Our Financial Literacy Problem in the United States

written by Frankie Rose

Americans historically work hard to get into a great college, get a fantastic well-paying job, and suddenly think that all of their work is done. The majority then start getting credit cards and car loans and think they have their whole lives in their new great job to pay everything back.

Many people in their early 20s in the United States start their working life already with unsustainable burdens of college loans, car loans, and credit card debt. The problem is not only the debt itself but also the lack of financial literacy that resulted in the public normalizing these hefty debts. Lack of education for long-term preparation of a financially healthy life is where we, as a country, have gone wrong.

What is Financial Literacy?

Financial literacy is the ability to understand the skills necessary to effectively manage money and make financial decisions; to understand how to build wealth and avoid debt; the basic understanding of inflation and interest rates; how to save, why to save, and how to invest correctly and safely to ensure a path of decreasing debt, building wealth, and sustainable income to live.

Two-thirds of American adults cannot pass a Financial Literacy Test.

44% of Americans cannot even cover a $400 emergency because they do not have the cash saved.

43% of student loan borrowers are not making payments to reduce the balance.

38% of US households have credit card debt.

33% of American adults have nothing saved for retirement.

In another study, researchers found in 2015 that only 30% of Americans were able to answer three simple financial questions about inflation, interest compounding, and risk diversification.

Policymakers, educators, and schools place little importance on the financial literacy of high school students. High school is the time to learn about how inflation affects interest rates, income, and taxes, how to save for retirement, and avoid the debt traps introduced as early as college. 

"Most Americans give wrong answers to investing, setting personal goals, and credit building questions. Only 44.27% knew how much money they would have if they invested $100 at 19. The question focused on investment with an annual return of 7%. Approximately 46.33% knew how to set personal goals, and 45.89% guessed the first step towards building a good credit score. These are some worrisome facts about American financial literacy or the lack of it thereof."

“Financially illiterate individuals may be more likely to accumulate unsustainable debt burdens, for example, either through poor spending decisions or through a lack of long-term preparation. This in turn can lead to poor credit, bankruptcy, housing foreclosure, or other negative consequences.”

(National Financial Educators Council)

The question is, how can we fix this?

It starts with the new generation. High school students and college students need to understand finances, credit card debt, savings, and goals, but mainly how to accumulate wealth and avoid unsustainable debt. Students in high school are not going to go out themselves and look at how to build a credit score, start saving, and consider how they can avoid the traps of the debt-ridden lifestyle they are being set up for. The Financial Literacy Club aims to promote the financial literacy of students. High school students will be reading work by other high school students, making it relatable and enjoyable while also educational and important. We want to make learning about finance fun and accessible through graphics, newsletters, competitions, and podcasts.

Teaching the next generation Financial Literacy will be life-changing for them and for the country as a whole. A country of financially well residents is a country with a healthy economy. To put all of the above into perspective: the U.S. adult financial literacy level, at 57%, is only slightly higher than that of Botswana, whose economy is 1,127% smaller. Despite the U.S. being the world's largest economy, it is ranked in 14th place by the Standard & Poor's Global Financial Literacy Survey, which measures the proportion of financially literate people in the country. The U.S. economy is the largest globally, yet our ability as a nation to benefit from this is failing. This needs to be changed, and it needs to be changed now.