Financial Literacy: the More You Know the More You Want to Know
By Jeanne Doran
June 7, 2017
An individual’s level of financial literacy often determines whether he or she seeks financial advice, and not in the way you might expect. The most knowledgeable—those who would seem to need less advice—are most likely to ask for it.
Researchers at Texas Tech, Maher Habib Alyousif and Charlene M. Kalenkosksi, found that people with some financial education ultimately seek the additional financial know-how they need to make better money decisions. So being financially literate affects one’s demand for financial advice in a positive way.
Researchers asked five questions in order to measure respondents’ understanding of compound interest, inflation, bond prices, mortgage interest and risk-return reward. Consumers that best understand these concepts also best understand their complexity and the value of expert advice, the researchers found.
People with lower levels of financial literacy struggle with these concepts; they tend to be preoccupied with everyday expenses and are less likely to recognize that financial advice would improve their situation.
This research echoes FINRA’s 2012 national financial capability study, which found that while 76% of respondents reported they weren’t satisfied with their financial situation very few sought financial help: only 9% went to debt counselors and 30% went to insurance experts.
The Texas Tech research builds on those findings, showing that financial literacy is only part of the issue. Higher income and higher risk tolerance are correlated with seeking financial advice. Again, this suggests that people with some money know-how understand the complexity and seek help.
Generally, individuals who don’t seek financial advice are the ones who need it the most. They tend to be over-spenders struggling with daily expenses and have a lot of debt and do not participate in a retirement plan.
Women tend to score lower than men and express less satisfaction with their personal financial situation and be less confident in their financial skills, the research found. Individuals who are not financially literate are less likely to own stocks and be prepared for retirement.
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