Financial Literacy Not Financial Stress

Why It Matters:

• According to finding from the National Financial Capability Study financial literacy in the U.S. is decreasing.

• The American Psychological Association (APA) found that lower financial literacy also leads to financial stress and health problems.

• By understanding this problem we can provide people with the proper tools to educate themselves.

Andy Bartosch tkc.profilePicture Written by: Andy Bartosch | Transamerica
May 15, 2017

4 Min readClock Icon

Loans, interest rates, inflation, mortgages. We know these words, but do we really understand how their concepts work and how they affect our financial decision-making? Financial literacy is an important and often underrepresented life skill. One that can have a far greater reach into your overall well-being than you might think.

Grasping the fundamentals of economics and personal finances may lead to smarter decisions, less debt, and greater financial comfort. Financial literacy was deemed so important, in 2004, the United States Senate designated April as Financial Literacy Month in order to, “raise public awareness about the importance of financial education in the United States and the serious consequences associated with a lack of understanding about personal finances.” (National Financial Educator’s Council)

But according to findings from the National Financial Capability Study (NFCS) released in 2016 by the Financial Industry Regulatory Authority’s (FINRA) Investor Education Foundation, Americans just aren’t that literate when it comes to basic principles of finance.

The study showed that, “61 percent of respondents were unable to answer more than three of the five questions correctly.” And, “only 37 percent of respondents were considered to have high financial literacy, meaning they could answer four or more questions correctly on the five-question financial literacy quiz—down from 39 percent in 2012 and 42 percent in 2009.”

Not only is our financial literacy down, but there’s a gap in what we think we know about personal finance versus what we actually know. According to the study, “When asked to assess their own financial knowledge, over three-quarters of respondents (76 percent) gave themselves high marks. So, in contrast to the decline in financial literacy quiz performance from previous years, self-perceptions of financial knowledge have become more positive relative to the 67 percent in 2009 and 73 percent in 2012 who rated themselves highly.”

That means people might be approaching personal financial decisions with greater confidence than knowledge, leading to potentially reckless economic activity — not exactly the picture of stability.

The picture looks even more troubling when you consider who is most affected by lack of financial knowledge. According to findings from the same FINRA study, women, minorities and millennials are taking the brunt of economic woes, and a huge part of that has to do with financial literacy.

With the U.S. on its way to becoming a majority-minority nation, ever-increasing female empowerment on a global level and millennials already inheriting the workforce, these economic groups are the future.

THINGS TO CONSIDER FOR MAKING SMARTER FINANCIAL DECISIONS

With financial literacy on the decline and our economic future in doubt, it makes sense that we would look to education to solve our financial literacy woes. But is it that simple? It can be. In 2018, an article in U.S. News & World Report recommended easy ways of thinking of your finances.

1. Keep a rainy-day fund. Only 46 percent of Americans have one, and you should be one of them. An emergency fund can help you deal with unexpected problems, such as job loss and funding unexpected health care bills.

2. Co-manage your money responsibly. Of adults in relationships, 40 percent admit to “financial infidelity.” By being open about your shared finances, you can help ensure you’re on track to meet your financial goals. Consider joining every single account or managing everything separately.

3. Know how to use your credit card wisely. Roughly 33 percent of Americans only pay the minimum due on their credit card each month. What’s the problem? Well, just paying the minimum means you’ll pay more in interest. What’s more, carrying a balance could affect your credit score.

So, what does it all have to do with well-being? Well, everything.

The link between finance and stress is no secret. In the report “Stress in America: The State of Our Nation” from the American Psychological Association, it states that 62 percent of Americans stress about money, and 61 percent stress about work. Meanwhile, the economy ranks second (35%) among overall stressors, followed by trust in government, hate crimes and crime in general.

It makes sense that poor financial decision-making leads to higher debt, less wealth, and more stress.

According to Web MD, while some stress can be good, keeping you alert at work and helping you avoid danger, too much stress can lead to health problems. Headaches, upset stomachs, elevated blood pressure, chest pain, sleeping problems. All of these and more start with too much stress. Unfortunately, people often try to deal with these problems with alcohol and drugs, which tends to simply make things worse.

Even more alarming, 49 percent of Americans aged 45 to 59 said they didn’t go to the doctor when they were sick or injured due to financial concerns, according to a new study by West Health and NORC at the University of Chicago.

All of these factors show a clear cycle of health problems worsened by financial stress. And the bell is tolling for millennials. “The younger generations have lower savings, are less financially stable and are more likely to be not insured or underinsured”, said Dr. Zia Agha, chief medical officer at West Health. “As you get older, you understand the importance of health care more and you’re more likely to seek care.”

The need for financial literacy is greater than ever. A wealth of knowledge keeps you wealthy. It prevents financial mistakes that lead to stress and a whole host of health problems.

To see how you fair, take the FINRA financial literacy quiz right here and join our conversation about financial literacy and the intersection of health and wealth.

Neither Transamerica nor its agents or representatives may provide medical, tax, investment or legal advice. Anyone to whom this material is promoted, marketed, or recommended should consult with and rely on their own independent tax and legal advisors and financial professional regarding their particular situation and the concepts presented herein.

Things to Consider:

• Take a financial literacy quiz and learn how you can shore up any missing knowledge.

• Be prepared to cope with financial stress.

• Help others grow their financial literacy.

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