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The 5 groups to blame for our financial illiteracy

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Blaming everyone for being dumb is one of my most enjoyable activities. Today, a delightful foray into the world of why we’re financially illiterate — and whose fault it is.

Let’s start with a Freakonomics article by Stephen J. Dubner:

“1. Do you consider yourself financially literate?

2. If so, how did you get that way?

And now, a third question:

3. How important is widespread financial literacy to the health of a modern society?

Before you answer the first question, take this little quiz, borrowed from the website of Annamaria Lusardi, a professor of economics at Dartmouth who knows and cares more about financial literacy than anyone else you’re likely to encounter:

1. Suppose you had $100 in a savings account and the interest rate was 2 percent per year. After 5 years, how much do you think you would have in the account if you left the money to grow?

a. More than $102
b. Exactly $102
c. Less than $102
d. Do not know

2. Imagine that the interest rate on your savings account was 1 percent per year and inflation was 2 percent per year. After 1 year, would you be able to buy more than, exactly the same as, or less than today with the money in this account?

a. More than today
b. Exactly the same as today
c. Less than today
d. Do not know

3. Do you think that the following statement is true or false? “Buying a single company stock usually provides a safer return than a stock mutual fund.”

a. True
b. False
c. Do not know

The correct answers are …

a., c., and b. I am guessing that the vast majority of this blog’s readers got all three answers correct. But there’s probably money to be made in betting the opposite way.

Those three questions are the ones that Lusardi, along with Olivia Mitchell of Penn, have been inserting in a variety of major U.S. surveys. In a new working paper titled “Financial Literacy: An Essential Tool for Informed Consumer Choice?” (abstract here, download here), Lusardi writes that among respondents age 50 and older, only half of them got the first two answers right and only one-third of them got all three answers right.”

* * *

So what’s going on here?

It’s easy to point at others and say, “Duh, those are so easy. EVERYONE knows about interest rates! Haaha ha ah ahahaaha!!!”

But if we’re honest, we can all acknowledge that our finances are not as optimized as they should be. We over spend. We don’t save and invest enough. When it comes to spending, we claim certain things are important (“investing for the long term!”) but our behavior doesn’t reflect it.

And it’s incredibly hard to change our behavior.

Whose fault is it?

Lots of people, especially anonymous online nerds, love to claim that our entire financial situation is our responsibility. In “Ugh, why don’t fat people just eat less?” I showed why this is patently false.

Others like to debate minutiae and blame the economy, Wall Street, and everyone but themselves. You’ll notice this especially among commenters on newspaper sites.

Book excerpt: 5 groups to blame for our financial illiteracy

In my personal finance book, I put together a targeted list of people to blame. Here’s an excerpt:

“Why does just about everything written about personal finance make me want to paint myself with honey and jump into a nest of fire ants? Personal-finance advice has been geared toward old white men and taught by old white men for far too long. I don’t understand why newspaper columnists continue to write about tax-optimization strategies and spending less on lattes, hoping that young people will listen. We don’t care about that. We care about knowing where our money’s going and redirecting it to go where we want it to go. We want our money to grow automatically, in accounts that don’t nickel-and-dime us with fees. And we don’t want to have to become financial experts to get rich.

Now, I fully recognize that I’m a big fancy author (that’s right, ladies) and am therefore part of the “media.” Perhaps it’s uncouth to mock my brethren. Still, I can’t help myself. Pick up any major magazine and chances are you’ll see an article called “10 No-Hassle Tips for Getting Ahead with Your Finances.” Amusingly, the same writers who breathlessly encouraged us to buy real estate in 2007 are now advising us on “what to do in the downturn.” I’m sick and tired of the same old boring, tired, and frankly horrible financial opinions that are paraded around as “advice.”

More on this in Chapter 6.

Other People We Can Blame for Our Money Problems

There are other common excuses for why we don’t manage our money. Most of them are complete B.S.:

  • “Our education system doesn’t teach this,” people whine. It’s easy for people in their twenties to wish that their colleges had offered some personal-finance training. Guess what? Most colleges do offer those classes. You just didn’t attend!
  • I also often hear the cry that “credit-card companies and banks are out to profit off us.” Yes, they are. So stop complaining and learn how to game the companies instead of letting them game you.
  • “I’m afraid of losing money,” some of my friends say. That’s fair, especially after market losses during the global financial crisis, but you need to take a long-term view. Also, you can choose among many different investment options—some aggressive, some conservative—
    it depends on how much risk you’re willing to take. (Because of inflation, you’re actually losing money every day your money is sitting in a bank account.) Fear is no excuse to do nothing with your money. When others are scared, there are bargains to be found.
  • “What if I don’t know where to get an extra $100 per month?” It doesn’t have to be $100. And you don’t need to earn another penny. I’ll show you how to streamline your existing spending to generate that money to invest. Remember, $1 saved per day is $30 saved per month.

Too many of us are paralyzed by the thought that we have to get every single part of our personal finances in order before truly getting started managing our money. Should I use my 401(k) from work or open an IRA? Should I go for mutual funds or individual stocks? Do I need a variable annuity?

Here’s my answer: Do you need to be the Iron Chef to cook a grilled-cheese sandwich? No, and once you make your first meal, it’ll be easier to cook the next most complicated thing. The single most important factor to getting rich is getting started, not being the smartest person in the room.”

Want the full 6-week program? Get my book here for about $10.

Who did I miss? Is there anyone else we should blame? And how come we spend so much time blaming other people, but not doing anything about it?

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  1. Elizabeth Gage Link to this comment

    Well, we could try to blame consumer products companies, and their insidious, infuriating advertising which aims to make us feel inferior if we don’t have the car, deodorant, dog treats, flat screen tv, smartphone…

    However, as intelligent people we know better than to believe them and can resist their seductive appeals, so blaming them probably won’t work.

  2. Personally I think the majority of Americans don’t want to think about money – ever. There is so much psychological baggaged wrapped up in it. Getting rich takes a proactive approach to your lifestyle, spending habbits, earning money, etc. If you view money as a topic to be avoided and those who do talk about money as greedy you’re never going to get there.

    This is unfortunately more true for women… fewer women read financial news. At least if you’re reading financial news (as sensational as it might be) you have a chance of running into some meaningful bit of into that might help you adjust your thinking.

  3. Ramit, may want to run the grammar check on the lead sentence about people being dumb. Think the word you want is “pastimes.”

  4. Blame Jesus, because he started the whole “it’s cool to be poor” culture. And blame your parents. They suck at teaching you about money, and sex. Now every time I want “some” I have to spend $200 and risk arrest in alley. Thanks Dad!

  5. Nice correction. 😉

  6. Hi Paul

    Great article. My brother has is money in a 401k and when I asked him which funds they were investing in, and how long before he could move money around in the fund ? I just got a blank stare and a why would I move my money around.

    Crazy that he would take way more time buying a care and kicking the tires then he would figuring out how to manage several hundread thousand dollars.

  7. From the 3 question survey portion, don’t you think that by adding “I don’t know” as an answer choice the data became worthless? People taking these “surveys” probably had hundreds of questions to answrer and a portion didn’t feel like answering when the easy-out, no-think answer of “I don’t know” was available. How about if you gave people compensation for the survey based on how many questions were answered correctly. That being said, most people are indeed dumb.

  8. James — on the contrary, adding “I don’t know” makes the data more worthwhile. If people truly don’t know, then they’ll just randomly guess one of the two remaining options, thus skewing the results of the survey.

  9. This is Tyler of the Old White Men Anti-Defamation League and you are on our potty list.
    In my second country, Guatemala, there are tons of people who have elementary school education and make less then US minimum wage but they are way better at saving their money than Americans. Why, they have too, there is no one else there to pick up the slack if they run out.

  10. Hi Ramit,
    Long time reader. Love the blog. Dan Solin calls the typical financial advice we see “financial-pornography”. I think he’s right. We’re inundated with terrible, short-term focused advice. You’ve written a great book to help people out. Thanks for writing.