This just in: A startlingly large number of Americans—perhaps you’re one of them—are basically financially illiterate, without a clue when it comes to concepts like inflation and interest rates. At the same time, financial options have grown, and grown more complicated, with gotcha mortgages and credit card agreements overloaded with 15 pages of fine print. What we have is a situation in which more and more fools are parted with their money, sooner and sooner.
The New Yorker’s James Surowiecki discusses just how clueless Americans are when it comes to finance:
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.
Studies conducted by the Federal Reserve Bank of Atlanta Studies prove something that you’d logically assume to be the case: When you’re bad at math and are otherwise financially illiterate, you make bad decisions with money. Specifically, you’re a lot more likely to wind up defaulting on your house. There’s a good chance you don’t even know if your mortgage is (was?) of the fixed-rate or adjustable-rate variety.
Part of financial-reform legislation is the creation of a new agency to protect consumers from confusing and misleading financial products, but it’s unclear just how good the agency will be at actually protecting consumers.
Surowiecki says we also need to make more efforts to teach the financially illiterate to “read,” so to speak:
We really need something more like a financial equivalent of drivers’ ed. There’s evidence that just improving basic calculation skills and inculcating a few key concepts could make a significant difference. One study of the few states that have mandated financial education in schools found that it had a surprisingly large impact on savings rates.
Sounds to me like a lot of what would be taught is arithmetic—which the schools fail to teach adequately right now. But I suppose it would be helpful to teach kids basics so that, for example, they’re able to select a credit card with decent terms.
In some ways, a credit card can be as dangerous as a car.
As Surowiecki writes:
The difference between knowing a little about your finances and knowing nothing can amount to hundreds of thousands of dollars over a lifetime.