April is Financial Literacy Month. It’s also National Canine Fitness, National Fresh Celery, and International Guitar Month (among so many other designations), but let’s not get distracted.
So, what is financial literacy? In 2008, the President's Advisory Council on Financial Literacy defined financial literacy as “the ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial well-being.” A lot of skills fall into that category, including budgeting, saving, and investing.
One aspect of financial literacy that is becoming more important is the way memory and aging affect financial decision making. Prior to the pandemic, the FINRA Investor Education Foundation and the Rush Memory and Aging Project explored this issue from several perspectives and discovered:
- Confidence in financial literacy appears to be good for brain health. One study found “…confidence in financial literacy is associated with a decreased risk of Alzheimer’s dementia and slower decline in cognition, above and beyond objectively measured financial literacy…While it is not completely clear why this relationship exists, it could be that confident people are motivated to engage with the world and actively seek to acquire new information.”
- Overconfidence about financial knowledge may lead to risky financial behaviors. Older Americans are responsible for a significant portion of our country’s wealth. Common wisdom holds that risk tolerance declines with age. However, a separate study found this was not always the case. In particular, overconfident people – those who believed their financial knowledge was higher than it actually was – reported being more tolerant of risk. There was no evidence overconfidence made them more susceptible to scams or fraud.
- Loneliness in tandem with low cognition can lead to poor decisions. A third study found loneliness, on its own, generally doesn’t appear to result in poorer decision making. However, loneliness in older people with low cognition may result in poor financial (and healthcare) decisions. The study accounted for differences in depressive symptoms, social network size, medical conditions, and income.
Financial decisions often become more complex as we get older. From retirement plans to estate plans, and from the cost of prescription drug benefits to the expense of chronic disease management, older Americans are asked to weigh outcomes and make financial (and healthcare) decisions. Being financial literate can help – and so can understanding the factors that may affect decision making as we age. Give us a call if we can help you!
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The information provided for informational purposes only, and does not constitute an offer, solicitation, or recommendation to sell or an offer to buy securities, investment products or investment advisory services. All information, views, opinions, and estimates are subject to change or correction without notice. Nothing contained herein constitutes financial, legal, tax, or other advice. These opinions may not fit to your financial status, risk, and return preferences.