Financial Literacy might be the Answer to the Economic Divide

The economic divide refers to disparities in income and employment between economic classes. The economic divide is not a focus on wealth disparity, something that has existed as long as royalty like pharaohs lived in palaces while the poor lived in hovels. The economic divide instead refers to the decreasing mobility in income levels and class seen in the U.S. and, to a greater degree, in Europe.

The Solution Provided by Financial Literacy

Financial literacy teaches the danger of using high-cost borrowing options like payday lenders and pawn shops, the high fees they charge often trapping people in a cycle of debt they cannot escape. Those living on a pay check to pay check basis cannot get control of their finances and improve them when they are losing up to 20% of each check to excessive debt. Understanding the true cost of credit cards can lead to planned saving for purchases instead of debt, reducing the long-term burden debt creates.

Financial education allows people to understand how to manage a checking account so that one is less likely to bounce a check, risking very high fees as a result. Financial literacy teaches people how to budget and the value of saving and investing over the long term. This information is necessary to move out of desperate and uncontrolled spending to slowly improving one’s financial situation. Better financial planning and investment management from experts such allow people to better manage financial windfalls like life insurance payouts and pension lump sums, so they don’t end up wondering where the money went a few years later.

Understanding how to select a retirement plan and the value of investing even a few percent each pay cycle results in long-term building wealth; financial literacy advocate Dave Ramsey refers to this as changing your family tree. Thus, financial planning can bring people out of poverty and into the middle class or from the middle class to wealth.

Better financial literacy also teaches young adults how not to get trapped under a heavy burden of debt or make bad choices that hurt their ability to grow their income and wealth over time.

The Other Major Factors in the Economic Divide

A child born to a single mother is several times more likely to grow up in poverty and suffer other negative life outcomes. Married parents, in contrast, have a much lower poverty rate, even when they have the same incomes.

However, simply living together isn’t enough, since the lack of commitment causes each side to engage in unhelpful behavior. And the lack of commitment is why three-quarters of “living together” families split up before the children hit high school as compared to only one-quarter of married couples. As divorce rates have spiked and marriage rates dropped, especially for the poor, more of the poor are less likely to rise out of poverty.

The economic divide has worsened over time because of decreasing financial literacy and the growth in sheer numbers and percentages of broken families. While altering the welfare system and rebuilding families is the best way to close the economic divide, financial education about debt, investments, and options helps us improve the lives of individual families almost immediately.

Photo by Got Credit


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  1. Casey Samantha May 1, 2017
    • Michelle Pietromonaco May 8, 2017

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