American families often find themselves struggling to maintain financial stability. Many people think lack of financial knowledge is the only reason for experiencing financial hardships. But practically, financial illiteracy is one of the reasons, but it is not the only one.

You must understand the concept of financial illiteracy. It will help you to determine the potential consequences of financial stability. At the same time, it is equally important to discuss the other factors and analyze the causes. But before that, it is essential to understand how much financial illiteracy can make you suffer.

 

What is financial illiteracy?

Financial illiteracy influences people to fall into debt problems. It also accumulates unpaid bills, and impacts the funds in the bank account. You cannot manage financial problems with a lack of knowledge. So, you will be considered financially illiterate. If you want to gain financial knowledge, you have to establish a good relationship with money.

What causes financial illiteracy?

There are several reasons why people fail to gather financial knowledge. Some of them are:

• If an individual doesn’t have any interest in finances.
• If a person cannot identify the proper resources of financial knowledge.
• If a person usually counts on others to make financial decisions on behalf of him or her.
• Teenagers who haven’t yet received financial knowledge from their parents.
• When consumers are addicted to bad financial habits.

You need to apply basic financial knowledge and skills to improve your condition. You need to have a solid positive attitude towards gathering financial information.

How much is financial illiteracy responsible for financial struggle?

Financial knowledge is one of the primary ingredients to achieve financial stability. Despite that, it does not stand as the only reason for the financial struggle. A decrease in your income levels and inflation makes your budgeting troublesome. It also causes debts to rise.

In a Great British Financial Literacy Test survey, 48% of 2000 people have failed. They were asked the meaning of many financial acronyms. Likewise, 80% of them could not answer questions related to retirement. In the “FinLit” survey, 2 out of 3 respondents are found to be financially illiterate.

Financial illiteracy is quite responsible for triggering financial struggle, such as:

• Without having proper knowledge of credit, people cannot maintain a transparent credit report. It is also important for building a good credit score.
• With the lack of knowledge about credit cards, people might fall into severe credit card debt.
• Lack of financial knowledge can make consumers choose insufficient insurance coverage.
• People should know about good investment options. This way they can select the appropriate option to invest and build wealth.
• Consumers must have the proper information on several retirement plans, such as 401(k) or Roth Ira. A person cannot opt for the best retirement saving plan for his/her future.

Let us discuss the other factors responsible for financial problems.

What are the other causes of financial struggle?

There can be many factors that may lead you to struggle financially. Some of the common causes are:

1. Wage deduction or unemployment

As mentioned earlier, the lack of financial knowledge isn’t the only reason for such financial distress. There are many possibilities that can cause financial struggle, such as a sudden loss of a job. You can suddenly get fired from your job or leave it, planning to become an entrepreneur.

There can be a deduction in your wage depending on the company’s current economy. You will immediately start struggling as your budget plan now needs changes.

2. Sudden emergencies

You can go through medical emergencies which were otherwise not in your budget plan. It will affect your previous financial planning. There can be other emergencies related to education, home expenses, etc. these emergencies often compel you to opt for a loan. These loans add up to your debts and stress at the same time.

3. Divorce

In the U.S., there are many single mothers struggling with bankruptcy. Divorce is a prevalent cause of financial trouble in the U.S.A., and can cause either one or both people go through financial distress.

4. Poor debt management

Poor debt managing skills are often a major reason associated with financial stress. You will end up piling unpaid bills and paying high-interest debts. These are very often responsible for damaging your credit score.

5. Inflation

The rate at which the prices for goods and services are referred to as inflation. Inflation reduces the value of money as well the purchasing power of consumers. Wages don't increase with inflation. So the market starts becoming expensive for consumers. So your new budget plan may not be able to make room for savings.

How to overcome financial stress?

You might be looking for some advice to help you tackle financial stress. Here are some suggestions to improve your financial situation.

1. Create a proper budget plan

Planning can be of great help considering your financial circumstances. Budgeting helps in reducing unnecessary expenses and keeping a monthly record. To maintain a proper budget, start noting down your net income followed by tax deductions. Write down all expenses, no matter how small they are. This will help you to save as well.

2. Track your expenses and stop overspending

Balancing your expenses with your income is very important. Spending more than you earn will deplete all your savings. You have to control your spending habits to reduce financial stress. Habits like wasting money on unnecessary goods are expensive. These habits will never let you build your financial discipline. At the same time, it is crucial to track your expenses which will help you control your impulse.

3. Keep your emergency fund ready

Keep some money aside enough to tackle an emergency that will prevent you from taking loans. No matter how small the amount is, building this fund will reduce financial anxiety. This will also improve your saving skills.

4. Manage your debt properly

Payday loans and credit card debt are often major reasons for financial stress. It can hamper your savings as well as your credit score. It can often get tricky when you have a number of loans with high-interest rates. A payday loan consolidation may help you pay off those debts at a lower interest rate in a longer period of time. Similarly, using the balance transfer method to manage credit card bills can help you pay off these debts without making high-interest payments.

5. Build a solid savings plan

Savings and investments play an essential role in easing your financial stress. Savings assures you a promising future. Automatic contributions for savings are a great way of pushing yourself for savings. It will help you restrain yourself from spending money out of impulse. You should make a perfect plan for savings and investments. For that, you can consider talking to a financial advisor.

Conclusion

Financial illiteracy is not the only reason but one of the main reasons for financial stress. It is important to gain financial knowledge to improve your financial condition. There can be many ways to boost your financial knowledge. Gathering financial information online is one of the smartest ways to increase your knowledge, as there are heaps of information posted every day. Reading articles and blogs will also give you relevant data that you may need to improve your condition.

The second important option can be taking help from an experienced financial expert. He/She can guide you through financial hardships and help you achieve financial stability. You must review your credit report and credit score periodically to analyze your financial condition. Checking the report will help you dispute the errors found to a credit bureau. Keeping the credit report transparent and error-free will also improve your credit score. Likewise, you can overcome your financial problems with time.

About The Author: Lyle Solomon has extensive legal experience as well as in-depth knowledge and experience in consumer finance and writing. He has been a member of the California State Bar since 2003. He graduated from the University of the Pacific's McGeorge School of Law in Sacramento, California, in 1998, and currently works for the Oak View Law Group in California as a Principal Attorney.