What steps can people take to be more financially literate? originally appeared on Quora - the knowledge sharing network where compelling questions are answered by people with unique insights.
Answer by Arshad Ahmad, Associate Vice-President and Professor in Finance and Business Economics at McMaster University, on Quora:
"What steps can people take to become more financially literate?"
Let's start with two important points about becoming financially literate. First, no matter how financially literate you are, you can always improve this skill set. The issues involved continuously shift and are so vast and complex that there is always something new to learn and understand. Second, if you are currently financially illiterate, it is absolutely in your best interest to change that situation.
If you can't do a simple budget, then you are likely financially illiterate. If you are unaware of your money-related decisions, are unaware of their consequences, or simply don't care, you're financially illiterate. If you think money matters are better dealt with by employing experts like investment advisors and accountants, but you don't have the ability to assess their performance, you are financially illiterate. You should not blindly trust your financial health to other people.
Read this Bloomberg article, It Just Got Even Harder to Trust Financial Advisors to see if it impacts your view on whether or not you have faith that financial advisors have your best interests at heart. The article reports occurrences of " ...misconduct that [range] from putting clients in unsuitable investments to trading on client accounts without permission," with prominent firms like OppenheimerFunds reporting a 19.6% misconduct rate and implicating 2,275 advisors.
Or read The Market for Financial Adviser Misconduct, which alleges misconduct to be pervasive. This is not to say that all financial advisors are dishonest; many provide an important service, but it pays to be wary as well as informed about their decision-making process and the results they deliver.
Another quick point: experts charge fees that are sometimes up to 2% of your savings. Given the 0% interest rate environment, you can pay yourself 2% by investing in your own financial literacy.
With that said, we need to address a third point: while people may enjoy hearing good financial advice, people typically ignore it. Advice doesn't matter unless we are willing to act on it. Let's be honest with ourselves; the chances that my writing will change your financial well-being may be about the same as your chances of being hit by lightning, but let's give it a shot anyway.
How many times have you heard these pet answers from financial experts? Make a budget, read the financial press, hear this genius opinion, scour that best website, listen to my podcast, watch this fantastic video, etc. The advice that is readily available is endless. Sometimes these experts will inspire action, but most of the time, financial advice is like diet advice: no matter how much it is backed by scientific evidence or how easy it might be to implement, it's an uphill battle to change your eating habits, just as it has been for a gazillion people who have tried before you. I'm no different. I often don't even take my own financial advice, believe it or not. In order to make a long-lasting change and build good financial practice habits, you need advice that taps into your motivation, or what really matters to you.
One surefire way to become more financially literate is to face a crisis. Most people learn financial literacy when they have to. If you have experienced a financial disaster that caused you to lose a significant amount of your life savings, you probably learned something in those calamitous weeks or months. During the Great Recession of 2007, a lot of people actually did learn the hard way, but then the terrific gains of the recovery washed away those bad experiences and now it appears we have to learn all over again.
Understandably, most of us would prefer not to learn financial literacy through unfortunate circumstances. You can start with figuring out what financial literacy means to you. Do you want to embrace rather than avoid money-related issues? Do you want to stop cringing when someone mentions budgets, or savings, or taxes? Do you want to better understand the finance-related headlines? Do you want to be able to better assess the performance of your financial advisors?
Start by figuring out what you really want to accomplish, and then get humble. Underestimate your current level of financial literacy. Get a little scared and admit your level of financial illiteracy. Then, follow these steps:
1. Recognize that you can get help. A lot of it is free and easily accessible.
2. Reflect on a past, current, or impending financial disaster.
3. Repair these errors where possible.
4. Set some small, attainable goals aimed at developing your financial literacy skills.
5. Band together with others who may need similar help. Working together is motivating and benefits everyone.
Finally, tap into the many resources that are readily available to you in your everyday life. Educate yourself. Maybe even take a course or MOOC like McMaster University's Finance for Everyone.
Remember, this is a personal journey. I've made both financial headway and missteps over the years, and it is important to recognize that we all have different motivators--you just need to uncover what yours are.
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