Numbers That Matter: Navigating Financial Literacy Challenges in The United States

Sixty-one percent of women and 41% of men believe they cannot calculate their net worth, according to a study by Qualtrics on behalf of Credit Karma, highlighting a widespread lack of financial literacy in the United States.

This appears to correlate with other numbers – 62% of respondents with credit scores of 600 and below (subprime) do not know how to compute their net worth, compared to 42% of Americans with credit scores of 661 and higher.

Benefits of Financial Literacy

Dr. Krieg Tidemann, assistant professor of economics at Niagara University, emphasizes the importance of financial literacy in making informed and rational decisions about personal household budgets and financial planning. Financially literate households, he points out, are more likely to improve their quality of life by reducing anxiety over household finances, and they enjoy a more comfortable life both before and during retirement. Moreover, from a societal perspective, financial literacy plays a significant role in easing fiscal constraints faced by governments, since financially illiterate households are more likely to participate in safety net programs.

Building on this, Raymond Quisumbing, a registered financial planner affiliated with Bizreport.com, says that with improved financial literacy, society can expect fewer people to fall victim to scams. They will also see an emergence of more advanced and beneficial financial laws and products tailored to cater to the needs of the market. Additionally, promoting legitimate financial products and services becomes easier as trust and awareness of finances increase.

Costs of Financial Illiteracy in Retirement

According to Dr. Tidemann, two different types of costs arise from financial illiteracy: households that save too little or spend too much may face a reduced quality of life during retirement or may delay retirement due to inadequate savings. On the other hand, financially illiterate households may save too much for retirement, leading to a lower standard of living during their working years.

These households may forgo some opportunities or experiences that could have enhanced their quality of life due to an overly conservative approach to retirement savings. Consequently, improved financial literacy can assist individuals in making decisions that achieve a balance between saving for the future and living a fulfilling life in the present.

Psychological Factors at Play

Quisumbing identifies emotions such as fear, shame, embarrassment, and procrastination as significant hindrances to addressing financial realities. Some may feel that talking about money is pointless when they have no extra funds. In contrast, others lack the knowledge to compile the necessary financial information. 

A prevailing misconception is the belief that net worth calculations are relevant only for high-net-worth individuals, according to Quisumbing. This notion is supported by the fact that 33% of Americans acknowledge knowing one or more celebrities’ net worth. 

Notably, this trend is even more pronounced among younger generations, with 64% of Gen Z and 45% of millennials reporting familiarity with the net worth of celebrities, according to the study. 

Addressing “Present Bias” 

Present bias is when you make decisions, giving more weight to or focusing more on your present situation than the potential futures. 

It’s a mistake that Dr. Tidemann reveals can lead to neglecting the long-term advantages of setting money aside. “Households often inadequately consider the costs of spending less now to save more. This is because the benefits of saving are hard to comprehend now since they are enjoyed well into the future.

“This is especially true with retirement savings, where the benefits may not be received for 40 or 50 years. Financial literacy education can help make younger households aware of this bias and encourage them to avoid under-saving.”

Getting to The Roots 

While various factors contribute to the persistence of financial illiteracy in America, one potential cause, as Dr. Tidemann notes, is its absence from formal K-12 educational curricula. The lack of attention to financial education in schools leaves young people with limited exposure to these vital topics, resulting in a heavy reliance on learning from parents or guardians, potentially perpetuating harmful intergenerational patterns of financial illiteracy.

Another significant contributor to the issue could be the profit incentives prevalent in the financial services industry. The assistant professor explains, “For many banks, credit card companies, and lenders, there is a monetary benefit to financially illiterate customers. These customers may be less savvy in shopping around for the best rates, unaware of hidden costs/fees, or more likely to face other avoidable costs from borrowing.”

A Simple Net Worth Formula 

Quisumbing offers a straightforward formula to calculate net worth: sum up all assets (cash, stocks, properties) and then deduct total liabilities (such as loans and credit card debt). By following this simple equation, individuals can better understand their financial standing and take steps toward improving their financial literacy.

The lack of financial knowledge poses significant challenges for individuals and households. It can hinder their decision-making about budgeting, savings, and retirement planning. The consequences of this blind spot are far-reaching, affecting not only personal financial well-being but also placing strain on government support programs.

This article was produced by Media Decision and syndicated by Wealth of Geeks.