Insider Calls for Early Spotlight Into Financial Literacy

The recurring theme of financial literacy may be old, but it keeps pushing itself forward and into the agenda of mortgage lenders and servicers as banks struggle to understand their borrowers' financial decision-making patterns.

Currently, according to TD Economics, an affiliate of TD Bank, key moments in sound financial literacy involve a lifelong commitment to financial decision-making that manages to balance spending with saving or the risk-reward of spending versus saving “beginning as young as possible and continuing throughout adulthood.”

The economic crisis, high unemployment rates, and huge debt burdens has shown that millions of Americans either do not know enough about finances or do not know how to put lessons into practice and plan for a financially fit future.

TD Economics Chief Economist Craig Alexander finds “it is impossible to quantify just how much inadequate financial literacy contributed to the housing crisis, not knowing the financial risks and obligations likely played a large role." What is common knowledge, he says, is that over 5.6 million mortgages currently either delinquent or in foreclosure cannot be blamed “entirely on over-aggressive lending."

In his view findings from a recent study indicate there is a significant knowledge gap. It asked adults to estimate how long it would take to pay off a credit card with a 1% interest rate by making a $30 minimum payment on a $3,000 starting balance and only one third recognized that the minimum payment was exactly equal to the monthly interest charge so by paying $30 each month, the principle would never go down.

Lack of basic financial concepts “can have lasting ramifications,” as borrowing for education or to finance a home can lead to greater personal wealth in the future.

Knowledge and financial tools that help to minimize or manage risks involved in any financial decision, are paramount in determining short-term and long-term financial goals Alexander says, including major financial decisions such as buying a home and setting up a retirement plan that involves “understanding financial limitations.”

It is why during the recent housing crisis many have contested when and where it is sound and safe to become a homeowner and whether homeownership should be everyone’s long-term goal that precedes retirement planning.

A study by economists at Boston College is one of many showing that a lack of long-term savings is likely hurting many Americans' ability to retire. It found that by the 401(k) account of a worker with annual earnings of approximately $50,000 nearing retirement age in 2007 had only $73,000—compared to about $320,000 this hypothetical worker would need to maintain the same standard of living in retirement.

Alexander finds these housing and non housing financial decisions and factors people need prepare better and for their long-term financial decision-making life cycle to be able to gain financial stability.

Online and in-person tools about saving, budgeting and the value of money at an early age may also pave the way to a lifelong commitment to financial literacy.

The TD Bank WOW!Zone is one example of a free, interactive financial literacy program for grades K–12 that features both an in-school and online component to provide information including understanding lines of credit, mortgages, and the stock market.