The Bee Cave Bee

A Nation of Financial Illiterates? - the second in a series of articles from our friends at Halbert Wealth Management:
According to a recent 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.  Put differently, 73% of young adults don’t have a clue regarding basic economics and investments.  However, it’s not just the young who have this problem.

Dr. Annamaria Lusardi, one of the authors of the JCA study, has been studying financial literacy for many years and is quite a prolific author on the subject.  Dr. Lusardi also published an earlier report for the US Financial Crisis Inquiry Commission (FCIC) that included a broader age range and an expanded, five-question test.  Unfortunately, the results are about the same: the majority of Americans do not understand basic financial principles.

At first glance, you might find these results hard to believe.  After all, Americans have been bombarded with stock market news on cable news networks since the dot-com bull markets of the late 1990s.  Plus, we’ve experienced two painful bear markets over the last decade that should have taught us something. 

In addition, the average worker in private industry today is likely to be covered by a 401(k) plan, which requires that participants receive investment education to enable them to better allocate their contributions.  Thus, Americans, as a rule, should be well prepared to answer some basic investment questions, right?  Wrong!

Dr. Lusardi noted the following in the FCIC report:  “While the correct response to [an] individual question is sometimes high … less than 10 percent of respondents are able to answer all questions correctly.”

The implications of these studies are sobering.  Dr. Lusardi points out that lack of proper financial grounding can cause individuals to improperly manage debt, incur sizeable interest charges and fees, not be familiar with the terms of their mortgages and have a hard time doing the basic math necessary to manage their financial affairs.

While the political implications are not discussed in either of these studies, it’s easy to see that lack of financial sophistication can lead to poor decisions, which may then become a rallying cry for government assistance (sound familiar?).   Plus, how can we expect voters to elect representatives who can help restore America’s fiscal integrity when they don’t understand basic economic concepts themselves?

The solution?  One of the more important findings of the JCA study 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.  Dr. Lusardi also suggests that financial literacy should be addressed through high school classes designed to teach the basics.  She reasons that, while learning financial matters from parents is probably the best way, not everyone has this opportunity. 

There’s an old saying that “people don’t plan to fail, they fail to plan.”  These recent studies suggest that, for the majority of Americans, the failure to plan has now become a national pastime.  If you feel that you or someone you know could be better grounded in financial matters, feel free to contact us at This e-mail address is being protected from spambots. You need JavaScript enabled to view it and we’ll be happy to steer you to some good basic resources.

Take the Test!

One of the financial literacy tests developed by Dr. Lusardi is available at the link below.  Take the test yourself and see how you do.  Also, let your friends and loved ones know about the test and get them to take it.  Click HERE.

Halbert Wealth Management, Inc. (HWM) is a Registered Investment Advisor based in Bee Cave, Texas.  As a “Manager of Managers,” HWM matches investor needs to a nationwide group of third-party professional money managers.  HWM seeks out strategies that can reduce the risk of investment losses while providing reasonable returns.