Financial illiteracy costs cannot be measured. The repercussions start with the individual who has not been exposed to sufficient education dealing with personal finance. Then it might spread to his or her family and friends. Add to this ripple-effect, the fact that people are influenced by their peers and by society as a whole and you wind up with a self-supporting system where financial illiteracy spreads throughout society. Thanks to recent studies on financial illiteracy costs, more people are becoming aware of the problem and statistics show that the effect is reversible through education, parental role-modeling of good financial behavior and public policy initiatives toward personal financial awareness.
What is the Cost of Financial Illiteracy?
Financial illiteracy costs are widespread and beset any member of society who was not fortunate enough to receive personal finance training. Without an understanding of the fundamentals of the economy and financial services, individuals are ill equipped to analyze public policy and its impact on their own lives. Financial illiteracy costs have been shown to have a very real impact on the financial standing of individuals. Financially illiterate individuals are more likely to make poor investment and financial decisions that erode their financial situation.
Signs of Financially Illiterate Young Adults
More than 20% of renters aged 18-24 overspent their income by $100 per month (Time). http://business.time.com/2013/01/17/todays-young-adults-will-never-pay-off-their-credit-card-debts/
58% of 18-26 year-olds set aside a portion of their income as savings (Bank of America). https://about.bankofamerica.com/assets/pdf/BOA_BMH_2016-REPORT-v5.pdf
37% of recent college graduates have been late with a student loan payment at least once in the past year (US Financial Capability). http://www.usfinancialcapability.org/downloads/NFCS_2015_Report_Natl_Findings.pdf
Obvious Shadows of Financial Illiteracy in the US
11.5% of 2014 college graduates have loans in default (Federal Student Aid Office of the US Dept of Education). https://www2.ed.gov/offices/OSFAP/defaultmanagement/cdr.html
46% of Americans say they have set aside 3 months-worth of living expenses in the case of an emergency (US Financial Capability). http://www.usfinancialcapability.org/downloads/NFCS_2015_Report_Natl_Findings.pdf
Culture and Experience Create Personal Attitudes Toward Finance
In a survey by OECD, well over a quarter of respondents replied that their culture influenced their attitudes toward wealth (Organization for Economic Cooperation and Development). https://www.oecd.org/finance/financial-education2017%20Seminar%20on%20financial%20education
46% of those with low financial literacy index scores reported learning from personal experience, while 73% of those with high literacy scores claimed to learn from personal experience (Federal Reserve). https://www.federalreserve.gov/pubs/bulletin/2003/0703lead.pdf
Repetition and Data-Tracking for Strong Financial Education Programs
When done correctly, financial literacy education amends the poor financial habits of learners and replaces them with a healthy and sustainable decision-making framework. Financial illiteracy is associated with low rates of saving, little knowledge of investment products, poor money management skills, and other harmful financial habits. Once these learners undergo a certified financial education program based on data and industry wide best practices, these individuals emerge with their poor financial habits supplanted by new, healthier habits.
The Coalition of Higher Education Assistance Organizations (COHEAO) emphasizes that repetition must find a place in a strong curriculum if the program is looking to impart long-term retention of financial concepts onto students. Repeated use of interactive activities and tests have been shown to enhance long-term retention (Coalition of Higher Education Assistance Organizations). http://www.coheao.com/wp-content/uploads/2011/04/COHEAO-Whitepaper-Financial-Literacy-on-Campus-.pdf
The Consumer Financial Protection Bureau (CFPB) suggests constructing measures of financial well-being as well as level of financial competency. This can help determine what knowledge or behaviors are responsible for the financial outcomes of individuals (Consumer Finance). https://files.consumerfinance.gov/f/201407_cfpb_report_financial-literacy-annual-report.pdf
Financial Experts on the Cost of Financial Illiteracy
“Financial literacy is not an end in itself, but a step-by-step process. It begins in childhood and continues throughout a person’s life all the way to retirement. Instilling the financial-literacy message in children is especially important, because they will carry it for the rest of their lives.” – George Karl, former NBA coach
“Many entrepreneurs struggle to understand payroll taxes, health care and other thorny issues… In other words, they don’t have the financial literacy to scale their businesses and attract investors.” – Daymond John, CEO of FUBU and Sharktank host
“The single biggest difference between financial success and financial failure is how well you manage your money. It’s simple: to master money, you must manage money.” – T. Harv Eker, author of Secrets of the Millionaire Mind
The High Cost of Financial Illiteracy
With recent financial crisis like the dot-com bubble and 2008 housing crash fresh in mind, financial illiteracy costs become even larger. Not knowing how to allocate their assets or mitigate risk exposure, many financially illiterate individuals made poor investment choices during the 2008 financial crisis that culminated in them losing not only their entire savings but sometimes their homes too. Such a distressing event illustrates financial illiteracy costs. Fortunately, financial educators and policymakers have begun to strengthen financial literacy programs designed to imbue learners with a framework of financial thinking that will prevent such mishaps in the future.