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Financial literacy pays off in many ways

Knowledge, it has been said, is power. When it comes to knowing about finances, it also can be peace of mind. Even better, being financially literate can save you money.

Americans who have a solid grasp of financial issues are richer in many ways, according to the Bankrate.com Financial Literacy Survey of 1,000 Americans conducted by RoperASW. (See our newest Financial Literacy Survey.)

In real dollars, financial literacy translates into bigger bank accounts.

Bankrate looked specifically at mortgages obtained by survey participants. Of those who had mortgages, people who scored an A or B on the Bankrate financial literacy survey paid substantially less for their home loans than those who failed.

Top-of-the-financial-class students were able to track down and lock in mortgages with a mean interest rate of 6.47 percent. Those who received an F in financial literacy ended up with loans carrying a 7.5 percent rate, an amount well above the national averages of rates for all mortgage types and terms.

How much money do our financially savvy homeowners save? Hundreds in the short term, thousands over the long haul.

Let's look at hypothetical homeowners John and Jim. Each took out a conventional 30-year mortgage of $150,000. John, an A financial student, got the 6.47 percent interest rate while Jim, who didn't fare so well on Bankrate's test, ended up with one a point higher.

Bankrate's mortgage calculator reveals that John will pay $945 in principal and interest each month for his house. Jim's extra percentage point will push his monthly mortgage amount to $1,049. So in just one year, Jim will pay $1,248 more than John. And most of those payments, particularly in the early years of a loan, go toward interest. Living in the same house for the full 30-year loan term doesn't help Jim either. Over the life of his mortgage, Jim will pay $37,440 more in interest than will John.

The disparity in payments can be found in the routes John and Jim took in obtaining their respective mortgages. Over half of the fiscally fit respondents such as John tell Bankrate that it's not a bother to search out the best mortgage deal.

Sixty-nine percent of Jim's cohorts, however, say finding the best deal on a mortgage is time consuming. Another 31 percent of that group also find the whole process confusing. The result: higher housing costs.

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Good money managers are happier
And while money may not buy happiness, Bankrate's survey indicates that the ability to manage it effectively does offer more peace of mind.

Financial literates are more satisfied about their personal fiscal situations and are confident that they are handling their money smartly. Eighty-four percent of people who earned an A or B on Bankrate's financial literacy quiz survey are very (37 percent) or somewhat (46 percent) satisfied with the state of their personal finances.

Those who passed the test (C and D grades) feel OK about their finances, too, but are not as confident as the more financially savvy. In the middle group, 30 percent reported they are very satisfied with their financial situations; 43 percent are somewhat satisfied.

Then there are the financially faltering. While most in the F-grade category are relatively content with their financial lives, they are not as happy as the higher scorers. Forty-three percent of those who failed the financial literacy quiz are somewhat satisfied with their financial situation. Only 16 percent are very satisfied.

What contributes to these satisfaction levels? Across the board, the more financially literate survey participants were more confident about their money management skills. This confidence, say almost three-quarters of them, lets them feel that they are in control of their personal finances.

Conversely, only half of those who failed Bankrate's financial literacy quiz share that attitude. In fact, a third of F scorers say they feel frustrated when dealing with their finances.

More control over financial goals
The ability to direct the money also enables the financially literate to accomplish some specific goals.

Sixty-four percent of poll participants in the F category say they don't have a large enough emergency fund. That's a concern of only 46 percent who got an A or B.

Almost half of C, D and F poll participants also report they are concerned that they won't be able to put away enough for their later years. That troubles only 37 percent of the financially savvy.

As for ever-present credit card bills, more than a third (38 percent) of the F-grade recipients say they worry that they can't pay their balance. This concerns 28 percent of C and D scorers and 22 percent of those who earned an A.

At a time when so much of life, financial and otherwise, seems increasingly out of control, the reduced stress that financial literacy affords is priceless.

-- Posted: March 16, 2003

 

 

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