Financial literacy is important for economic welfare – teaching people how to manage money, to budget and invest in responsible ways. The benefits of financial literacy stand well established. However, if there is knowledge, does that necessarily translate into empowerment? There are costs to financial literacy, for the individual and for society – the number of which I shall clarify in the course of the paper.
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Information Overload and Paralyzing Choices
Learning about finances is an unintended consequence of informational overload. A new financial literate typically tackles a variety of concepts, most of which come in two broad categories: either knowledge or choice overload. Compound interest, investment diversification, taxes, and retirement accounts often seem like an endless list of abstractions that leave one unable to make financial decisions. Research at Harvard Business School also states that too many financial options reduce the chances of proactive financial choices Psychological Stress and Anxiety
Knowing the risks involved in poor financial decisions and the rewards that accompany better financial decisions is one thing that may cause a lot of stress, especially to those with limited resources. After people become financially literate, they realize their finances are precarious. Hence, anxiety increases in planning finances due to the high probability of financial crashes associated with such precarious financial situations. The Consumer Financial Protection Bureau (CFPB) reported that the financially literate know what may go wrong better than do other people. This knowledge is perhaps a good thing about planning but also lays on the shoulders of persons living paycheck to paycheck relentless pressure over mental strain due to not making the best possible financial choices. This is unrealistic given economic uncertainties .
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Inequality and Limited Access to Resources
Financial education does not solve the structural barriers that prevent most people from becoming economically secure. While some would become responsible stewards of their financial lives, an unlucky few will not due to lack of access to investments, available loans at reasonable interest rates, and retirement plans. Financial literacy programs focus on personal behavior but do not address systemic ones, such as stagnant wages and predatory lending practices. A report from the Brookings Institution indicates that while financial education is beneficial, it cannot take over for policy reforms necessary to address issues concerning income inequality.
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False and Risky Investments
Increased financial knowledge can sometimes breed overconfidence in individuals toward their ability to navigate their way through complex financial products and markets. Bad behavior may then follow in the guise of taking speculative investments or high-leverage trading. Such an investment or trading strategy may be catastrophic in the long run. In fact, The Journal of Financial Economics shows that those with high levels of financial literacy have a higher tendency to engage in high-risk investments. If they are inexperienced in managing risk, the result may, in the end, lead to being counterproductive.
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Emphasis on Indivnsibility
Financial literacy lessons teach self-sufficiency more often than not, and to a large degree, that which is weak here is of a personal nature. An emphasis on individual responsibility may also shift the spotlight elsewhere from systemic reforms that might have to take place in order to open access to housing, health care, and education to more people. For example, NPR reveals that overstressing personal finance education sometimes lets institutions off the hook for creating fairer financial systems, leaving the task to individual persons to navigate increasingly complex economies.
Conclusion: Balanced Apprancial Empowerment
Clearly, financial literacy is an important value, yet it has limitations. Access to resources and appropriate support systems are complementary to attaining true empowerment, along with financial literacy. Noticing the cost and the psychological effect of financial literacy on people may assist educators and policymakers in reaching an optimal balance between individual empowerment and structural change. Financial literacy empowers an individual; however, if these benefits cannot be within the reach of many, far-reaching reforms are inevitable.
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