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Over the several years I have been writing and commenting on HD it has been made clear that the HD community includes many sophisticated investors and planners. People who use budgets, track expenses, do their best to investigate and then make financial decisions based on information they develop. They use various type of software programs and, of course, their own spreadsheets. They analyze risk and investment expenses. They like details. They think about the future. And, it appears, they have been doing all this for many years.
See, the HD community is just not normal. They are financially literate while several reports indicate Americans score less than 50% on basic financial literacy tests- really basic. The lack of financial knowledge is estimated to cost Americans billions of dollars annually through poor decisions, overwhelming debt, and insufficient savings.
We talk about financial education a great deal, but we have a long way to go. While many HD readers and writers are comfortable with details in various ways, many people – me included- are not that thrilled with all the math, assumptions, etc. It seems to me we need to present financial matters in the simplest form possible. For example:
Save, never pay credit card interest, spend.
Compounding interest is your best friend.
Invest in index funds and never stop.
Only use debt for necessities such as a home or car, but at a level you can afford that does not interrupt saving and investing.
Start early and be patient.
What ideas do you have?
What DON’T many, perhaps most, Americans know?
1. How Compound Interest Works
Many people don’t fully grasp how interest accumulates on savings or debt.
🔹 2. Credit Scores
Few understand how scores impact loan interest rates, renting, or even job prospects.
🔹 3. Budgeting and Spending
Overspending on housing, cars, or subscriptions is common.
Financial literacy surveys show only about 40% of U.S. adults use a monthly budget. No comment from me on this one except a budget doesn’t really stop overspending, common sense does 😎
🔹 4. Debt Management
Misunderstanding how minimum payments work.
Lack of awareness about student loan terms, interest rates, and repayment options.
🔹 5. Investing Basics
Many avoid investing out of fear or lack of knowledge.
Misunderstandings about:
Stocks vs. bonds
Risk and diversification
Long-term gains and inflation
Over 60% of Americans don’t invest outside of retirement accounts.
🔹 6. Retirement Planning
Don’t know how much they’ll need to retire.
Think Social Security will fully cover expenses.
Don’t understand 401(k)s, IRAs, or employer matches.
🔹 7. Taxes
Confusion about tax brackets (many think all income is taxed at the highest bracket).
Misunderstanding deductions vs. credits.
Underutilization of tax-advantaged accounts (e.g., HSA, 529 plans).
I think too few people appreciate that they need to concentrate on the following to have a chance at a decent life:
1 health
2 relationships
3 finances
in that order.
I might even reorder that to say relationships is top. But specifically not to mean spousal/partner relationships alone. The avoidance of bad romantic relationships probably being more important than the having a romantic attachment at all.
Excellent observation
Employers can check your credit rating and info? I would never want to work for an employer that messed up that they check your credit score before hiring you
Anyone who wants a job which involves access to/or handling money will have to be able to qualify for an employers Fidelity Bond. I would expect that today this would always mean looking at credit scores. Fidelity Bond policies exclude anyone who has committed a financial crime or previously defaulted on a Fidelity Bond.
I knew someone wanting to get on with the gov’t and my name was given as a reference. A person from the gov’t came personally to my home and wanted to know as much as I willing to share about the financial situation of the prospective employee.
With AI, it’s going to get more difficult for those seeking a job. Yet companies are desperately looking for workers in the AI field.
You cannot obtain a Top Secret clearance which is necessary to work for many defense contractors, or for the military without having the govt conduct a detailed Background Investigation of your life. This obviously includes how you handle credit.
We checked scores all the time. It a measure of responsibility but equally important hiring someone with a poor score and financial status could lead to undesirable behavior.
Hmmm, I don’t like that at all. Just doesn’t feel right to me. C’est la vie 😑
Part of me does think it’s about credit agencies selling snake-oil data to gullible employers though. Employers sure love “data” these days…
I’m talking about 30 years ago
The HD community is composed of otherwise diverse folks, but we are self- selected for our keen interest in personal financial topics and desire to learn more. So I suspect that our financial literacy, on average, is greater than a random sample might reveal. The trick is how to recruit more folks who are novices and who would gain tremendously by logging on. Jonathan’s recent post encouraging donation to a literacy effort for young people comes to mind. I cannot recall the date of his post but I sent a donation.
Jonathan’s recent post encouraging donation to a literacy effort for young people
I think it’s this one.
Thats it. Thank you.
I like these catchy and memorable comments on interest to help educate young people;
I don’t think it’s lack of resources or information, I think it’s lack of motivation.
Lack of interest.
I agree. I think that is a big part of. Many people just amble through life obvious to what’s going on and then at some point can’t understand how they are not better off
I know this is not one of your posts defending your approach to finances but you can surely appreciate the “natural” default to amble through, given your resistance to using common planning tools as too hard, too complex?
Reality Is I suspect is that many people don’t proactively tackle it until they hit a particular trigger point. For some that may be age: 40,50,60. For others a shocking life event like an unexpected job loss or bereavement.
I know for me I only woke up to the idea of maximising in my 40s and the real plan only came finally together during Covid as that was an ideal real world trial of what baseline living costs were.
It’s hard to know what to do about it. The Financial Services industry does try somewhat but it’s hard to view a lot of their material as being much above the absolute basics and there is clearly self interest in every article that they publish around savings rates needing to be higher or retirement accounts being inadequate to fund retired lifestyle. You can see why consumers might be turned off by such “propaganda”.
Plus of course all the usual stuff around busy lifestyles, expensive family needs and consumption “wants” that fuel the engine of late stage capitalism.
I think you’re right. I was thinking of a former colleague who was great at his job, and a very disciplined person in general. Definitely not someone who would “amble through” anything, but for some reason, I guess he just didn’t know better, until he did. I remember when he told me he had seen the light and was getting started investing, and we were in our mid-forties. I’m sure he stuck to it and did well afterward.
You’re right, this has nothing to do with me or my views. However, once a person understands the basics of managing money and investing, the incremental value of delving deeper lies with the individual.
If someone does better living with a budget so be it, but that doesn’t mean a person who doesn’t use a budget can’t manage their money.
On the other hand a person who doesn’t know the difference between a bond and a stock, may be headed for trouble. Likewise a person who pays no attention to credit card interest isn’t likely to get ahead.
All I’m saying is that for you the turnoff comes at the idea of budgeting or spreadsheets – for others it might be the idea of stocks and bonds that they find too complicated or view as for experts only. For others still maybe making it through month end vaguely in the black or without a CC company virtually breaking their legs might be their sole priority.
It’s hard to walk in someone else’s shoes particularly if you’ve been blessed with the gifts of natural frugality (within reason) or greater than average earnings.
And as has been identified here before perhaps we have to recognise that people’s personal financial failings are a key part of the engine that drives capitalism that stock/index investors then benefit from.
“And as has been identified here before perhaps we have to recognise that people’s personal financial failings are a key part of the engine that drives capitalism that stock/index investors then benefit from.”
I also tell my wife that even though some corporations have taken advantage of recent inflation, the effect on us is lessened because we will see some of the additional corporate income in returns of our index funds.