The Importance of Financial Literacy
The current pandemic is a generational event that has caused many to reflect on their financial situation and look closely at their financial habits. According to a recent poll conducted by the National Endowment for Financial Education (NEFE), 88% of Americans say the COVID-19 crisis is causing stress in their personal finances. These current obstacles create an opportunity for all of us to improve our financial literacy. The greatest generation of savers this country has ever seen was a product of the great depression. This is no coincidence. The great depression helped shape that generation’s perspective on money. It created a desire for financial security. It created a desire for financial literacy.
Financial literacy is critical because it equips us with the knowledge and skills we need to manage money effectively. It’s one thing that will impact almost every aspect of your life, yet many people do not have the knowledge they should and even those who do often don’t share it with their children. So, what is financial literacy and what does it entail?
Financial literacy is the ability to make informed judgements and effective decisions regarding the use and management of money. The pillars of financially literacy include:
- Budgeting– Creating a budget and living within your means is one of the most basic aspects of staying on top of your finances. Budgeting is planning out how one’s monthly resources gets allocated. Effective budgeting promotes accountability and increases one’s awareness of spending patterns, thus minimizing excessive or unnecessary spending.
- Saving– Saving is one of the most important aspects of maintaining a healthy financial situation. Most of the lofty goals Americans have in life involve big financial purchases. Buying a house, having a family, and traveling are just a few examples of common goals in life, but accomplishing these things is much more difficult without saving.
- Investing– Successful investing requires learning how to make your resources work for you to achieve your financial goals. To invest effectively, you must understand the ways to invest (e.g., stocks, bonds commodities), the inherent risk/reward and the importance of diversification.
- Understanding Credit /Managing Debt– Your credit score is your financial shadow. It follows you around throughout life like a six week old puppy and can haunt or help you depending on your history. Effectively managing debt is as crucial to establishing a good credit score as is understanding the difference between good and bad debt.
- Paying bills– Although seemingly rudimentary, it’s important to have a routine established to pay your bills and pay them on time.
Ideally financial principles are modeled in the home, learned in the classroom and practiced throughout life. Even though financial literacy is essential to us all, only 17 states require high school students to take a course on financial literacy. According to a survey by MyBankTracker, 54% of Americans spend as much or more time planning their vacations as they do on their finances. I get it. Vacations are fun and balancing your checkbook is not.
Some sobering statistics:
- Over 50% of Americans live paycheck to paycheck (MagnifyMoney)
- 58% of Americans have less than $1,000 saved (Go Banking Rates)
- 20% of Americans don’t save any of their annual income (CNBC, Bankrate)
- Americans hold a total of 1 Trillion in credit card debt with an average interest rate of 17.89% for new cards and 14.52% on existing cards (Wallet hub)
Financial Literacy isn’t something that happens overnight. It starts with sparking an interest. It could be that memorable teacher, a game of monopoly, that gift of a share of Disney stock or that generational event. Lifelong learning, building upon a foundation and expanding our knowledge base are fundamental to improving our overall financial literacy. To that end, we will be publishing a series of more in depth articles on some of the related topics geared toward educating the younger generation.