For many American teenagers, the most basic financial skills they'll need as an adult aren't taught in a classroom. There are no lesson plans, no standards for minimum financial competency and no safeguards against sending them out into a world overflowing with debt-inducing opportunities. For many, their financial sensibilities are cobbled together from lessons passed down from family members (sometimes the hard way), anecdotes from friends and the occasional Google search.
If letter grades were given out for financial literacy, the United States would get a C+ at best. Globally, we're ranked 14th in the world for our basic financial skills, with only 57% of adults considered financially literate. Australia, Canada, Denmark, Finland, Germany, Israel, the Netherlands, Norway, Sweden and the United Kingdom have financial literacy rates of 65% or higher, according to Standard & Poor’s Global Financial Literacy Survey. Meanwhile, the U.S. has the highest national debt of any country, and is in the top-ten of highest debt per capita.
It's well documented that inadequate financial literacy leads to serious money problems down the road.
- 40% of U.S. adults don’t have enough savings to cover a $400 emergency.
- The median retirement savings for Americans between ages 55 and 64 is $104,000, or $310 per month if it was invested in an annuity.
- Average household credit card debt has risen to $8,284, its highest level in a decade.
- Student loan debt, at $1.5 trillion, is more than double what it was a decade ago. The average is $6,600 per student, annually.
- Students with loans leave college with an average debt of $22,000.
It’s not just a "millennials" problem. The cycle of debt begins at a young age for most Americans, inciting and feeding their reliance on student loans and credit cards. Poor money management skills beget decisions made in haste, desperation and anxiety, leading to more debt, creating more stress-induced decision making, and so on.
Rather than teaching the very skills that could prevent, or at least mitigate, bad money habits, some college campuses welcome credit card companies onto their grounds, who are more than eager to sign up an 18-year-old to a high interest account.
Who's making sure they understand how interest rates work? How to manage debt? How long it takes to pay off a credit card bill if they only make the minimum payments? Not the credit card company. Not the school. Most students graduate with more debt than they can handle and at least one credit card.
Making Financial Literacy the Law
Every few years, FINRA, the finance and banking regulator, issues a five question test as part of its National Financial Capability Study, which measures consumers’ knowledge about interest, compounding, inflation, diversification and bond prices. Only 37% of those who took the test got all five questions correct, which suggests that the basic economic and financial principles that underpin these problems are widespread, touching every state in the country in different ways.
In the United States, financial illiteracy, or at least the lack of education that enables it, may soon be against the law. In North Carolina, lawmakers are proposing legislation that would require high school students to take one financial literacy course before they graduate. Senate Bill 134 is pushing for an economics and personal finance course (EPF) that will provide basic instruction on 23 economic principles, including how to manage a credit card, the basics of borrowing money and how to get a mortgage.
North Carolina is one of 28 states pushing for legislation to teach financial literacy in high school. The effort, long delayed, comes as Americans rack up a record amount of credit and student loan debt - much of it landing in the laps of 18 to 35-year-olds trying to take their first steps toward major financial milestones. This often leads to a debilitating cycle of reckless spending and little if any savings or investments. As a result, almost half of Americans are living one crisis away from a financial disaster.
Still, the effort is welcome and necessary. As we enter Financial Literacy Month in April, we should take stock of the state of financial education today, and where it needs to go.
What Americans are Reading on Investopedia
We looked into our data from 11 million monthly U.S. readers to see which states looked up which personal finance topics, and how that compared to their average debt to household income, as well as whether or not those states were pushing for financial literacy requirements. Here's what we found:
Areas with the highest debt-to-income ratio like the Southeast and Rocky Mountain region show the strongest interest in topics like 'how to get out of debt' and 'how to save more,' suggesting many are trying to supplement the gaps in their own financial education.
Readers in the Northeast, also the region with the highest household income, show a preference for banking topics over credit or debt management.
The Rocky Mountain region has the highest debt to median income ratio in the country. Of particular interest to these readers, especially in Utah, are mortgage related terms.
The Southwest region of the country has the second highest debt to income ratio in the country, and our readers there focus heavily on credit related stories.
Similarly, the Southeast region of the country has the highest debt to income ratio, and its residents are the most active seekers of information about managing their finances. The top terms and topics they search for include ‘managing credit’, ‘building credit’, and ‘loans and mortgages’. Readers in the Southeast searched for these topics 42% more than the rest of the country.
In contrast, the Northeast has the lowest debt to income ratios in the country and is comprised of the most financially secure residents in the nation. Readers in this region are more interested in retirement and banking related topics, searching far less often for topics related to credit or debt.
The Mideastern region of the country has the second lowest debt to income ratios, but the highest median household income. These are among the most financially secure people in the country, as a group. They have relatively little interest in personal finance topics and search for more banking related topics. It’s no surprise that Mideast is in close proximity to nine of the largest 15 banks in the country.
It's no surprise that our readers show the most interest for credit and debt related topics in the states where people are suffering the most financial hardship, and it's good to see many of those states, like North Carolina, pushing to make financial literacy education mandatory for high schools.
In a nation where movies like Wolf of Wall Street and shows like Billions dominate pop culture, we're often surprised by how many readers still come to Investopedia for our most entry-level financial concepts. Queries for topics like “What is a stock?”, “What is the importance of a credit score?” and “How do I start investing?” are some of our most popular articles, even among a readership that stretches from 18 to 80-years old.
Most Americans aren't getting the financial education they need, and are left to create a DIY patchwork of tips and tricks for money management, credit and debt. We're watching the effects of this financial literacy deficit manifest themselves through a swelling debt that continues to tighten its stranglehold on millions of Americans, many of whom come to us for help.
To be sure, high school should not be the only place we learn financial literacy, but it’s a great place to start.