What is financial literacy ?

The Importance of Financial Literacy

Trends in the United States indicate that Americans’ financial literacy is declining. In its National Financial Capability Study, conducted every few years, the finance and bank regulator FINRA poses a five-question test that measures consumers’ knowledge about interest, compounding, inflation, diversification, and bond prices. In the latest study, only 34% of those who took the test answered four out of five questions correctly.1

Yet making informed financial decisions is more important than ever. Take retirement planning: Workers once relied on pension plans to fund their retirement lives, with the financial burden and decision-making for pension funds borne by the companies or governments that sponsored them. Today, few workers get pensions; some are instead offered the option of participating in a 401(k) plan, which involves decisions about contribution levels and investment choices. Those without employer options need to actively seek out and open IRAs and other tax-advantaged savings accounts.

Add to this people’s increasing lifespans (leading to longer retirements), Social Security benefits that barely provide enough for basic survival, complicated health and other insurance options, more complex savings and investment instruments to select from among—and a plethora of choices from banks, credit unions, brokerage firms, credit card companies, and more. It’s clear that financial literacy is a must for making thoughtful and informed decisions, avoiding unnecessary levels of debt, helping family members through these complex decisions, and having adequate income in retirement.

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