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Why Most People are Financially Illiterate and 6 Steps to Become More Literate

— January 20, 2021

Most people are financially illiterate, and that’s unfortunate, but you don’t have to be. Set yourself apart by becoming educated. Then consider teaching others about finances. Someone has to do it – it might as well be you.

A conversation with the average American will reveal the reason for so many of the financial problems people are facing. Most people have no clue how to manage their money, but you don’t have to be one of them. Let’s look at how bad it is, how it got that way, and how you can separate yourself from the uneducated majority.

The Consumer Financial Literacy Survey is an annual survey that attempts to gauge the financial literacy of adults ages 18+ in the United States. According to the study, “two in five U.S. adults (40%) – a proportion that has held roughly steady since 2007 – say they have a budget and keep close track of their spending.”

That means approximately 60% of the country’s population doesn’t know where their money is going. This study goes on to show that nearly 1/3 of those surveyed do not save a single penny of their household’s annual income for retirement, despite the fact that one of the top financial concerns was not having enough money saved for retirement.

Additionally, about 1/3 of the people surveyed said that they have revolving credit card debt (debt that carries over month to month). The ironic piece to this puzzle is that the majority of people consider themselves mostly proficient in their knowledge of personal finance. People think they’re more financially literate than the polls and statistics show.

The majority of Americans have not reviewed their credit score or their credit report within the last 12 months, even though Credit Sesame makes it easy by offering a free credit score, and you can easily pull a free credit report annually from each of the major credit bureaus (more on that in the steps below). What’s more interesting is that about 1/3 of the people said that they didn’t see any reason to pull their credit score or report. It wasn’t that they just didn’t get around to it – they didn’t think it was necessary.

Financial Literacy in Schools

It’s easy to see that, as a country, we’re largely financially illiterate. But why? It’s obvious that very few schools teach any sort of financial literacy outside of balancing a checkbook, if that. How much financial education do you remember having in school? Probably not much, and definitely nothing significant.

It’s easy to say that personal finance should be taught in schools, but the implementation isn’t as easy. There are actually several reasons why we want – but can’t have – personal finance in schools. In a 2013 Time article, Dan Kadlec explains that while 99% of adults agree that personal finance should be taught in schools, there are several reason why it isn’t taught in schools.

The primary reason is because we simply don’t have the manpower. According to a University of Wisconsin study, only 1 in 5 teachers actually feel qualified to teach a class on the subject. In other words, we have the students for it, but the teachers are lacking. In Kadlec’s article, he also mentions that, “Personal finance concepts are not part of standardized tests like the SAT or ACT. As the saying goes in education circles: If it’s not tested, it’s not taught.” In many ways, our school system has developed into a circular system that teaches for the sake of teaching others to teach others. This often means that subjects without life-application are taught, while subjects that are necessary in life, such as personal finance, are not taught.

Kadlec goes on to explain how education is run at the state level, so it’s an individual state decision whether or not to mandate a certain subject. Finally, there is the issue of disagreement among what methods of personal finance are effective and what should specifically be taught. What it comes down to is that we are each responsible for our own financial literacy. We can’t count on the public education system to teach us or our children – it’s our responsibility. There’s no reason to wait on the government to implement this type of teaching either; have you seen their financial report card lately? Since we must self-teach, where do we start? It starts with our thinking and our view of wealth.

The Wealth Image

Hollywood has done a great job of leading us to believe that wealth is shown through our possessions. In movies, the wealthy live extravagant lifestyles to include Ferraris, butlers and multi-million dollar homes overlooking the ocean. But, Hollywood is Hollywood, and as we all know, it’s not always realistic.

So what do the rich and wealthy look like in real life? Let’s look at one of the richest people in the world: Warren Buffett. “Billionaire investor Warren Buffett famously still lives in the Omaha, Nebraska, home he bought in 1958 for $31,500,” says Susie Poppick in a Time article released earlier this year.

In The Millionaire Next Door, Thomas Stanley explains how the average millionaire doesn’t “look like” a millionaire. Thousands of millionaires have earned their money through moderate-risk, consistent investing over several decades. Fancy cars and big houses are often associated with the rich; however, those things are often signs of extreme debt and a low net worth. In fact, Stanley makes the claim that high incomes often lead to a low net worth, because people’s lifestyle rises to match their income.

According to Sanj Katyal, people tend to think all doctors are rich, but to the general public’s surprise, many are far from it. In his article Most Doctors are Financially Illiterate, Katyal says, “Many physicians I know are struggling to make ends meet while making several hundred thousand dollars per year. Despite growing incomes, their savings rates remain extremely low due to ever increasing expenses.” This may come as a surprise, but again, a high income does not equal wealth.

For Profit Sanford Brown Took Their Money but Wasn't Accredited
Photo by JESHOOTS.COM on Unsplash

This view has likely contributed to the financial downfall of America. If you’re trying to live the lifestyle that you think wealthy people are living, you’re going to end up like the average broke American – buried in debt. Wealthy people are wealthy because they wanted money more than they wanted things. Once you reach that point, you’re on your way to achieving wealth.

How to Be in the Minority

You’re in the right place. Reading popular finance blogs like this one is a great start to increasing your financial IQ. Fortunately, there are thousands of great personal finance books on every subject you could ever want to learn about. The fact is, if you’re financially educated, you’re in the minority. In this case, the minority is right where you want to be. So how do you get there?

  1. Track your spending and budget your money. There are countless tools to help you track your spending, and many of them are free. Sticking to your budget gets easier with time. If you know where your money is going, you’re already ahead of the game.
  2. Keep track of your credit. Credit Sesame makes it so easy that there’s no excuse not to. Open the email each time Credit Sesame gives you a credit update to make sure your score hasn’t changed significantly, and to make sure you don’t have any alerts on your credit. You can pull three free credit reports a year from Space them out so that you always have an updated view of your credit.
  3. Get an emergency fund. Dave Ramsey suggests starting with $1,000, but ultimately the goal is to save 3-6 months of living expenses. This will protect you against emergencies and keep you from going into credit card debt when they arise. Just remember, if you have a serious emergency like job loss, you’re going to temporarily change your lifestyle and live on a bare-bones budget, so it won’t cost as much as you think to get six months of living expenses.
  4. Get a debt pay-off plan. You can either use the debt snowball (pay off your debt from smallest payment to largest, and each time you pay off a debt, you add that amount to the next debt) or you can use the debt avalanche (similar to the debt snowball, except in order of highest interest rate to lowest). Develop a plan and stick to it. Having a plan puts you in the minority. Becoming debt-free puts you in the top of the minority.
  5. Start investing for retirement. According to statistics, you most likely have something put aside for retirement, but will you have enough to retire at the rate you’re contributing? Use this retirement calculator to figure out how much you need to invest to have the amount you’ll need for retirement. Develop a plan for contributing to your retirement and stick with it.
  6. Start educating yourself on finances. Read all of the books and articles you can find. Make it a personal goal to become financially literate. Every book you read on personal finance puts you a step ahead. Even just reading 15 pages a day can lead to reading hundreds of books in your life. The first five steps I mentioned will put you on the right track, but this step could completely change your finances and your life, and it just takes a few minutes each day.

Most people are financially illiterate, and that’s unfortunate, but you don’t have to be. Set yourself apart by becoming educated. Then consider teaching others about finances. Someone has to do it – it might as well be you.

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