If you’ve spent any time reading up on education or financial news lately, you’ve probably come across the term financial literacy. The goal behind teaching financial literacy is to help people develop a stronger understanding of basic financial concepts—that way, they can handle their money better.
That’s a worthy goal, especially when you consider a few stats about how the typical American handles money:
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Nearly four out of every five U.S. workers live paycheck to paycheck.
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Over a quarter never save any money from month to month.
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Almost 75% are in some form of debt, and most assume they always will be.(1)
Ouch! With those numbers, it’s no surprise that leaders in business, education and government want to help spread the benefits of greater financial literacy to as many people as possible.
In fact, it mattered so much to lawmakers, in 2004 the Senate passed a resolution officially recognizing April as Financial Literacy Month to “raise public awareness about the importance of financial education in the United States and the serious consequences that may be associated with a lack of understanding about personal finances.”
What Is Financial Literacy?
Financial literacy is the possession of skills that allows people to make smart decisions with their money.
And don’t be misled by the word literacy. Although understanding stats and facts about money is great, no one has truly grasped financial literacy until they can regularly do the right things with money that lead to the right financial outcomes.
When you have this skill set, you’re able to understand the major financial issues most people face: emergencies, debts, investments and beyond. Financially literate people know their way around a budget, know how to use sinking funds, and know the difference between a 401(k) and a 529 plan. Here are the concepts financially literate consumers have mastered:
Budgeting
It’s one thing to learn how to add and subtract in elementary school, but it’s something else entirely to actually apply those principles to your own finances! Most Americans live paycheck to paycheck, and it’s largely because of a gap between what the math says they can afford and what they actually spend. Financial literacy can make people habitual budgeters who are willing to save for their goals and delay gratification in order to have peace of mind, both today and in the future.
Emergencies
Only 39% of Americans would be able to cover a $1,000 emergency if one happened to them today.(3) And actually, about 40% of Americans wouldn’t even be able to cover a $400 emergency.(4) But people who become financially literate learn how to build a $1,000 emergency fund—and from there, learn how to grow their emergency fund to include three to six months of expenses for those times when life throws a bigger curveball.
Debt
In addition to mortgages, which amount to nearly $9 trillion in debt nationwide, Americans are weighed down with auto loans, credit cards and student loans. The Federal Reserve Bank of New York reported in 2018 that the total consumer debt in America had reached $3.95 trillion.(5) To see how that debt load impacts daily living, consider the fact Northwestern Mutual reported that 40% of Americans spend up to half of their monthly income in debt payments.(6) A big part of financial literacy focuses on understanding how the time and money people spend on paying off debt hurts their ability to invest in their future.
Teaching financial literacy skills in schools is becoming more popular all the time. After all, what better place to communicate these life lessons around money than in the classroom? And you can probably guess that we believe financial literacy is as fundamental to learn as reading and writing!