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Most surveys that measure financial literacy focus on teenagers, and the results are always grim.

In research by the nonprofit Jump$tart Coalition, which promotes personal finance education, the average high school student correctly answered just 48.3% of the questions covering money basics in 2008. That was down from 57.3% a decade earlier, but even that score was hardly distinguishing -- anything less than 60% counts as an F.

A 2005 poll by Harris Interactive for the National Council on Economic Education showed that adults aren't that much savvier.

While teens on average scored a 53 (another F) on a quiz testing knowledge of basic economic and personal-finance concepts, the grownups' average score was just 70 (a C).

In addition:

  • More than one-quarter of adults failed the quiz.
  • Women were far more likely to fail than men; 42% scored an F, compared with 15% of men.
  • Men were much more likely than women to get an A or B on the test (51% compared with 17%).

If it makes you female readers feel any better, there are also lots of studies out there showing that we're better investors than men -- once we get around to investing.

Liz Weston

Liz Weston

But the fact remains that there's a heck of a lot of financial ignorance going around, and financial ignorance is costly. Women may have even more to lose than men, since we tend to earn less, are more likely to have interrupted careers and live longer, which means we have more time to suffer from our mistakes.

My email box and Facebook page bear testimony to the daily cost of financial illiteracy: men and women who are overwhelmed by debt or have no savings, or don't invest for retirement, or fall for investment scams, or think we can drive gas prices down by not buying fuel for a day.

Understanding economics and personal finance doesn't mean you won't make mistakes or face financial disasters. But you can lessen the odds and repair the damage faster if you know the rules of the game.

Here are the economic and financial concepts I wish everybody knew:

1. The difference between needs and wants

Our actual needs are pretty limited: food, shelter, clothing, companionship. Just about everything else is a "want," and our wants are essentially endless. Because our resources are limited (see "scarcity," below), we have to make choices about which wants to fulfill.

Also, the way we fulfill our needs involves a lot of choice. Shelter, for example, can be a bed at a mission for the homeless or a $125 million mansion. Our food choices offer a similar range, from beans and tap water consumed at home to steak and Dom Perignon at an exclusive restaurant.

I've discovered many people believe they have to spend money in certain ways or in certain amounts, when in reality their spending is a choice -- or is at least based on choices they made earlier. If you're facing a monster mortgage payment, for example, it's because you chose to buy that home and selected that particular mortgage.

Taking responsibility for our choices can be scary, but it should also be empowering. After all, if you have choices, you're not just a victim of circumstance.

2. Scarcity makes your choices for you

It's lovely to believe in a world of endless abundance, but the reality is that at any given point in time, our resources have limits. Whether it's oil in the ground, our time here on Earth or the cash in our pockets, there's only so much available to be spent.

People who ignore this reality are the ones who run out of paycheck before they run out of month, or who extend their unsustainable spending by relying on credit cards, home equity loans and other reckless borrowing. Their refusal to make the sometimes-hard choices needed to responsibly manage money means that they will have even fewer choices in the future. The money they spend on stuff and on interest can't be invested in other goals, like retirement, so odds are pretty good they'll wind up old and broke.

3. The pointlessness of the hedonic treadmill

This isn't the latest workout device at your gym. The hedonic treadmill means that we quickly adjust to improved circumstances. A raise at work or a new possession may make us happy for a little while, but we soon take our situation for granted. Our expectations continue to rise: If only I could get another raise, or a better car, or a bigger house. Should those expectations be satisfied, again we'd adjust and quickly want more.

This has a lot of implications for personal finance and the economy, but here's something to consider: Maybe we need to look beyond our wallets for true happiness.

4. Every money decision has a cost of its own

"Opportunity cost," very simply, means what we give up to get something else. In every choice, there's an opportunity cost. If you decide to go to college, for example, you're giving up the income you could have earned by working full-time during those years plus whatever you could have purchased with the money used to attend school. You also may take on loans to pay for school, which will have to be paid back with future income that could have gone for other purposes.