Monday, June 10, 2013

Failing the Road Test: Americans Aren’t Equipped to Save

Failing the Road Test: Americans Aren’t Equipped to Save

Driven by an individualist streak and fueled by Wall Street money and influence, Americans are increasingly on their own when it comes to their financial future.  Whether a family is facing retirement, unemployment, health care, or educational expenses, the policy of both political parties leans to individualized solutions rather than community-based ones.  A recently released survey by the FINRA Investment Education Foundation shows that Americans are ill equipped to manage their financial affairs.
Southern Merger (1998)
The Foundation administered a basic financial literacy test to 50,000 people consisting of only five questions.   The questions were the equivalent of the easiest inquiries on a written drives test, such as identifying the meaning of an octagonal sign or knowing what the yellow double line means on the center of a two-lane road.  Had the financial literacy test been a driver’s test, America would have been denied a learner’s permit, let alone an operator’s license.  And yet despite flunking, we allow and even encourage our citizens to make vital investment decisions.

The test-takers only got 2.8 out of the 5 questions correct.  You should go to and take the test.  If you are in the financial services business, you’ll agree with me that the questions are very easy.  However, for those who have better things to do with their lives than study finance or investments, I suspect some of these questions will be stumpers.   Nonetheless, you can’t begin to invest a 401(K) or an IRA in a competent manner unless you can correctly answer all five, as well as a variety of other, questions.

Among many other disconcerting facts, the survey revealed that:

·      Fewer than half (41 percent) of Americans surveyed reported spending less than their income.
·      Over a quarter (26 percent) of Americans reported having unpaid medical bills.
·      More than half of Americans (56 percent) do not have rainy-day savings to cover three months of unanticipated financial emergencies.
·      Over a third of Americans (34 percent) reported paying only the minimum credit card payment during the past year.[1]

For the past three decades, government policy has encouraged programs for individual savings and borrowing, and dismantled or restricted social or community-based programs.  Our tax code is full of deductions and credits designed to encourage these financial activities.  However, it turns out that we are, as a whole, financially incompetent.  It is as if the vast majority of Americans were incapable of keeping a car between the lines, and government encouraged us to drive anyway.  Americans may prefer their individual freedoms, but when it comes to finance and savings, most of us just don’t know how to act.  And yet, when individual savings prove inadequate or household debt levels become unsustainable, it is society that pays the even higher price of dealing with the shortfalls.

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