Based on policies and decisions emanating from the federal government during the first quarter of the 21st century, it is obvious to many that our leaders at the national level, for the most part, are intellectual lightweights and believe the citizens they represent are primarily disengaged idiots. I wouldn't go quite that far, but there is sufficient evidence to support the contention that roughly half of Americans are financially illiterate and lack even an elementary understanding of economics.
American exceptionalism does not extend to dominance in the rankings of financially literate adults by country. The Scandanavian countries, followed closely by Canada and Israel, are the "cream of the crop" when it comes to financial knowledge. The United States languishes in 14th place, stuck between the Czech Republic and Belgium. In general, men are considered more financially literate than women, White and Asian Americans are considered more financially literate than Black and Hispanic Americans. Before stringing me up for being a sexist racist, I will go on record for saying these differences are not due to genetic reasons, but rather due to systemic and socioeconomic factors. Since I've opened the generalization box, I'll also mention that members of Gen Z have the lowest level of financial literacy, while Baby Boomers exhibit the highest level. This is not surprising, considering the priorities of our educational systems and the fact that wisdom is accrued over time. Among U.S. adults, risk comprehension is the weakest point of their financial literacy. Only 36% of U.S. adults answered related questions correctly.
The impact of financial illiteracy on financial outcomes is both obvious and impactful. According to the National Financial Educators Council (NEFC), a lack of financial knowledge costs adults $948 annually on average. Limited or no financial knowledge often leads to costly choices for individuals and the country as a whole. Too many Americans have excessive debt levels, and the majority feel anxious about their finances. Over 42 million Americans are carrying student loan debt, with the average student loan borrower owing $39,075. Over 14 million Americans have more than $10,000 in credit card debt. Wages not keeping up with inflation is obviously a major factor, but lack of financial knowledge contributes as well.
Even many Americans who have jobs that pay way above-average compensation struggle with establishing a savings program for present-day expenses and for retirement down the road. A surprising number of households with significant income generation live paycheck to paycheck. Part of the reason for this phenomenon is attributable to something known as "lifestyle creep." As income rises, so do expenses, with high earners spending on luxury items, upscale housing, extensive travel, and other pricey lifestyle choices. High debt levels are often incurred to fund expensive primary and secondary residences, six-figure vehicles, and tuition payments for children attending prestigious universities. Money management skills are often lacking among the high income earners that find themselves living paycheck to paycheck.
There are steps that can be taken that will hopefully improve our abysmal financial literacy rates. According to NEFC, nearly half (44%) of 18-34- year- olds said their high school didn't offer a personal finance course. Many who had the option to take a course but decided not to wish they had. Early education is key to success. In 2024, 35 states required K-12 students to take at least one personal finance course to graduate. That's up from 23 states in 2022, a step in the right direction. The internet is also a great source for advancing one's financial knowledge. Although that comes with the caveat that there is also a surplus of junk and voodoo economics in this area of the internet. That said, there are also a number of reputable financial podcasts that can be extremely educational and helpful. My favorite is "Thoughtful Money" featuring Adam Taggart. Still another source for improving financial acumen would be the vast number of published books that deal with personal finance and economics. Lastly, among U.S. adults who are knowledgeable about personal finances, 49% say they learned a great deal or a fair amount about personal finance from family and friends. My advice to a young person would be to ask a ton of questions and entertain a wide variety of opinions from family and friends who at least understand the basics of economics.
I hesitate to include professional financial advisors on the list of potential sources in which to enhance one's investment acumen. There has been a proliferation of salespeople masquerading as financial advisors. Salespeople are not inherently bad, evil, or ne'er-do-wells. They simply have a job that creates conflicts of interest that are detrimental to the financial planning process. All too often, they fail to take a wider view to improve their clients' chances of accomplishing their objectives by offering solutions that are often outside the range available to sales-oriented representatives. I've also thought that too many financial advisors, at least when it comes to investments, prefer to keep their clients in the dark and incapable of truly understanding the nature of their various investments. I would be remiss if I didn't acknowledge that there is a modest percentage of financial representatives that are talented and always act in a fiduciary capacity for their clients. They are the exception, and not the rule.
Besides financial loss at the individual level touched on earlier in this blog, widespread financial illiteracy also poses a risk to our economic and social systems. Congress may be a check and balance on the executive and judicial branches of the government, but the people are the check and balance on Congress. The short-sighted and unwise policies that economists deplore often turn out to be immensely popular with voters. Why should we think that politicians fail to listen to the voice of the people when heeding the voice of the people is the usual path to political power in a democracy? Politicians listen all too well, and as a result, they heed to a host of economically illiterate demands.
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