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Why Financial Literacy is Important

May 22, 2017

If only money came with instructions, the route toward wealth would be clear and direct. Unfortunately, many people have inadequate financial knowledge, and for them, the path is more obscure.  

 

Are most people clueless about financial matters?

That depends on what gauge you want to use to measure financial knowledge. The U.S. ranked fourteenth in Standard & Poor’s 2015 Global Financial Literacy Study, with just 57% of the country’s population estimated as financially literate. (1)

 

Obviously, the other 43% of Americans have some degree of financial understanding – but it is mixed with a degree of incomprehension:

 

• A recent LendU survey found that nearly half of college students carrying student loans thought those debts would eventually be forgiven if left unpaid.

 

• This year, Fidelity Investments asked Americans the following question in a multiple-choice quiz: “If you were able to set aside $50 each month for retirement, how much could that end up becoming 25 years from now, including interest, if it grew at the historical stock market average?” The correct answer was $40,000, but just 16% of respondents got it right. Another 27% guessed $15,000 (i.e., 50 x 12 x 25, as if interest was not a factor).

 

• Only 42% of those quizzed by Fidelity knew that withdrawing 4-5% a year from retirement savings is commonly recommended. Fifteen percent of those older than 55 thought they would be “safe” withdrawing 10-12% per year.

 

• *The S&P 500 has returned positively in 30 of the last 35 years. Just 8% of those answering Fidelity’s quiz guessed this correctly. (2,3)

 

Apart from these examples, consider another one at the macro level.

According to the latest National Financial Capability Study from FINRA (the Financial Industry Regulatory Authority), only about a third of Americans younger than 40 understand the basic financial concepts of compounding, inflation, and risk diversification. 

 

A lack financial acumen may hurt a person's ability to build or protect wealth.

For example, an employee who skips retirement plan enrollment at work, mistakenly thinking that a tax-advantaged retirement account is the same as a bank account. The small business owner puzzled by cash flow and profit-and-loss statements. Or the young borrower who fails to grasp the long-run consequences of only making interest payments on a credit card or loan.

 

Financial professionals continually educate themselves regarding economic news, tax law changes, and market developments. Investors should similarly stay up to date with such financial changes.

 

Ten or twenty years from now, you may find yourself in an entirely different place financially. The economy, the Wall Street climate, and even the investment opportunities before you could all differ greatly from what you see today. If your financial knowledge is ten or twenty years out of date, you risk being at a disadvantage.

 

 

Citations:

1 - marketwatch.com/story/should-colleges-require-a-financial-literacy-class-2017-04-03/ [4/3/17]

2 - investopedia.com/news/3-ways-improve-financial-literacy/ [4/21/17]

3 - marketwatch.com/story/most-americans-failed-this-eight-question-retirement-quiz-2017-03-23 [3/23/17]

 

This post has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Your Financial Roadmap, Inc. is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
 

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