Financial Literacy Month is being observed in April 2014.
This is an excellent time to recognize the important role that financial literacy plays in individual economic security and the financial health of the nation. Many Americans are not well-informed about important financial issues that affect their everyday lives. Schools, parents, government agencies and financial institutions and advisers all have a role to play in helping to increase knowledge and understanding of critical economic issues.
The overall lack of financial literacy among the general public is evident from a number of surveys. In one study conducted by the TIAA-CREF Institute, people over 50 years of age were asked three general financial questions. To be able to provide the right answer, they would need to understand the basics of inflation, interest rates and risk diversification. Only about one-third of the people answering the survey got all three questions right.
Individuals wishing to test their own financial literacy may take a similar quiz from the FINRA Investor Education Foundation here. The quiz consists of five questions, and after completion one may compare one’s own performance to the national average and the averages for each state. The quiz has been taken by 25,000 consumers, and only 14 percent were able to answer all five questions correctly.
Surveys have also found that young Americans are less likely to be financially literate than older Americans, but that is not surprising considering that 26 states have no requirements for financial literacy education, and only four states require that students take a high school personal finance class.
A lack of financial literacy has real consequences, as studies show that people with a better understanding of personal finance are more likely to plan for retirement, and people who make such plans have an average personal wealth twice as great as people who do not. People with low financial literacy tend to save less, borrow more and pay higher fees for financial products. A lack of financial literacy also corresponds to people having difficulty with debt and not understanding the terms of mortgages and other loans. Without a basic understanding of personal finance, people are more likely to end up paying higher interest rates and avoidable fees.