Americans are 'financially illiterate' - survey
Tuesday February 26, 12:42 pm ET
By Catherine Clifford, CNNMoney.com staff writer
Americans don't understand debt, which may be one reason that they have
too
much of it, according to a survey released Tuesday.
The survey presented 1,000 people with a hypothetical scenario about
credit
card debt and asked them to compute how long it would take to pay it off.
Only 35.9% of the 1,000 respondents could figure out how many years it
would
take for the amount they owe on their credit cards to double. A full 18.2%
did not know how to respond and 31.9% of those surveyed over-estimated the
timeframe.
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The survey by Harvard Business School and Dartmouth College professors and
TNS asked respondents to *****s their debt levels. Those who said they
felt
they were carrying too much debt were found to be "wildly wrong" when it
came to using compound interest to calculate how long it would take to pay
off that debt.
Of those polled, 26% said they consider the debt they are carrying to be
unmanageable, while 61% said their debt level was "just right."
Americans don't realize they're unaware of some of the complexities of
personal finance - like compound interest - said Bob Neuhaus, the
executive
vice president and the head of the financial services sector in the U.S.
for
TNS. "If financial literacy was higher, you would see more caution in the
use of consumer debt. It would not eliminate the problem, but it would
mitigate [it]."
The survey draws attention to a large problem without an easy solution.
"Even those with a college degree don't have an understanding of the basic
finance ideas," said Annamaria Lusardi, Professor of Economics at
Dartmouth
College.
However, there are smaller, more manageable steps that can make a
difference. Harvard Business School Professor Peter Tufano, a
self-proclaimed believer in financial education, does not see credit as
inherently bad, but he said that debt services are much more complicated
now
than they were a generation ago. He said credit card companies could help
by
creating more consumer friendly credit contracts that plainly spell out
the
terms, and bills that itemize outstanding debt so consumers can grasp the
reality of how they spend money and how long it will take to pay.
A lack of savings could be compounding the consumer debt problem. Another
nationwide survey of 1,000 Americans released Monday by the American
Savings
Educational Council (ASEC) and America Saves found that a mere 53% of
Americans have adequate savings with only 28% saving the recommended 10%
of
their annual income.
Three-quarters of Americans surveyed said that they spend less than their
income and save the difference, which may provide enough for an emergency
unexpected expense, but only a little over 50% have enough savings to
provide for a comfortable standard of living in retirement.
However, those who make more money are able to sock away more for a rainy
day, according to the savings survey. Ninety-percent of the high-income
group (those earning at least $75,000 annually) say they have adequate
savings, but only 48% of the low-income group (those earning below $35,000
annually) can say the same. And 81% of the high-income group re****t saving
at least 5% of their income, compared with 34% of the low-income group.
Regardless of income or level of financial literacy, there is one unifying
lesson: have a plan. "Having a financial plan increases savings and
financial stability," said Stephen Brobeck, executive director of Consumer
Federation of America.
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