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The financial illiteracy problem

By Kemberley Washington ·
Friday, October 11, 2013
Posted: 2 pm ET

Many college graduates face financial decisions they simply are not equipped to handle. And they are not alone.

Financial illiteracy is widespread across America. Most individuals lack the basic financial knowledge needed to choose the mortgages, retirement plans or employee benefits that best fit their needs.

With the uncertainty that surrounds the economy and the status of the Social Security system, this knowledge is more important than ever. Individuals are now forced to deal with several challenges, including:

  • The growing number of complex financial instruments that are available.
  • Employers shifting from defined benefits to defined-contribution plans.
  • Health care reform.

The financially illiterate among us

Financial illiteracy is more profound among minorities and women. Research has found that both groups are less likely to have basic financial knowledge. This is alarming, especially since women tend to live longer than men, and African Americans and Hispanics are less likely to have wealth than whites.

Studies show some women are less likely to have an interest in personal finance and are less likely to understand basic financial concepts -- such as compound interest and risk diversification -- in comparison with men.

The impact of financial literacy

People who lack basic financial knowledge might be less likely to have higher levels of debt and experience problems with managing money.

Conversely, the more financially literate you are, the better. An individual who has more financial knowledge may be more likely to plan for retirement, invest in the stock market and have higher levels of wealth than those who do not.

Having wealth provides a buffer and opens doors for opportunity, including attending college, working as an entrepreneur and navigating through difficult financial times.

Financial literacy provides a starting point to help individuals make better financial decisions.

Kemberley Washington is a certified public accountant. She writes a personal finance blog at Connect with her on Facebook or Twitter.

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1 Comment
Francesca Patricolo
October 23, 2013 at 9:03 pm

The article says, "People who lack basic financial knowledge might be less likely to have higher levels of debt and experience problems with managing money." But isn't it a good thing to be less likely to have higher levels of debt?