Financial illiteracy in America is widespread.
And it is not just for millennials or baby boomers or the poor or women or men. The problem goes across the board.
Millions of Americans are in danger of falling into the trap of not understanding what they need to do to ensure their financial health and their families ‘well-being.
All sorts of Americans of various income groups, genders and ages know very little about personal finance so financial disaster could be just around the corner for them. That is one of the conclusions of the first annual financial literacy survey by Stash, a digital investment advisor. The survey questioned 26,000 Stash investors and 1,100 people from the general population.
“Widespread” Money Ignorance
Among the frightening results, “there is widespread misunderstanding among respondents on basic investing financial planning concepts,” according to the survey. Millennials tend not to use the 401(k)-retirement saving vehicle. This is usually a huge mistake in trying to reach financial independence.
“Even though a majority of millennials said they are investing for retirement, fewer than half (48 percent) contribute to a 401(k) plan,” the survey said.
(This is unfortunate because using the matching option that many 401(k) plans have—say you put in six percent of your salary into a plan and your employer matches, putting in another six percent, is one of the key ways that people accumulate significant retirement assets over years).
The study warned that “When two out of five survey respondents don’t understand how compounding works, you can bet people are missing out on opportunities to maximize their savings.”
(Indeed, I see the results of this in my own life. I know many of my peers who are in their 60s and have almost no assets).
American women, the Stash survey found, are doing as badly as American men. Women invest but tend to invest smaller amounts than men, the survey said. “The Stash survey found that “almost half of female respondents (47 percent) invest between $1 and $500 each year.” While most men and women invest something each year, the survey found, about 20 percent of women and 10 percent of men invest nothing.
Here is some other data from the survey, 41 percent of respondents “do not understand that a diversified portfolio is a safer investment than a single stock.” (Diversification is a key element in long term investing. If you invest exclusively in just stocks, or just one kind of stock, your chances of having a big loss are much greater than if you diversify—invest in both stocks and bonds. That’s because stocks and bonds tend to go in opposite directions).
Inflation? What Is It?
Other alarming results from the survey: About 2 out of five don’t understand how inflation works—how it devalues the buying power of a set amount of dollars and can reduce one’s living standards.
And it just gets worse. Some 26 percent believe “a moderate investment should return over 16 percent annually.” These people don’t seem to understand that the long term return of the stock market is about nine percent. Other respondents didn’t grasp the significance of the rate of interest on their mortgage.
The problem is many Americans don’t know what they should know, according to a Stash executive. “Most Americans know they need to be saving and investing for their futures, but they do not understand the fundamentals of what this entails,” said Brandon Kreig, CEO and co-founder of Stash. He emphasized that the survey found the problem is not confined to one age or gender.
The American Know Nothings
How did many Americans reach the point of becoming financial know nothings; of babes in the woods who could be easily separated from their wealth? One can start at home—where parents often set a poor example of money management—but then one can continue on to the schools. Only 17 states now require any courses in personal finance to graduate from high school, according to the 2016 Survey of the States sponsored by the Council of Economic Education.
Only 20 states, the survey found, require any courses in economics. Isn’t economics—the vital social science of how human beings satisfy wants today and in the future—an important discipline that every young person should learn? This lack of economic or personal finance education, to me, is an indictment of our entire, expensive, often dysfunctional public school system. It is a system that spends and taxes a lot but often doesn’t equip young people to survive at a time when investment knowledge is a vital part of prospering.
The frightening data from these two surveys is “a call for action,” says a George Washington University economics professor.
“We know now that most students are not financially literate; they lack this basic but fundamental skill to live in the 21st century,” according to Annamaria Lusardi.
The Survey of States report also found that, while more states are adding personal finance standards, the number of states requiring a personal finance course to obtain a high school diploma remains the same—17. And “only 20 states require high school students to take a course in economics—that’s less than half the country and two fewer states than in 2014,” according to the survey.
These depressing surveys are worrisome for the next generation. But they could also affect our country today, said one financial executive reviewing the Survey of States findings.
The prosperity of our country today, and of those who expect to achieve financial independence in a generation or two, requires a better educated American.