Understanding core personal finance concepts like cash management, bank accounts, credit, taxes and investing is important. With that knowledge, people can make decisions that benefit their current budget and help with future goal achievement. When they have low financial literacy levels, though, people tend to overpay and undersave.
[Related:How to Be Master of Your Cash Flow]
A 2023 survey conducted by the National Financial Educators Council found the estimated average amount of money lost due to lack of financial knowledge was $1,506 per respondent.
Although strides have been made, most Americans still have trouble with key financial subjects. The TIAA Institute-GFLEC Personal Finance Index shows alarming data in its 2023 report. On average, U.S. adults correctly answered just 48% of the index’s basic money questions.
Here’s why financial literacy remains low, which communities are most affected and how to address the gap.
Financial Skills Aren’t Always Taught at Home
As they grow, children absorb information through observation, conversation and action. While living at home, they may see their parents do everything from comparing prices of consumer goods at the supermarket to sitting down at the computer to pay bills.
While some parents explain what they’re doing and show how to best spend, borrow, save and invest, then gradually integrate the kids into the process, many don’t.
Annamaria Lusardi, senior fellow at the Stanford Institute for Economic Policy Research and director of the Financial Freedom Initiative, says the spread of knowledge is not equitable, and certain home-based lessons can actually do harm.
When parents have low financial literacy levels, haven’t saved for the future, are often stressed about bills and have a negative view of money, the next generation is unlikely to get the tools they need to be successful.
[Related:How to Manage Money Stress]
“In our research, how much children learned about money depended on whether their parents invested in stocks and their retirements,” Lusardi says.
She adds that there’s a correlation between a parent’s financial well-being and their children’s financial knowledge. “That’s the good news. The bad news is that this group is very small, disproportionately white and from college-educated families,” she says.
Another roadblock presents when parents haven’t kept up with technology, such as cryptocurrencybuy now, pay later plans and mobile payment systems. They can’t teach what they don’t know or use.
Trial and Error Can Be Too Costly and Risky
When people don’t learn how to handle money at home or in an academic setting, they might do it through trial and error. Unfortunately, this method is not ideal for financial choices.
“We found that even people at an older age aren’t good with money,” Lusardi says. “The reason is that it’s not so easy to learn from experience. A lot in finance is not intuitive and many decisions aren’t done repeatedly, where you get better at them as you go along. You may buy one home in a lifetime.”
A person with undeveloped financial skills may not save and invest for a sufficient down payment, or use credit products effectively to create a credit score that’s appealing to mortgage lenders. The lower an applicant’s credit scores, the higher their annual percent rate (APR) will likely be on loan products and the more the payment and interest will cost.
Prevention via direct education, therefore, is better than learning the hard way, and dealing with harsh and long-lasting outcomes.
How Schools Are Integrating Financial Literacy
Efforts to improve national financial literacy rates are ramping up, and progress is being made in some schools.
A 2024 Council for Economic Education (CEE) survey reported that 28 states now require students to take an economics course to graduate from high school and 35 states mandate a course in personal finance. This reflects a 12-state increase from 2022.
In 2021 the CEE developed national standards for financial curriculum, focusing on six critical categories: income, spending, saving, investing, credit and risk.
“Once you have the requirements, that’s a giant step forward,” says Nan J. Morrison, president and CEO of CEE.
“It ensures equitable access because you’ve leveled the playing field. Every child should be exposed because everyone makes financial decisions. We believe personal finance and economics should be treated as any other subject. We can’t assume all children are learning it at home,” she adds.
However, not all students are receiving the necessary or highest quality education.
In 2023 the Center for Financial Literacy at Champlain College evaluated and graded all 50 states and Washington, D.C., on their efforts to produce financially literate high school graduates.
Only Alabama, Iowa, Mississippi, Missouri, Tennessee, Utah and Virginia received an A, while California, Connecticut, Massachusetts, South Dakota, Vermont and Washington, D.C., failed.
Getting everyone up to speed will take time and effort, which includes educating the educators.
“It’s all about implication,” Morrison says. “Teachers must be trained. Would you send someone to a teacher to learn math or a foreign language who doesn’t know it?”
Financial Institutions Try to Close Gaps
One of the problems associated with a lack of money acumen is distrust in financial institutions, which has caused many people to avoid opening checking and savings accounts.
In 2021 the FDIC National Survey of Unbanked and Underbanked Households discovered an estimated 4.5% of U.S. households were unbanked. Not having a deposit account can lead to an overreliance on payday lenders, check-cashing services, pawnshops and rent-to-own agreements. These types of alternative lenders charge high fees, and users won’t build their credit.
Unbanked individuals are disproportionately from low-income, minority, immigrant and rural households. To close the gap, some banks have been taking action. Wells Fargo, for example, launched the Banking Inclusion Initiative (BII) in 2021.
Per an email interview with Michael Martino, head of diverse customer segments for consumer, small and business banking at Wells Fargo, the bank is focusing on Black and African American, Hispanic and Native American/Alaska Native individuals and families because they account for more than half of America’s unbanked households.
“Through our research, we found that many individuals are choosing to be unbanked because they feel it is the best option to help them achieve their goal of financial stability,” Martino said.
He added that many of the unbanked spend an estimated $40,000 in lifetime fees, largely due to relying on expensive banking alternatives. “We know that a bank account is a first meaningful step towards building generational wealth,” he said.
BII is partnering with organizations like Operation HOPE, opening HOPE Inside centers in selected branches. Community members have access to free education and one-on-one sessions on topics like money management, credit improvement and how to achieve financial goals. Wells Fargo plans to open 50 new HOPE Inside centers in low- to moderate-income areas by the end of 2026.
[READ: 15 Steps to Achieve Financial Freedom.]
Leaving No One Behind: Financial Literacy for All
Improving financial literacy rates is an ongoing process, and though outside entities are increasing efforts, parents can and should take control.
Don’t hesitate to discuss money with children in positive ways, urges Lusardi. Start with simple topics, such as how to handle money and what savings is for.
“When you talk about money, it raises their curiosity,” Lusardi says. “If you make them think it’s boring or stressful they won’t want to learn, so if you don’t know enough, get a book about personal finance and learn it yourself.”
Other options include personal finance podcasts, which are free and are ideal for busy people. Parents can also listen to them in the car when they’re driving their kids around, so everyone learns together.
“A lot of people from marginalized communities feel that finance is for the rich, but no, it’s for everybody. Without it they pay high costs for financial services. Being poor is expensive. That’s why basic financial education is so important,” Lusardi says.
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Many Basic Money Questions Stump U.S. Adults — How to Boost Your Financial Literacy originally appeared on usnews.com
