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Financial Literacy: What’s the Point?

(Source: theatlantic.com)

Worse still is that levels of financial literacy are lower among the less educated, minorities, and women. Almost 65 percent of Americans with graduate degrees possess basic financial knowledge and skills, compared to just 19 percent of high-school grads. African Americans and Hispanics score lower than do whites on surveys measuring knowledge about financial concepts like debt. And analysis done in the U.S. and Europe has consistently found that women are significantly less likely to answer financial-literacy questions correctly than men.

The costs of financial illiteracy are high. For example, research on credit-card debt found that those with lower levels of debt literacy were more likely to do things that resulted in higher fees and charges like going over the credit limit or only making the minimum payment. One study estimates that up to one-third of the fees and charges paid by those with lower debt literacy is due to a lack of knowledge. Overall, financial mistakes tend to be more common among those with less education and income. Financial institutions often target such unsophisticated consumers  with their less-than-straightforward—and often very expensive—financial products. A recent study found that misconduct by financial advisers is concentrated in firms located in counties with low levels of education and elderly populations.

By contrast, being financially savvy has clear payoffs. Those with higher levels of financial literacy are more likely to plan for retirement, make better investment decisions, refinance mortgages at the optimal time, and manage credit-card debt better. They are also more likely to sidestep common pitfalls like borrowing against 401(k) accounts.

So who is financially literate? Disproportionately, they are white males from college-educated families whose parents had stocks and retirement savings. Phillip Cartwright, the CEO of a biotech start up, underscores the high levels of financial literacy among white men at the top. Talking to me about how he manages his finances he said, “I talked to different financial advisors. But I went to business school, I worked in finance for five years. So I went to meet with some [advisors] and I thought ‘Maybe these people know something?’ I couldn’t find anybody who knew a lot more than I did.”

The George Washington University economics professor Annamaria Lusardi has done pioneering research on financial literacy. Her studies have documented the gaps in financial knowledge among different demographic groups. “What the data on financial literacy shows is that financial knowledge is unequally distributed,” says Lusardi. “Those with the least knowledge are also the most vulnerable groups in economic terms. As a result, the lack of financial literacy exacerbates economic inequality.” Lusardi’s own analysis has estimated that more than one-third of wealth inequality could be accounted for by disparities in financial knowledge.   

More Info: theatlantic.com

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