Is Ignorance Really Bliss?

December 16, 2021
Avril Liljekvist

When it comes to the news cycle and the concepts of 'doomscrolling' it's easy to argue that remaining in the dark about what's going on in the world can actually contribute positively to your mental health. But ignorance about financial matters generally leads to negative outcomes for individuals and families across a wide range of areas.

Debt and Credit

Research undertaken in Australia showed that there appears to be a relationship between low financial literacy levels and the number of consequences of debt default experienced. Lower financial literacy levels were also associated with lower social and economic capital, and younger people and women reported lower financial literacy levels. Research conducted in the United States indicates that financially literate individuals manage debt and credit better, and are more active about seeking better deals.

A lack of understanding about the way in which debt and credit work, and the power of the individual consumer to renegotiate, refinance or pay down debt effectively can create additional problems for individuals already experiencing financial stress. Making sure that we have a solid understanding of the way in which these tools work can be essential to using them effectively.

Superannuation and Investment

While superannuation funds give members the ability to choose the way in which their super is invested, financial literacy is significantly associated with whether people decide to make that investment choice. A higher level of financial literacy was also associated with the choice to seek expert advice.

This tells us that when people don't have a good understanding of how investments, including superannuation, work, they tend not to actively participate, leaving their super in the passive default option, and not making additional contributions on top of the superannuation guarantee. In the long term, this is likely to have a direct impact on the performance of their super, and their situation going into retirement. And worse, they're not seeking out expert advice to help them overcome that financial literacy gap.

Democracy and Political Participation

At the end of the day, our political participation is also affected by our understanding of economics. When the Federal Budget is handed down, experts trawl through it to determine what the outcomes will be, and then the media puts different perspectives across according to varying agendas. The ability to look beyond the 'party line' and consider the realities of proposed budgetary actions is essential to discovering the truth about how we are going to be affected by these decisions.

If we don't understand how franking credits work, how do we vote effectively in our own interests when the two main political parties have opposing policies on what to do with them? If we don't understand how marginal tax rates work, how do we ensure that we're voting for election promises that work for us, and our loved ones?

Research conducted in the United Kingdom identified a lack of financial literacy among voters as a 'threat to democracy' because the inability of people to engage in discussion about economic policies hampered their engagement with the political process. Studies have been conducted about the way in which financial literacy affects electoral participation, political orientation and even immigration. It is clear that increasing our financial literacy has a direct impact on how effective we are in engaging with the political process across a range of topics beyond just those directly connected to our own finances.

Ignorance Is Just Too Expensive

If we want to be good citizens who can advocate for our own, and others' wellbeing, and if we want to avoid negative financial outcomes, or even just make sure that we have the opportunity for better outcomes, we need to become financially literate. In a world in which our economic decisions can affect the quality of life for not just ourselves but for everyone on the planet, surely we have the responsibility to educate ourselves and make the best decisions we can.

* The information provided in this article is general information only and does not take into account your objectives, financial situation or needs. Before making a financial decision, please assess the appropriateness of the information to your individual circumstances and consider seeking professional advice.

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