Wednesday, December 17, 2008

Financial Literacy

Financial literacy is the ability to understand finance sufficiently to make appropriate decisions regarding one's personal finances.

December 2008 -Today’s generation lives better—and larger—than any in history. For example, 50 years ago the average U.S. home was around 1,200 square feet. By 1976, the average home had grown to 1,645 square feet. By 2005, the average home was 2,434 square feet. Houses are bigger, cars are more extravagant, and, as every parent of a teenager knows, designer clothes and electronic gear are the norm.

But high living comes at a high price, as the ongoing subprime mortgage crisis demonstrates. Too often, what people consider a “normal” lifestyle is in fact financed by debt. Surveys suggest that Americans lack basic financial knowledge about how to successfully manage debt. For example, most Americans neither understand credit scores nor regularly review their credit reports. A study by Experian, one of the three largest credit-reporting agencies, on whether consumers are using more debt to finance the “American Dream,” found that consumer debt rose 12.5% over the two-year period from February 2004 through February 2006, and averaged $11,669 in 2006. More ominously, the number of late payments rose almost 20%, and personal bankruptcies increased over 31% during that time period.

An individual’s first experience with debt often occurs when borrowing money to finance a college education. As college costs soar, students increasingly finance their educations with easy-to-obtain student loans and credit-card debt. The Project on Student Loan Debt notes that one-fourth of graduating seniors in 2004 carried more than $25,000 in student loan debt. At public four-year institutions, 62.4% of graduating seniors have student loan debt, while 73.9% of graduating seniors at private, nonprofit four-year institutions have student loan debt. Upon graduating, many young professionals incur more debt to purchase a home (which must then be furnished) and a car. The pressure on young professionals to appear successful (e.g., new clothes, and meals at expensive restaurants) often fuels additional credit-card debt.

Cultural Trend Toward Materialism

Pursuing a financial goal of owning more “stuff” reflects a general cultural trend towards materialism. For example, a 1970 survey of about a quarter-million new college students found that about 40% considered “being very well-off financially” to be very important, and about 70% considered “developing a meaningful philosophy of life” to be very important. By 1987, and continuing through the most recent survey, these numbers reversed: In 2005, about 70% of entering college students considered being very well-off financially to be very important, while about 40% consider developing a meaningful philosophy of life to be very important.
One online dictionary defines materialism as “the preoccupation with, or emphasis on, material objects, comforts, and considerations, with a disinterest in or rejection of spiritual, intellectual, or cultural values.” Making the attainment of material possessions a priority in one’s life leads to a bigger house or better car, but the hidden psychological and relationship “costs” of materialism are considerable. For example, higher credit-card and mortgage payments often lead to a stay-at-home spouse needing to return to work, to work overtime, or to take a second job. Less time with family and community follows from such choices. What is the psychological cost of these choices?

Are people happier with bigger homes and better cars? Research suggests not. More-materialistic people are less happy, and have poorer psychological health, than are those who are less materialistic. These results hold true in many countries, including Australia, Bulgaria, England, Germany, Romania, Russia, Singapore, South Korea, and the United States. Research also indicates that progress toward materialistic financial goals (e.g., a bigger house, a better car) does not increase psychological health or emotional well-being.
In addition, results from both the United States and Hong Kong indicate that workers who care more about money are more willing to engage in unethical and illegal workplace behaviors. Hence, materialism is a threat to workers’ psychological health and to organizational internal control systems. Because of this vast body of accumulated evidence, we have come to think of materialism as a public health problem.

However, despite the contrary claims of some psychologists, not all financial goals are psychologically unhealthy. Our research results suggest that positive (i.e., functional) financial goals contribute to happiness. For example, financial goals of saving for college or retirement, or thoughtfully giving to charity, all correlate with better psychological health. Furthermore, research has shown that progress toward nonmaterialistic goals (financial or otherwise) increases psychological health, while progress toward materialistic goals does not.
The AICPA’s 360 Degrees of Financial Literacy program ( focuses on educating the public about the importance of financial literacy, and provides tools that help individuals at various life stages work toward setting and achieving functional financial goals. This program, begun in 2004, has earned widespread praise. No one, however, has investigated the possibility that financial education like 360 Degrees may also reduce materialism.

Personal financial literacy is at the very core of happiness in life. One can have a loving family, good friends, a satisfying job, and a supportive church. But living life with too many bills and no reserve savings account is stressful. Missing a few paychecks and facing an emergency vehicle repair or hospital bill can make life horribly stressful. These kinds of financial events negatively impact one’s health, relationships and work performance.
Financially literacy leads one toward positive financial behaviors such as creating an emergency savings account of $500 to $2,000, paying off credit card balances, and saving for retirement. These actions result in decreased financial distress and increased financial well-being.
Financially healthy employees make good benefits selections that save them money as well as save their employers money. When compared to employees with poor financial well-being, financially well employees have higher job performance, less absenteeism and short-term disability, better health, fewer wage garnishments, and less turnover.

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