One of the biggest concerns for aging Americans is whether they will have the financial means necessary to live comfortably after retirement. In some cases, a lack of financial literacy can contribute to the problem. New studies have shown financial literacy is more important than first thought.
Researchers who analyzed a decade’s worth of data on the financial literacy of older people associated financial literacy – as well as confidence in financial literacy – with a decreased risk of Alzheimer’s dementia and slower cognitive decline.
The research also found that those with lower financial literacy, coupled with low health literacy (the ability to make positive health decisions and follow directions for treatment), experienced poorer overall decision making, higher susceptibility to scams and lower psychological well-being. The studies found no differences between men and women.
“These findings suggest that efforts to mitigate declining financial and health literacy may promote independence and wellbeing in old age,” according to the study, which was conducted by researchers from the Rush University Medical Center and published by the FINRA Investor Education Foundation.
What Is Financial Literacy?
Financial literacy involves understanding and effectively using a variety of financial skills. This includes personal financial management, budgeting and investing. Strong financial literacy helps people achieve goals in life, from saving for retirement to responsibly managing debt.
The need for financial literacy has grown as finances become more complex. Not that long ago, most Americans would make purchases using cash. Cash management and savings were the two most important aspects of finance for most people. Now, with credit cards, loans, self-directed investments and other financial tools, there’s a larger need for a more detailed understanding.
The Connection Between Financial Literacy and Cognitive Health
In the Rush University study, researchers analyzed data from 1,000 people who participated in the Rush Memory and Aging Project. There are two main findings in the study:
- Losing financial literacy can serve as a sign of the onset of cognitive health issues
- Maintaining financial literacy – and feeling confident about it – can help maintain cognitive health
Participants entered the study free of dementia. They checked in annually and reported if they had an Alzheimer’s dementia diagnosis and took a test that assessed cognitive health. Researchers found that, on average, older people living in community settings experienced about a 1% loss every year in financial literacy.
Those who maintained financial literacy also maintained better decision-making skills and a healthier psychological outlook. The researchers wrote that “declining financial and health literacy may represent a novel harbinger of adverse outcomes, and regular monitoring of financial and health literacy could serve as a useful tool to identify individuals at risk of impending impairment in decision making and other important aspects of functioning.”
Confidence in Your Financial Abilities
An interesting aspect of the Rush University Medical Center studies is that they also monitored how confidence in financial literacy impacted cognitive health. The results were striking. While those with higher financial literacy had better cognitive health, having confidence in financial literacy also reduced the risk of Alzheimer’s.
For just one standard deviation (SD) from the average in financial literacy, the risk of a person developing Alzheimer’s dementia reduced by over 40%. For every SD in increased financial literacy confidence, the risk of developing Alzheimer’s dementia dropped by 20%.
The researchers wrote that the findings indicate “older persons with higher confidence tend to have better cognitive health. Further, older persons who are under confident are more likely to develop Alzheimer’s dementia and have faster cognitive decline.”
The research gives older people, as well as their loved ones, another way to measure the possibility of onset of dementia. They also deliver a clear message: take classes, find a mentor and read up on finances! Financial literacy may have a greater impact on your future than you know.