According to a 2013 report from the Financial Industry Regulatory Authority’s Investor Education Foundation, 19 percent of Americans are spending more money than they make. Of the 25,000 people surveyed over a four-month period, just 41 percent said they spend less than their income and the remaining 40 percent spend every thing they make, or close to it. This means that more than half of Americans are either financially stagnant or are trapped in a worsening situation.
The results of the survey clearly reveal that most Americans are in a tight financial spot, if not in dire financial straits. To some degree this is the product of the late-2000s financial crisis, which destroyed millions of jobs and pulled the country’s gross domestic product down to 10 percent below its potential, according to the Congressional Budget Office. Long-term unemployment remains an outsized problem and economic confidence is still in shambles — in January, a survey conducted by Gallup found that more Americans believe they are worse off financially now than a year ago.
But the economy is not the only thing to blame, according to FINRA Foundation Chairman Richard Ketchum. Referring to the first survey, Ketchum said: “This survey reveals that many Americans continue to struggle to make ends meet, plan ahead, and make sound financial decisions — and that financial literacy levels remain low, especially among our youngest workers. No matter how you slice and dice it, this rich, new dataset underscores the need for us to continue to explore innovative ways to build financial capability among consumers.”
A test administered every other year by Jump$tart supports this claim. Many Americans, particularly young Americans, are clueless about the basics of finance, business, and economics. We’ll go over seven questions from Jump$tart’s 2008 college-level survey of financial literacy that many or most college students got wrong.
1. “Inflation can cause difficulty in many ways. Which group would have the greatest problem during periods of high inflation?
a) Older, working couples saving for retirement.
b) Older people living on fixed retirement income.
c) Young couples with no children who both work.
d) Young working couples with children.”
The answer, in green, is B: Older people living on fixed retirement income. Unfortunately, just 5.7 percent of survey respondents picked this answer, suggesting that college students either don’t understand the implications of inflation or what fixed income is (or both!). The majority of respondents, 50.1 percent, chose answer C; 36 percent chose answer D; and 8.2 percent chose answer A.
2. “Retirement income paid by a company is called:
c) Rents and profits.
d) Social Security.”
The answer is once again B, but less than half, 44.2 percent, of respondents got it right. In fact, more people chose answer A, 401(k). The confusion here indicates that the only thing the students knew about 401(k) plans is that they are somehow related to employers but don’t have any real understanding of the relationship. Sadly, 8.1 percent of respondents chose answer D, Social Security, which suggests a misunderstanding of what Social Security is.
3. “Sara and Joshua just had a baby. They received money as baby gifts and want to put it away for the baby’s education. Which of the following tends to have the highest growth over periods of time as long as 18 years?
a) A checking account.
c) A U.S. Govt. savings bond.
d) A savings account.”
The answer is B, stocks, but just 19.2 percent of respondents got it right. The majority, 61.9 percent, chose a U.S. savings bond, while 17 percent answered D, a savings account. The results suggest that students either overestimated the growth rate of government savings bonds, or underestimated the long-term growth rate of stocks. Without formal education, it can be hard to disassociate investing in equity from the stigma of people like Jordan Belfort.
4. “If your credit card is stolen and the thief runs up a total debt of $1,000, but you notify the issuer of the card as soon as you discover it is missing, what is the maximum amount that you can be forced to pay according to Federal law?
This is kind of a technical question, but the way that students answered suggested that they weren’t just unfamiliar with the law on this common credit card issue but totally ignorant of it. The correct answer is D, but just 11 percent of respondents chose correctly. The majority, 58.9 percent, chose answer C, nothing, which means that they made a false assumption about their liability for a lost or stolen card.
5. “If you have caused an accident, which type of automobile insurance would cover damage to your own car?
The correct answer is D, collision, but less than half, 42.7 percent, selected this answer — 20.3 percent chose A, comprehensive, and 31.6 percent chose B, liability. Considering that the vast majority of Americans drive and the vast majority of those have auto insurance, understanding which insurance is which is pretty important.
6. “Many savings programs are protected by the Federal government against losses. Which of the following is not?
a) A U.S. Savings Bond.
b) A certificate of deposit at the bank.
c) A bond issued by one of the 50 States.
d) A U.S. Treasury Bond.”
The correct answer is C and, you guessed it, just 37.4 percent of respondents got it right. More — 48.2 percent — chose B, a certificate of deposit at the bank. The fact that most students chose answer B suggests that they are unaware of the Federal Deposit Insurance Corporation, which was established to provide deposit insurance. This is an incredibly important concept to understand in periods of financial turmoil. Deposit insurance is designed to prevent bank runs, which can throw fuel on financial fires in times of crisis. This was most recently witnessed in Cyprus.
7. “If you had a savings account at a bank, which of the following would be correct concerning the interest that you would earn on this account?
a) Earnings from savings account interest may not be taxed.
b) Income tax may be charged on the interest if your income is high enough.
c) Sales tax may be charged on the interest that you earn.
d) Sales tax may be charged on the interest until you pass your 18th birthday.”
The correct answer is B, but just 39 percent of respondents got it right. More students, 47.1 percent, chose A, while 10.4 percent chose C. Of all the questions to get wrong, this one isn’t very egregious, but it does suggest that students are unfamiliar with the tax system. No surprises there, though. No one understands the tax system.
Fun facts about the survey: women scored better than men, those with wealthier parents scored better than those with less wealthy parents, and those with the highest earnings expectations after college actually scored slightly lower than those with more modest expectations.