Editor's note: An earlier version of this column provided an incorrect dollar amount for U.S. household debt. This is a corrected version.
As a result of last month’s election, Idaho students may not be using new laptops to study. But they would do well to study personal finance more.
The U.S. Department of the Treasury describes financial literacy as the ability of an individual to make smart financial choices, such as earning and spending, saving and investing, using credit and avoiding fraud. A 2010 study by the Financial Industry Regulatory Authority found that Idahoans do well on a basic quiz of financial concepts, but our spending and savings patterns are weak.
(Take the FINRA quiz on financial literacy at www.usfinancialcapability.org)
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The FINRA study looked at four areas of our “financial capability” — whether or not we spend less than our income, how much we save for a rainy day, how much we borrow from nonbank lenders, and how often we comparison shop when signing up for a credit card.
As a group, Idahoans are spending too much. Only 34.6 percent our state’s population report spending less than they make and putting money aside for a rainy day. This is lower than all other states save one (Montana).
The U.S. as a whole is clearly bad about making ends meet. The national average of people who report spending less than their monthly income is only 42 percent. The U.S. saving rate, as a percentage of disposable personal income, was 3.3 percent in September. This is down from 3.7 percent the previous month and over 5 percent at the height of the financial crisis in fall 2008.
It may be the case that households can’t save because they need to continue paying down debt. Reducing the amount of debt you owe is a form a savings. By reducing future obligations, we increase the amount we can save over our lifetimes.
However, households across the country have a long way to go if they are to get debt to a more manageable level. According to the most recent Federal Reserve data, household credit in the U.S. stands at $12.95 trillion, or 82 percent of the nation’s current income. This compares with only 69 percent 10 years ago.
Another area of financial literacy we need to work on is how we buy financial services and products. The FINRA study found that 23 percent of Idahoans have used some form of high-cost nonbank borrowing over the past five years. This includes taking out payday loans or getting an advance on a tax refund. Both of these financial services are very expensive.
A 2011 study from the Federal Deposit Insurance Corp. found that 5.7 percent of all Idaho households (approximately 33,000 families) are unbanked, and 19 percent of households are underbanked. An unbanked household is one where no one has any kind of deposit account at an insured depository institution. By underbanked, the FDIC means the household holds a bank account but also uses the expensive payday loans or tax advances.
Hopefully, going forward, Idahoans and the rest of U.S. households will make better financial choices. We all need to reduce our debt and avoid payday loans or other high-cost financial services.
Policymakers at the state and federal level can lead the way by reducing their dependency on borrowing and by promoting traditional banking services. Our leaders can lead the way to financial literacy.
Peter Crabb, professor of finance and economics at Northwest Nazarene University in Nampa. firstname.lastname@example.org