The basic financial skills Ameican adults need in order to cope aren't often taught in a classroom. For many, there are no lesson plans and no standards for minimum financial competency. They are just sent out into a world overflowing with opportunities to get into debt.
At best, their financial sensibilities may come 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, the nation ranks 14th in the world for 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. is in the top ten for highest debt per capita.
It's well documented that a lack of financial education leads to serious money problems down the road. And many are teetering on the edge:
- 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 balance for those who carry debt month to month was $6,597.
- Student loan debt, at $1.5 trillion, is more than double what it was a decade ago. The average is $35,359 per borrower in 2019.
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 skills that could prevent, or at least mitigate, bad money habits, some college campuses welcome credit card companies onto their grounds. They're 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, the Financial Industry Regulatory Authority (FINRA), 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 34% 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.
But financial illiteracy, or at least the lack of education that enables it, may soon be against the law, at least in parts of the U.S.
In North Carolina in 2019, lawmakers passed legislation that requires high school students to take a financial literacy course before they graduate. House Bill 924 created an economics and personal finance course (EPF) to 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 21 states that requires financial literacy in high school as of 2020. A total of 25 states require an economics class. These efforts come as Americans rack up a record amount of credit and student loan debt, much of it owed by 18- to 35-year-olds. This often leads to a debilitating cycle of reckless spending and little if any saving or investing. As a result, almost half of Americans are living one crisis away from a financial disaster.
Still, the effort is welcome and necessary.
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 close the gaps in their own financial education.
Readers in the Northeast, 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 people in the nation. Readers in this region are more interested in retirement and banking topics, and search 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 more for banking related topics.
It's no surprise that our readers show the greatest interest in 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 in 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 come to Investopedia for our most basic 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. 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.