The financial reform bill Congress hopes to finally pass by the Fourth of July includes establishing a new Office of Financial Literacy. The new Dodd-Frank financial reform bill also includes a new Consumer Financial Protection Bureau to enforce ethical behavior from banks. But ultimately, consumers will have to educate themselves about money management to stay out of financial trouble. The Office of Financial Literacy will try to make it easier for them to do that.
A national strategy for financial literacy
The Office of Financial Literacy as written into the Dodd-Frank financial reform bill isn’t the first effort by the government to encourage financial management from consumers. A 2003 law that provided people a free credit report once a year also established the Financial Literacy and Education Commission, which was charged with developing a national strategy for financial literacy. In 2004 the FLEC launched the MyMoney.gov website to provide a central location where consumers can find money management tools and useful government financial information.
The FLEC financial literacy website
Recently the FLEC’s financial literacy website got a new look. The new version of the site creates online access where users can find information about how to plan for life events that have financial implications, such as birth or adoption of a child, home ownership or retirement. There are also answers to questions users may have about a variety of personal or professional situations. MyMoney.gov offers money-management tools including a savings calculator, household budget worksheets and a college prep checklist.
Americans are literally lazy about finances
To promote financial literacy, the government has pushed knowledge more than regulation. The assumption is that the more high-quality information and money management tools consumers have, the better choices they will make. But most Americans are financially lazy. It’s common knowledge that we should spend less, save more and shop around for the best credit card rates. But most of us don’t.
American financial literacy lacking
In a survey of American financial literacy, the Wall Street Journal reports that the Finra Investor Education Foundation — the research arm of the securities industry regulator — found that about half of those 45 or older hadn’t tried to calculate their retirement needs. About half of almost 1,500 people surveyed also admitted to occasionally carrying a credit-card balance and paying interest. And only one in five knew that when interest rates rise, bond prices fall. In addition, the survey found that 57 percent of adults who earn more than $75,000 a year don’t shop around for credit cards, and 46 percent don’t compare prices on auto loans. Plus, most adults don’t check their credit records each year.
Debt-to-income ratio is the key
Debt is the most painful consequence of inadequate financial literacy. Seerpress.com reports that even though the current average debt-to-income ratio of in America is down to 122 percent from 133 percent in 2007, it still should be below 100 percent. In contrast, from 1960 to 1985, the debt-to-income ratio in America stayed well below 70 percent. The government is trying to do its part by imposing stricter policies and offering free advice. But true financial literacy could be as simple as not spending more than you make. That is a personal responsibility.