How Financially Literate are You?
Does the title seem like a loaded statement? What is financial literacy? Why do I need to have it? Is it important? In my opinion, the discussion of financial literacy represents the construct by which any discussion around money takes place. So that in itself makes it pretty important and necessary to acquire. But what is it? If you google the term you get the following:
the ability to understand how money works in the world: how someone manages to earn or make it, how that person manages it, how he/she invests it (turn it into more) and how that person donates it to help others.
A lot of what I do on a daily basis allows me to traverse in and out of this subject. One thing that continues to interest me is all the different expressions or reactions to financial literacy individuals have. These “expressions” are the subject of this writing and I’d like to make the argument that the better versed you are in understanding your own expressions as it relates to financial literacy, the better off you will be financially.
What’s our Baseline?
The link to the following quiz provides our baseline. I’m only referencing this because in order to find a solution, there first has to be an acknowledged problem. Many studies have shown (not only the one I have provided the link to) show that Americans are not that financially literate–sadder still this is prevalent across the globe. Most Americans would be considered below average. This is quote from the article:
only 44.3% of those with college degrees answered all three questions correctly, compared with 12.6% for those with less than a high school degree, 19.2% of those with only a high school degree and 31.3% for those with some college.
This provides context for the problem for which I believe has to be a solution. I will admit that 63.8% of survey respondents got all three questions right, but then again they all had post graduate degrees. As a financial professional, I can tell you that nowhere near a post graduate degree is necessary to be financially literate.
Is this Really a Problem?
Here is why I think this is such a big problem. Prior to the 1970s, a lot of retirement programs were designed to pay a benefit to retirees until their death. However, more recently, retirement programs have been steadily changing todefined contribution plans instead of defined benefit plans. Basically the retirement payout is not based on a promise, but on the contributions made by the retiree and the investment choices made by the retiree. This change has huge implications, because now the individual is forced to make choices about investments that he or she may not be qualified to make in order to create income in retirement. As companies shift this responsibility to individuals, the performance of the investments become more important. Naturally, this phenomenon has given rise to the financial services industry as a way for individuals to shift some (or all) of this new-found responsibility to professionals. Essentially, this is why being financially illiterate is not an option any longer. Even now, it has become important to either hire a financial professional or know enough to do it yourself. At a minimum, you need to be financially literate enough to have a thoughtful discussion because ultimately it will affect the transfer of wealth for an entire generation.
A Long-Term Solution to the Problem
The solution is knowledge. However, in order to make real progress on teaching a generation on how to handle money, it must start early. The obvious conduit is school and it would likely be the most efficient. One consideration would be the development of some type of program to supplement what is already being taught on financial literacy. As an educator, my wife spends a considerable amount of time teaching the state-mandated curriculum, but more time on the subject matter is needed to change those survey results. For older adults, the challenge will be learning enough to reach a status of financial literacy that will allow them to provide for their future self. So I ask the question again, “how financially literate are you?”