Yahoo Finance Think You’re Financially Literate? Here’s What You May Not Know
Financial literacy is integral to long-term financial health, and yet, too few Americans possess it. Our education system is largely to blame. According to “The Financial Literacy Crisis in America: 2023 Report” published on Dave Ramsey’s blog, Ramsey Solutions, only 17% of adults in the U.S. said they took a personal finance class in high school. And 88% said high school didn’t fully prepare them for how to handle money in the real world.
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Though research shows that financial literacy is poor in America, not everyone is lacking. Do you have the chops to consider yourself financially literate? Financial experts shared with GOBankingRates the most common topics they find people are financially illiterate about — often without knowing it.
The Time Value of Money
“One of the biggest misunderstandings is [around] the power of the time value of money,” said Anthony DeLuca, CFP, CDFA, an expert contributor at Annuity.org.
“People do not invest, because they do not believe they have enough money to make a difference. Plainly, if you stay consistent in your investment, you will have exponential growth in your portfolio. For example, if you invest $7,000 a year into an IRA with an 8% return for 35 years, you will amass over $1.2 million,” DeLuca said.
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The Power of Dollar-Cost Averaging
There’s also a lack of financial literacy around dollar-cost averaging in that many people don’t use it, according to DeLuca.
“You should utilize the concept of dollar-cost averaging,” DeLuca said. “Most investors stop buying when the market is going down. They instead try to time the market, which is nearly impossible. It’s best to buy as the market corrects. Especially in your 401(k), you are essentially buying mutual funds at a cheaper value. Once the market rebounds, you’ll have bought more of an investment at a discount. This is the beauty of dollar-cost averaging.”
Thinking You Can Time the Market
Many folks are under the (wrong) impression that they can time the market. This is untrue, and it’s potentially risky to think you can pull this off. No one can.
“There are an infinite number of variables affecting the market,” DeLuca said. “Not to mention the countless investors who have different motives and trading theories. It’s best to invest at appropriate times and stay consistent versus trying to time the market to perfection.”
How and When To Check Your Credit Score
There’s a dangerous myth that checking your credit score can or will cause it to drop. This is untrue, but many don’t have the financial literacy to know it. They also may not know that checking your credit score is free.
“Checking your credit score will not impact it,” said Abby Butkus, director of strategy and growth at Arro Finance. “There are many … free sources, so this is not something you need to pay for.”
The Risks of Buy Now, Pay Later Plans
Buy now, pay later (BNPL) plans have been growing in popularity, thanks largely to the increase in the number of Americans living paycheck to paycheck. Erika Rasure, Ph.D., chief financial wellness advisor at Beyond Finance, said BNPL is usually not fully understood. Though it can make sense for consumers in some situations, BNPL is loaded with risk.
“BNPL has been used to help people manage their cash flow when making larger purchases,” Rasure said. “In some cases, it can make sense to spread out the payments for more significant items, such as appliances or furniture, when there’s little to no interest paid to do so.”
“However, considering BNPL for day-to-day purchases like groceries may reflect the financial pressures many households are facing. For others who are struggling, it may be the best solution for their situation, given their current resources. Nonetheless, like credit cards, the risks of BNPL are similar when it comes to having the means to repay and the inability to do so,” Rasure explained.
The Importance of Saving For Retirement Early in Life
Not saving enough for retirement is a major crisis in the U.S. Some may not grasp that you really need to start building a plan and a nest egg as early as possible.
“Most people in their 20s and 30s think saving for retirement is an older person’s game,” DeLuca said. “The reality: It’s the exact opposite. The sooner you start investing, the more time you have to handle market volatility and experience exponential growth. Then, you can truly enjoy your retirement.”
When To Collect Social Security
“Lastly, there’s a rumor that you should take out Social Security as soon as you’re eligible,” DeLuca said. “The theory is, ‘Why wait until you’re 70 to receive a slightly higher monthly income if you won’t live that long?’ The reality: Most people catch up to this number in their late 70s and live 10 years longer. That’s a crucial amount of time, and some people truly need every penny of their Social Security.”
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This article originally appeared on GOBankingRates.com: Think You’re Financially Literate? Here’s What You May Not Know
