New Year’s Resolution–Don’t Be Financially Illiterate

31 Dec New Year’s Resolution–Don’t Be Financially Illiterate

Anyone who works with consumers these days–attorneys, housing counselors, lenders, and brokers and, for that matter, anyone who reads media reports on the mortgage crisis–has no doubt reacted to some tale of financial woe like this: “How could anyone be that dumb!” We’ve all heard some version of the exploding ARM, the payments which are higher than the borrower’s monthly income, the “liar’s loans” with no proof of income (or anything else) required. Whether we are reacting to the lender’s nonsensical approval of the loan, or the borrower’s outrageously optimistic assumptions, at some point we come across a scenario that just boggles the mind.

Of course, in many of those cases, there is an explanation, if you know the background. Many transactions which appear ridiculous in hindsight made perfect sense, or at least some sense, at the time they were transacted. But there may be a bigger issue at work here: Americans’ abysmal financial literacy.

Bob Sullivan, of MSNBC’s Red Tape Chronicles, has a lot to say about financial literacy, or “innumeracy.”

Turns out, there’s an entire field of study — albeit a small one — devoted to this subject. It’s called “innumeracy” — or mathematical illiteracy. It’s a hidden epidemic in our society. And the consequences are dire.Just as there is a hidden epidemic of people who are functionally illiterate in our country, there is big problem (bigger, by my reckoning) with people who can’t do basic math. There’s no way to function in our society without understanding money, percentages, interest calculation and so on. Yet in a recent government study, less than one in seven American adults ranked “proficient” at math.

Here are a few examples of innumeracy in action:

According to the Department of Education’s National Assessment of Adult Literacy, U.S. adults are terrible at solving real-world math problems, like calculating tips or comparing prices in grocery stores. Some dismal results:

*Only 42 percent were able to pick out two items on a menu, add them, and calculate a tip.

*Only 1 in 5 could reliably calculate mortgage interest.

*1 in 5 could not calculate weekly salary when told an hourly pay rate.

*Only 13 percent were deemed “proficient.” Worse yet, only 1 in 10 women, 1 in 25 Hispanics and 1 in 50 African Americans made the grade.

*Americans are terrified of numbers when it counts most: 20 million Americans pay someone to file their 1040EZ, a one-page tax form with around 10 blanks to fill out.

If ever there was any doubt about the importance (to all of us) of financial literacy, the last two years have proved the point, in spades. Now, I don’t doubt that there have been other factors at work in creating the current mortgage crisis. Like greed, for example. And magical thinking. I am inclined to think those factors played the largest role. But consumers are largely powerless to address corporate greed, as manifested by bankers who created more and more exotic securities to sell in order to prop up paper profits, and not incidentally, their bonuses. And we are largely powerless to address the kind of magical thinking that allows mortgage brokers, lenders, and rating agencies to expect the same outcome from no-doc, no down-payment loans as from traditional, thoroughly underwritten mortgage loans. But we can, and should, learn to do the math.

One reason to increase our financial literacy is to make it harder to rip us off. If you can’t calculate a simple interest rate, how do you know you aren’t paying too much on your car, your credit cards, or even your mortgage? If you can’t add, how do you know your bank, lenders, and even the cashier at the grocery store isn’t ripping you off?

Perhaps more importantly, if you can’t do those things you can’t budget, you can’t save, and you can’t plan for things like retirement and college for your kids. It is difficult to accumulate wealth, and if you manage to do that despite your financial illiteracy, you are setting yourself up as a target for every kind of scam artist. And if you can’t accumulate wealth, plan for retirement, and take care of your family, you are setting yourself up for a lifetime of financial stress and disappointment.

The resources are out there. There are non-profit counseling services to help you learn to budget. There are free interest and amortization calculators online. (Several calculators are available at www.bankrate.com, but that’s just one example.) There are books, and blogs, and every kind of article imaginable. I know math freaks a lot of people out (which is why people pay someone to file their 1040EZs) but if you can read, you can learn to do this. And if you are reading this and you know how to do this, help someone who can’t. Don’t do it for them–teach them to do it themselves. And for mercy’s sake, teach your kids, or find someone else who can. Ignorance is not bliss–it’s expensive, it’s offensive, and it affects all of us.

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Däna (pronounced "Donna") Wilkinson, has been a bankruptcy lawyer in South Carolina for 20 years. She is certified as a bankruptcy specialist by the South Carolina Supreme Court.
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