Financial Literacy Not Financial Stress

Why It Matters:

• Financial literacy in the U.S. is decreasing.

• Lower financial literacy means a more unstable economic landscape.

• 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
05/15/2017

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 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.

THINGS TO CONSIDER FOR MAKING SMARTER FINANCIAL DECISIONS

• Automate Savings. Make saving for the future automatic by participating in 401(k). And use online bill pay to keep yourself penalty free and out of debt.

• Pay down debt. Avoid credit card debt at all costs. Only use your credit card for purchases you know you have enough money in the bank to pay for. Or save your credit card for emergencies only.

• Keep money-savvy friends. Surround yourself with people who support smart financial decisions. They’ll help keep you on track and give you some of their own tips for being smart with money.

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.

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 according to a 2013 New York Times article on financial literacy, it’s not that simple. Or is it? The article highlights efforts to teach financial literacy as early as high school and subsequent failure of the learned knowledge to translate into the real world. However, as the article points out, teaching simple rules of thumb such as “always contribute the maximum amount you can to your 401k” or “get a 15-year mortgage if you’re over 50” seems to lead to better financial decision-making. And redesigning the financial landscape to make it simpler and more user-friendly will only add to America’s financial toolbox.

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

The link between finance and stress is no secret. The aptly named Paying with our Health stress report from the American Psychological Association says nearly three-quarter (72%) of adult Americans report being stressed about money at least some of the time. The remaining quarter (22%) of adult Americans say they experience “extreme stress” related to money.

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

As most of us are already aware, stress contributes to a whole host of health problems like: anxiety and depression, drug and alcohol use, difficulty sleeping, difficulty eating properly, fatigue, and muscle tension. (Mayo Clinic)

Even more alarming, the stress report study shows in the last year, 1 in 5 Americans have either considered skipping or have skipped going to the doctor when they needed health care due to financial concerns.

All of these factors show a clear cycle of health problems worsened by financial stress. And the bell is tolling for millennials, who, according to the study have reported increased stress (36% in the last year) and have more difficulty coping with stress than previous generations.

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.

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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