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The high cost of financial illiteracy


The July 5 issue of the New Yorker has a short but excellent essay by James Surowiecki on the high cost of financial illiteracy. Most Americans, Surowiecki says, can’t explain what compound interest is. The less people know, the more they get into financial trouble. Over a lifetime, Surowiecki says, the difference between knowing something about your finances and knowing nothing can add up to hundreds of thousands of dollars. Financial illiteracy also makes people much more susceptible to financial predation, which is raging out of control in our era.

We know that the poor pay more for pretty much everything than do people who are more well off. That, no doubt, is a combination of financial weakness and financial ignorance.

An important point that I have not heard made, though, is that frugality and financial ignorance are not compatible. Frugality requires not merely financial discipline. Frugality also requires laser sharp, Ph.D.-level financial sophistication. Frugality is more than not buying what we don’t need. Frugality also is about paying no more than absolutely necessary for the things we do need — a home, transportation, food, etc.

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