By Ron Galperin
As the City of Los Angeles’ chief accountant and auditor, I think a lot about financial literacy and what it means to live in a society in which too many people lack the skills to manage their personal and household budgets.
Simply put, we have a hidden crisis on our hands.
Many Americans are stymied by tests involving simple math to solve everyday financial problems expressed in English. U.S. adults do worse than adults in 19 of 23 industrial nations, ranking just behind Poland. This represents a failure of our educational system as well as a stark reminder of the work we have to do as a society. Parents need to set an example of fiscal management for their children. As a child, my immigrant parents set aside a portion of every paycheck to savings, no matter how difficult it was to do. From a young age, the value of savings was ingrained in my habits.
Recent national surveys have found that 61% of U.S. adults are unable to figure out how much money a driver would earn in a day, when survey takers are told the driver’s flat daily rate, along with how many miles he or she drove at a specified per-mile rate.
Fifty-six percent are not able to figure out that they need to buy gas now when they are shown a picture of their car’s gas gauge registering one quarter of a tankful, told that a full tank holds 16 gallons, that the car averages 17 miles per gallon and that the next opportunity to buy gas will require them to drive 75 miles.
It’s no surprise that people who can’t use math to solve hypothetical problems do no better in managing their own financial lives.
Largely because of the relatively high numbers of foreign-born residents in Los Angeles, who may be literate in languages other than English, and because of high poverty rates, there is reason to believe that Angelenos fare worse than most other Americans. In Los Angeles County, 33% of adults lack basic prose literacy skills in English, meaning they cannot read and understand an English language newspaper. More than half, an estimated 3.8 million adults, cannot perform relatively simple tasks such as writing a short letter in English explaining a billing error.
Yet many adults who are not financially literate do not sense they have a problem. Three-quarters of 25,000 online respondents to a recent survey sponsored by the FINRA Investor Education Foundation gave themselves higher marks for financial knowledge than they deserved. “But even among respondents who gave themselves the highest rating, less than two-thirds [were] able to do two simple calculations involving interest rates and inflation,” the survey found.
For example, the survey asked: “Suppose you owe $1,000 on a loan and the interest rate you are charged is 20% per year compounded annually. If you didn’t pay anything off at this interest rate, how many years would it take for the amount you owe to double?” The correct answer is about four years. Survey takers were asked to choose between ranges. Only 33% correctly answered that it would take at least two years but less than five.
This epidemic of financial illiteracy leaves too many of our neighbors vulnerable to scams and unable to weather unforeseen circumstances. I am urging that, as a first small step, the Los Angeles Unified School District consider adding basic financial literacy to the formal goals of its high school curricula. I am proud to do my part by hosting financial planning workshops around Los Angeles, free of charge. With support from leading philanthropists and nonprofits in L.A., we should undertake a major educational effort with free workshops, online tutorials and public-service announcements to underscore the importance of financial literacy and to make available the resources Angelenos need to take control of their personal and household budgets. There are already incredible nonprofits that offer workshops around Southern California; as a city, we should coordinate with them to publicize their events, seek grants and maximize the reach and accessibility of their programs. Working together, we can make a real difference in people’s lives.
— Ron Galperin is the Los Angeles city controller.