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What are the Costs of poor Financial Literacy?

Submitted by Jaclyn Smith on Wed, 03/09/2011 - 3:24pm
March 9, 2011

Academic institutions and governmental offices regard financial literacy as crucial to societal stability as well as to corporate profitability1. The true magnitude of the impact of poor financial choices on our community is difficult to measure.

  • One widely cited study of the relationship between financial literacy and worker productivity2 (Joo and Garman, 1998) estimates that “a worker with financial problems spends 15 minutes per day dealing with personal financial matters,” resulting in an annual loss of 62.5 hours of worker productivity.
  • The Economics Center’s estimate suggests that in the Cincinnati metro area employers experience $200 million a year in avoidable costs from lost worker productivity due to a lack of financial literacy. This is based on Bureau of Labor Statistics (BLS) data indicating an average employment level of about 1,000,000 and March 2010 national employee compensation data from BLS, of about $30 per hour.
  • Recent surveys show that at least 50 percent of workers are experiencing financial stress 3 . Other types of employer-related costs associated with worker financial stress include employee absences and turnover, as well as expenses for their human resources staff.
  • A survey of American workers found that workers are stressed by their financial situation, with 88 percent carrying some form of monthly debt. Regular debt burdens reduce a household’s ability to save for emergencies, and also leave the family with less discretionary income after paying expenses and obligations4.
  • Lower income households are particularly vulnerable to the stresses and disadvantages that come with financial ignorance. As low income households also tend to be less educated, they also have less financial knowledge5. This lack of financial understanding results in low income households paying more for loans, from mortgages to credit cards.6
  • Refinance loans with prepayment penalties are 20 percent more likely and those with balloon payments are 50 percent more likely to experience a foreclosure than other loans7.
  • There are substantial costs for businesses. In particular, mortgages to less qualified borrowers, subprime loans, are more likely to lead to foreclosure and produce foreclosure related losses of nearly $600 million nationally to investors and lenders in 1999. 7

    • 1. Sealund & Associates Corporation. (2009). Whitepaper: Personal Financial Literacy = Productive Employees.

    2. Joo , So-hyun and Garman, E. Thomas. (1998). The Potential Effects of Workplace Financial Education Based on the Relationship between Personal Financial Wellness and Worker Job Productivity .

    3. PayScale.com. (February 2009). “Is the Recession Making You Sick?”

    4. Kane, Tom. (2008). “American Workers: Getting Ahead or Just Getting By?” White Paper.

    5. Collins, J. M. (2009). “Education Levels and Mortgage Application Outcomes: Evidence of Financial Literacy.” Institute for Research on Poverty Discussion Paper No. 1369-09.

    6. Fellowes, Matt. (2006). “From Poverty, Opportunity: Putting the Market to Work for Lower Income Families.” The Brookings Institution. Metropolitan Policy Program.

    7. Quercia, R., M. Stegman, and W Davis. (2007). “The impact of predatory loan terms on subprime foreclosures: The special case of prepayment penalties and balloon payments.” Housing Policy Debate. 18(2). 311-346.