Researchstates that many Americans have not quite grasped the concept of saving. This ismostly due to a lack of education in finance and economy. Economists even go sofar as to say that, if things don’t change, there could be chances of anotherrecession. America’s financial illiteracy is an issue that many have taken tostudying and many economists are saying is a major problem. In an article by the FinancialEducators Council, the author says that “the vast majority of all the financialliteracy statistics point to the lack of a financial education as the primarycause of many of the problems,” (Mitchell, Evaluating Literacy Statistics). Thisis something that many would think to fix quickly, but it doesn’t seem to be aseasy as it sounds. Perhaps a course on economy would help, in high school, forthe teenagers of the country to be prepared for “real life”. But a lot ofpeople think that it isn’t necessary.
The Financial Educators Councildefinitely disagrees. And they are not the only ones who take issue with that. Mitchell also wrote about the impactof finance education.
“The National Financial Educators Council asked 1,101young adults aged 18-24 ‘What high school-level course would benefit your lifethe most?'” According to the article, the majority, which was 51.4%, responded”money management” as the high school-level course they thought would be mostbeneficial to their personal lives. A financial education mandate wasimplemented 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 lowerdelinquency rates on credit accounts, (Mitchell, Evaluating Literacy Statistics). Furthermore, Mitchell pointed out that financialdecision-making can be impacted positively by “providing high-quality, notdifficult information; providing incentives for good decisions; andfacilitating the best use of available information in real-life situations.
” In January 2010, Forbes published anarticle titled America’s FinancialIlliteracy. Here, the author, Thomas F. Cooley, points out a study done bytwo economists on financial literacy and “the effectiveness of efforts topromote it for many years.” They took to people of over the age of fifty withthree questions in a survey. Questions pertaining interest rates, savingsaccounts, inflation, and buying company stocks. This was done with the purposeto evaluate just much America was illiterate in the subject of finance.
Themost worrying thing was that, “Only 50% of respondents were able to answer thefirst two questions correctly and less than a third was able to answer allthree,” Cooley said. Unfortunately, efforts to end financialilliteracy have not been very effective. It would be a smart idea for people tostart educating themselves before trying to retire. According to another websitearticle, Big Think, the number one reason why Americans are financiallyilliterate is credit card debt. Their solution: something called the FinancialLiteracy Quiz. A tool created by Financial Industry Regulatory Authority(FINRA) in the years 2006 as part of its National Financial Capability Studythat is six questions long. (Admittedly, this is the same quiz Forbes tooktheir data from.
) This data has been used to study American’s capacity infinancials and more than 60% of the people who have taken the survey haveanswered the questions incorrectly. A question that stood out to them wasthe one of credit card debt, the last question, which was added into the quizin 2015. The question: “Suppose you owe $1,000 on a loan and the interest rateyou are charged is 20% per year compounded annually. If you didn’t pay anythingoff, at this interest rate, how many years would it take for the amount you oweto double?” According to Vazquez, only 33% of the respondents answeredcorrectly, “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 theUnited States and it is definitely a problem.
“Given the close percentileranking of those two answers, the study suggests that most Americans don’tunderstand the difference. If almost as many Americans think it takes over fourtimes as long for interest rates to double than they actually do, it meansthey’re allowing vast amounts of debt to sneak up on them,” (Vazquez, #1 Reason). Oddly enough, another point theymade was the fact that most Americans are answering this question wrong isn’texactly a lack of knowledge, by itself, but also over-confidence. “Americanstend to have positively biased self-perceptions of their financial knowledge,”(Vazquez, #1 Reason). This isn’t exactly a good thing, and it is probably worsethan a lack of education on financials, if people believe they are smarter thanthey actually are.
If the people do not have a basic understanding, thingscould get ugly. Vazquez also goes on to say that itmay actually be a completely different thing, “…according to psychologyprofessor John D. Mayer: we think our future selves are completely separatepeople from our current selves.” Or, as The New York Times said, we think our “futureselves are ‘this annoying other person who wants to prevent you from having funin the present.
‘” But, instead of focusing on the now, people must realize thatthinking ahead is always best. That way, they may actually have a chance atretiring 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 thepercentage of those who could pass the same test from the FINRA has fallensteadily 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 mostproblems with the bonds question.
They said, “Just 28% knew what happens tobond prices when interest rates fall. (They rise).” What seems to be very worrying isthat less than half of all Americans seem to be able to answer basic questionsabout financial risk. However, according to Fortune, the study also showed that”even eight years after the financial crisis, significant segments of thepopulation, including African-Americans, Hispanics, women, Millennials, andpeople lacking a high school education—so a lot of people—are still worse off thanbefore the recession,” (Farber, Nearly Two-Thirds). This, coupled with thehorrible 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 wouldbe, just like in the states of Idaho, Georgia and Texas, for there to beclasses implemented, with real information and real ways of helping the peoplelearn.
In conclusion, Farber points out thefact that most women put off medical services, like going to see the doctor,buying prescriptions and even undergoing a medical procedure because of thecost. “This leaves more than one in five Americans, or 21%, with unpaid medicaldebt, 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 forinnovative strategies to equip consumers with the tools and education requiredto effectively manage their financial lives… My hope is that policymakers,researchers, and advocates will use these findings to make more informeddecisions about how to best reach underserved populations.” Perhaps one day,there will be something implemented and the country will excel in finance.