We have a financial literacy crisis emerging in this country today. Surveys done by the Jump$tart Coalition for Personal Financial Literacy reveal that 12th graders consistently score extremely low on a test of practical money management questions. When it comes to adults, 75% of them don’t know how much to save for retirement. About half can answer simple questions about interest rates and inflation.
There has been a lot of talk in Washington around the turn of the century about doing bankruptcy reform to encourage consumers to behave more responsibly; however, there isn’t much talk about the responsibility of lenders. Lenders have been acting more irresponsibly by loosening lending standards. But then again, is it the lenders, or is it the government regulation? The CRA (Community Reinvestment Act) forced banks to give mortgages to people in poor communities that otherwise would not be able to buy a home. While the sentiment was good, the basic idea was seriously flawed. When these loans started to go bad, they played a key role in the Fannie Mae/Freddie Mac crisis that led to the banking crisis in 2008. Credit card companies, on the other hand, have been purposely taking advantage of financial illiteracy by encouraging credit card use, and even advertising it as sound financial planning.
Consumers have not been getting a sound financial education, so they can make wise choices regarding their personal finances. Each person has just let their gut guide them along the way, and they learn as they go. The problem with this is that there are aspects of financial planning that aren’t intuitive and cannot be learned by experience without suffering a total financial failure. There are also legal aspects to financial management in the form of contractual agreements with financial institutions and insurance companies that go way over the heads of most people. So consumers are making these key financial decisions, entering into contracts when they don’t have the slightest idea what is really in them. So educating consumers in the basics of sound money management is important, and should be done in our school system before they graduate high school. This education should not be done by banks or other financial companies because of their tendencies to influence our children to become consumers of their services without knowledge of all the downside aspects. This curriculum should be developed by independent financial experts without influence from corporate sponsorship in the financial industry in any way.
The Real Solution
The solution isn’t just improved education; however, it goes much deeper than that. Money is an indicator of values. You can look at the checking account statement of any person and quantify their values by how much money goes to what. People spend money on what they value the most. Those values come out of their beliefs about how the world works. These foundational beliefs affect behavior, and behavior around money is 90% of the problem with poor financial management. Education is the other 10%. So we need to be teaching our children the proper values and priorities first before we can solve the financial literacy problem. These values can only be taught in the family, and community churches and other faith based organizations. Values are not something the government can give us, because this country’s values were given to it by the people in the form of the U.S. Constitution, and it was those Judeo-Christian values that have guided this country since its inception. Without an understanding of values based in the realities that have made this a great country, the behavior around money won’t change, and no amount of financial education will change the behavior either. So the key to the problem of financial illiteracy starts at home, were values are instilled.