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The Present

Essential financial life skills for 21st-century Americans

Having these financial life skills can help you navigate challenging economic environments.

Photo by Jp Valery on Unsplash

Key Takeaways
  • Americans are swimming in increasingly higher amounts of debt, even the upper middle class.
  • For many, this burden can be alleviated by becoming familiar with some straightforward financial concepts.
  • Here’s some essential financial life skills needed to ensure your economic wellbeing.

When it comes to Americans’ finances, the statistics paint a pretty grim picture. According to Northwestern Mutual’s 2018 Planning & Progress Study, Americans are facing greater challenges than ever when it comes to their finances, and most don’t seem to have the life skills needed to handle those challenges well.

One in five Americans have no retirement savings whatsoever, and a third of Baby Boomers have under $25,000 saved for retirement. With the increasingly dicey status of social security, this is going to mean a lot of older folks will be working for their entire lives. About 50% of Americans reported that they feel fear when considering their financial situation. The average personal debt rose to $38,000 in 2018 and that excludes mortgages, arguably the best form of debt one could have since its tied up with an asset. While mortgages are typically the most common form of debt, in 2018, credit card debt tied mortgages as the primary source of debt. And we don’t even need to get into student loan debt.

These challenges aren’t isolated to the lower class, either. Data from the Federal Reserve shows that all Americans aside from the top 10% are experiencing income stagnation. Upper-middle-class households are finding that the price of products and services are rising faster than inflation, forcing some to take on increasingly riskier forms of debt. In order to cope with this changing economic landscape, it’s crucial that Americans master these financial skills.

Photo by Jp Valery on Unsplash

Understand the power of compound interest

Compound interest refers to the exponential growth that happens when interest piles onto a sum over time. If you invest $5,000 at an interest rate of 7% per year, the next year that sum will increase by $350. If left untouched, the year after that, it will increase by $374.50. So long as that money remains untouched, it will grow at a rate that speeds up year over year, eventually reaching an impressive velocity.

Compound interest swings both ways: investing your money in a fund can be a fantastic way to build wealth, but leaving credit card debt to grow and grow is a fantastic way to give yourself an ulcer. If you have debt, it is vital that you pay off more than just the interest it gained. Consider the $5,000 example. After its first year of growing at 7% interest, you can’t just pay $350 towards it — it’ll never go away like that.

When it comes to student loan debt, programs like the Peace Corps can seem like a godsend. Joining volunteer programs like these often means you no longer have to pay your student loans for the duration of your service, but that doesn’t mean your loan stops growing. Weigh all your options before letting debt accrue over time. Otherwise, you might be amazed at how horrifically large the beast has grown.

Understand retirement accounts

Though it might not seem too bad to put off saving for retirement until you’ve turned, say, 30, doing so means that your retirement account will be in fairly poor conditions. Because of compound interest, people who contribute more frequently and earlier to their retirement account will have disproportionately more money available when they retire.

Many people are not in the position to contribute to their retirement accounts. More immediate needs like groceries, rent, and other bills take precedence. But even small amounts can make a significant difference if they’re started earlier rather than later. Even if you haven’t been contributing for years and retirement looms nearer on the horizon then you’d like, remember that the best time to plant a tree is a decade ago, but the second best time is right now.

For those of you fortunate enough to be employed in a job with employer matching contributions, absolutely contribute the maximum percentage of your income that employer will match. If you can afford to do so, then meeting your employer’s matching rate is literally free money.

Understand different investment vehicles (and when to use them)

Everybody wants their money to grow, but it may not be appropriate for everybody to invest in things outside of their retirement fund. Namely, if you have debt with a relatively high interest rate, investing in securities may not be worth your time. Stocks, for instance, don’t have a guarantee rate of return, though the average return of the S&P 500 is 10.5% per year. The trouble is, this figure can vary tremendously in any given year.

On the other hand, your credit card or student loan debt will always remain the same in fair weather or foul. So, if that debt carries a particularly high interest rate, you can in effect become wealthier by paying it down.

If you’ve got money left over after contributing to your retirement account and if your debt has a low interest rate or you’re fortunate enough to have no debt whatsoever, then it can be beneficial to invest in another investment vehicle, like an index fund. Index funds track some financial index such as the S&P 500 and enable you to buy a small portion of everything in the index they track. If you invest in an index fund tracking the S&P 500, you can expect a 7% return on average — though it’s important to remember the golden rule of investing: Past performance is no guarantee of future returns. It’s also important to look at the expense ratio of a given fund, or the amount that fund charges investors for its service. Funds with high fees can seriously hamper your returns.

That’s not to say that this is necessarily the best option for you. Just as every investor is different, every investment vehicle is different, each with its own upsides and downsides. It’s important to consider factors like your risk tolerance and goals when selecting an investment vehicle. Investopedia offers a great deal of information, like this page covering the basics of different kinds of investments. There are also many excellent books on investing, such as Benjamin Graham’s classic The Intelligent Investor, which is reliably found on lists of the best investing books, and The Essays of Warren Buffett.

Financial management is an essential life skill, especially in 21st century America. Obtaining financial security is difficult, but it is even more difficult without the knowledge of how to go about these things. It can be tempting to avoid considering these kinds of things when things are tough, but those moments are precisely when thinking about your finances is essential. Understanding the three items discussed above can help navigate America’s choppy financial waters.


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