Financial Literacy

Financial literacy is a hot topic these days. This is especially true as memories of the Great Recession are still fresh, millions of baby-boomers are retiring and masses of Millenials battle skyrocketing student loan debt. However, the question still remains – how important is financial literacy?

The National Financial Educator Council (NFEC) states that “lacking” financial literacy and not having a firm understanding of one’s personal finances can create big problems for Americans. The NFEC surveyed 1,500 adults. Respondents reported that they lost roughly $1,230 in 2018 because they did not understand the basics of household finances. This figure is about equal to the monthly mortgage on a modest home. Almost 20% reported not understanding their finances cost them $2,500, based on calculations provided by the NFEC. American’s lost upwards of $295 billion in 2018 due to the absence of financial literacy.

Lending Tree provides another disheartening figure – the collective debt of Americans reached $4 trillion for the very first time. Furthermore, more U.S. households say that attaining good credit has become a major problem.

The issue of financial literacy has become so important that Congress cited April as Financial Literacy month back in 2004. The U.S. Senate states that the initiative is intended to “raise public awareness about the importance of financial education…and the serious consequences that may be associated with a lack of understanding about personal finances.”

It seems that Congress was onto something here. Loss of financial assets, larger debt, and tough credit conditions are among the largest threats rooted in lacking financial literacy. However, these are not the only dangers that American’s face on a daily basis.

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What is Financial Literacy?

In the most basic sense, an individual is financially literate when they are well versed in money and finance. This is especially true when it comes to understanding one’s personal finances on a deeper level. Being financially literate enables you to make smarter money management decisions. These intelligent decisions lead directly to a financially secure future. Better yet, a future that protects the assets built by you and your loved ones.

Categories that typically come into play with financial literacy are every day financial issues. Some of these issues include budgeting, spending, debt, taxes, retirement savings, college savings, mortgage management, and tax and estate planning.

Digging deeper, financial literacy can also include more niche themes. Some of these themes include investing, understanding how interest rates work, passive versus active income, and overall financial planning.

Five Ways to Improve Your Financial Literacy

People can engage in financial literacy in multiple ways, as follows:

Reading

Whether it’s simply Googling personal finance articles, delving into an investment book, or catching up on financial issues. The simple act of reading can pay big dividends when it comes to improving one’s financial literacy. This could very well be the last thing that current undergraduates want to hear, but your college years are a great time to develop a strong sense of financial literacy.

Take a Class

You can certainly benefit from taking a financial literacy course in any one of a number of subjects. Some of these subjects include accounting, retirement planning or saving for college. Online financial classes are easy to find. If you’re looking for in-person classes, the odds are in your favor. Your local community college likely offers a handful of solid financial planning courses. A personal favorite option of mine would have to be MOOC’s. MOOC stands for Massive Open Online Courses and they’re available for just about any topic you can imagine. Furthermore. some of the nation’s most prestigious schools offer MOOC’s – MIT and Harvard are two of the marquee names.

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Listen to Podcasts and Radio Shows

Tune into financial podcasts or simply listen to Dave Ramsey. These broadcasts are a solid launching point to improve your financial literacy. These shows provide real-world personal finance scenarios that any mainstream American can learn from.

Watch Television or YouTube Shows

Video is a great way to absorb some personal finance lessons, especially when it comes to investing and participating in the stock market. Tuning into CNBC or checking out The College Investor with Robert Farrington can help you understand money and saving and investing better, and best of all, it’s free.

Talk to a Financial Professional

A surefire way to learn about finance is to talk to, and work with, a financial planner, a tax planner or an estate planning specialist on a personal, one-on-one basis. Getting the facts from a financial expert in person is a great learning experience. Plus, you get the valuable opportunity to ask personal financial questions that are important to you.

5 Signs You Might Need Help Improving Your Financial Literacy

Few want to admit that they’re not up to speed when it comes to financial literacy. This is totally understandable. However, it’s critical to know and recognize ‘soft spots’ in your fiscal knowledge and work to eliminate them if you plan on getting a better handle on your household finances.
If you want to get the job done right, it would be wise to focus on the following financial literacy hot spots:

Create a Budget and Stick to It!

Possessing the necessary discipline to construct and maintain a firm household budget is one of the most critical steps an individual can take to strengthen their finances. On the other hand, not having one, or having one and not sticking to it, is a sign that an individual needs to improve their financial literacy. It should go without saying that improving ones financial literacy should occur sooner rather than later.

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Are You Carrying Personal Debt?

This shouldn’t come as a surprise, but excessive debt is a really, really, really, bad thing. That being said, deep debt has the potential to threaten your financial future. It is also a blatant red flag that you’re in need of a strong grip on personal finances. Personal debt is the number one roadblock to financial security and learning how to get out of it should be a top priority.

Do you Have an Emergency/Rainy Day Fund?

Having a fund with 3-6 months of cash stowed away for a rainy-day fund is a pretty big deal. This fund can serve as a financial cushion to help you and your family get through an illness, a severe injury, job loss, or other unforeseen moments of adversity.

Not having an emergency fund can leave you vulnerable to unfortunate events that leave you short of cash. This can be a major thorn in your side when it comes to covering the mortgage, rent, or putting groceries on the table. These are just a few of the major expenses that an emergency fund will help cover if the need arises. In short, get educated about emergency savings and start building your savings. Doing this and you’re well on your way to mastering one of the basic and most important personal finance needs.

Do You Understand Compound Interest?

Compound interest can be awesome. Knowing how compound interest works and how money, when left alone to build interest over time, can lead to a hefty financial egg down the road. If you don’t understand the importance of compound interest then you’re likely borrowing from your retirement or college savings fund on a regular basis. These are two of the worst things that you can do when it comes to making compound interest work in your favor. Why? Well, you’re essentially stealing from your future self when you withdraw funds from your retirement or college savings account.

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Do You Understand the Value of Insurance?

A sturdy insurance plan is a total necessity for most everything in your life – home, health, auto, and yes, investments. Insurance protects your finances from events that could utterly destroy your savings and seriously weaken you financially. It also provides a formidable line of defense against other financial misfortunes. On the other hand, not having insurance leaves you and your assets exposed to loss and is a clear sign that you’re behind the times on one of the financial matters that can mean the most to you, when you need it the most.

Financial Literacy Summary

Financial literacy is a major problem and it is growing at an alarming rate in the United States. In fact, the Financial Industry Regulatory Authority states that 63% of Americans are categorized as ‘financially illiterate’.

This should go without saying, but this is one problem that American’s simply cannot afford to carry around on a daily basis. This is especially true when there are so many household financial issues to address.

Thankfully, there is an upside!

By simply acknowledging the issue, U.S. financial consumers have taken the first step towards becoming smarter and savvier about their money and finances. This knowledge, gained by surrounding one’s self in financial education, can quickly translate into lower debt, more savings, better credit, and a long-term financial picture. This picture will further improve every time you pick up an investment book or tune into a financial podcast.

About Andrew Roche

Andrew Roche is an underwriter at United Wholesale Mortgage by day and a digital marketer by night. In addition to his role as an underwriter and his digital marketing hustles, he is also in the process of completing an MBA in Marketing & Finance through the Mike Ilitch School of Business at Wayne State University.