According to Wikipedia, “Financial literacy is the ability to understand finance. More specifically, it refers to the set of skills and knowledge that allows an individual to make informed and effective decisions through their understanding of finance.”
Knowing how to manage money is part of being financially literate. More aspects of financial literacy include being able to plan for the future, discuss money without (or in spite of) discomfort, and respond to life events that affect financial decisions.
Here are some more numbers for you from that 2009 survey done by the U.S. Department of Treasury
- 51% of Americans have no funds set aside for emergencies.
- 58% of Americans have never saved for retirement.
- 59% of Americans have never saved for children’s education.
- 15% of Americans have no bank account.
Those are some astounding numbers! And keep in mind, those numbers are from 2009!
Problems Of Financial Illiteracy
There are some major problems with the masses being financially illiterate.
When consumers are lacking financial literacy, market efficiency is dramatically effected. The world market depends on consumers being financially literate. Then consumers are able to demand more and better products. When demand for better products goes up, it forces companies that create these products to compete with each other to meet consumer’s demands.
Without financially literate consumers, the above chain reaction cannot happen.
Another problem caused by financial illiteracy is social cost. Having low levels of financial literacy could lead to decreased quality of life, poor health, higher prices for financial products, and greater use of public ‘safety net’ programs.
Finally, financial illiteracy was one of the major causes of the Great Recession. That’s a scary thought! If more Americans had a better grasp of financial literacy, the economy would not be in the downward spiral it is in now.
Is There Hope?
The short answer is “yes”!
As the economy is slow to get back on it’s feet, more and more financial institutions are looking at educating consumers about the dangers of over spending and increasing debt loads. How are they doing this? By using online tools! These tools can increase consumer knowledge and encourage a change in financial behavior.
Some of these tools come in the form of online lessons and quizzes. Other forms are online games in which the player has to make important and responsible financial decisions in order to advance and win the game.
For example, there was a Wells Fargo case study done in 2011. This case study invited all new college student credit cardholders to participate by directing them to a website set up with financial literacy lessons and quizzes. There was also a control group that did not take the lessons or quizzes. Below are the results:
- 51.2% of the students who used the online tools are less likely to file bankruptcy
- 45.1% are less likely to be 60 days past due.
- 22.8% are less likely to have late fee accounts.
- 20% have less revolving monthly balances.
These finding prove that online tools can make a difference in the financial literacy of consumers.
Education video games are another source for gaining financial literacy. Immediate feedback for mistakes and immediate rewards when making the correct decision is one reason these games work so well.
Students can also take what they learn in these games and apply it to other areas of their lives like standardized tests.
There is an old Chinese proverb that goes, “Tell me, and I’ll forget. Show me, and I may remember. Involve me, and I’ll understand.” Educational games move the players from passive listening to active problem solving. This is important for tackling financial literacy head-on.
Conclusion
Financial literacy is not only important for your personal life; it is important for society to function as a whole. We all have a responsibility to handle our money and financial decisions in the proper way. We have many tools available to us in order to meet this obligation. Have you ever heard the saying, “You can lead a horse a water, but you can’t make him drink”? Well, the same is true for us.
We have to take the initiative to learn correct financial habits. We have to actively seek out the information needed to make responsible financial decisions. This is how we become financially literate.
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