Adult illiteracy in the area of finances stems from inadequate preparation in high schools and universities. Students are expected to learn about advanced subjects concerning mathematics or chemistry, yet they are given little to no guidance on financial matters that end up affecting most areas of their lives. The majority of students do not receive sufficient training (if any) concerning the basics of finances, such as balancing checkbooks, budgeting, calculating compound interest, and maintaining good credit scores, nor are they adequately educated in the areas of saving for emergencies, large ticket items, or retirement.
This problem doesn’t only exist today but has been affecting generations of Americans. The reality is that past generations were much more frugal and typically did not spend what they did not have. In recent generations, this trend has moved toward using more debt and spending more; often beyond available income.
The problem of 401(k) financial illiteracy across the nation was made painfully evident by the recent financial downturn. The focus of the blame for the collapse has been placed on banks and other lending institutions that made bad financial transaction and investment decisions, but what has not been addressed is the massive amount of financially poor decisions made by millions of people who entered financial contracts without understanding the repercussions.
The alarming aspect is that, as economic confidence begins to recover, these same individuals continue to remain financially illiterate for the most part. Therefore, as the economy improves, these same people, along with the younger financially uneducated generation, will sign a variety of personal loan, credit card, and mortgage contracts that will inevitably leave them in dire straits once again at some point down the road.
This continuing problem was confirmed through a National Foundation for Credit Counseling survey conducted in 2013. In the study, 40 percent of adults in the U.S. gave themselves a low or failing grade for personal finance knowledge.1 The survey also revealed that approximately one-third of participating adults does not have any savings.
Financial illiteracy is not an issue just for these individuals to worry about. It’s a problem all employers need to address. Sixty percent of the millennial generation (those born since 1982) admit that stress over personal finance issues is adversely affecting their job performance. The cause of that stress concerns poor financial planning, budgeting, and decisions made through a lack of knowledge and understanding in those areas — i.e., financial illiteracy. That should be reason enough for human resources to start looking into the growing issue.
1 The 2013 Consumer Financial Literacy Survey. Harris Interactive on behalf of the National Foundation for Credit Counseling (2013). PDF file available from NFCC_NBPCA_2013 FinancialLiteracy_survey_datasheet_key findings_032913.pdf
Mark Singer, CFP®, AIF® is the President and Co-Founder of Financial Literacy Toolbox. Mark is a leader in the world of financial education. Mark is the author of three books, a frequent speaker at events, and is the creator of The Financial Literacy Toolbox, a virtual resource center to help financial advisors, wellness providers, and institutional retirement services firms change the conversation about financial wellness.
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