According to Merriam Webster, to be literate is to be “educated, to have the ability to read and write.” However, to be functionally literate, one must understand how to process information, ask appropriate questions, and make informed decisions.
Two examples of literacy that are fundamental are health literacy and financial literacy. In segment one on health literacy (see Messenger Papers, Health Section), we discussed why health literacy is crucial to understanding how to access healthcare, communicate effectively with providers, make appropriate medical decisions and hopefully obtain favorable outcomes.
Financial literacy is equally important, as it’s necessary for understanding basic fundamentals of money management. Examples include saving, budgeting, taxes, investing and setting specific goals, such as planning for college or retirement. It is also important to understand how to manage finances as a couple, including spending habits and priorities.
According to the Corporate Finance Institute (https://corporatefinanceinstitute.com), financial literacy is the “cognitive understanding of financial components and skills.” These skills include budgeting, investing, borrowing, taxation, and personal financial management. The absence of such understanding is referred to as being financially illiterate. Being financially literate is necessary for obtaining financial stability, reaching stated financial goals and securing a comfortable retirement.
Here are some facts that emphasize the importance of financial literacy:
- It is estimated that 78% of Americans live paycheck to paycheck
- Student loan debt is about $1.5 trillion for more than 44 million borrowers
- Credit card debt levels are at a record high of $1.04 trillion
- Overall, Americans are approximately $12.58 trillion dollars in debt
According to www.investopedia.com, becoming financially literate can improve one’s quality of life. Below are some of the benefits of being financially literate:
- Ability to make better financial decisions
- Effective management of money and debt, effective budgeting
- Greater odds of reaching one’s financial goals
- Less financial stress and anxiety
- More informed decision making as to borrowing, investing, managing risk, and purchasing financial products
Although there are financial professionals, such as certified financial planners, available to assist people with their finances, it is always prudent to educate yourself as much as possible. There are many resources that can be accessed, such as adult education classes, online courses, financial books and periodicals, podcasts and others. Here are some basic principles to build a solid financial future:
Create a Budget
Keep track of income and expenses. You can use Excel, a budget app or even a simple notebook. Your budget should include income, and expenses including rent/mortgage, utilities, loan payments and discretionary spending such as eating out, shopping, and travel. This will tell you where the money goes.
Pay Yourself First
Choose a savings goal, such as for a home down payment or college tuition, and set a realistic dollar amount aside each month before you divvy up the rest of your expenses. Also, pay your bills on time and avoid delinquency. This will improve your credit score.
Invest, Invest, Invest
Invest regularly by taking advantage of employer sponsored plans such as a 401(k). Also consider a ROTH IRA, or no-load mutual fund. This may be an area where professional help can be useful, or take a class or workshop in investing. A well-diversified investment portfolio should include stocks, mutual funds, bonds and fixed income securities. A professional advisor can help you determine how much money you will need to retire comfortably.
Also, many reputable investment companies, such as Fidelity, offer free online calculators and other retirement tools. Most experts recommend having three to six months of living expenses saved in a bank or money market, for emergencies, before opening an investment account.
To demonstrate the power of investing over time: If one had invested $10,000 in an index stock fund 20 years ago, and then added only $200 per month thereafter, the value today would be $136,000.00.
Check Credit Report
Review your credit report yearly for any errors and inform the credit bureau of any inaccuracies. Learn what it takes to maintain a high credit score, such as paying your balance in full every month.
Ideally, it would be good to introduce financial principles to students prior to high school graduation. Dr. Kevin R. Simmons, Assistant Superintendent for Instruction and Administration at Smithtown Central School District, explains what financial courses are taught within the district:
“We cover financial literacy in our business course, Personnel Financial Management, which is a half-year elective course open to students in grades 9-12,” says Simmons. “It is also one of the required courses for those students pursuing a CTE Endorsement (Pathway) in Marketing and Accounting/Finance. We cover the following topics in the class: Budgeting, Banking, Checking Accounts, Credit, Insurance, Investing and Identity Theft. “
Parents and guardians can also take a proactive role in educating children on the basics of money management. Planning for college or a career is a good launching point, including opening a savings account, borrowing for college or obtaining a credit card.
Conclusion
Based on the statistics cited above, much can be done to improve the financial literacy of Americans. Starting early and establishing good habits in money management can safeguard one’s financial future and hopefully lead to a better quality of life.
