The Basics of Financial Literacy
Financial literacy is the possession of the set of skills and knowledge that allows an individual to make informed and effective decisions with all of their financial resources.
– Wikipedia
Much has been said about financial literacy, and more specifically, much has been said about the need to raise these skills in American consumers. While one might be forgiven for thinking that a lack of financial literacy is exclusively a problem with young people and students, the National Foundation for Credit Counseling’s Financial Literacy Survey revealed that 41 percent of adults gave themselves a grade of C, D, or F regarding their knowledge of personal finance.
That’s almost half the adult population who are poorly educated when it comes to managing money. And while only 17 states now require high school students to take a course on financial literacy, these courses have been proven to have a direct impact on a student’s ability to make wise financial decisions. That’s still less than half the country. Are we putting two and two together?
Students who have some personal finance classes under their belts are much more likely to successfully save money, budget wisely, and invest smarter. And it’s not just how to balance your checkbook or set a monthly budget. In a Retirement Income Literacy Survey conducted for The American College of Financial Services last year, 80 percent of the respondents received scores of 60 or lower on financial questions about retirement. Just 20 percent received what amounted to a passing grade.
So let’s take a closer look at what exactly does financial literacy consists of. Here are the five key components that make up this area of much-needed education in Americans:
1. BUDGETING
Creating and maintaining a budget is one of the most basic aspects of staying on top of your finances. Without following a budget, it’s difficult to hold yourself accountable on where your money is coming from and what it’s going toward, so mastering the basics of budgeting is where any financial novice should begin.
2. INTEREST
Understanding the ins and outs of interest can impact your finances more than you likely realize, so it’s an important concept to gain a better understanding of early on in life.
3. SAVING
Obviously, saving is an important aspect of maintaining a healthy financial situation. Learning to save early on can help you gain the knowledge as well as practice and set of skills you’ll utilize throughout your entire financial life.
4. CREDIT AND DEBT
Credit can be an extremely useful tool — if it’s managed correctly. Making rash decisions when you’re young can end up costing you throughout adulthood, so it’s important to grasp the concepts and tools behind responsible credit practices and the basics of credit scores as early on as possible.
5. CYBERSECURITY
Millions of Americans are the target of cyber theft and fraud each year. In this modern day-and-age, identity theft is more prevalent than ever. Since everything is digital and just about everyone has shopped online at one point or another, your financial information is more vulnerable to fraud.
Understanding this concept, along with preventative measures like password protection and limiting the amount of information shared online can be the key to maintaining safe accounts or, inversely, can lead to financial ruin.
IMPORTANT DISCLOSURES
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities.
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David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual's personal circumstances. Member FINRA & SIPC.