Back in 2007, I had known two people in America as both were my batchmates. One of them belonged to America but the other one was Indian and both of them were working at the same firm, and at the same post in New York City. My Indian friend always used to save some money from his salary and the American was a spendthrift and hardly saved anything. The standard of living of the American person was much better than the Indian due to the spending of more money. But when the recession of 2008 came, both were expelled from their jobs. The Indian man was able to manage through the recession period due to his savings but my American friend was badly hit by the financial crisis as he had no savings. This situation was one in thousands that were witnessed in the USA during the global financial crisis and may be supported by the fact that only 57% of Americans are financially literate while others do not plan their finances properly. Sounds strange, right? So let’s talk about the financial illiteracy of the world’s largest economy.
Financial Literacy is the convergence of financial, credit, and debt management and the knowledge that is essential to make economically responsible decisions – decisions that are vital to our everyday lives. Financial literacy includes comprehending how a checking account works, what using a credit card means, and how to avoid debt. In sum, financial literacy impacts the daily problems an average family faces when trying to balance a budget, buy a home, fund the children’s education, and while ensuring an income for the time of retirement.
The level of financial illiteracy differs as per income & educational levels, but studies show that highly educated consumers with high incomes can be just as ignorant about financial issues as the people who are less-educated and come in lower-income consumers’ group. And it appears as consumers are hesitant to learn about financial literacy. Due to such a situation, people in the USA find it difficult to choose the right investment for them. They find this more stressful than even getting eye surgery.
Many consumers have had a very slight understanding of finances, how credit works, and the impact which is potentially related to their financial well-being for a lot of years. The financial illiteracy has been portended, as one of the main reasons behind investing and savings problems faced by a lot of Americans. When it comes to financial literacy, Americans fall deplorably short. Although the U.S. is the world’s largest economy, the Standard & Poor’s Global Financial Literacy Survey ranks it No. 14 while measuring the financial literacy among the adults in the country. To put that into outlook: the financial literacy level among the US adults, at 57%, is only a little higher than that of Botswana, whose economy is 1,127% smaller.
To assess the real situation of financial illiteracy in the USA, we can observe that 44% of Americans don’t have enough cash to cover even a $400 emergency, 43% of student loans takers are not making payments at all, the credit card debt has spread in around 38% of the US Households, and 33% of American adults have $0 saved for retirement.
In case, if a lack of financial knowledge is linked to a lack of wealth, the as per the experts’ beliefs, fewer people will have Advisors for the financial assets depending on for their revenue. Financial advisors recognize this problem as 78% of these strongly believe that financial illiteracy is a major concern in the U.S., according to a survey of advisors by the Investment News website. But there is a disconnect as out of all these advisors only 4 in 10 advisors are doing anything to address the problem, meaning the majority are ignoring the issue.
And when we see deep through the social stats, there is a huge Racial Gap as when we compare the Median Household Wealth in the USA, then we can observe that in White Americans Households, the median wealth is $151,800 but in the Black American Households, the same falls to $4,300. So, it can be said that there is disparity not only on income and other social parameters but also in the financial literacy of the communities in America.
Nowadays, the concept of financial illiteracy has seen a trend due to various reasons like consumers are shouldering more of the financial decisions (overdependence on pension funds for Retirement), increased complexity of the processes of investing and savings in the financial avenues, lack of government aid (situations like sufficiency of social security funds), and longer life expectancy (due to which longer retirement period).
Talking about innovative methods, Financial Literacy can be imparted in the Modern People even with the use of Technology. Using apps like Financial Football game by Practical Money Skills (Founder – Visa), where through the concept of a football game, basic financial literacy is imparted in the players. Many start-ups are also coming which are taking up this issue.
Only five states of the United States of America have a personal finance requirement in high school. If we’re not ready to bring financial education into the classroom, then the responsibility ultimately falls on individuals to educate themselves. The problem is that most people don’t realize how important it is to learn about money management until it’s too late, like when they can’t afford to retire. Employers and universities are well-positioned to promote financial wellness at the time in people’s lives when they need it most. They have the power to create much-needed change in the country and hopefully, they’ll choose to be part of the solution.
A great case for optimism can be observed as 60% of Americans say they know someday they will need to be more financially secure but they just don’t know how to get there. This percentage increases to 70% for those people who belong to the category between the ages of 18-39 years old.
This means there is a great desire in American people for getting financial education, planning using the financial literacy of theirs and to get themselves secure from any financial contingency they might face in the future – but the question is just how to deliver that information in the best compelling way.
Written by: Shubham Mittal
(Shubham is a Second-year student of Hansraj College pursuing B.Com(Hons) )