Literacy in the Financial Sector

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Financial Literacy

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A startling new study was released last week and the numbers should cause every one of us to take a step back and re-evaluate priorities. In New York, where the study was based, it was discovered that a devastating 80% high school graduates can’t read at their grade level. Not only that, but their math skills are just as lacking.

This is a huge – someone used the word “catastrophic” – reality that will hopefully result in a major shift in this nation. What this means for the financial sector is even more jarring. If our high school graduates can’t read or write then they they can’t graduate college, accept jobs in the financial sector, balance their checkbooks, manage their credit card debt, read the terms and conditions of their financial contracts and a host of other problems that means our nation could become significantly weakened if the course doesn’t change.

Remedial Courses to Catch Up

In New York City, education officials said 11,000 kids who had graduated from the city’s high schools needed remedial courses to relearn the basics before entering New York’s community college system. Most don’t get those courses, which means their educational opportunities cease to exist at that point. And here’s another reality: the poorest kids in America rank 26th out of the 30 developed nations in math compared to their peers. Think it’s a problem found only in lower income communities? Think again. The children from the wealthiest homes also rank 26th.

Georgetown University Center on Education and Workforce responded with yet another alarming number. The U.S. economy will create close to 47 million new and replacement jobs over the next sixty months and of those jobs, more than half will require at least some college education. Consider the vicious cycle this creates:

Limited Options

For those graduating high school, their options are limited. If they are subjected to math and reading testing, they may disqualify themselves at that point. For those who are able to get one of the still-too-few jobs available in this country, if they are unable to keep up, they will likely find themselves being replaced. For those who do go on to college – either a university or a community college – if they are unable to keep up, they too will fall to the wayside. Because their educations simply halted at some point, the ability to manage their households, buy homes, understand their retirement options, save for the future – they risk their entire financial futures. Outsourcing, anyone?

Bloomberg Input

What’s more frustrating for some in New York is the city’s mayor. Michael Bloomberg’s game plan is to put education at the top of his priority list – after he leaves office. He says he will fund charter schools, but the question is, why? Why go that route? Why wait until he’s out of office and are their ulterior motives behind that decision? His plan is fine and good, except it does nothing for the kids currently in school and who face a bleak future because they can’t read or handle basic math problems.

Those problems aren’t limited to our youngest in this country either. One need only look at the financial mess this country is in and the big players that led us to this point. Millions of Americans agreed to subprime mortgages, often unaware of what an ARM was, what debt ratio is or how and adjustable rate would affect their monthly expenses. They have no idea how credit card interest is calculated, nor do they know how long it will take to pay down that debt making only the minimum payment. These are the problems adults are facing; those who have already graduated and entered into daily life as an American consumer.

ARM or Fixed Rate​?

An economist at Dartmouth and the president of the Financial Literacy Center, Annamaria Lusardi, has taken on these problems with several studies that are as in-depth as any ever conducted in this country. He has consistently found that half of the participant in any of his studies were unable to answer even the most simplest of questions. In one report, he says,

Many people don’t know the terms of their mortgage or the interest rate they’re paying. And, at a time when we’re borrowing more than ever, most Americans can’t explain what compound interest is.

And then there’s Obamacare. Because many employers are ditching healthcare insurance in its entirety, that’s leaving a host of Americans with no one but themselves to shoulder the intricacies of finding the right policies and then ensuring it fits into their budgets.

The decisions are more numerous and complex than ever before,

said Lusardi,

It’s like we’ve opened a faucet, and told people they can draw as much water as they want, and it’s up to them to decide when they’ve had enough. But we haven’t given people the tools to decide how much is too much.

A few years ago, Gary Rivlin, an economist, pulled together hundreds of stories from American consumers who he says were “financially ignorant” and who were “bamboozled into making bad decisions such as refinancing out of low-interest mortgages, say, or buying overpriced credit insurance – by a consumer finance industry adept at creating confusing products”. A full thirty percent of homeowners in the lowest quartile of financial literacy believe they have a fixed rate mortgage. They don’t realize it’s an ARM until they’re hit with a massive monthly payment. It’s little wonder, then, that the foreclosure crisis grew as big as it did in recent years. While we shouldn’t believe everyone can be transformed into a financial genius, there should be the kind of resources that will allow our young people a fighting chance so that their not constantly trying to keep up financially. As Rivlin said,

The difference between knowing a little about your finances and knowing nothing can amount to hundreds of thousands of dollars over a lifetime. And, as the past ten years have shown us, the cost to society can be far greater than that.

For those who say financial literacy should be taught in school, it’s a great observation and under normal circumstances, the ideal solution. Remember though – 80% of high school students can’t read and do math at their own grade level. Adding another requirement isn’t the solution until the initial problems are fixed. It’s like throwing new paint on a peeling house – it looks great, but that old paint will flake through – it’s just a matter of when.

So what are your thoughts on literacy as a whole and financial literacy specifically?

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About Author

David is a CPA and has spent the past decade as a financial adviser helping clients meet their fiscal objectives. With an appreciation for journalism, he has spent the past few years overseeing several financial columns as well as writing two previous finance blogs. He resides on the East Coast with his wife and two sons and has guided many through the recent recession while providing a no-nonsense approach to spending and saving.

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CREDIT DAD is an independent, advertising-supported website. Many debit cards, credit cards and other financial offers that appear here are from companies from which CREDIT DAD Websites receive compensation. This compensation may impact how and where products appear on this website (including, for example, the order in which they appear). CREDIT DAD Websites do not include all card offers in the marketplace.