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Financial Illiteracy - America's Problem

Financial Illiteracy - America's Problem

March 20, 2017

I’m really saddened by the lack of financial literacy in our country. Study after study shows that we don’t understand basic financial concepts. A 2015 study conducted by the FINRA Foundation found that nearly 2/3 of Americans can’t pass a basic financial literacy test.  A 2016 study by found that 63% of Americans don’t have enough saved to cover a $500 setback. According to the Economic Policy Institute, the median savings for families close to retirement (ages 56-61) is just $17,000. And this figure is actually less than the median amount reported in 2004!

Even Alan Greenspan said “the number one problem in today's generation and economy is the lack of financial literacy.” How in the world has such a prosperous nation gotten into such a predicament? It’s a terribly complex issue, but I believe there are several factors that contribute to the high rate of financial illiteracy in America.

First, most families don’t teach even basic financial concepts at home. I’m sure there are several reasons for this; perhaps some parents lack the skills themselves. Others probably don’t place a high priority on teaching financial skills. I imagine that time constraints and a lack of desire from children contribute. And, many families are just plain uncomfortable talking about anything “money.” I saw a statistic indicating that families spend an average of two weeks/year dealing with prom logistics as opposed to five hours/year talking about finances.

Second, our schools don’t teach and test financial skills. Sure, some curricula cover a few basic concepts, but nothing like the complete set of skills that should be taught. I’m all for a well-rounded education; in particular, one that teaches critical thinking. But, for the life of me, I can’t figure out why we don’t teach key financial skills from elementary school all the way through college. But we can’t stop there. A stronger background in math would provide the foundation for understanding many of the concepts that I help clients with every day.

Third, the financial services industry has a sales driven culture. Banks, investment and insurance firms as well as mutual fund companies all want you to buy their products. Of course they do – we are a capitalistic country after all! But, here are my concerns: frequently companies put their own interests ahead of the consumer in deciding what products to make and push. Sometimes, compensation schemes for advisors and agents are skewed against what might be in the best interest of the client. Complicating things is that often these companies are selling their products to families who do not have a high level of financial literacy. And, products are getting more complicated every day.

Fourth, the “advice” industry is not effectively regulated. Multiple organizations along with many federal and state entities are all involved in regulating the actions of the hundreds of thousands of people who work with the public. There isn’t a coordinated approach. There isn’t broad consistency among agencies. Often, regulations aren’t black and white. Lobbyists for the big financial companies help influence laws. And the volume…the volume of regulations can make it more expensive to conduct business – which can result in a lack of affordable services to those who need them most.

Finally, America is the land of consumption. Consumer spending is the backbone of today’s American economy. When I think back to my youth, I don’t remember houses being so big, new cars in the driveway being the norm, so many restaurants, as much high end shopping, and travel to exotic locations being so frequent. Our big family vacation each year was to visit our grandparents at their house in Florida. You see, the problem is not that all of this is available…it’s just that most people can’t afford the “standard American rate of consumption.”

Financial illiteracy is a big national problem. Studies show that consumers lose hundreds of millions of dollars a year as a result. Families are more dependent on government programs. Financial stress causes loss of productivity at work. Certainly, some marriages suffer due to financial problems. There are probably cases where people do not receive as high quality of health care due to their lack of financial resources. And, don’t even get me started on the fact that there are differences in literacy among men and women as well as between economically vulnerable families versus those who are well off. With this kind of impact, why aren’t we talking about this as a nation? I believe we should.

April is National Financial Literacy Month. Please keep an eye out for articles about this subject. Read, get educated. Find a way to make a difference. Have one more conversation about financial skills with someone in your family. Consider volunteering to teach a financial skills workshop. Advocate for financial classes and stronger math curricula to be part of your local school’s curriculum. Hire a financial planner to “teach” you or your children concepts you want to learn. Let your elected officials know this is an issue they should address. Most of all, let’s not continue to ignore the problem.

In 2017, if all of us take one small action to improve financial literacy, we be more literate as a country by the end of the year. Let’s make an impact!

After all, what is your second half strategy?