Here is an interesting article about some recent research in the Journal of Financial Counseling and Planning. The study indicates that financial literacy is declining in the United States, but at the same time there is a growing number of people who are overconfident in their financial knowledge.
Here’s a quote from the article:
The average score on a test of objective financial knowledge declined steadily when different groups of Americans were surveyed four times between 2009 and 2018.
And the percentage of people who believed they were above average in financial literacy – but actually scored lower than average on the test – increased from about 15% in 2009 to nearly 21% in 2018.
The research is based on the National Financial Capability Study (NFCS). This survey asks five multiple-choice questions about interest rates, inflation, bonds, mortgages, and other financial topics. Respondents are also asked to rate their financial knowledge on a scale of 1-7.
The authors of the study theorized that some of the questions on the survey are less relevant to people than they use to be. For example, if someone if solely focused on paying student loans or rent, then a question about a mortgage won’t make much sense.
Here’s another interesting quote:
“Financial knowledge is good, but our ultimate goal should be for better financial outcomes. We need to find ways to help people make better choices,” [Professor Sherman Hanna] said.
I don’t disagree with the notion that financial outcomes are most important, but it’s hard to overstate the importance of financial knowledge. Having a firm grasp of financial principles can help protect consumers from predatory practices that, unfortunately, are all too common in the financial industry.
I’m a strong proponent of financial literacy. Many aspects of life are intertwined with our financial success or failure. So it stands to reason that having a higher degree of financial understanding might help people make better choices and, hopefully, live better lives.
Just consider the following life markers:
- Where we grow up
- Where we go to school
- Who we marry
- What career we pursue
- Whether we have kids or not
- Whether we buy a house or not
All of these can have a huge effect on our lives. It’s not an overstatement to say that if you can get 4 or more of these “right”1 you are well on your way to a successful life.
For some of them, we have no control. As kids, we don’t get to decide where we grow up. Some kids are more lucky than others. Warren Buffett has always said that he was extra lucky to be born in the United States, as a man of his talents likely wouldn’t have succeeded as a farmer in sub-Saharan Africa.
But for others, such as who we marry, we generally have lots of control.
And each of these markers has a significant financial component. Getting married is often thought of as a romantic connection. But in many ways marriage is closer to a financial arrangement and means of mutual financial support.
I’m hopeful that our society can figure out some of the issues around financial literacy over time. If everyone had a firm grasp of how their finances work, I think we would all be better for it.
1 In this case, “right” is in the eye of the beholder and highly dependent on personal circumstances and preferences.
