By Liz Pulliam Weston
Most surveys that measure financial literacy focus on teen-agers, and the results are always grim.
In the latest research by Jumpstart Coalition, a nonprofit that promotes personal finance education, the average high school student correctly answered just 52.4% of the questions covering money basics. That's down from 57.3% in the 1998 survey and up from 50.2% in 2002, but it hardly matters. Anything less than 60% counts as an "F."
Now a poll by Harris Interactive for the National Council on Economic Education shows that adults aren't that much savvier.
While teens on average scored a 53 (another F) on a quiz testing knowledge of basic economic and personal finance concepts, the grown-ups' average score was just 70 (a C).
In addition:
If it makes you female readers feel any better, there are also lots of studies out there showing that we're better investors than men -- once we get around to investing.
But the fact remains that there's a heck of a lot of financial ignorance going around, and financial ignorance is costly. Women may have even more to lose than men, since we tend to earn less, are more likely to have interrupted careers and live longer, which means we have more time to suffer from our mistakes.
My e-mail box, and the Money message board, bear testimony to the daily cost of financial illiteracy: men and women who are overwhelmed by debt, or have no savings, or don't invest for retirement, or fall for investment scams, or think we can drive gas prices down by not buying fuel for a day.
Understanding economics and personal finance doesn't mean you won't make mistakes or face financial disasters. But you can lessen the odds and repair the damage faster if you know the rules of the game. (You'll also be treated a bit more kindly by the denizens of the Your Money board, many of whom believe there is such a thing as a stupid question.)
Here are the economic and financial concepts I wish everybody knew:
Our actual needs are pretty limited: food, shelter, clothing, companionship. Just about everything else is a "want," and our wants are essentially endless. Because our resources are limited (see "scarcity," below), we have to make choices about which wants to fulfill.
Also, the way we fulfill our needs involves a lot of choice. Shelter, for example, can be a bed at a mission for the homeless or a $125 million mansion. Our food choices offer a similar range, from beans and tap water consumed at home to steak and Dom Perignon at an exclusive restaurant.
I've discovered many people believe they have to spend money in certain ways or in certain amounts, when in reality their spending is a choice -- or is at least based on choices they made earlier. If you're facing a monster mortgage payment, for example, it's because you chose to buy that home and selected that particular mortgage. Taking responsibility for our choices can be scary, but it should also be empowering. After all, if you have choices, you're not just a victim of circumstance.
It's lovely to believe in a world of endless abundance, but the reality is that at any given point in time our resources have limits. Whether it's oil in the ground, our time here on Earth or the cash in our pockets, there's only so much available to be spent.
People who ignore this reality are the ones who run out of paycheck before they run out of month, or who extend their unsustainable spending by relying on credit cards, home equity loans and other reckless borrowing. Their refusal to make the sometimes-hard choices needed to responsibly manage money means that they will have even fewer choices in the future. The money they spend on stuff and on interest can't be invested in other goals, like retirement, so odds are pretty good they'll wind up old and broke.
This isn't the latest workout device at your gym. The hedonic treadmill means that we quickly adjust to improved circumstances. A raise at work or a new possession may make us happy for a little while, but we soon take our situation for granted. Our expectations continue to rise: if only I could get another raise, or a better car, or a bigger house. Should those expectations be satisfied, again we'd adjust and quickly want more.
This has a lot of implications for personal finance and the economy, but here's something to consider: Maybe we need to look beyond our wallets for true happiness.
"Opportunity cost," very simply, means what we give up to get something else. In every choice, there's an opportunity cost. If you decide to go to college, for example, you're giving up the income you could have earned by working full-time during those years plus whatever you could have purchased with the money used to attend school. You also may take on loans to pay for school, which will have to be paid back with future income that could have gone for other purposes.
The good news, of course, is that even with opportunity costs, college is a slam-dunk for most people. The average graduate makes 70% more over his or her lifetime than someone who stops with a high school diploma.
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