A Case for Financial Literacy

March 30, 2011

Our economy’s recovery seems to be moving toward what many call a “new normal.”  Whether this new normal will be better than the old normal will depend on how we approach fixing the problems that caused the recent economic crisis. While people disagree about the causes of our economic problems, one thing is clear:  a very large number of Americans don’t have enough information about personal finance to make good decisions.

Far too many Americans do not understand the basics of personal finance. Researchers from the Federal Reserve Bank of Atlanta, the University of Geneva and Columbia University found that Americans’ understanding of personal finance is so inadequate that even people who were buying homes just a few years ago could not correctly answer the following question: What will a $300 item cost after it goes on a “50 percent off” sale?.  We are now painfully aware that hundreds of thousands of Americans, caught up in the excitement of a housing bubble, signed loan agreements they did not understand and could not afford. We also have learned that far too many people do not know how to develop and maintain a budget, to understand credit, to understand investments, or to effectively use our banking system.

We also have come to the stark truth that uninformed consumers are costly to society as a whole.  The costs of the recent financial and credit crisis, partly driven by bad consumer decisions, have yet to be calculated, yet we know that these costs are enormous.  Just looking at the loss of jobs – 7,740,000 in the U.S. and 411,500 in Ohio since the start of 2008 – gives some indication of the costs inflicted on our citizens.  More than eighty percent of families carry some form of monthly debt which reduces their ability to save for emergencies or purchase health insurance.  Businesses have incurred many billions of dollars in costs because of bankruptcies, home foreclosures and lost worker productivity.

Effective financial education in our schools is an obvious way to remedy this problem of financial illiteracy.  Schools are the context where the basics of financial education should be provided in a consistent manner.  In addition to quality curriculum, teachers need to understand basic financial education. These teachers also must receive training on how to teach personal finance in ways that are engaging to young students.  The business community should be invited to assist schools moving toward a goal of financial education.

Financial literacy is not only needed, it is possible.  It is time to undertake this task.

About the Author

George M. Vredeveld, PhD is the Alpaugh Professor of Economics at the University of Cincinnati’s College of Business and Director of the Economics Center.