Annual Report 2016 | Federal Reserve Bank of St. Louis

Economic Literacy for Life

For Better or Worse, Your Decisions Matter

"The recent crisis demonstrated the critical importance of financial literacy and good financial decision-making, both for the economic welfare of households and for the soundness and stability of the system as a whole." 1

—Ben Bernanke | former Federal Reserve chairman

In this reference to the Great Recession, former Federal Reserve Chairman Ben Bernanke was talking about budgeting, wise credit use and saving as key components not only to the success of households but also to the success of our economy.

Certainly, making informed decisions regarding spending, credit, saving and other financial matters helps the individual household's bottom line. But in what ways do the individual's decisions, when made well, benefit the overall economy? And, when do the individual's decisions, when done poorly, set all of us back?

Decision-making is one of the most basic skills taught and promoted by the economic education team at the Federal Reserve Bank of St. Louis. Bad financial decisions by individuals usually ripple throughout society—as do good ones. Let’s look at some examples:

Decisions about Credit

Individuals' decisions regarding credit were critical as the country entered the Great Recession (2007-09). Creditors were reluctant to lend. Households either didn't want the credit or couldn't get it. (Economists debate which scenario was more likely, with many thinking that households' stress over already high credit balances caused them to voluntarily reduce their credit exposure.2)

Either scenario would have produced a considerable drop in consumption spending and gross domestic product (GDP), which are key indicators to the health of the overall economy. The drop that actually did happen was the result of individuals' decision-making—whether it was the decision on the part of households to maintain high credit balances leading up to the recession, or the decision on the part of creditors to sharply reduce access to loans, or whether it was the decision on the part of lenders to extend large loans to households or, later, to sharply reduce access to lending.

Decisions about Saving

As for the issue of saving, decisions on whether to save, how much, etc., can have an impact on individuals and on the economy that can be just as serious as the impact of decisions regarding credit. For example, the dire effects of poor saving habits may lie dormant until they are too late to correct.

A Case for Better Decision-making by One and All

Results from a Survey of 25,000 Americans

U.S. Ark. Ill. Ind. Ky. Miss. Mo. Tenn.
Spending more than income 18% 15% 18% 20% 16% 21% 18% 16%
Have unpaid medical bills 21% 30% 18% 27% 27% 33% 26% 24%
Do not have emergency funds 50% 50% 47% 52% 52% 56% 56% 56%
Used one or more non-bank borrowing methods in the past 5 years 26% 32% 24% 26% 29% 35% 31% 30%
Paid the minimum payment only (credit cards) 32% 40% 30% 34% 31% 32% 35% 32%
Home "underwater" (negative equity) 9% 10% 12% 12% 6% 12% 11% 7%
Did not compare credit cards 58% 53% 59% 57% 62% 53% 62% 56%
Results on 5-question literacy test—3 or fewer correct 63% 65% 61% 65% 65% 69% 62% 65%

SOURCE: FINRA Investor Education Foundation.
NOTES: These questions were taken from the 2015 National Financial Capability Study, which was funded by the FINRA Investor Education Foundation. Answers are given for the U.S. overall and for each of the states in the Eighth Federal Reserve District, home of the St. Louis Fed.

Consider the retirement savings of baby boomers. Life expectancy for a baby born in 1930 was 59.7 years. A baby boomer born 30 years later could be expected to live for 69.7 years.3 In a financial sense, whether increased longevity is good news or bad news depends on the decisions made on the way to senior living.

Nearly 50 percent of baby boomers either do not know how much they have saved or, even worse, report that they have saved nothing for retirement. About one-third have at least $100,000 saved but less than $250,000.4 Baby boomers who made the decision to save nothing for retirement can expect to live nearly 12 years longer than their parents did, relying only on Social Security. Even those who have saved may outlive their savings.

So, how do these personal saving decisions affect the economy in general?

For starters, a lack of savings can starve economic growth. Savings are the lifeblood of investment, and investment is the driver of increases in our standard of living. If seniors have not saved a sufficient amount to fund their retirement, they will have to draw down every dollar of their savings. On a large scale, this reduces the money available to businesses to borrow to expand. Beyond this, these same retirees will use every dollar of their Social Security for consumption, placing nothing in savings for others to invest.

And things could get worse. Social Security projections show annual deficits until 2034, when the fund will be depleted.5 Whatever the remedy turns out to be, it will most certainly involve higher taxes or lesser benefits, having an impact on consumption and investment in the future.

Building Our Skills

The common theme is that decisions matter, and that the effects of poor decisions made by some can spill over to a great number of us. The St. Louis Fed has multiple resources to help all of us develop stronger decision-making skills. For example, beginning at the early elementary level, students can participate in an online, interactive storybook called Once upon a Decision. Those who are a bit older (including adult consumers) can view a higher-level course, The Art of Decision-making.

Click image for a larger view
We Can Help You Make Decisions

It's never too late—or early—to work on your decision-making skills. The St. Louis Fed has resources for people of all ages, and the resources cover all sorts of topics, from budgeting to banking, credit to college, saving to shopping ... and on and on.

Both courses promote informed decision-making by having students define their problem, identify the alternatives that could possibly solve their problem, choose the criteria that would best satisfy their goals in solving the problem, evaluate their alternatives according to these criteria or goals, and then choose the best alternative, all the while being aware of what they give up when making their choice.

What they give up, their opportunity cost, is the most important lesson in personal finance and economics because it represents the consequences of a decision.

For the baby boomer who spent all of his income, the opportunity cost is the loss of spending power in retirement. For the individual who used his credit card with abandon, the opportunity cost is the many goods he cannot buy in the future.

But for society as a whole, there is also an opportunity cost to the individual's behavior. So, the opportunity cost of ignoring decision-making education might present itself as a lower standard of living, not just for those who made the poor decisions, but for all of us.

While everyone can access our online resources on decision-making, some high school seniors have a unique opportunity every year to learn in person from St. Louis Fed experts about the decisions that the students face currently and will face for the rest of their lives. These 13 young men and women are members of our student board of directors. They meet monthly with St. Louis Fed leaders to learn about basic economics, personal finance and the Fed itself.

Watch as members of our student board of directors talk about the preparation they've received from the St. Louis Fed to make better decisions.

"We need to understand how decisions we make now can affect us in our future," said Amanda Meyer, a board member.

Credit is a particular interest of the students since they will be headed to college soon.

"We learned about both credit and then forecasting your college expenses," said Meyer, "and how this is a great investment, but how you also need to be aware of your post-education salary, expenses and things like that."

Added Egzona Ramushi, another board member, "I think that was one of the most important things we learned because ... we don't want to be in debt for the rest of our lives."

Some of our other resources on decision-making:

  • The Credit Cred online course, in which you learn about building strong credit, arranging credit for major purchases, avoiding common mistakes and monitoring your own credit score.
  • The Budgeting 101 course, which shows you how to create a budget for a fictional nursing student—and then for yourself.
  • The video Ways to Save, part of our No-Frills Money Skills series, which shows how to save for major goals in life, such as cars, college and retirement.

To see these and more resources, go to


  1. See Bernanke. [ back to text ]
  2. See Jiang. [ back to text ]
  3. See National Vital Statistics Report. [ back to text ]
  4. See Insured Retirement Institute. [ back to text ]
  5. See Social Security. [ back to text ]


About the Author
Barb Flowers
Barbara Flowers

Barbara Flowers is an economic education coordinator with the St. Louis Fed.

Barb Flowers
Barbara Flowers

Barbara Flowers is an economic education coordinator with the St. Louis Fed.

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