By Barbara O’Neill, Extension Specialist in Financial Resource Management, Rutgers Cooperative Extension.
The phrase “financial illiteracy” describes the widespread inability of many Americans to understand key financial concepts and manage their personal finances wisely. It is costly to both individuals and society. The total price tag can be tallied in many ways: Forgone savings and investment opportunities, lives shattered by financial loss or bankruptcy, higher prices than necessary paid for goods and services, dreams and aspirations that go unfulfilled, and marital discord about money. The collective loss in dollars resulting from common financial errors just has to be tremendous.
Financial illiteracy handicaps anyone seeking to become financially secure and the country as a whole (e.g., low savings rates, stock market panics, and increased potential for fraud). In my 35 years as a financial educator, I have seen first-hand many costly financial errors that people make: High debt loads, substantial income unaccounted for, inadequate insurance, lack of investment diversification, insufficient use of tax-favored investments, inadequate emergency funds, lack of clearly defined goals and/or savings earmarked to achieve them, disconnects between stated risk tolerance and existing assets, and poor communication among family members about finances.
Consider the potential magnitude of any one of the above-mentioned errors on just one individual. For example, an uninsured 30-something who is disabled for years with no income stream; someone with a $5,000 credit card balance that will take 16 years to pay off with $4,567 in interest charges (this assumes minimum payments of 3% of the balance); or someone who does not understand investments and is either taking inappropriate risks to “chase yield” or experiencing eroding purchasing power on cash assets that don’t keep pace with taxes and inflation. Many people simply don’t know what they don’t know, especially in today’s complex financial environment.
Things got a little better after the financial crisis, but not by much. A study of 10,661 Americans’ financial practices found little progress. Another recent study of how Americans are equipped to handle personal finance challenges, with findings from Rutgers’ Personal Resiliency Resources Assessment Quiz, can be found here.
Since the Great Recession, interest in addressing American’s financial illiteracy has been strong. Grants for financial education and research are available from multiple funders, and youth financial education courses nationwide have increased. I’m proud to live in a state (New Jersey) that had a “perfect storm” of positive events in 2009 to improve youth financial capability: New curriculum standards, a personal finance graduation requirement, and a legislated pilot test of the effectiveness of financial education. High school personal finance education is critical because teenagers make many critical financial decisions soon after they graduate.
Much more work remains to be done, however. It is not enough to just teach financial concepts and expect good things to happen. Financial educators must also ultimately change behavior. What people know about money (financial literacy) is a means to an end: what people do with what they know (financial capability). Financial education programs need to be inspiring, personalized (e.g., self-assessment tools and learning activities), and designed to help people address real or perceived obstacles in their lives. They also need to reach people with various demographic characteristics at “teachable moments.” Raising America’s financial IQ in this era of reduced budgets and increased accountability requires collaboration among multiple partners with complementary skills and resources.
While increasing the financial capability of Americans is costly (e.g., teachers and media campaigns), the cost of doing nothing is much higher. This country simply can’t continue to have so many of its citizens unable to manage their finances, making serious money mistakes, and waiting for chance- rather than choice- to determine their financial future. Opportunities abound for financial literacy advocates to make a real difference. As per the America Saves campaign slogan, let’s inspire Americans to “Build Wealth, Not Debt” and teach future generations to do the same.
Follow Barbara on Twitter at @moneytalk1.