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The Importance of Financial Literacy

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.Untitled design

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 Global Financial Literacy Study, with just 57% of the country’s population estimated as financially literate.

Obviously, the other 43% of Americans have some degree of financial understanding – but it is mixed with a degree of incomprehension.

At the macro level. According to the latest National Financial Capability Study from FINRA (the Financial Industry Regulatory Authority), 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 twenty 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 If your financial knowledge is ten or twenty years out of date, you risk being at a disadvantage.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.

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