Over the Thanksgiving holiday I spent some time catching up with my oldest childhood friend. We used to ride bikes together every weekend in the small town where we grew up in South Carolina. After talking about our families and careers, Kate asked me why I think so many people mess up their personal finances. She wanted to know if I think bad financial role models are to blame or if the financially-challenged are just, well, dumb.
I haven’t seen specific studies about how IQ relates to financial literacy, but when so many Americans lack basic math skills it follows that those people would also struggle with a credit card statement or the terms of a mortgage. Econ4u.org, the Web site of The Center for Economic and Entrepreneurial Literacy (CEEL), has some sobering statistics:
- Only 59% of young adults between the ages of 18 and 29 pay their bills on time
- 30% of Americans don’t know their credit score
- 25% of employees who are eligible for a retirement plan at work don’t participate in it
- African-American students are only 80% as financially literate as white students
- 48% of American credit card owners only pay their minimum payment each month
I guess my friend’s question also comes back to the issue of nature versus nurture: Are you a product of your genes or a product of your environment? If you’re organized and tend to be a planner, can you end up being good with money even if you grew up in the middle of a financial nightmare? And conversely, if your parents teach you how to save, invest, and manage money, will that information go in one ear and out the other if you’re impulsive and never plan for the future?
Both of those scenarios happen all the time. I know people who would rather have their appendix removed than spend 15 minutes reconciling their checking account or creating a budget, even though their parents are very savvy with money. It’s just not in their DNA to find personal finances the least bit interesting, even though they say that they want more financial security. Reforming someone who isn’t concerned about good money management is more difficult than helping someone who genuinely wants to learn but who wasn’t taught much about finances at home.
I believe that understanding your psychological relationship with money (what I call your money mindset) is so important for financial success that I devoted an entire chapter to it in my new book, Money Girl’s Smart Moves to Grow Rich. I wanted to address common issues—like thrill-seeking, poor-self esteem, jealousy, and feelings of entitlement—that can be the root cause of many terrible financial decisions that people make. Self-awareness about the bad habits that cause you to overspend or to delay financial planning is just as important as understanding the nuts and bolts of retirement accounts, for example. So I wanted to cover the whole enchilada. Taking control of yourself is the first step to taking control of your financial future.
The problem is that oftentimes the people who need the most help are the least likely to seek it. So what can you do if you care about someone who’s on a self destructive financial path? Here are 5 ways to help someone who’s financially-challenged get the information they need to make better choices for themselves and their families:
1. Have a financial intervention. For a loved-one who’s got serious financial troubles—like out-of-control spending and dangerously high consumer debt—gathering family and friends together to discuss the situation may be a solution. The purpose of an intervention is to communicate your concern and to help the person implement resolutions quickly. If no one is sure what to do, ask for their commitment to meet with a credit counselor or a financial adviser, make the appointment for them, and have someone attend the meeting with them.
2. Set up a financial dinner meeting. If a hard-core intervention is overkill for the situation, ask the financially-challenged person to have dinner with you. After you’re together let them know that you’re worried about their financial future and ask if they’d like to brainstorm with you about potential solutions. You could offer to set up a meeting with a credit counselor or a financial adviser and to go along if they need your moral support.
3. Create a financial book club. Financial books might not make for the most titillating group conversation, but reading and discussing a chapter or two a week is a great way to digest new information. Pick newly released books with up-to-date information and get together at friends’ homes or in cozy coffee bars to dish about what you want to improve when it comes to your personal finances.
4. Give personal finance books. Put a good book about money in someone’s stocking this year. Whether it’s Christmas, Chanukah, a birthday, graduation, or any special occasion, personal finance books and e-books make great gifts. Everyone wants to have more money and create financial security—even if they don’t act like it sometimes.
5. Offer up personal finance blogs and podcasts. There’s a treasure trove of free financial information that’s waiting to be discovered online. Do a search for “personal finance blogs” in Google or “money podcast” in iTunes and you’ll see what I mean. You never know what media might spark a new interest for someone. So remember to share links to information that you enjoy with any financially-challenged person in your life.
Let me know if you have additional tips about the best ways to help friends or family improve their finances. If a particular tactic worked really well or went horribly wrong for you, I’d be interested to hear your story.