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1.  State-by-State Financial Literacy Results

2.  The State of Financial Literacy

3.  Are You Financially Literate? Take the Test!

4.  Consequences of Financial Illiteracy

5.  Political Implications

6.  Financial Literacy Resources


Back in June of last year, I wrote about a study showing that many Americans, including a large number of young adults, are financially illiterate.  In December, the Financial Regulatory Authority Investor Education Foundation (FINRA Foundation) released the results of a companion study showing the state-by-state results of the financial literacy survey.  The results are shocking enough for me to again discuss the state of financial literacy in America and what it might mean for our country both economically and politically.

Just to recap my June 22 E-Letter findings, a study from the Journal of Consumer Affairs (JCA) found that only 27% of young people ages 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.

In my June E-Letter, I also introduced you to 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.

The findings of these studies help to address some of the big questions that arose out of the credit crisis.  For example, how could people enter into a mortgage without having sufficient income to fund the payments?  Or, why do people routinely go much further into debt than they can afford to pay off?  The answer is, evidently, that many Americans don’t think their financial decisions through and/or do not seek out professional advice.

This week, I’m going to address the state-by-state results of the most recent survey published by FINRA.  Then, I’ll discuss again some of the negative consequences of a financially illiterate public and how it can affect not only our economy, but also our political environment.  I’ll also give you another chance to take the financial literacy test as well as provide some additional resources for teaching young people the basics of economics and how to manage money effectively.

The State of Financial Literacy

On December 8, 2010, the FINRA Foundation issued a press release announcing the results of a state-by-state analysis of financial literacy developed jointly by the U.S. Department of the Treasury and the President's Advisory Council on Financial Literacy.  The survey polled more than 28,000 respondents in all 50 states and the results, to say the least, were very disappointing.

The survey echoed the results of earlier nationwide studies showing:

  • Over half (55%) of all Americans are living paycheck-to-paycheck, spending more than or about equal to their household income;
  • A significant majority of Americans (60%) do not have a "rainy day" fund to cover three months of unanticipated financial emergencies;
  • More than one in five Americans (24%) have engaged in some form of higher cost non-bank borrowing during the last five years, including taking out a payday loan or getting an advance on a tax refund; and
  • Americans, on average, were able to correctly answer just three of five questions about fundamental financial concepts.

However, the state-by-state study also showed that there is a significant difference in financial literacy across state lines and among various demographic groups.  For example, the study found that citizens of New York, New Jersey and New Hampshire have the highest financial literacy, while citizens of Kentucky and Montana were among the lowest when compared to other states.

To see how your state compares to others and to the nation as a whole, click on the following link and then move your cursor over your home state:

I wouldn’t try to read too much into the state variances, however.  New York and New Jersey may have better coverage of economics in school, but you also have a higher percentage of people working in financial services businesses there than in Montana, which could also help explain some of the differential.  

Plus, the economics of the credit crisis could also have an effect.  For example, Montana, one of the lowest-rated states, actually scored a little higher on the financial literacy exam than New York residents.  Where Montana got left behind was the lack of rainy day funds, non-bank borrowing and spending more than they made, all of which could be due to economic hardship.

The financial literacy studies have also found that young Americans in general were more likely to be ignorant of financial matters than older Americans.  This resulted in the tendency for young people to more often engage in non-bank borrowing (payday loans, etc.) than their older counterparts.  FINRA Foundation Chairman, Rick Ketchum, noted that the findings point out the need to improve financial education in our schools.  Amen to that!

Take the Test

The FINRA Foundation study measured financial literacy through a test developed by Dr. Lusardi for this and other similar studies.  The quiz involves five questions about very basic economic and financial concepts.  We have provided a link to the test using these five questions to help you determine your own financial literacy and to forward on to your family and friends.  When I first provided this test to my readers back in June of 2010, it was a smashing hit!  Fortunately, over 90% of my readers were able to answer most or all questions correctly.  If you missed it the first time, click on the following link to take the test:

Link to Financial Literacy Test

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 grand-children, friends and other family members 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.

Personal Consequences of Financial Illiteracy

The study results reported by the FINRA Foundation closely paralleled the findings of other smaller studies in relation to the consequences of financial illiteracy.  All 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 studies have also shown 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 one such study, 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 financial literacy 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.  Past studies of foreign populations have also documented low levels of financial literacy in several countries.  Perhaps that explains why Greek citizens are demonstrating against spending cuts even as their government is drowning in debt.

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.

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 2010 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 at the bottom of this E-Letter 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.  You can probably guess that progressives everywhere immediately sought to discredit Klein’s survey and its conclusions, but that doesn’t mean that it’s not correct.

We also 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.

Financial Literacy Resources

While investor education is nothing new, many of the product-independent and government websites offering such information often focus on how particular investments work and how to avoid being involved in a scam.  While this information is very important to know, these sites often provide no economic education to help investors understand what’s going on in the global economy.

In a world of constant news about the Fed’s actions and runaway spending by the federal government, it’s important for people to know and understand the potential economic effects of the policies coming out of Washington, as well as those of foreign countries.

In light of the disappointing results on the financial literacy tests, the FINRA Foundation has listed a variety of financial literacy resources on its website for both young people and older investors as well.  Here’s a link:

One of my favorite resources is in a video game format specifically designed for middle school and high school students.  The game is called “The Gen i Revolution” and was developed by the Council for Economic Education.

Unlike some other attempts I have seen, this game is higher quality and much more involved, which should help to keep players interested.  Players are given a set of 15 interactive financial missions designed to help them learn financial concepts.  Each mission involves a character facing a different financial crisis and the player must help to solve this dilemma using knowledge gained from the program as well as the assistance of “Operatives” representing a variety of financial experts.

I think the graphics involved and the competitive nature of the game will help to keep it from being viewed as “lame” by today’s video-game-sophisticated teens.  I highly recommend it!  You can find basic information about The Gen i Revolution and how to get started at the following Internet link:

There is also a variety of other economic educational resources available to the general public on the Internet.  Just type “economic education resources” in your search engine and you’ll get plenty of hits.  I recommend that you stick with educational resources from organizations that are not investment-product related, as they are less likely to have a bias toward any certain type of economic interpretation or investment product.

As you might expect, Congress is also attempting to get into the act of promoting financial literacy.  Last month, Representative Andre Carson of Indiana introduced the Young Adults Financial Literacy Act (HR 300).  The bill proposes to “…establish a grant program…to fund the establishment of centers of excellence to support research, development and planning, implementation and evaluation of effective programs in financial literacy education for young adults and families ages 15 – 24 years old…”

If it strikes you as a bit ironic that the federal government is promoting financial literacy while it is simultaneously spending trillions of dollars more than it takes in, you’re not alone.  It’s the same old story – see a problem and then throw money at it.  Perhaps it would be a good idea to require all Congressmen to attend the first classes and then take a graded exam for public review!


As when I first wrote about the state of financial literacy in the US, the 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 we have recently witnessed during the credit crisis.  Had the subprime borrowers been more financially literate, it could be argued that they might not have taken on the mortgages that are little more than “toxic waste” on the books of America’s banks.

The same goes for overextended consumers who ran up debt by borrowing against their homes and running up credit card balances.  At present, households are “deleveraging” by paying down debt, but we don’t yet know if this will be a long-term behavior modification or just the result of tight credit and high credit card interest rates.

A final effect of financial illiteracy that we have discussed is in the political realm.  When I first wrote about the financial literacy crisis back in June of last year, we had not yet seen the results of the mid-term elections.  However, we now know that Republicans were swept into office by a landslide, largely because of the feeling that they could get spending and the national debt under control.

This makes me feel somewhat better about financial literacy, at least among voters, in that they elected those who they felt would most likely get government spending under control.  Now all the newly-elected Republicans have to do is show that they are not only different from the tax and spend Democrats, but also different from the Bush-era Republicans that showed they could spend taxpayers’ money with the best of them.

From a personal perspective, however, the most important lesson to be learned is the revelation from the various studies that financial literacy tended to be higher in children whose parents were financially literate.  Since economic and financial education may be lacking in the classroom, you may be your child’s best resource for learning about real-life financial issues.

To that end, 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.  They can also sign up for their own free subscription to the Forecasts & Trends E-Letter at the following link:

Forecasts & Trends E-Letter New Subscriber Link

Hoping for a financially literate electorate,

Gary D. Halbert

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 02-08-2011 2:55 PM by Gary D. Halbert