The document discusses the lack of financial literacy in the American middle class, which has contributed to high levels of consumer debt and economic instability. It argues that current education fails to teach financial comprehension - understanding how to spend less and mitigate risks. The solution proposed is reforming education to emphasize frugality from a young age, increasing the use of cash to disconnect spending from credit, and enacting transparency laws to clearly illustrate the risks of debt. Widespread financial literacy would benefit both individuals and the overall economy.

1. The Effects of Financial Illiteracy in the American Middle Class
Shawn Tkach
Summary:
The lack of Financial Literacy in the United States, that runs rampant across the poor
and middle class (predominantly), has resulted in the greatest stratification of wealth since the
Great Depression (Weissmann 1). Americans are becoming increasingly obsessed about
making more money, while still misunderstanding how to use it. This has led to miseducation in
the country’s youth and aided significantly in generational poverty (“Getting it Right on the
Money”).
Higher education is attempting to improve literacy (ex: Champlain College’s Financial
Sophistication Lead Class) but currently only attacks this issue from a standpoint of mere
knowledge, however, knowledge without application is useless. It does not matter if you know
how a credit score is calculated if you don’t understand that buying things on credit (intentionally
indebting yourself) can destroy your financial future.
Most schools/universities do not teach students how to be intelligent with their money,
but rather how to make more money (Bortz 1). This attempts to fix the symptom (not having
“enough” money) and not the underlying problem (not handling money wisely). Miseducation in
the middle class, coupled with institutionalized poverty in the lower class, has created enormous
governmental pressures to fix this problem. Historically these circumstances, left unaddressed,
have led to revolution and often a nation’s demise (Archer 2).
Prevalence:
Currently the middle-class American is swimming in personal debt. The average
outstanding mortgage debt alone tops $155,000, an amount that many will be lucky to absolve
themselves of (Chen 1). In an age of plastic cards and consumption most have less than $500
in their personal savings account. Even in the upper-middle class ($75-99,0000), barely half
saved anything at all in 2012 (Schrager 1). These patterns of debt have left an astounding 76
percent of American’s living paycheck to paycheck (Johnson 1).
This data coincides with the general understanding that Americans are unable to grasp
basic economic principles. Although more prevalent in the nations youth, this is reflected across
all age demographics.
“Dozens of studies show that Americans of all ages struggle on tests about the
fundamentals of personal finance and economics. For example, in a survey testing the
proficiency of high school students on the basics of investing, insurance, mortgages, and
other financial subjects, the students, on average, only answered 48.3 percent of the
questions correctly” (Dinwoodie 3).
On this same test, first year college students scored even lower, earning merely 34.8 percent on
average, while the typical adult was barely able to pass with a “C” (Dinwoodie 6).

2. The Importance of Education:
Personal responsibility and increased knowledge are two key factors in mitigating the
risky financial behavior that led to the economic crisis in 2008 (and others before) (U.S. Dept. of
Treasury). Though the causes for any collapse are massively complex, the mispricing of
financial risk no doubt contributes heavily (Gallery 1).
“...it is undeniable that a lack of financial literacy is a contributing factor. Far too
many Americans entered into home and other loan agreements that they did not
understand and ultimately could not afford” (U.S. Dept. of Treasury).
It is clear that financial understanding among the middle class in particular is vital to the
nation's overall economy. A case study of middle class literacy in Thailand confirms these
findings, concluding that, “... improving the financial literacy of the emerging middle class
provides a double dividend: it increases the welfare of this group and also contributes to
financial development, which is a driver of growth” (Grohmann 3). Unfortunately there have
been very few attempts at reforming financial understanding among the general populous in
America.
Only four states require the testing of students’ personal finance knowledge for grades
K-12 (MI, TN, UT, VA) (Prah 1). In the past four years only a single additional state has adopted
similar policies, despite national economic unrest, leaving the majority of young adults lacking
necessary literacy (Council for Economic Education). “The problem of financial illiteracy at the
high school level is becoming a growing pandemic in America” (Harrelson). While these states
recognize the need to implement a curriculum, the effectiveness of current standards may prove
to be an issue.
A recent case study of school teachers in Taiwan validated the connection between
teacher’s financial literacy and their ability to educate students on economic principles. If
financial literacy is wavering across all ages, as data suggest, then “teachers’ own lack of
financial literacy would inhibit their teaching financial education in the classroom” (Deng 1). This
has led state senators in North Carolina to push for legislation that will prompt schools to
provide outlets for teachers to educate themselves accordingly (Hagan 1). Clearly, continued
education and reform is necessary at some level.
Federal Strategyand its Downfall:
In 2003 the Financial Literacy and Education Commission was created under the Fair
and Accurate Credit Transactions Act. The intent of this Commission was to establish a national
strategy for financial education, after a record number of individuals found themselves in
exorbitant credit card debt. Along with a dot gov website and a financial telephone hotline, a
number of other resources were formed in order to increase literacy rates (U.S. Department of
the Treasury). Regrettably, five years after its inception the housing market crashed, exhibiting
higher levels of financial ignorance than even before.
However, it may be unfair to peg current curriculums as failures; information on their
success is still emerging and remains inconclusive (Collins 2). Moreover, data indicates that

3. advice often serves, “as a complement to, rather than a substitute for, financial capability:
individuals with higher incomes, educational attainment, and levels of financial literacy are most
likely to receive financial advice” (Collins 1). Individuals who seek financial advice (from
professionals) are more likely to make an informed decision. Unfortunately, most people who
seek advice are savvy enough financially to understand the need. This may explain the lack of
effectiveness in current financial reform programs.
A Culture of Credit:
Many of the aforementioned issues revolve around the fundamental abuse of credit
(Harrelson). The cataclysm of credit has indeed bridged itself across all age demographics; its
advent correlating heavily with debt cycles. Although only available to a few exclusive
individuals at first, credit cards began to emerge with popularity around the late 50’s early 60’s.
By the 70’s,
“16 percent of households held at least one bank credit card; by 1998, 68 percent of households
did so. Only 37 percent of families with a bankcard carried a balance in 1970, but 55 percent did
so in 1998. For those carrying a balance, the average balance, adjusted to 1998 dollars to
eliminate the influence of inflation, was $839 in 1970 and $4,073 in 1998” (Woolsey).
Currently the average consumer in America has 1.96 credits cards. Of these, over 62 percent
carry a balance, each amounting to roughly 8,220 dollars (“Credit Cards”).
Our Debt Society:
This growing trend of personal debt is staggering, yet it has received nominal attention
over the years. This lack of recognition may, in part, be due to the nature of our economy. John
Maynard Keynes popularized the economic concept of paradox of thrift that states, “ if everyone
tries to save more money during times of economic recession, then aggregate demand will fall
and will in turn lower total savings in the population because of the decrease in consumption
and economic growth” (Paradox of Thrift). As a nation, our wealth (GDP) is not built on thrift,
and thus promoting a lifestyle of saving equates to the less growth. The benefits (for the
economy) can be seen when real wages for Americans grew stagnant in the 70’s, while
productivity continued to steadily increase.
As previously stated, there are a number of reasons for any economic phenomena, but
revolving debt correlates almost exactly (see citations). Data from the Bureau of Economic
Analysis shows that GDP directly follows consumer debt; more consumer debt equating to a
greater GDP (Richard Vague). Additional examples of this can be noted in the relationship
between revolving consumer debt (credit/interest based) and economic productivity (U.S.
Federal Reserve).
Summation:

4. The lack of financial literacy has led to an overreliance on credit and left the middle class
floundering in debt. While consumer spending boosts GDP, widespread bankruptcy drains the
overall pot (e.g. crash of 2008). Although the economy made steady gains as consumer debt
piled up, it suffered greatly once individuals could no longer keep up with revolving debt.
Emphasizing that “a healthy economy needs a healthy middle class” (Solman 1). It is no
surprise that financial literacy and educational opportunities correlate heavily to an individual’s
ability to build wealth. Despite being squeezed, widespread financial literacy would benefit the
middle class and the overall economy (Behrman 1).
Strategy
The Misunderstanding and Misrepresentation of Credit:
As a country, our current curriculum has failed to significantly address issues of financial
literacy in the middle class. This is compounded by the unwillingness to capitalize on advice for
those who are in most need of it (Collins 1). If the situation is not addressed in the immediate
future, it is likely we will see another economic crash. For these reasons we must restructure the
current financial education model to include the dangers of accruing personal debt via credit and
credit cards, require banks to illustrate the current financial state of the average credit card
wielding American, and propose an alternative before sending any individual home with a debt
contract.
The great misunderstanding of the 21st century is that individuals need to attain a credit
card (or credit) at some point in their life to survive. It is not uncommon to hear teachers, car
salesmen, and realtors explain the fundamentals of “good” debt. Friendly words like credit and
payment plans have coaxed millions of Americans, who don’t know any better, into a life of
blatant debt slavery. It is notable that when one signs any document allowing him to take on
personal debt it is formally known as a Writ of Indenture (“Bond-Indenture”).
First and foremost, credit predominantly allows you to buy what you cannot afford.
Today, debit cards offer the same convenience, ability, and even rewards, yet they remain less
popular (Pritchard 1). While most Americans believe themselves capable of handling their
finances wisely data is proving to be contrary,
“Despite the low levels of financial literacy, many people think they know more
than they do, and end up paying the price. When asked, 76 percent rated themselves as
being good at day-to-day financial matters such as managing their credit cards. But
among the percentage of those who gave themselves the highest marks, one-third were
handling their finances in ways that increased their costs — making minimum payments
on their credit cards, incurring late payment fees or taking out cash advances”
(Singletary 1).
Many individuals are unwilling to humble themselves enough to receive financial advice and in
doing so will seek out “Yes” men. It does not take an astronaut to understand that a sub-prime

5. mortgage (over thirty years) is a terrible idea; however, the temptation of a beautiful house is
enough to intentionally remain ignorant.
Educational Reform and Financial Comprehension:
Proper education forces individuals to think critically about situations; creating habits of
reasoning and problem solving (ideally). Current education models fail because they do not form
habits; they merely push knowledge. Students may learn how to balance a ledger and pay their
bills, but not how to mitigate expenses. Over 85 percent of new cars and half of all used cars
are bought with loans (“Bad Carma”). While a strong case can be made for “needing” a car, the
payment is almost always avoidable (e.g. buying a different car). For this reason, Financial
Literacy should rather be re-termed as Financial Comprehension, as this is the ultimate goal.
For example: a student may be literate in reading yet maintain a third graders comprehension;
the same goes for financial literacy.
A key aspect of comprehension is understanding how to mitigate risk. Financially, the
most obvious way to do this is to save money; ideally enough to act as a buffer in case of an
emergency. Most people who don’t have any savings (roughly one third of Americans) will tell
you they have no room in their current budget (Jones 1). Sometimes this may indeed be the
case, however, more often than not, the issue lies in their fundamental handling of expenses. As
previously stated, one third of individuals who perceived themselves to be money-wise were
actually “handling their finances in ways that increased their costs” (Singletary 1).
The new financial comprehension curriculum will focus not on how to aid an individual in
earning more, but rather spending less. America is a consumer culture that is obsessed with
making more to get more; this is a cycle that never ends (e.g. why people who win the lottery
still go bankrupt) (Woodruff 1). In order for the majority of America to accumulate wealth, the
impulse to consume must be curtailed. The majority of individuals with a net worth of over one
million dollars did so by being habitually frugal (Thomas). As a country we need to encourage a
shift away from immediate gratification to the historically advantageous delayed gratification.
Every state should require some level of financial comprehension equipping, even
beginning in elementary school. Barbie’s (along with other many other toys) are now coming
complete with attractive toy credit cards to coerce children into the norm of charging. The
private industry has always been well aware of the psychological effects of conditioning young
children (e.g. Jerky Tins and Dipping Tobacco); the educational system must do the same.
Killing Consumerism with Cash:
Currently only 27 percent of all transactions are made using cash while 66 are done with
plastic (New 1). This can create a disconnect in the consumer's mind between the item and
cost. Moreover it negates one of the simplest forms of budgeting there is. For example: if you
withdraw 500 dollars in cash for groceries in a month, you now have a physical representation
of this portion of your budget and are less likely to go over.
This concept is widely practiced in countries such as Japan where people use cash
twice as often as in the U.S. “Many small businesses — including two of Tokyo’s 13 restaurants
with the highest rating of three stars in the famed Michelin guide — don’t even take plastic”

6. (Warnock 1). Although Japanese GDP has remained stagnant for almost twenty years their
average standard of living is among the highest in the world. “Unemployment is half that of the
US; life expectancy five years longer. Average real incomes are the same as Germany's, and
inequality lower” (Meadway 1).
Japan’s lack luster GDP has been attributed to the nature of frugality among the citizens.
“According to the BIS, 87.5% of all coins and cash in Japan in 2012 wasn’t in banks, but with
individuals, companies and local governments” (Warnock 1).
The United States has proven to be unhealthily obsessed with GDP at the expense of its
citizens. A cash based society would encouraging saving, fiscal responsibility, and decrease the
power of the banks. America’s historic levels of productivity may suffer, but the benefits of cash
will far outweigh the short term stimulus of credit.
Debt Deterrents and TransparencyActs:
Furthermore, the federal government should enact legislation that will impose the
financial health risks on borrowing money. Similar to the Canadian Tobacco Act of 1997, which
“regulated the sale and production of tobacco products (“Tobacco Act”). This will allow for the
protection of those with insufficient comprehension and act as an additional deterrent.
The Tobacco Act requires pictures and text to be displayed on equal opposite sides of all
tobacco products; displaying the hazardous nature of the product (“Tobacco Act”). These often
include graphic pictures of rotting gums and hospitalized individuals, to act as a preventative.
Since the enactment of this legislation there has been a steady decrease in the prevalence of
current smokers (Tilson 3).
While like financial images may be difficult to achieve, accessible text is not. Financial
jargon can easily become overwhelming, forcing many to rely on the understanding of the
lender; not unlike the indentured servants of the past (Collins 1). A Financial Accessibility Act
will create standardized documents with attainable language to account for all levels of
comprehension.
Summation:
Successfully integrating financial comprehension relies on government cooperation on a
state and federal level. States must ultimately provide a successful curriculum, instituted at an
elementary level, continuing through graduation, with required evaluations like any other class.
Congress must continue to heavily regulate creditors and lenders, making cash more valuable,
and create the framework for a Financial Accessibility Act. Though the steps of progress are
difficult, education is always a worthwhile investment for the social and economic development
of a nation.
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