Is the system stacked against you?
We live in a world of ever greater inequality. The 1% are getting richer every day and the middle-class dream of a good life is disappearing.
In the news, we hear how big corporations are avoiding paying their fair share in taxes. And the reputation of banks went down the drain with the 2008 financial crisis.
So, one might be forgiven for asking: “Is the financial system stacked against me?”
How is today’s world different from that of previous generations?
Previous generations could rely on an unofficial rule: Work hard until retirement and you will receive a pension from the state that you can live on.
This agreement no longer works! The state pension funds are empty, and we are living longer. This means that we need to save more money during our working lives. The money for your Netflix subscription must come from somewhere when you are 80 years old.
The number of financial products and service providers has increased at the same time. My parents’ generation had a checking/current account, a savings account and a mortgage. That was it.
But today you have credit cards, student loans, investment accounts, private pension accounts and everyone from your local supermarket to your car dealer wants to offer you loans through one bank or another. And they all fill up their offers with abbreviations and jargon that is explained in some terms and conditions that no one ever reads.
One can easily lose the overview of the different options and sometimes you don’t want to ask for an explanation out of fear of sounding uninformed. And there are plenty of less reputable financial service providers out there that “bank” (pun intended) on you not raising any questions. That makes it easier to part you from your money.
What is financial literacy?
There is no single definition of what financial literacy means. Some are even so complex that they might scare people off from pursuing the topic further.
The simplest definition I could find comes from Wikipedia:
Financial literacy is the possession of the set of skills and knowledge that allows an individual to make informed and effective decisions with all of their financial resources.
This means, that you are financially literate, when you know how to manage your money and can navigate the world of consumer finance.
Why is knowledge about financial terms important?
Making wrong financial decisions can cost you tens or hundreds of thousands of Dollars/Pounds/Euros etc in unnecessary fees, interest charges or missed earnings.
You can budget and live within your means all your life. But if you choose the wrong mortgage, investment opportunity or sign up to the wrong pension plan, you can still end up broke.
How does this article help me?
First and foremost remember: you are the client! You can choose between different banks, lenders etc. They want something from you, namely selling you their product, so they can make money!
So here are some simple tips to start you off:
1. If you don’t know an abbreviation or term or don’t understand something about a financial product, ask them to explain it to you in plain English. And if they can’t do that or it sounds too good to be true, think twice before signing any documents.
2. Get offers from at least two to three service providers. The goal is to find the best deal for you. Not the one that earns them the most profit.
3. Discuss your plans with someone in your family or amongst your friends, before making any decisions. Have any of them used the same financial product or service provider in the past? How was their experience?
4. STAY AWAY FROM PAYDAY LENDERS! I have seen offers that charge over 300% in fees and interest. That means, if you borrow $100 from them for one year, you need to repay the $100 + $300 in fees and interest. You are literally throwing your money away.
What articles can I expect in the future?
I had to overcome my own financial struggles in the past. At one point I was more than $20,000 in debt, because of financial decisions my parents had made. And whilst there are plenty of articles out there explaining to you how to create a budget etc., I found no place that clarified to me how the financial system works.
The purpose of this upcoming series is to describe to you how things are connected and to give you simple explanations for financial jargon. I don’t want to tell you how to live your life. We are all very different. But I want to give you the tools, so you can make your own informed decisions.