Many challenges await the new president, some of great urgency. In his inaugural address, he expressed a desire for action. There are many areas of action but one especially pernicious issue has several relatively simple solutions. That is the problem of financial illiteracy.
Our research shows that financially knowledgeable individuals make smarter financial decisions and achieve better outcomes; they are more likely to save, plan for the future, invest, and become contributing members of society; and less likely to take on expensive debt.
However, millions of Americans lack even a basic understanding of personal finance. In 2015, only 32 percent of Americans could answer correctly three basic questions on financial concepts like interest rate, inflation, and risk diversification. This “financial illiteracy” undermines their quest for a better future.
Consider debt. The number of student loan borrowers has nearly doubled in the past decade, and many borrowers do not understand the effects of that borrowing beforehand. According to our research, 54 percent of student loan holders did not try to calculate their monthly payments before borrowing, and 53 percent said that given the chance, they would do things differently. This debt causes financial stress: 37 percent of people with student loan payments due said they were late with a payment at least once in the last 12 months.
Debt is also a growing problem for older Americans, threatening their retirement security. And speaking of retirement, only 39 percent of Americans have even tried to determine how much money they will need in later life, a figure barely changed since 2009.
Financial fragility is another problem exacerbated by limited financial literacy. Some 34 percent of Americans said that they could not come up with $2000 if an unexpected need arose within the next month. We need to put in place policies that improve individuals’ financial security both in the long-term and the short term. We need to equip people with the knowledge to make quality financial decisions around debt, and we need ways to encourage American families to build “rainy day funds” for emergencies.
There is an urgent need for policy action to encourage the spread of financial education so that people in all walks of life can make savvy financial choices. Parents and teens would benefit from having a better grasp on how to pay for college. Millions of Americans would be more likely to build emergency savings if they realized their importance. People also would benefit from a better understanding of how to save for retirement. Our research shows that the mere act of planning for retirement is a strong predictor of retirement wealth.
Some schools already provide financial education for all students. Workplace financial education and financial wellness programs can also impart essential knowledge. Government incentives for both employers and schools to provide financial education could spur new solutions to the problem of low financial literacy.
If more schools and employers provided financial education, millions of American would have the tools to build better lives for themselves and for us all. This is a vision for the future we hope for.