Most Americans are Not Financially Literate
Most Americans are Not Financially Literate - The proof is in the studies – more than 66% of American’s can’t pass a basic financial literacy test. Can you pass a financial literacy test? The test asks 5 questions about basic finance, questions that every adult should know. The topics cover things like debt interest, inflation, compound interest, impact of losses and risk diversification – all basic topics everyone should know. Take the 3 minute challenge yourself? Click Here
So why do many of us not think about becoming financially literate, when such a lack of knowledge can result in hundreds of dollars of lost income? Is it because we are not taught financial literacy in high school or college? Or is it our capitalistic, consumer based society?
Let’s Be Honest - Here are 5 real reasons.
- Bad Spending Habits
- Poor Financial Management
- Irresponsible Investing Practices
- Shaky Personal Judgment
- Difficulties With Debt
Why are Most Americans are Not Financially Literate
Some say, most Americans are not financially literate because the economy and society promote irrational thinking among consumers. While the newest smartphone or a new car are shiny status symbols that buyers gravitate too because of the instant gratification.
The benefits of wise financial management become apparent only months and years a bad decision is made. Even if consumers later regret not having taken their time, they still don’t spend time doing due diligence or research about savings accounts, retirement, investment fund costs, interest rates, and the cost of credit cards.
We seem not to realize the benefits of becoming financially informed, so face it most Americans are not financially literate.
For many others the reasons most Americans are not financially literate is the fault of the financial institutions. The way products and services are promoted and the complexity of lengthy consumer financial contracts, in this view, is a deliberate attempt by firms to lure unwitting customers into overpaying for substandard products.
Banks and lenders highlight their attractive initial terms and bury fees and interest-rate adjustments in a maze of small print. If it weren't for those contracts and predatory lenders these consumers would not have made that purchase, or they would have taken a closer look at the contract.
There are serious problems with these irrational hypotheses. First, it is hard to quantify its prevalence and impact, since everything that does not fit the model can be ascribed to irrational decision-making. Behavioral analysis often serves as justification for the paternalism of politicians and regulators rather than as an impartial guide to public policy.
So why do people display foresight in certain areas of financial decision-making, such as investing in their children’s education or insuring against unlikely but impact of financial shocks, but not when it comes to some impulsive financial decisions? The same people show a lack of foresight.
A Lack of Financial Literacy Can Be Devastating
There are no excuses for bad decisions, most Americans are not financially literate. Consumer financial regulation, until the last couple of years had become more granular in the terms of financial contracts. If it were a matter of preventing bad behavior from financial firms, one would expect the thousands of individual rules, on everything from maximum interest rates to dispute resolution to the equal treatment of borrowers, the government would have solved the problem.
Unfortunately, a majority of Americans think they’re making smart financial decisions. What they don’t realize is they don’t fully understand how finances work. Something like simple interest, for example. It’s a simple topic – easy enough to understand, but if you misunderstand it, you could lose quite a lot of money.
If you don’t understand simple interests, you may invest your money incorrectly. The opportunity cost could be detrimental to your finances both now and in the future. These people don’t even consider that they could get compound interest on their money.
Credit Card Interest can Eat your Finances
If you don’t understand credit card interest, you could pay thousands of extra dollars for purchases and not even realize it. Being aware of what credit card interest costs you and why you shouldn’t just make the minimum payment required is crucial.
As Americans, we need to fully understand basic finances. Without financial literacy, you may have a hard time getting your finances in order. You may not choose the right savings account, invest your money correctly, or rack up credit card debt.
If you don’t understand the basics, talk with a financial advisor. Find out what you can do to make the most of your finances. Even small mistakes today can cause you financial destruction for years down the road. Your finances are cumulative, but it’s never too late to learn the basics. Learn as much as you can about finances, how they work, and how to make the most of your money to gain financial freedom.