On April 1, many of us play pranks on one another, competing for biggest laugh or highest shock value. However, that day also marked the start of something that’s no joke — Financial Literacy Month. Since 2003, the United States government has promoted the month-long initiative in an effort to spread financial education to all Americans.
So what exactly is financial literacy?
Financial literacy is having both the mastery of basic financial concepts and the ability to effectively use that mastery when making financial decisions. Though it’s widely accepted that financial literacy is a good thing for both individual consumers and the economy as a whole, there are a few myths circulating about it.
Let’s debunk three of them.
Myth #1: Nearly all Americans are financially literate.
Unfortunately, this one doesn’t hold water. The 2018 Consumer Financial Literacy Survey presents some troubling statistics about American financial literacy:
- 59% don’t have a budget and nearly 50% don’t keep strict track of their spending
- 44% made no attempt to lower their credit card interest rates
- Nearly 50% aren’t confident that they’re saving enough for retirement
- More than 20% don’t understand how their credit score is determined
- Nearly 80% say they could benefit from professional advice for common money matters
Interestingly, 55% of participants said that they feel good about their level of financial knowledge. A similar study done by the Financial Industry Regulatory Authority (FINRA) found that most Americans (76%) believe that they have a high level of financial literacy.
However, FINRA’s study also included a short financial quiz that asked participants about things like interest rates, inflation, mortgages, and other common finance-related topics. Only 14% of survey takers got all 5 questions correct.
The disconnect is concerning and indicates that Americans may be prone to overestimating their money management capabilities.
The bottom line: While some Americans are managing their money well, there are many that need more information and guidance.
Myth #2: Children don’t need to learn about money.
Buying into this myth does a major disservice to our youth. Introducing important concepts around money early and often leads to children understanding their importance and how they work.
While a six-year-old doesn’t need to know about the different types of mortgages available, it’s appropriate for them to learn about things like saving money, earning money, opportunity cost, and charitable giving. As they get older, they should be taught about interest rates, credit scores, student loans, and other higher-level money management concepts.
Of course, the maturity level and cognitive ability of a child will dictate when and how concepts are introduced. But, the point is that children should receive lessons on money management throughout their younger years so that they are fully equipped to make good financial decisions once they leave the nest.
Still not convinced? We need only look to the financial standing of current young adults to see the importance of youth financial education. This Consumer Financial Literacy Survey infographic revealed that:
- 13% of those ages 18-34 have debt in collection
- Nearly a third (33%) of Millennials don’t really understand how credit scores are determined
- 39% of Millennial women and 25% of Millennial men aren’t paying all of their bills by the due date
The bottom line: Children need financial education during their youth so they don’t struggle with money management when striking out on their own.
Myth #3: Financial literacy is a cure-all for those that are struggling.
It would be nice if this were true, but it’s not. While financial knowledge can lead to more prudent decision making and behavior, it’s not the only piece of the financial success puzzle. All of the money management information in the world can be rendered moot by mindset or circumstance.
Psychology is very powerful and our perceptions about money strongly influence our relationship with it. If we believe money scripts like “I’ll always be poor,” our chances of achieving the contrary will be slim. No money-related factoid is going to fix a mindset that holds us back from seeing the possibilities.
Further, circumstance can derail even the most informed, determined, and optimistic among us. Job loss, accidents, major illnesses, and family tragedies are common and can really impact our ability to thrive financially. Understandably, money management often becomes an afterthought in times of crisis.
Additionally, if the flow of income is reduced or stopped, it doesn’t matter if we know we should pay the bill when we don’t have the money to do so. In this case, financial literacy makes no difference.
And let’s not forget those who live in poverty, either circumstantial or generational. Financial literacy is important, but doesn’t address every issue they face.
The bottom line: Financial literacy, while important, isn’t the only factor in achieving financial success.
While it’s not a panacea for every American’s financial woes, financial literacy certainly can facilitate better money management and decision making. As such, Americans should continuously add to their financial knowledge throughout their lives — and share what they learn with the people that they love.