Being educated on personal finance matters can have an enormous impact on the financial decisions and actions by individuals at all stages of life.
Personal finance basics should ideally be taught both at home and at school starting at a young age. Exposure to formal courses in financial literacy can be extremely helpful in leading kids to ultimately make smart money decisions on everything from budgeting to participating in the stock market to saving for retirement and more. For students who are offered rigorous, formal educational opportunities in financial literacy or personal finance, a 2015 FINRA study found that this foundation of knowledge “can improve the credit scores and lower the probability of delinquency for young adults.”1
Unfortunately, few states have substantive financial literacy or personal finance course requirements for high schools—only 5 states require personal finance courses as a graduation requirement that equals a one-semester or half-year course.2 19 more states require some sort of personal finance instruction but only as part of an existing required course.2
The lack of formal personal finance education has proven to be detrimental in today’s society. Many adults graduate both high school and college without taking a proper course in financial literacy, causing them to start their careers with only self-taught knowledge of how to manage their money. Many don’t understand the importance of creating and maintaining a budget, the impact of their credit score/history, prioritizing saving, and so on. This has a direct impact on their ability to make responsible financial decisions—many of which have repercussions throughout life.
Financial literacy is the understanding of basic financial components such as saving, budgeting, investing, debt management, and more. It is the ability to make sound, educated decisions regarding everyday financial matters using available resources. You don’t necessarily have to be a math whiz to be financially literate—rather, you need to be able to understand basic economic and financial concepts and apply them to a wide variety of situations. Here are some common themes often covered in financial literacy courses:
Accessing financial information has never been easier. Bank accounts can be checked within seconds on a mobile phone, notifications can be sent within minutes if any overdraft or fraudulent activity is detected, credit scores can be accessed online, and so on. All of these conveniences and opportunities make it all the more important for today’s consumers to be financially literate. With so much information readily available comes more responsibility—something that not everyone is prepared to shoulder. With the never-ending influx of financial information coming from all angles, consumers need to be able to rationally weigh each offer or decision that comes their way.
Furthermore, people are living longer and with that comes the need for a dependable retirement fund that will last. While many used to rely solely on Social Security or pension plans for their retirement, the vast majority are now required to save on their own via employer-provided defined contribution plans or another savings vehicle. With more than one in three of today’s 65-year-olds living to age 90, an understanding of the basics of saving, investing and budgeting is crucial to enjoy a well-funded retirement later in life.3
Lastly, the need for understanding such financial basics is global. While many associate being financially illiterate with those in emerging or underdeveloped nations, the United States ranks only 14th in the world on the list of the most financially literate countries.4 Moreover, only one in three adults worldwide show a basic understanding of financial concepts.4
No matter your age or socioeconomic status, being financially literate is imperative in order to make confident financial decisions. Here are some suggestions on how to improve the financial literacy skills of either your family members or yourself:
1) Advocate for financial literacy courses. Whether or not you live in a state where some sort of personal finance instruction is required, consider reviewing how your state is ranked and if/how more could be done. The “2017 National Report Card on State Efforts to Improve Financial Literacy in High Schools,” released in late 2017 by Champlain College, is a great place to start to get in-depth information on the specific efforts your state is making.2 Of course, the efforts made by each specific school will differ no matter the state. Consider talking to your children’s teachers, principal, school board, etc. about either offering or improving a personal finance course at the next parent-teacher conference or whenever the next opportunity arises. The Jump$tart Coalition website is also an excellent resource to consult to view best practices and activities, national standards for K-12 personal finance education, progress being made on a local, state-wide, and federal level, and so on.
No matter the age of your child, it’s ideal for parents to also weave in lessons on basic money matters at home. Practice going over age-appropriate financial concepts at home, especially if your child is not learning anything of the sort at school.
2) Test your own financial literacy capabilities. Learning opportunities for personal finance matters certainly don’t stop in high school or college. There are innumerable resources available online where you can take a quiz to quickly evaluate your knowledge. Click here to take a quiz by FINRA that tests your knowledge and decision-making skills on everyday economic and financial questions, including calculating interest rates, inflation, and principles relating to risk and diversification. According to the National Financial Capability Study, 61% of respondents in the U.S. could not answer more than 3 out of 5 questions correctly.5 Only 37% of respondents answered 4 or more questions correctly, which indicates a high level of financial literacy; this is down from 39% in 2012 and 42% in 2009.5
Many people assume that they are financially literate without actually testing their capabilities. Accessible online resources bring awareness to those who may not consider the issue to be something that concerns them.
3) Discuss the topic with your financial advisor. Many financial advisors prioritize educating their clients on financial products, services, and concepts throughout their working relationship. If you are concerned about the financial literacy capabilities of yourself, your spouse, your children, etc., talk to your financial advisor on any ideas or resources they may know of to help you sharpen your skills. If you don’t currently have a financial advisor, click here to find one in your area.
4) Make a conscious effort to become more financially literate. Most people can likely do more in their everyday lives to improve their financial literacy. Some simple ways to start: track your expenses each month, take advantage of the three-free credit reports you can download each year, set up a meeting with your company’s employee benefits representative or retirement plan administrator, stay up to date with current events, and so on. Make an effort to fully understand all reports, statements, offers, etc. coming your way and for anything you need more clarification on, talk to your financial advisor.
Becoming financially literate or increasing your financial knowledge can only have a positive impact on how you view both everyday and longer term financial matters. With so many complex products, services, and decisions available at your fingertips combined with the fast-paced nature of today’s world, it’s more important than ever to prioritize financial literacy. Take some time this April (Financial Literacy Awareness Month) to reflect on this and determine how you can improve the financial literacy of both yourself and your family.
Written by North Star Resource Group.
1”State Financial Education Mandates: It’s All in the Implementation.” FINRA Investor Education Foundation. Published January 2015.
2Pelletier, John. “2017 National Report Card on State Efforts to Improve Financial Literacy in High Schools.” Champlain College. Published December 12, 2017.
3“Long-Term Care: The Basics.” LongTermCare.gov. Last modified October 10, 2017.
4Klapper, Leora, Annamaria Lusardi and Peter van Oudheusden. “Financial Literacy Around the World: Insights from The Standard & Poor’s Rating Services Global Financial Literacy Survey.” Global Financial Literacy Excellence Center. Published 2015.
5“Financial Capability in the United States 2016.” FINRA Investor Education Foundation. Published July 2016.
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