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Life Health > Running Your Business

Understanding Financial Literacy Inequality

By Harry N. Stout

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What You Need to Know

  • The author says uneven access to financial knowledge contributes to financial equality.
  • He believes no amount of point-of-sale disclosure can overcome financial illiteracy.
  • He wants the financial services industry to step up and do more to promote personal finance education.

In survey after survey, Americans of all ages can’t answer basic financial questions. This lack of knowledge strikes at the heart of why Americans cannot properly manage their financial affairs and plan their financial futures.

How can a consumer decide which product to buy to protect their household financially without basic financial literacy? How can day-to-day money decisions be made? How can new fintech tools be understood and used? Will consumers hurt their future by making wrong money decisions? Can lifelong financial security be achieved? How can decisions be made on where to invest and how to save for retirement?

Where Lack of Knowledge Starts

Only 20 states require students to take a personal finance or economics course to graduate from high school. In fact, we require more education and training to get a driver’s license than we do to learn to manage personal money matters. In short, the low educational priority placed on personal finance is quite shocking. Money knowledge is essential to functioning as an adult in our fast-paced, technology-driven society.

Much is also written about income inequality in our country. In a December 2013 speech, then-President Barack Obama called income inequality the “defining challenge of our time.”

My personal belief is that financial knowledge inequality is part of the income inequality problem. A person can’t possibly make the right decisions for their financial future without a basic knowledge of personal finance. No amount of point-of-sale disclosure can overcome financial illiteracy.

The Inequality Crisis

Investopia defines income inequality as the extreme disparity of income distributions with a high concentration of income, usually in the hands of a small percentage of a population.

When income inequality occurs, there is a large gap between the wealth of one population segment and the wealth of another. There can be varying types of income disparity segregation and analysis used to understand income inequality. Overall, income inequality simply refers to the fact that different people earn different amounts of money. Understanding exactly why this happens is not as clear as you would think.

Over the past 30 years, income inequality has increased in our country, as income has flowed unequally to those at the very top of the income spectrum. As you read economic literature, it largely points to several major causes of falling wages for most Americans and rising income inequality. These include the disruptive impact on jobs from the introduction of new technologies; the need for people to be upskilled or reskilled to secure jobs in the new economy; the negative impact of foreign trade including the exporting of jobs to other countries (with China being the leading example) and, lastly, our governmental policies that set the ground rules under which businesses operate.

The problem you see in the literature is definitively assigning specific amounts of blame to each of these factors. Which has contributed most to the problem? In my view, it is not clear. I do believe, however, that an unmentioned and contributing factor to income inequality is financial knowledge inequality.

How can people decide which jobs to pursue, properly weigh the cost/benefit of getting an education or preparing for a trade, work to make ends meet or navigate the economic ins and outs of our economy without a firm financial knowledge foundation? How can they decide to join a union or take new courses to allow them to use new technologies without understanding the financial ramifications of their decisions? I just don’t believe people can be successful without knowing the basics of how money works.

How to Move Forward

The main reasons for income inequality show the difficulty in pointing to one cause of inequality over others. In my view, income inequality has no single root cause. I do believe, however, that having a solid grasp of financial concepts and practices is essential for economic success.

In our complex and ever-changing world, personal financial education is a key building block we must all possess to be as financially successful as possible. Our industry needs to better focus its resources on addressing this issue. It will result in more educated customers who understand why they are buying what they are buying. Overall, the long-term beneficial impact of such an effort should be better financially secured households.

Harry N. Stout (credit: Stout)Harry N. Stout has been the president of Fidelity & Guaranty Life, deputy chief executive of Old Mutual Financial Network, and managing director of Insurance Insight Group. He is also the author of The FinancialVerse personal finance books and of a new book, Today’s Annuities — A Tool to Create Protected Lifetime Income.

(Photo: Alexander Raths/Shutterstock)

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