Abysmal Survey Results: Americans Don’t Understand Basic Financial Concepts

by Darwin on November 13, 2009

A recent financial literacy survey conducted by Financial Finesse, a finance eduction outfit, revealed some pretty alarming results – downright abysmal in fact.  It revealed what most of us probably suspected, but with specific numbers tied to it, the prospects don’t look good with regard to the financial literacy of everyday Americans.  According to the survey which was conducted as a 10 year study of US employees across companies in which they service (here):

  • 86% of employees indicated that they have no idea whether or not they are on track to retire comfortably.
  • 53% admit they lack a basic knowledge of stocks, bonds and mutual funds.
  • 43% do not have a handle on their cash flow and spend more than they make each month.
  • 62% have not set up an emergency cash reserve.
  • 23% do not pay their bills on time each month.

You probably glanced through these data and said, “Wow, this survey data looks pretty bad”.  However, it’s worthwhile to really consider the implications of each of these poll results.  Let’s break these down one by one:

Retirement

With an enormous proportion of Americans having no idea where they stand with respect to retirement, this could very well be the next crisis brewing – the Retirement Crisis.  Is it possible that in the next few years, our administration will be passing legislation to bail out retirees that didn’t plan for retirement or were adversely impacted by market moves because they were too heavily invested in stocks?  Don’t count it out – retirees are a very mobile and vocal political force given their numbers and influence.  And they get to the polls!  The internet abounds with calculators and advice on retirement planning.  The bottom line is that you need to be realistic about what your spending is going to be in retirement, how far off it is, how much you can reasonably expect to earn on your investments up to and during that time (without taking on exorbitant risk!) and have a healthy buffer to account for the unexpected – like the inevitable tax increases to fund our debt, rising health care expenses, and perhaps be able to leave some family money to your heirs or help with college funding for your progeny.

As evidenced by this case of the 25 vs 35 year old investor and the stark difference in funds at retirement, it should really drive the message home that starting young yields incredible benefits and if you’re not that young anymore, there should be a sense of urgency to start now.

Stocks, Bonds, Mutual Funds

While many investors rely on a financial adviser to handle everything from how much to set aside to asset allocation, many people are too naive to even the most basic premise of asset classes.  Aside from the dangers of receiving poor financial advice and not understanding how to benchmark the performance they’re like paying 1-2% per year for, these Americans don’t even know what questions to ask their adviser.  While this site is geared toward slightly more sophisticated investment strategies like how stock options work and alternative investments, wikipedia is a great place to start to learn the basics in a user-friendly unbiased fashion.

Spending More Than They Make Each Month

People that form bad money habits often find themselves constrained to a lifetime of debt-ridden misery.  It can be a terrible existence of hopelessness and frustration.  By forming good money habits early on like putting parts of your finances on autopilot and living within your means, it makes all the difference in the world with regard to what type of life you’re going to lead and provide for your family.

No Emergency Fund

Life is all about the unexpected.  And by not planning for the unexpected, one can completely lose a shot at goals and aspirations by not having adequate contingency for things like a car accident, a broken appliance, a costly health situation, etc.  While you can only “hedge” so much with an emergency fund, having no emergency fund at all is a surefire way to not realize your life’s financial strategies when you’re living on the margin – because life happens.

Not Paying Bills on Time

This one’s a no-brainer.  Some people actually HAVE the money and don’t pay bills on time because they’re either unorganized.  This takes a terrible toll on your credit score which is instrumental in determining everything from whether an employer will change their mind on hiring you (viewed as a high theft risk if you have a poor credit score) to what rate you’re going to get on a substantial mortgage for the next 30 years.

Aside from following some basic principles and executing discipline in financial decisions, it’s evident that financial literacy needs to be taught in schools.  I can say I learned very little in the way of personal finance and investing in school, even in my undergrad – most of it came from my parents initially, and then through a healthy curiosity and the internet and capped off by an MBA.  But today, with so many parents acting like kids themselves when it comes to fiscal responsibility, how can we reasonably expect the next generation of American adults to far any better?

Are you Concerned by This Survey on America’s Financial Literacy?  Surprised?

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1 Mark Wolfinger November 13, 2009 at 10:11 am

Surprised, no.
But disappointed.

Just look at the TV shows that are the most popular. It says a great deal about the intelligence of the average citizen.

School is the place to learn and many kids don’t care. Couple that with the fact that the curriculum gives them no chance to get a feel for money matters. If they could only understand one simple concept: compount interest, their after-graduation lives would change.

And once out in the real world, it must feel good to just spend all they have and not think abut anything else. How did we allow this to happen? Even worse, why do we allow it to continue?

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2 Financial Samurai November 13, 2009 at 11:55 am

Don’t believe in survey’s mate. They are just created to make the writer and all of us to feel better.

I bet EVERY SINGLE person who reads this post understands the financial basics such as spend less than you earn.

And if that’s the case, how is it that most do not? The answer is, don’t believe survey’s.

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3 Darwin November 13, 2009 at 12:21 pm

I’m not sure you interpretted the survey results correctly. It didn’t ask whether people understand that they “should” spend less than they earn. It asked whether they “do” spend more than they earn – which Americans tend to do very well. Based on what we see in America (and our government’s example) I can’t say I disagree with the results – seems to represent America pretty accurately from what I can discern.

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4 Kevin November 13, 2009 at 5:31 pm

The survey is definitely accurate. Most people are in debt over their ears, losing their homes and don’t have a job. How do you figure we all got that way?

Our country’s going down the crapper fast.

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5 Financial Samurai November 14, 2009 at 12:06 am

Most people certainly DO NOT spend more than they earn. Only a few are completely irrational in that regard.

Let’s do a survey right here. Who spends more than they earn and has no savings? I’m sure all of you will say your finances are fine.

Trust me folks, there is much more money out there than you can ever imagine. Kinds making 100k at 23 1 year out of school, dock workers working 35 hrs a week making 160k, police and fireighters receiving 100-200k pensions. There is a ton of wealth.

Feel free to check out my post “Fortunes, Fortunes, Everywhere.”. We’re not the only ones making a lot of money. Trust me on this!

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6 Darwin November 14, 2009 at 12:27 am

Actually, most of our friends are pretty affluent and they spend about what or more than they make. I don’t know their finances intimately, but many carry credit card debt and make well into the six-figures. I’m not sure there’s a very strong correlation between income and indebtedness.

Depending on which source you check out and how current the data is, you’ll generally find the data indicates ~40-50% of Americans carry credit card debt. I interpret that to mean that they’ve spend more than they make. Otherwise, smart people wouldn’t hold cash in the bank earning .25% and pay 25% on their debt.

While the oft-cited “average” $8,000 per American in credit card debt is misleading when toying with medians, means, families, individuals, etc., even at the low end, if 40% owe anything, that’s a sizable portion of our population that’s not doing something right.

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