All the perplexities, confusion and distresses in America arise not from defects in the constitution or confederation, nor from want of honor or virtue, as much from downright ignorance of the nature of coin, credit, and circulation.
—John Adams, second president of the United States
If you had to pass a test to prove you could handle money before you could get your next paycheck—the way you have to pass a test to prove you can drive a car—would you get paid? The sad truth is that millions of us wouldn’t. When it comes to managing money, Americans young and old are flunking out.[2]
The results from surveys, polls, and tests that measure financial literacy are in, and the results are grim. Most people don’t have a clue.[3]
Jumpstart Coalition, the nonprofit organization that promotes personal finance education, concluded from results of its latest survey that three-quarters of Americans are ill-equipped to make critical personal financial decisions.[4]
A survey of Americans[5] conducted by the Harvard Business School found strikingly low levels of financial knowledge. Two-thirds of respondents didn’t know how credit cards work. Many people didn’t know the terms of their mortgage or the interest rate they’re paying. And, at a time when we’re borrowing more than ever, most Americans couldn’t explain compound interest.
Only a minority of respondents had any idea that borrowing at an interest rate of 20 percent, compounded annually, will lead to a doubling of debt in fewer than five years.
The subprime mortgage fiasco that sent the US economy into a tailspin is the poster child for the national cost of financial ignorance. Even though unscrupulous lenders and overleveraged investment bankers played a huge part in escalating the madness, consumers had a choice when it came to entering into those mortgages. Financial illiteracy fueled the madness. Four years after the bubble burst, estimates are that one in four homeowners are underwater, making it nearly impossible to refinance their homes or relocate to take another job. How far under? Another report shows 5.5 million US households are tied to mortgages that are at least 20 percent higher than the current home value.[6]
It is heartbreaking to think that so many Americans were lured into toxic mortgages and home equity loans, unaware that they were willingly agreeing to big balloon payments on interest-only contracts. Or found adjustable rates to be the pathway to smaller payments that allowed them to buy more expensive homes. The sad truth that I am hearing now from so many people is that they didn’t have even the foggiest idea what the lender was talking about, and assumed everything would be okay.
Not surprisingly, a study by the Federal Reserve Bank of Atlanta found that borrowers with the lowest math skills were four times more likely to have bought homes that wound up in foreclosure.[7]
The fallout from this rampant financial ignorance is shocking:
What grade would you give yourself? Knowing what you do know about money and managing your finances, how would you rate your financial proficiency, knowledge, and confidence to manage your massive lifetime income?
Massive? Yes, you read that right. In your lifetime, you will handle millions of dollars in earned income, and that’s not a typo. Let me prove it to you.
Let’s use the latest US Census median household income figure of $52,029.[14] Now multiply by 45, which is the commonly accepted number of income-producing years. Are you ready? The answer is $2,341,305. And that’s an average. Your number could be significantly more.
I know what you’re thinking, so let me address that. I realize that you may not have made $52,029 (insert your figure here) every year. But your income will not remain the same for the rest of your income-producing life, either. Over time, your income will increase. So consider it a kind of average, and a very conservative estimate at that.
My point is that when you look at the big picture, the total amount of money that will flow through your hands and which you will control during your lifetime is significant. You are a millionaire, receiving that fortune one paycheck at a time.
Managing your income skillfully is at least as important as your ability to drive a car. You worked hard to learn how to drive. You took a written test to prove you knew the laws and rules of your state. You took a road test to prove that you are a safe, knowledgeable driver.
Yet, chances are high that you entered adult life without any kind of financial training that would prepare you for handling something of such value and importance as a lifetime of income. And you didn’t even get an operating manual.
If you did arrive at adulthood with a good grasp of personal finance and money management as a life skill, you are fortunate. That puts you miles ahead of many of your peers as you look forward to your income-producing future. Sadly, most people enter adulthood lacking personal financial intelligence. They have no rules to follow, not even a list of suggestions or any kind of mental framework for how to manage an income or even what that would look like.
Every day my email inbox bears witness to the high cost of financial ignorance. I hear from men and women who are overwhelmed by debt, have no savings, don’t invest for retirement, go back to school on student loans because they’re broke and can’t get a job, find divorce to be a solution, and just flat-out make terrible financial decisions. And my mail is also peppered with cries for help.
“I’m just not good with money.”
“I’ll never have enough.”
“I don’t know where to start.”
“I’m such a loser, I’ve made so many mistakes.”
“My financial situation makes me so depressed.”
“I’m so overwhelmed I am paralyzed.”
“Just tell me what to do. I don’t need to know why, just what and how!”
Can you identify? It is scary to be in a situation where the lifestyle you’ve chosen requires every last nickel of the income you produce just to get by. And that’s in a good month. When something comes up that you didn’t expect, it can throw your life into the kind of turmoil that has debt written all over it.
I know personally what a lack of financial training will do to you, and the ways financial ignorance can change the course of your life. Let me tell you my story . . .