Critically Important yet Difficult to Attain

According to the National Financial Educators Council, being financially literate means:

Possessing the skills and knowledge on financial matters to confidently take effective action that best fulfills an individual’s personal, family and global community goals.¹

The Government Accounting Office defines financial literacy as:

The ability to make informed judgments and to take effective actions regarding the current and future use and management of money. It includes the ability to understand financial choices, plan for the future, spend wisely, and manage the challenges associated with life events such as a job loss, saving for retirement, or paying for a child’s education.²

Financial literacy, or more importantly, the lack thereof is a major problem facing many Americans today. A recent financial literacy survey conducted by the FINRA Foundation revealed that about two-thirds of adult Americans are not able to pass a basic financial literacy test.³

To make matters worse, the financial world and our financial lives are only becoming more and more complex and convoluted. The number and type of financial products has exploded – take mortgages for example. It used to be that a 30-year fixed-rate mortgage was your primary and possibly your only option. Your biggest challenge was finding the most favorable interest rate you could. Now, you have a wide variety of mortgage choices including: a fixed-rate (30, 20, or 15 year), an adjustable-rate (variable rate, option, or hybrid), a jumbo, a combination, an interest-only, an FHA 203k rehab and/or other gov­ernment-backed (VA, USDA, FHA, etc.) mortgages. Figuring out which mortgage is best for you is no longer a simple decision. Rather, it requires signifi­cant effort and the ability and willingness to under­stand and analyze a large amount of financial infor­mation. And, as we all know, the mortgage decision is just one of the many large and small financial de­cisions each of us has to make throughout our adult lives. Those who get these decisions right a majority of the time are often better prepared financially for unexpected expenses, large expenses like college tuitions and weddings, and for retirement.

Unfortunately, increasing financial complexity is not the only barrier many Americans face as they try to navigate their financial lives. Other potential difficulties include:

    1. The ongoing reduction in employee access to pensions and other “safety nets”: Thirty-five to forty years ago, almost 40% of U.S. workers had access to a pension which helped to support them in retirement. ( These workers also usually had a shorter lifespan than most Americans currently have. Now, however, pensions are almost non-exis­tent for many private-sector employees and most soon-to-be retirees need to financially plan for a 25+ year lifespan in retirement. Without access to a pension, the responsi­bility for accumulating significant retirement assets and for generally taking on more responsibility for their own financial lives has fallen in the laps of each worker. Unfortunately, these individuals are attempting to grapple with these issues even though they often lack adequate financial knowledge, experience, and resources. We are already seeing the disastrous results of this for some workers – 33% of American adults have nothing saved for retirement and 44% of Americans do not even have enough ready cash at hand to cover a $400 emergency medical expense. (­la/2018/04/03/4-stats-that-reveal-how-bad­ly-america-is-failing-at-financial-literacy/#1ae­9c4d52bb7);
    2. Numerous studies show that financial knowl­edge is a “use it or lose it” thing: (­ucation-flunks-out-and-heres-whats-being-done-about-it-2018-10-10) In other words, it is very common for people to forget much of what they learn about managing their finances if they are not consistently using this knowledge. This is certainly understandable as much of this knowledge is highly-de­tailed and technical. Think about the math courses you took in college – if you are not consistently using calculus principles and solving difficult math problems it is highly likely that you have forgotten much of what you learned. The same holds true for financial knowledge.
    3. Studies also show that as we age our finan­cial decision-making capabilities decline. (­cial-decision-making-declines-age-confi­dence-doesnt-t1641) This is unfortunate as many Americans now live well into their 80s and 90s and they are tasked with handling and managing their assets, taxes, bills, etc. This can be an overwhelming burden for anyone and especially for those who are challenged with aging and even just a mild cognitive decline. This problem is often worse for many women who generally live longer and also may not have been manag­ing their finances throughout their lifetime as they allowed their spouse to handle this aspect of their lives.

This is certainly a sobering situation. Fortunately, though, it is also a situation you can remedy. A couple of simple tips can help keep you prepared to face a variety of financial decisions:

    • Do not be overconfident about your level of financial knowledge or decision-making abilities. It is well-documented that people often over-estimate how strong their finan­cial decision-making abilities are. Ironically, this situation can be exacerbated if you have taken a financial literacy course at some time in your life.
    • Engage in just-in-time education before making important financial decisions. For example, if you are thinking about buying a car this fall, start educating yourself about the options you will have to pay for the car and whether or not you will buy or lease. Please don’t assume that just because you bought a car 5 or 10 years ago you don’t need to start over again with your research. You do! Your personal finances may have changed during the intervening years and the available financing options may have also changed. Plus, you will need to familiarize yourself with the analysis.
    • Keep exercising and using your financial “muscle” throughout your life. Do not give up participating in your family’s finances and decisions or let someone else take over that entire role.
    • Reach out for help. It is important to find and build a relationship with a trusted financial advisor who can help educate you and guide you through your important financial decisions. Please reach out to your BLBB financial advisor! We regularly work with clients to help them think through a wide variety of financial planning issues and make smart financial decisions.





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