Tim Pawlenty, president and CEO of Financial Services Round Table and former governor of Minnesota, once said, “Financial literacy is an important part of avoiding financial mistakes and planning for a strong, secure financial future.” He might not have realized it at the time, but this quote is spot-on.
In a survey conducted by the National Financial Educators Council, 38% said their lack of financial literacy set them back at least $500 in 2022. And, this also includes the 15% who said it set them back by $10,000 or more. For comparison’s sake, in 2021, it was about 11%.
Poor financial literacy costs most respondents (68%) between zero and $499.
The survey, conducted between Oct. 23 and Dec. 5, surveyed about 3,000 adults across the country and found the average cost to be $1,819 per person. Compared to 2021, that figure is nearly $500 higher in 2022.
“A lot of people come out of [school] without having been taught financial literacy in any detail,” said certified financial planner Denis Poljak, a partner with the Poljak Group Wealth Management at Steward Partners in Shreveport, Louisiana.
“They end up just … learning from their mistakes,” Poljak said.
The good news? Anyone can improve their financial literacy.
What is Financial Literacy?
A person who is financially literate is someone who understands all aspects of financial management, including budgeting, investing, borrowing, taxation, and taxation planning. An individual who lacks such skills is considered financially illiterate.
With finance playing such an important role in modern society, financial literacy is vital for long-term prosperity. In spite of this, Financial Industry Regulatory Authority (FINRA) reports that 66% of Americans suffer from financial illiteracy.
Financial literacy, however, allows people to better prepare for specific financial obstacles. As a result, personal economic distress is reduced.
To put it simply, it is imperative that people achieve financial literacy in today’s society. Why? In addition to student loans, mortgages, credit cards, investments, and health insurance, financial literacy affects many aspects of life.
Why Is Financial Literacy Important?
The more financially literate a consumer is, the more confident they are when dealing with finances. However, they will also be better prepared to handle the inevitable peaks and valleys of their financial lives by understanding how to prevent and manage problems.
A big part of that is keeping tabs on their bank and credit card accounts to spot potential fraud as soon as possible. Another example would be keeping enough cash on hand to cover a costly car repair out of pocket. Similarly, financial literacy can make it easier for consumers to save for their children’s college education or vacation.
Your life can be impacted by financial literacy in the following ways:
Understand your earnings and expenses.
To build financial literacy, it is important to understand your income and expenses by creating a budget. After you make a budget, you can monitor your spending and make adjustments as needed. Make your budget work for you by choosing a method that’s most likely to work for you, such as the zero-based plan or the 50/30/20 plan.
Ensure debt is repaid and avoided.
By comparing loan terms and seeking the lowest interest rates, you can save a lot of money over time. You can also avoid accruing interest by paying off credit card balances each month. Debt can be tackled with the help of a nonprofit credit counselor or on your own if you have financial literacy.
Financial literacy prepares people for emergencies.
Having an emergency savings account is one of the most crucial ways to prevent credit card debt from building up. Savings should always be equivalent to three to six months’ worth of expenses in order to pay your bills on time. As a result, this prevents harming your credit score or even bankruptcy.
Can help ease the distress of living paycheck-to-paycheck.
According to a recent LendingClub report, 63% of Americans live paycheck to paycheck.
Most people are unable to keep up with inflation because it is increasing so quickly.
But, being financially literate can assist you in living within your means.
Ability to make better financial decisions.
An understanding of financial literacy can prevent devastating mistakes. As an example, interest rates on floating-rate loans may change monthly, and retirement contributions can’t be withdrawn until retirement. Some seemingly innocuous financial decisions may end up costing individuals money in the long run or preventing them from achieving their dreams. By being financially literate, individuals can avoid making costly mistakes in their personal finances. In addition, fraud related to chit funds, pyramid schemes, Ponzi schemes, and carding is on the rise. An individual who has a good sense of finance will avoid such shady schemes. It’s also the antidote to get-rich-quick schemes.
Critical for your overall health.
A lack of savings and/or debt can significantly affect a person’s life. There’s more to it than just daily stress. Divorce, depression, and poor health can be caused by financial problems. Inflation is on the rise and the COVID pandemic continues to cause financial difficulties for many adults, as noted by Bankrate. Basic knowledge of these risks could prevent many of them.
Plan for a secure retirement.
You should also save for retirement regardless of your other short-term plans. With financial literacy, you’ll know how much to save, what kind of retirement you want, and how to achieve it.
How to Improve Your Finanical Literacy
1. Start (or update) your budget.
Whether you’re 20 or approaching retirement, making a budget is a crucial first step to managing your money. An effective budget helps you monitor your spending each month. Without knowing how much money comes in and goes out, it is easy to neglect saving money.
To simplify your life and help you better navigate your finances, there are numerous free budgeting tools available. Each month, personal finance apps can help you optimize your spending and saving habits. You’ll be able to see your financial habits and choices more clearly when you input all your financial commitments into a money management app.
With the right money tool, you can keep track of your finances, budget, and income. You can also organize your expenses, as well as receive payment reminders.
You can also watch these recorded webinars and read these articles:
- Managing Your Money: Budget and Savings Ideas, presented by Wells Fargo Campus Program Manager Jeff Vickers
- 10 Strategies for Improving Your Finances, facilitated by Greg Teague of ComPsych, UF’s Employee Assistance Program provider
- Budgeting as a Family guide, containing tips for including children in budgeting
- Financial Wellness Resource, complete with a budget worksheet
- 6 Types of Budgets and How to Choose, all budget systems have similar concepts, but each has a unique way to reach financial goals. This Due article explains the different types of budgets and ho to choose the right type.
2. Get to know your banking options.
When you don’t optimize your banking, your money won’t go all that far. As such, find out what your current financial institution(s) charges, what account options you have, and what investment options you have.
Furthermore, consider Treasury Inflated Protected Securities, high-yield savings accounts, or real estate investment trusts as alternatives to regular savings accounts. Ultimately, there are banking alternatives that you can explore if you want to make money instead of losing it.
To find out more about your banking, saving, and investing options, please schedule an appointment with your financial advisor. They can guide you in choosing the best option depending on your financial situation and goals.
3. Understand credit scores.
“Lenders use a credit score between 300 and 850 to figure out how likely you are to repay debts,” explains Due Founder and CEO John Rampton.
Borrowing money, opening an account, or renting an apartment requires trust from someone else. “At the same time, lenders and landlords cannot contact all your credit card issuers to determine your trustworthiness. Your credit score will be pulled instead,” adds John.
Your credit score summarizes your financial life. Specifically, it’s a three-digit number that shows borrowing and repayment history. The higher your score, the more credible you are in the eyes of creditors.
“Even if you laugh at this concept, credit scores are very serious business.”
“The higher your credit score, the better your ability to manage your finances and repay any debt; the lower your score, the riskier you are as a borrower,” says John. “On the flip side, the lower your score, the higher your interest rate, and the more difficult it will be for you to obtain credit.”
There is a score for each of the major credit bureaus, such as Experian, Equifax, and TransUnion. Based on the information provided by each bureau, FICO, a data analytics company, creates credit scores.
“Here’s where things get confusing,” John warns. “Depending on the type of credit you’re seeking, your score will vary.” It is important to note that FICO scores are just base scores. For credit or loans, lenders typically assess your risk using FICO scores.
“In other words, there’s a difference between defaulting on a credit card and falling behind on your mortgage,” he says. “As such, you might have to use a different credit score when you apply for a credit card than when you apply for a mortgage.” FICO scores vary from 250 to 900 depending on the industry.
How to rebuild a damaged score.
“There are many avenues that lead to damaged credit,” Peter Daisyme writes in a previous Due article. “You might have missed a few payments on an important loan.” There’s also a possibility that you’ve opened too many credit cards. You may even have defaulted on your mortgage or car loan. If your credit score has been damaged, you might wonder how to repair it.
“However you got here, your personal credit score is damaged, and it’s likely affecting your life in several negative ways; you might find yourself turned down for loans, getting worse rates for mortgages, and/or being rejected for apartment applications,” Peter adds. Fortunately, this situation does not need to go on forever. “With the right techniques and the proper commitment, you can rebuild your credit score from the ground up.”
To start, find out what errors you made in your score and correct them.
You also need to understand how your credit score is influenced by the factors that affect it. In spite of the fact that several types of credit scores exist, the FICO score is the most commonly used. The following factors affect your FICO score: payment history, amounts owed, length of credit history, new credit, and credit mix. And, every year, review your performance in these categories and correct any errors.
You should also do the following:
- Commit to avoiding new credit and debt.
- Set up payment reminders.
- Start reducing your debts.
- Establish better long-term habits, such as paying your bills on time.
4. Set aside some time for learning.
There are many resources available to help you develop financial confidence. Many government offices offer free resources on personal finance topics, including the:
- Federal Financial Literacy and Education Commission
- U.S. Securities and Exchange Commission
- Consumer Financial Protection Bureau
Online money magazines, journals, and websites are other great resources. They can offer advice for your current situation, give you long-term insight, and help you understand the latest financial trends that may affect your financial planning.
- Read personal finance books.
- Subscribe to free financial newsletters, such as Athene’s Smart Strategies. It’s designed to help you achieve your financial goals with expert financial advice.
- Listen to financial podcasts. You can get ideas from the Best Personal Finance Podcasts to Listen To from U.S. News and World Report.
- Make use of social media to follow financial experts and influencers. For example, follow this list of financial experts and influencers on Twitter or LinkedIn.
- Enroll in a course on financial literacy. Students can learn basic money management skills from budgeting to saving, paying off debt, and investing in an online school, college, or adult education center. Your financial literacy can be enhanced by taking a course that helps you build strong money habits.
5. Check with your employer.
Ask your employer if they offer employee financial wellness programs or free financial counseling. Your workplace benefits may include the option of speaking with a financial professional. By doing so, they can let you know what areas need your attention most, such as retirement, budgeting, and debt reduction.
6. Establish or join an accountability community.
Despite having great intentions, life sometimes prevents you from making smart investments and savings decisions. As a consequence, your financial goals might be put off until tomorrow if you make excuses. To help you stay accountable in these situations, you can find a community of like-minded people.
If you and your friends have similar goals, start a book club to share knowledge and talk about how you’re each improving your money management skills. You could also create a social media group or join an existing community. Some examples include the Financial Common Cents Facebook group, Bravely’s Instagram stories, or the Bogleheads forum.
7. Promptly pay your bills.
Make sure your monthly bills are always paid on time, as mentioned previously. You may want to consider automatic withdrawals from your checking account or utilizing a bill-pay app. Additionally, you can set up email, phone, and text reminders for payments.
8. To grow your savings, pay yourself first.
In order to become financially literate, you need to know how to save money. Automatically depositing money from your paycheck into your savings account is just as easy as automating your bills.
If you prefer, you can have your checking account automatically transfer money to your savings account. The fact that you choose to save money monthly (or weekly) shows you’re proactive in managing your finances.
If you sacrifice a little bit of your extra income now, you’ll be better prepared for life in the long run. You may also want to try a savings challenge if you want to make saving money more exciting.
9. Teach your kids healthy financial habits.
Get your child started with a savings account and teach him or her how to save. The key to improving financial literacy as an adult is to learn about money management at a young age. By advocating, conducting research, creating standards, and providing educational resources, organizations like Jump$tart Coalition for Personal Financial Literacy are working to improve K-12 and college students’ financial literacy.
You can also sign your kids up for kid-friendly debit cards like Greenlight. Using Greenlight, parents can restrict which stores their children may visit. Moreover, they can learn the basics of saving with spending limits. Also, Greenlight provides investment opportunities.
10. Look into credit counseling.
Expert help is also available from credit counseling agencies, which hire counselors who are certified in budgeting and debt repayment. Additionally, you may want to consider hiring a certified financial planner if you have the means. Their services include financial planning, tax planning, college savings, and debt repayment.
There are also well-regarded nonprofit agencies and nonprofits that offer resources. You can learn about finance on your own schedule. The following are some of the best organizations to contact:
- Financial Planning Association. It provides resources on various financial topics, including divorce and estate planning, for financial planning professionals.
- National Foundation for Credit Counseling (NFCC). A member organization of the NFCC offers credit counseling locally and remotely, and the NFCC’s website offers free budgeting and retirement planning tools.
- Financial Literacy and Education Commission. As part of the U.S. Treasury Department, it coordinates efforts between the public and private sectors to improve financial literacy.
- MyMoney.gov. Provides basic financial education. There is help available on topics such as how to balance a checkbook, invest in a 401(k), or buy a home
How do you define financial literacy?
Financial literacy means knowing and using financial skills, like budgeting, investing, and financial management. In a nutshell, financial literacy is the relationship between you and your money, and it is a lifelong journey.
Why is financial literacy important?
Everyday financial decisions are an integral part of life; it would be a good idea to become familiar with them. Moreover, financial fraud is easier to identify. It is also possible to reach your financial goals if you know about finances.
What are the principles of financial literacy?
Financial literacy is based on five broad principles. It is important to remember that, regardless of the type of financial literacy model used, the overarching objective is to educate individuals on how to earn, spend, save, borrow, and protect their money.
How can you improve your financial literacy?
A person’s financial knowledge can be improved by following the steps below:
- Reading financial magazines, newspapers, or financial books for beginners.
- Taking short-term finance courses online.
- Keeping up with finance blogs and experts on social media.
- Professional financial advice provided by a consulting firm.
How does financial literacy work?
Let’s say a high school student is about to enter college and needs to decide which school to attend and how to cover their education. Their decision-making process may include determining how much money they should save from their after-school job, what the loan terms will be, and what opportunity costs exist.
As a result of becoming more financially literate, the student may be able to make more responsible decisions in this example. The concept of financial literacy here refers to saving, employment, budgeting, loans, and planning for the future. By practicing financial literacy and making smart decisions, a student can achieve long-term success financially.