If only money came with instructions. If it did, the route toward wealth would be clear and direct. Unfortunately, many people have inadequate financial knowledge, and for them, the path is more obscure.
Are most people clueless about financial matters? That depends on what gauge you want to use to measure financial knowledge. The U.S. ranked 14th in Standard & Poor’s 2015 Global Financial Literacy Study, with just 57 percent of the country’s population estimated as financially literate.
Obviously, the other 43 percent of Americans have some degree of financial understanding — but it is mixed with a degree of incomprehension. Witness some examples:
• A recent LendU survey found that nearly half of college students carrying student loans thought those debts would eventually be forgiven if left unpaid.
• This year, Fidelity Investments asked Americans the following question in a multiple-choice quiz: “If you were able to set aside $50 each month for retirement, how much could that end up becoming 25 years from now, including interest, if it grew at the historical stock market average?” The correct answer was $40,000, but just 16 percent of respondents got it right. Another 27 percent guessed $15,000 (i.e., 50 x 12 x 25, as if interest was not a factor).
• Only 42 percent of those quizzed by Fidelity knew that withdrawing 4-5 percent a year from savings after retirement is commonly recommended. Fifteen percent of those older than 55 thought they would be “safe” withdrawing 10-12 percent per year.
• The S&P 500 has returned positively in 30 of the past 35 years. Just 8 percent of those answering Fidelity’s quiz guessed this.
Apart from these examples, consider another one at the macro level. According to the latest National Financial Capability Study from the Financial Industry Regulatory Authority (FINRA), only about a third of Americans younger than 40 understand the basic financial concepts of compounding, inflation and risk diversification.
Statistics aside, think about how a lack of financial acumen hurts people’s chances to build or protect wealth. How about the employee who skips retirement plan enrollment at work, mistakenly thinking that a tax-advantaged retirement account is
the same as a bank account; or the small- business owner puzzled by cash flow and profit-and-loss statements; or the young borrower who fails to grasp the long-run consequences of only making interest payments on a credit card or loan?
Financial professionals continually educate themselves. They stay on top of economic, tax law and market developments. Investors should as well. Ten or 20 years from now, you may find yourself in an entirely different place financially — who knows?
The economy, the Wall Street climate, and even the investment opportunities before you could all differ from what you see today. If your financial knowledge is 10 or 20 years out of date, you risk being at a disadvantage.
Financial literacy is not about prevention, but instead about empowerment. The more you understand about personal finance, the more potential you give yourself to make smart money decisions.
Mark Lund is the author of The Effective Investor and founder and CEO of Stonecreek Wealth Advisors Inc. in Draper where he helps people with their investments and retirement plans.