Does the concept of risk diversification cause sweat to bead along your hairline? Or maybe it’s compound interest that gets you hot under the collar — inflation that leaves your palms clammy. Now that we’ve triggered flashbacks to freshman year when you barely passed economics 101, take comfort in the fact that you aren’t alone. According to the Financial Literacy Around the World — a survey conducted by Standard and Poor’s Rating Services — basic financial concepts leave millions of Americans perplexed and perspiring.
Over 150,000 adults from more than 140 countries were included in Standard and Poor’s global survey. Each participant was asked 5 simple questions regarding financial theories S&P considers essential to successful money management. These questions touched on concepts of risk diversification, inflation, and compound interest while testing survey takers’ grasp on basic numeracy.
Survey Highlights: Basic Trends & Ranking
The results were less than flattering. Barely over one-third of adults around the world (33%) are considered financially literate. Most of these are concentrated in emerging countries with low rates of university graduates. There was a marked difference between male and female financial literacy in both developed and emerging countries, with women less likely to pass S&P’s survey by 5 whole percentage points.
The top spots for literacy went to Sweden, Norway, and Denmark. These Scandinavian countries each scored a passing grade of 71%. Close behind were Canada and Israel with 68%, while Australia, Finland, Germany, the Netherlands, and the UK claimed the last of the top 10 spots with scores between 65% and 67%.
The U.S. has a lot to improve if it’s expected to dethrone one of these countries for its spot on the top 10. Coming in behind New Zealand (61%), Singapore (59%), and the Czech Republic (58%), the U.S. scored 57%. Thanks to that 43% fail rate, Americans rank 14th in financial literacy around the world.
This placement is a little embarrassing for America, the leader of the free world, but it isn’t totally discouraging. If the world was a classroom, the U.S. would be the student asked to stay behind because of his poor grades. A full-ride scholarship is unlikely but with hard work determination, he could turn his grade around.
Survey Significance: Financial Literacy Protects Consumers
Why should the country endeavour to improve these grades? A 57% — though nothing to write home about — is still a passing grade after all. Financial literacy is a cornerstone of household management. Without understanding the basics behind numeracy and interest, people struggle to make informed decisions regarding their financial future. A lack of critical financial knowledge can stop people from borrowing, saving, or investing safely.
Numeracy, interest, and compound interest are at the heart of every financial product. Whether it’s a mortgage for a home, a lease for a new SUV, or a cash advance to help pay for an emergency, each of these financial products come with rates, terms, and conditions that affect how much can be borrowed and how much must be repaid at any given time. People who aren’t aware of fundamental financial concepts may end up accepting higher interest rates with shorter terms simply because they don’t know any better.
Take, for example, the rise of payday loans in the U.S. These financial products often provide the only financial assistance some Americans can access, yet their short terms, usually due within the next pay period, are out of their means to follow. It doesn’t help when predatory loan companies target these vulnerable individuals by using overly complex language to hide their short terms.
Without understanding how interest applies, they may accept these terms without investigating the alternative a direct lender of installment loans can offer. Though the same size as the typical payday loan, these installment loans have forgiving repayments schedules that allow the borrower to repay the advance over several weeks.
Financial ignorance will also jeopardize an individual’s ability to save in many ways. When they accept loans outside of their capabilities, they’ll waste extra cash covering late fees and interest, making it difficult to set aside savings. They also aren’t equipped to tap into potential financial benefits of investing through multiple ventures so as to diversify risk.
The Upshot
The U.S. may have an edge over the global average, but its performance still has a lot of room for improvement. Financial ignorance harms an individual’s chances at managing their household budgets, avoiding predatory loans, and investing properly for their future, so it’s time that the country buckles down and makes financial literacy a priority. Who knows, with enough work, we might be able to steal Germany’s spot in the top 10.
