Why are so many people woefully ignorant of financial matters?

In My Humble Opinion
1

I’m always amazed how so many ordinarily smart(ish) people can be so completely clueless when it comes to financial matters. I don’t mean being able to build a Black-Scholes options model. I mean some basic concepts about money that everyone should know:

-Because of inflation and opportunity costs, money in hand is worth more than money in the future (bird in the hand is worth two in the bush)

-A loan (including credit cards) is not free money.

-If you’re employer offers a 401k or ESPP program with matching funds, you are throwing money away if you don’t participate

-Stocks are ownership in a company. Bonds are ownership in a companies debt (which they pay to you)

-You can look at a graph on Yahoo! Finance all day long but it won’t give you any clue as to what the stock price will do.

2

Because it’s not taught in high school. At least it wasn’t when I was in school Consequently, I was offered a credit card (aka free money) when I was 18 and promptly dug myself into a deep hole that took me years to climb out of.

Is financial planning taught in junior/senior high these days?

3

There are probably as many people who are ignorant on many other matters, but financial ignorance stands out because of the high cost of many common mistakes (e.g., assuming that a credit card does translate into free money).

4

No matter how much I read about it, I don’t really understand the stock market. I understand buying apples and cars and houses and appliances, but stocks and bonds and mutual funds? Goes right over my head. I recently watched “The Smartest Men In the Room”–a documentary about the whole Enron fiasco–and I felt like the dumbest girl in the room.

All the other stuff you mentioned, though, I understand.

5

I don’t understand investing, or retirement things, or income taxes at all. If you explain it to me, I’ll understand clearly for a little while, but then ask me to remember it the next day or explain it back to you, and I can’t. It won’t stay in. It’s the same for insurance, with deductibles and co-pays and all that - my stupid brain has such a hard time wrapping around the concepts and I can’t explain why. I’m not dumb. I’m not in any sort of debt and I’m careful with my money. I understand how to live within my means, and I only use my credit card to buy things online and then pay it off immediately with an online transfer. I paid off my student loans as fast as I could manage it because I didn’t want to end up paying twice as much through interest. So maybe I’m already better off than some.

What worries me a little is that very soon I’ll be living in a different country, working a real grown-up job with retirement plans and health insurance, and I’m going to need a crash course. That scares me. It isn’t the math aspect that freaks me out - I’m fine with numbers - I just don’t understand. When I don’t understand something completely, I can still do it, but I’ll be scared to death that I’m doing something wrong. I’ll follow instructions from those I trust and hopefully experience will help teach me properly, without too many expensive mistakes.

I took “home economics” back in high school, which was a joke. It was mostly cooking and sewing - the only financial stuff we did was draw up a budget based on fake, teacher-assigned income and expenses. Nothing about income taxes, retirement savings, loans, credit cards, or anything else that would be helpful. My parents weren’t much help filling in the blanks, either.

6

I see school programs on PBS that are about economics from the 70’s. The shows are meant to be teaching aids. They’re teaching the high school students 70’s economics. How can they not fail when they leave high school.

Some times it’s a matter of you can’t pay the current basic bils, so you can’t contribute to a 401k. $12,000 a year before taxes is going to have someone contriobuting to a 401k with even a 100% matching contribution.

7

I think it’s because in people’s minds “finance = maths” and many people are quite innumerate and terrified of maths.

8

As others have mentioned, the education system is responsible for a large part of the blame. I was never taught anything, really, that would help me as an adult. They never said a word about banking, credit, paying bills, insurance, investing, retirement, any of it. Neither did my parents. I’ve never known anyone with money, so I’ve had no one to guide me through the workings of the stock market or retirement funds.

I understand that credit and loans are not free money. But I never had to deal with them, because I’ve never had a credit rating or been given a loan. I was poor until I was 40. I couldn’t have wrecked my life with a credit card - nobody would give me any credit, because nobody else would give me any credit, either. I discovered that I couldn’t even rent a movie.

My wife and I are in debt from buying the things you need when you move into a house together. (Not luxuries, I mean the furniture and appliances, etc.) We are faithfully paying it off, as much over the minimum as we can afford. We’ve never missed a payment, and consistently refuse payment holidays. We have a stellar credit rating. We are living within our means. With diligence, we will have that debt paid off in about five years. I became eligible for a 401k plan six weeks ago, but no one in HR will explain it to me. Not only will they not advise me on what I’m supposed to do with it, they won’t even define the term for me so I get some kind of idea what it means. In a situation like this, who do you ask?

9

I agree with everyone so far. It’s because we aren’t taught financial responsibility in school. If you grow up in a family with financial savvy, you learn these things, and if not, you’re screwed. Honestly. I’m from a blue collar background, and I know nothing about thestock market. All of the money that I don’t spend is sitting in my bank account. I honestly don’t know what to do with it. Investing sounds…well, really scary.

On the other hand, some of the kids I work with grew up wealthy, and they’re 23 or 24, in their first jobs, and I know that they’re investing their money, trading, or something. They definitely make the same amount I do, and yet they know how to make it into more, and they’re not struggling trying to stay alive in NYC on an entry-level salary like me. And it will be this way forever, They’ll have enough money to retire when they want, with enough money, and I won’t. I’m too stupid to figure it all out, though I’ve tried, and I have no one I can trust to help me out. I can’t afford to pay someone to financially advise me, so I’m kind of stuck.

The liberal conspiracy theorist that’s hiding out in the back of my mind sometimes wonders if the reason schools don’t teach it is because someone high up thinks that the “haves” and the “have nots” should stay that way. I’ve worked my way up, I have an excellent college education and I never spend enough to incur credit card debt, and I work very hard, but that can’t make me into a “have.” Grrr.

(Disclaimer: I’m not really this whiny, most of the time. I have a very happy life, I just wish money matters came naturally…they REALLY don’t.)

10

They might not be allowed to “advise” you in any way. I know we’re not allowed to say much to anyone that could be construed as “advice.”

But who do you ask? Ask Dopers! That’s what we’re here for!

11

Do you folks have good book recommendations for financial dummies like me?

I live within my means, but if you say anything about investing, I tend to glaze over, unfortunately.

12

Great list, msmith. So many people don’t get the basics and it makes me crazy. I have taught all of those things to various friends and colleagues over the years. It’s not that difficult.

How do you learn? You get curious and ask someone. In the past I would buy a book. Now, with the internet, there is no excuse.

13

Here is what I tell everyone. If financial stuff doesn’t interest you, that is totally reasonable and understandable, so don’t try to make yourself like it or spend any time trying to learn how to be a financial wizard. Put your money in an index fund and don’t worry about it. Only invest in individual stocks or non-index funds if you plan to spend a lot of time watching your investments and learning about the markets.

An index fund generally has very low fees and is tied to the general stock market. For example, an S&P500 index fund will contain 500 individual stock that span all major market sectors. On average it will outperform 90% of all of the funds out there. Spend a whole bunch of time trying to beat the market which even most fund managers can’t do or put it in an index fund? That’s an easy choice for me.

14

That’s excellent advice for those who just don’t want to learn about investing, but even w/ idex funds you should learn a bit about mutuals. They have gotten tricky over the years by adding fees and other costs. Still an index fund is the best choice for the average person w/ limited knowledge about the market. I’d just add, don’t put all your eggs in one basket. Open accts’ in three or more index funds, maybe based on different indices.

15

It just isn’t taught, anywhere. In school we learned how to balance a checkbook. Oh great, checkbook. Yeah, since we all use debit cards now and that stuff is done online.

At home finances were never discussed. I didn’t even know how much my parents made per hour until I had to fill out a FAFSA for college. It was a real eye-opener that we got by as well as we did on such a low amount.

Money is just such a taboo subject to many people that alot of us are just left clueless. For example, in this thread I’ve seen mutual funds (what the heck is that?!), indexes, stocks, and bonds (I learned what these were from the first post!). Now how do I get one of these things? Are they tied to banks? Can I walk up to a teller at a bank and say “I’d like an index fund please.”? Do I have to do this online at imposing websites like Charles Schwabb? If so, what did people do before the internet to get these things?

I really need a book on all this. Then again, my $10k a year income doesn’t really leave alot of wiggle room for investing. At about $50 a month I can invest (and that’s if I live in complete ramen-noodle consuming poverty), I’m probably not going to get very far.

Enlighten me!

16

Nitpick, growing into a point:

Zero-interest loans (including, in the very short term, credit cards) are free money. For example, I got my Lasik at 18-months-no-interest financing. I could easily have paid cash up front, but instead, I’ll make the minimum payments for sixteen or seventeen of those months, collecting interest all the while, and then pay off the balance at the last opportunity to do it before interest kicks in. End effect: I get about $200 in interest that I wouldn’t have beforehand. I could play a little hardball and probably make it $300 or even $400 if I got lucky (with the caveat that it could be $100 if I were unlucky or I could come out behind if I were stupid). Even if something happened to my financial situation, I could blow away the loan at any time without repurcussions. Free money.

Similarly, I try to front-load big purchases to the beginning of my credit card cycle. I don’t spend what I don’t have, but my credit card gives me a month before the bill cycles again, plust two weeks after that to pay it off, so I can accumulate about six weeks of interest, absolutely free. My spending is spread out over the month, but given the frontloading, I’d say it’s an extra $4-5 a month versus what I’d have, spending cash or using a debit card. Again, it’s free money. It’s not much, but why not take the leverage when you can?

This is actually a pretty good example of the problem: money is actually a very abstract thing. Money is a fiction, and it attracts gross oversimplifications. Credit cards are free money. Credit cards are not free money. Both of these are lies. Stocks are ownership of a company? That too is a fiction, but it is a useful one. For any worthwhile company, they cost far more than the fractional worth of the actual company. What stocks really are is part ownership of the company’s (also totally fictional) future earnings, which is a subtly different animal. That’s why Microsoft has been flat since 2001, even though the company has grown and continues to make lots of money - the projection of future growth has become considerably less optimistic; that’s all. Money works in such an incredibly complicated way that anything you could teach meaningfully in a high school semester would have to be stripped down to uselessness, like the arbitrary, regimented “budget” that Antigen mentioned.

It’s not always a matter of family background (My parents think like msmith537 and I’m a public school brat), but as Millit suggests, it really is about your attitude. If you think of money as a way of getting the things you want right now, then you get stuck paying off your credit cards forever, because the credit cards really are money right now (to make things worse, most high-school classes I’ve seen approach it this way and forget to mention the consequences). If you think of money as an expression of your constraints, and you live within them, then you get your basic financially-responsible adult. If you start thinking about money as a tool, as leverage and potential, then your finances become this mercenary game, and… hey, free money.

(Thank you Professor Burgstone!)

17

Another one that people don’t seem to get is that to be okay financially you must live below your means. This means that income should be greater than expenses. If this is not the case, increase your income or decrease your expenses.

Also I think that a lot of people don’t look too far forward into the future. It would be much easier for me to handle a crapped out car and living on ramen for a while now than it will be at 70, so I contribute as much money to my 401k as I can (it doesn’t hurt that my employer matches 75 cents for every dollar!) Many people don’t have emergency savings of any kind so every six months or so when there is an emergency out come the credit cards to purchase a new tire or to pay that medical bill. I don’t have a complete grasp of the inner workings of the stock market but I save for retirement in my 401k, save for emergencies, save for a house since I know I will want to buy property here in the next 5 years or so, etc. I don’t finance anything that will decrease in value so I don’t take out loans for computers/cars/televisions/etc. and because of that I have no debt. I know enough about money that I can take care of myself easily and I don’t lose sleep at night over which bills have to be paid.

Credit cards can be useful. I charge many of my bills to my discover card, pay them immediately, earn that cash back bonus and come out ahead of the game. Many people do not have the ability to do this and that makes it a slippery slope for them. Those people would be better off not using credit cards like that if it means they will just roll over debt month to month.

I talk to a lot of people every day who put no thought into their finances at all. “What do you mean it will be more expensive to insure my new 2007 Lexus than my 1996 Mazda? That is insane! No one told me that at the dealership!” Or another popular one, “Why did my payment get returned? I don’t know how much was in my account/left on my card balance/etc. Who knows how much money they have at any given time?” A small amount of research would prevent a lot of problems like this. If they had called to get a quote they would have known that lexus was out of reach for them financially, but because they didn’t they now own something worth less than what they are paying for it and when you add in the cost of insurance it becomes more than they can afford. If they know that their funds are always cutting it close then they could suck up the $5 late fee and wait to send a payment until they have money so that they can avoid a $39 bounced check fee from the bank.

18

Maybe I was strange - but most of those things seem to be common sense, and the ones that aren’t were taught in High School - in Business Ed (which was semi-required to graduate).

Of course, many of those things ended up being about as relevant or useful in real life as the height of Mt. Everest (something I also learned in HS). Obviously, if I were to climb it, every foot would matter - but I’ve never climbed it, and I’m doubt I’m ever going to do so. I’ve also only ever worked for one company that’s matched 401K deposits, so knowing it’s free money has not been very useful knowledge.

Also, where you start out financially has a lot to do with when certain pieces financial information become useful to you. There are things I’m lucky enough never to have had to know. There are also things that I doubt I’ll be lucky enough to make use of.

19

But “most people” don’t have extra money, so most of these points you make are moot. The median income in the US is about 46k. While that is a decent about of money, that doesn’t afford most people the ability to contibute the maximum amount to a 401k, or buy stocks.

I think everyone understands this, they just lack control, or they need the money.

Most people don’t need to worry about this. Either way, you are neglecting to factor in the fact that instant gratification is considered, by many, better than delayed gratification. Contributing to a 401k will help to ensure I am taken care of in the future, but buying a nice car will get me laid now. It’s a matter of priorities. If knowing these things is of very little utility to you, why do you need to know it?

20

Pay off your credit card debt.

Buy a house if you want a house.

Put enough money in a savings account to cover 3-6 months’ expenses.

Contribute to your 401(k) (assuming you’re American. If you’re Canadian, it’s called an RRSP.)

If you have a family, buy term life insurance with a death benefit at least equal to four years of your salary.

If you have money left over, go to your bank and tell them you want to invest it in index funds with a low to medium risk and let them explain how to do that.