Finding Opportunity in the High Cost of Financial Illiteracy

When economists Benjamin J. Keys, Devin G. Pope, and Jaren C. Pope decided to quantify the collective cost of Americans failing to refinance their homes during the recent financial downturn, the results were eye-opening. They estimate that about 20 percent of households that could have refinanced as of December 2010 failed to do so. The median household would have saved $160 per month – or approximately $11,500 over the life of their loan – by refinancing. Instead, they failed to cash in on a collective $5.4 billion in savings. Of course, this only speaks to one specific cost and during one specific time-frame. According to a 2015 National Foundation for Credit Counseling (NFCC)/NerdWallet poll conducted by Harris Interactive, consumers are struggling on a variety of financial fronts. Every day, millions of unknowing Americans pay the price for their lack of financial savvy – in what can seem like a million different ways. How does financial illiteracy take a toll? All this is happening at a time when managing money is more dynamic – and confusing – than ever. It’s now possible to do banking transactions, pay bills, shop and invest money with a swipe on your mobile phone. Yet, none of this technology provides the innate knowledge necessary to manage money wisely.
  • Mishandled credit: A single poorly-timed late payment can cost thousands in the long run. Just consider late fees, escalated interest rates and dented credit scores that affect future borrowing. Other all-too-easy credit snafus:
    • Not understanding how to earn and maintain a good credit score
    • Not shopping for the best possible interest rates
    • Racking up more debt than is manageable.
  • Failure to save: Saving is becoming a lost art – and with it goes the capacity to accumulate adequate funds for emergencies, health care, retirement, education, or even big-ticket spending on vacations or home improvement. About 18 percent of NFCC/NerdWallet survey respondents said they had “no savings or investments.” When people fail to save, the costs can be substantial:
    • Over-reliance on credit
    • Inability to pay bills or repay loans
    • Possible bankruptcy
    • Quality of life issues: Postponing retirement or skimping on medical care.
  • Lack of basic knowledge: What consumers don’t know can hurt them:
    • 41% of adults grade their personal finance knowledge a C, D or F, according to the NFCC/NerdWallet survey.
    • 40% have and stick to a budget.
    • 29% are saving nothing toward retirement.
    • 24% don’t pay all their bills on time.
    • 80% of Americans can’t pass a simple test on how to make retirement savings last, according to the most recent survey by the American College of Financial Services.
  • Costly transactions and services: Poor money management easily translates into overdraft and late payment fees. But it doesn’t stop there:
    • Unbanked or underbanked consumers pay more – often much more – for basic financial services such as money transfer and payday loans.
    • Investors pay billions to financial advisers in hopes of beating the returns on basic index funds, often with no such result.
    • Time is lost rectifying problems, carrying out “alternative” transactions and managing vendors. In this scenario financial illiteracy is not only a time suck; it is also potentially de-motivating.
Moreover, the financial challenges that people face aren’t getting easier. They’re getting more difficult. Wages are stagnant while the costs of buying a home, paying for college, accessing health care, and just plain living are rising, often at alarming rates. Arguably, money wasted on avoidable fees, debt, interest charges and lost opportunity could mean the difference between success and failure. And because nothing succeeds like success (and, unfortunately, nothing fails like failure), the long-term costs of financial illiteracy may compound over time. The very real dollar costs, coupled with a loss of hope and multiplied by hundreds of millions of people, make financial illiteracy a problem no one can afford.