Why is Financial Literacy So Important?
April is Financial Literacy Month, dedicated to increasing awareness of the need to support financial education programs and to helping educate the public on financial basics. But why is it so important to be financially literate?
Well, the statistics speak for themselves. Americans are woefully under-informed about their finances and not just how much money they have in their bank accounts, but the whole spectrum of things which make up the sum total of one’s financial life and behaviors. This is especially true for younger folks. The financial literacy of high school students has fallen to its lowest level ever, with a score of just 48.3%.
The average score for college students on the same 31 question exam, however, was 62.2%, nearly 15 percentage points above that of high school seniors. [1]
In addition, scores improved for every year of college, with seniors averaging 64.8%. The good news is that American college graduates are close to being financially literate and probably will be so with more life experience.
The bad news is that just 25% of our young adults are graduating from college, and this number appears to have stabilized. This means that 75% of young American adults are likely to lack the skills needed to make beneficial financial decisions.
There are many personal finance classes available to anyone who cares to search them out. But for the most part, knowing what the difference between credit and debt is, and a general overview of banking and financial terms won’t necessarily translate into making better financial decisions, according to Richard Cordray, director of the U.S. Consumer Financial Protection Bureau.
“People have to understand where they may need to go and get more information," Cordray explains. Experiential learning," Cordray says, "has been shown to be very effective at reaching young people."
Experiential learning, such as following the stock market, or getting lots of credit card offers and comparing them, and seeing the information in context and how it applies to the real world is key.
Other studies have shown that requiring high-schoolers to take more math would promote better financial decisions which in turn would positively impact their financial lives.
It doesn’t take an expert to see how two and two add together here. Giving a person a better grasp of math, in general, will allow them to understand concepts that relate to math in their future.
For instance, teaching a high school student about mortgages is somewhat pointless, but if they understand math, then when the time comes, mortgages won’t become a scary idea that can’t be understood.
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.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable– we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
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