In my post dated October 31, 2017, we addressed the first of six roadblocks to building a financial plan. The first roadblock - not setting financial goals. NO GOALS, NO DIRECTION. Here's the link to review the post: Have you scored any goals?
The second roadblock is Lack of Financial Knowledge. Many people do not fully understand how money is made, spent, and saved, nor do they have the skills and ability to use financial resources to make decisions. These decisions include how to generate, invest, spend, and save money.
Financial knowledge focuses on the ability to manage personal financial matters in an efficient manner and it includes the understanding of making appropriate decisions about personal finance such as investing, insurance, real estate, budgeting, retirement and tax planning.
Financial knowledge involves financial principals and concepts such as financial planning, compound interest, managing debt, profitable savings techniques and the time value of money.
The lack of financial literacy may lead to poor financial choices that can have negative consequences on the all-around well-being of an individual. The lack of financial literacy can also lead to large amounts of debt.
There are many shocking statistics which highlight the seriousness of the lack of financial knowledge in America.
- 5% of Americans have not saved a dime toward retirement.
- The median retirement account (IRA, 401(k), 403(b), etc.) balance is only $3,000 for working-age households and only $12,000 for households approaching retirement.
- In nearly 67% of working households with earners between ages 55 and 64 years, at least one earner has saved less than one year’s income for retirement.
- Approximately 69% of Americans have less than $1,000 in total savings and 28% reported having no savings at all.
- 40% of Americans making $100,000 or more per year have less than $1,000 in savings.
- 62% of seniors aged 65 and older have less than $1,000 in savings, with one in three seniors having no savings account at all.
- 47% of single seniors and 22% of married seniors are almost completely dependent on Social Security.
- 70% of non-retired Americans plan to work as long as possible during retirement and only 25% of non-retired Americans say they have no plans to work during retirement.
Any improvement in financial literacy will have a profound impact on consumers and their ability to provide for their future while avoiding the pitfalls of debt. Recent trends are making it all the more imperative that consumers understand basic finances because they are being asked to shoulder more of the burden of investment decisions in their retirement accounts while having to decipher more complex financial products and options. The tasks are not easy but a better understanding and more knowledge can ease the burden tremendously.
A well designed and executed financial plan will help you obtain financial knowledge so you will have the skills, attitude and behavior necessary to make sound financial decisions and ultimately achieve individual financial security.
Until next time, cheers!
Sources: National Association of Government Defined Contribution Administrators, Congressional testimony, 2016 BankRate.com survey, Social Security Administration.