Badly in Need of Financial Education

Americans spend more, in aggregate, than we save. In recent years, millions of us bought homes we couldn't afford with mortgages that had interest rates that rise over time. Just a few years ago, tens of millions of us turned our 401(k)s into 201(k)s by loading up on overpriced tech stocks.

No question, greedy corporations have a lot to do with our troubles. You can't open the mail, watch television or read a magazine without seeing another pitch for yet another credit card. Mortgage brokers deceived unwary consumers into signing up for mortgages they couldn't possibly pay. And stock brokerages and investment bankers made billions of dollars hyping Internet companies that had little or no profits or revenues.

In addition to pointing fingers, however, it's important for Americans to look in the mirror. No one held a gun to consumers' heads when they made the decisions to run up their credit-card debts, or buy houses they couldn't afford or stocks of companies that had little or no value.

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Mostly, people made poor decisions because we're a nation of financial illiterates. We lack the knowledge to make sound investment choices. "An educated borrower is less likely to get into a loan that gradually gets worse over time," says Paul Golden, spokesman for the National Endowment for Financial Education.

What to do about this pervasive problem? I think the answer starts with our schools. You aren't ready for adulthood in 21st Century America without financial education.

But far too little is being done to improve the situation. Only three states require a semester in financial education and only 15 require some financial education as part of another course. "I've been to schools that require Tasmanian history, but they do not teach financial literacy," says Muriel Siebert, chairman and chief executive officer of the brokerage firm that bears her name. Her foundation pays for a unit on financial education required in New York City schools.

Laura Levine, executive director of the nonprofit Jump $tart Coalition for Financial Literacy, says children should learn the basics of thrift in elementary school. "We should teach young children that savings is a good habit," she says.

Budgeting and money management should be introduced at a later age. She wouldn't start too late. "The kids who drop out are the ones who need this the most."

The ignorance of high school students is appalling. The coalition just released its annual survey of financial literacy. The average score: 48%. And they weren't tough questions. For instance, 41% of students thought that interest on savings accounts was tax free, while 18% thought it was subject to sales tax.

Where are teenagers learning such nonsense? From television and from their parents.

About 60% of Americans fail to pay off their credit cards every month. The average American carries more than $5,000 in credit-card debt. Overall credit-card debt soared more than 300% between 1989 and 2006, according to research firm Demos.

Look at how adults are saving for retirement. Half of all workers have saved less than $25,000, according to a survey by the Employee Benefit Research Institute. Among over-55 workers, only 23% have saved $250,000 or more. The median net worth of all Americans over 65, including their houses, is less than $150,000.

Defined benefit pension plans are going the way of the slide rule. We live in a society in which almost every adult has become his or her own pension-fund administrator -- charged with deciding how much to contribute to a 401(k) and other retirement plans and how to allocate that money. However, the overwhelming majority of people are ill-equipped for that role.

What should Americans be doing? In a nutshell, they should max out on their 401(k)s and other retirement savings, including IRAs. They need to understand that saving for retirement is up to them. Americans also need to be careful about debt: They need to pay off their credit cards and avoid mortgages they can't afford or whose terms they can't understand.

Anyway you slice it, this is a national crisis, and only education -- for those of all ages -- stands a chance of solving it.

Steven T. Goldberg (bio) is an investment adviser and freelance writer.