A Nation of Financial Illiterates

[jeffrey]

Halfway through his Presidency, George W. Bush called on the country to build “an ownership society.” He trumpeted the soaring rate of U.S. homeownership, and extolled the virtues of giving individuals more control over their own financial lives. It was a comforting vision, but, as we now know, behind it was a bleak reality—bad subprime loans, mountains of credit-card debt, and shrinking pensions—reflecting a simple fact: when it comes to financial matters, many Americans have been left without a clue...

The dangers of financial illiteracy in America : The New Yorker

[rob62521]

It's a pretty accurate article...few people take the time to learn anything about finances and the use of common sense...well, it isn't common anymore.

Everyone wants things the easy way...get rich quick or I'll worry about it when the time comes. Few (SA folks excluded) know the merits of saving for things...it's all about instant gratification. And if someone gets in big debt, they think a consolidation loan will solve their problem.

[jIM_Ohio]

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.

Read more: The dangers of financial illiteracy in America : The New Yorker

I don't like it when writers put a President's name on something, like its Bush's fault everyone is a bunch of idiots? LOL must be idiots if he was elected twice (and I am one of the idiots which voted for him twice). LOLOLOL

What can be done? One solution is regulation: the financial-reform bill now before Congress will create a consumer financial-protection agency that should help curb the finance industry’s most predatory excesses. Another solution is to tinker with “choice architecture”—doing things like enrolling people in 401(k)s automatically—in order to “nudge” them toward better decisions. Both of these strategies are necessary, but they’re not enough on their own, because financially illiterate consumers are always going to be easy victims. We also urgently need proper financial education.

Read more: The dangers of financial illiteracy in America : The New Yorker

and words to live by

If financial education taught people only how little they actually know, it would accomplish quite a lot.

Read more: The dangers of financial illiteracy in America : The New Yorker

and the summary

The point isn’t to turn the average American into Warren Buffett but to help people avoid disasters and day-to-day choices that eat away at their bank accounts. The difference between knowing a little about your finances and knowing nothing can amount to hundreds of thousands of dollars over a lifetime. And, as the past ten years have shown us, the cost to society can be far greater than that.

Read more: The dangers of financial illiteracy in America : The New Yorker

[kork13]

Interesting to see this right now.... My little brother (16) just mentioned to me yesterday that he's absolutely clueless in dealing with money. I think when I see him next month I'll see if I can knock some sense (cents? ) into him. He wants to be smart with his money, just doesn't know how...

[rob62521]

jIM...don't you know...Bush is blamed for everything and will be for decades. I agree with your post!

[buildmybudget]

It's a good article. Too bad few Americans will read it and even less will strive to affect a change in their budgeting and financial planning. It really makes me curious where we'll be in a few decades given the ever-expanding gap between those who know how to manage money and those that don't have a clue.

[Kjackson25]

Another unfortunate aspect of this topic is that much of the education out there is driven and taught by the very people it could benefit. Think about financial conventional wisdom, you have to invest in the market to build wealth. Not true. Big down payments are the best way for you to buy a house. No it's not. A well diversified portfolio will minimize your risk- really how did that work from 2007-2009?

[disneysteve]

Originally Posted by Kjackson25

Big down payments are the best way for you to buy a house. No it's not. A well diversified portfolio will minimize your risk- really how did that work from 2007-2009?

What do you mean by "big" down payment. Certainly, I believe in the former standard of 20%. That avoids having to pay PMI and also helps avoid being upside down if the value of the property drops. The vast majority of folks who found themselves upside down ended up in that position because they bought with little to nothing down so that they had no equity. As soon as the value dropped even $1,000, they were upside down. On the other hand, if you bought a $300,000 house with 20% or 60K down, the value had to fall at least 60K before you found yourself upside down.

As for a diversified portfolio, of course it reduces risk. You can't pick a 2 or 3 year period that represents one of the worst periods in recorded history and use that as a basis for throwing out what has worked for nearly 100 years. Investing is a marathon, not a sprint. Sure, we all lost money from 2007-2009, but even during that time, some of my holdings made money because I was diversified. Had I been more concentrated in stocks, I would have lost far more money.

[snafu]

I don't understand why parents don't involve their kids in age appropriate family financial decisions. Teens have a huge segment of the retail market, they need to have a criteria for spending. Anyone in their 1st job opens a bank account and financial institutions regularly put on free seminars to market their products. you needn't be a client to attend. All the mutual funds will drown you in material if you ask...I presume young people can still read.

the library has shelves of books starting with the yellow series Financial Information for Dummies. I think you are responsible for your own learning! much easier than learning by trial & error

[maat55]

[quote]

Originally Posted by jIM_Ohio

I don't like it when writers put a President's name on something, like its Bush's fault everyone is a bunch of idiots? LOL must be idiots if he was elected twice (and I am one of the idiots which voted for him twice). LOLOLOL

It is a fact that Bush stuck his nose into the housing market, providing F&F with 400 billion to give loans to those who could not get them in the free market. This housing bubble was a direct affect of poor government monetary policy. This has been going on since the 30's. IMO, the government is causing more damange than it is good. Americans are getting used to government programs(despite their horrific results)and using less common sense. Government policies concerning home-ownership, retirement benefits, healthcare, education, unemployment and welfare have direct affects on the individuals personal financial skills.

It is certainly not one presidents fault, but Bush had his hand in this crisis. Had the free market been allowed to happen without government intrusion, there would have been much fewer of these idiots. F&F distort the risk factor.