Are Americans “Financially Illiterate” and Causing Bankruptcies?
New Research May Shed Light on Your Money Troubles
by www.SixWise.com

Americans owe close to $1 trillion in credit and charge card debt, which is up more than 25 percent since 2003, the Federal Reserve reports. And this doesn’t include the $10.54 trillion in mortgage debt.

Now, with the economy slumping many are having trouble keeping up with their bills, and as a result bank-issued credit-card delinquencies hit their highest level in five years during the second quarter of 2008, according to a January 2009 report by the American Bankers Association. Consumer bankruptcies also increased drastically last year by nearly 33 percent, according to the American Bankruptcy Institute and the National Bankruptcy Research Center.

"We're in a different time than we've been in any of our living memories," Gerri Detweiler, credit advisor for Credit.com told SmartMoney.com. "The level of debt that consumers owe is much higher than it's been in the past, and there's this big gap in [debt] solutions."

All of this debt may not really be Americans’ fault, though, as a recent survey found many adults simply don’t understand debt … and that’s why they have so much of it.

The survey, conducted by Harvard Business School and Dartmouth College professors and TNS, asked 1,000 people to figure out how long it would take to pay off a hypothetical credit card debt. Only about 36 percent figured it out correctly, while 18 percent didn’t know how to respond and 32 percent over-estimated.

Bob Neuhaus, the executive vice president and head of the financial services sector in the U.S. for TNS, told CNNMoney.com that Americans don’t realize they don’t understand personal finance issues like compound interest.

"If financial literacy was higher, you would see more caution in the use of consumer debt. It would not eliminate the problem, but it would mitigate [it],” he told CNNMoney.com.

Further compounding the problem is that many Americans have little financial cushion to fall back on if times get tough. A second survey of 1,000 Americans by the American Savings Educational Council (ASEC) and America Saves found that just 53 percent of Americans have enough savings, and only 28 percent save the recommended 10 percent of their annual income.

Adults Aren’t the Only Ones Who Could Benefit From Finance Lessons

Teenagers also fall short when it comes to being responsible spenders. Nearly one-third of high school seniors have credit cards, and by the time they graduate college more than half have accumulated up to $5,000 in debt, according to this article on Mcclatchydc.com.

The author also points out that surveys show these young adults are financially illiterate, with little understanding of interest, minimum payments, credit reports, identity theft or how long it takes to pay off student loans.

He notes that Ben Bernanke, the chairman of the Federal Reserve, even highlighted the importance of financial literacy from an early age:

"In light of the problems that have arisen in the subprime mortgage market, we are reminded how critically important it is for individuals to become financially literate at an early age so they are better prepared to make decisions and navigate an increasingly complex financial marketplace," Bernanke said.
 
How to Shrink Your Debt and Become Financially Savvy (and Teach Your Kids to be Too)

First and foremost, you need to have a financial plan, including a budget and a debt payment plan. Of course, before you devise a plan, you need to know how much debt you’re carrying, and at what interest rates. So make a list of what you owe and tally up your total debt.

Next, read this step-by-step guide on how to dig yourself out of debt. Basically, you should pay your necessities (mortgage, food, utilities) first, then move on to taxes and student loans. From there focus on paying down one credit card at a time, and start with the one with the highest interest rate.

Do whatever it takes to make sure you’re paying more than the minimum on your credit cards, as paying only the minimum, it can take 10 years or more to pay off a card. You can consider downsizing your home, cutting back on unnecessary splurges or even taking a second job.

According to the Bureau of Labor statistics, 8.5 million Americans have already taken a second job to meet regular household expenses or pay off debt.

Perhaps most importantly, you’ll want to talk to your kids about your financial situation -- including the steps you’re taking to remedy it -- and teach them how to become financially responsible when they’re adults.

"Children are listening when we talk about money," explains Laura Fisher, ABA Education Foundation director on Forbes.com. "With the economy as the new buzz word, it is the ideal time for parents to talk money with children. But parents need to do more than talk; they need to be real life examples of responsible money managers for their children."

Financial health is one of the six corners of true "whole" health. It is widely proven that stress is the number one cause of disease, and money-related problems are the number one cause of stress, especially in this economy.

Therefore, getting your finances straightened out, and helping your kids and grandkids to learn solid personal finance skills at a young age, will not only give them a head-start in understanding and effectively managing money down the road, but will also have a direct impact on your and your family’s overall health and well-being.

Recommended Reading

How to Dig Yourself Out of Debt

How to Use the Current Economy as a Premier Lesson to Teach Your Kids About Money Management

Sources

McClatchydc.com March 15, 2009

SmartMoney.com January 30, 2009

Reuters.com January 2, 2009

CNNMoney.com February 26, 2008