5 ms·

Financial Illiteracy Is Killing Us

19 points by grellas 16y ago

devijvers 16y ago
Actually, it's not financial illiteracy that's killing us. Image for a moment that we were financially literate, what would be able to do that we are not able to do today and what would be doing differently? Being financially literate would mean we would be able to read. However, as soon as we would be able to do that we would be shocked and we would walk away. What is killing us is not being able to financially write. Money is a medium that has been designed so that it can hardly be read let alone written. We need to redesign money. Money is a medium like all other media and it can be redesigned.
- rikthevik 16y ago
  > Money is a medium that has been designed so that it can hardly be read let alone written. We need to redesign money. Money is a medium like all other media and it can be redesigned. I have no idea what that means. When was money designed? Who designed it? Money is just something we use so that we don't need to directly trade chickens for laptops. The current financial structure has some problems, but humanity hasn't come up with any better method for exchanging wealth.
  - sdevijver 16y ago
    Define wealth. Money has lost nearly all its capability of exchanging wealth. Of course it was designed: it's a human tool and we designed it. Our current forms of money have hardly changed since 14th century Italy. Me thinks now is a good time for a rethink.
  - maushu 16y ago
    Debit cards come to mind, if only they were managed by the government and not by private entities.
    - anamax 16y ago
      > Debit cards come to mind, if only they were managed by the government and not by private entities. What govt would resist the temptation to do dumb things with debit cards? For example, the combination of school locations and laws about how close some people can live to schools means that there are many cities where such people can't live. (The specific category that I'm thinking of is registered sex offenders but there are others.) Govt means that the majority gets to decide what happens to the minority. What could possibly go wrong....
- scott_s 16y ago
  Good point, but the analogy falls apart because "literacy" implies being able to read and write.
terra_t 16y ago
"Financial literacy" is often a cover-up for schemes to brainwash consumers into believing "stocks always go up", and that you should sell your dreams down the river, give as much money to wall street as you can with your 401K, and kid yourself that you're going to be able to afford to send your kids to college and then retire comfortably some day. That's just such a cock-and-bull story that people conclude "finance is hard, let's go shopping" and pull out the credit cards.
- hammmatt 16y ago
  I agree with you that there great myths about finance. However, I do not find it fair to conclude that there is a mass belief that is all a lie. I think people just don't think. They are fine to just stretch their finances to whatever whims them think they can handle.
  - terra_t 16y ago
    Of course. The situationists have long asked the question of "Why don't people listen to revolutionary movements?" The answer is that people have a protective mechanism against BS in the media -- a kind of radical disengagement that keeps TV preachers and other demagogues from being much more dangerous than they are. People aren't offered a story that makes sense; the average person certainly doesn't have a coherent criticism of Wall Street, but, given no framework that works, they just live for the day.
    - hammmatt 16y ago
      I agree with you that given the percentage changes in the way we view money, there has to be massive social change in thought. I also agree that people filter what the news tells them. However, I disagree that the two are related. I don't believe the news media causes people to spend more because they aren't having some sort satisfaction. Other causes seem more likely to me. 1) People believe that their income will continually increase over their lifetime. 2) The increase in the number of advertisements over the last 50 years. 3)People have an accustomed lifestyle, but are making less money. Therefore, instead of cutting back they go into a little bit of debt. Which becomes alot of debt. And of course, all of the above. 3)
vital101 16y ago
As consumers, our biggest problem is living well within our means.
maukdaddy 16y ago
Financial literacy is not going to be taught in schools until it appears on some standardized test. Parents need to be picking up the slack and teaching their children these skills. For all of the helicoptering modern parents do, you'd think watching over finances would be part of it.
- ynniv 16y ago
  Or teaching their kids that producing or saving a dollar can be more rewarding than spending one.
  - rdtsc 16y ago
    That might be a hot or controvercial subject depending what potential banking or other corporate interests it might go against. Banks might not like the fact that a new generation of consumers wants to save too much, don't want to carry a credit card ballance, don't want to buy homes with mortgages they have to pay for 30 years, would rather buy a used car with saved money instead of finanancing it and so on. As much as the media harps about "financial illiteracy" there are also industries that thrive on that illiteracy. In general whenever there is illiteracy someone will take advantage of it. In this case I think it is a multi-billion dollar business. That business will try to go against education. It could very well be that lobbyist for large financial institutions would try to influence the curriculum. It would "court" the state education systems to make sure the "right" stuff is taught in the financial literacy course. I also can see this subject be as hot as religion and politics and perhaps that is also why it is not taught.
    - ynniv 16y ago
      I should hope that parents don't consider the interests of multi-national corporations when talking with their children. I assume that you meant the curriculum of public education, but even that should (should) be driven by local opinion and not corporate interests.
- Calamitous 16y ago
  You erroneous assumption is that the parents know these skills at all, let alone well enough to teach them.
loup-vaillant 16y ago
I'm not sure the ones which could have the power to make that happen actually want everyone to be financially literate. If we all were, our financial system would probably changes deeply (if not violently) within the decade. Same thing goes about the Internet and the food, by the way.
- smanek 16y ago
  What's wrong with the financial system and internet? I have a pretty intimate knowledge of both, and I'm OK with them (I don't know anything about food though ...)
  - Retric 16y ago
    The primary focus of the US financial system is sales. In large part this is based on the ignorance of the average American. Take a 25 year old who makes 30k / year and invests 3k/year in their 401k. Now figure out how much they pay in fees on that investment over the next 40 years. Now play the same game with a 25 year old who would like to invest 10 million and if anything they get worse service even if they get a lot more face time.
    - hugh3 16y ago
      I'm not sure what you're getting at here, partly because I've never invested in a 401K _or_ tried to invest $10 million cash. How much fees does each of these guys pay?
      - Retric 16y ago
        For a 401k a little over 1/2 a % per year or around (1.065 ^40/ 1.07 ^40) 17% of their final return over 40 years. For 10 million investment ~1% per year is not uncommon so something like (1.06^40 / 1.07^40) = 32% of their return over 40 years. Now plenty of people pay far more or less than these numbers, but that's a reasonable ballpark. For more details from someone with a little money: http://philip.greenspun.com/materialism/money http://philip.greenspun.com/materialism/money "Jeffrey Greene owned $500 million in Southern California real estate and was getting nervous about its value. He was an old friend of Paulson's and, in 2006, let Paulson pitch him on the virtues of investing in his new fund to bet against mortgages. Instead of agreeing to pay the 2-and-20 fee (2 percent annually raked off the top regardless of performance, plus 20 percent of any profits), Greene decided that he could run the trade himself. He pestered his Merrill Lynch broker until the guy got approval from top executives to allow a rich individual to participate in the illiquid and confusing credit default swap market. " http://philip.greenspun.com/book-reviews/the-greatest-trade-ever http://philip.greenspun.com/book-reviews/the-greatest-trade-...
reasonattlm 16y ago
"Economic ignorance is the death of cultures; it is presently eating away at the US, and is sadly most advanced in medicine and medical research." http://www.fightaging.org/archives/2006/02/death-for-everyone-before-inequality-for-anyone.php http://www.fightaging.org/archives/2006/02/death-for-everyon... http://www.fightaging.org/archives/2007/09/jealousy-fear-envy-and-economic-ignorance-powerful-poisons.php http://www.fightaging.org/archives/2007/09/jealousy-fear-env... http://www.fightaging.org/archives/2009/02/the-decline-is-always-slow-until-the-rapid-collapse-at-the-end.php http://www.fightaging.org/archives/2009/02/the-decline-is-al...
ezyang 16y ago
Say that I am financially illiterate. How do I fix this?
- djm 16y ago
  The same way you fix the problem of now knowing how to code, not knowing brain surgery, not knowing how to drive a car - buy some books and study. I'm not trying to be sarcastic, just to point out the strangeness of it all. Most people wouldn't turn the ignition key and start trying to drive a car without taking some instructon first, but they are happy to whip out that credit card whenever the chance allows them.
  - ezyang 16y ago
    Which books? I didn't learn to drive a car by reading books: I paid for lessons. I wouldn't learn brain surgery by reading books, I'd go to medical school. A rephrasing of this question: what level of financial literacy can a person reasonably expect to attain by just applying "common sense", and what is the baseline level of financial literacy that we should strive for?
    - djm 16y ago
      Well, OK, I just chucked a few examples out there without thinking them through. In retrospect I don't think you'd learn to code much just by reading books either. What I wanted to say was that to learn about managing your finances you need to take an active role in learning how things work - whether by reading books, going on a course, whatever. As a base level of financial literacy I don't think people need that much to make a big difference in their lives. Teach people budgeting, how to track their spending, and a basic understanding of savings and credit interest rates/compound growth etc. Teaching people to live within their means and use credit for "needs" instead of "wants" will be one of the hardest lessons to impart. I don't know how you'd accomplish that.
danilocampos 16y ago
I can vouch for this personally. tl;dr - Financial illiteracy really is screwing some people with their pants on. By any reasonable measure, my mom should be all set. Nothing more than a GED but she has started more than one successful business. Generally, she can drop herself into any town, open a shop for her services (dog grooming), and do great business. She's just really good at it. She's in her 40's now and made a boatload of cash between '03 and '09, before the recession really kicked her business in the teeth. It should be no big deal -- she should have over a $100,000 saved away to smooth out a rough patch like this one. Instead, she lost her house. Instead of keeping the nice, affordable big home she had three minutes from her shop, she increased her commute by 20 minutes in a bigger, more expensive house (with a pool!) she ended up unable to afford. Instead of saving, she bought big TV's, expensive pets, gambling and a Mercedes. Even Christmas of '09, when things were drum-tight, she was buying needless expensive gifts for people. My mom is financially illiterate. When she should have been saving for a rainy day and setting up her retirement, she was blowing a considerable amount of money on stupid things. Worst of all, she has already been down this path – she had to declare bankruptcy back when I was a kid. The other part that sucks: This crap gets passed on. I was financially an idiot for years. Only in the last couple of years have I gotten a frugal grip on my life, and now I get to dig out of some stupid debt decisions.

19 points by grellas 16y ago

Actually, it's not financial illiteracy that's killing us. Image for a moment that we were financially literate, what would be able to do that we are not able to do today and what would be doing differently? Being financially literate would mean we would be able to read. However, as soon as we would be able to do that we would be shocked and we would walk away. What is killing us is not being able to financially write. Money is a medium that has been designed so that it can hardly be read let alone written. We need to redesign money. Money is a medium like all other media and it can be redesigned.

rikthevik 16y ago
> Money is a medium that has been designed so that it can hardly be read let alone written. We need to redesign money. Money is a medium like all other media and it can be redesigned. I have no idea what that means. When was money designed? Who designed it? Money is just something we use so that we don't need to directly trade chickens for laptops. The current financial structure has some problems, but humanity hasn't come up with any better method for exchanging wealth.
- sdevijver 16y ago
  Define wealth. Money has lost nearly all its capability of exchanging wealth. Of course it was designed: it's a human tool and we designed it. Our current forms of money have hardly changed since 14th century Italy. Me thinks now is a good time for a rethink.
- maushu 16y ago
  Debit cards come to mind, if only they were managed by the government and not by private entities.
  - anamax 16y ago
    > Debit cards come to mind, if only they were managed by the government and not by private entities. What govt would resist the temptation to do dumb things with debit cards? For example, the combination of school locations and laws about how close some people can live to schools means that there are many cities where such people can't live. (The specific category that I'm thinking of is registered sex offenders but there are others.) Govt means that the majority gets to decide what happens to the minority. What could possibly go wrong....
scott_s 16y ago
Good point, but the analogy falls apart because "literacy" implies being able to read and write.

terra_t 16y ago

"Financial literacy" is often a cover-up for schemes to brainwash consumers into believing "stocks always go up", and that you should sell your dreams down the river, give as much money to wall street as you can with your 401K, and kid yourself that you're going to be able to afford to send your kids to college and then retire comfortably some day. That's just such a cock-and-bull story that people conclude "finance is hard, let's go shopping" and pull out the credit cards.

hammmatt 16y ago
I agree with you that there great myths about finance. However, I do not find it fair to conclude that there is a mass belief that is all a lie. I think people just don't think. They are fine to just stretch their finances to whatever whims them think they can handle.
- terra_t 16y ago
  Of course. The situationists have long asked the question of "Why don't people listen to revolutionary movements?" The answer is that people have a protective mechanism against BS in the media -- a kind of radical disengagement that keeps TV preachers and other demagogues from being much more dangerous than they are. People aren't offered a story that makes sense; the average person certainly doesn't have a coherent criticism of Wall Street, but, given no framework that works, they just live for the day.
  - hammmatt 16y ago
    I agree with you that given the percentage changes in the way we view money, there has to be massive social change in thought. I also agree that people filter what the news tells them. However, I disagree that the two are related. I don't believe the news media causes people to spend more because they aren't having some sort satisfaction. Other causes seem more likely to me. 1) People believe that their income will continually increase over their lifetime. 2) The increase in the number of advertisements over the last 50 years. 3)People have an accustomed lifestyle, but are making less money. Therefore, instead of cutting back they go into a little bit of debt. Which becomes alot of debt. And of course, all of the above. 3)

vital101 16y ago

As consumers, our biggest problem is living well within our means.

maukdaddy 16y ago

Financial literacy is not going to be taught in schools until it appears on some standardized test. Parents need to be picking up the slack and teaching their children these skills. For all of the helicoptering modern parents do, you'd think watching over finances would be part of it.

ynniv 16y ago
Or teaching their kids that producing or saving a dollar can be more rewarding than spending one.
- rdtsc 16y ago
  That might be a hot or controvercial subject depending what potential banking or other corporate interests it might go against. Banks might not like the fact that a new generation of consumers wants to save too much, don't want to carry a credit card ballance, don't want to buy homes with mortgages they have to pay for 30 years, would rather buy a used car with saved money instead of finanancing it and so on. As much as the media harps about "financial illiteracy" there are also industries that thrive on that illiteracy. In general whenever there is illiteracy someone will take advantage of it. In this case I think it is a multi-billion dollar business. That business will try to go against education. It could very well be that lobbyist for large financial institutions would try to influence the curriculum. It would "court" the state education systems to make sure the "right" stuff is taught in the financial literacy course. I also can see this subject be as hot as religion and politics and perhaps that is also why it is not taught.
  - ynniv 16y ago
    I should hope that parents don't consider the interests of multi-national corporations when talking with their children. I assume that you meant the curriculum of public education, but even that should (should) be driven by local opinion and not corporate interests.
Calamitous 16y ago
You erroneous assumption is that the parents know these skills at all, let alone well enough to teach them.

loup-vaillant 16y ago

I'm not sure the ones which could have the power to make that happen actually want everyone to be financially literate. If we all were, our financial system would probably changes deeply (if not violently) within the decade. Same thing goes about the Internet and the food, by the way.

smanek 16y ago
What's wrong with the financial system and internet? I have a pretty intimate knowledge of both, and I'm OK with them (I don't know anything about food though ...)
- Retric 16y ago
  The primary focus of the US financial system is sales. In large part this is based on the ignorance of the average American. Take a 25 year old who makes 30k / year and invests 3k/year in their 401k. Now figure out how much they pay in fees on that investment over the next 40 years. Now play the same game with a 25 year old who would like to invest 10 million and if anything they get worse service even if they get a lot more face time.
  - hugh3 16y ago
    I'm not sure what you're getting at here, partly because I've never invested in a 401K _or_ tried to invest $10 million cash. How much fees does each of these guys pay?
    - Retric 16y ago
      For a 401k a little over 1/2 a % per year or around (1.065 ^40/ 1.07 ^40) 17% of their final return over 40 years. For 10 million investment ~1% per year is not uncommon so something like (1.06^40 / 1.07^40) = 32% of their return over 40 years. Now plenty of people pay far more or less than these numbers, but that's a reasonable ballpark. For more details from someone with a little money: http://philip.greenspun.com/materialism/money http://philip.greenspun.com/materialism/money "Jeffrey Greene owned $500 million in Southern California real estate and was getting nervous about its value. He was an old friend of Paulson's and, in 2006, let Paulson pitch him on the virtues of investing in his new fund to bet against mortgages. Instead of agreeing to pay the 2-and-20 fee (2 percent annually raked off the top regardless of performance, plus 20 percent of any profits), Greene decided that he could run the trade himself. He pestered his Merrill Lynch broker until the guy got approval from top executives to allow a rich individual to participate in the illiquid and confusing credit default swap market. " http://philip.greenspun.com/book-reviews/the-greatest-trade-ever http://philip.greenspun.com/book-reviews/the-greatest-trade-...

reasonattlm 16y ago

"Economic ignorance is the death of cultures; it is presently eating away at the US, and is sadly most advanced in medicine and medical research." http://www.fightaging.org/archives/2006/02/death-for-everyone-before-inequality-for-anyone.php http://www.fightaging.org/archives/2006/02/death-for-everyon... http://www.fightaging.org/archives/2007/09/jealousy-fear-envy-and-economic-ignorance-powerful-poisons.php http://www.fightaging.org/archives/2007/09/jealousy-fear-env... http://www.fightaging.org/archives/2009/02/the-decline-is-always-slow-until-the-rapid-collapse-at-the-end.php http://www.fightaging.org/archives/2009/02/the-decline-is-al...

ezyang 16y ago

Say that I am financially illiterate. How do I fix this?

djm 16y ago
The same way you fix the problem of now knowing how to code, not knowing brain surgery, not knowing how to drive a car - buy some books and study. I'm not trying to be sarcastic, just to point out the strangeness of it all. Most people wouldn't turn the ignition key and start trying to drive a car without taking some instructon first, but they are happy to whip out that credit card whenever the chance allows them.
- ezyang 16y ago
  Which books? I didn't learn to drive a car by reading books: I paid for lessons. I wouldn't learn brain surgery by reading books, I'd go to medical school. A rephrasing of this question: what level of financial literacy can a person reasonably expect to attain by just applying "common sense", and what is the baseline level of financial literacy that we should strive for?
  - djm 16y ago
    Well, OK, I just chucked a few examples out there without thinking them through. In retrospect I don't think you'd learn to code much just by reading books either. What I wanted to say was that to learn about managing your finances you need to take an active role in learning how things work - whether by reading books, going on a course, whatever. As a base level of financial literacy I don't think people need that much to make a big difference in their lives. Teach people budgeting, how to track their spending, and a basic understanding of savings and credit interest rates/compound growth etc. Teaching people to live within their means and use credit for "needs" instead of "wants" will be one of the hardest lessons to impart. I don't know how you'd accomplish that.

danilocampos 16y ago

I can vouch for this personally. tl;dr - Financial illiteracy really is screwing some people with their pants on. By any reasonable measure, my mom should be all set. Nothing more than a GED but she has started more than one successful business. Generally, she can drop herself into any town, open a shop for her services (dog grooming), and do great business. She's just really good at it. She's in her 40's now and made a boatload of cash between '03 and '09, before the recession really kicked her business in the teeth. It should be no big deal -- she should have over a $100,000 saved away to smooth out a rough patch like this one. Instead, she lost her house. Instead of keeping the nice, affordable big home she had three minutes from her shop, she increased her commute by 20 minutes in a bigger, more expensive house (with a pool!) she ended up unable to afford. Instead of saving, she bought big TV's, expensive pets, gambling and a Mercedes. Even Christmas of '09, when things were drum-tight, she was buying needless expensive gifts for people. My mom is financially illiterate. When she should have been saving for a rainy day and setting up her retirement, she was blowing a considerable amount of money on stupid things. Worst of all, she has already been down this path – she had to declare bankruptcy back when I was a kid. The other part that sucks: This crap gets passed on. I was financially an idiot for years. Only in the last couple of years have I gotten a frugal grip on my life, and now I get to dig out of some stupid debt decisions.