The negative effects of ignorance in money

Basic financial concepts are becoming more and more difficult for people to comprehend, endangering both their personal and professional lives.

One could not get blamed for believing that there are more urgent issues to worry about than some people’s inability to understand the concept of compound attention given the state of the world today. It seems more urgent to address issues like inflation, economic unpredictability, increased social unrest, and new technological ( and possibly existential ) threats like Artificial Intelligence.

But, there is a case to be made that financial illiteracy is the root of the majority, if not all, of these issues and risks.

Ignorance is bliss, right?

Only 18 percent of people of the European Union have a high level of financial literacy, with 64 percent being mediocre and the remaining 18 % being low levels, according to an Eurobarometer study released in July 2023. However, there are significant differences between member state. Only in four Member States ( the Netherlands, Sweden, Denmark, and Slovenia ) do more than 25 % of the population have high financial literacy levels. The disparity was even more pronounced among some socioeconomic groups, specifically “women, younger people, people with lower incomes and lower public education levels who tend to be, on regular, less financially knowledgeable than other groups.”

Until one examines what the analysts defined as a “high level of financial literacy,” these numbers may not initially seem disturbing. The participants were deemed” top of the class” in the financial knowledge assessment if they could correctly respond to four out of five basic questions, which ranged from” ( do you ) understand that an investment with a higher return is likely to be more risky” to” Do you” understand the relationship between interest rates and bond prices. Only 20 % of those polled in complete correctly answered the next question.

The level of financial education is actually lower in the United States. According to research conducted by the Financial Industry Regulatory Authority ( FINRA ), about two-thirds of Americans are unable to pass a simple test with questions on basic ideas like inflation and interest, similar to those posed by Eurobarometer.

As might be expected, the financial ignorant people and their families are severely impacted by this lack of understanding of finance, fundamental economic concepts, and even secondary math. The average American lost$ 1, 819 to personal financial errors last year, according to the most recent National Financial Educators Council ( NFEC ) report released in April. Credit card interest rates and fees, which will cost buyers$ 120 billion in 2022, are the main nets for people with poor financial education.

These errors are now more expensive as interest rates rise. According to the Consumer Financial Protection Bureau ( CFPB), Americans spend$ 17 billion a year on overdraft and non-sufficient funds ( NSF ) fees, which is another common black hole in the financial system.

Broad repercussions

It is clear the harm that monetary poverty may cause to those who experience it. The most typical scenario is a lifetime of economic hardship, struggling to make ends meet, and living paycheck to paycheck, but things can get much worse. Getting laid off or even experiencing a health crisis can quickly result in mounting debts because there are no rainy-day resources available to act as insurance in the event of unforeseen expenses. Many people in these situations experience a descent into true poverty, which frequently results in social exclusion, millennial disadvantage, and cultural immobility. A vicious cycle is thus frequently created when the next generation is denied access to a high-quality training and the chance to become financially literate for themselves.

The adult and their families are not the only ones who are impacted by the effects, though. Financial literacy properly kneecaps the democratic system and practically ensures that real growth and prosperity will always be elusive, particularly when it is this pervasive in any society.

Simply put, how are voters supposed to make an informed, logical decision at election day if they are unable to understand basic concepts like curiosity rates, customer value inflation figures, government budgets, money creation, and economic policy decisions and interventions?

In fact, a 2020 study revealed that the majority of Americans are unaware of how banks operate: “38 percent of respondents thought banks should always have the exact amount of user deposits in their reserves.” The majority of people who were familiar with finite reserve banks were unaware of its true scope.

What is to prevent any voting from being seduced by populist goals and politicians ‘ “free lunchtime” promises if the body political as a whole has little to no understanding of even the most basic principles of wealth creation and stablecoins money in general? Suggestions based on the lowest common denominator, instant gratification, and small time desire are destined to prevail in these circumstances every moment.

Citizens have no means of defense. It is not astonishing that misguided ideas like Modern Monetary Theory and Universal Basic Income are becoming more popular in this environment. Everything goes in a world where, up until recently, negative interest rates were the rule without any public opposition or, at the very least, concern.

Regarding the leaders themselves, it is obvious that they sell simple solutions to difficult problems ( populism promises win the popular vote ), but not much else about their justification is. It’s possible that political and administrative leaders are fully aware of this information gap and gladly exploit it to further their own agendas by capitalizing on the general ignorance of the populace.

But, it’s also possible that they are simply the offspring of the same educational program that denied their fellow citizens financial literacy and just lack the necessary knowledge. Simple ignorance may appear to be an overly generous explanation to the reader who is more pessimistic. There is, nevertheless, proof to back it up.

According to a 2017 Dods Political Intelligence study, British Parliamentarians are at least as ignorant about the creation of new money as the average resident:” Only 15 % of MPs were informed that existing funds is destroyed when members of the public repay money. 62 percent of respondents believed this to be false, while 23 percent said “do n’t know.” Compared to only 5 % of Labour MPs, 19 % of Conservative members appeared to have a slightly better idea, answering correctly.

Potential results

There is no reason to believe that we will be able to break this vicious cycle, presuming that little changes in the educational system and that the majority of schools still view financial literacy as a non-essential ability. Economically ignorant people who continue to support mistaken guidelines that will keep corroding the economy and society at big will be produced by schools.

Over the past few years, we have now witnessed this decay quicken. Living standards have fallen, debt, inflation, and economic problems of all kinds have gotten significantly worse, which has led to socio-political conflict. The intense political fragmentation we are witnessing throughout the West certainly results from the poorer people getting and the angrier they become.

Additionally, there is a real possibility that financial poverty will be used as another tool to advance all kinds of risky plans. For instance, when the average voter is unaware of the threat of direct monetary policy transmission, selling the concept of central bank digital currencies ( CBDCs ) and the elimination of cash is much simpler. The same is true of public investing. Security budgets may increase dramatically, and “forever war” can be funded with little resistance. Everything goes when the general public does not comprehend what a gap is, how it affects them, or what loan servicing fees mean for them. When residents do not fully understand the effects on the economy, new fees for the wealthy and for companies to “pay their good reveal” are also a contentious plan.

To wrap things up, however, there is a glimmer of hope in the advancements of the banking and cryptocurrency industries. Financial education classes are built into many of the personal finance applications, fresh trading platforms, and other contemporary tools that are frequently used by the younger generation, both directly and indirectly. They encourage aspiring beginner traders to “learn on the job” in addition to providing a wealth of knowledge and resources. It can be a double-edged sword because uninformed and unprepared people risk losing money they ca n’t afford in order to learn very expensive lessons. These losses, but, even inspire a lot of aspiring traders to do their research and learn more about fundamental finance concepts.

Numerous owners have learned about the flaws in “old income” thanks to the rise of cryptocurrency. Without a doubt, cryptocurrency is the subject of significant administrative curiosity and speculation. Most individual investors have largely chosen Cryptocurrency and its counterparts over fiat money because they are aware of how the latter is produced, how it is misused, and how unsuitable the whole economic, financial and banking system actually is.

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