On Financial Literacy and Microsaving
The New York Times‘ Nicholas D. Kristof gets it right a lot of the time. He comes close with animals, and perhaps some day he’ll move that little bit extra that will make certain crucial connections, but for now, he’s great for compassionate and informative reporting and writing about human rights issues.
In today’s “Sparking a Savings Revolution” he writes about the effectiveness (and rarity) of savings accounts for the world’s poor.
One of the ugly secrets of global poverty is that a good deal of suffering is caused not only by low incomes but also by bad spending decisions. Research suggests that the world’s poorest families (typically the men in those families) spend about 20 percent of their incomes on a combination of alcohol, cigarettes, prostitution, soft drinks and extravagant festivals.
But there’s also the reality that there simply aren’t reasonable vehicles for savings. Kristof writes:
One challenge is that those men don’t have a good, secure way to save money, and neither do poor people generally. It just sits around, itching to be spent. It’s also vulnerable to theft, covetous family members and demands for loans from relatives.
In West Africa, money collectors called susus operate informal banks but charge an annualized rate of 40 percent on deposits. Yes, you read that right. You pay a 40 percent interest rate on your savings!
Several large, international organizations offer savings programs, including CARE and MatchSavings.org, if you’re interested in making a year-end gift.
Here in America, though we have surprisingly increased the amount we save since mid-recession, we still aren’t a nation of savers. I spent about a decade in the financial literacy business, writing educational materials for low-income people. What I realized is that (a decade ago) no one cared about whether poor people knew anything about money because there’s no money in them as a demographic.
Like the people in Kristof’s article, the clients of the company I wrote for made bad financial decisions but didn’t even see them. And they didn’t connect the dots between their decisions and their future, mostly because they were convinced that the future wouldn’t be any different from the past or the present: bleak. Money can get people out of poverty, but only if they know what to do with it and they know how the system works. Surprisingly little money can go surprisingly far if handled wisely.
Lest you think it’s the poor people whose financial literacy isn’t up to snuff, check out “Americans Nearly Flunk Financial Literacy Test,” which includes illuminating tidbits such as: “not only are people not saving for the unknown, they’re also not saving for the known.” Then there’s “Financial Literacy: The Time Is Now,” which states, “When it comes to financial matters, Americans are functionally illiterate.”
So here’s a suggestion for 2010: Improve your financial literacy. Save more and save smarter. Think about your future and plan for how you will get there. Stop buying unnecessary stuff. Live within or below your means. Stop using credit. Seek out the advice of a financial expert (the nonprofit Financial Planning Association‘s planners do pro bono work!).
This year has been difficult for everyone, and devastating for many, financially speaking. Some of what occurred was out of the control of the average person. But some of it wasn’t. Today, I’m thinking about my part in my less-than stellar 2009 financial situation and how I might change the way I do things in 2010.
Anyone want to join me?
Stephanie Ernst
Marji
Kelly G.
Deb
Mary Martin
I’m actually rather frugal compared to most people I know, yet getting my finances under control has still been a long struggle, largely because of some periods of bad luck. I’m one of those people who doesn’t save because I’m putting all extra cash each month toward the credit card balances, the “0″ on which has repeatedly seemed oh-so-close when some sort of major event happens, and I end up having to rely on them again for things such as groceries and vet care when the incoming money has dried up temporarily or when the bills soar higher than usual (e.g., when veterinary care turns into surgery). I’m very much looking forward to the day, hopefully within the next year and a half, that I can shift to a focus on savings.
But hearing others’ stories, even right here in this country, can quickly give me perspective. There are people who couldn’t use a credit card in hard times even if they wanted to because they wouldn’t even be able to get one. And I do believe there are people who would struggle to save even a small amount per month — I’m certain there are people making poor financial decisions as you and Kristof note, but of course, there are also people who aren’t making frivolous purchases and who really are doing their best yet are still struggling just to get food on the table, afford clothes and medical care for their kids, get the power bill and rent paid, etc., people who count out their dollars each day to see what they can afford to feed their kids or to make tough decisions between truly important and necessary purchases, and who therefore would understandably have a hard time imagining how or what they could save each month. Sigh. Hard stuff.
I do, by the way, recognize that having some moderate savings would stop me from having to use the credit cards in those situations. But that one remains a tough call for me. For me personally, when I look at the interest rates and my current realities, it makes more sense to put what I have toward eliminating the cc balances than to watch the fees add up there while I redirect money to low-interest savings. Ugh. This is making my head hurt.
“[w]hen I look at the interest rates and my current realities, it makes more sense to put what I have toward eliminating the cc balances than to watch the fees add up there while I redirect money to low-interest savings.”
Absolutely. Many people don’t realize that when they invest in anything that doesn’t pay–guaranteed–at least the interest rate of their credit card(s), they’re actually losing money (net)! For the first time in a while down here in Florida, it became very clear that that includes real estate.
When it comes to saving, I’m not saying the purpose is to make money, but more to have a small safety net so that dipping into credit comes later. One of the lessons the recession taught us is that all kinds of things that have nothing to do with your personal decisions can dramatically alter your life–in a bad way. And a safety net/emergency fund is a luxury for most Americans, and that’s a problem (that I’m not saying I have a solution to other than the obvious).
I like that you mention your head hurting because that means you’re thinking about this. We will all have a relationship with money for the rest of our lives. We can’t even say that about many of the people in our lives! Yet many people–and particularly those who aren’t in great financial shape–don’t think enough about their financial situations. And heaven knows we’ve seen that even people with lots of disposable income don’t investigate thoroughly where they’re money’s going. It seems that no matter what your income or your savings, the recession was a great teacher for everyone.