Why Is Financial Literacy So Important?
According to 1,500 Americans in a survey conducted by the National Financial Educator Council in 2018, they lost $1,230 on average because they didn't have a proper understanding of household finances. That's around the same amount you'd pay for the monthly mortgage of an average-sized home. Here's another financial fact: the collective debt of Americans has exceeded $4 trillion, the highest it has ever been. This is according to LendingTree, an online lender of personal loans, and the Federal Reserve. One last disturbing fact to get our point across: 40% of Americans are not able to afford an emergency expense that costs $400. In fact, 46% don't have a rainy day fund at all. We haven't even discussed student loan debt. Obviously, losing financial assets, gaining larger debts, etc. are all big issues in the US. All of which can be traced back to a lack of financial literacy. So, it shouldn't be a surprise that around two-thirds of Americans can't pass a basic five-question financial literacy quiz.
What is Financial Literacy?
Financial literacy is defined as being knowledgeable about your money. This includes effective money management and growth, knowing how to make the right decisions that will help you create a secure financial future. A future that will enable you to comfortably enjoy your retirement.
There are several topics that are considered under financial literacy. That includes budgeting, spending, debt, savings, managing your mortgage, taxes, and overall financial planning. According to the Federal Financial Literacy and Education Commission, there are five key principles that you need to understand in order to be financially literate:
- You need to know how much you earn, including your salary, benefits, and tax withholdings.
- You need to understand how to save and invest your money, such as setting aside funds for emergencies, short-term, and long-term goals.
- You need to understand how you can protect your money by getting insurance as well as knowing how to detect fraud.
- You need to know how to spend wisely through comparison shopping and budgeting.
- You need to know how to borrow money – getting the lowest possible rate – and how to be responsible for repaying your debts.
Why Do You Need to Learn Financial Literacy?
Learning how to manage your money wisely has a huge impact on how you will be able to live your life. When you learn to budget, you become capable of distributing your money effectively between expenses, savings, and repayment of debts. With accounting, you're able to more clearly see where your money is coming from and where it is going. This is true whether you're running a business or handling your personal finances.
When you learn financial planning, you can develop an emergency fund as well as a retirement plan. Last, but definitely not the least, financial literacy helps you understand and manage debt properly. Not only will you know how to recognize the best loans with the lowest interest rates, but you also understand that paying off your loans as soon as possible can help you avoid interest charges, late fees, and a high credit utilization ratio.
In short, these are the benefits of financial literacy:
- enables you to plan for your future
- helps you reach financial goals
- helps you overcome financial hardships
- enables you to thrive instead of living from paycheck to paycheck.
- helps you make the most out of your income.
How to Be a Financial Consultant for Yourself:
To be your own financial consultant, you're going to need to set up an effective financial plan that you'll be able to stick to. What's a financial plan? It's a course of action that helps you manage your money effectively, thereby enabling you to meet all current and future financial obligations and desires. In short, it pushes you to make better choices regarding money at every stage of your life. Naturally, this would vary from one individual to another. To create one for yourself, you need to follow the steps below:
- Write down a list of things you need to have in order to reach financial security. This includes emergency funds, retirement plans, debt pay-off, and all your other financial goals (short-term, mid-term, and long-term).
- Observe where your money goes. What are you spending on? Do you spend too much eating in restaurants and cafes? Do you limit your expenses to just rent and utilities? Are you paying off credit card debt or loans for your business startup?
- Create an emergency fund to shock-proof your budget. Start out small, maybe around $500, then slowly build it up.
- Attack your debt, starting with the high-interest ones. If you're struggling to pay off revolving debt, you might want to consider personal loans for debt consolidation, which can help you combine several bills into one at a much lower interest rate.
- Build your savings through investments. If you don't know-how, look for financial education courses or programs that focus on how to invest your money.
Financial Literacy: Teaching Kids About Money
Teaching your kids how to manage money properly is one of the most important things you'll ever do in this life. And it's never too early to start. According to a recent study published in the Journal of Behavioral Decision Making, children as young as five years old may already have feelings about spending and saving, which affects their spending behavior. In fact, you need to ensure that you start them young because, right now, one in five US teenage students do not have basic financial literacy skills.
Teaching kids about money early on in life can help them avoid financial issues later in life. Don't expect schools to do this for you because only 17 states have schools that require students to attend a personal finance course in high school. And only a handful of those provides quality personal finance education; just five, in fact, according to the Champlain College's Center for Financial Literacy.
If that's not enough, here are some sobering statistics from the National Financial Capability Study (2016) that was conducted by FINRA Foundation:
- Only 46% of Americans have set aside rainy-day savings – three months worth of living expenses in case of an emergency.
- Among those with student loans, 37% have been late with a payment at least once in the past year, while 25% have been late more than once.
- 39% of Americans with credit cards are likely to only pay the minimum payment, pay late fees, use the card for cash advances, or pay over the limit fees.
- 40% of Americans surveyed feel that they have too much debt.
- 63% of the respondents were not able to pass a basic 5-question test on financial literacy.
Financial Education for Kids:
Instead of teaching them as teenagers, why not start them even younger? Financial education for kids should not start and stop at just helping them learn how to count money. Learning how to spend money is easy. What kids need to learn is how to make good spending decisions and how to save. This helps them build a strong foundation of financial responsibility. There are free online financial education courses and programs for kids offered by some companies such as IgniteSpot and InCharge Debt Solutions.
Money Management Education for Preschoolers:
Teach them the names of coins and the value associated with each one. While they won't really understand what each value signifies, it's a good start in helping them understand that money is physical and comes from somewhere. This helps them know that while we conduct a lot of financial transactions without the physical exchange of money (swiping a credit card or debit card, purchasing stuff online), money is real and has value. To make things interesting, you might want to check out some of the coloring pages and games and activities that the United States Mint offers on its website.
Because kids this age also love play-acting, you might want to play a shopping game with them. Get play money and some toys, snacks, and other store items and act as a shopkeeper while your kid tries to buy stuff from your store. Not only will the game indulge their need to exercise their imagination, but it also helps imprint the basics of commerce in their mind.
Money Management Education for Elementary Kids:
Once your kids hit elementary age, they can now start earning money. Instead of just giving them an allowance, pay them a "salary" for the chores they do at home. This helps teach them the concept that money must be earned; they cannot expect to have money given to them. Also, it helps instill the concept that money has value.
Since they'll be earning money, help your kids open a savings account. Children's accounts in banks sometimes have no fees or no minimum balance required. Encourage them to make weekly deposits to the account and point out how their money is growing. Teach them the concept of interest and how they still earn a little bit of money by putting their savings in a bank.
This is also a good time to help them learn how to make their own buying decisions. If they want to buy something, they need to understand the outcome – they won't have enough money to buy another thing that they might also want. In simpler terms, this is like saying, "if you buy that toy, then you won't be able to buy the video game you want." Helping them weigh different possible outcomes of their purchasing decisions is a step towards good money management. Here's another tip: let them sleep on it. Help them learn how to avoid impulse buys while instilling patience.
Teaching your child about money doesn't have to mean lecturing them. You can make learning fun by playing board games that feature money management such as Monopoly or Game of Life. Sims is a good video game that will help instill the importance of working for your money and living on a budget.
Money Management for Middle School Kids:
This is the perfect time to teach your kid to do comparison shopping – comparing brands and prices, trying to find the best deal. It's also a great age for them to learn how to budget their money. They're going to start making money decisions on their own, and it's best if they know how they can plan for their expenses. Don't forget to teach them to give. Let them pick a charity or church that they like. By practicing giving, they will eventually learn to understand how it benefits both the recipient and the giver. Another activity that might interest your kid is the annual yard sale. They can be in charge - setting the prices and haggling with the customers.
Did you know that you can teach your kid about the value of investing at this age? Damon Williams of Chicago talks about how he was able to build a $50,000 stock portfolio by the time he was 14 in this YouTube video. And he did all of that just because he wanted to buy an expensive pair of Nike basketball shoes. If you're not knowledgeable about the stock market, then this can be a great learning opportunity for both of you.
Financial Literacy for High School Students:
Financial literacy for high school students - why is it important? Why do teenagers need to learn about money management? Well, students at this age are already facing several financial decisions that can have an enormous impact on how they will be able to build a stable financial future. Some of these decisions include buying a vehicle, moving away from home and renting a place, keeping a budget, getting insurance, and paying for college. By teaching them good money habits early on, you help them avoid making mistakes that can lead to lifelong money problems.
By this age, your teen can already use certain types of credit cards. A prepaid credit card can help them practice responsible spending with a limit. Teach them how to choose the right credit card. What are the features, the costs of maintaining the card, finance charges, and the benefits or perks? Even more important, teach them about identity protection.
There are lots of other examples of how you can ensure your child is financially literate. But the most important method is by example. Talk to them about your family's financial status. Let them see the bills, your bank accounts, credit card statements, etc. Show them how you save money for family vacations, birthday parties, and gifts. Practice frugal shopping, couponing, and patience. Schools don't teach students to manage money, and this is why the financial education of children and students is the parents' area of responsibility. Remember, children learn more by watching than by listening.
Financial Planning Software and Tips:
Because of technology and the wealth of information online, it's easy for anyone to become financially literate. There are a number of things you can do to help you learn effective wealth management.
- Learn how to keep track of your income and expenses using budgeting apps. There are also plenty of budgeting worksheets that you can find online as well. Some banks, credit unions, and credit card lenders offer free tools that you can use to monitor your spending patterns. Some even offer credit-tracking programs for free.
- Join educational programs on financial topics offered by your state government. These include the consumer protection agency, the attorney general's office, and credit counseling agencies.
- For those with the means to do so, you might want to consult with a certified financial planner. You can learn more complex financial goal-setting, which includes saving for retirement and investing your money.
- If you're going to get financial planning software, make sure to find one that's easy to use. You need to ensure that nothing will dissuade you from doing your daily, weekly, and monthly accounting.
Books on How to Make Money: Do They Really Work?
There are a lot of books on how to make money, how to get out of debt, etc., available in your local bookstore and online. Your local library probably has its fair share. The question is, does reading them actually work? Will they help you achieve financial freedom? Yes and no. There really are a lot of personal finance books out there, and not all of them will help you. Most of them will have the same message. But the only way for a personal finance book to work for you is if the message is delivered in a way that resonates with you personally. Then, it becomes a life-changing book. Otherwise, you might be better off taking advantage of free financial education courses and programs provided by several institutions as well as articles and tips from blogs.
