A Nation of Financial Illiterates
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  1. Are You Financially Literate? Take the Test!
  2. Basic Findings of Recent Studies
  3. Consequences of Financial Illiteracy
  4. The Family Connection
  5. Political Implications


The title of this week’s E-Letter may sound a bit harsh but, based on information from two recently published studies, it’s probably true.  According to a study from the Journal of Consumer Affairs (JCA), only 27% of young people age 23 to 28 could correctly answer three basic economic and investment questions.  Coming at it the other way, 73% of young adults don’t have a clue regarding basic economics and investments.

One of the authors of the JCA study was Dr. Annamaria Lusardi, who has been studying financial literacy for many years and is quite a prolific author on the subject.  While the JCA study is the most recent publication and deals primarily with young people, Dr. Lusardi also published a report for the US Financial Crisis Inquiry Commission (FCIC) that included a wider age range.  Unfortunately, the results are basically the same: the majority of Americans are financially illiterate.

In this week’s E-Letter, I’m going to discuss the findings of the JCA and FCIC studies that Dr. Lusardi has authored.  Since the focus of the JCA study was on young people, I also suggest that you forward this article to your own adult children and grandchildren to determine their level of financial literacy.

After discussing these findings, I’m also going to cover the political implications of a financially illiterate electorate, and highlight another recent survey that shows how political ideology can fill the vacuum when someone isn’t grounded in financial matters.  It will prove to be an interesting discussion, so let’s get started.

Take the Test

The JCA study featured a series of three questions developed by Dr. Lusardi to gauge basic financial literacy.  The earlier FCIC report used the same three questions, but expanded the test to include two additional questions.  We have reprinted the test using these five questions to help you determine your own financial literacy and to forward on to your family and friends.  While I feel that my readers will easily be able to pass this test, I encourage you to take it anyway.  Here’s the link:


How did you do?  It was pretty basic, wasn’t it?  That makes it even more disturbing that the large majority of Americans can’t answer all of the questions correctly.  No wonder Baby Boomers are reaching retirement with little or no nest egg and families are drowning in debt.

I urge you to forward this E-Letter to your adult children and grandchildren and encourage them to take the test and tell you how they did.  If you prefer, you can also just copy the above link and send it on in an e-mail.

I would be very interested to hear your feedback on how you and your adult children and grandchildren did on the test.  Feel free to send an e-mail to me at [email protected] to let me know the outcome of all who took the test.  Just put “Test Results” in the subject line of your e-mail.  If I get enough response, I’ll share the results in a future E-Letter.

Basic Findings of the Financial Literacy Studies

As noted above, the JCA study focused on adults aged 23 to 28.  It asked participants only three of the five very basic questions in the link above about economics and investments and then tallied the scores.  At first glance, you might think that this age group would do quite well on such an easy test.  After all, they have been bombarded with stock market news all their lives, including stories about two major bear markets within the last decade. 

In addition, the average young person today is more likely to be covered by a 401(k) plan than a traditional pension.  Since 401(k) plans generally allow participants to direct the investment of their accounts, they also require participant investment education to enable them to better allocate their contributions.  Thus, young people, as a rule, should be well prepared to answer some basic investment questions, right?  Wrong!

Almost three quarters of those taking the test in the JCA study could not answer all of the three questions correctly.  In addition, certain demographic groups did worse than others.  For example, the study noted that young women, African-Americans, Hispanics and those with less education did more poorly on the test than other demographic groups.

The FCIC report (five basic questions) had an even lower percentage of participants answering all questions correctly.  Dr. Lusardi noted:

“While the correct response to [an] individual question is sometimes high, less than half of respondents answered two questions about interest rates and inflation correctly and less than one-third answered those questions and a question about risk diversification correctly. Less than 10 percent of respondents are able to answer all questions correctly.”

The FCIC report also stated that there is a disconnect between how financially literate people think they are, as compared to how they actually scored when answering the basic questions discussed above.  In other words, many people think they know more about financial matters than they actually do.  If you forward the above test to your adult children and grandchildren, you may be met with this attitude.  Thus, it may be interesting to see how they actually do on the test versus how they think they will do.

Dr. Lusardi suggests that a possible solution to the problem would be to address financial literacy through high school classes designed to teach the basics.  While learning financial matters from parents is probably the best way, as I will discuss later on, not everyone has this opportunity.  Plus, Dr. Lusardi’s preference for a classroom solution may also be based on another finding in the JCA study, namely that students who had teachers who were “interested in students” and peers who planned to go to college were more likely to be financially literate.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Personal Consequences of Financial Illiteracy

The JCA study closely paralleled the findings of the FCIC report in relation to the consequences of financial illiteracy.  Both found that Americans without proper financial grounding improperly manage debt, incur sizeable interest charges and fees, are not familiar with the terms of their mortgages and have a hard time doing the basic math necessary to manage their financial affairs.

These and other studies of financial literacy have found that those who lack basic financial understanding are less likely to save money, do not understand inflation and do not grasp the concept of diversification to reduce risk.  In the FCIC report, Dr. Lusardi noted:

“The findings from this survey paint a troubling picture of the state of financial capability in the United States.  The majority of Americans do not plan for predictable events such as retirement or children’s college education.  Most importantly, people do not make provisions for unexpected events and emergencies, leaving themselves and the economy exposed to shocks.”

Economic shocks, indeed!  It can be argued that at least part of the reason for the subprime mortgage fiasco lay with borrowers who were too unsophisticated to realize that future mortgage rate resets would be unaffordable, or that granting a loan based on undocumented or even fictitious sources of income is not the proper way for banks to lend money.  Add this lack of financial literacy to a heaping helping of Wall Street greed and you get a global economic crisis.

There’s an old saying that “people don’t plan to fail, they fail to plan.”  The JCA and FCIC studies show that, for the majority of Americans, the failure to plan is now a national pastime.  Even so, the lack of financial awareness is not just an American problem.  The FCIC report notes that past studies of foreign populations have also documented “low levels of financial literacy in several countries.”

The Role of the Family

One of the more important findings of the JCA study, in my opinion, was that the education and financial habits of parents largely influenced the financial literacy of their children.  In other words, children learn financial management best at home and by example.  While Dr. Lusardi’s suggestion for high school financial classes is a good one, the best place to learn is at home.

Just last year, I wrote an E-Letter discussing ways to teach children and grandchildren about saving and investing.  This is one of my recurring themes that I repeat from time to time, and I have found that it is always appreciated by my readers.  As a parent or grandparent, you might be the only source of financial instruction for your descendants. 

I think the studies discussed above have shown that you can’t assume that young people will get all the basic financial education they need in high school, or even in college.  Business-related courses in college often deal with theoretical issues or financial management for large corporations.  Young people need to know how to manage their own money in the real world like – how to buy a car, get a mortgage, manage (and avoid) credit card debt, etc., etc.  You won’t find this basic level of instruction in most business schools.

That being said, let’s discuss some ways that you might approach the younger members of your family financial matters: 

1.         The first and most obvious thing to do is talk about it.  It seems that financial topics are sometimes taboo among members of the same family.  It is also important for this communication to be a conversation and not a lecture.  We all know how kids turn off their listening devices when they hear a lecture, no matter what their age. 

Also remember the discussion above about how many people think they know more about financial matters than they actually do.  That’s why having your adult children or grandchildren take the financial literacy test is a good idea.  It just might prove to them that they aren’t quite as financially savvy as they think they are.

2.         Don’t worry about not being qualified to talk about financial matters with your child.  We’re talking about how to handle basic financial matters, and you have plenty of experience doing that.  If you know how to handle your own financial situation, you should be able to easily communicate that to your teenagers and/or adult children.

3.         Help your children set goals and participate in monitoring their progress, but resist the temptation to do it for them.  Show them where to look for the information they need, but make them do the looking.  Also, don’t take over and handle major transactions such as buying a house or a car.  Just stay on the sidelines and offer advice, but let them do their own negotiating.

4.         Encourage investing as early as possible.  Teenagers and adult children may run off a list of reasons why they can’t start investing right now.  However, the power of compound interest is strongest when savings and investing are started at an early age.  They need to know this!

5.         Teach by example.  Perhaps the best way to influence your adult child’s financial behavior is by providing a good example.  This includes not only sharing methods and strategies for financial matters, but also includes discussing some of the challenges you have encountered over your lifetime.  Wisdom that comes with age knows the folly of living beyond one’s means and keeping up with the Joneses.  However, don’t assume that they automatically know this because they grew up under your roof.  Help your adult children or grandchildren lay out a plan so they can have the same peace of mind that you enjoy as they near retirement. 

6.         The financial literacy test web page also contains a link to allow those who take the test to sign up for a subscription to the Forecasts & Trends E-Letter.  Encourage your friends and loved ones to sign up for the E-Letter on their own so they can stay informed.  It’s timely, informative and FREE!

Political Implications

As my long-time readers know, I always try to reveal the links between politics and investments whenever I can.  That has never been more important than now, as we wrestle with trillion-dollar deficits and a mountain of national debt.  As we evaluate those who run for office, financial literacy is a must, in my opinion.

Do you vote for the person who promises you the most government benefits or the one who supports a strong fiscal agenda?  If you are financially illiterate and have no idea what the economics of uncontrolled spending mean, then you may be more likely to vote for the pork-barrel candidate.  If that’s the case – and 73% of young people don’t have a clue as to basic economics or finance – we could be going headlong into a financial literacy crash course known as Depression 101.

Voting, however, is just the beginning of how financial illiteracy can affect politics.  Failing to plan for the future has created a large number of Baby Boomers without sufficient assets for retirement.  That, in turn, puts more pressure on Social Security, since it is now the lion’s share of retirement income for many retirees.

But we all know that Social Security is on shaky ground in regard to future funding, and that it has already had to dip into the fictitious “trust account” to pay ongoing benefits.  The system needs to be fixed, but the failure of many to plan for their own retirement now ties the hands of policy makers and restricts the list of available options.

A final way that politics and financial literacy interact is that political ideology can actually influence financial literacy.  Yes, you read that right.  And that’s not just my opinion; the results of a recent Zogby International survey found that there is a high correlation between political ideology and the ability to correctly answer basic economic questions.

Daniel Klein wrote about this survey in the May issue of Econ Journal Watch.  The survey was conducted with Zogby researcher, Zeljka Buturovic, and asked 4,835 respondents to answer eight questions about basic economics.  Participants were also asked to disclose which of the following political categories best described them: progressive/very liberal, liberal, moderate, conservative, very conservative or libertarian. 

The results were shocking, at least to many.  The study concluded that the more liberal the participant, the higher the chance that questions would be answered incorrectly. 

For your review, the Zogby survey questions are reproduced below.  Participants had to answer whether they 1) strongly agree; 2) somewhat agree; 3) somewhat disagree; 4) strongly disagree; or 5) are not sure.  The answers can be found after the SPECIAL ARTICLES section beneath my signature, but try to answer them first before looking at the answers.

  1. Restrictions on housing development make housing less affordable.
  2. Mandatory licensing of professional services increases the prices of those services.
  3. Overall, the standard of living is higher today than it was 30 years ago.
  4. Rent control leads to housing shortages.
  5. A company with the largest market share is a monopoly.
  6. Third World workers working for American companies overseas are being exploited.
  7. Free trade leads to unemployment.
  8. Minimum wage laws raise unemployment.

Answers were graded based on the number of incorrect answers.  Thus, if a respondent selected “not sure,” it didn’t count as an incorrect answer.  It should also be noted that the authors of the Zogby survey agree that some exceptions may apply to some of the questions, but they would be atypical.  

The test seeks to determine the basic economic results of the items listed, not their social or political merit.  In question #2, for instance, mandatory licensing does generally increase the cost of professional services, even though none of us would probably want to be treated by an unlicensed physician.  Think cause and effect, not value or desirability.

Now let’s see how you compared with the participants by political affiliation.  The following list shows the average number of questions answered incorrectly, sorted by political group.  The lower the number, the more correct answers a group had:

Libertarian 1.38
Very Conservative 1.30
Conservative 1.67
Moderate 3.67
Liberal 4.69
Progressive/Very Liberal 5.26

The numbers don’t lie, folks.  Given a financial literacy vacuum, political ideology can fill the void, creating the illusion of knowledge.  I’m sure that progressives everywhere can find some economist to support the idea that they answered these questions correctly – Paul Krugman quickly comes to mind – but the basic economic concepts are generally black and white. 

We know that some politicians in Washington would disagree with what are or are not the “correct” answers to some of these questions.  For example, some in Washington would not agree that raising the minimum wage increases unemployment, but the facts prove otherwise.  It’s the decision as to whether the negative consequences are worth it that must be pounded out in the halls of Congress.

The survey had over 4,800 participants of all political persuasions, so from a survey sample size standpoint, it appears to have been statistically valid.  Plus, all participants were asked the same questions.  At the time the study was released, it was also the subject of an article in the Wall Street Journal.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.


The financial literacy statistics are disturbing on a number of levels.  First, we know that lack of financial sophistication can lead to poor economic choices for families.  This subjects them to higher interest rates, fees and sometimes inferior products.  Worst of all, it increases these costs for those who can least afford it.

Problems stemming from the lack of financial literacy can also spill over into the economy as a whole, as noted by Dr. Annamaria Lusardi.  We have just witnessed one such economic consequence in the form of the subprime mortgage debacle which, I believe, was at least partially caused by lack of financial literacy on the part of the borrowers.  The lack of financial knowledge and the failure to plan ahead made many of those who took out subprime mortgages unaware that their future payments would be unaffordable.

A final effect of financial illiteracy is in the political realm.  From mainstreet cries of “Where’s our bailout?” to tying the hands of policy makers who must address out-of-control entitlement spending, politicians now have to deal with problems brought on by a lack of the average American’s ability to plan for their own financial future.

Most important, however, is that financial literacy can also affect who we elect to represent us.  How can we expect Americans to elect fiscally conservative candidates when over 70% of young people lack even basic financial understanding?  Couple that with the tendency of liberals to vote based on the assumption that economic principles match their ideology, and there’s little wonder we had a Congress and president elected on nothing more than the notion of “hope.”

The answer, I believe is in educating voters so that they can balance social benefits with fiscal responsibility.  I applaud Dr. Lusardi in her drive to have financial literacy taught in high schools, but the studies show that it is most effectively taught at home and by example. 

So, I encourage you to share your financial wisdom with those in your family who may be lacking.  And I encourage you to share this week’s E-Letter with anyone you think it could help – especially your own children and loved ones.

Hoping for a financially literate electorate,

Gary D. Halbert


Americans’ Financial Capability by Dr. Annamaria Lusardi

Zogby International survey questions and answers.  The correct answer based on generally accepted economics is listed in red below each question.  Again, the thrust is to correctly identify the consequence of the economic issue, not its social value:

  1. Restrictions on housing development make housing less affordable.
    (Agree and Strongly Agree are correct)
  2. Mandatory licensing of professional services increases the prices of those services.
    (Agree and Strongly Agree are correct)
  3. Overall, the standard of living is higher today than it was 30 years ago.
    (Agree and Strongly Agree are correct)
  4. Rent control leads to housing shortages.
    (Agree and Strongly Agree are correct)
  5. A company with the largest market share is a monopoly.
    (Disagree and Strongly Disagree are correct)
  6. Third World workers working for American companies overseas are being exploited.
    (Disagree and Strongly Disagree are correct)
  7. Free trade leads to unemployment.
    (Disagree and Strongly Disagree are correct)
  8. Minimum wage laws raise unemployment.
    (Agree and Strongly Agree are correct)


"Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc. are not affiliated with nor do they endorse, sponsor or recommend any product or service advertised herein, unless otherwise specifically noted."

Forecasts & Trends is published by ProFutures, Inc., and Gary D. Halbert is the editor of this publication. Information contained herein is taken from sources believed to be reliable, but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgment of Gary D. Halbert and may change at any time without written notice, and ProFutures assumes no duty to update you regarding any changes. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Any references to products offered by Halbert Wealth Management are not a solicitation for any investment. Such offer or solicitation can only be made by way of Halbert Wealth Management’s Form ADV Part II, complete disclosures regarding the product and otherwise in accordance with applicable securities laws. Readers are urged to check with their investment counselors and review all disclosures before making a decision to invest. This electronic newsletter does not constitute an offer of sales of any securities. Gary D. Halbert, ProFutures, Inc. and all affiliated companies, InvestorsInsight, their officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Securities trading is speculative and involves the potential loss of investment. Past results are not necessarily indicative of future results.

Posted 06-22-2010 4:16 PM by Gary D. Halbert
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