Millions of Americans face financial difficulties because they just “don’t get it,” their financial health on a knife’s edge. On a basic five-question financial literacy quiz, 80 percent couldn’t answer four of the five questions correctly. The world runs on money, but they don’t “get” how money works. Because of their ignorance, their illiteracy, they sheepishly admit to losing an average of $1634 a year reports the Financial Educators Council.
These are 18 to 34 year olds, Millennials, who on the literacy quiz got wrong such questions as “Suppose you have $100 in a savings account earning 2 percent interest a year. After five years, how much would you have?” They didn’t even ask them to do the math, just if it would be more or less than $102. Or even a “super tough” one “Imagine that the interest rate on your savings account is 1 percent a year and inflation is 2 percent a year. After one year, would the money in the account buy more than it does today, exactly the same or less than today?”
“Financial literacy is the ability to understand and effectively use various financial skills, including personal financial management, budgeting, and investing. Financial literacy is the foundation of your relationship with money, and it is a lifelong journey of learning,” defines Investopedia.
Investopedia also warns, “The lack of financial literacy can lead to a number of pitfalls, such as accumulating unsustainable debt burdens, either through poor spending decisions or a lack of long-term preparation. This in turn can lead to poor credit, bankruptcy, housing foreclosure, or other negative consequences.”
Gflec.com reports the following facts. One in four Millennials, 24 percent, are financially fragile. Half could not come up with $2,000 if they encountered an unexpected financial issue. Thirty percent overdrew their checking accounts. They keep the payday loan companies and pawn shops in business since the half of them that have only a high school education use either or both sources of alternative financial services even including the 39 percent who have bank accounts and the 35 percent who have credit cards (presumably at their credit limits.)
Financial literacy helps answer such questions as how many credit cards someone should have, is borrowing for college worth it, should I buy or lease a car, should I rent or buy a place to live, and how much can I afford to pay for a mortgage or rent? Financial illiteracy can doom someone to poor or even disastrous economic decisions. They simply don’t know how to figure out what makes most financial sense.
It continues its decline. All age groups find themselves worse off than 12 years ago, but Millennials saw the sharpest drop in financial knowledge. Just between 2009 and 2018, they saw an eight-percentage point drop in the literacy from 42 percent to 34 percent. For the math averse and financially illiterate, that’s a 19 percent drop in literacy. But their parents’ generation, even though their literacy slipped, 51 percent could still answer four of the five questions correctly.
A National Financial Capability Study (NFCS), reports the TIAA Institute, shows that Millennials tend to rely heavily on debt, engage frequently in expensive short- and long-term money management, and display shockingly low levels of financial literacy while student loan burden and expensive financial decision making increased significantly from 2009 to 2018 among young adults.
These data bode poorly for the financial well-being of the country. After all, in a few years, the Millennials will be in charge. Today, they are mostly our employees and renters. They will be the bosses, the company owners, the teachers, the government workers, and filling every slot in the economy. The older generations will be retired and depending on the Millennials to get it right. It doesn’t look promising.
This illiteracy pervades the entire country, border to border, coast to coast, north to Alaska, and across the ocean to Hawaii. WalletHub analyzed financial-education programs and consumer habits using 17 metrics that included high school financial literacy programs and the share of adults with rainy-day savings to learn the extent of illiteracy around the country. Even the most financially literate state, according to wallethub.com, Virginia, comes in at only 68.25 percent financially literate slightly over two-thirds.
The most financially illiterate state, Alaska came in at 53.39 percent financially literate, followed closely by Mississippi (54.2), South Dakota (54.76), Oklahoma (55.57), Louisiana and Arkansas (54.15), New Mexico (54.57), West Virginia (56.4), and District of Columbia (56.54 percent). The District of Columbia figure brings up several obvious questions. All the people in states bumping on the bottom of financial literacy are ripe for scammers. The financially illiterate simply can’t see through the scammers’ flimflam.
As we might expect, their amount of education correlated with the financial literacy. Those with only some high school show a financial literacy rate below 50 percent while those with graduate degrees come in at about 80 percent.
On a knife’s edge, one step ahead of financial disaster, their economic wellbeing can all blow up at any time with late or unpaid rent, auto repossession, collections, and bankruptcy. It affects not just them but all those around them and with whom they do business including employers and landlords.
By Robert L. Cain
