Certified Financial Planner Cindy Couyoumjian Looks at 3 Ways Financial Illiteracy is Costing People
Financial illiteracy isn’t just a problem across the U.S.: according to InvestmentNews.com, it’s a full-blown epic failure. How dire is the absence of fundamental personal money management awareness? A joint study carried out by researchers at George Washington University and the University of Pennsylvania revealed that only 30 percent of American adults were able to correctly answer three basic financial questions about risk diversification, interest compounding and inflation.
“People spend a significant, if not in some cases excessive amount of time learning all there is to know about their favorite sports teams, their favorite TV shows, their favorite bands and singers, or whatever else interests them and makes their lives more interesting and enjoyable,” commented Cindy Couyoumjian, a Certified Financial Planner (CFP) who is also the Founder and CEO of Cinergy Financial, an investment firm based in Tustin, California. “However, when it comes to basic financial concepts that directly impact their quality of life and standard of living, they have many more questions than answers. If we do not close this knowledge gap, people will continue to be exploited and make mistakes that cost them and their families dearly.”
While there are countless ways that financial illiteracy is costing people big time, there are three common pitfalls that can take years or decades for people to climb out from; if ever: devastating debt, investment ignorance, and retirement regrets.
1. Devastating Debt
Despite some proclamations to the contrary, debt is not inherently negative. In fact, when used correctly, debt can be productive and profitable. For example, instead of paying excessively high rent and a small fortune in commuting costs, individuals and families can purchase a home closer to work. Or, instead of trying — and possibly failing — to save $10,000 to enroll in a course that would significantly boost their lifetime earning potential, people can get a student loan and generate a remarkable return on their investment.
However, what gets many people in trouble — including folks with plenty of education and experience — is when they no longer use debt to solve urgent problems (e.g. fix a leaky roof) or achieve wise goals (e.g. purchase a home when it is feasible and intelligent to do so). Instead, they put themselves at the mercy of an imposing debt mountain that keeps growing and growing.
Cindy Couyoumjian explains the key is to create a robust and realistic budget and integrate it with a sound financial plan that aligns decisions with clear and appropriate earning, saving, investing and spending objectives. This doesn’t necessarily mean that debt disappears. But what it does mean is that people are in control of debt, rather than being controlled by debt.
2. Investment Ignorance
“I’ll learn about investing when I have money to invest” is a self-fulfilling double-bind: because most people who wait until they have what they deem to be about that of a nest egg to get into the investment race, never actually reach the starting line.
Adds Cindy Couyoumjian: “Unless someone is deeply in debt and either being harassed by creditors or is contemplating a bankruptcy filing, the right time to start thinking about investing is not next year, next month, next week, or even tomorrow. It’s right now! It’s a total myth that you need thousands of dollars on hand to be an investor. Even putting aside $25 a week is worthwhile, because it puts money to work and at the same time promotes saving and discipline. Of course, with, there is a big difference between wise investing and reckless wishful thinking. The former involves working with a qualified and experienced professional who will create an investment plan that is tailored to the individual’s risk tolerances and investment goals. The latter is basically flushing money down the toilet. There may be some short-term wins and gains, but it never lasts. The story always ends badly.”
3. Retirement Regrets
While the above-noted consequences of financial illiteracy are certainly distressing, in terms of sheer terror and trauma, they pale in comparison to retirement regrets. A shocking number of seniors believe — or, to put things more fairly, have been led to believe — that their workplace pension and Social Security check will be enough to cover them during retirement. Unfortunately, this is rarely the case; especially considering that out-of-pocket healthcare costs typically skyrocket later in life.
Cindy Couyoumjian concludes by stating: “While it is obviously ideal for people to start learning about financial planning and management do’s and don’ts early in life, it is never too late for people to get the basics. No, they probably don’t have enough financial runway ahead to significantly grow their savings or net worth. But they can learn how to protect their capital and assets and avoid being victimized by scams carried out by criminals, as well financial abuses perpetrated by family members or caregivers.”