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America’s Growing Financial Literacy Problem

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America's Growing Financial Literacy Problem

America’s Growing Financial Literacy Problem

Making major personal finance decisions can be daunting for anyone.

Whether the decision is related to paying back student debt or how to invest for the first time, the outcomes of these decisions have a long-term impact on the quality of our lives. Smart decisions can lead to achieving financial independence, while bad decisions can lead to years of being stuck in the “hole”.

Even though it’s clear that financial literacy is important, there’s a big problem: it’s actually been dropping for years in the United States.

Diagnosing the Problem

Today’s infographic was done in conjunction with Next Gen Personal Finance, a non-profit that provides a free online curriculum of personal finance courses geared to students.

The graphic paints a troubling picture of the current financial literacy situation in the country, while demonstrating why personal finance is a crucial area of study for our youth.

Here are some of the indicators that show literacy is dropping:

  • The U.S. ranks 14th globally in terms of financial literacy
  • With a 57% literacy, the U.S. beats Botswana (52%) but gets edged out by countries like Germany (66%) or Canada (68%)
  • Only 16.4% of U.S. students are required to take a personal finance class in schools
  • 76% of millennials lack basic financial knowledge
  • Between 2009-2015, Americans got worse at answering five key personal finance questions posed by FINRA – a major U.S. financial regulator

And worse, this lack of knowledge is translating into anxiety and even fear.

  • Four of five adults say they were never given the opportunity to learn about personal finance
  • 70% of millennials are stressed and anxious about saving for retirement
  • 22% of millennials feel overwhelmed about their finances
  • 13% of millennials feel scared

Meanwhile, student debt is soaring to new highs – how do we put our students in a better spot to succeed?

The Road Ahead

As financial products continue to increase in complexity, the road ahead is not an easy one.

However, there is still a great case for optimism: 60% of Americans say they know someday they will need to be more financially secure – they just don’t know how to get there. This number increases to 70% for those between the ages of 18-39 years old.

This means there is actually a great thirst for financial education out there – the question is just how to best deliver that information in a compelling way.

Another good sign? The youngest generation, Gen Z, is already starting to think about money differently:

Gen Z saw millennials struggle with wage stagnation and huge college debt, so they took note and are making a conscious effort to approach money and debt differently.

– Jason Dorsey, Center for Generational Kinetics

Real World Benefits

Increased financial literacy translates into real world benefits for individuals, and to the economy as a whole.

People with strong financial skills are better at job planning and saving for retirement. Meanwhile, financial savvy investors are more likely to diversify risk, and students that take a personal finance course see up to a 5.2% increase in credit scores within two years.

Lastly, consumers that understand compound interest:

  • Spend less on transaction fees
  • Accrue less debt
  • Incur lower interest rates on loans
  • Save more money

And this is just scratching the surface of what could be possible.

Making the right financial decisions can help people meet their own personal goals, live a life of abundance, get out of debt, and become financially independent.

This infographic was originally published on the Wealth 101: A Crash Course in Personal Finance minisite, a collaboration between NGPF and Visual Capitalist

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Money

How Americans Make and Spend Their Money

These charts break down how Americans get their income, as well as where that money goes, based on different income groups.

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How do you spend your hard-earned money?

Whether you are extremely frugal, or you’re known to indulge in the finer things in life, how you allocate your spending is partially a function of how much cash you have coming in the door.

Simply put, the more income a household generates, the higher the portion that can be spent on items other than the usual necessities (housing, food, clothing, etc), and the more that can be saved or invested for the future.

Earning and Spending, by Income Group

Today’s visuals come to us from Engaging Data, and they use Sankey diagrams to display data from the Bureau of Labor Statistics (BLS) that helps to paint a picture of how different household income groups make and spend their money.

We’ll show you three charts below for the following income groups:

  1. The Average American
  2. The Lowest Income Quintile (Bottom 20%)
  3. The Highest Income Quintile (Highest 20%)

Let’s start by taking a look at the flows of the average American household:

The Average American Household – $53,708 in spending (73% of total income)

The average U.S. household has 2.5 people (1.3 income earners, 0.6 children, and 0.4 seniors)
Average American Household Earnings and Saving

As you can see above the average household generates $73,574 of total inflows, with 84.4% of that coming from salary, and smaller portions coming from social security (11.3%), dividends and property (2.6%), and other income (1.7%).

In terms of money going out, the highest allocation goes to housing (22.1% of spending), while gas and insurance (9.0%), household (7.7%), and vehicles (7.5%) make up the next largest categories.

Interestingly, the average U.S. household also says it is saving just short of $10,000 per year.

The Bottom 20% – $25,525 in spending (100% of total income)

These contain an average of 1.6 people (0.5 income earners, 0.3 children, and 0.4 seniors)

How do the inflows and outflows of the average American household compare to the lowest income quintile?

Here, the top-level statistic tells much of the story, as the poorest income group in America must spend 100% of money coming in to make ends meet. Further, cash comes in from many different sources, showing that there are fewer dependable sources of income for families to rely on.

For expenditures, this group spends the most on housing (24.8% of spending), while other top costs of living include food at home (10.1%), gas and insurance (7.9%), health insurance (6.9%), and household costs (6.9%).

The Highest 20% – $99,639 in spending (53% of total income)

These contain an average of 3.1 people (2.1 income earners, 0.8 children, and 0.2 seniors)

The wealthiest household segment brings in $188,102 in total income on average, with salaries (92.1%) being the top source of inflows.

This group spends just over half of its income, with top expenses being housing (21.6%), vehicles (8.3%), household costs (8.2%), gas and insurance (8.2%), and entertainment (6.9%).

The highest quintile pays just short of $40,000 in federal, state, and local taxes per year, and is also able to contribute roughly $50,000 to savings each year.

Spending Over Time

For a fascinating look at how household spending has changed over time, don’t forget to check out our previous post that charts 75 years of data on how Americans spend money.

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Markets

Stock Market Returns Over Different Time Periods (1872-2018)

In any given year, the stock market can be a crapshoot – but over long periods of time, the U.S. market has consistently performed for investors.

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Putting hard-earned money in the stock market can make some people nervous.

It’s well known that a correction can occur at any time, and the fear of market crashes can make even the most seasoned investors to make questionable decisions.

While it’s true that putting your money on the line is never easy, the historical record of the stock market is virtually irrefutable: U.S. markets have consistently performed over long holding periods, even going back to the 19th century.

Market Performance (1872-2018)

Today’s animation comes to us from The Measure of a Plan, and it shows the performance of the U.S. market over different rolling time horizons using annualized returns.

Note: The animation uses real total returns from the S&P Composite Index from 1872 to 1957, and then the S&P 500 Index from 1957 onwards. Data has been adjusted for reinvestment of dividends as well as inflation.

Animation: Stock Market Returns Over Different Time Periods (1872-2018)

Using just one-year intervals of time, the market can be a crapshoot. Unfortunately, if you were to just choose a one-year period at random, there would be a significant chance of losing money.

However, as the timeframes get longer – the animation goes to 5-year, 10-year, and then 20-year rolling periods – the frequency of losses rapidly decreases. By the time you get to the 20-year windows, there isn’t a single instance in which the market had a negative return.

Why Time Matters

Over 146 years of data, the chance of seeing negative returns for any given year is about 31%.

That fact in itself is quite alarming, but even more important to note is the distribution of returns in those down years. As you can see in the following chart also from The Measure of a Plan, it’s not uncommon for a down year to skew in the high negatives, just as it did during the crisis of 2008:

1 year stock market return distributions

According to the data, there have been 10 individual years where the market has lost upwards of 20% – and while those off years are greatly outnumbered by the years with positive returns, it makes it clear that timeframe matters.

Past performance obviously doesn’t guarantee future results, but the historical track record in this case is quite robust.

Long-term investors can see that as long as their time horizon is measured in the decades, you can take the odds of making money in the stock market to the bank.

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