Why Is Financial Literacy Important?
Isn’t it wild that a 2018 study found that only one-third of adults in the USA can answer at least four of five financial literacy questions correctly? A 2018 assessment of 15-year olds found that 16% were below a proficient level of financial literacy, 22% demonstrated a basic level, and 12% demonstrated the highest level of financial literacy. The same studies found that African-American and Hispanic adults answered even fewer literacy questions correctly. Why is financial literacy important? Keep reading!
What is Financial Literacy & Financial Education?
According to the U.S. Financial Literacy and Education Commission, financial literacy describes the skills, knowledge and tools that equip people to make individual financial decisions and actions to attain their goals; this may also be known as financial capability, especially when paired with access to financial products and services. A financially literate person is empowered to be a better steward of their resources.
On the other hand, financial education is the process by which people gain information, skills, confidence, and motivation to act, through various means, including classroom education, one-on-one counseling and coaching, technology-based interventions, and self–study.
Why Is Financial Literacy is Important?
- Better decision making and informed judgments
- Savings, investments, and financial planning will be less complex
- Financial literacy and education impact every aspect of our lives
- Certain demographics are disproportionately affected by the lack of basic financial literacy, further widening the wealth gap
- According to CNBC, nearly half of Americans don’t have enough money to retire comfortably
Here are a few statistics that further highlight why financial literacy is important:
- According to MagnifyMoney, over 50% of Americans live paycheck to paycheck
- In a 2020 survey by Travis credit union, 35% of Americans said they spent more than they earned
- According to Bankrate, 27% of Americans have more credit card debt than emergency funds. Millennials, woman, and non-white respondents were more likely to indicate this position
Who Should Be Responsible For Financial Education?
In my opinion, financial lessons should be taught throughout our lives. Financial literacy should begin at home, continue at school (elementary, high school, and university), and then should be further advanced in the workplace as part of the onboarding process.
Basic Financial Literacy Should Begin At Home
Financial literacy should be a lifelong pursuit that begins at home, but it often doesn’t. The truth is, whether parents admit it or not, parents are a child’s first teacher when it comes to everything, finances included. Research shows that parents who have three or more types of savings are more likely to have kids who discuss money with them (and less likely to have kids who spend money as soon as they get it (40% vs. 52%) or lie about their spending (34% vs. 43%).
Parents and guardians are uniquely positioned to equip their children with financial literacy by:
- Having honest but age-appropriate money conversations
- Leading by example and leading with transparency
- Providing opportunities for practical/hands-on money management
Financial Literacy In Schools
It’s also wild that while financial literacy will benefit 100% of students at any institution, it is not a required part of the curriculum. Yet, subjects like algebra that have little relevance for most students remain on there. At the age of 18, young adults should have undergone financial education such that they understand the basics of budgeting, saving, debt, investing, and giving. With this foundational knowledge, young adults are equipped to build good money habits early on and avoid the mistakes that often lead to challenges that take decades to undo (if it is possible to undo).
As of 2020, only six states require a standalone personal finance course in high school. Those six states are Alabama, Iowa, North Carolina, Tennessee, Utah, and Virginia. For children from lower-to-moderate income families, mandatory personal finance learning in high school may be their only chance at financial education. Financial literacy is a social justice issue.
On a positive note, in 2019 New Jersey made financial literacy mandatory for all high school and middle school students. New Jersey assemblywoman Angela V. McKnight and personal finance expert and 1st generation Nigerian American immigrant, Tiffany “The Budgetnista” Aliche were key in getting the legislation passed.
Wouldn’t it be great if part of the onboarding/orientation process included a number of financial education modules for professionals entering into the workforce? A May 2020 PwC survey found that for 54% of America’s workers, financial matters or challenges are the largest sources of stress. Good financial literacy programs at work would relieve employee stress, increase productivity, and improve recruiting and retention. The report showed that 38% of employees had less than $1,000 to deal with unexpected expenses. Broken down by generation, 62% of Gen Z, 37% of millennials, 34% of Gen X, and 37% of Baby boomers could not handle a $1,000 emergency. Companies can serve employees through the following
- Financial well-being questionnaires/assessments
- Programs that recognize the diversity of financial literacy levels within the workforce
- Actionable, relevant, and timely information
- Provide tools for better decision making such as automated savings,
Financial Literacy Upon Immigration
When it comes to financial education and financial services, immigrants are generally underserved. Many immigrants suffer financial distress because of a lack of knowledge of their new country’s financial systems. As the children grow up, it is often an additional burden not only to support the family but also to educate their parents even as they try to learn the system.
Financial Education Through Independent Courses/Programs
Today, financial education is largely obtained through webinars, apps, blogs, and books. Financial education is now available via social media (TikTok, Twitter, Instagram). These have a likelihood of catching the attention of millennials and Gen Zs, and while social media sound bites make an excellent starting point, they are never enough. They are a call to go deeper on financial topics.
To this end, webinars, apps, blogs, courses, and books are often the next steps for the independent learner. The good news is that with the right level of due diligence, there are a lot of great online programs.
Financial literacy is just as critical as any form of education. Unfortunately, many remain in the dark until it is late and financial mistakes have been made. The good news is, there are options but until it comes required learning, it is up to the individual. The individual must pursue an interest in financial awareness and carve their own path to better our lives, our families, and our communities.