Emphasizing the financial ABCs

The most recent market decline has been painful for all investors and no doubt will lead consumers to question the vibrancy of the economic recovery. Ironically, those doubts are likely to result in restrained
MAY 30, 2010
The most recent market decline has been painful for all investors and no doubt will lead consumers to question the vibrancy of the economic recovery. Ironically, those doubts are likely to result in restrained consumer discretionary spending, which would lead to slower business activity and hiring, which in turn would derail the recovery — just as it was beginning to show signs of life. If there are any positives in such a gloomy scenario, it is that consumers and investors finally are learning some of the lessons of 2008: Save regularly, spend wisely and stay out of debt. These messages should be rote by now, but they are easily forgotten. For example, the personal savings rate, only 1% in the first quarter of 2008, began to climb as the mortgage bubble burst. According to the Labor Department's Bureau of Economic Analysis, it reached 5% in the first quarter of 2009. But since then it has slipped to 4% in the third and fourth quarters, and declined to 3% in the first quarter of this year. The recent jolt of economic uncertainty should reinforce the verity that saving is a virtue, and living beyond one's means is hazardous to one's financial health. That lesson is one that the people of Greece, Spain, Portugal and Ireland are rediscovering. The Great Depression taught all who lived through it to spend less than they earned and to save for a rainy day. It also taught that rainy days are part of life. The current “Great Recession,” reinforced by the latest market correction, may teach the same lessons again. It also may teach Americans that while they are computer crackerjacks, they don't know as much about personal finance as they think they do. According to the National Consumer Credit Counseling Foundation, 64% of respondents in its 2010 Financial Literacy Survey gave themselves grades of A or B on knowledge of personal finance. Only 34% gave themselves a grade of C, D or F. Yet 78% of the respondents agreed that they would benefit from professional advice, and 31% strongly agreed. Only 8% of the respondents reported that they had gained their knowledge of personal finance from a financial professional, with 41% saying they had learned from parents or at home, and 15% from self-help books or the media. Given the size of the mortgage crisis and the number of people who overextended themselves with mortgage and credit card debt in the past five years, these results suggest grade inflation in terms of personal financial knowledge. The fact that only 8% of the respondents had gained their knowledge from financial professionals suggests that financial planners and investment advisers have a responsibility and an opportunity. They have the responsibility to reach out in their communities to reinforce the lessons of the past five years and to impart real knowledge about personal finance so that consumers do not repeat the mistakes of the past. They can do this by offering personal-finance seminars — not investment seminars — at schools and community groups, etc., covering such basic topics as personal budgeting, the importance of saving, the correct use of credit cards, understanding mortgages, and other issues of everyday importance. The new credit card rules and regulations by the proposed consumer finance protection agency offer a perfect introduction for such seminars. Financial planners and investment advisers who offer such basic seminars eventually may convert at least a few of the attendees into clients. As the evidence shows, many people earn good money yet know very little about how to handle it.

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