The Truth About Financial Illiteracy And Knowing What You Don't Know

The Truth About Financial Illiteracy And Knowing What You Don't Know

We love how simply James Surowiecki of The New Yorker put it: “when it comes to financial matters, many Americans have been left without a clue.”

If you’re reading this post, you’re a good ol’ regular LearnVester and you’ve signed up for the LV Daily, then you’re probably already interested in learning about your finances. Be proud of yourself, you’re far ahead of the game. And since you’re trying to stay informed, you’re more likely to ask for help when it comes to money matters, according to Surowiecki. Depressingly, “the less people know, the more overconfident in their abilities they tend to be.”

In a study about financial literacy among older Americans, when respondents were asked two simple questions about inflation and compound interest, only half answered correctly! Other studies have shown that among participants with little financial understanding, 30% were wrong about what type of mortgage they had.

Financial illiteracy is not a sudden trend, but the current economic state makes it far more dangerous for anyone to stay unaware. Today’s world is all about options, personal preference, independence, “a dizzying emporium of choice and easy credit.” Without an understanding of these options, how is anyone supposed to make the right decision?

Surowiecki takes a stab at how we can overcome this gigantic pitfall, but both the new financial-reform bill and “choice architecture,” which he describes as a way to encourage better decisions (automatically enrolling people in 401(k)s), just might not be enough. What he really thinks we need (Aha!) is proper financial education, or something “more like a financial equivalent of drivers’ ed.”

Whether we like it or not, how we treat and understand our money directly impacts our lives. Since you’re already on the right path, don’t leave your loved ones in the dust. Get your friends and family signed up for the LearnVest Daily.

Read all of “Greater Fools” for more James Surowiecki and his take on the dangers of financial illiteracy.

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