Though finance is incredibly important to have an understanding of, many people understand little about their finances. How does credit work? How can a person go from financially well to financially poor? What happens if someone makes a drastically poor financial decision? This lack of understanding drives many people into poor financial situations due to struggling with saving and investing.
This lack of financial literacy isn’t the fault of a specific group; in the Financial Industry Regulatory Authority’s most recent financial literacy test, only 34% of people between 2009 and 2018 answered four or more questions correctly about interest, compounding, inflation, diversification, and bond prices. This suggests that financial illiteracy is a widespread problem that needs to be addressed, not a concentrated one.
For those unaware, financial literacy is “the confluence of financial, credit, and debt management knowledge that is necessary to make financially responsible decisions.” This includes knowing how checking accounts operate, what using a credit card does and means, and avoiding debt—in short, financial literacy can drastically impact a person’s life. A lack of financial literacy impacts all sorts of people: those in developed or advanced economies, those in developing economies, and everywhere in between. The type of economy a person lives in doesn’t necessarily mean they have better or worse financial literacy; no matter the financial landscape, consumers fail to show that they have a strong grasp of financial principles.
The financial environment at large is changing as well. Since becoming a global marketplace, there are far more participants and other factors influencing the financial environment society lives in. Technological advances are especially prominent in how the financial market has changed and continues to change; it creates conflicting views that create difficulty in creating, implementing, and following financial roadmaps.
With the ever-changing financial market, being financially literate is crucial for consumers to understand. It can help consumers save enough money to provide a decent income during their retirement while avoiding high debt, bankruptcy, defaults, and foreclosures. Furthermore, low financial literacy has left the largest workforce—millennials—unprepared for financial crises that may occur. By emphasizing the importance of financial literacy, consumers at large will improve their lives now and in the future while preparing for potential crises that may throw them in a devastating loop.