Aside from a rousing session of Monopoly, most Americans don’t give financial literacy much thought. In fact, only 40 percent of adults will maintain a budget and track their spending. That’s what the Jump$tart Coalition has discovered, and it may ring true through practically all social groups. The average American does not possess a sufficient financial education or, at a minimum, does not understand how to apply this knowledge to the real world. Jump$tart advises financial literacy among pre-school through college-age youth.
Americans owe $11.5 trillion to lenders
In brief, financial literacy is the ability to use knowledge and skills to manage financial resources effectively over a lifetime for financial well being. Why is this knowledge important for young people? Take a look at the average credit card balance of any 20-something, and you’ll see how vital it is to keep track of finances. Nearly 10 percent of post-college students have a credit card balance averaging just over $7,000, excluding financial aid repayment. Poor financial management like this usually means that by middle age most people (three-fourths of American families according to Chase Blueprint, a new system the New York-based bank uses to review credit card activity) will be living paycheck-to-paycheck. More than one-fourth of American families have no savings at all.
Today, American consumers owe about $11.52 trillion to lenders and creditors. This debt burden tends to balloon each year. And how about student loans? In 2014, student loan debt had soared by more than 11 percent. There’s more grim news because only 50 percent of American families have more than three months’ worth of expenses saved. Nearly as many—43 percent—are concerned that their savings won’t be enough to cover unexpected costs or emergencies. Chase Blueprint took time to divide various financial statistics by age group and found that among those persons ages 45 to 54 years, the median saved for retirement was $101,000. That may sound like a lot of money, but it really isn’t considering a typical retirement age of 65 years … not to mention expenses seniors (those fortunate to have a fixed income by mid century) will likely incur over an increased life span. And, because the Social Security trust fund is expected to be exhausted by 2033, 38 percent of adults are concerned about being able to retire on time—if they can afford to retire at all.
Schools lack in financial education
Most adults wish they had financial coursework in school. Only 5 percent say they were taught about money by a teacher, and 40 percent say they would give themselves Cs, Ds or even Fs on their grasp of personal financial concepts. A full 85 percent of parents believe that financial education courses should be a requirement for high school graduation. Teenagers are listening to the dire American economic forecasts, and 52 percent of these young people want to learn more about how to manage money because they’re interested in budgeting, saving and investing for the future.
Celebrity economists such as Suze Orman and Robert (“Rich Dad”) Kiyosaki insist that early knowledge of money, management can be a key to mid-century financial wellbeing.
“We were not taught financial literacy in school,” Kiyosaki said, “and it takes a lot of time to change your thinking and to become financially literate. Our schools do very well at teaching reading, writing and arithmetic, but they are horrible at preparing kids to work with money. Nearly every person who graduates from school is financially illiterate.”
Consumers fail in money management
The Financial Industry Regulatory Agency in 2014 conducted a survey of Americans supposedly versed in financial literacy and reported that a significantly large portion of consumers failed in money management. The respondents failed in comprehension of interest rates, the effects of inflation and in the fancy concept of risk diversification. Only one-third of respondents could correctly supply an answer to each subject question. The biggest problem, according to the survey, lies with both Generations X and Y heading eventually into to middle age because these age groups were less likely to be financially capable than older Americans. The researchers found that people with low levels of financial literacy suffer from this handicap since childhood. People with a high degree of financial literacy were more likely to plan for retirement, and those who do plan for old age could possibly accumulate more than double the wealth of those who don’t.
People who have a lower degree of financial literacy tend to borrow more, accumulate less wealth, and pay more in fees related to financial products. These individuals are less likely to invest, are more likely to experience difficulty with debt, and are less likely to know the terms of their mortgages and other loans. Another financial services organization, TIAA-CREF Institute, reported that the cost of financial ignorance can be particularly high, leading many people to incur avoidable charges and fees from things like making late credit card payments or paying only the minimum amount due. The same individuals with limited financial management skills tend to overspend their credit limit and use cash advances—which they can’t repay and therefore subject themselves to bankruptcy and a bad credit rating.
Never too early to learn budgeting
Many economists suggest that parents and children should engage in regular, constructive conversations about money matters to give kids a solid foundation for financial wellbeing. This advice may stem from the fact that kids are not receiving financial education courses at school. According to a survey conducted in 2012 by the National Endowment for Financial Education revealed that 89 percent of K-12 teachers agree that students should either take a financial education course or at least pass a competency test. The survey discovered that very few teachers are prepared to teach this subject with any fluency. In essence, for most Americans planning for financial literacy has become a do-it-yourself proposition.
“Teachers are the single most important influence on student success,” said Vince Shorb of the National Financial Educators Council. “The qualifications of financial educators have direct impact both on short-term student outcomes and on their long-term financial wellbeing. Teaching financial literacy early will result in positive influence for that student later on in life. For instance, college graduates spent 16 years gaining skills that will help them command a higher salary, yet little time is spent on helping them save, invest and grow their money.”
Credit card is not ‘free money’
Early financial literacy can have many benefits. The Jump$tart Coalition suggests that because many young people have little understanding of finance and economics, they’ll likely spend their 20s and 30s spending and borrowing without knowing that interest builds up or that credit cards aren’t free money. The Internet is a strong driver toward economic insolvency. When the average child goes online, he or she can find much more than a few gadgets or “must haves” necessary in their life. And when they’re old enough to buy something (with a credit card), online shopping makes it far too easy to get in debt. There are more debt options online. The Federal Reserve released a report in 2012 that revealed 513,000 student credit card accounts were opened in 2008, and by 2009 there were approximately 2 million student credit cards circulating nationwide. Apparently, agreements between banks and colleges have made it easy for students to accumulate debt—more students are paying tuition with credit cards every year in addition to charging text books and other expenses.
“Credit card debt is completely within your control,” said Orman. She should know, having spent the past 30 years as one of the world’s foremost financial advisors. USA Today once called her a “one woman financial advice powerhouse.” Orman is among the people who say “pay off” and then “tear up” those costly credit cards and, if possible, see if you can qualify for a balance transfer that offers a low or zero percent introductory interest rate for the first six to 12 months.
Student loans more expensive
“Move your high-rate credit card to that new one,” she said. “Don’t use the card for any new charges, and push yourself to pay off the balance as soon as possible. If you have a high-interest credit card, always send in some extra money each month. Your goal is to get the costliest balance paid off first, and keep doing this until you zeroed out the balances on all your cards.”
Many college students between 18 and 25 have at least one credit card. By the time they graduate, however, most of these young people will have four or more credit cards with an average balance of $3,000. The students are taking out more credit each year they’re in school. The Fed report suggested that if these young people had financial literacy courses while in secondary school, they’d likely graduate from college with less debt.
Student loans cost more today. In 2011, borrowing for college accounted for a greater slice of the debt pie than did credit cards, and while the costs of education have grown, incomes and government aid aren’t keeping pace. Students are taking on more debt, and with banks tightening their belts since the dawn of the Great Recession, many young people are taking a chance on risky sub-prime loans. The volatility of such borrowing—coupled with an increase in credit card debt—has resulted in more Millennials considering bankruptcy. A USA Today poll conducted in 2005 found that almost one in five Americans ages 18 to 24 years have declared bankruptcy. This age bracket is reportedly the fastest growing demographic in bankruptcy court; most bankruptcies are the result of accumulated debt, so people as young as 15 may be already on the road to bankruptcy and poor credit.
Avoid ‘learning the hard way’
“If financial education is carefully implemented early in a person’s life, it can improve the credit scores and lower the probability of credit delinquency for young adults,” according to the National Financial Educators Council.
Creative Wealth International, which operates an office in Riverside, works to supply kids and teenagers with the ability to take care of themselves financially as adults. They’d rather have youth not “learn the hard way” about poor money management. Some of their statistics gathered over the years are rooted in the finding that until every child learns about money and investing—whether in school or at home—another generation will experience economic challenges and that the nation’s financial strength will only be as strong as that of its citizenry. They list a series of reasons why financial literacy is vital, including:
—Money is the number-one cause of divorce in America;
—Lack of money is among the top reasons why people fall into addiction and/or commit suicide;
—About 75 percent of Americans live financially “month-to-month”;
—Consumer debt and bankruptcies are at an all-time high;
—Only one third of the nation’s “Baby Boomer” generation has saved enough for retirement;
—The rules of saving for retirement have changed, from pensions given to employees after many years of service to employees being completely responsible for saving for their own futures.
Certain states, demographics fair poorly
Financial literacy and savings behavior tends to vary among states. Data gathered from a National Financial Capability Study found that New Hampshire and Alaska top the financial literacy and financial behavior categories (the difference being understanding things like interest rates, and the latter setting aside sufficient emergency funds), while residents of Louisiana and West Virginia tend to rank at the bottom. California has nothing to brag about, considering that the Golden State comes in at 17 (financial literacy) and far down at 31 in terms of financial behavior.
A failure to understand financial concepts tends to prevalent among certain demographics of the population. Jump$tart found that White male students from college-educated families disproportionately account for the ever-shrinking percentage of students who are financially literate. This distinction appears to persist over a lifetime. Women, African Americans, Latinos and individuals with low economic opportunities continue to display very poor levels of financial literacy—much lower than their counterparts—at middle age, before retirement and into retirement. The problem is not exclusive to the United States. Researchers at the Wharton School of Business at the University of Pennsylvania found that under-educated women in seven nations—Germany, Italy, Japan, the Netherlands, New Zealand, Russia and Sweden—display similar poor financial literacy.
