Abstract

While taking the course Federal Budgets and Policy with Professor Keith Hall at Purdue University, I was assigned the role of a policy analyst within the federal government. My task was to write a policy brief for my principal—potentially a member of Congress serving on the Budget Committee—on any topic I believed deserved greater attention and could have a positive impact on society. I chose to focus on the importance of financial literacy, a subject I have been passionate about since my senior year at Aviation High School. Back in 2018, I wrote my senior “Quality of Life” paper on the importance of financial education, which opened my eyes to the widespread lack of financial literacy being taught to younger generations.

That early research sparked a lasting interest that shaped my academic path. It motivated me to pursue studies in Accounting at CUNY LaGuardia Community College, followed by Finance and Investments at CUNY Baruch College. Currently, I am on track to earn my master’s degree in Economics from Purdue University, with a focus on financial economics and economic policy. Throughout this journey, the need to promote financial literacy has remained central to my academic and professional goals.

About Keith Hall: Keith Hall became the ninth Director of the Congressional Budget Office on April 1, 2015. He has more than 25 years of public service, most recently as the Chief Economist and Director of Economics at the International Trade Commission (ITC). Before that, he was a senior research fellow at George Mason University’s Mercatus Center, the Commissioner of the Bureau of Labor Statistics, Chief Economist for the White House’s Council of Economic Advisers, Chief Economist for the Department of Commerce, a senior international economist for the ITC, an assistant professor at the University of Arkansas, and an international economist at the Department of Treasury. In those positions, he worked on a wide variety of topics, including labor market analysis and policy, economic conditions and measurement, macroeconomic analysis and forecasting, international economics and policy, and computational partial equilibrium modeling. He earned his Ph.D. and M.S. in economics from Purdue University.

More Information: https://www.mercatus.org/scholars/keith-hall and https://www.bls.gov/bls/history/commissioners/hall.htm

Introduction

Dear committee members, I am drafting this report to highlight one of the most serious issues our country faces: the lack of financial literacy among our citizens. As we know, the primary factor contributing to our citizens’ debt is the excessive credit card debt resulting from mismanaging credit cards. Many Americans feel they were not properly taught how to manage their money before entering the workforce. As part of the federal government, I propose that under the Financial Literacy and Education Commission, established in 2003, we develop a new initiative called Operation National Financial Freedom. This initiative would enable the federal government to implement financial literacy programs covering topics such as budgeting, investing, and debt repayment strategies. If financial literacy were taught to Americans at an earlier stage, such as during their freshman year of high school, we could see a significant positive change in society. Currently, over 90 million Americans live in poverty. Our goal should be to reduce this number to less than 1 million. We can address this issue by improving existing financial literacy programs and making financial education a required part of students’ curriculum.

Why Financial Literacy Matters

Financial literacy is arguably one of the most important subjects that can be taught; however, according to a 2024 internal survey conducted by Bank of America, over 20% of respondents strongly felt they were living paycheck to paycheck. As highlighted above, there is a growing trend among Americans who feel trapped in this cycle. This rising concern is driven by several factors, including the increasing cost of living in the United States and a widespread lack of knowledge on how to effectively budget income and save for the future.

The same survey revealed that in 2024, households earning less than $50,000 annually were spending nearly 40% of their take-home pay on essential expenses. This income bracket is not only the most vulnerable to poverty but also tends to have the least access to quality education. When families struggle just to meet basic needs, affording the education necessary to break the cycle of poverty becomes nearly impossible.

Growing up, I learned about money from my parents, who learned from their parents, and so on. This highlights the reality that financial knowledge is often passed down through generations. Without intentional efforts to seek further education on these topics, progress stalls, and financial hardship is perpetuated. To break this cycle, it is crucial that we prioritize financial literacy education, ensuring that all individuals regardless of income have the opportunity to build the financial skills necessary for long-term stability and success.

It is important to note that even households earning over $100,000 a year report feeling as though they are living paycheck to paycheck. The rising cost of living in the United States continues to put financial pressure on families across all income levels. However, this reality should serve as a reminder that, as Americans, we must learn to adjust our spending habits to reflect changing economic conditions otherwise, our financial stability will continue to erode.

Homeownership has long been considered part of the American Dream, yet without proper education on how to save, spend responsibly, and avoid taking on unnecessary debt, many Americans will find this dream increasingly out of reach. Fortunately, there are already many accessible and affordable resources available to help individuals build financial literacy often for less than the cost of a meal at Chipotle.

Two highly recommended books on personal finance are The Psychology of Money by Morgan Housel, which covers essential topics such as budgeting, the importance of maintaining a strong credit score, and strategies for paying off credit cards on time, and I Will Teach You to Be Rich by Ramit Sethi, which provides practical guidance on investing through Roth IRAs and 401(k)s. Sethi also highlights the often-overlooked impact of financial advisor fees on long-term investment returns an important topic that every American should understand.

How Much Are Americans Saving and Spending?

Being able to save a portion of one’s paycheck is critically important. Establishing an emergency fund to cover unexpected expenses is something every American should prioritize. According to a 2024 survey conducted by Empower, one of the nation’s leading retirement account providers, 37% of Americans reported that they would be unable to cover an unexpected expense of over $400. Additionally, 21% of Americans revealed that they do not have an emergency fund at all. These findings highlight the financial vulnerability many individuals face and demonstrate that a significant portion of the population feels unable to save adequately.

The same survey also found that 57% of respondents identified paying down debt as a higher priority than saving underscoring the heavy burden of consumer debt in the U.S. To better understand the growing strain on household finances, let us now examine the latest delinquency data provided by the New York Federal Reserve through their Consumer Credit Panel and Equifax.

Delinquency data is critically important to monitor because it serves as a key indicator of why many Americans feel unable to prioritize building an emergency fund—they are instead focused on paying down existing debt. Currently, approximately 15% of credit card accounts are more than three months past due. This raises important questions: Is this delinquency spike related to stagnant income growth? Is inflation contributing to the increased financial strain? To better understand these dynamics, we turn to data from the U.S. Bureau of Economic Analysis (BEA), specifically focusing on Disposable Personal Income (DPI) and Personal Consumption Expenditures (PCE) the latter being the Federal Reserve’s preferred measure of inflation.

According to the BEA, DPI represents the amount of income individuals have left after paying personal current taxes, reflecting the funds available for both spending and saving. Below is a chart that illustrates the relationship between DPI on both a month-over-month (MoM) and year-over-year (YoY) basis. We will first examine the MoM changes starting in 2022, a period when inflation began to surge following the onset of the Russia-Ukraine conflict an event that has had a significant impact on global markets and consumer costs.

As shown above, in 2022 we observed a nearly 13% increase in current taxes, which caused disposable personal income (DPI) to post a negative result. This essentially indicates that more taxes were paid than income received. Currently, month-over-month (MoM) taxes are growing at a much faster pace than personal income, resulting in less take home pay available for both savings and essential expenses. If this trend continues, an increasing number of Americans will feel unable to save for an emergency fund or retirement, especially those already burdened by pre-existing debt that is past due. As highlighted earlier, not only are credit card delinquencies rising, but student loan delinquencies for payments more than three months overdue are also skyrocketing. This growing financial strain reflects a broader issue of financial illiteracy, particularly among younger generations, which urgently needs to be addressed. Now, let’s take a closer look at the year-over-year (YoY) data.

As we have observed, month-over-month (MoM) current taxes are increasing, and year-over-year (YoY) current taxes continue to rise steadily. Personal income, as defined by the Bureau of Economic Analysis (BEA), refers to “income that people receive from wages and salaries, Social Security and other government benefits, dividends and interest, business ownership, and other sources.” When examining YoY personal income growth, we see that it has generally remained below 5%, while current taxes have been growing at a much faster pace than disposable personal income (DPI).

If we can find a way to slow the growth of current taxes, it would allow Americans to retain more DPI, enabling them to pay down debt and increase savings both of which would strengthen the overall economy. Living in a society where many Americans feel they cannot afford basic necessities is far from the American Dream; in fact, the lack of financial literacy is contributing to the erosion of that dream. To better understand this dynamic, let’s now compare the YoY growth of DPI and Personal Consumption Expenditures (PCE) to assess the impact of higher inflationary periods.

During periods of higher PCE inflation YoY, we observe an increase in DPI due to inflation-adjusted raises. However, as inflation declines, DPI growth will also slow because companies will no longer need to increase employee raises to match inflation. Increased inflation periods are also linked to higher interest rates, which are set by the Federal Reserve as part of their monetary policy to keep inflation at a 2% YoY target. Raising interest rates can reduce inflation, but they can also have both positive and negative effects. The most notable negatives include the rising cost of debt and mortgage rates. When debt costs increase, typically benchmarked by the 10-year US treasuries, it makes borrowing more expensive for businesses, adding financial stress and increasing bankruptcy risks. Rising mortgage rates, which are closely tied to the 10-year U.S. Treasury, lead to higher costs for new homebuyers. Since many Americans are already feeling they lack enough savings, higher interest rates may discourage home purchases, resulting in lower homeownership rates.

Despite these negatives, higher interest rates can have strong positive effects, especially if Americans have more cash on hand, as they can benefit from higher savings account rates. If Americans were more financially responsible and better educated about budgeting during high-interest periods, they could start saving by opening a high-yield savings account (HYSA). These accounts are just as safe as regular savings accounts and FDIC-insured, but offer higher variable rates. Because HYSA rates fluctuate, Americans can take advantage of periods with higher interest rates to earn more on their savings. They might also consider buying Treasury bills, which, although less liquid than HYSA, come with tax advantages they are tax-exempt from federal taxes, saving money for those in states with both federal and state taxes. This type of financial knowledge isn’t typically taught in schools, yet it’s something many Americans should know.

This highlights the importance of financial literacy, which we need to improve before the problem worsens. Each month, the US Bureau of Labor Statistics (BLS) reports the average prices of essentials, and below we will examine MoM and YoY changes. These directly impact how much Americans can save because DPI is what remains after covering necessities. Looking at MoM data first, as shown below, since 2022, the price of eggs has increased the most among common grocery items. Recent months have seen chicken per pound remain relatively stable with small changes, while ground beef per pound has steadily increased. Additionally, the YoY percentage change for popular grocery items is shown. Due to inflation and global political tensions, YoY prices are rising much faster, making necessities more expensive for the average American. This data explains why most Americans feel they don’t have enough money to save.

Since we have established that rising interest rates are making debt more expensive and global political factors are driving up the cost of essential expenses, we will now conclude this section by examining the national savings rate for Americans. According to the Bureau of Economic Analysis (BEA), the personal saving rate is defined as “income left over after people spend money and pay taxes is personal saving. The personal saving rate is the percentage of their disposable income that people save.” Below, we present the historical personal saving rate.

Since the 1980s, Americans have been saving less money, particularly during periods of economic expansion. Interestingly, during recessionary periods, we tend to see spikes in the saving rate, largely because unemployment rises and consumers cut back on discretionary spending. This pattern held true during the COVID-19 recession when widespread work-from-home arrangements and reduced consumer spending led to an all-time high in the personal saving rate. However, as the economy recovered and Americans resumed spending, the saving rate experienced a sharp decline.

To promote greater financial security, our nation should consider setting a national savings goal. This could be achieved by offering incentives such as tax breaks or account-matching bonuses to individuals who meet targeted savings milestones similar to the benefits provided through 401(k) retirement plans. Encouraging higher savings rates will not only strengthen household financial resilience but also support long-term economic stability.

For example, if you contribute 5% of your net pay to a savings account, the U.S. government could match that 5% contribution. This strategy would not only provide a stronger incentive for Americans to start saving but also help them better plan and prepare for retirement. According to the Bank of America survey shown below, the “Baby Boomer” and “Traditionalist” generations many of whom are nearing or already in retirement continue to experience significant financial strain. In fact, over 20% of these households report that more than 95% of their income is spent on essential expenses. As noted earlier, the cost of necessary spending continues to rise year after year, placing growing financial pressure on older Americans.

Operation National Financial Freedom

Throughout this research, we have expressed the importance and the effects of minimal financial literacy knowledge, and now I will express how we could improve financial literacy through educational programs. Committee members, we must start teaching our younger generations as soon as possible the concepts of money and the different types of financial strategies that they could follow. Doing so will only help improve our society and have more people reach the “American Dream”. I propose we start teaching students financial literacy throughout high school, with each year focusing on a specific area, so students would be able to have time to master the concepts and become fully financially literate.

Students throughout high school are required to take a health and gym class to graduate. These classes help students become physically healthy through the gym and spread awareness on how to remain healthier as they get older through their health class. My argument is, why don’t we have classes dedicated to one of the most important subjects, personal finance? In the first year of high school, when students are taking algebra, we can teach them budgeting strategies and the importance of saving money for the long term. Budgeting strategies that can be covered could include the famous 50/30/20 rule, where 50% of your income goes towards necessities such as rent, utilities, and groceries, 30% towards wants, and 20% towards saving and investing. The great thing about this simple distribution formula is that it’s highly customizable, and as time goes on, when financial situations change, a person can easily change the allocation to also include debt payments and could decrease their discretionary spending.

Within the same year, Students can start being taught the basics of how to read bank statements, choosing bank accounts that are best for them and their current needs, as certain bank accounts have different benefits that could be tailored to what the person is looking for. Personal finance does not take rocket science math; however, it is very basic algebra and statistical concepts that can go a long way to help a person throughout their life to achieve their financial goals. In the sophomore year of high school, we can start educating students on the importance of credit scores and why it’s important to always pay off their debts on time. A prime example of this would be using mortgage approval rates based on credit scores, which the New York Federal Reserve publishes every quarter. as shown below, we can notice that higher credit scores would lead to a higher chance of getting a mortgage approved, as you are seen as less risky to the bank. If the future generation wants to eventually own a home, we should start teaching them how to properly raise their credit scores effectively so that when they have the funds to buy a home, not only when they have higher credit scores, but they will be granted the opportunity to potentially get discounted rates for their mortgages. The dream for most Americans is to one day be able to afford a home, which could only be achieved through financial literacy and making smarter / more strategic money decisions.

For many Americans, a credit card serves as their first line of credit, allowing them to begin building a credit score. However, due to a widespread lack of financial literacy, we are witnessing a significant increase in delinquency rates, with many individuals carrying unpaid balances for over three months. As shown previously, there is a clear upward trend in these growing late balances, which highlights the misuse of credit cards. This issue could be addressed by incorporating educational lessons on how to properly manage credit cards so that individuals can use them to their advantage.

One of the most misunderstood concepts surrounding credit cards is the difference between the payment due date and the closing date. The closing date is what is reported to the credit bureaus and determines the amount that will reflect on a person’s credit report. This, in turn, affects their credit score. For example, if someone has a closing date on the 3rd of the month and, over the previous billing cycle, they spent $2,000 out of a $5,000 credit limit, this usage amounting to 40% of their available credit—will be reported to the credit bureau. High credit utilization signals that the person is a heavy spender. Consistently using more than 30% of available credit can lead to late payments and a declining credit score. Teaching individuals, especially students, to treat their credit cards as they would a debit card can help them develop responsible spending habits, improve their credit scores, and eventually qualify for important financial milestones, such as homeownership.

Credit cards, however, are not the only common source of debt for consumers. In recent years, there has been a sharp increase in student loan debt across the nation. This rise can be attributed to several factors, including the pressure from high school faculty urging students to attend college and employers increasingly requiring college degrees or even master’s degrees for entry-level positions. The growing burden of student loan debt is also linked to students attending expensive private institutions and choosing majors that offer limited earning potential, which makes it difficult for them to repay their loans. As a result, many borrowers make only minimum payments, allowing interest to accrue and the overall loan balance to grow.

Using ARIMA modeling, I have forecasted the growth of both student loan debt and credit card debt through the first quarter of 2030. If current trends continue, student loan debt could potentially rise to $1.7 trillion, while credit card debt could reach $1.5 trillion by the end of the forecast period. Without intervention, these two key forms of debt could become the catalysts for the next global financial crisis, similar to the 2008 housing market collapse. Today, we see a comparable pattern: institutions are issuing loans at high annual percentage rates (APRs) to consumers who have little to no income to repay them. When these borrowers are unable to make full payments, their debts accumulate further, creating a snowball effect that perpetuates what seems to be an unending debt crisis.

To address the student loan debt crisis, we must reconsider the societal pressure placed on high school students to immediately attend college. Instead, we should help students explore their interests, understand potential career paths, and evaluate the expected income associated with their chosen fields. Since education is an investment, the potential return on investment (ROI) should be carefully weighed. Students should be encouraged to consider whether their future earnings will be sufficient to repay any loans they may incur, ensuring that their educational pursuits align with their financial well-being.

After teaching students about the importance of credit scores, credit cards, and student loans, one of the most valuable next steps is to help them understand the differences between retirement accounts and basic investment strategies they can follow. For example, students can learn that Traditional IRAs are beneficial for individuals who are working but do not have access to an employer-sponsored 401(k). In simple terms, a Traditional IRA is similar to a 401(k), with the primary differences being the annual contribution limits and the fact that 401(k) accounts typically come with employer-matching contributions based on how much the employee invests. Both Traditional IRAs and 401(k)s involve pre-tax contributions, meaning that if an individual contributes $5,000, that amount is deducted from their taxable income for the year. However, when they retire, they will owe taxes on the withdrawals, including any capital gains.

Since these accounts defer taxes until retirement, it is difficult to predict what income tax rates will look like 30 or 40 years from now. This is where the Roth IRA serves as a valuable alternative or hedge against potentially higher future tax rates. With a Roth IRA, individuals contribute after-tax dollars, allowing their investments to grow tax-free and enabling them to withdraw both contributions and gains without paying taxes in retirement. Essentially, they choose to pay the taxes now in exchange for future tax certainty.

It is important to explain that both Traditional and Roth IRAs, as well as 401(k) accounts, are simply vehicles for investments—individuals still need to choose what assets to invest in. For many people, this can be an overwhelming and confusing process due to a lack of understanding of financial markets. As a result, some individuals prefer to hire financial advisors to manage their portfolios. However, this convenience comes at a cost. In the United States, financial advisors typically charge an Assets Under Management (AUM) fee, which averages around 1% and can reach as high as 2% of the portfolio’s value annually.

Today, more affordable alternatives exist in the form of robo-advisors automated investment platforms that design and manage portfolios based on an individual’s risk tolerance, rebalancing allocations as needed. Robo-advisors usually charge a much lower AUM fee, around 0.25%, making them an attractive option for individuals who want market returns, such as those of the S&P 500, but with less involvement and lower costs.

To illustrate the impact of fees over time, I will present a portfolio example below. The portfolio consists of VTI (total U.S. stock market), VXUS (international equities), VGLT (long-term bonds), and GLD (gold). This diversified portfolio gives investors exposure to a broad mix of asset classes, including domestic and international equities, fixed income, and commodities. If an investor started with $100,000 and chose a financial advisor charging 2% AUM, they could end up paying nearly $700 per month simply for the management of a passive strategy that requires minimal ongoing research. As the portfolio grows, these fees will also compound, further eroding returns.

Teaching students how to construct diversified portfolios and understand the impact of investment fees over time is essential for closing the financial education gap. By equipping the next generation with this knowledge, we can help improve financial literacy, increase the median net worth of households across the country, and empower more Americans to take control of their financial futures.

Research Summary

Improving financial literacy will not only help reduce consumer debt and increase household net worth, but more importantly, it will strengthen consumer confidence in their financial well-being. As financial education improves nationwide and personal saving rates rise, we can begin to open the discussion on the future of Social Security specifically, the possibility of phasing it out or making participation optional.

Social Security was originally created during the Great Depression to provide income support for the elderly. However, times have changed, and Social Security has become increasingly expensive for the U.S. government to sustain. In 2024, for example, Social Security payment adjustments decreased due to lower inflation compared to 2022, temporarily easing the cost of payouts. Despite this, the long-term financial burden of Social Security remains a growing concern.

In the future, Americans could be better served by saving the equivalent of their Social Security contributions independently and investing those funds in the stock market with reinvested dividends. This approach has the potential not only to provide individuals with greater retirement security but also to save the federal government trillions of dollars over time a solution that could be viewed as a win for both citizens and the government.

Additional Charts For Further Reference

Reference

Financial Literacy and Education Commission. (2025, February 8). U.S. Department of The Treasury. https://home.treasury.gov/policy-issues/consumer-policy/financial-literacy-and-education-commission

MyMoney Tools | MyMoney.gov. (2017, September 21). https://www.mymoney.gov/mymoney-resources/tools?filter=61258

Household debt and credit report. FEDERAL RESERVE BANK of NEW YORK. https://www.newyorkfed.org/microeconomics/hhdc

Change in household debt balances mixed; student loan delinquencies rise sharply - FEDERAL RESERVE BANK of NEW YORK. (n.d.). https://www.newyorkfed.org/newsevents/news/research/2025/20250513

Bank of America Institute. (2024). Paycheck to paycheck: what, who, where, why? https://institute.bankofamerica.com/content/dam/economic-insights/paycheck-to-paycheck-lower-income-households.pdf

Over 1 in 5 Americans have no emergency savings. Empower. https://www.empower.com/the-currency/money/over-1-in-5-americans-have-no-emergency-savings-research

Lee, J. (2023, August 31). Here’s why some economists are concerned student loans may cause the next big bubble. CNBC. https://www.cnbc.com/2023/08/31/why-student-loans-may-be-the-next-bubble.html