Commentary: Financial Ignorance Is Not Bliss

The basics of “Personal Finance 101” are eluding many of us. States should consider mandatory financial ed in schools.

By Dara Duguay
Director of Citi’s Office of Financial Education
June 2007

Last year, for the first time since the Great Depression, the personal savings rate in this country was in the negative range—at minus 1 percent to be exact. As befits an optimistic generation, the average Baby Boomer has saved only $50,000, excluding equity in their homes. Plus, average Americans spends $1.22 for every $1 they earn; it is hard to save money when you are living beyond your means.  

The basics of “Personal Finance 101” are eluding many of us. This is not surprising since learning about money is more often taught through trial and error rather than formal education. Simple topics like saving and investing and the wise use of credit are critical skills that are not usually taught prior to high school or college graduation.

You can’t expect people to be able to build a house just by giving them a saw, a hammer and some wood. Likewise, you can’t expect someone to know how to manage his finances just by giving him an income, a mortgage, a credit card and an insurance policy. People need to be taught how to use these tools in order to succeed.

Financial education is a critical component to alleviating poverty and achieving prosperity. In fact, a widely quoted study shows that students exposed to financial education curriculum mandates increased their lifetime net worth by one year. Research also reveals that people who receive financial education are more likely to balance their checkbooks, develop a financial plan and follow a budget.

April, once again, was Congressionally recognized as Financial Literacy Month. Numerous states passed resolutions to the same effect. But the gravity of the situation requires a sustained commitment.

The movement to require personal finance classes in schools is gathering momentum. Currently 15 states include personal finance instruction within a required class. Pending legislation in numerous states could increase this number.

If we fail to build on this momentum, we risk producing a generation of Americans who are incapable of managing the basic financial instruments of our modern economy. Therefore, as a matter of state policy, we should incorporate financial education into existing K-12 classes such as math and economics. Combining practicality with theory and providing “real life” learning is both efficient and effective.

Time will tell if a more financially literate population can reverse some of the negative trends like bankruptcies, low personal savings rates and record high incidences of foreclosure. It is clearly worth the gamble, however.

When Utah passed legislation several years ago to include mandatory financial education in high schools, policymakers optimistically hoped to see a decline in their state’s high bankruptcy rate. If this proves true, it will have been a prescient strategy.   

Will financial education cause credit-counseling centers to go out of business? Will it ensure that all Americans have a bank account?  Probably not, but I believe that understanding the importance of saving for retirement, living within a safe debt level, paying bills on time, and not signing a contract you don’t understand can have profound impacts. Following those simple rules can turn what might have been a money mess into a money success. 

This is why Citi has made a 10-year, $200 million global commitment to supporting non-profit financial education initiatives. Some examples include:

  • From Purses to Portfolios financial education program for women in Delaware
  • National Urban League’s financial education program in 13 cities
  • Financial education and wealth building collaboration in 28 states with ACORN, a community organization of low- and moderate-income families
  • Financing Your Independence program with the State University of New York's Educational Opportunity Center
  • Neighborhood Revitalization and Preservation Through Financial Education Project with the National Training and Information Center in five states

Citi will continue to support legislative efforts to ensure that the next generation of adults has the skills to avoid many of their parents' mistakes.