More Americans than ever—41 percent—are holding off on major life decisions either because they are financially strapped or worried about the economy, according to a poll conducted by Harris Interactive for the American Institute of Certified Public Accountants (AICPA). On hold are decisions like home ownership, higher education, marriage, children, medical procedures and retirement. The number represents an 11-percentage-point increase from 2007.
What does this say about the ability of our communities to meet the challenges of the future? Can progress be made when, according to recent surveys, 43 percent of American families spend $1.22 for every $1.00 earned, savings rates are at their lowest level since the Great Depression and bankruptcy rates are staggering?
America’s lack of financial literacy has been called a crisis, an epidemic and a national disgrace. From the vantage point of economic development, it presents challenges that cross all age, race, gender and geographic boundaries. Ultimately, everyone feels the pinch.
A case in point is the sub-prime mortgage crisis that has gripped the nation. Although many borrowers—and the investors buying and selling mortgage-backed securities—knew exactly what they were getting into, others simply did not understand that their affordable monthly house payment would balloon into something that was beyond their financial means. Either they weren’t told, or they did not have the financial education to make an informed decision. Better-educated consumers may have made all the difference.
How we got to this point
For more than two decades now, educators, financial professionals, financial institutions and government agencies have been addressing financial literacy on many fronts. But in spite of these efforts, most experts agree that there is still much to be done before all Americans have the knowledge and skills needed to reach their financial goals.
What social, political and economic forces brought us to this crisis? Technology, a proliferation of financial products and services, and changing attitudes toward money and spending are among the factors that are often cited.
- The financial marketplace is complex. Few can escape the impact of the global economy. For those with financial skills, this complex and dynamic marketplace represents opportunity. For others, it can be confusing and intimidating.
- There are more choices. Consumers once had a handful of Usregular financial choices. Now there are dozens that regularly demand attention. Consumers are constantly bombarded with an increasing number of complicated financial services, from online mortgages and insurance, to credit card offers and investments.
- Marketing strategies. Credit card offers to new high school graduates are common examples of businesses taking advantage of vulnerable consumers. In spite of government regulations and disclosure requirements, consumers continue to be attracted by the rewards of spending, without considering the responsibilities that follow.
- More responsibility for retirement. The days of employer-sponsored pension plans are fading. Individuals must make their own decisions on retirement planning and investment, health care insurance and other benefits. Without knowledge and the discipline to save, millions will never achieve a financially secure retirement.
- Technology. Consumers have hands-on, 24/7 access to financial accounts and products. They can also use technology for research, planning and smart money management. The information is there, but it’s not always accessible to those who need it most.
Attacking the problem head-on
The seeds of financial literacy should be planted at a very early age and should continue throughout life. To that end, in 2006 the AICPA and the Ad Council launched Feed the Pig (feedthepig.org), a national public service campaign targeting 25- to 34-year-olds with messages about personal saving. Young people are urged to budget, plan purchases, save part of every paycheck and build a stronger financial future. This year, the CPA organization went even further, launching feedthepig.org/tweens, which targets students in the fourth and fifth grades.
Signs of progress
One measure of progress toward financial literacy is a biennial survey of high school seniors conducted by the JumpStart Coalition for Personal Financial Literacy (jumpstartcoalition.org), a public-private coalition that seeks to improve financial literacy in students from kindergarten to college. The average survey score rose only slightly in 2005-06 to 52.4 percent. Although this average is down from the high of 57.3 percent a decade ago, it shows improvement from the 2002 low of 50.2 percent.
Even with these encouraging results, JumpStart reports that a number of important concepts are still not well understood by the next generation of consumers:
- Only 22.7 percent of students understand that interest on savings accounts may be taxable.
- Only 40.3 percent realize that they could lose their health insurance if their parents become unemployed.
- Only 16.7 percent reported having taken a course in money management or personal finance.
Everyone can do something
Just as financial literacy is everyone’s problem, it will take a community effort to find solutions. Individuals must make a commitment to continuing education on financial matters, to developing financial skills in children and volunteering to help others benefit from greater financial understanding.
Business leaders can also do their part by offering seminars, educational materials and financial counseling services to employees and the public. Studies have shown that money worries affect worker productivity and job satisfaction.
Financial literacy experts say that in today’s complex world, money-smarts are as important to success in life as the ability to read and write. Citizens who do not have control of their personal finances, do not have control of their futures. If you need evidence, just look at the current state of the economy. iBi