Two-Thirds of Americans Struggle with Financial Literacy

Editor’s Note: This is the first part of a four-part series on financial literacy in the United States. Stay tuned for more helpful articles on how you can reach the retirement you have worked hard to attain.

Now that April is here, it’s National Financial Literacy Month. This is a good time to gauge our knowledge and comfort with money matters. Why? Well, because financial literacy is something that affects all of us.

In its research, the FINRA Foundation has found that financial literacy is “strongly correlated with behavior that is indicative of financial capability.” People with high literacy are more likely to plan for retirement, have an emergency fund, and avoid expensive credit card debt. In turn, those behaviors can lead to quality-of-life outcomes, including more financial wellness, more confidence, and more peace of mind.

But in the same breath, studies show a gap between what Americans say they know and how they actually rank in their financial knowledge base. A recent study brief by the FINRA Foundation drives it home.

In the study, nearly two-thirds of Americans failed a quiz on basic financial concepts.

What Did the Study Find? 

Over 20,000 people were given a five-question exam. It included multiple-choice and true-or-false questions on topics including:

• Calculating interest payments
• Estimating savings growth
• Judging different financial risks
• Knowing the relationship between interest rates and bond prices
• Understanding basic debts like mortgages

What’s interesting is that multiple generations were well-represented in the survey. Baby boomers were the dominant group at 37%, Gen Xers made up 33%, and Millennials were roughly 30%. The national average for correct answers was just a score of 3.1.

The results match those of earlier years. Across a 6-year period, the FINRA Foundation recorded that these financial literacy rates stayed the same — and, at times, even decreased. Even so, self-rated reports of financial knowledge shot through the roof. For example, in 2009 75% of Baby Boomer men rated their financial knowledge as high. Then, six years later, it went up to 85%. 

Why Does It Matter?

All of this is intriguing, you might say, but why should it matter? Because what we know, and what we don’t know, influence what we do. This is particularly true for financial behaviors, financial habits, and money matters. Remember what we mentioned earlier about financial literacy correlating with good behaviors?

And not only is this just an individual issue. It’s really a nationwide problem. As financial contributor Mark Avallone writes for Forbes.com:

“A lack of financial preparedness has huge societal costs, and in the coming years as Americans age, these costs will likely increase. There are daunting challenges facing not only the poor but also the working middle class,” he says.

“In the face of flat real wages, structural unemployment, a high tax burden, and higher healthcare costs, it is becoming more difficult for millions of Americans to find extra income to save at the end of the month,” Avallone writes. “In addition, many don’t understand the enormous commitment a self-financed retirement entails.”

As Avallone says, these challenges are due, in part, to a lack of financial readiness. And for retirement investors, that can raise the prospect of an underfunded, downgraded lifestyle in their golden years.

Financial Wellness Takes Staying the Course

In a must-read article in the Union-Tribune, “Money: Saying ‘no’ or ‘not now’ could be a life-changer,” Jim Chilton talks about the power of our financial decisions. Chilton is the Founder and CEO of The Society for Financial Awareness, a national organization focused on ending financial literacy in America, one community at a time.

He writes: “Many of us recall the saying, ‘If you always do what you’ve always done, then you’ll probably always get what you’ve always gotten.‘ It may be trite, but it certainly is revealing about our behavior, our choices, our addictions, our likes, dislikes, and everything else that defines how we make decisions.”

“In short, what we choose and how we choose it defines us. As well, in our financial dealings, this behavior most certainly applies,” Chilton continues. “Most of us love to spend, hate to budget, often procrastinate and seldom pause to look at the consequences, beforehand, when it comes to our financial decisions.”

Behavior as the Foundation of Financial Identity

Chilton goes on to say: “Our behavior is our individual foundation of our financial identity. We want to look, act, and come across prosperous to all who know us – to do that, we are in a constant ‘hamster wheel mentality’ of attempting to keep up with the folks we’re around: family, friends, neighbors, coworkers, church members, etc. This perpetual chase is quite damaging.”

Thus, as Chilton observes in the article:

• Divorces are ascending to 60 percent.
• School loans have now surpassed auto loans and credit card debt combined.
• College graduates are coming out of school to a plethora of low paying or part-time employment.
• Prescription medications for anxiety and depression are at an all-time high.

“Bottom line,” Chilton writes, “The inevitable shows up like a credit card payment – reality. Then, unfortunately, we deal with it.”

Getting Financial Futures on the Right Track

Sure, progress doesn’t come overnight. And there aren’t any shortcuts. But acknowledging behaviors that are counterproductive to financial well-being — and taking steps to control them — is a powerful step for getting money matters in order.

For many people and their path to retirement, this may be just creating a financial plan. Many people have some vision or outline of what their retirement and financial goals, but putting them on paper? That is another level of planning, and according to the Employee Benefit Research Institute, few have done it. Only 11% of Americans have a written financial plan for retirement, the institute reports.

If you haven’t taken this step to prepare for your retirement, it’s important, especially seeing how different risks may affect your post-work finances and lifestyle.

Could You Benefit from Personal Guidance?

If creating — or optimizing — your plan for retirement sounds like a challenge, guidance from a financial professional can help you.

As Chilton says: “Like all maladies needing a cure, going to the professional usually puts you back on the rails that you fell off of. Realizing our behavior is so crucial to our financial journey, it behooves all of us to self-medicate on the right choices and to embrace our failings so we can move confidently ahead in life by design, not default.”

Research and studies suggest that working with a financial professional can help you identify your goals, chart out paths to attain them, and keep on track. Many investors with a financial professional report higher savings, more peace of mind, and better overall life perspective.

If you could benefit from the guidance of an expert, financial professionals stand ready to help you at SafeMoney.com. Use our “Find a Financial Professional” section to connect with someone directly. And if you need a personal referral, call us at 877.476.9723.