By Neil Berman

(The opinions and views expressed in the commentaries of The Somerville News belong solely to the authors of those commentaries and do not reflect the views or opinions of The Somerville News, its staff or publishers.)

“It is the sense of Congress that States should develop curricula relating to the subject of personal finance, designed for use in elementary and secondary schools.”  Senate bill No. 256 §222. (109th Congress 2005)

This quote is from the “The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,” which changed the U.S. Bankruptcy Code. It was written by lobbyists hired by the credit card industry and their allies, who believed that too many people were declaring bankruptcy. Their premise was that people were opting out of responsibility for their debts, going bankrupt because it was easier then paying their bills.

Section 222 of the Act was inserted by legislators who thought that at least some of the bankruptcies were the result of people not understanding their personal finances. The Act also required two financial management trainings for people who, by virtue of their filing bankruptcy, were considered to be financially illiterate.

But what is financial literacy? I think the basic rule of personal finance is knowing what you can afford, what you can’t afford, and how to work from that knowledge to be able to keep out of financial trouble. Financial literacy can also allow people to afford more of what they want by being able to save and plan ahead

Most folks cannot afford all they want. But here in America they can usually afford all they need. I think discerning what you need and what you want is the first step towards financial literacy.

Being able to prioritize your needs is easy regarding what comes first-food, clothing and shelter. Beyond the basics though, there is not much information available to help people learn how to make financial decisions. They need to be able to understand the financial tools available-many new and complex-often having both useful and harmful attributes. Getting our financial house in order and avoiding the pitfalls takes more and better knowledge than most of us have.

One reason for our confusion is the sophisticated marketing techniques used to get us to spend our money. In my opinion, marketing began to be scientifically refined in the late 1800’s and early 1900’s. At that time the industrial revolution had advanced to the point where industry was producing more than needed for survival. This was a sharp contrast from earlier times, when communities and countries struggled to produce enough food for everyone.

Other items, particularly shelter & clothing, were produced as needed. For example, I live in a house, built in Somerville in 1892 or so, by the first family to live in it. My house has three bedrooms, but only two small closets. People had a few changes of clothes and one or two pairs of shoes back then. Now houses are made with a walk in closet for every bedroom, at least.

As industry began to produce more items than people needed, industrialists wanted to persuade people to buy more.  At the same time, factory owners like Henry Ford began to realize that they needed to pay their workers enough to buy the things they made. This increased demand, but not enough.

New theories of psychology suggested new tactics. Instead of people buying only what they needed, people could be convinced to want more. Why would people want things? At first status was used, and over the years other psychological drives were employed in advertising, such as happiness, security, sex, individuality.

While these forces made knowing the difference between what we need and what we want more complicated, another financial tool was also growing and changing. Credit had always been something that was handled by personal relationships. Lender and borrower typically would meet to discuss the amount needed, the purpose of the loan, and the ability of the borrower to pay back the loan.

However, as marketing was making people want more, credit could enable them to pay for it-in the short term. After World War II banks began to offer credit cards to carefully chosen individuals and businesses. They proved to be very profitable, and companies offering them began to expand their offerings, using credit limits and eventually the credit reporting agencies they created to grow the consumer credit market. From the 1970s and on to the present, this expansion greatly increased the ability of all of us to live beyond our means, blurring the difference between needing something and wanting it.

I don’t think financial literacy requires understanding complex or tricky concepts. But an understanding of financial tools and traps is necessary. In the past,  most of our financial decisions came down to what something cost and how we would pay for it. Now we must also learn to filter out marketing to our desires and our impulses for immediate gratification, understanding the real possibility of future financial hardship and disaster. This requires financial literacy.

To be continued

Neil Berman is a Somerville-based bankruptcy attorney.