Low financial literacy may be costing consumers money

Low levels of financial literacy could be costing the average U.S. household over $5,000 every year, according to a recent study. Over a 10-year period, this could amount to $84,458, compared to households led by people who understand financial basics well.

The Allianz study surveyed more than 1,000 people each in the U.S., the U.K., France, Spain, Italy, Germany, and Australia and asked them questions designed to test their understanding of financial basics, such as interest rates and inflation, as well as investment risks and returns.
Worryingly, the results reveal that 32% of Americans lack the knowledge and skills to make sound financial decisions – what Allianz classifies as “low financial literacy.”

Meanwhile, 58% are on average, financially literate, and only 10% demonstrate a high level of financial literacy. This is roughly in line with most other countries surveyed. Interestingly, two-thirds of all people who were polled worry that they know less than the average investor about financial markets and investing.

Better financial knowledge generates more money

But what kind of money could broader financial knowledge add to a household’s budget?
Based on the amount of financial assets owned by the average household, Allianz calculates that the difference in income from any kind of investment can quite dramatically differ between people with low, average and high financial literacy. For example, the study said, a person with high financial literacy can expect to earn an extra $5,198 per year. Over the course of 30 years, this adds up to $880,825.

“Low financial literacy really hurts," said Ludovic Subran, chief economist at Allianz. “In fact, over long investment periods, like when saving for retirement, it can literally cost you a fortune.

“But the good news is that making smart financial decisions is not rocket science. By acquiring basic knowledge and skills, people can move from low to average financial literacy and put a lot more money in their pockets."

What people think of their financial future

Given the challenging economic climate, the study also asked participants for their views on their financial future.

Although about six out of ten Americans rated the economic outlook as fairly bad to very bad, a significantly lower proportion (42%) of people with average financial literacy said the same about their own individual economic prospects. Compared to that, about 12% with very high finance skills felt very confident about their financial situation.

Lack of confidence is striking in U.S. women

This lack of confidence is especially notable among U.S. women, with 69% of them saying that they are not confident about their financial situation. More women were also found to exhibit low financial literacy than men.

It is a similar story for the generational divide too. The study shows that financial knowledge and skills increase with age, with a higher concentration of highly financially literate people found among baby boomers (21%) than among Gen Z (6%) or millennials (11%).

“Typically, financial literacy programs concentrate on boosting numeracy skills, but financial literacy is more than mathematics," said Patricia Pelayo Romero, senior economist at Allianz and co-author of the study.
"Any successful financial literacy intervention, particularly those catering to women and young people, should start with confidence building,” she said.

Enhancing clients’ level of financial literacy

As consumers seek to improve their level of financial literacy, financial professionals are valuable resources, said Kelly LaVigne, VP of consumer insights, Allianz.
They can help educate clients about their money while working with them to develop their written retirement plan. By illustrating how varying strategies would affect their finances, a financial professional can help their client have a better grasp of financial concepts.
“For example,” he said, “a financial professional can explain how, as your needs change across life stages, your investment strategies evolve too.”
And before sitting down with clients to create a written financial plan, a financial professional may ask their clients to get a better grasp on their money and track their spending for a period.

This will help them understand how much money is coming in and what’s going out. By doing the hard work to track their spending, saving, and investing, clients will gain a better financial understanding.

It’s also important for clients to track how their money management aligns with their values and big financial goals, LaVigne added. “If a client values quality time with friends and family but only dines out alone, then their spending isn’t aligning with their values,” he said.

In addition, financial professionals can hold small personal client events with a select group to dive into topics like budgeting, the effects of inflation, investment and protection strategies, Social Security, expenses in retirement and more.

“These sessions can help clients learn more about finances and build the relationship with their financial professional,” LaVigne said.

 

Ayo Mseka has more than 30 years of experience reporting on the financial services industry. She formerly served as editor-in-chief of NAIFA’s Advisor Today magazine. Contact her at [email protected]. 

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