Financially Illiterate

There's been a lot of talk in Washington and in the media about Americans gaining more control over their retirement funds -- think of President Bush's ideas about Social Security, for example. But is it really a good idea to let the average American make big financial decisions that affect his or her nest egg? Perhaps not.

The folks at Harris Interactive recently surveyed Americans and reported some rather astonishing results. As Mary Williams Walsh recapped in The New York Times, "About half of American adults did not know that if they kept their money at home, in cash, they were at greater risk of losing ground to inflation than if they invested it elsewhere." Yikes -- these people need to race over to our Savings Center, where we'll explain why it's so important to have short-term savings and how to get a decent return on that money. (The center features some special CD rates for Fools.)

Meanwhile, young people embarrassed themselves most in the survey, with only about half understanding the role of the stock market in the economy. The term "budget deficit" wasn't understood by most students, and mutual funds were also apparently mysterious. (Point teens and clever pre-teens you know to our Teens and Their Money area, which will teach them how to make, save, and spend money.)

Ms. Walsh cited even more troubling information: The Employee Benefits Research Institute found that "fewer than 20% of workers thought that Social Security would be their primary source of income in retirement, even though Social Security is currently the primary income source for more than two-thirds of retirees." (Learn more about this critical topic in "7 Social Security Myths.") Many Americans don't understand the difference between stocks and bonds. Many are not participating in 401(k) plans at work, even when employers match contributions to some degree.

People this uninformed may make tragic financial errors -- perhaps investing in a penny stock such as Center Star Gold Mines just because they think a gold mine will make them rich. (Be a penny-stock millionaire!) They may invest in shares of computer maker Gateway (NYSE: GTW  ) instead of Dell (Nasdaq: DELL  ) simply because Dell's share price is much higher in absolute terms, not appreciating that while Gateway is struggling, Dell is firing on all cylinders with a stock price considered attractive by many experts.

Is there any good news in all this? Yes! First, the average American is becoming more financially literate -- gradually. More financial lessons are being taught in schools. The trend is positive, though the situation isn't improving as rapidly as it might.

Next, if you're reading this article at The Motley Fool, chances are that you're not among the woefully uninformed. But you may still be under-informed. Do you know what the limitations of a P/E ratio are? Do you know what ETFs are? And do you really appreciate the power of dividends? Fortunately, you're only a click or two away from all that and more. Pop over to our Fool's School to learn about all kinds of investing topics. Consider trying one of our online how-to guides as well -- they're like online seminars, and teach you about critical topics such as "How to Read Financial Statements" and "How to Know When to Buy and Sell." Some are free, some cost a little, and all come with a money-back guarantee.

You might also take advantage of a free trial of our Rule Your Retirement newsletter. It's full of valuable tips as well as inspiration and motivation. And if the thought of taking control of something as critical as retirement on your own is daunting, seek the help of a financial advisor. Choose carefully, though (we offer some tips), and perhaps try our well-regarded TMF Money Advisor service.

LongtimeFoolcontributor Selena Maranjian does not own shares of any companies mentioned in this article.