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Disclaimer: I am not a certified financial professional.  All articles and posts are opinions expressed by me, a contributor to the Common Cents Finance platform.  The information provided is not a research report or financial advice.  It should not be used as the basis to buy or sell a security, nor is it an offer to buy or sell a security.  This article may generate revenue through affiliate commission at no cost to you.

Currently, the United States faces a crisis that very few want to acknowledge: financial illiteracy.  Despite being one of the most developed countries and advanced economies in the world, a significant amount of American citizens lack the financial education necessary to realize upward social mobility or any form of financial freedom.  According to a Financial Industry Regulatory Authority report, 66% of Americans cannot correctly answer more than three questions on a five-question financial literacy quiz.  With two-thirds of the country not understanding personal finance, it becomes apparent as to why so many Americans do not properly handle their money and other assets.  Not understanding personal finance can result in poor financial behavior, such as neglecting to budget, save, and invest. 

In that same study by FINRA, 19% of American households spend more than their actual income, while 36% break even.  In other words, more than half of all households in the US either spend as much or more than what they earn in a year.  FINRA also estimates that 46% of Americans do not have enough money saved to cover three months’ worth of expenses.  These two statistics demonstrate the lack of one of the most fundamental personal finance skills: budgeting

A lack of financial management prevents these households from partaking in beneficial financial activities, such as saving, paying off debt, and investing in the stock market.  Further, not allocating any funds towards preparing for financial emergencies, many individuals can be one unexpected expense away from poverty or complete financial ruin.  Budgeting is a fundamental aspect of personal finance, and having so many citizens not doing so properly is indicative of widespread financial illiteracy.

Additionally, financial illiteracy is also present when it comes to investing.  According to a Gallup poll, 55% of Americans own stocks in some way, whether it is a personal investment or a retirement plan.  As shown in the figure from Gallup below, this is a decrease from between 2001 and 2008, when 62% of American adults owned stocks.  Further, there has always been a large percentage of individuals not participating in the stock market, demonstrating that this has been a persistent issue in America. 

Since 1998, the percentage of households that did not participate in the stock market remained around 40% roughly until 2016, according to the St. Louis Federal Reserve.  Investing is one of the most effective ways for an individual to create generational wealth that can improve their financial standing.  It strongly correlates with other factors, such as income and financial security.  By not investing, many face an increased likelihood of being unprepared for retirement and other financial burdens.

How Financial Illiteracy Affects the Country’s Youth

While the concepts of budgeting and investing might appear to only affect more mature Americans, that is far from the case.  In actuality, the effects of financial illiteracy have a tremendous impact on the youth of the United States, and this impact can have lifelong financial ramifications.

The most prominent impact on young Americans is the student loan crisis.  For many soon-to-be high school graduates, college is a very anticipated experience.  For the first time, many young students can experience being independent for the first time in their lives.  Even for those who are not completely excited about attending college, there is immense societal pressure for all upperclassmen in high school to apply to colleges and universities.  In the United States, there are over 20 million college students from all walks of life.  On the surface, this appears to be a positive statistic, as many are looking to enhance their education and future career opportunities.  However, attending college has a tremendous price tag, which many young students many not understand due to financial illiteracy.

Before the 2000s, selecting a college was a rather straightforward process.  Soon-to-be graduates only had to take financially trivial aspects of a university into consideration, such as campus size, extracurriculars, etc.  However, there is now a factor that trumps all others: tuition.  Rising tuition costs have made what was once a simple decision-making process into a financial decision that can have lifelong ramifications.

According to the College Board, since 1990, the cost of a private four-year college education in the United States has more than doubled, going from $18,560 to $37,650.  In that same time frame, the tuition for public four-year colleges tripled, increasing from $3,800 to $10,560.  This has far outpaced the rate at which income increased over this time.  From 1990 to 2020, the average household income increased 56% for the upper quartile, while only increasing 21% for the lowest quartile.  The price of a college education in the United States has outgrown the increase in household income by a significant margin.  Further, it has tripled the rate of inflation over the past twenty years, as reported by US News.  This demonstrates just how unaffordable attaining a higher education could be for many Americans.  

Consequently, the total student loan debt in the country has reached unprecedented levels.  As of 2020, the Brookings Institute reports that there is $1.5 trillion worth of student loan debt in the United States, which is an increase of 20%, or $25 million, since 2004.  This is also a widespread issue in the country, as there are 42 million Americans with student loan debt.  Student loan debt has reached its all-time high, as it is now the second-largest form of debt in the United States behind home mortgages, representing 11% as seen in the figure above (Federal Reserve Bank of New York).

Student loans are not intrinsically detrimental to one’s financial situation.  In fact, they can provide many educational opportunities to individuals who could not otherwise afford them.  However, due to their lack of financial literacy, many students are unaware of the concept of return on investment.  Based on a financial literacy survey, 47% of college students were unable to answer questions correctly, demonstrating their lack of financial understanding.  When looking at specific sub-groups, such as non-business majors, women, underclassmen, and those with no work experience, the observed performance is actually worse according to ScienceDirect.  With so many college students lacking basic comprehension of finance, they are unable to project the return on investment for their college education.

Potential college students should look to see what their income can be as a result of their college education.  The degree a student is pursuing should lead to a career that pays a salary that allows them to afford their student loan debt payments.  If the student is majoring in a field with a low salary ceiling, then they should not look to take out tremendous amounts of debt, if any at all.  Unfortunately, this is not the mindset many college students have, and that is largely due to their financial illiteracy.  This contributes to the fact that one million graduates default on their student loans annually.

Having such significant amounts of debt can be financially crippling for many young Americans.  Many individuals start their careers in their early twenties already at a disadvantage with the amount of debt they owe.  While some may argue that these individuals should live with their decisions, it is unfair to punish those who made these financial choices without having the education to understand the consequences.

The student loan crisis is only one of the ramifications of financial illiteracy affecting Americans.  There are also the issues of uninformed trading in the stock market, being unprepared for retirement, unknowingly accumulating credit card debt, wasting money on gambling, lottery tickets, and luxurious purchases, and more.

The Education System Fails to Address Financial Illiteracy

Financial illiteracy plagues the United States, and the public school system fails to address it on any front.  Despite the financial magnitude that it could have, many teenagers graduate from the public school system with little-to-no exposure to financial education.  In many primary schools and high schools, personal finance is not a subject taught to students. 

As of 2021, the New York Times states that there are twenty-one states in the United States that require students to take a personal finance-related course prior to their high school graduation.  Less than half of the states in the country understand the importance of teaching basic concepts of finance to the country’s youth.  Even the states that do implement personal finance into their curriculums, they do not do so in a manner where students can learn most effectively. 

According to Next Gen Personal Finance, of the twenty-one states that implement personal finance in their curriculums, only six states offer standalone personal finance courses.  The other fifteen states either have their students exposed to personal finance through a number of other courses, such as economics and mathematics or teach personal finance through a one-time program.  In either scenario, school systems are not attempting to prioritize teaching personal finance to their students.  Rather, it appears as if they are going through the motions so they can say they taught the subject. 

Exposing students to personal finance through other courses do not provide students with an in-depth financial education.  Further, a one-time workshop does not give instructors the time needed to properly instruct these topics thoroughly.  Many personal finance topics are not necessarily straightforward, meaning a standalone course would be the ideal way to teach this material.  Thus, although twenty-one states are instructing financial literacy to their students, ultimately only six are actually doing so effectively, and studies demonstrate that.

According to a 2016 Bank of America report, only 31% of young Americans believed that their high school properly taught them good financial habits, while 41% of college graduates believed that their college did so.  Over two-thirds of students believe that their high school does not prepare them for their financial future, while slightly less believe the same about their college or university.  This just demonstrates that, even though some schools do have some financial literacy courses in their curriculum, the majority do not have courses or programs that are effective in actually educating their students about financial literacy.

This serves as a disadvantage to these students upon graduation for various reasons, and the college selection process demonstrates that best.  Ultimately, many high school graduates are set up for financial failure, urged to take on tremendous amounts of debt with no certainty that they will be able to afford it.  Society puts the responsibility of deciding whether or not to take out a six-figure student loan on the shoulders of seventeen-year-olds that have no understanding of finances.  To prevent this from occurring in the future, financial education should be a point of emphasis of school curriculums, so financial issues like this do not persist.  

Financial Education Needs to Be Implemented in School Curriculums

Studies have shown that improved financial literacy can have profound effects on students’ financial behaviors.  According to a 2010 study, students who scored higher on a financial literacy test were more likely to engage in saving behavior and experience fewer financial issues in their lives.  If students were financially literate, they would not be taking out debts that they would not be able to pay in the long term.  Another study found that students who receive financial education in high school are more likely to utilize low-cost financing to attend college.  Students who understand financial concepts more profoundly may rely upon scholarships and financial aid more so than those who do not have a grasp of the material.  

Further, there is research that demonstrates the effectiveness of formal financial education.  According to a study conducted by the Federal Reserve, students, who have graduated from high schools with mandatory financial literacy programs, had better credit scores and lower delinquency rates than those students who did not have mandated financial literacy courses.  The researchers even come to the following conclusion: “If the goal of policymakers is to influence debt repayment behavior, and the opportunity costs of providing this form of education are relatively low, then mandating financial education may prove to be a reasonable strategy.”

Additionally, a 2014 study found that a thorough personal finance course led by instructors who were educated on the material significantly improved the “average personal finance knowledge” when tested.  This study focused specifically on a “successful and unique high school personal finance curriculum” called the Keys to Financial Success. As alluded to earlier, this program required instructors to take a thirty-hour course to ensure their mastery of the material before teaching students.  Roughly 1,000 students took this course for a semester, with the majority seeing an improvement in their financial literacy comprehension skills.  The researchers of this study make two key conclusions that validate the need for implementing personal finance into school curriculums. 

Firstly, they concluded that “a well-designed personal finance course” is an effective measure to promote the understanding of personal finance.  It is worth reiterating that many schools that have mandated financial literacy courses do not have programs that are well-designed or very thorough.  Secondly, the researchers concluded that it is also important for instructors to be “properly trained” for a personal finance course to be effective (Asarta et al. 1).  This is important, as many schools choose to teach financial literacy through other somewhat related courses.  A teaching approach like this does not suggest that the instructor is well-educated on the topics of personal finance.  Rather, they are properly educated in the primary course that they teach, like mathematics or economics. 

Ultimately, the researchers make the following assertion: “Based on the interest worldwide in helping today’s youth understand financial issues, the Keys to Financial Success curriculum offers one effective alternative for changing student personal finance outcomes.”  Thus, it can be concluded that having a thorough, well-planned personal finance course implemented into school curriculums would effectively promote financial literacy amongst students.

Instilling Healthy Habits that Compound Over Time

In addition to its effectiveness, there are other reasons for teaching personal finance to young individuals.  Exposing these concepts to students at very young ages would allow for these ideas to ingrain themselves into their daily lives and behaviors.  In other words, early education would turn proper financial behaviors into habits.  In his book The Power of Habit, Charles Duhigg makes the point that the human brain tries to make any routine into a habit because habits allow the mind to ramp down more often.  Forming habits allows for acts to become second nature, where no thought is required:  “When a habit emerges, the brain stops fully participating in decision making. It stops working so hard, or diverts focus to other tasks. So unless you deliberately fight a habit-unless you find new routines-the pattern will unfold automatically”  Once ingrained into the human brain, habits do not go away.  Instead, like with investing, habits can actually compound over time, completely shaping an individual into who they are.  

Chart

In his book Atomic Habits, James Clear presents the notion that habits, both positive and negative, can compound over time (Clear 16).  Because of this, Clear argues that small habits can make a tremendous difference down the line: “Habits are the compound interest of self-improvement.”  Often, individuals think that a major change needs to occur for an individual to realize a significant change in their lives.  However, Clear demonstrates that, by simply improving oneself by 1% every day, one would improve themself by thirty-seven times over.  On the other hand, if one’s habits result in them declining 1% daily, then they will finish the year worse than they started (Clear 16).  Between the work of Duhigg and Clear, it is made evident that small habits developed early can integrate these habits into individuals’ everyday lives and allow for the benefits of good habits to compound so self-improvement can be realized.  This could be seen in the figure above. 

Conclusion

Ultimately, it must be concluded that teaching financial literacy to young students, in grammar schools and high schools specifically, would ingrain healthy financial habits into their brains and allow these good habits to compound to a point where individuals do not face the risk of poverty and realize upward social mobility. If more Americans have a comprehensive understanding of basic financial concepts, than they would be able to learn more complex areas more easily. This would empower many Americans with the ability of having complete say over their financial situation, which could alleviate many from stages of poverty.

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Post Author: Anthony Crincoli

Anthony is the Founder and Lead Content Creator for Common Cents Finance. Away from the platform, Anthony is a CPA Candidate and an auditor for a Big Four public accounting firm. He has a passion for personal finance and looks to promote financial literacy whenever and however he can.

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