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I’ll not scare you with the same old shocking facts to show – how bad your finances are, the debt trap and lack of savings blah blah blah…. But of course, we’ll discuss financial literacy.
Let’s take a different approach
You must be familiar with these annoying words: living paycheck to paycheck, looming student debt, and no emergency fund etc. We hear them quite often in today’s economic environment.
Because for a very long time, our wages have been stagnant, but the cost of living has gone up to astronomical levels. Food, rent, gas, the education you name it everything has gone up.
No doubt these are major challenges we are facing today, but there is also another side of the coin.
Why we are struggling so much with our finances? What went wrong?
The root cause of the problem is the lack of financial knowledge.
Though having the basic financial education is must for all adults, still we lag behind as the S&P survey shows only 57% of adults in the US are financially literate.
The situation is even worse for millennials, as the number of people with debt is consistently going up, not paying bills on time, spending more than saving and not enough for retirement are common for all.
In this article, I’ll try to answer all these questions – what is financial literacy, why we are lacking it, why we need financial awareness, It’s key components, how to learn the finance basics? Make sure to read it till the end.
So, what is financial literacy?
Financial literacy is the knowledge of basic financial concepts which helps people to take decisions related to their money. It covers financial concepts like making a budget, saving, paying bills on time, managing debt, planning for home buying, investing for retirement and be aware of financial frauds.
Ok, we got the problem,
But why we don’t have the money skills? What’s stopping us?
Main causes for lack of financial knowledge
1. They never taught us in schools: Remember your junior high school days, they taught us history, science, maths, and literature almost everything, but they never taught us simple money concepts of saving, credit, and investments.
As a result, when you grow up and start earning you find it difficult to manage your money and finances. Brilliant young minds end up in debt trap with poor finances and broke up for rest of their life.
2. Our Parents never taught us: When it comes to money, most of the patents don’t discuss it with their kids. Parents are more concerned about kids behavior, health and studies, which is essential but they are missing one major life skill – money basics.
It is important to teach kids about money concepts at a young age. How to save money, making a budget, how to pay bills on time and spending wisely are some of the basic money lessons which help kids when they start earning.
3. Spending lifestyles: Our lifestyle has spoiled our spending habits. we want all the latest gadgets, peer pressure to upgrade our cars. All over the places, discounts and offers urge to shop more.
Credit cards reward points & schemes are designed to force us to do mindless shopping which ends in wasting money on things which we don’t actually need.
4. Attitude towards money: When we live with family we don’t care much about money, as our parents are there to look after our monetary needs. It’s just our mindset to money.
The game changes when we enter the real world and start earning, it becomes difficult to manage things and we struggle to meet our financial responsibilities. Our wrong money attitude leads to drowning down in debt.
Why we need financial literacy?
1. To keep our finances in good shape – With a solid financial foundation, we are better equipped to set our financial goals like – home buying, children’s education and enough fund for retirement.
2. Economic challenges – The world economies are more interconnected now than before due to globalization. There is always concern over the recession, trade war, taxes, and rising costs. We should know which factors hurting our money and finances.
3. Job challenges – We have been facing prolonged stagnant wages and on the other side we have skyrocketing prices, how to meet monthly expenses? There is more pain with the advancement of Artificial Intelligence escalating fear of more job losses ahead.
4. People are living longer – As our healthcare systems improve, we are living longer than before so we need more funds after retirement to sustain the present lifestyle.
5. Financial products have become complex – When it comes to investments and savings, there are too many financial products in the markets like ETF, Annuity plan, REIT and many more. To understand all these complex financial products, we need deep financial knowledge.
6. Limited support from government – There is a rising trend where the government is significantly cutting our social benefits in the form of reducing pension, social security money, and reduction in healthcare benefits. There is no guarantee of government support in the future, therefore we need to take charge of our finances without depending on the state.
The key components of financial literacy:
Budgeting is the core of basic finance lessons, because the other parts of finance puzzle like controlling unnecessary expenses, saving, investing or debt reduction planning are connected with budgeting.
One should know how to make a budget, combine all incomes and deduct all expenses for a given period and analyze where your money is going. Budgeting helps to track your expenses, identify wastage and channelize savings and investments to reach your financial goals.
Making the budget gives us a clear picture of our monthly expenses, how much is needed for food, rent, transportation, and debt payments etc.
A budget helps in:
- Managing incomes and expenses
- Pay bills on time
- Tracking expenses
- Saving more money
- Control wastage of money
- Creating an emergency fund from small budget savings
- Pay debt early by channelizing excess budget savings
2. Managing debt
Poor money skills lead to the debt trap, and it left us with regret rest of our life for accumulating so much debt. One fine example is the student debt crisis.
Before taking any debt, analyze your repayment capacity based on your present and future income. Also, compare the benefit of that debt against its real cost. If it’s worth it, go for it.
Learning about debt reduction techniques by utilizing your budget savings to pay off debt early.
One should know basic money math like calculating simple interest rate, compound interest rate and the time value of money.
Basic knowledge of how to building the credit history, credit scores and how to improve credit score by paying debt on time.
Debt management covers:
- Before taking debt, analyze pros & cons, is there enough income to finance that debt?
- Understanding how car payment and credit cards payment works.
- How to calculate interest rate – simple & compound, time value of money.
- Understanding credit score & building credit history.
- Debt reduction techniques.
3. Savings & Investments
One of the core objectives of financial literacy is to save money to achieve financial goals. For saving again need to manage income and expenses through budgeting.
Life is uncertain, any time we have emergencies like medical expenses, major car or home repair and legal settlement. To fund these emergency expenses, we must have an emergency fund.
A small amount can be saved from budget to build an emergency fund.
We need to invest money from our savings to achieve our financial goals like – home buying, children’s education, and retirement planning.
Lack of financial knowledge is the main reason for insufficient funds for retirement. we need to invest in right funds to get enough returns to cope with the rising cost of living.
Savings helps in:
- Creating an emergency fund
- Early payment of debt
- Retirement planning
- Achieving financial goals like buying home
- Investing in assets to generate income in future
4. Financial Terms
For most of us, financials terms always come as a question mark. Though we have a brief understanding of 401K and IRA, we lack deep knowledge.
Terms like mutual funds, bonds, and stock markets have a deep impact on our finances. It’s a must to understand the working of the stock market and the factors affecting stock prices.
The types of mutual funds, bonds and certificate of deposits (CD) available in financial markets. Some financial products are complex like the fixed and variable annuity.
Important factors for financial products:
- To know how to open an account for dealing in stocks, bonds, and MFs.
- Risk factors in each financial product.
- How to buy or sell.
- The whole mechanism of financial products. how things work?
- What is the cost incurred for the services?
- Tax implications.
Apart from these, there are other financial terms related to the economy like Inflation, Gross domestic product (GDP), Fed rates and many more which affects our lives. All these terms form the part of financial awareness.
5. Knowledge about government welfare programs
Financial literacy also covers understanding about federal and state welfare programs for healthcare, housing, education and many more.
Government welfare programs are meant to empower real needy and weaker sections of society. One can take advantage only when he/she has full knowledge about the welfare program.
Some examples of welfare programs:
- Public housing – Provide housing to the low-income group at subsidized rates.
- Social security – Old age pensions, income for disabled and unemployed
- Healthcare – Medical aid, health insurance
- Education – Loan forgiveness
Before applying for any welfare programs, one should have complete knowledge about the requirements like:
- Eligibility for welfare programs
- Documents required
- Amount of monetary benefits
6. Spotting financial frauds & scams
Financial frauds are rising at a rapid pace never seen before. It’s all over the place credit card frauds, fake checks, quick rich schemes you name it.
Financial education helps in spotting these frauds and scams. One of the key objectives of financial education is to create awareness about financial fraud and scams.
As a consumer, we should always be very vigilant using our credit cards, ATMs or the document we are signing. Pay special attention to alerts and notices issued by authorities about the frauds.
Earlier it was thought that elderly people are more vulnerable to financial frauds, but the recent data from federal trade commission suggest that millennials are also its victim.
Types of financial scams & frauds
- High return Ponzi scheme
- Fake IRS phone calls
- Identity theft
- Cloning of Credit or ATM card
- Hacking bank accounts
Main reasons for being a fraud victim:
- Don’t ask questions about any schemes or investments.
- Not doing your research before giving your money to such schemes.
- Risky behavior like sharing personal information online like PINs and passwords
- Sharing personal information to unknown phone calls
- Clicking on email links & downloading email attachments.
How to become financially literate?
To become financially literate is not a rocket science, there are tons of resources available all over which we discuss later. Firstly, you need to develop a habit of reading about finance topics, it may be from magazine, newspaper, T.V. or internet.
Take a step by step approach, starting with budgets and small saving, then move towards debt and investments. And finally on more complex topics like financial terms, welfare programs, and spotting scams and frauds.
Next step would be to practically apply that knowledge in your life. Try to analyze how much did you learn and keep updated with the new things in the finance world.
Ways to improve financial literacy:
1. Search over the internet
The easiest way is learning basic finance skills is to go through websites like –
- Government websites – mymoney.gov, investor.gov, and usa.gov/saving-investing
- Personal finance blogs – The penny hoarder and making sense of cents
- YouTube guides on various money topics
- Finance related articles on – Entrepreneur, Inc, and Forbes
Finance topics are broadly covered in business & finance sections of leading newspapers and magazines. For all those book lovers, there are some best works in finance –
Newspapers – The Wall Street Journal, FT, The New York Times and Washington Post
Magazines – Forbes, Money, wired and Fast Company Read books
Books – The richest man in Babylon, The behavior gap and Rich dad, poor dad
Some of the great personal finance podcast where the top money experts share their financial wisdom are:
- So money
- The Dave Ramsey show
- Staking Benjamins
- Smart Passive income
You can watch some of the interesting money and financial shows on T.V.
- CNBC – Mad money, The Suze Orman show
- Fox News – Forbes on Fox
- ABC – Shark tank
One of the excellent ways to learn financial lessons is through courses. Almost all leading universities have financial awareness programs. These programs include workshops, resources, and question & answer sessions.
- University Programs – enroll for Financial literacy programs
- Online courses – from Udemy or online universities
- The seminar, webinar, and workshops conducted by university and educational institutes
6. Ask your family members, friends
Your elder family members have a lot of experience in dealing with money matters, it’s a good idea to ask their help in managing finance. One can also take the advice of friends and co-workers, they all face similar challenges of money and finances as you.
7. find a mentor
A mentor who will guide you on the way to learn financial skills. Look for a mentor or teacher who is good with money. A mentor can be from your family, friend, boss or your spouse. Share your doubts and problems with your mentor, ask questions, discuss your options and try to find a workable solution.
The final words
Financial literacy is an important aspect our life, as our life depends upon how we earn and spend our money. If you find it difficult to manage your finances, no matter how old are you, it’s never too late. It is not that difficult either, anyone can learn basic money lessons. As I discussed earlier, there are great resources available all over the places. You just need to make choice, from where you want to start learning.
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