Counting The High Cost of Financial Illiteracy: Why Learning About Money Is a Great Investment
Financial illiteracy is one of the major social and economic issues of our time, as it can have an extended impact not only on individuals but also on their loved ones, communities, and the whole economy. Without the benefit of financial literacy, individuals won't have the skills, knowledge, behaviors, and systems in place to make the best financial decisions for themselves. Bad financial decisions have negative consequences that can affect all aspects of an individual's life, including emotional wellness, physical wellness, and relationships with loved ones. Also, these negative consequences often come with a steep financial cost.
In this blog post, we will explore the pain points of being financially illiterate and why people should strive to become financially literate. We will count the costs of financial illiteracy by looking at a recent survey conducted by the National Financial Educators Council to estimate how much money people feel they lost during the past year due to a lack of financial knowledge.
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Financial Illiteracy vs Financial Literacy
The lack of financial literacy, that is, "financial illiteracy", is a frequent topic in the news lately. But what exactly is financial literacy? Why do people need to be financially literate and how do they achieve it?
86% of Americans, surveyed by the National Financial Educators Council (NFEC), believe that Personal Finance should be taught in school. We all know from our youth that Financial Education is a subject rarely taught in schools or even at home, and the results have been devastating. Therefore, people are left to learn from their own mistakes. And, those mistakes can be very costly.
Financial Literacy Defined
According to the National Financial Educators Council, the definition of Financial Literacy is to:
"Possess the financial knowledge, behaviors, systems, team, and plan to confidently take effective action that best fulfills an individual's personal, family, and global community goals."
As you can see, the definition of Financial Literacy doesn't just stop at financial knowledge. Including behaviors, systems, a team, and a plan, shows the depth of skill needed to be truly successful in managing your finances.
Financial Illiteracy Pain Points
In our complex financial world, financial illiteracy inevitably leads to making unwise financial decisions. Moreover, individuals who are financially illiterate struggle to effectively manage their current finances and plan for their future financial security.
A financially illiterate person may inadequately save for retirement, spend more than their budget allows, and make other financial decisions that provide short-term gratification but result in negative long-term consequences. The financially illiterate individual may become a victim of predatory lending practices, rack up high levels of debt, and struggle with poor credit scores. Also, they may lose the opportunity to save money and build wealth over the years.
Financial illiteracy not only affects a person's money but also impacts every area of their lives and the lives of the people in their lives. Some of the most common pain points and pitfalls of financially illiterate individuals are:
Debt
Scams/Investment pitfalls
Living paycheck to paycheck
Missed opportunities/ opportunity cost
inadequate retirement planning
Increased stress levels
Lower work productivity
Relationship conflict
Disruptive family relations
Poor emotional health
What Are The Costs of Financial Illiteracy?
Annual Cost of Financial Illiteracy Survey
No doubt, the costs of financial illiteracy are high. Every year since 2017, the National Financial Educators Council (NFEC) has conducted a survey asking American adults to estimate how much money they had lost during the past year due to a lack of personal finance knowledge. The single-question survey asked U.S. residents across the country, “During the past year, how much money do you think you lost because you lacked knowledge about personal finances?”
In the most recent survey, conducted between December 4 and December 17, 2023, a total of 1,540 people responded. Among this diverse group of respondents, the estimated average amount of money that a lack of knowledge about personal finances cost people in 2023 was $1,506. If we generalize the results to represent all of the approximately 258 million adults who live in the U.S., a lack of financial literacy costs Americans a total of more than $388 billion in 2023.
Here are all the details of the study from the National Financial Educators Council 2023 Cost of Financial Illiteracy Survey.
How Much Do Americans Pay For Financial Illiteracy?
We all know that financial illiteracy costs individuals money each year. Keep in mind, making financial mistakes carries a price tag and even minor consequences can add up quickly.
Some common financial mistakes :
Credit Card Interest and Fees: The average interest rate Americans paid on credit cards in 2022 was 16.65%.
Poor credit scores: The financially illiterate are more likely to have bad credit scores and to carry credit card balances. Good credit scores earn you a lower interest rate. People with bad credit scores can be paying 25 -30% interest rates on their credit card balances.
Luxury Spending: When you spend money on luxury items, you should realize they are a want rather than a need. You may need a purse, but a Louis Vuitton bag is a want.
Overdrafts: The median fee for a bank overdraft is $34. The CFPB estimates that Americans spend $17 billion a year on overdrafts and other fees.
Identity Theft and Fraud: Those lacking financial knowledge may be more susceptible to these scams. The FBI reports that Americans lose $6.9 billion annually to identity theft and $5.8 billion to other fraud each year.
Vehicle costs: Buying a new car is a losing proposition. Financially illiterate people overestimate the amount of money they can spend on a car and underestimate the ongoing vehicle costs.
Financial Literacy Test Data
The National Financial Educators Council (NFEC) conducts multiple tests and surveys to measure the status of financial literacy in the U.S. each year. More than 70,000 people across the U.S. have completed the NFEC 30-question National Financial Capability Test, which measures general knowledge of financial literacy and earning income. The average scores to date are broken down by age group as follows:
10-14 years old: 57%
15-18 years old: 63%
19-24 years old: 71%
25-35 years old: 76%
36-50 years old: 77%
50+ years old: 78%
The NFEC also conducts an Advanced Financial Education Test that asks more difficult questions focused on financial literacy alone. Almost 13,000 people across the country have taken the test to date, with an average score of 58%.
The NFEC's brief, 8-question Financial Foundations Decisions quiz evaluates people's ability to make entry-level financial decisions. The average score among the 30,847 participants so far has been 72%.
The NFEC is helping to address the student loan crisis by conducting a 12-question test that measures students' ability to make responsible student loan decisions. The 8,904 people who have taken this test to date have scored an average of 59%.
Breaking The Cycle Of Financial Illiteracy
Financial illiteracy has become a point of concern for communities and governments worried about the effects such a critical lack of knowledge can have on the lives of individuals. Limited access to financial literacy classes and education leaves people woefully unprepared. Equipped with only a partial and inadequate framework for thinking about financial decisions, too many individuals submit to making poor financial choices with long-term consequences that are difficult – if not impossible – to correct. Preventing and mitigating financial illiteracy requires the continued efforts of employers, governments, and the financial education industry. 1
[1] National Financial Educators Council, “Financial Illiteracy in America“
The Positive Impact Of Quality Financial Education
Breaking the cycle of financial illiteracy can be accomplished through high-quality financial education. The distinction is the overarching purpose of quality financial education is not to transfer knowledge from educator to learner. Rather, the end goal is for the learner to make positive financial behavioral changes and to achieve higher-order thinking skills to properly assess financial decisions in their lives.
What difference would a financial education have made in your life?
Quality financial education programming will result in measurable improvement in:
Positive financial habits and behaviors
Positive financial sentiment
Willingness to put financial education into action
Implementation of financial systems
Financial knowledge
Confidence in financial matters
Financial decision-making skills
Actual quantifiable results
Financial pain point relief
Some of the benefits of financial education are:
Ability to live a desired lifestyle
Independence and self-sufficiency
Security
Ability to make a positive impact and assist others
While each of these benefits may have very personal and unique meaning to different people, the common denominator is a successful Financial Education outcome can provide options for people to choose their unique path, and not have that path chosen for them.
“An investment in knowledge always pays the best interest.”
Benjamin Franklin
The Bottom Line On The Cost Of Financial Illiteracy
Financial illiteracy carries a high cost that significantly impacts every aspect of our lives. Financial illiteracy doesn't just affect individuals; it impacts communities. So, how can you beat the odds and not become another discouraging statistic?
What can we do to improve financial literacy in our communities? The answer is investing in Financial Literacy Education, individually and as a community. Financial Literacy Education is a lifelong process. The earlier a person is introduced to financial concepts and can put them into an actionable plan, the better the future outcome.
Truth be told, the benefits of a solid Financial Education extend way past any obvious monetary advantages as the financial decisions you make today affect your future security, success, dreams, goals, anxiety levels, stability, and lifestyle choices. The benefits and value are unique to each individual. Formal Financial Literacy Education can help prepare students for financial opportunities and challenges they will face in the future.
Research proves that Financial Literacy Education when properly administered by a qualified financial educator, can make real improvements in the financial health of learners. Certified Financial Education Instructors (CFEI) are trained by the National Financial Educators Council and are uniquely qualified to design and deliver quality financial education. Achieving the Accredited Personal Finance Instructor (APFI) designation represents the highest level of qualification for a personal finance instructor. When you are ready to begin the financial journey for yourself or the people your organization serves, make sure you hire a qualified financial educator.
Make Your Impact With Financial Literacy
You can join the movement to increase financial literacy in our communities by:
Educating yourself: Take the time to learn about personal finance, saving, investing, budgeting, debt and credit management, budgeting, and risk management.
Supporting Financial Education Initiatives: Advocate for increased financial education in schools, workplaces, and community organizations.
Let's work together to raise awareness about the importance of financial literacy. Empowered individuals make wiser choices, leading to a more prosperous future for all!
How much do you estimate that you have lost during the past year due to a lack of financial knowledge?
Smart Money Changes Everything is strictly a financial education website. The information presented in this post is solely for your general financial education and is not to be considered financial advice. Always check with your trusted financial professional team who will consider your unique situation and goals to develop your own personalized comprehensive financial plan.
