How Financial Education Can Help Low-Income Workers Achieve the American Dream

A good education, a steady source of income, a place to call home — for most people, these three aspirations lie at the heart of the American Dream. Yet despite the very real intentions of an all-too substantial segment of U.S. residents, giving this dream life remains nearly impossible.

For the laid off, underemployed or simply terminally unemployed, the reason is simple: there's no money. But what about for the 9.6 million low-income working families, whose breadwinners should theoretically have the capacity to purchase their own white-picket-fenced homes in suburbia? What's holding them back?

To begin with, there's the obvious problem of low wages, which are notoriously difficult to invest in wealth-building assets. Luckily, programs are popping up across the nation to provide financial management services to low-income workers; for example, EARN, the nation's leader in microsavings programs (and, full disclosure, my esteemed employer), has helped tens of thousands of low-income workers build wealth through matched savings accounts, checking accounts for the unbanked, microloans and money management coaching.

But at the end of the day, financial management trainings aren't mandatory for low-income workers. That wouldn't necessarily be a problem, except for one thing you've probably never heard of: the Dunning-Kruger effect. Here's the gist: the less you know, the more you think you know, so the less likely you are to attempt to learn more.

In terms of financial education, this pernicious trend displays itself in full. An Atlanta Fed study, writes James Surowiecki of the New Yorker, "found that 30 percent of people in the lowest quartile of financial literacy thought they had a fixed-rate mortgage when in fact they had an adjustable-rate one." That same lowest quartile "were also the least likely to do research before getting a mortgage."

The solution? Mandatory financial education. "We really need something more like a financial equivalent of drivers’ ed," writes Surowiecki. And we need it soon. "63 percent of teens say they are knowledgeable about money management, including budgeting, saving and investing," found the 2007 Charles Schwab Teens & Money Survey, but "when probed about specific areas of knowledge, they reveal significant gaps." Especially frightening numbers? Only 31 percent of teens surveyed knew how to establish good credit, and a mere 23 percent were somewhat or very knowledgeable about what a credit score was.

Until financial education finds a home in America's schools, only those low-income workers with access to money management programs — and only those who recognize their lack of knowledge and choose to enroll in the first place — are likely to achieve prosperity. Americans deserve a better dream than that.

Photo credit: tim (the enchanter)