Fewer than one-third of young adults possess basic knowledge of interest rates, inflation, and risk diversification according to a recent study on the financial literacy of America’s youth by The Financial Literacy Center*. This is pathetic and a risk to our nation’s economic strength.
Freakonomics author Stephen J. Dubner writes that “financial literacy is one of the most important ingredients for a well-functioning society.” In July, BusinessWeek wrote that the “Time is now,” for financial literacy, stating, “It’s more essential than ever to educate Americans of all ages about how money works.”
There are two major proposals for financial reform under consideration right now, according to the New York Times. One is to give the Federal Reserve more supervisory powers over large financial institutions and the other is to create a Consumer Financial Protection Agency. Neither proposal addresses financial literacy, yet yesterday in an editorial the New York Times described Federal Reserve proposals to give bank officials a share of the risks that they take as, “Sound ideas.”
In a June article, Financial karate for American consumers, I wrote that, “our nation needs to develop a culture of Self-reliant, independent, accomplished people and NOT a culture of reliance on government”…. Because these “are skills and traits that will protect consumers by enabling consumers to protect themselves.” My concern was, and still is, that by using a government agency instead of a major push for financial literacy we will cause some consumers to feel secure in their dependence on a fallible regulatory organization.
In a later post, In the future, “Madoffs” will use regulations as props in scams I wrote that, “Until consumers learn financial self-defense, regulations will provide the props for the scammers.”
This study by the Financial Literacy Center is solid evidence of the enormous problem created by lack of basic financial knowledge among people that need to be able to take care of themselves. There is a solution. The individual states need to require personal finance as part of their state’s requirement for a high school diploma. This type of program could be done in a classroom or as part of independent study. There are plenty of materials available that a good educator given a few hours could apply to their school.
Dave Ramsey offers Financial Peace University, Mint.com has Personal Finance, Personal Budget and Budget Tool Forums, the University of California Irvine has learning tools, and sites like SmartMoney offer numerous tools for amateurs and the experienced. Chances are that if you have a 401K or other investment plan where you work your plan manager offers similar tools. Please note that the sites that I have listed above are just what I was able to find in a couple of minutes. I don’t promote any of these sites but offer them merely as examples of just how easy it is to find educational material on personal finance. Your local library and bookstores also contain an abundance of books on the subject.
Financial literacy is quite possibly the most important knowledge a responsible adult can possess. Self-reliance, independence, and accomplishment should be a national goal whether our objective is to clean the environment and make health care accessible or simply to reduce government. Self-reliance, independence, and accomplishment are goals under which everyone wins. We need to begin pursuit of these goals through a nationwide focus on financial literacy.
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*The Financial Literacy Center was launched by the RAND Corporation, Dartmouth College, and the Wharton School of the University of Pennsylvania.
Special thanks to Andrew Sullivan at the Daily Dish where I found the initial report on the story.
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