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The variety of forms and methods of managing personal finances becomes enormous with more and more complex systems being implemented. Managing credit and debt, paying for education, trying to save for retirement, and many other aspects of modern economy do not make our lives easier. We need to learn a bunch of things before we can start approaching the issue of personal finances.
Modern financial products are not simple. Even payday loans evolved to something very complicated. It is one of the simplest and most convenient forms of credit, but many people have problems even with payday loans. Imagine how hard it is to fully understand how credit cards with all their neat little details and hidden fees work!
Other aspects of personal finance management also complicate things. There are all those 401K, 529, 1040, and many other documents that you must fill out perfectly or else you will not only screw your wallet, but may also get in prison! With all that variety of responsibilities, bills, and credit options, managing finances seems like an overwhelmingly overcomplicated puzzle.
While many people including some federal officials claim that it is simply a question of financial literacy, the vast majority of modern scholars believe that being financially literate has nothing to do with being able to manage personal finances well enough. However, it is definitely much better for people to know how to handle the contents of their wallets.
Financial Literacy Rate Is Low
Most Americans struggle with filling out simple forms let alone understanding complex economic issues and complicated financial products. Less than 30% of surveyed people over 50 managed to answer just 3 simple basic questions about interest, inflation, and diversifying risks. Some may think that the situation is different with younger people, and some will be wrong. In fact, the youth is just as informed on the matter as elders. Over 40% of all students is on the lowest end of the financial literacy spectrum.
Uneducated people, minorities, and female citizens show the least level of knowledge in finance handling. Only 19% of people who has high school education only have enough skills and knowledge to manage their finances on their own.
Another concerning demographic is Hispanic and African Americans who usually score very low in financial concepts. It is unsurprising that they more often become debtors since the very concept of it is often not grasped by the fullest extent. Men usually answer questions related to finances much better than women.
The problem is that financial illiteracy can cost you dearly as shown in many researches that demonstrate how many people are making decisions that result in higher fees when handling credit cards. It is often the problem of lacking knowledge about financial products and debt in general. The same can be applied to users of payday loans who often do not read the conditions of the loan properly.
There is also a very important correlation between the level of education and income and financial literacy. People with less income and worse education usually have correspondingly lower level of money management skills.
Being Financially Smart Is Beneficial
As all of the above suggests, being a smarter has significant advantages. People with better financial literacy follow well-structured retirement plans, invest smartly, and correctly utilize credit in order to avoid falling in debt. People who know their finances usually do not make mistakes like borrowing money while harming 401(k).
The problem is that the vast majority of financially literate people come from white wealthy families. Their parents usually have their retirement plans set up and can teach about managing finances.
One of the most famous researchers about this topic is Annamaria Lusardi from the G.W. University. She is a very capable scientists and decided to conduct a thorough research to find gaps in financial education between different demographics. Her findings suggest that financial literacy is poorly distributed in general and that this is one of the core factors driving the inequality. Her estimates suggest that about a third of inequality in wealth is a result of poor financial management on behalf of less rich people.
What Can Be Done?
Teaching financial literacy is what should be on top priorities. Basics of money management, taxation, debt management, and some other aspects of modern life should be delivered to consciousness of all Americans. The level of awareness and responsibility must increase dramatically in order for Americans to live better lives.
The main reason why education must be the main priority is that it is nearly impossible to change the financial framework in which we live. However, we can not only try to re-distribute financial literacy but also focus on providing better advice by expanding responsibilities and services from professionals in the personal financial management area.
There are also experts who argue that we must make sure that the very structure of the economy is capable of providing a healthy environment for regular people. While professionals and financially literate people usually can avoid various pitfalls, the amount of citizens who will become victims of debt is quite frightening.