Imagine that you hopped into your car to drive to the Land of Wealth and Happiness, except your car doesn't have a steering wheel, the windshield is covered with mud, and you're actually sitting in the back seat. That's akin to where many people are these days on the road of financial capability.
Research shows that many people know little about managing their money, according to a 2016 report on financial knowledge in the Journal of Consumer Affairs.
Only a third of individuals in Arkansas can correctly answer four or five basic financial knowledge quiz questions, according to the National Financial Capability Study from the Financial Industry Regulatory Authority (FINRA). About a fifth of respondents reported that their household spent more than their income in the past year and fewer than half said they had a rainy-day fund, the FINRA survey also found.
The knowledge and wealth deficits are sometimes more pronounced for women, the Journal of Consumer Affairs study showed, in part because many have added financial demands or employment and earning gaps due to caring for children. Divorce is another obstacle that reduces women's wealth.
When you factor in that women live longer, will therefore need more money to retire, and on average earn 82 cents per dollar compared with men, according to a St. Louis Fed analysis, some women's financial futures are cloudy.
To complicate matters, women of color on average possess significantly less wealth than white men and women alike, the St. Louis Fed analysis finds. This means that even if women of color invest at the same rate as their white counterparts, they are investing less because they earn less, further putting their golden years at risk of becoming doldrum years.
These data clearly suggest that women could benefit from personal finance education, and recent research from the Global Financial Literacy Center shows that better financial behaviors are linked with broader financial knowledge. Better and more education would provide a foundation for women that would allow them to achieve a higher level of financial well-being, add to their self-confidence, and enable them to take actions necessary for building wealth.
While more financial education may not solve wage and wealth gaps, it can help people make the best use of what they earn and promote more financial stability. The St. Louis Fed has free online economic and personal finance resources in English and Spanish for children and adults. They are available at stlouisfed.org/education.
Everyone should master the basics of personal finance:
• How to create a budget and establish an emergency fund
• What a credit report is and how to manage it
• How to use credit cards responsibly
• How to save and invest for retirement
• How much to save for major purchases such as a house or college tuition
Why not start now? Your future depends on it.
Mary Suiter is economic education officer of the Federal Reserve Bank of St. Louis, which serves all of Arkansas. The views expressed are those of the author and do not necessarily reflect official positions of the Federal Reserve Bank of St. Louis or the Federal Reserve System.