Financial Literacy Can Help with Long-Term Wealth

Rutgers expert shares how financial literacy can make an impact

The road to financial literacy – and ultimately financial independence – is a long one. Embarking on this journey requires the right mindset and desire to improve continuously, according to John Longo, a professor of professional practice at Rutgers Business School–Newark and New Brunswick and chief investment officer at Beacon Trust, a $3 billion investment advisory firm.

In his book, Buffett's Tips: A Guide to Financial Literacy and Life Longo says there is no consistent path to getting rich quick, but knowing how to spend – and not spend – is crucial to long-term stability. The book, influenced by trips Longo took to Omaha with Rutgers students to visit Warren Buffett, teaches readers to become financially literate using a framework inspired by Buffet.

With the coronavirus pandemic causing widespread economic hardships, Longo shared some best practices with Rutgers Today to help those struggling to understand their financial situation.

Financial literacy can be challenging. Why do many young adults struggle with it? 

Most schools provide little to no formal training in financial literacy for their students. This dynamic is slowly changing with a minority of states, including New Jersey, requiring some type of financial coursework during their formative years. In contrast, young people are bombarded with advertising and social media depicting a flashy lifestyle that few can afford. I am in favor of credit cards, but only if a young adult can pay the balance in full each month. Many people roll over their credit card debt, which is often accumulating at an interest rate close to 20 percent per year, placing them in a financial hole at an early age. Warren Buffett, one of the greatest investors ever, and his firm, Berkshire Hathaway, have compounded at 20 percent per year since he took control. The average investor has to recognize that there is no hope of generating those types of returns.

How can a person move from financially ignorant to financially literate? 

Living within your means is the most important step to building long-term wealth. We have all read about multi-millionaire athletes and celebrities who eventually went bankrupt, so it is not just about having a high income. Building wealth involves avoiding high interest rate credit cards, obtaining a good credit rating and investing for the long-term. For most people, owning stock is a great way to build wealth over the long-term, but you have to stick with it and not be shaken out during the inevitable market gyrations. Other attractive long-term investments may include real estate and private equity, but these are illiquid investments that require a very long time horizon and often have large minimum investments.

What should people keep in mind for a future economic crisis? 

My thoughts are with those struggling with the pandemic, both health-wise and economically. Now that the stimulus bill has passed, my hope is that we are able to quickly get funds to those who need it. I’m reminded of a Buffett quote about how society should help those who have been impacted through no fault of their own. He said that in America, “nobody should be roadkill.” 

In terms of lessons learned for the next crisis, people should follow Buffett’s advice and have an emergency fund to cover six months of living expenses. Beyond that, try to get comfortable investing in the stock market for the long-term as a strategy for building wealth. Few people can live off the extremely low level of interest rates that will be with us for the next two to three years because of the coronavirus pandemic.

How can financial literacy impact a person’s everyday life? 

Financial literacy means making good financial decisions, especially related to spending and investing activities. When people go shopping, they often search carefully for sales and other bargains. Yet in the investment world, few people devote substantial time to research and of chase the hottest investments, which inevitably cool off. Everyone should bring some of their shopping mentality to their investment activities before taking the leap.