Understanding Financial Literacy Inequality

Where Lack of Knowledge Starts

Only 20 states require students to take a personal finance or economics course to graduate from high school. In fact, we require more education and training to get a driver's license than we do to learn to manage personal money matters. In short, the low educational priority placed on personal finance is quite shocking. Money knowledge is essential to functioning as an adult in our fast-paced, technology-driven society.

Over the past 30 years, income inequality has increased in our country, as income has flowed unequally to those at the very top of the income spectrum. As you read economic literature, it largely points to several major causes of falling wages for most Americans and rising income inequality. These include the disruptive impact on jobs from the introduction of new technologies; the need for people to be upskilled or reskilled to secure jobs in the new economy; the negative impact of foreign trade including the exporting of jobs to other countries (with China being the leading example) and, lastly, our governmental policies that set the ground rules under which businesses operate.

The problem you see in the literature is definitively assigning specific amounts of blame to each of these factors. Which has contributed most to the problem? In my view, it is not clear. I do believe, however, that an unmentioned and contributing factor to income inequality is financial knowledge inequality.

How can people decide which jobs to pursue, properly weigh the cost/benefit of getting an education or preparing for a trade, work to make ends meet or navigate the economic ins and outs of our economy without a firm financial knowledge foundation? How can they decide to join a union or take new courses to allow them to use new technologies without understanding the financial ramifications of their decisions? I just don't believe people can be successful without knowing the basics of how money works.

How to Move Forward

The main reasons for income inequality show the difficulty in pointing to one cause of inequality over others. In my view, income inequality has no single root cause. I do believe, however, that having a solid grasp of financial concepts and practices is essential for economic success.

In our complex and ever-changing world, personal financial education is a key building block we must all possess to be as financially successful as possible. Our industry needs to better focus its resources on addressing this issue. It will result in more educated customers who understand why they are buying what they are buying. Overall, the long-term beneficial impact of such an effort should be better financially secured households.

Harry N. Stout has been the president of Fidelity & Guaranty Life, deputy chief executive of Old Mutual Financial Network, and managing director of Insurance Insight Group. He is also the author of The FinancialVerse personal finance books and of a new book, Today's Annuities — A Tool to Create Protected Lifetime Income.