Major Presence of Financial Illiteracy in America

Research states that many Americans have not quite grasped the concept of saving. This is mostly due to a lack of education in finance and economy. Economists even go so far as to say that, if things don’t change, there could be chances of another recession. America’s financial illiteracy is an issue that many have taken to studying and many economists are saying is a major problem.

In an article by the Financial Educators Council, the author says that “the vast majority of all the financial literacy statistics point to the lack of a financial education as the primary cause of many of the problems,” (Mitchell, Evaluating Literacy Statistics). This is something that many would think to fix quickly, but it doesn’t seem to be as easy as it sounds. Perhaps a course on economy would help, in high school, for the teenagers of the country to be prepared for “real life”. But a lot of people think that it isn’t necessary. The Financial Educators Council definitely disagrees. And they are not the only ones who take issue with that.

Mitchell also wrote about the impact of finance education. “The National Financial Educators Council asked 1,101 young adults aged 18-24 ‘What high school-level course would benefit your life the most?’” According to the article, the majority, which was 51.4%, responded “money management” as the high school-level course they thought would be most beneficial to their personal lives. A financial education mandate was implemented in the states of Georgia, Texas and Idaho, and after three years, the states were able to find that there were increased credit scores and lower delinquency rates on credit accounts, (Mitchell, Evaluating Literacy Statistics). Furthermore, Mitchell pointed out that financial decision-making can be impacted positively by “providing high-quality, not difficult information; providing incentives for good decisions; and facilitating the best use of available information in real-life situations.”

In January 2010, Forbes published an article titled America's Financial Illiteracy. Here, the author, Thomas F. Cooley, points out a study done by two economists on financial literacy and “the effectiveness of efforts to promote it for many years.” They took to people of over the age of fifty with three questions in a survey. Questions pertaining interest rates, savings accounts, inflation, and buying company stocks. This was done with the purpose to evaluate just much America was illiterate in the subject of finance. The most worrying thing was that, “Only 50% of respondents were able to answer the first two questions correctly and less than a third was able to answer all three,” Cooley said.

Unfortunately, efforts to end financial illiteracy have not been very effective. It would be a smart idea for people to start educating themselves before trying to retire. According to another website article, Big Think, the number one reason why Americans are financially illiterate is credit card debt. Their solution: something called the Financial Literacy Quiz. A tool created by Financial Industry Regulatory Authority (FINRA) in the years 2006 as part of its National Financial Capability Study that is six questions long. (Admittedly, this is the same quiz Forbes took their data from.) This data has been used to study American’s capacity in financials and more than 60% of the people who have taken the survey have answered the questions incorrectly.

A question that stood out to them was the one of credit card debt, the last question, which was added into the quiz in 2015. The question: “Suppose you owe $1,000 on a loan and the interest rate you are charged is 20% per year compounded annually. If you didn’t pay anything off, at this interest rate, how many years would it take for the amount you owe to double?” According to Vazquez, only 33% of the respondents answered correctly, “2 to 4 years”, while 29% of the respondents answered incorrectly, saying “5 to 9 years”. This means that there is still trouble here in the United States and it is definitely a problem. “Given the close percentile ranking of those two answers, the study suggests that most Americans don’t understand the difference. If almost as many Americans think it takes over four times as long for interest rates to double than they actually do, it means they’re allowing vast amounts of debt to sneak up on them,”.

Oddly enough, another point they made was the fact that most Americans are answering this question wrong isn’t exactly a lack of knowledge, by itself, but also over-confidence. “Americans tend to have positively biased self-perceptions of their financial knowledge,” (Vazquez, #1 Reason). This isn’t exactly a good thing, and it is probably worse than a lack of education on financials, if people believe they are smarter than they actually are. If the people do not have a basic understanding, things could get ugly.

Vazquez also goes on to say that it may actually be a completely different thing, “…according to psychology professor John D. Mayer: we think our future selves are completely separate people from our current selves.” Or, as The New York Times said, we think our “future selves are ‘this annoying other person who wants to prevent you from having fun in the present.’” But, instead of focusing on the now, people must realize that thinking ahead is always best. That way, they may actually have a chance at retiring comfortably, or retiring at all.

In a different article, titled “Nearly Two-Thirds of Americans Can't Pass a Basic Test of Financial Literacy”, written by Madeline Farber from Fortune, the researchers estimated that the percentage of those who could pass the same test from the FINRA has fallen steadily since the financial crisis to 37% in the year 2015, from 42% in 2009. After a financial crisis, there should have been some lessons learned but, apparently, that wasn’t the case. In 2015, the survey respondents had the most problems with the bonds question. They said, “Just 28% knew what happens to bond prices when interest rates fall. (They rise).”

What seems to be very worrying is that less than half of all Americans seem to be able to answer basic questions about financial risk. However, according to Fortune, the study also showed that “even eight years after the financial crisis, significant segments of the population, including African-Americans, Hispanics, women, Millennials, and people lacking a high school education—so a lot of people—are still worse off than before the recession,” (Farber, Nearly Two-Thirds). This, coupled with the horrible lack of education that is already present, is worrying because these “significant segments of the population” are most people. And “most people” don’t work in Wall Street, or earn millions as CEOs. What would help most would be, just like in the states of Idaho, Georgia and Texas, for there to be classes implemented, with real information and real ways of helping the people learn.

In conclusion, Farber points out the fact that most women put off medical services, like going to see the doctor, buying prescriptions and even undergoing a medical procedure because of the cost. “This leaves more than one in five Americans, or 21%, with unpaid medical debt, according to the study,” (Farber, Nearly Two-Thirds). Richard Ketchum, Chairman of the FINRA Foundation, said in a press release, “This research underscores the critical need for innovative strategies to equip consumers with the tools and education required to effectively manage their financial lives… My hope is that policymakers, researchers, and advocates will use these findings to make more informed decisions about how to best reach underserved populations.” Perhaps one day, there will be something implemented and the country will excel in finance.