Financial literacy: Is money a master or servant?

April was National Financial Literacy Month, a designation passed by the Senate in March 2004 to illustrate the significance of financial literacy to American consumers, and to help them create and continue “healthy financial habits.”

Consumers can either control their finances and have their money work for them, or their poor financial habits can lead to big problems.

In the words of Barnum and Bailey Circus founder, P.T. Barnum, “Money is a terrible master, but it can be an excellent servant.”

Do Americans have appropriate understanding of the world of finance and how it operates, as well as comprehension of their own personal circumstances? Or are their activities as wild and confusing as a three-ring circus?

This week, the literature provides a variety of opinions on financial wellness of Americans, and a few suggestions for betterment.

‘Just because you don’t understand it doesn’t mean it isn’t so.’ –Lemony Snicket

“Financial Illiteracy Pervasive,” notes a CUNA blog post. Research shows that “Americans need help when it comes to management of personal finance,” and the lack of understanding spans all income groups and is not limited to either men or women.

And most people don’t know what they should even know about when it comes to finances.

“Most Americans know they need to be saving and investing for the future, but they do not understand the fundamentals of what [that] entails,” says Brandon King, CEO and co-founder of digital investment advisor Stash. “In this country we emphasize consumption at the expense of saving and investing.”

Perhaps this consumer misunderstanding about the extent of their own financial aptitude is evident in a recent Morning Consult survey conducted with the American Bankers Association.

Survey findings report that Americans are confident: 62% say their own level of financial literacy is good or excellent. Still, only 29% believe other consumers have similar knowledge.

“Reality falls somewhere in between,” says the press release. “Fifty-seven percent of American adults could be classified as financially literate,” according to an S&P Global analysis. This ranks the U.S. 14^th in the world.

In order to be “financially capable” consumers need to understand fundamentals like credit, compound interest, diversification, and inflation.

Another study shows consumer perspective of financial self-awareness is not as rosy. 

“Only 15% of Surveyed U.S. Consumers Give Themselves an “A” in Financial Literacy,” says Equifax. And one-third say they deserve a “C”.

Survey findings include:

• 45% read financial websites in the last year;
• 28% looked for assistance from friends and family;
• The majority of participants identified variables to affect credit scores—87% knew that timely bill paying is influential;
• 42% knew negative data remains on a credit score for seven years;
• 61% are confident or extremely confident about their finances in the short-term; and
• Respondents age 45-59 have the least confidence concerning their financial future; those age 60+ were most confident.

‘Never spend your money before you have earned it.’ --Thomas Jefferson

A Mintel survey shows many consumers are challenged with managing their finances and are not confident about what they know, “just 19% of respondents [are] giving themselves an “A” grade on financial knowledge.”

Four financial struggles are evident:

1. Young people are hurting; only 19% of the iGeneration have set 3-6 months’ worth of living expenses aside, compared to 20% of millennials, 28% of Xers, 37% of boomers, and 40% of the World War II cohort.
2. Consumers fail to plan. Most do not consult financial advisors; 21% lack confidence in their ability to attain financial goals.
3. Parents are more frequent planners. Ten percent of childless consumers have written financial plans, and 26% contribute to retirement savings; parents have competing financial demands and more often plan to accommodate needs.
4. One of three consumers use budgets to monitor income and expenses.

Another cohort is in special need of assistance, says an article at the Journal of Accountancy.

“Three out of four older divorced people need a better understanding of how to manage their finances,” notes the AICPA Personal Financial Planning Trends Survey.

Subsequent to divorce, men and women are equally apt to “break good spending habits,” although women are twice as likely to seek financial help after.

Those who remained married have takeaway that good financial habits are important, given the lack of awareness that presents itself upon divorce.

“It is imperative for couples to establish open and regular communication about their financial life together, to share their plans for retirement, and to agree on their approach to saving and spending.”

Thirty-six percent of financial planners believe prenups would have been helpful in preparing clients for the financial hit of a divorce.

Another perspective is “Men Likelier Than Women to Seek Financial Advice,” notes thinkadvisor.com.

A Country Financial study reveals 24% of women had never obtained financial advice versus 15% of men.

Further, 43% of men have greater comfort in offering financial advice than taking it, compared to 35% of women who indicated the same.

“A diversity of counsel can have a positive influence in guiding well-informed decisions,” the article notes, “especially true as 51% of respondents reported that they were not managing their own investments or savings as well as they should.”

‘Money has a language of its own.’ --Robert Kiyosaki, American author

Are there any solutions to the dearth of financial awareness problem?

There are opposing views on the question of “Should Colleges Require a Financial Literacy Class?”

Proponents say “ignorance carries a high price” and younger consumers will find advantage in formal instruction.

One area of concern is the growing default rate among student loan holders.

“Financial literacy is about prevention. Regulators simply cannot keep up; they tend to come in when a problem already exists.”

Those opposed believe “courses will miss the real issues,” things like making appropriate investment and retirement savings decisions, because financial offerings frequently change and society is impactful.

“Government policies affecting employment, health care and benefits have a vastly greater effect than personal financial acumen on Americans’ financial health,” says the article.

Bankruptcy is more often brought about by medical costs, lesser pay, divorce, and job loss, “not profligate spending.”

Can we identify “The Truth About Financial Wellness?”  This benefitspro.com article says 72% of employers are committed to helping employees with financial wellness beyond retirement planning.

Bonuses for employers include increased morale, good influence on corporate culture, and reduced employee stress.

Employees desire the assistance. “Employees trust their company, and most have the majority of their financial resources tied to their employer already through their retirement plans, health insurance, HSAs, and more.”

It is suggested that holistic financial wellness is critical. Three steps to change in handling finances include simplicity in plans, solutions to prompt inspiration and motivation, and an opportunity for success.

“Personal finance is 80% behavior; it’s only 20% knowledge. People need quick wins.”

A three-ring circus can be fun, but not when it comes to financial literacy.

How can you help consumers and employees master their money so better financial habits may serve them well?

LORA BRAY is a market intelligence analyst for CUNA’s economics and statistics department. Follow her on Twitter via @Bray_Lora and visit the CUNA blog, The Research Roundup: Economic Perspectives.