Financial literacy is the ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial well-being.
Without financial education, many individuals fall into an unfavorable cycle of troublesome debt and poor credit—this leads to hitting numerous roadblocks for paying necessary bills, purchasing a home, getting a job, etc. According to Money Management International, most consumers experience some level of financial illiteracy that significantly impacts their everyday lives. Americans carry more than $2 trillion in consumer debt and 30 percent of consumers report having little to no extra cash making it impossible to dodge a paycheck-to-paycheck lifestyle.
“Financial knowledge and healthy personal finance habits are critical in today’s world,” said Jerry O’Flanagan, vice president of consumer banking at First National Bank. According to the results of the National Financial Educators Council financial literacy test—a test administered to 1,309 people during 2012 and 2013—financial literacy in America needs improvement. Out of five questions:
- respondents age 55 and older scored a mean 3.3 answers correctly
- respondents age 35-54 scored a mean 2.9 answers correctly
- respondents age 18-34 scored a mean 2.3 answers correctly
Studies have also found that the average retention rate of financial lessons learned is a maximum of two years. Therefore, personal finance education in high school may not fully prepare someone years later to buy a home, understand his or her workplace benefits, or save for families and retirement.
Anyone can combat financial illiteracy at any age. Here are four simple ways.
Take a Personal Finance Course
By studying, learning, and practicing, anyone can improve financial literacy. When you are a child, you save your allowance, and when you are an adult, you prepare for retirement. There are a number of courses available for people of all ages that teach financial literacy and personal finance basics. Some courses that may be particularly beneficial for adult learners include:
ProLiteracy Education Network also provides a financial literacy curriculum—developed by Michigan Adult Education—to teach students reading, writing, and math skills needed for the GED or other high school equivalency tests in the context of learning financial literacy. Topics include setting financial goals, creating a financial plan, using financial institutions, managing money, taxes, and consumer protection.
If you do not have a free ProLiteracy Education Network account, you can sign up for one.
Start Learning and Planning Early
Maurice Jones, president and CEO of Local Initiatives Support Corp (LISC)—the country’s largest social enterprise investment nonprofit—shared his story about becoming financially literate at an early age.
When I was growing up on my family’s farm in southern Virginia, Saturdays were the day my grandparents and I would drive the 10 miles to Kenbridge, the nearest town, to run errands. We’d visit the hardware store, the five and dime and, before heading home, the bank. My grandparents would do farm business, and if I had money in my pocket, I’d make a deposit into the account they had helped me open. All the way home, I’d savor the balance stamped in my small paper passbook.
Apart from being a highlight of my Saturdays, those bank visits were an early course in financial management that proved as important in preparing me for adulthood as learning to read or play football or write a legal brief. It was practice in handling the reins of my own economic life.
The truth is, most Americans don’t get that kind of early training and have trouble with basic financial literacy. Studies have shown that even many retail investors lack an understanding of how compound interest or inflation work. The losses that result are estimated to set our economy back by some $10 billion a year.
Through many seasons of growing and harvest, my grandparents taught me how markets worked and how to read an invoice. And I came to understand that balancing profit and loss, sticking to a budget and having some savings for emergencies were the foundation of the farm’s—and my family’s—wellbeing and progress.
Something as simple as opening a bank account at an early age can be very beneficial for becoming financially literate. Adolescents with an account in their name, even if it is rarely used, are six times more likely to go on to higher education than youths without one.
Create a Budget and Establish Goals
Budgeting enables you to establish a spending plan for necessary expenses. Following a budget or spending plan will also keep you out of or help you work your way out of debt if you are currently in debt.
Once your budget is established, you can easily manage income and expenses, which in turn helps you plan for your future. Developing a budget is a simple process. MyMoneyCoach.com provides this excellent step-by-step guide on how to effectively develop a budget. View these steps in full detail at 7 Steps to a Budget Made Easy.
- Set realistic goals
- Identify income and expenses
- Separate needs from wants
- Design your budget
- Put your budget plan into action
- Seasonal expenses
- Look ahead
For additional assistance with budgeting for specific goals, use this helpful budget calculator on Practical Money Skills.
Open a Savings Account
Opening a savings account seems obvious but not everyone does it. Establishing a savings account can have a lifelong impact by allowing you to develop good financial habits that will last.
In addition to certain life goals you set, there are life events and emergencies you can plan and save for, such as earning an education, starting a family, or paying unexpected health bills. It is impossible to foresee many unplanned expenses, which is why it is crucial to consider opening one or multiple savings accounts.
Regardless of your age, it is essential that you save a percentage every time you receive money. By saving, you gain the flexibility to achieve your goals and develop smart and routine financial habits.
Before you begin saving, determine what it is you are saving for—your children’s’ educations, a new home, retirement, emergencies, etc. You need to set a realistic goal and determine how you want to save for it. Depending on what you want to save for, there are numerous types of savings accounts. Here are a few different savings accounts to fit particular needs.
- Basic bank savings accounts offer the lowest interest rates, usually less than 1 percent. They come with few restrictions on access to your money, and they don’t usually have required minimum balances. These accounts associated with brick-and-mortar banks also can be accessed online.
- Money market accounts are high-yield accounts that pay interest based on the current market rates. They are likely to require a higher minimum balance than a basic bank savings account.
- Online savings accounts are typically similar to basic bank savings accounts, but they offer higher interest rates because they operate online and don’t involve the overhead that standard banks have.
- Credit unions are like banks, but they’re owned by their members and may offer higher interest on savings.
- Automatic savings plans are options you can set up for your savings account. You can choose to automatically transfer a set amount from your checking account to your savings account every month.