Breaking America’s Financial Illiteracy

348608 2617 294x300 Breaking Americas Financial IlliteracyBy 18, kids are given enormous financial responsibility. They can get their own credit cards, auto loans, and student loans. Heck, during the housing bubble, they could buy a house. Yet, incomprehensibly, most young adults have received little or no training for how to manage their personal finances.

Not surprisingly, Generations X and Y are getting themselves into huge financial trouble. Our public schools must step up to give our kids a practical, real-world financial education if America’s cycle of financial illiteracy is to be broken.

Why public schools? Because the majority of today’s parents don’t understand personal finance well enough to teach their own children. I’m in favor of a mandatory, year-long Financial-Ed class for high schoolers. The class would have to cover the evils of credit cards, the importance of saving, the true costs of owning cars and homes, the dangers of student loans, what types of insurances there are and how they work, why the stock market is a casino, and taxes.

How can issues so critical to a successful adult life be ignored in school? And, if today’s twenty and thirty-somethings really knew about all of this, would the housing boom and bust perhaps have not been so dramatic?

Consider this fantastic piece by James Suroweicki in The New Yorker:

The depth of our financial ignorance is startling. In recent years, Annamaria Lusardi, an economist at Dartmouth and the head of the Financial Literacy Center, has conducted extensive studies of what Americans know about finance. It’s depressing work. Almost half of those surveyed couldn’t answer two questions about inflation and interest rates correctly, and slightly more sophisticated topics baffle a majority of people. Many people don’t know the terms of their mortgage or the interest rate they’re paying. And, at a time when we’re borrowing more than ever, most Americans can’t explain what compound interest is.

Worse, we live in a time when people are taking more responsibility for their finances. The article continues…

Financial illiteracy isn’t new, but the consequences have become more severe, because people now have to take so much responsibility for their financial lives. Pensions have been replaced with 401(k)s; many workers have to buy their own health insurance; and so on. The financial marketplace, meanwhile, has become a dizzying emporium of choice and easy credit. The decisions are more numerous and complex than ever before. As Lusardi puts it, “It’s like we’ve opened a faucet, and told people they can draw as much water as they want, and it’s up to them to decide when they’ve had enough. But we haven’t given people the tools to decide how much is too much.”

It turns out that the more educated people are about finance, the more cautious they are about borrowing money. This makes sense: the more you know, they more debt-averse you become. It’s the people who don’t know, but think they do, who get into trouble.

Unsurprisingly, the less people know, the more they run into trouble. Gary Rivlin’s blistering new examination of the subprime economy, “Broke, U.S.A.,” is full of stories of financially ignorant people bamboozled into making bad decisions—refinancing out of low-interest mortgages, say, or buying overpriced credit insurance—by a consumer finance industry adept at creating confusing products. Such stories are backed up by the numbers. A study by economists at the Atlanta Fed found that thirty per cent of people in the lowest quartile of financial literacy thought they had a fixed-rate mortgage when in fact they had an adjustable-rate one. A study of subprime borrowers in the Northeast found that, of the people who scored in the bottom quartile on a very basic test of calculation skills, a full twenty per cent had been foreclosed on, compared with just five per cent of those in the top quartile.

Suroweicki’s piece was written within the context of the pending financial reform bill, which will create a new consumer financial protection agency within the Fed. The agency will help enlarge the fine print in loan contracts and to limit some predatory lending. The problem is that, while the agency can regulate the quality of loan supply, it can do little to regulate the quality of loan demand.

In order for the cycle to be truly broken, the shift needs to be cultural, not bureaucratic. People who can’t pay money back have to not want to be lent to.  This can only be improved by two things: changing social mood towards debt (meaning buying that new TV on credit isn’t cool anymore), and better education so that fewer people are suckered by banksters.

My hope is that today’s school children will learn from the mistakes of my generation and live more debt-averse lives. My fear is that instant gratification of buying stuff with borrowed money is too deeply ingrained in our culture for our children to escape.

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I am a longtime real estate agent who has pretty much seen it all during the housing boom as bust. With experience in selling high-end property and low-end foreclosures, raw land, short sales, development work, apartment buildings, and working with investors, I bring a well-rounded perspective to my work.I also have started to do some paid real estate consulting. If you have questions or just need some good real estate advice, book an appointment at addition to selling real estate, my insights have been featured in The New York Times, The Big Picture, and regularly on I have also done consulting work with ForeclosureRadar.Starting my career, in 2003, I have sold homes throughout Alameda and Contra Costa counties, specializing in Danville, Alamo, Blackhawk, San Ramon, Dublin, Pleasanton, Walnut Creek, Lafayette, and Orinda. I live in Danville with my three kids.

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5 thoughts on “Breaking America’s Financial Illiteracy

  1. Alan Barker

    It’s so true. It’s amazing how financially illiterate many Americans are. Schools place so much focus on humanities and the arts, things that have very little real life implication, but almost no emphasis on money. If people understood really understood finance, there would be no pay day loan companies and people would not be paying credit card interest.

  2. Deborah

    I teach and the problem with teaching this stuff is that it does not interest students that much.

  3. Greg Fielding

    I betcha it’ll interest students quite a bit more in the coming decade as the economy continues to struggle and social attitudes towards debt and spending continue to evolve.

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