Financial Illiteracy

"The number one problem in today's generation and economy is the lack of financial literacy." - Alan Greenspan

"We were not taught financial literacy in school. It takes a lot of work and time to change your thinking and become financially literate." - Robert Kiyosaki

I find it very amusing that the first quote was from one of the all time economic monkeys Alan Greenspan.  He will however be outdone by the 800 pound Gorilla that is Ben Bernanke but that will be left to history to tablet.  These two so called financial experts are driving the economy to the brink of failure and so how is it possible for the average Joe to understand the financial landscape?  Well I do not plan to answer that question today (other than to advise you to keep reading my blog) but what I do want to bring to the forefront is that getting to grips with financial literacy is critical to your future.

In the good old days (and I mean old as it was even before my time) people would go to work and stay put for decades.  The result of this loyalty was that a defined benefit pension plan was provided.  A defined benefit pension plan is one where the company shoulders the responsibility of ensuring that your retirement proceeds do not run out prior to your life.  They pay a set amount to you every month and often linked this to a measure of inflation so that once you leave the company you are set.  Over time these have been eliminated and in fact many were cut completely during bankruptcy proceedings, so if you are still on one of these I advise you to plan for the worst as I would imagine that this will be cut at some point in the very near future.

At present the only places that these antiquated systems can be found are governments and educational facilities.  These places continue to offer these perks in order to attract talent and because they are able to fund the obligations with other people's money - namely yours and mine!  The problem with these plans is that life expectancy is increasing at a rapid clip and these plans are going to sink governments the world over so it is just a matter of time before all of these plans have to change.  Once again I am not going to delve any deeper into this topic but suffice it to say that for the majority of us we will retire with no benefit other than our savings and the reminder may find that their retirement plans are suddenly thrown into turmoil at a time when they can least afford it.

Our savings is the modern retirement plan, termed the defined contribution plan.  In these plans you contribute to your retirement and if you are lucky your company adds to that amount.  When you retire, whatever the balance in that plan plus your other assets outside of the plan less any debt is what you have to live on for the remainder of your life.  Some people rely on another government program, social security, but this is also a form of defined benefit that will also have to be trimmed in the very near future if the solvency of the United States is to be taken seriously so I do not expect much from this either.

So as the burden of retirement falls squarely on your shoulders if you are not financially literate then you are in trouble.  Now for this blog financial literacy does not mean that you need to understand every trading option or new derivative technique developed yesterday by some MIT hotshot, what it means is that you have to have the wherewithal to be able to make investment decisions that will define your retirement.

In most cases you will rely on the input from a financial planner or some other form of financial expert but they can only take you to the water trough.  The decision to drink will always be left up to you as you are the only person that can truly evaluate whether the investment being presented fits within your risk tolerance and meets your retirement objectives.  Furthermore, while some financial experts know a lot about finance I can assure you that they do not know everything.  Take me for an example, I have traded pretty much everything over 30 years and have studied all kinds of markets and private equity my entire life but I am no expert in tax or annuities to name a few areas of weakness.  What I do know however is how to determine when to make changes to my portfolio and evaluate what is presented so that I can ensure it works for me and this is the skill that you need to develop.

Studies have shown that the elderly and females have the lowest levels of financial literacy but this is not to say that high net worth males get off as financially literate.  I have met many a high net worth individual who believes that they understand finance when in truth they are just too afraid to admit that they have no clue.  Often times these people pile all their eggs into one basket (as this is the only one that they understand) and when it works they believe that they are now set however they are only one bump in the road away from ruin.  Rather take the honest route and begin to work on your weakness than dig a hole in the sand and stick your head in it as I for one do not like the view that would present and neither should you.

With so much on the line and in such a rough investment environment as the one in which we now live it is critical to do your homework.  Find a number of trusted advisers that have your best interest in mind but always remember that the final decision is yours and yours alone.  Turning your financial future over to someone with the thought that they will look after it like you will is not an option and will more than likely result in financial despair right at the time you need to rely on your finances most.