Value Added
Badly in Need of Financial Education
The mortgage mess once again illustrates that many Americans are clueless about money.
By Steven Goldberg, Contributing Columnist, Kiplinger.com
May 12, 2008
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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.
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.
Reader Comments (12)
Posted by: Sylvia at 05/13/2008 03:20:00 PM
I couldn't agree more that most Americans don't know the ins and outs of finances. So, why isn't it made part of the curriculum in high school? That would be a good place to start at least.
Posted by: dagim at 05/13/2008 05:42:49 PM
What a timeily article. Yes it is each and everybody's responsibilty to become financially literate. However, it mayn't be such a bad idea either for the federal government to step in and mandate some sort of financial competency from our children before they mingle to the unforgiving adult's world and make costly mistake just to become a burden to society.
Posted by: Giles Belski at 05/14/2008 08:14:23 PM
Your article was well timed and extremely important. Why is it that that educators in our teaching system,dont spend any time informing their pupils that finances are very important, more so than literature or history or geography...not that those subjects should be eliminated, but the handling, saving and spending of money should be foremost EVERY student should be taught the importance of saving, investing and most of all, not to ever carry a balance on their credit cards!!This is the biggest problem that our youth and country has...
Posted by: Steve at 05/14/2008 08:58:30 PM
...We do need financial education - it should be mandated. However even with financial education there are people who seek instant gratification - and who will not save, get into debt, with mortgages they can't afford.
Posted by: LisaMarie at 05/15/2008 06:57:04 AM
It should be mandatory for the schools to teach finance courses as well as money management, it should start at the very begining of a childs education and continue on in high school. I'm not saying try to teach pre-k students the stock market, but there are a number of things that can be taught to a child that young about money that are age appropriate, other than spending it...
Posted by: Julia at 05/15/2008 09:56:29 AM
... I am one of those people who didn't learn how to handle finances. I went to the best private schools, but money was NEVER discussed in the home.... My divorced mother has ZERO savings with no possibility of a pension after working for 38 years. I know I'll have to end up caring for her, and I will have to put her on a financial diet when it happens. It will be a source of great stress. I'm currently digging myself out of credit-card debt and have increased my retirement savings. I lecture my 20-something staff on the importance of saving for rainy days AND their future, but they are too busy buying cars and homes and gadgets they can't afford...We all need to...remember the important things, and buying the next greatest cell phone and a house that you can't afford is not one of them.
Posted by: Bluedog at 05/15/2008 06:29:28 PM
Teaching finance in high schools is a good idea. But in managing one's money one must use a healthy dose of common sense. That cannot be taught. As I am fond of saying: 'Common sense is an uncommon virtue'.
Posted by: JD at 05/15/2008 11:43:25 PM
Intelligence cannot be mandated. Achievement cannot be mandated. Only opportunity can be given. You cannot have freedom without responsibility. We lack the latter, and far too many now advocate reducing the former as a "solution".
Posted by: longtimeago at 05/21/2008 02:58:43 PM
Long time ago, basics of running a household and a family (morals) were taught at school. We have now done away with all this, replacing it by useless maths and social sciences. Everybody is everybody else's equal, and everybody has the right to purchase a house with zero down...
Posted by: Chuck De Vore at 05/27/2008 06:47:18 PM
At one point in my teaching I required my students to keep an account of their economic life for a month income outgo what and where spent and saved. It was an eye opener for them...Little was ever put into a saving or investment account. I preached a 10% of all earning savings idea. Some did and some come up to me today to say thanks but not many, I see some published as bankrupt too. Spend and show off was the idea, save no way, spend, spend. The parents were doing the same thing. Retirement was never a thought, the government FICA will take care of me. Yes education might help but you can only head the horse to water not make it drink.
Posted by: Bonnie S. at 05/28/2008 01:10:02 PM
I just had to let you know about an account I opened at Wachovia. Everytime I use my debit card or pay bills electronically using the internet, Wachovia takes $1 out of my checking account and puts it into an account called WAY2Save which pays 5% interest for one year. The special rate for June, July, and August is 16% interest. I'm buying everthing from stamps to groceries with my Wachovia debit card. I'm only allowed to put $100 from my checking into this savings account in addition to those $1 amounts. Is there anywhere else you can earn 16% on your money? I love it!
Posted by: Alex K. at 09/17/2008 02:58:48 PM
I had the unique opportunity to learn basic accounting and economics in high school, as part of a specialized business program. However, waiting for schools across the country to implement similar curricula may take quite some time. I currently work for Enspire Learning, an e-learning firm that has just launched Fluent in Finance, a curriculum aimed to expand financial literacy...