You don’t know what you don’t know. And that’s the whole problem with financial literacy. Scrambling to pay bills or struggling with credit card debt is just the tip of the iceberg. Can you manage your own finances successfully if you don’t understand the relationship between bond prices and interest rates?
Ric Edelman, founder of Edelman Financial Engines, says the answer isn’t that clear-cut. “Yes, your actions matter more than your attitude,” Edelman said. “But your attitude often colors your actions.” Many people don’t anticipate the real cost of college when shopping for schools.
The problem with not knowing as much as you could: Not only are you not managing things that well, but you might also be missing out. For instance: You got a new job, and your employer asked if you wanted to participate in the 401(k) plan. You turned it down because you think you’re too young to have to worry about retirement. Or you tell yourself you’ll get to it later.
Every day, we are faced with financial decisions — and most of us don’t have the information we need to make good decisions. Several things can go wrong, but one of the most common is not recognizing the total costs of ownership.
Under the hood
When people shop for a new car, they usually ask the dealer what the monthly cost will be. Wrong question. Don’t just think about the sticker price or the monthly payment when you scout how much you can afford each month.
Based on the financing, the dealer says it will be $300, and people can see that fitting into their budget, Edelman says. But they are not factoring in how much it will cost to buy fuel based on that vehicle’s miles per-gallon ratio. Other costs to consider: tolls, parking, insurance, general maintenance, garage fees. Don’t forget that some vehicles cost much more to insure than others.
Without looking at the total cost picture, you could take on an expense that seems affordable at first, but really isn’t when you add up the other fees.