Finance Literate – Since April is Financial Literacy Month, you may be starting to see a sprinkling of references to financial education all over the internet.
What is the definition of financial literacy? This means understanding how to earn, spend, save, manage and invest. It also means understanding how the economy works.
Finance Literate
If you’re like me, you get really excited about financial literacy and the possibilities it can create for all of us.
Ways To Improve Your Financial Literacy
Having said that, I fully recognize that many will not share my excitement in this area. Most personal finance or financial literacy articles will go directly into how to budget, the benefits of saving and the impact of interest rates. At that point, the majority of individuals lose interest (pun intended) and move on to something else.
In an effort to keep your attention, let’s spend some time looking at the “why” of financial literacy, not just the “how.”
While this topic may not be as exciting to you as it is to me, hopefully we can at least agree that money can have a significant impact on our everyday lives. My personal belief is that money does not necessarily buy happiness; it’s not just about buying that brand new car or latest gadget. However, money can allow a person to have more flexibility, reduce stress and improve relationships.
Living beyond our means can lead to bankruptcy, divorce and massive stress. In addition, the burden of student loan debt can keep first-time homebuyers out of the market, thus derailing the economy.
Financial Literacy Inventory
Meanwhile, living with minimal debt and a savings cushion can give you the peace of mind and security of being financially free. That’s why financial literacy isn’t just about getting better with money to buy more stuff—it’s about getting better with money to improve many different aspects of life.
As you can see, financial literacy is important at all ages. And teaching these concepts to children can instill lasting habits: A study by Cambridge University researchers (PDF) showed that behavior around money forms in children as early as age 7. If you happen to be over 7 (shout out to all the loyal readers who aren’t), it’s never too late to learn.
Let’s face it, there is a lot of conflicting information out there about personal finance. But the better educated you are about finances, the better decisions you will make. The essence of personal finance is simple:
It can be difficult to go out and make a higher income if you are barely able to scrape by on your current salary. Even with a higher income, paying off debt slowly takes a lot of discipline when spending beyond our means is a constant temptation. Finally, investing can be confusing with so many options in the market. I know it can be challenging depending on income level, amount of debt or other life situations that come up. We are all on a different path in our financial journeys, hence the name
Why Financial Literacy Is So Important
Not sure where to start? Here are three core financial literacy principles that can help improve anyone’s personal financial situation.
You will talk about budget!” Yes, there’s a reason almost every discussion about financial literacy focuses on budgeting or tracking your spending. If you don’t know where your money is going, how can you make improvements to your financial situation? Budgeting is where you plan your expenses ahead of time.
For those who may not want to budget, simply tracking your expenses after the money is spent can give you a snapshot of where your money is going. It’s amazing how those random $10 or $20 purchases can add up if left unchecked.
Some of you may already be on a tight budget; others might cut out unnecessary expenses and use that money to pay off debt, build up savings or invest. Below are some resources from the Federal Reserve if you want to get started.
The Importance Of Teaching Financial Literacy
Now that you’re budgeting or tracking your expenses, hopefully you can find a small cushion to save an emergency fund of $1,000 to $2,000. The Federal Reserve issued a report on the economic well-being of American households indicating that 40 percent of Americans could not cover an emergency expense of $400 without selling or borrowing something.
Establishing an emergency fund is a critical step to help with the unexpected costs that always seem to pop up. A flat tire, leaking toilet or unexpected medical expenses could be right around the corner. An emergency fund can greatly reduce the stress of these unexpected situations. Ideally, you’ll want to work your way up to having three to six months of emergency savings to protect yourself or your family in the event of a job loss, significant medical event, or other large and unexpected expense.
Last year I wrote a post about the power of compound interest. Compound interest is known as the “eighth wonder of the world” because investing even a few hundred dollars a month in your 20s can make you a millionaire by the time you retire. On the other hand, high interest loans can cripple a person for years. While there is a time and place for debt, not having a plan to get out of high-interest debt can lead to financial turmoil.
I remember a point in my life where the basics of interest rates were very confusing. The difference between a 3 percent interest rate on a money market account versus a 3 percent interest rate on a car loan was not clear. Interest rate percentages are used interchangeably and, at least to me, it wasn’t clear the positive or negative effect interest rates had on an investment or debt.
Financial Literacy In Canada
According to a working paper from the National Bureau of Economic Research, less than one-third of young adults have basic knowledge of interest rates, inflation and risk diversification. Financial literacy can help you understand these topics so you can make better financial decisions.
Personal finance is as much about behavior as it is about the numbers. Having a strong understanding of financial literacy will allow you to make better financial decisions that can hopefully improve your daily life. At the macro level, financial literacy can result in stronger family balance sheets, leading to a stronger overall economy (PDF).
Although the concepts of personal finance are simple, research shows that there is a long way to go in spreading financial literacy. Take time this April to educate yourself or a friend on personal finance-related topics. The St. Louis Fed’s economic education team has a variety of resources that can assist you or someone else on the journey to becoming more financially literate.
Mark Catanzaro Mark Catanzaro is a senior manager in the St. Louis Fed’s Oversight and Regulation Division. His academic background includes economics and finance.
Financial Literacy Resources
This blog explains everyday economics, consumer topics and the Fed. It also spotlights the people and programs that make the St. Louis Fed central to America’s economy. Opinions expressed are not necessarily those of the St Louis Fed or Federal Reserve System. Being financially literate in today’s economic climate is more important than ever. Understanding finances can help you make better money management decisions, budget your money properly, save enough for college, and be financially prepared for retirement. Although it may sound scary, financial literacy starts with a budget. Today, only one-third of Americans have a budget that they actively use when making financial decisions, even though 75% of Americans believe you should have a budget.
With more of the burden placed on consumers to make educated decisions about things they may have little knowledge of, it’s important to properly educate yourself, regardless of your age. Here are some reasons why financial literacy is so important today:
While the implementation of a financial literacy curriculum in schools is a positive trend towards financial literacy, we all need to take a long hard look at our financial health and see if we need a refresher course in financial literacy.
This content has been developed from sources believed to provide accurate information. The information provided is not written or intended as tax or legal advice and should not be relied upon for purposes of avoiding any federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal advisor. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not guarantee a profit or protect against loss in falling markets. This material has been developed and produced by Advisor Websites to provide information on a subject that may be of interest. Copyright 2014-2019 Advisor Websites. Financial literacy is the ability to understand and effectively use various financial skills, including personal financial management, budgeting and investing. The meaning of financial literacy is the foundation of your relationship with money, and it is a lifelong journey of learning. The earlier you start, the better off
Personal Financial Literacy (2nd Edition): Madura, Jeff, Casey, Michael, Roberts, Sherry: 9780132116602: Books
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