Money. Everybody wants it. But not everyone understands it. Financial literacy in America is not only low but has steadily declined over time.
That is the conclusion of research from Finra, the Financial Industry Regulatory Authority. In 2009, the average respondent to its triennial survey could answer three out of five simple financial literacy questions correctly. By 2021, this number had fallen to 2.6. Worse, out of the 27,000-plus people surveyed, only 4 per cent were able to answer all questions correctly. This suggests many lack a basic understanding of concepts like inflation, compound interest and risk diversification.
An older — but more sweeping — study led by Standard & Poor’s Ratings Services offered equally dismal findings. The US is ranked number 14 in terms of financial literacy, behind Singapore and the Czech Republic. Norway, Denmark, and Sweden tied for first place.
The problem has real world implications. Americans collectively lose billions of dollars every year in unnecessary interest payments and investment costs, among other things. At the same time, making sound financial decisions has become more difficult given the growing complexity of new financial products and services on the market. Some argue subpar financial literacy combined with predatory lending helped precipitate the subprime crisis and the spectacular crypto boom and bust. Digital savviness does not equate financial shrewdness
One obvious solution is to provide more financial education. The importance of improving understanding on how money works, particularly among disadvantaged groups, has prompted the FT to set up a charitable foundation the Financial Literacy and Inclusion Campaign (FLIC).
Currently, 23 US states require high school students to pass a financial literacy course before they can graduate. On paper this makes sense given that young people are likely to face greater financial challenges than previous generations. In practice, it can be difficult to drill financial knowhow into teens when they are still such a long way off from having to personally deal with things like mortgages or credit card payments.
Financial education is not a cure-all. Despite the rise of personal finance classes in US schools over the past 24 years, Americans continue to drown in debt. But a lack of expertise worsens the risks of poor decision making. As the economic downturn deepens, tackling ignorance about finance has never been more crucial.