How Important Is Financial Literacy?

Not surprisingly, financial literacy roughly matches the amount of education that a person has. And the less financial savvy you have, the harder it hits you in the pocketbook.

In a word: very. It is estimated that about one third of the income inequality in America (an election year issue) is just the result of inadequate financial knowledge. For example, studies show that up to a third of the fees paid for financial services are the result of this lack of knowledge. For our purposes, let’s say that financial literacy can simply be described as “Knowing how money works in the world.”

The lack of even basic understanding of how we manage money has been shown in survey after survey, in groups running from teens through seniors. For whatever reason, women as a group scored even lower than men.

Not surprisingly, financial literacy roughly matches the amount of education that a person has. And the less financial savvy you have, the harder it hits you in the pocketbook.

People are certainly motivated to understand and manage their money more effectively, but, as in all education, from languages to medical info, if you don’t use it, you lose it. And the average person does not deal with all aspects of the financial world very often. So the import of new money knowledge has been found to last about 2 years, at most, if not used.

A big study from FINRA Investor Education Foundation has found that a working knowledge of money matters on brief questionnaires has actually dropped from 42% correct to 37% in recent years. So what’s the problem?

The problem seems to be that because we handle money daily in some way or another we think we know more than we actually do (76% say they have a ‘very high’ amount of financial knowledge). Just as when asked, most of us claim that we are above-average drivers. Not where I drive, thank you very much.

Of course, human nature being what it is, a stronger economy allows us to think that we are smarter than we really are about all-things-money. So what can we do to improve our financial knowledge, make more money, save more, handle a down economy and spend more wisely? Aside from reading Physicians Money Digest, that is….

Experts in this field have concluded that it is more effective and easier to change the framework that we function in, through regulation, than to formally educate some 300 million of us. An example of the effectiveness of this approach can be seen in the new regulation that states that all financial advisors must assume fiduciary responsibility for whom they work. In other words, they must now put their client’s success before their own. Are you surprised that they did not have to before this?

From the education side, in addition to separate stand-alone financial courses, it would work even better to integrate financial perspective into all other areas of learning and instruction. Lord knows it would help docs in training, to better help our patients, as well as ourselves, to know more about money matters, personal and professional.

All of this effort is not to say that in our society each of us is not responsible for the management of our own finances. We are and always will be. But it pays off directly to our pocketbooks if we purposely learn as much as we can about how to live our financial lives, personal and professional, in a smarter way.