Many Americans Lack Basic Understanding of Finance

Full article: 

Enquirer Column

Our economy seems to be moving toward what many call a “new normal.” Whether this will be better than the old normal will depend on how we approach fixing the problems that provoked the recent economic crisis. People may disagree about the causes of our economic problems as well as ways to fix our financial markets, but they do agree that there is a problem. Unfortunately, little attention has been given to a crucial fact facing all of us: a large number of Americans have had little education in person finance and money management.

Robert Shiller, a distinguished economics professor at Yale University, argues that many Americans do not understand the very basics of personal finance. He quotes researchers from the Federal Reserve Bank of Atlanta, the University of Geneva, and Columbia University who found that Americans’ understanding of personal finance is so inadequate that even people who were buying homes just a few years ago could not correctly answer the following question: What will a $300 item cost after it goes on a “50% off” sale? How can you make sound financial decisions if, for starters, your basic math skills are that weak?

Far too many Americans do not understand the risks and benefits of credit, how to effectively use our banking system, how to develop and maintain a budget, or how and why to make investments. Far too many Americans, caught up in the excitement of a housing bubble, signed loan agreements they did not understand and could not afford. Research shows that bad financial decisions create stress that weakens family ties and reduce the family’s ability to save for emergencies or to purchase health insurance. These bad decisions increase the costs of borrowing for all of us, create a greater reliance on public assistance, and further depress property values because of the rise in foreclosures. These costs have yet to be calculated, but we know that they are huge, including the loss of 7,740,000 jobs in the U.S. and 411,500 in Ohio since the start of 2008.

The stress caused by poor financial knowledge also impacts worker productivity. In 1998, So-hyun Joo and Thomas Garman published a study that estimated “a worker with financial problems spends 15 minutes per work-day dealing with personal financial matters,” resulting in an annual loss of 62.5 hours of productivity per worker. Based on the Joo and Garman study, the Economics Center at the University of Cincinnati estimates that lost worker productivity due to financial illiteracy costs the Cincinnati metro area $200 million a year.

Shiller believes it is time to face this problem head on. Effective financial education is in the best interest of individuals, families, businesses, and the future of our country. The classroom is one place where the basics of financial education should be provided in a consistent manner. Year after year the building of financial literacy and good decision-making can better prepare our students for responsible citizenship. It will take a quality and relevant curriculum, teacher training, and the engagement of the business and the broader community to help our schools provide a solid financial education for all our students.