Financial stress and anxiety are linked to problematic financial behaviors and low financial literacy according to recent research published by the FINRA Investor Education Foundation and the Global Financial Literacy Excellence Center at George Washington University. The study also found that financial stress was most prevalent in single women, young adults, and people with past-due bills for the treatment of a health problem.
We All Experience Financial Stress In Different Ways But At Predictable Times:
- Loss of income
Approximately 36% of Americans regularly spend all of their earnings. Without saving to give themselves a safety net, they are unprepared if they lose employment income
- Unexpected Expenses
We all should be putting money aside for what life might throw at us, but nearly 31% of Americans would not be able to come up with $2,000 within a month in an emergency.
While divorce is stressful for both parties, the rate of bankruptcy filings for single mothers in the United States is 300% higher than the national average.
- Budgeting Difficulties
People worry about balancing financial obligations with current debt. For adults between 21 and 34 those debts are usually student loans and credit card balances.
The Cost of Low Financial Literacy
Lack of financial illiteracy cost the average American $1,389 in 2021, according to the National Financial Educators Council. Here are two of the most significant reasons:.
- Poor Debt Management: It’s OK to use your credit card to earn reward points, but it’s important to pay down or pay off the balance as quickly as possible. Spending to your credit card’s spending limit and only making the minimum balance chokes off your ability to save or even invest your money and having interest work for you.
Just look at these two scenarios:
1. You might decide to put a $5,000 item on your credit card with a 15% APR. If you pay the minimum monthly balance of $112.50, you will pay $5,729.19 in interest and it will take you 266 months to pay off the bill. Over 22 years, that item would actually have cost you $10,729.
2. If instead of giving those interest payments to your credit card company, you invested it and earned just 7% a year, over that same 22 years, you would have almost $13,000 in savings.
- Predatory providers: Be wary of anyone selling products in the financial services space. Unfortunately, many individuals and institutions try to prey on people with a lack of financial knowledge. They often offer unnecessary products under the guise of “protection” or the false promise of “getting rich quick.” Think hard about how a promoted product will actually help you achieve you or your family’s financial goals.
The easiest way to spot a potentially problematic situation is if you don’t understand how the financial services company makes money off of you as a customer. If the business model is complicated, or lacks transparency, then it might not be right for you.
How to Easily Improve your Financial Literacy
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