19 Alarming Things We Learned About Financial Literacy in America

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Last week, the SEC released a wide-ranging report on financial literacy in the United States. Sadly, it was found that "American investors lack essential knowledge of the most rudimentary financial concepts: inflation, bond prices, interest rates, mortgages, and risk." The study ultimately concluded that this lack of financial knowledge will have a serious adverse effect on the ability of Americans to retire comfortably.

We found the conclusions of the study to be extremely discouraging and decided to take a closer look at all 182 pages of it, in addition to an earlier 40-page report on financial literacy by the Library of Congress. The studies focused on basic investor knowledge. Here are some of the alarming things that we discovered:

1. Women may have better instincts when it comes to investing, but they consistently perform worse than men on investor literacy quizzes.

2. A 2008 Health and Retirement Survey concluded that older Americans "lack even a rudimentary understanding of stock and bond prices, risk diversification, portfolio choice, and investment fees." Among the most widespread answer to the questions in the survey was "do not know."

3. In a Wisconsin study from 2010, researchers found that, "low intelligence [EDITOR'S NOTE: The authors of the report probably meant IQ here] and the lack of exposure to mathematics courses in high school correlate with difficulty later in life in managing finances and saving for retirement." The number of mathematics courses was statistically significant in predicting whether those surveyed knew how much money was in their bank and retirement accounts, but the number of English courses wasn't.

4. Across multiple studies, there was considerable uncertainty by respondents about whether stocks were the best long-term asset class.

5. In a 2010 Northwestern Mutual Life Insurance study to determine Americans' general financial knowledge, 69% of the 1,664 participants failed the quiz.

6. In the Northwestern Mutual study, only 32% of the participants could accurately define the term "index fund."

7. In a Financial Industry Regulatory Authority, or FINRA, study in 2009, only 21% of the respondents were correct in knowing that bond prices typically will fall when interest rates rise.

8. Only 52%, in the FINRA study, correctly answered "False" to the following: "Buying a single company stock provides a safer return than a stock mutual fund."

9. The FINRA study also found that young adults performed the worst according to age group; adults aged 45 to 49 performed the best.

10. In a 2008 study of high school seniors, only 36.2% knew that "retirement income provided by a company" is called a "pension."

11. In a Moneytrack/IPT Investing Survey from 2007, only 39% of the participants could correctly define the term "diversification."

12. An Ariel study of 401(k) savings disparities found that African-American and Hispanic workers in the U.S. have lower 401(k) balances and participation rates than their white and Asian counterparts. The study found that more financial education among these groups is needed.

13. An alarming 43% of investors in a 2007 MoneyTrack/IPT Investing Secrets Survey demonstrated a susceptibility to fraud.

14. In the 2008 survey of high-school seniors and college students, scores sank to an all-time low (students began taking the annual survey in 1997).

15. In a 2009 National Financial Capability Study, only 15% of respondents indicated that they had "checked an advisor's background or credentials with a state or federal regulator."

16. Only 51% of participants in a recent online study understood how and when a financial intermediary receives compensation for sales of investment products in a hypothetical example.

17. In the same study, 58.6% of online survey respondents incorrectly answered a question about calculating standard mutual fund fees.

18. A Library of Congress report found that "low levels of financial literacy have serious implications for the ability of broad segments of the population to retire comfortably, particularly in an age dominated by defined-contribution retirement plans."

19. 75% of Americans nearing retirement age in 2010 had less than $30,000 in their retirement accounts. Is this a result of people not knowing any better?

This list paints a very grim picture of the state of American financial literacy at the moment. It's easy, of course, to nitpick some of it. For example, a lot of respondents had trouble identifying stocks as providing superior returns over the long term. Given that we just learned that Treasuries have outperformed stocks over the past 30 years, maybe it's understandable that investors were uncertain on that one.

Yes, it may be tempting to challenge various details of the findings, but it would be unwise to reject the overall conclusion. The 19th item on the list, which shows the shockingly low amount of funds that most Americans have put aside for retirement, didn't come from the SEC. Rather, that number came from a recent piece in The New York Times about the grim state of our retirement system. Clearly, we have very serious problems when it comes to understanding how much we need to live comfortably in retirement. And a woeful lack of financial knowledge is partly to blame for that.

So we shouldn't spend too much time wondering whether or not Americans in general are financially literate; it's abundantly clear that we are not. The more relevant (and urgent) questions are: What does this mean? And what should we do about it? In a future commentary, we'll try to answer those questions.

In the meantime, you can read about our "13 Steps to Investing Foolishly" as a great way to brush up on your own financial literacy.

The Motley Fool is investors writing for investors. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (23) | Recommend This Article (59)

Comments from our Foolish Readers

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  • Report this Comment On September 05, 2012, at 10:39 AM, gcp3rd wrote:

    It seems to me the general population has not kept pace with the key change in retirement plans, which is the shift from pensions to your own savings accounts. Pensions are easy - clock your time and you know you will get a check for X amount every month until you die. Whether or not it will be enough is probably debatable but the dollar amount is largely not up to the individual. Having never had a pension I make some assumptions here.

    On the other hand having to save enough money on your own and calculate what you need is inherently harder. Not only is it harder to just determine what you really will need (predicting investment returns, salary, etc 20, 30 years or more into the future??) but more importantly having the discipline and will to put that money away when your employer isn't making you do it has to be tough for many if not most.

  • Report this Comment On September 05, 2012, at 5:16 PM, Borbality wrote:

    Financial literacy is kind of like the opposite of nutrition literacy. Anyone can know what's healthy, but very few actually act on it.

    With investing, you don't have to know how it all works.

    Anyone (well, most people with a job) can put money away and contribute regularly to a 401k or similar plan with a targeted index fund.

    Regular people can figure out complicated ways to pirate video games and music, sophisticated ways to grow marijuana. Fantasy Football is more complicated than a 401k.

    The average joe isn't stupid, he just has his priorities mixed up.

  • Report this Comment On September 05, 2012, at 5:30 PM, mtf00l wrote:

    Let us not forget that Consumerism has been the mantra since the fifties. Then came Credit Cards...

  • Report this Comment On September 05, 2012, at 5:41 PM, LynxSS77 wrote:

    Today's high schoolers not knowing what a pension is is understandable though. It's akin to them not knowing how to work a dial telephone or knowing what a cassette tape is, forget about any technology older than that.

    Do non-grandfathered pensions even exist anymore outside of governmental jobs? If there are there may be more of those dial telephones still in use than pensions accepting new members those high schoolers could get enrolled in ;)

  • Report this Comment On September 05, 2012, at 5:58 PM, Borbality wrote:

    Lynx, i was thinking the same thing about pensions. Anyone graduating high school today would think pensions are for government employees only, not from a "company" at all.

  • Report this Comment On September 05, 2012, at 6:11 PM, Zombie111 wrote:

    Scary. I wonder how other countries compare? Wasn't better financial literacy one thing that some of the Occupy Wall St protesters were asking for? Looks like it is badly needed.

  • Report this Comment On September 05, 2012, at 7:39 PM, matthewluke wrote:

    "Buying a single company stock provides a safer return than a stock mutual fund."

    Is that exactly how the true/false statement as asked? No other explanation? Just that one sentence? Well then, maybe part of the problem was the way questions/statements asked.

    I am assuming the true/false statement is about diversification. But maybe someone else answering the statement is thinking about how mutual fund managers often under perform the major indexes. And they may be thinking about the fees those fund managers charge for the privilege of that under performance. Or maybe they are thinking about the tax implications of mutual funds with high turnover ratios.

    Maybe if they asked the question like this, they would have gotten a better response:

    True or False

    "Buying a single company stock provides a safer return than a very low expense ratio passively managed ETF that generally corresponds to the price and yield performance of the S&P 500 Index."

  • Report this Comment On September 05, 2012, at 8:17 PM, TMFBane wrote:

    @WhichStocksWork, Yes, that was exactly how the question was asked, and I agree that it's possible that the respondents were approaching it from a different angle.

    As mentioned in our piece, many of the questions aren't perfect, and there's a huge amount of subjectivity involved in designing these types of quizzes for a general population.

    All that having been said, it's hard to come away from reading these studies in the aggregate, and not feel that our country has some pretty serious challenges when it comes to financial literacy.

    If you'd like to take a closer look at the various questions and results, you can find them in the appendices to this doc:

    Thanks for the commments, everyone.

  • Report this Comment On September 05, 2012, at 9:25 PM, matthewluke wrote:


    Not just the United States. It is a problem among all countries. Even just singling out developed nations with developed financial markets and institutions (US, Canada, Japan, Western Europe, Australia, etc.), financial literacy for everybody is fairly low.

    I am an American living in Japan. Anecdotal, I do not see any major differences in overall financial literacy levels between the two countries. Though it does seem that financial literacy may have a lot to do about what you personally experience. So maybe Japanese people will be better able to answer a question about deflation than an American because they have personally experienced deflation.

  • Report this Comment On September 06, 2012, at 8:33 AM, columnist77 wrote:

    I think high-schoolers should receive basic financial facts about all aspectsof it, not just investing. My daughter took a course and for all I can see learned how to write a check. (This was a few years ago- ha)

  • Report this Comment On September 06, 2012, at 9:00 AM, wolfman225 wrote:

    Is it "financial literacy" that's the root issue? Or is it more the mental and ethical shift away from the frugality and thrift practiced by our grandparents (and in some cases, greats) to the modern practice of mortgaging our futures in order to "live the good life" right now?

    Education is vitally important, I agree. But it's useless without the population feeling the urge to acquire and practice the financial discipline required to provide for themselves and their families.

    I think the article is "putting the cart before the horse", in that respect. Unless we begin to relearn the lessons of the past and start impressing those lessons on our children by instilling a sense of responsibility and self-relilance, as opposed to the belief that someone else will always take care of them and come to their rescue (this means we will have to let them fail, occasionally, and experience the consequences of poor decisions), all of the education in the world won't make a difference. As was noted above, these people aren't stupid, they can figure out all kinds of ways to get "free stuff".

  • Report this Comment On September 06, 2012, at 9:19 AM, TMFBane wrote:

    wolfman225, you've made some great points. I think this is an excellent way to think about the problem.

  • Report this Comment On September 06, 2012, at 1:16 PM, CMFStan8331 wrote:

    I think American financial education (only partially excluding those at the very top) has always been criminally inadequate. However, I'm also forced to agree with wolfman225 that internal motivation is a critical factor. If people have no interest in long-term delayed gratification, they are unlikely to see much value in or expend much energy on investing. All the information in the world won't accomplish much if folks are unwilling to help themselves.

    The other part of this equation, though, is that Americans have been historically conditioned to believe that finance and investing are hopelessly complex subjects that are best left to experts, not realizing that most experts actually under-perform the market. Because investing is equated with day trading and arcane, mysterious products in the popular culture (CNBC, Goldman-Sachs, credit default swaps, currency arbitrage, etc.) , the idea of owning individual stocks scares a lot of people to death, even though it's not that hard to evaluate and compare companies with all the info now available online. For anyone who isn't willing to devote the time or accept the inherent risk of owning individual stocks, index funds and ETF's are a great alternative and comparing expense ratios and historical tracking of index funds is a very simple task.

    As with most large-scale problems, there isn't one easy answer for our lack of financial literacy. We need to work for improvement on all these fronts to shift the country upward from the current, dangerous state of affairs.

  • Report this Comment On September 06, 2012, at 4:57 PM, Johny205 wrote:

    I find it funny that several people I've known don't pay a $10 minimun fee on a credit card statement that has a $60 ballance. My younger sister, who was 24 years old at the time when I realized this impaticular example said "I'll just pay it next month". I told her she will ruin her credit with stupid unresponsible actions like this and she was totally ablivouis to the fact that it would ruin her credit. They should teach a class about credit in school.

  • Report this Comment On September 06, 2012, at 6:44 PM, actuary99 wrote:


    Amen to that. However I think it'd be difficult to achieve the change you think is needed.

    "the belief that someone else will always take care of them and come to their rescue (this means we will have to let them fail, occasionally, and experience the consequences of poor decisions), all of the education in the world won't make a difference"

    My wife made horrible decisions several times and was never allowed to fail by her parents, and now I'm married to someone with that mentality. It is not an easy mentality to change.

  • Report this Comment On September 07, 2012, at 6:52 AM, skypilot2005 wrote:


    Let’s establish a Consumer Education Bureau and house it next to the Consumer Financial Protection Bureau……

    Elizabeth Warren should run it if, she loses her Senate campaign. If not, how about Barney Frank?

    Ah. Massachusetts liberals looking out for us…..

    Come on.

    I say take responsibility and start subscribing to The Motley Fool.


    Leave the rest of us alone.


  • Report this Comment On September 08, 2012, at 3:54 PM, dontgopoor wrote:

    This is not surprising given that financial literacy requires some study and consumers in general have a poor understanding of even simpler finance issues such as how marketing affects their buying decisions.

    Look at what's covered in "SOLD: Don't Go Poor and Miserable Being Sold Happiness".

  • Report this Comment On September 08, 2012, at 10:52 PM, neamakri wrote:

    There's a corrollary to Murphy's Law: It's worse than you think.

    Today's high schoolers share a number of things in common, one thing is most of them hate math.

    So....the only advice I can give everyone is this: put a lot of money into your 401(K) account. The IRS does NOT tax current contributions, thus you get more bang for your buck.

  • Report this Comment On September 09, 2012, at 6:21 AM, kcod wrote:

    It is unreasonable to expect every citizen (or even a significant portion of all citizens) to be adequately 'financially literate' - that is why we have 'financial advisors'.

    The identical issue applies (e.g.) with regard to the Law - that is why we have lawyers.

    What is unreasonable is that it is perfectly clear that a good proportion of all 'financial advisors' are acting, not in the interests of their customers, but primarily in their own interests. Even sophisticated customers cannot reliably identify whether they are faced with an advisor who is honest or a charlatan (think Madoff, think Stanford etc.). These last are, of course, worst case offenders; there are lots and lots who are more marginal but still completely unsatisfactory.

    What we need is not more (inevitably low-level) education for the average Joe (which cannot hope to produce the desired result), but more checking on the moral integrity (and more swinging personal penalties for any identified failure of morality) on the part of the 'financial advisors'.

    And this extends into Government; I see adverts on TV for loans at an interest rate of 1745% - yes, really that figure. Anyone who takes up a loan at this rate clearly doesn't have the least comprehension of what they are doing. But that is not the point; the point is that Government is egregiously failing to protect its own citizens from this (legal) theft. Even the Romans (or was it the Greeks?) in 433BC had a Law that interest shall not be charged at more than 12%.

    The above is just an example - it would not be very hard to ban (by Law) many of the other financial tricks that are nothing but rip-offs perpetrated on the innocent and ignorant.

    For example, it is perfectly clear that 'specialised' funds (on average, not the very few that break the rule for a short period) are much less good investments than a physical tracker of a major stock-market index. Since, on average, they are just a gauranteed means for the 'financial advisor' to soak the ignorant investor of his cash, they should simply be banned.

    I'm sure you can think of others.

  • Report this Comment On September 10, 2012, at 9:41 AM, Forza4st wrote:

    It certainly doesnt help that we receve the minimum education in this department in high school and college. At the very least, all colleges should force students as a requirement to take a course on these basic matters in their freshman years and again in their senior years (for reinforcement purposes but also to test if each student has retained the information). The reason I state "require" is because all colleges and universities make claims of "preparing students for the future". Since this is the case, it should not matter if you are majoring in Biology or Economics, the college should stabd behind its promise and deliver a course OR courses which actually prepare students for the real world as let's face it, in this increasingly financially perilous time, our students abd overall populace deserve this kind of education and awareness. It's great that an economics course teaches you supply and demand models among many others, but are most of us going to be performing this sort of detailed analysis when trying to put food on the table for our families? How about concepts on budgeting, risk management, lease vs. buy (homes and cars), employment trends, the importance of retirement planning and starting early, navigating financial websites, the importance of monitoring your investments (doing your homework) etc. In addition to these topics, historical examples along with hard data should be incorporated to provide students with context for better understanding. Finally, competent professors should be selected for instructing these courses with the university sending a clear message (through a developed communications campaign) that these courses are VITALLY important to each student's future success.

  • Report this Comment On September 12, 2012, at 1:37 PM, aleax wrote:

    @neamakri, "put a lot of money into your 401(K) account" -- even though in 2012 they finally raised the contribution limit, it just went to 17,000 (from 16,500 for several previous years) -- you're allowed to contribute an extra 5,500 if you're 50 or older.

    I'd call that "serious" money, but not "a lot of" money -- your yearly living expenses in retirement will pretty surely be higher than that, for example -- with low-risk investments sporting negative real returns (i.e nominal returns below inflation) maximizing these contributions is just not enough, you'll also need to accept some risks to get (one hopes!) some positive real returns on those savings.

  • Report this Comment On September 12, 2012, at 3:47 PM, TopAustrianFool wrote:

    Did the SEC counted themselves are illiterate? If they didn't then I can't really take this report seriously, but to say that sounds like anoher argument for central planning.

  • Report this Comment On November 19, 2012, at 12:25 AM, lowmaple wrote:

    (investments,and doing your homework). Many people get out of school and NEVER want to do homework again.

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