Why Are Americans So Bad With Money?

And is there a way to help them?

Jo Yong Hak (Reuters)

The financial know-how of most Americans stinks, roughly five years after the global financial recession officially ended.

The majority of people still can't correctly answer five basic questions about interest rates, mortgages, bonds, inflation, and risk-taking. The financial crisis may have prompted discussions about the need to promote financial literacy, but just 14 percent of 25,000 Americans surveyed knew the answer to all five questions, according to a 2012 report on financial capability in the U.S., published by the Consumer Financial Protection Bureau, the Treasury Department, and the FINRA Investor Education Foundation. 

Educators and academics say financial-literacy education remains a tricky endeavor. "I have not discovered in my own work any gold standard," says Anand R. Marri, an associate professor at Columbia University Teachers College and the vice president and head of economic education for the Federal Reserve Bank of New York. "There is a lot of interest in it from nonprofits, the federal government, state governments, schools, and corporations. But I have not seen a program and said, 'This is the best way to do it.' "

Now, researchers at the University of Arizona are trying to change this by conducting a multiyear study into the way young adults develop and gain financial knowledge. (The latest results will come out this June and will focus on the way twentysomethings navigate the tough job market and its effect on their finances.)

The hope is that the study's long-term results will help financial educators learn more about what causes people to spend, save, take on debt, rely on payday loans, or buy homes they cannot afford. "If we look at how these behaviors are formed, we have a better chance of intercepting them," says Joyce Serido, one of the study's primary researchers and an assistant professor at the University of Arizona.

Widespread financial-literacy education is not a new concept, first rising to prominence about 15 years ago. There are roughly 800 different types of financial-literacy curricula currently published in the U.S., says Marri. Institutions from the Federal Reserve to the Council for Economic Education to financial services companies offer guides on the best ways to teach young people about money, financial markets, and good saving habits.

The federal government alone spent $68 million on 15 financial-literacy programs in 2010, according to the Government Accountability Office. And the Jump$tart Coalition, a D.C.-based nonprofit that promotes financial education, has found that roughly 25 states now require some type of financial-literacy classes or similar exposure to graduate from high school.

The only problem with this myriad of options? They tend to teach financial literacy in a pretty didactic way by testing students on multiple-choice questions instead of asking them to really think through their financial values. "Just think of any one-semester course you took in high school. Do you remember it at all?" says Laura Levine, president and CEO of Jump$tart.

Add to this a flood of information and sales pitches coming out of the financial-services industry, and it's no wonder that Americans feel confused. A November 2013 study by the Consumer Financial Protection Bureau showed that the financial industry spends about $17 billion annually to market its products, whereas the federal government, nonprofits, schools, and corporations combined spend about $670 million on financial education. That comes out to about $54 per person per year spent on financial marketing versus a little more than $2 per person spent on financial education. It's hardly a fair battle.

The push among financial educators these days is to instead focus on the underlying behaviors that shape young people's financial decisions with the hope of eventually changing them. It is part of the broader field of behavioral economics, which posits that economists can only teach people to tweak their actions when they understand the psychology behind economic decisions.

That is the philosophical basis of the University of Arizona study that began as a research idea in 2006 and published its first few waves of its findings in 2009, 2010, and 2011. Funded by the National Foundation for Financial Education, the University of Arizona, and the Citi Foundation, the research started out following roughly 2,000 students at ages 17 or 18 as they entered college and began to make their own independent money decisions.

So far, the study has shown that parents hold enormous sway over shaping kids' financial lives. The second wave in 2010 showed that the recession tended to hit middle-class young adults harder than really poor or really rich kids because their families' financial lives were so upended by unemployment, the plummeting stock market, or weak housing prices.

After graduating from college, many of the young adults surveyed in 2011 made much worse financial decisions than they had in their late teens. "Kids were doing some dramatic things to get a handle on their finances," Serido says. "At this point, many of them had accrued huge amounts of debt from college but did not have careers or jobs lined up. Things were not rosy for the kids who graduated in 2011."

The next wave of research, scheduled for publication in June, will revisit the same young adults in their mid-twenties as they try to navigate the still-weak labor market and continue to lean on their parents for financial support. Serido hopes to follow this group through their mid-30s to map the way they develop their adult financial lives, both mistakes and successes.

Marri of Teachers College calls the University of Arizona study the best hope for rethinking and revamping the model of financial-literacy education. Other promising ideas include greater training for middle and high school teachers, who may find themselves teaching financial literacy alongside English, math, social studies, physics, or driver's education. Financial education that uses case studies instead of rote memorization, also tentatively seems to work well, say Marri, Levine, and Serido.

"We need to have more continuous education flowing to people," says Ted Beck, the CEO of the National Endowment for Financial Education, one of the funders of the University of Arizona study. "You need a foundation of knowledge and then ongoing reenforcement for it to work."

That's the hope of the University of Arizona researchers as they delve into the young adults' financial lives over a 20-year period—that they will discover what works over the long-term to make good financial habits stick. "What is loud and clear for me is that we are not teaching kids to be millionaires," says Serido. "Our goal is to help people understand that their financial behavior has impact on their well-being. That is the twist that is really important for kids to hear."