Americans’ Financial Literacy Crisis: A Growing Concern
It's increasingly clear that Americans are struggling to manage their money, and recent trends suggest the problem is getting worse. Young adults, already dealing with record levels of student debt, are increasingly failing to monitor their credit card debt and bank balances. Many view store refunds or amounts less than $5 as "free money," and numerous people continue to pay for online subscriptions they don't use.
The Pioneering Work of Annamaria Lusardi
Stanford economist Annamaria Lusardi has been at the forefront of highlighting Americans' financial illiteracy. For two decades, she has tracked financial literacy rates using three basic questions she helped design, which have become a global standard. Her recent study on how Americans responded to these questions in 2021 revealed an alarming lack of financial knowledge: only 29% of participants answered all three questions correctly, while most either got them wrong or didn't know the answers.
Key Findings from Lusardi's Research
Understanding Inflation: Only 53% of respondents grasped how inflation works, even as prices surged on essentials like cereal and cars.
Interest Rate Calculation: About 69% knew how to calculate a simple interest rate.
Investment Risks: Just 42% understood that mutual funds are generally safer investments than a single company's stock.
Lusardi emphasises the critical importance of financial literacy, especially as methods of managing money evolve. She points out that the rapid changes in the financial landscape demand that people have the skills to make decisions with long-term impacts.
Financial Literacy in a Rapidly Changing World
High rates of financial illiteracy are particularly concerning in today's environment of heightened economic uncertainty and growing wealth inequality. Lusardi's research shows that young, less educated, female, or unemployed individuals scored the lowest in financial literacy. Black Americans and Hispanics also had lower financial literacy levels.
The United States is not the only place where this issue exists. The Journal of Financial Literacy and Wellbeing publisheda global analysis revealing widespread financial illiteracy. Whether in a well-educated Nordic country like Finland or a country like Peru, which faced extreme inflation in the 1990s, most people do not understand how money works. Worldwide, women, racial minorities, the least educated, and the unemployed are the least knowledgeable about financial matters.
The Importance of Financial Education
Lusardi's extensive research shows that people who understand basic financial concepts are better at managing money. They save more for retirement, make smarter investment decisions, and manage their debts more effectively. Financial literacy also helps people handle economic shocks, such as those experienced during the COVID-19 pandemic.
Stanford's commitment to improving financial literacy is a key reason Lusardi joined the institution. In addition to her role at SIEPR, she serves as the academic director of the Global Financial Literacy Excellence Centre, which she founded in 2011. At Stanford, Lusardi aims to establish financial literacy as a critical speciality within economics.
Moving Forward: Teaching the ABCs of Personal Finance
Lusardi believes that developing personal finance skills is as essential as learning to read and write. She advocates forteaching people, especially the young, how to make savvy financial decisions.
Despite the increasing availability of personal finance education, challenges remain. Many instructors lack proper training, and students often forget what they learn. However, there is reason for optimism. More than half of US states have added personal finance instruction as a high school graduation requirement, and universities, including Stanford, are now offering personal finance courses. Employers also recognise the impact of financial anxiety on productivity and sponsor personal finance lessons in the workplace.
Lusardi notes that financial literacy education is accelerating, and she sees this as a very positive development.
Conclusion
Addressing the financial literacy crisis in America requires a concerted effort to educate individuals from a young age, equipping them with the knowledge to make informed financial decisions. Lusardi's work highlights the gaps and drives change, offering hope for a more financially literate and secure future.