Befuddled by debt? You're not alone

Americans are 'financially illiterate' and caught up in a web of debt. Poor savings don't help, according to two new studies.

Subscribe to Personal Finance
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By Catherine Clifford, CNNMoney.com staff writer

Why Ben Stein loves annuities
Actor and Economist Ben Stein is a huge fan of annuities as a way to ensure a secure retirement.
When will you be debt free?
Enter credit card information
  CC name Balance
($)
Rate
(%)
Minimum
payment($)
1
2
3
Choose a plan
Minimum payments only
Fixed payments
$ monthly
Debt-free deadline
I want to pay off my credit cards in:
years and months
Quiz
Risk Tolerance
How much uncertainty can you stomach?
1. You have $10,000 invested in stocks and mutual funds. The past quarter has been rough -- the value of your holdings has dropped by 20 percent. You:
Cash out what's left and stow it under your mattress.
Move all your money to a government bond fund.
Do nothing. You're sure the market will rebound in the long run.
Pour another $10,000 into the stock market. After all, it's cheap!

NEW YORK (CNNMoney.com) -- Americans don't understand debt, which may be one reason that they have too much of it, according to a survey released Tuesday.

The survey presented 1,000 people with a hypothetical scenario about credit card debt and asked them to compute how long it would take to pay it off. Only 35.9% of the 1,000 respondents could figure out how many years it would take for the amount they owe on their credit cards to double. A full 18.2% did not know how to respond and 31.9% of those surveyed over-estimated the timeframe.

The survey by Harvard Business School and Dartmouth College professors and TNS asked respondents to assess their debt levels. Those who said they felt they were carrying too much debt were found to be "wildly wrong" when it came to using compound interest to calculate how long it would take to pay off that debt.

Of those polled, 26% said they consider the debt they are carrying to be unmanageable, while 61% said their debt level was "just right."

Americans don't realize they're unaware of some of the complexities of personal finance - like compound interest - said Bob Neuhaus, the executive vice president and the head of the financial services sector in the U.S. for TNS. "If financial literacy was higher, you would see more caution in the use of consumer debt. It would not eliminate the problem, but it would mitigate [it]."

The survey draws attention to a large problem without an easy solution. "Even those with a college degree don't have an understanding of the basic finance ideas," said Annamaria Lusardi, Professor of Economics at Dartmouth College.

However, there are smaller, more manageable steps that can make a difference. Harvard Business School Professor Peter Tufano, a self-proclaimed believer in financial education, does not see credit as inherently bad, but he said that debt services are much more complicated now than they were a generation ago. He said credit card companies could help by creating more consumer friendly credit contracts that plainly spell out the terms, and bills that itemize outstanding debt so consumers can grasp the reality of how they spend money and how long it will take to pay.

A lack of savings could be compounding the consumer debt problem. Another nationwide survey of 1,000 Americans released Monday by the American Savings Educational Council (ASEC) and America Saves found that a mere 53% of Americans have adequate savings with only 28% saving the recommended 10% of their annual income.

Three-quarters of Americans surveyed said that they spend less than their income and save the difference, which may provide enough for an emergency unexpected expense, but only a little over 50% have enough savings to provide for a comfortable standard of living in retirement.

However, those who make more money are able to sock away more for a rainy day, according to the savings survey. Ninety-percent of the high-income group (those earning at least $75,000 annually) say they have adequate savings, but only 48% of the low-income group (those earning below $35,000 annually) can say the same. And 81% of the high-income group report saving at least 5% of their income, compared with 34% of the low-income group.

Regardless of income or level of financial literacy, there is one unifying lesson: have a plan. "Having a financial plan increases savings and financial stability," said Stephen Brobeck, executive director of Consumer Federation of America. To top of page

Photo Galleries
10 of the most luxurious airline amenity kits When it comes to in-flight pampering, the amenity kits offered by these 10 airlines are the ultimate in luxury More
7 startups that want to improve your mental health From a text therapy platform to apps that push you reminders to breathe, these self-care startups offer help on a daily basis or in times of need. More
5 radical technologies that will change how you get to work From Uber's flying cars to the Hyperloop, these are some of the neatest transportation concepts in the works today. More

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.