There is no doubt that unscrupulous lending practices were a leading cause of the recent recession. However, those practices would not have been able to happen as easily if consumers were better able to question these abusive practices. While the newly created Consumer Financial Protection Agency’s job is to monitor and warn consumers about these practices, they only have limited reach and simply won’t be able to flag everything. That is why financial literacy may be the key in successfully fighting these practices. As Fed Chairman Ben Bernanke said, “Well-informed consumers…are one of the best lines of defense against the proliferation of financial products and services that are unsuitable, unnecessarily costly, or abusive.” The benefit of financially informed consumers is twofold because they will also increase overall market efficiency and innovation.
Financial literacy in America is extremely low, which is unsurprising considering that very few schools teach any personal finance. The Financial Literacy and Educational Commission found that a key reason for this lack of education was that the teachers felt like they did not have a firm grasp on the subject either. Without it being taught in schools, parents are now responsible for educating their children. However, parents aren’t any better educated than the teachers. A study by Charles Schwab found that while 70% of parents have taught their kids (see Best Board Games for kids to learn about money) how to cook and do laundry, only 29% taught their children how credit cards and interest rates work. Without this education, it has left much of the population without an understanding of finances and how debt will affect them in the future.
While the government has passed a number of laws that aim to protect consumers, including the 2009 CARD Act that has forced credit cards to be more transparent with their terms, it won’t be enough if Americans still don’t have the basic understanding of what those terms are.
To help raise financial literacy, The Federal Reserve provides educational tools on their site (www.federalreserve.gov) to help teach people about mortgages, credit cards and general financial empowerment. It also provides loan calculators and up-to-date information on all the latest scams and how to avoid them.
Another resource is www.mymoney.gov, which is dedicated to teaching all Americans the basics of financial management. This site provides resources for people of all ages and at different stages of life. Topics covered on the site range from those targeted at youth and parents to those planning to buy a home and have a baby.
While these resources are helpful, how many people will actually seek out this information themselves? The fact that personal finance is not taught in schools is still a major issue and will continuously contribute to the lack of knowledge among future parents and teachers. And, with the Class of 2017 graduating as the most indebted ever, with an average of $22,900 in student debt, it is vital that they are educated about interest rates and budgeting so they can stay on top of their monthly payments and protect themselves from the mountains of “bad debt” that many of their parent’s experienced.
Teaching young adults financial literacy is the first step in guiding them towards a more stable financial life and helps them avoid some of the mistakes of their elders, including the mortgage crisis, and falling into debt. What do you wish you were taught before financially fending for yourself?