com gave people a test to see what level of financial sophistication they had. Then it looked at differences between the financially literate and the financially dense. It found high scorers had mortgages with an average interest rate of 5.95 percent. Those who received an "F" in financial literacy ended up with loans averaging 6.80 percent. It may not sound like much, but Bankrate.com tallies up the savings and the results may surprise you:

 

If you get a $150,000 30-year fixed-rate mortgage at 5.95, you end up paying $322,024. But with a 6.80 percent loan, the final total is $352,040 for the same home. The difference: a tidy $30,016. And who wouldn't want that money earning interest in a 401(k)?

 

You know the phrase work hard, play hard, right? In a former life, I worked at a company that was the poster child for the work hard play hard mentality. We were all very young, unmarried mostly and very, very ambitious. We had our little rituals that we used to torture new employees. They were part of our culture, part of our lore. Those in the know were on the inside. For those that were the victims of our innocent pranks, it marked their passage from outsider to a member of the club.

 

One of those rituals was called spoon fighting, which only occurred after too many drinks, up at Fridays after work. The uninformed newcomer would be spun this great tale, usually by a senior executive about our long tradition of spoon fighting brought over from England. He would then be told that one of us, who by the way, knew all about spoon fighting – we were informed! – was the reigning spoon fighting champ and that all new employees had to face the champ in a spoon fight. That was the tradition.

 

Well, no one could resist, what with all of us chanting spoon fight, spoon fight! And of course, being a relative newcomer there was a lot of pressure to impress your peers and to fit in so of course I’ll spoon fight! Bring on the champ.

 

The rules of the game were explained to each warrior. You had to hold a regular teaspoon between your teeth and then you had whack your opponent on the head as hard as you can. Each person got five tries. Oh yeah, and there was a catch, both were blind folded.

 

A napkin was used to blind fold each participant and the new guy always went first. He would put the spoon in his teeth and try mightily to hit his opponent as hard as he could on the top of the head with the spoon. You can imagine us roaring at his clumsy efforts. “Keep going”, everyone would shout in encouragement. “You’ll get the hang of it.”

 

When it was the champs turn, he would have his blind fold off and he would act as if he had the spoon in his mouth but at the same time, the “referee” would have a spoon in his hand and would rare back and thwack the poor blind folded newbie as hard as he could. "Oww", he would cry. "Dang that hurt!" The bystanders would all cheer for the champ. "Yea! Well done!"

 

This would go on for some time until one of two things would happen. The unaware newcomer would get bashed in the head all the way to the end of the game vowing to practice his spoon fighting skills and come back another day to meet his tormentor, or it finally dawned on him that the game was rigged and everyone else was in on it except him.

 

Now I freely admit this was a juvenile ritual performed by a bunch of drunks and you may find it appalling. But if you do, so much the better.

 

Are you starting to feel that lump yet? This is the game most of us play. The difference is, in the spoon fight, the victim almost always figured it out. In the financial markets most of us never do. We remain on the outside getting thwacked, paying the penalty that the uninformed must pay until they understand the game as well.

 

Here is the good news. Learning the rules to spoon fighting is quite simple. You just have to be let in on the secret and you will never be taken advantage of again - at least not in a spoon fight.

 

Same is true when it comes to the investment game, the rules are a little more complicated, but still, all it takes is someone who is willing to learn and someone who is willing to teach.

 

The most important thing you can do, in my opinion, is to find someone who is achieving the results you want, glom onto them, make them your mentor, seek out their advice, and learn as much from that person as you can. Take them out to dinner, put them on your personal board of directors – whatever it takes to get the benefit of their wisdom.

 

On the other hand, if someone is not getting the results you want, their advice isn’t worth very much is it? Discard it. It’s worthless.

 

SOURCES:

 

1. "Do You Know When You Qualify for Full Social Security Benefits?" Fast Facts from EBRI 25 May 2006

http://www.ebri.com/pdf/publications/facts/fastfacts/fastfact052506.pdf

 

2. "Survey of Financial Literacy in Washington State: Knowledge, Behavior, Attitudes, and Experiences" Washington State Department of Financial Institutions; December 2003

http://www.dfi.wa.gov/news/finlitsurvey.pdf

 

3. Dana Dratch; "Financial literacy pays off in many ways " Bankrate.com 6 April 2004

http://www.bankrate.com/brm/news/financial-literacy2004/pay-off-home.asp

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.