Financial Illiteracy Is Killing Us
By BRETT NELSON
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As Ben Bernanke and the Federal Reserve dither over what to do about the darkening economy, I’m reminded of, and damn near demoralized by, a scene in “I.O.U.S.A.”, the remarkable and terrifying 2009 documentary about the burgeoning debt crisis in America.
In the scene, a cameraman asks a smattering of people to define “trade deficit.” Here was one of the better answers, delivered by a fresh-faced woman who looked roughly 18 years old: “Deficit usually means…disorder or something. Something is wrong with it. It’s not good.”
Ok, maybe the notion of importing more stuff than we export is a tad abstract. How about the notion of debt? Cameraman to passersby: “How big is the federal debt?” Some responses: “I’m guessing quite a bit”; “3 million”; “I know it’s in the billions.” Try $8.7 trillion. (The film was made in 2009–after bailouts, stimulus packages and healthcare reform, that number is now a few trillion higher, and will soon surpass the $14.5 trillion worth of goods and services this country produces annually.)
The point of “I.O.U.S.A.”—sponsored in part by the Peter G. Peterson Foundation (Mr. Peterson is a billionaire investor and former U.S. Secretary of Commerce)—is to scare us stiff about the consequences of mass fiscal irresponsibility. It succeeds. But it also drives at something deeper: our rotting education system that ultimately led to this problem.
That teenagers are allowed to drive, vote and parent, all while not knowing the difference between an asset and a liability, is nothing short of a travesty. Yet that’s what we have–and we are all paying for it.
I’m thinking now about the $1.3 trillion in delinquent consumer debt–$986 billion of it overdue by at least 90 days. One. Point. Three. Trillion. I’m also thinking about the wide-eyed throngs who signed up for no-doc mortgages they could never in their wildest dreams afford. And then there was the obvious mental mismatch between members of Congress and the Hank Paulsons, Ben Bernankes, Lloyd Blankfeins and their pin-striped ilk that led to a “financial reform” bill with so many holes that two institutions–Fannie Mae and Freddie Mac, which now own or guarantee half the entire mortgage market–fell right through. (Does anyone truly believe that was a fair fight?)
Here’s who should be thinking about all of this: the folks who run our schools. If the U.S. aims to compete–for anything–on a global scale, its populace has to be financially literate. And it isn’t. Not even close.
Consider the atrocious findings in a 2008 report by the Jump$tart Coalition for Personal Financial Literacy (underwritten, ironically enough, by Merrill Lynch). Begun in the 1997-1998 school year, the nationwide biennial survey of 12th graders aimed to determine “the ability of our young people to survive in today’s complex economy.” The 31-question exam touched on topics ranging from credit cards and car insurance to the stock market and home ownership. The results were bad, and are getting worse.
The average grade on the first exam was 57.3%. (You need a score of 60% to pass.) In 2008, it had dipped to 48.3%, with nearly three quarters of the 6,856 students failing. Fewer than 5 out of every 100 earned a “C” (75% or better). While college seniors scored higher on the same exam in 2008, averaging 64.8%, the Jump$tart report points out: “The good news is that most college graduates are financially literate. The bad news is that only 28% of Americans graduate from college, leaving nearly three quarters ill-equipped to make critical financial decisions.”
Here are some more arresting numbers, compiled by the folks at Practicalmoneyskills.com, sponsored by Visa.
–A 2009 Financial Literacy Survey of adults, conducted on behalf of the National Foundation for Credit Counseling, revealed that:
• 41% of U.S. adults, or more than 92 million people living in America, gave themselves a grade of C, D, or F on their knowledge of personal finance.
• One-third of adults report that they have no savings and only 23% are now saving more than they did a year ago because of the current economic climate.
• Among adults who have children under the age of 18 living in their household, 33% want to provide a college education for their child but have not done anything about it yet. Only 21% have established a 529 Plan or other education savings account and expect to be able to pay for four years of college for their children.
–Sallie Mae’s 2009 survey of how undergraduate students use credit cards revealed that:
• 84% of the student population has credit cards; half had four or more.
• Undergraduates are carrying record-high credit card balances. The average (mean) balance grew to $3,173, the highest in the years the study has been conducted. Median debt jumped to $1,645 from $946 in 2004. One out of five undergraduates carried balances between $3,000 and $7,000.
• Only 15% of freshmen had a zero balance, down from 69% in 2004.
• 60% of undergrads experienced surprise at how high their balance had reached, and 40% said they have charged items knowing they didn’t have the money to pay the bill.
• Only 17% said they regularly paid off all cards each month, and another 1% had parents, a spouse, or other family members paying the bill.
• 84% of undergraduates indicated they needed more education on financial management topics; 64% would have liked to receive information in high school and 40% as college freshmen.
–A 2009 survey of America’s “Financial IQ” by Capital One revealed that:
• Nearly half (47%) of those surveyed said they are putting less money into savings and the same percentage report that current economic conditions have caused them to dip into their savings to cover day-to-day expenses.
• While a third of those surveyed said they save regularly every month, only 12% report that they are saving the recommended 10-15% of their income for the future, and another 12% said they are not saving anything at all.
• The majority of Americans (59%) consider themselves to be highly knowledgeable or very knowledgeable when it comes to personal finance, down from 64% in 2007.
• Nearly two-thirds (63%) of those surveyed say they are extremely comfortable or very comfortable managing short-term finances but only half (54%) feel comfortable managing long-term finances.
(On those last points, I can’t help but recall the Lake Wobegon effect, which describes our collective tendency to think that we are all above average.)
The best weapon in the fight against financial illiteracy: education. Consider the results of a 2008 study by the Boys & Girls Clubs of America and the Charles Schwab Foundation of teens participating in the financial education program Money Matters:
• Teens who reported learning a great deal about goal-setting were significantly more likely to also report that they had saved money for something they wanted and then purchased it (79%), compared to those who reported they learned little or nothing about goal-setting (58%).
• Teens who reported learning about managing savings and checking accounts were more likely to report having opened both types of accounts (57% vs. 44% opened a savings account; 36% vs. 28% opened checking accounts).
• Those who reported learning about saving money were more likely to save regularly (72% vs. 57%).
• Teens who learned to track spending were more likely to report having developed a budget (50%) vs. those who learned little or nothing (29%) and also more likely to save money to purchase something (80% vs. 60%).
With that, I have but one message to school principals, headmasters, chancellors, parents, members of Congress, the national business press and anyone charged with nurturing the next generation of consumers, investors and voters: