The timing was coincidental. Just as we asked 1,000 adults to take the AARP Bulletin's Financial Literacy Quiz, the national economy gagged. The stock market plummeted, home mortgage foreclosures soared, banks began tightening the purse strings on outstanding loans, and consumers are feeling the squeeze.
Unfortunately, there may be a connection between the quiz and the economic chaos around us. The test results showed us what we as a nation don't know about the 21st-century world of personal finance.
We polled people 40 and over, and not one person answered all our questions correctly. And we're supposed to be wiser than younger generations! The poll covered crucial consumer subjects—from credit cards and car buying to Social Security benefits and 401(k)s. The results were disheartening: the average score was 50.3 percent.
This ignorance puts the economy at risk. Managing a household budget and planning for retirement have become incredibly complicated. Tin cans under mattresses are out; hedge funds are in. Wall Street wizards have created ever more complex ways to invest. Financial institutions lent beyond their limits, and consumers borrowed beyond their means, all parties in a spend-and-borrow binge that buried us in debt.
Most distressing is the number of people, especially those 60-plus, who had no idea how to answer most of the questions. "Which generally provides a safer return, a single stock or a mutual fund of stocks?" Just 49 percent had the right answer, the mutual fund. Another 16 percent said a single stock. And 34 percent didn't know. Among those over 60, the "don't knows" were 47 percent.
Little stories tell big stories, and the big story is that day by day, we have become comfortable with excessive debt. Former Treasury Secretary Robert Rubin, for one, is alarmed by the red ink he sees. "We have fiscal deficits where there should have been surpluses. We have a personal savings rate that's negative. We have a trade deficit at levels that are unimaginable." Finally, he says, we are dependent on China, Japan and South Korea, whose governments keep purchasing the U.S. bonds and notes that finance our soaring national debt. "This can't go on indefinitely," he says.
What can we do? It's a political season, and we can force candidates to speak responsibly about the financial challenges we face—individually, nationally and globally. That's one of the principles of the initiative launched by AARP, the Business Roundtable and the Service Employees International Union. (Check out www.dividedwefail.org and pledge to help hold the candidates accountable.)
On a personal level, you can restore the tradition that stresses prudence and personal savings. Take our financial literacy quiz. And attack your own balance sheet. In "Money for Life," financial writer Jane Bryant Quinn suggests directing half of your disposable income to reducing your personal debt. Use what's left for your living expenses. That may seem arbitrary. But it's an important first step.
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