How Do You Define Smart?

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how do you define smart

Happy Wednesday everyone! I originally had a different post planned for today but had to change course when I read this article on Yahoo Finance last week. The article was discussing findings from The Financial Capability Study that surveyed 25,000 Americans last year in relation to their personal financial situation and how “smart” they might be financially. Overall, the statistics were not very surprising and really seemed like more of the same numbers that we have been seeing for quite some time. What stuck out to me though was the study moderator’s claim that the Great Recession has changed financial behavior and I have to respectfully disagree with them. So, let’s get into their findings on what they view as changed behavior.

Are We Really Smarter?

Even though Mrs. Frugal Rules would say I am a pessimist, (I consider myself a realist, but that’s besides the point) I do like to hear the good news first. The good news, if you want to call it that is as follows and has occurred over the past four years:

  • 8% increase in people paying off their credit cards each month to 49%
  • 5% increase in people having a three month emergency fund to 40%
  • 4% increase in people having no problems with monthly bills to 40%
  • 9% increase in people satisfied with their financial health to 25%

You might take a look at these numbers and think to yourself that things are on the upswing. Well, let’s take a look at the bad news:

  • Only 41% spend less than they earn
  • 56% do not have a three month emergency fund
  • 34% do not pay even the minimum on their credit cards each month
  • The average person from the survey scored a whopping 57% (an F in my books) on a 5 question basic financial literacy test

Now I know there is some debate about the need for an emergency fund within the personal finance community and that is not really the point of this post. That is something I have discussed in the past and really what I am seeing here, ultimately, is a spending issue and emergencies, or the lack thereof, is inconsequential until the spending problem is addressed. To see that only 41% spend less than they earn means that nearly two thirds of the people surveyed are spending more than they bring in each month and that is backed up with the F score on the financial literacy test. As an aside, I took the more expanded 12 question test and got 11 of the 12 correct; given that, I assume the 5 question test probably wasn’t that difficult. I know that we have seen some tough times over the last five years and that might be at play here, but I hesitate to say that tough times are ultimately to blame. So, if there are some people that have been unable to make headway, what does it say for the others who’re not in that position? In my opinion, it shows either a comfort level with having debt and/or living paycheck to paycheck, or it shows a lack of knowledge…not increased levels of being smart.

Do Your Surrounding Circumstances Matter?

What I did find interesting, though not terribly surprising, about the survey results was that they pointed to a number of influencing factors. According to the survey, where you live, how much money you make and your education level have a somewhat significant impact on your level of financial literacy and ability to avoid debt. To be fair, I am sure this plays some role for some, but I highly doubt it as a blanket statement. The study found, surprise surprise, that we emulate those we’re around. Meaning those who spend gather around those who spend and those who save/invest gather around those who do the same. I know this plays a role, but at what level does this become an excuse? We all have our excuses that we like to use in various parts of our life, heck, I know that I use them. The problem comes in when we believe those excuses and use those as reasoning to justify our problematic behavior. This is not to disparage those who do not know better, it is meant as a call to take action and take responsibility for our behaviors. We all do not have the benefit of receiving good financial education that results in us being financially literate, but I do know that there is a wealth of resources available to help teach the basics and fundamentals so we can stop making excuses and start being responsible for ourselves. As one who has benefitted from those resources myself in order to turn around my financial life I can’t encourage you enough to seek them out if you have the need.

Ultimately, it’s Simple Math

So, what are we to do with all these numbers? Are we really smarter in regards to personal finances…I think not. While there are improvements, I am still not a buyer in believing that we’re smarter with personal finances. The question becomes then, how can we change that? Ultimately it comes down to simple math…spend less than you earn. It really is as simple as that, even our five year-old understands that. If you only have a certain amount of money coming in each month then you must spend less than that and save or invest the rest. You can budget or not budget, use an envelope budget or not, you can have an emergency fund or not…what matters is how spend your money. Beyond that it comes down avoiding temptation to spend, being frugal when you do spend and making the remainder of your money work for you as opposed to being a slave to it. Amidst all the theories, preferences and ideas it really does boil all down to that – spending less than you earn and save the rest. If my five year-old can understand it, then I am certain the rest of us can too.


What do you think? Are we really smarter when it comes to personal finances, or are we still coming up short?


Photo courtesy of: Anton Fomkin

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I'm the founder of Frugal Rules, a Dad, husband and veteran of the financial services industry. I'm passionate about helping people learn from my mistakes so that they can enjoy the freedom that comes from living frugally. I'm also a freelance writer, and regularly contribute to GoBankingRates, Investopedia, Lending Tree and more.


  • As a nation overall, I don’t think we are very smart. Many pieces (individual citizens) are smart and moving in a good direction.

    • pauline says:

      I agree (sorry!). Two generations ago you would work hard and almost always pay cash, unless it was a mortgage. Even then many people built a small house on a cheap piece of land until they could afford something better. Now you are giving away credit cards to college kids and a free t-shirt to smooth things, and you think it is normal to put groceries on credit and carry a balance. Europe is more credit averse and it has its drawbacks on the global economy (and businesses mainly) but most households have weathered the crisis just fine because they do not have consumer debt and have always lived below their means.

      • John says:

        I agree as well Pauline. We have made credit very easy to get access to. My Dad likes to tell a story about my grandfather and how he paid cash for everything and only used a credit card once. He took our family out to dinner, when I was baby, paid for dinner with the card and then cut the card up. He said that he used the card to “see how it felt” and went back to cash for the rest of his life. 🙂

    • John says:

      I agree FMM, I think individuals are smart and making good choices. The nation as a whole…not so much.

  • Moneycone says:

    You hit it right when you concluded the post with ‘Ultimately it is simple math’! On financial smartness, tell me why you signed up for that credit card and I’ll tell you how smart you are!

    I have great respect for those who choose to pay off debt over trying to ‘earn more by investing, rather than paying off debt’.

  • I think we are “moving in the right direction’ when it comes to personal finance, but there is definitely a long way to go. There obviously is no shortage of information out there, so I blame the problem of financial literacy on time and action. It takes time to understand finances and it takes action to make more money / spend less money and manage your finances.

    • John says:

      I agree DC, there is a long way to go. I have hope that we can make a change, but it’ll require work for us to get there.

      • I still think getting some basic personal finance education in our schools is a necessary step, if not the most vital step in the process.

        • John says:

          I could not agree more. I know that people debate it being done in school vs. being done in the home. It’s a chicken vs. egg debate. I say why not have it in both? The sad fact is that many kids do not get the teaching in their home, so why not at least implement some basics in school to help build some sort of foundation? It just makes sense to do it that way.

  • Matt Becker says:

    I couldn’t agree more that the number of people spending more than they earn is incredibly troubling. It’s just such basic math, and so basically unsustainable. I will say that I think environment can play a large role. It’s certainly not the only factor, and there are plenty of ways to get out of a bad situation, but it can be hard when you don’t have examples around you of how to do so.

    For an interesting take on the 5 questions literacy test, check out the finance buff:

    • John says:

      I agree Matt, that number was really troubling to me as well. I know that environment can play a major role, I just struggle as to if that is just really an excuse or not. I am sure it is for many, but I know that for many, many others it is not. Thus why education is so vital to help mitigate it.

  • That’s a tough question to answer because I can only speak for myself. I think often times people “know” what they need to do, but are choosing not to do it for one reason or another…or again, at least it used to be that way in my case. I just chose not to act on the knowledge that I had that I shouldn’t be spending money I didn’t have.

    • John says:

      That is a great point Tonya and I think it’s something that many deal with. I know that I did to some level and still made crazy decisions.

  • Yeah, um NO. At least from what I’ve seen, the numbers aren’t moving nearly as fast as they should. I still see LOTS of people on a daily basis who spend more than they make, don’t track spending, spend tons of money that they don’t have on entertainment, etc. Smart, to me, is about wisdom, not intelligence. You can have all the degrees in the world and still not have a clue about basic common sense stuff. One thing my dad did that I’m so grateful for was that he was a frickin’ drill sergeant in the way of instilling common sense into us kids. We got a good tail-chewing if we did stupid stuff that lacked common sense. 🙂

    • John says:

      I have seen that as well Laurie and was largely the impetus for this post. I agree that a lot of it is about wisdom and not just book smarts. I have seen too many that are brilliant people yet have no clue how to handle their finances.

  • I don’t personally know anyone who has a written budget as we do. I have friends with law degrees and friends who didn’t finish high school… and none of them have a plan for their money. I try to tout a budget so you can spend less than you earn, but have yet to convert anyone.

    • John says:

      I have run into that a lot as well Jen. I know that budgeting is not for everyone and that is ok. I think the key is to have a plan for your spending and not where it’s going. So few know even that.

  • Cat says:

    I think it’s all over the place – some folks are making strides and some – not so much. Even I’m not as on the ball as I’d like to be!

    • John says:

      That is a good point Cat. Like I responded to an earlier comment, I think some individuals are doing great and moving the right way and society as a whole not really.

  • This is tricky because for those who aren’t paying their minimum CC balances, they could be trying to build an emergency fund. Or vice versa.

  • I agree–the Great Recession didn’t make us smarter, just poorer. When good times are rolling again, people will go back to being dumb. 🙂

  • Jake @ Common Cents Wealth says:

    It’s great to see a lot of these percentages increasing, but the flipside is still pretty scary. I can’t believe 60% of Americans spend more than they make. I feel like that is just common sense, but I guess it isn’t for a lot of people.

  • anna says:

    I think the good news stats are a bit misleading considering it compares data from 4 years ago during the recession. The stats for those points *should* increase because the economy is better than it was back then so more people are able to do those things, not necessarily because people are becoming smarter about it. If ever, the emergency fund thing might be a learned improvement, but the other three points should just happen, anyway, you know? That’s really unfortunate 60% have problems paying monthly bills.

    • John says:

      That is a good point Anna! I would hope they would increase, though I am a little too cynical to think they will. 😉 I agree, though, that 60% is really unfortunate.

  • Finance is really just basic math, but when I was working in mortgage collections, I realized that most don’t understand basic math. People don’t run finances based on math, but more emotions and that is our problem. We are bombarded by spend, spend, spend and the over consumption culture. I would say our culture is not very smart when it comes to finances.

    • John says:

      Great point Grayson. It can be easy to give into those emotions and feel like we can do something when the math is just not there. Many of us have been there, myself included.

  • Greg@Thriftgenuity says:

    I try to think the best of people, so I’d like to think that people are understanding their finances. I think that is because, as you mention, birds of a feather, so I sometimes forget that people don’t think like me and my family and friends do.

    Unfortunately, I think people have short memories when it comes to materialism and the consequences of not saving. And, not to get too political, but in recent times, there continue to be safety nets for those that have not been wise with their money. So what lesson will be learned if that is always there?

    • John says:

      I do as well Greg, though that only can take us so far.

      I agree, we do have short memories and any “lesson” we may have learned will quickly go by the wayside when/if things do get better for the person or if assistance does continue.

  • We have a long road ahead of us. Living beyond your means has become so commonplace and ingrained as “okay” or “normal” in so many people. I think the Great Recession forced a group of individuals to make cut-backs in order to survive and some realized they way they were living previously was more harmful than good and did make permanent changes. While another group merely made them to get by with the full intent to go back to “normal” as soon as possible. The good news, in my opinion, is there finally seems to be a growing awareness that this lack of financial literacy is a problem. It’s starting to get media coverage. More people are starting PF blogs to help others get out of debt and see that one can live an incredibly “rich” life within their means.

    • John says:

      I agree Shannon, we do have a long road ahead of us and I think you’re right to be optimistic (though I always struggle with that 😉 ) as there is growing awareness about this and can only hope that awareness turns into headway being accomplished.

  • I think the “financially literate” group may have picked up a few new member due to the recession, but by and large I don’t think things have changed. As the economy strengthens, people will begin to get loose with their money again. We just experienced the equivalent of a diet. Diets don’t work because they are temporary. What works is changing your habits permanently, which I believe most people have not done.

    • John says:

      That’s a great point Nick and I could not agree more. It really does come down to changed habits that stick and not just changing for change sake. Otherwise, it won’t stick for the large majority.

  • krantcents says:

    I don’t think it has anything to do with being smarter or not. There are smart people who do stupid things all the time. Did the same people who had consumer debt and paid it off become smarter? I think they were the same people they always were and just learned how to manage their money.

    • John says:

      That’s definitely a valid point KC. Though, I would argue that those who do pay off that debt became smarter in terms of managing their money which resulted from an increased/improved knowledge level.

  • I agree with you John. While there have been improvments, we’re still not quite “smarter” with finances yet. I get so frustrated sometimes because I believe my younger brother has a shopping addiction and he has a maxed out student credit card that he is in no hurry to pay off because it’s “only” $500. The irony is he bartends in the summer time when he’s not going to college and could easily pay that credit card off in 2 weeks worth of tips but he chooses not to. He would rather spend spend spend because he can. I’m hoping he will eventually learn, but it’s looking like the will learn the hard way like I did… 🙁

    • John says:

      Sorry to hear that GMD. I was the same exact way when I was in college and while it may “only” seem like $500 the underlying issue was a spending addiction. Here’s to hoping that he doesn’t choose the hard lesson like we did. 🙂

  • I agree with your assessment of those numbers. Far too many people still aren’t simply living within their means.

    The general lack of financial literacy taught in the education system is a big part of the overall problem. If parents aren’t financially literate then how are their children going to be? While there is a wealth of information available, so many people aren’t interested in taking the time to learn. In my opinion, we’ve got to teach financial literacy to young kids while they’re in school and therefore a slightly more captive audience.

    • John says:

      Great points Erin! I agree that many are not interested, for some reason or another, in learning more about finances. I too think it should start young to begin to build that foundation for financial literacy.

  • CashRebel says:

    Only 41% spend less than they earn! That’s incredible. I never would have guessed that. I guess I figured that people were a little smarter now and it was more like 75% of people spend less than they earn. Eye opening post.

    • John says:

      I agree Ross, I did a double take when I read that, but it seems to be true. We still have a lot of work just to hit the 50% barrier.

  • Jim says:

    Well said John, I agree it is a simple theory; spend less than you make. Problem is the media does such a great job of creating “need” and folks fall into the trap of always chasing that next need. They wake up one day and find themselves in a world of debt and have no idea how they got it. Shut off the media!

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