Microsoft Word Ed Horwitz Post Dissertation Fina docx

 Negative Effects of Low Financial Literacy  
One of the more widespread effects influenced by low financial literacy levels involves 
the lack of planning and saving that occurs earlier in life. Low levels of financial literacy have 
been associated with decreased levels of retirement savings (Lusardi, 1999, 2003). The effects of 
low financial literacy are manifest within many older Americans, who report not being at all 
confident about their retirement preparedness, with only one in three adults in their 50s having 
developed any kind of retirement saving plan (Lusardi, 1999, 2003). This represents a challenge 
difficult to overcome, because starting to plan and save for retirement at age 50 requires 2.6 
times more monthly savings to generate the same amount in retirement than starting to save at 
age 30 ($197.12 per month at age 30, versus $513.20 per month at age 50 to accumulate 
$100,000 at age 65, assuming a 5% rate of return).  
A commonly used standard for estimating income needs in retirement is to plan on 
replacing 70% of preretirement income. The reality is that many low- to middle-income 

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households simply will not have enough disposable income to set aside each month to save for 
the needed amount in retirement, especially if they begin at age 50 or later. As a result, these 
households will become heavily dependent on government welfare and social security programs 
to provide for their income needs in retirement. The importance of starting to plan earlier in life 
is clear, and there can reach a point where time works against an individual’s ability and 
resources to adequately prepare for retirement. Therefore, the need for education and awareness 
on the importance of planning and saving earlier in life becomes a critical element for financial 
education at all ages.     
Low levels of financial literacy have also been associated with a variety of poor financial 
management outcomes. The inability to grasp basic financial concepts was found to be 
associated with the lack of accumulated wealth. Those with lower levels of financial literacy 
accumulated less wealth at retirement than those with higher levels of financial literacy (Lusardi 
& Mitchell, 2007b). Financial literacy affects financial decision making, whereby those with low 
literacy were less likely to invest in stocks, and were more likely to exhibit poor borrowing 
behavior (Yoong, 2010; van Rooij et al., 2011).  
Effects of financial illiteracy can be seen in the negative behaviors related to poor credit 
management (Lusardi, 2008). Poor borrowing behavior, in the form of expensive credit use of 
payday loans, tax refund loans, pawn shop loans, and credit at rent-to-own stores, is associated 
with low levels of financial literacy (Seay & Robb, 2013; Lim, DeJohn, & Murray, 2012; Skiba, 
Bos, & Carter, 2012; Swagler & Wheeler, 1989). Low levels of financial literacy have resulted in 
high levels of consumer debt, low savings rates, and record levels of bankruptcies (Fox, 
Bartholomae, & Lee, 2005). 

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Low levels of financial literacy have also been associated with lack of stock market 
participation. A broad-based assessment of financial literacy among older Americans utilizing 
the RAND American Life Panel found that ignorance of stock market investment knowledge 
significantly reduced the likelihood of owning stocks (Yoong, 2010). Stock ownership and 
proper investment diversification help to provide reduced risk and needed inflation protection for 
longer term savings (van Rooij et al., 2011). In addition, the financial service products today, 
both in number of choices and in design features, represent an added level of complexity to 
understand and navigate (Lusardi, 2008). Households that lack basic financial knowledge tend to 
make repeated poor financial decisions and suffer long-term wealth accumulation effects 
(Yoong, 2010).  
The effects of low levels of financial literacy can also manifest in financial stress 
extending beyond an individual’s personal life (Joo & Garman, 1998). At work, employees 
routinely experience stress from poor financial behaviors in their personal lives, which 
negatively impacts their productivity at work (Garman, Leech, & Grable, 1996). These negative 
personal financial effects are seen throughout the workplace, and have negative financial 
consequences for employers as well. Employees use work-time to contact creditors, seek out 
additional credit sources, and talk with co-workers and their supervisors about financial 
problems (Garman, 1997). The associated costs incurred by employers from these negative 
work-time behaviors include lower productivity, increased absenteeism, frequent tardiness, 
accidents from increased risk taking, increased health care costs for financial stress-related 
illnesses, employee theft, time lost on the job dealing with personal finance matters, and 
increased employee turnover (Garman, 1997).  

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