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Home Financial Literacy Phyllis Shallman – The Danger of Overestimating Your Financial Literacy

Phyllis Shallman – The Danger of Overestimating Your Financial Literacy

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Have you overestimated your financial literacy?

It’s a precarious position—few things are more dangerous than being overconfident AND wrong. It’s a direct path to acting rashly and making big mistakes.

And when it comes to money, those mistakes can be costly.

This isn’t speculation—it’s a scientifically studied phenomenon called the Dunning-Kruger effect. Put simply, it’s the tendency for unskilled people to grossly overestimate their own competence. The lower the skill level, the more likely they are to overestimate themselves.

And that plays out in personal finance time and time again.

Think about that family member with yet another hair-brained business idea. Or the NFT-slinging college student who’s certain that one of the .JPGs on his computer will be worth millions someday.

It’s the same pattern—you learn a factoid about money. “Compound Interest makes your money grow.” “Real estate can be lucrative.” “You need to start saving ASAP.”

You take that information and, instead of using it as a foundation to do more research, you use it as ammunition. Now you’re an expert! And experts don’t need to read or learn—they already know everything.

From there, it’s a slippery slope into dangerous territory.

Next thing you know, you’re swept up in businesses you don’t understand, or handing your money to “gurus” who promise get-rich-quick schemes.

It’s not always so dramatic, of course. Overestimating your financial literacy can manifest in more subtle ways—like not bothering to comparison shop for a mortgage because you’re confident you already know all there is to know about home loans.

But the end result is always the same—you make mistakes, and those mistakes cost you money.

So, how can you avoid falling into the trap of overconfidence?

The first step is to acknowledge that it’s a trap. Be aware of the Dunning-Kruger effect and its impact on your personal finances.

The second step is to commit to lifelong learning. Read books and articles, listen to podcasts, meet with a professional—whatever it takes to continuously expand your knowledge.

And finally, be humble. Recognize that there’s always more to learn, even if you’re already pretty savvy when it comes to money.

If you can do those things, you’ll be on your way to financial success. And that’s something you can feel confident about.

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