This article dives into the question— Why is financial literacy important? I can’t help but wonder how many young couples would benefit from hearing this question from middle school on up through college.
Posing this question of financial literacy importance, I believe, would save many young families from needless debt and money worries. It would challenge them to learn vital financial life skills to avoid that pain.
Defining Financial Literacy
You can define financial literacy simply.
● Being knowledgeable about money
● Possessing the power to manage money
● Skills that prevent financial hardships
Take your pick of those basic definitions. Financial concepts can get complicated. But personal finance comes down to simple best practices.
● Spend less than you make
● Use a budget
● Earn more by adding valuable job skills
● Prepare for financial emergencies
● Couples must share financial knowledge and responsibilities
These 3 statistics are reason enough to answer why financial literacy is important:
3 in 4 workers say they're in debt (and see no way out, ever)
Nearly one in 10 workers making $100,000+ live paycheck to paycheck (2017)
Many Americans cannot cover a $500 emergency (2023)
Those stats show how crucial being financially literate is, right? Sadly, I could list a hundred similar statistics.
Financial Literacy Empowers Individuals, Families, Communities
Our younger generations need to be applauded for their desire to make the world a better place. My hope is that Gen Z and Millenials will see how financial literacy can help them with their mission.
Money is a tool. Yes, it can be used to cause harm. But money is just as powerful in the hands of good people. So good people need to be financially literate in order to harness this monetary power. And then pass this knowledge on to their children too because it is not being taught enough in schools.
One could argue that American society would thrive more if some algebra courses were replaced with financial literacy courses. I’m a math guy so I’m not coming out against algebra and the logical thinking it helps build. Yet, logic is of little use if you’re buried under $71,000 of credit card debt because you were not warned of those dangers early in life.
People empowered with financial literacy stand a better chance of improving their family’s lives and their community. This positive momentum will spread even further. Another reason financial literacy is important.
Who’s to Blame for Lack of Financial Literacy?
All of us here in America who don’t take action to turn things around. That’s a tough pill to swallow. But if we want families to rise above poverty and then go on to earn impactful incomes and save for retirement, everyone has a role to play.
Now, believe it or not, there are arguments against the importance of financial literacy. Below are some quotes from Annamaria Lusardi, Professor of Economics and Accountancy at George Washington University.
“Research shows that the people who consult financial advisors are already financially literate.”
Her response to the argument that financial advisors are the sole solution to helping people manage their finances wisely. A solid foundation from an early age improves chances of building wealth with the guidance of a financial advisor.
“Some researchers and practitioners argue that financial education is not effective in changing people’s behavior, and money spent to implement it will be wasted.”
Professor Lusardi points out this notion is based on old research. Yet, even if new research showed this, so what? We don’t give up teaching K-12 reading just because of disheartening literacy facts such as:
● Only 35% of public school students are proficient readers by grade 4
● 27% of eighth-grade students are below the basic reading level
● U.S. ranked 12th in a study of literacy across 20 “high-income” nations
● 75% of prison inmates have low literacy or dropped out of high school
Teaching methods for reading must evolve. Just as methods to teach young people about personal finance. Why is financial literacy important? The same reason reading is important… people struggle without these skills.
3 vital financial skills are below.
Financial Literacy and Money Management Skills
We’re now clear on what financial literacy is and its importance. So let us break it down a bit more with these financial skills that go a long way in avoiding financial struggles.
Budgeting
Navigating costs associated with college
Goal setting
A short list that could be lengthened but those 3 will take a person a long way.
Budgeting builds discipline while protecting your family from financial blindsides. Christmas comes at the same time each year, taxes too, and home / car repairs are unavoidable.
College debt has put many young people behind the 8 ball. Many had no idea how fast costs would add up and when you’re 18 years old, how can you understand the pressure of owing $40,000 (ONLY $40k if you’re lucky)?
Goal setting gives us something to aim at, else we are aimless and careless with our income. Goals set the stage for sacrificing in the short-term in order to build a better future for our family.
Why is Financial Literacy Important? Summary (+ a Crazy Idea)
Becoming knowledgeable about personal finance will make one of the biggest impacts possible on your life. Sharing this financial knowledge with others will do the same for those people.
Think of all the families that can avoid hardships using proven money management skills. Communities can be improved when families are in a better position too.
Now, do these changes happen in the time it takes to watch a TikTok video? No. Major changes take time and patience but the earlier Americans become financially literate, the better chance we all have of positive change.
On that note, I’ll leave you with a crazy idea on how anyone can level up their personal finance wisdom. Set time aside to learn. Free time is available - proof below:
Average person loses 26 days each year to wasted time
TikTok users average 95 minutes a day on the app
TV watching eats up 2 hours & 33 minutes daily (U.S.)
We’ve got the time for financial literacy if we make it a priority.
Bonus: Questions to ask yourself to test your knowledge about money:
● Are you setting aside money to replace a car, appliances, etc.?
● Can you predict how much you will spend on groceries next month?
● Do you understand the risks of using stock trading apps?
● How much is your insurance deductible— all policies?
● Do you understand how long-term health care works?
● Can you guess the average Social Security benefit amount per month currently?
● Do you have a budgeting tool that’s easy and effective?
● Is compound interest something you understand fully?
● Can you borrow from a 401k? (and should you?)
● Is it smart to invest in hot trends even if you don’t understand them fully?
No trick questions, folks. Just some to get your mind going so you can dive deeper into topics you may need to brush up on.
Investment advice offered through Private Advisor Group, LLC, a registered investment advisor.