Ray’s Take: Can you explain what risk diversification is? Can you identify the effects of inflation? Do you know how to calculate interest? If you answered yes to these three questions, you are better off than 43 percent of Americans and a whopping two-thirds of the world’s population, according to Maggie McGrath in an article written for Forbes Magazine about the results from the first-ever S&P Global FinLit Survey. Also, according to this survey, only one-third of the world’s population is financially literate. The U.S. was ranked a dismal 14th in financial literacy compared to all other countries in the world.
By definition, financial literacy is the ability to understand how money works in the world. This means knowing how someone earns and makes money, how to manage it, how to invest it and how to donate it to help others. We have a financial literacy problem in America. Former Federal Reserve Chairman Ben Bernanke, said, “Widespread problems like the subprime mortgage market and the resulting rash of foreclosures and bankruptcies illustrate just how serious this lack of financial education has become in today’s world. “Financial ignorance carries significant costs. Consumers who fail to understand the concept of interest compounding spend more on transaction fees, run up bigger debts, and incur higher interest rates on loans. They also end up borrowing more and saving less money,” said the authors who compiled the S&P FinLit Survey.
When it comes to money and your finances you can never stop learning. There are always new trends, products and situations where you need to spend time researching and educating yourself. There are lots of resources available to help you improve your financial literacy. You don’t necessarily need to attend a class or join an online course. Read as much as you can. You can go “old school” with The Wall Street Journal or Barron’s. Or you can go global with The Economist. Always remember that there’s someone on the other side of every transaction who may or may not have your best interest at heart.
Dana’s Take: Rather than facing financial realities and learning how to manage money, some people prefer to spend as if they were their financial “dream self.”
In Peter Walsh’s book, It’s All Too Much, he says that we often keep possessions that reflect our “dream selves.” For instance, my “dream self” throws big outdoor parties, so I must keep a dozen tiki torches. Since I have not accomplished this, I should grieve that they represent a dream not realized and get rid of them. Similarly, I think we make financial choices based on our dream selves and not in the reality of our actual paycheck. This is called aspirational spending. Financial education can help people get where they want to go.