As we grow up, one of our responsibilities as adults is handling our finances. No one wants to be broke and to be drowned in debt all their lives, right?
Learn from these 32 financial experts who imparted their knowledge of financial literacy and its importance in our lives.
Table of Contents
- To make the best financial decisions
- Being financially illiterate can cause many problems
- If financial literacy was taught in schools, it would change lives
- Debt elimination is a top priority
- Financial literacy is life literacy
- Being financially literate takes time and patience
- With financial literacy, you can build your assets
- To understand how to manage personal finances
- To overcome financial obstacles
- Financial literacy is education in the personal finance and financial realm
- Financial literacy is more than just money
- Financial literacy is needed to survive and thrive
- It impacts the lives of others
- To make smart and responsible financial decisions
- Financial literacy must be taught as early as possible
- To achieve the things you want to do in your life
- Financial literacy can mean different things depending on your goals
- To know your financial vocabulary
- Financial literacy affects the economy’s health and sustainable growth
- To align one’s financial decisions with your priorities in life
- For the greater good of society
- Being financially literate is not the same as being financially responsible
- Make wise decisions regarding savings
- Without financial literacy, you won’t reach financial stability
- To allocate your financial resources efficiently
- To set you up for life-long financial success
- To avoid common financial confusions
- To avoid falling into innumerable tax and decision traps
- To navigate your financial journey successfully
- An essential part of navigating the modern world
- To provide peace of mind and confidence to forge your financial path
- To adapt conventional financial approaches that suit your needs
- Financial literacy is synchronous with your life plan
- To help keep your business
- Financial decisions have lasting consequences
JeFreda R. Brown, MBA, CFEI
Financial Educator | CEO, Provision Financial Education
To make the best financial decisions
Financial literacy is competence in personal business skills and financial education to make effective decisions concerning goals, family, lifestyle, and desires.
It’s having the needed financial skills and financial knowledge to make the best financial decisions for the things that matter the most to a person.
When I teach financial education, I always begin with financial psychology. Financial psychology focuses on people’s mindsets and perspectives about money. We all first learn about finances from someone.
This establishes the foundation of how we develop financial behavior.
Being financially illiterate can cause many problems
Those who have negative financial influences learn negative financial behavior. This leads to developing bad financial skills.
Financial literacy is so critical, but it does not get the attention that it needs. There is more focus on STEM. However, being financially illiterate can cause many problems for a person, even health problems. The Federal Government spends over $3 billion on STEM coursework but less than 1% on financial education.
Financial literacy is essential because over 67% of Americans cannot pass a basic 5-question financial literacy test. It’s important because most people don’t even know what financial literacy is and that they need it.
When the economy collapsed in 2007-2008, many Americans lost their life savings because the market tanked. I had family members who lost thousands of dollars in their retirement plans. There were reports almost weekly of people taking their lives because they had lost so much financially.
This should not have happened. It should never happen.
If financial literacy was taught in schools, it would change lives
Financial literacy is essential because many people still have to work past the age of 70 because they have not planned adequately (if at all) for retirement. Financial literacy is essential because 40% of Americans do not have a net worth over $10,000.
Professor of Finance, Heider College of Business, Creighton University
Two of the biggest financial crises confronted by Americans in the past dozen years have been caused at their core by a lack of financial literacy. Both the financial crisis of 2008-09 and the burgeoning student loan crisis were the result of a lack of financial literacy.
Debt elimination is a top priority
The financial crisis of 2008-09 was precipitated by a lack of understanding of how variable rate mortgage debt worked. People were taking out mortgages with low teaser rates on large homes. When prices rose, many borrowers didn’t have sufficient cash flow to make those rising mortgage payments.
Today’s student loan crisis, at its core, is caused by a simple misunderstanding of how burdensome debt can be. Too many borrowers are funding expensive educations that do not provide the borrower with sufficient earning power to pay off the loans.
Teaching financial literacy in college is too late. By that time, many students have sealed their long-term fate by incurring burdensome student loans. I am an advocate for preparing students for the real world by teaching financial literacy in high schools.
And, this education need not be extensive.
Budgeting, taxes, and debt (including mortgage debt and student loan debt) are the major topics that need to be covered.
Students should be taught that debt elimination is a priority. To quote Albert Einstein, “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”
People can put their Investment house in order by reducing debt and acquiring assets that grow in value over time. The fastest way to change one’s net worth for the positive is to obtain more assets that earn compound in value (like stocks or CDs) and reduce one’s debts and lower interest payments.
Howard Dvorkin, CPA, MBA
Founder and Chairman, Debt.com
Financial literacy is life literacy
‘Financial literacy’ is just the fancy answer to this question: How do you teach people to get the most mileage out of their money? Yet, for some reason, Americans are ignorant about financial literacy.
They’ve learned all about carbs and sugar so they can find the perfect diet and lose weight, but they don’t spend any time learning about saving money so they can lose debt.
That’s too bad because financial literacy is life literacy – after all, money problems are the leading cause of divorce, and the stress of being in debt leads to self-destructive behavior like overeating and over-drinking. It’s hard to be healthy when you’re in debt.
I get it, though: financial literacy is about as exciting as dental hygiene. I mean, we all know we need to floss regularly and brush after meals. But, even though we know those tasks are good for us, we find them so dull that we don’t always do them.
One big difference: Once you need a root canal, the pain makes you change your behavior, and you start taking care of your teeth. But millions of Americans are deep in debt, and their pain doesn’t compel them to spend less and save more.
Americans are so tech-obsessed, I’m surprised they haven’t adopted the latest innovations to save more money. You can use bleeding-edge online tools to help you budget, from Make Change to Mint to a suite of services offered by many banks.
You can learn financial literacy while you’re on your phone waiting in line at the grocery store.
There’s simply no excuse for not knowing what to do with your own money.
Being financially literate takes time and patience
If you take the time to do your homework and gain this understanding of how to work with your money (and make it work for you), you’ll be on the path to financial success!
With financial literacy, you can build your assets
Take investing, for example. Most consumers avoid investing simply because they don’t understand it. Many believe you have to be a savvy business owner to invest in.
This is a misconception: anyone with financial literacy can take advantage of the long-term benefits of investing and build their assets.
Being financially literate while investing means starting small, being consistent, diversifying your portfolio, weighing risk, and understanding that is a long term process. Investing is most effective when it’s done over a long period. This maximizes your potential return.
Richard P. Sabo, CFS, RFC
Owner & Financial Advisor, RPS Financial Solutions
To understand how to manage personal finances
As a fraud consultant and testifying expert, I have worked on thousands of cases over the years where people were getting “ripped off” on life insurance and investments through various schemes because they didn’t have any financial literacy.
Financial literacy is having knowledge or understanding of how to manage personal finances such as life insurance, investing, reconciling a checkbook or the proper use of credit cards, etc.
I often tell people that the reason that I own a financial planning firm is that nobody understands this stuff, and I also have a fraud consulting practice because nobody understands this stuff.
These topics are barely touched on in high school and college, which is ironic because the point of higher education is to help you get a job and make a better living. But they don’t teach you what to do with the money that you make.
If they started teaching financial literacy at a young age and offered classes on it, then there would not be so much fraud going on, and a lot fewer people would be taken advantage of.
I recently spoke at Pitt Law School to a group of law students regarding securities fraud and went over two cases with them. A professor works with the students and handles small securities cases in the arbitration to teach them the basics of handling a situation.
When I explained the details of each case and reviewed things like the fees and expenses that were charged that you don’t see, they were completely unaware of how it worked. I then had to spend additional time explaining the basics just for them to understand the wrongdoing that occurred.
These are people in law school that did not know about basic investments, including the fees and expenses and the different types of financial planners.
Financial Therapist & Couple’s Therapist
To overcome financial obstacles
Financial literacy is knowing how to earn the amount of money you want, understanding your saving and investment options, and feeling confident in your spending decisions and financial management skills.
According to the Bureau of Labor and Statistics, only 1/3 of all Americans use a budget, which means the vast majority aren’t in control of their spending and have little to no idea where their money is going.
Research indicates that people are more likely to use a budget if their income is over $75,000 per year, which emphasizes the importance of teaching people how to increase their revenue and put their hard-earned money to good use.
A 2017 report in MarketWatch found that 50 percent of Americans live paycheck to paycheck, and almost 20 percent of people have no savings to speak of. On surveys, people report feeling anxious and fearful about their financial well-being, but it’s not because they’re poor.
A 2017 survey by Career Builder found that one in ten Americans earn over $100,000 per year, and 28% earn $50,000-$99,000 annually yet still report “struggling to make ends meet.”
With Americans holding $1 trillion in credit card debt, $1.22 trillion in auto loans, and $1.5 trillion in student loan debt, we’re in the midst of a financial crisis that affects all Americans.
Women are at an even higher financial risk than men because they earn about 79 cents for every dollar men earn, which totals about $10,000 less per year. They’re also more likely to take extended leaves of absence from paid work to care for children or elderly parents, which affects their lifetime earnings and the age at which they can retire.
Without financial literacy, women won’t have the skills they need to overcome these financial obstacles.
Lack of financial literacy also impacts women’s confidence when it comes to investing.
A survey in investments by BlackRock found that women prefer to keep 71% of their funds in cash, while men save 60%. This reveals that women tend to play it safe when it comes to managing money, most likely in fear of making a grave financial mistake.
Erring on the side of caution due to a lack of financial self-confidence costs women hundreds of thousands of dollars in compounding interest throughout their lifetime.
Not only do women earn less, but they’re also less likely to take an active role in financial decision making. Nearly 58% of women turn over financial planning to their male partners. Lacking confidence, control, and self-worth, women today are doubting their ability to earn what they deserve and manage it effectively.
As a result, they lose financial power in their relationships, which can have devastating effects in the event of divorce, separation, or death of a spouse.
Because more than 75 percent of people manage their finances without the help of a financial advisor, and only 31 percent of financial advisors are female, women need financial literacy now more than ever.
Research indicates that when women become active participants in their financial lives, they report higher confidence, fewer mistakes, and less stress around money.
When people gain financial literacy, they start advocating for better wages, more paid time off and save more, which better positions them for a secure financial future.
Personal Finance Coach | Motivational Speaker | Author | Owner, ABC’s of Personal Finance
Financial literacy is education in the personal finance and financial realm
Money education is just as important as the three R’s when it comes to life. Money is a large part of everyday life – it is used to take care of our needs and our wants.
Understanding something this important is the difference in you making wise financial decisions or decisions with negative consequences.
Financial literacy is not being taught in schools and in many cases, not at home either. This leaves people with society as their teacher on such an important subject. As Maya Angelou said, “When we know better, we do better.”
We must know to make wise decisions to build wealth and achieve financial freedom.
Founder, One Stop Life Insurance
We’re taught in school how to count money, but we are never taught how to spend money.
Financial literacy is more than just money
This is a crucial part. It’s tied to people’s view of life and the ability to prioritize. When it is all said and done, it doesn’t matter (well, it matters a little bit) precisely what you make, but how you view money.
I have friends who are earning more than I am. However, they are in far worse financial shape than me.
To be financially literate is a sign of having the quality and discipline to be successful in other areas of your life.
It is incredible how the two correlate with one another.
Let me give you an example; many sports players are multimillionaires. They have this lavish and expensive lifestyle. Then one day, they find themselves completely broke. Why is that?
Well, in my mind, they lack financial responsibility and the ability to see life’s bigger picture. Yes, they excelled in one area; however, due to lack of self-control, they failed in finance.
Financial literacy is more than just spending; it is also about our health.
When people are spending beyond their means, often, they will find themselves in debt. Credit card debt, vehicle loans, mortgages, etc. cause them to start feeling anxious and overwhelmed.
It is no surprise to anyone that there are thousands of suicides per year due to financial hardships. This reinforces how critical financial literacy is. It is, in fact, a matter of life or death for some.
Financial literacy means to have the self-discipline to save and buy what you need vs. what you want.
Personal Finance Expert | Founder and President, FinFit
Financial literacy is needed to survive and thrive
Did you know that 57% of employees want guidance and coaching to help them validate their financial decisions?
This is because many Americans don’t feel confident in their own financial knowledge. According to Fortune magazine, ⅔ of adult Americans cannot pass a basic financial literacy exam. We are failing to give Americans the fundamental tools they need to survive, let alone thrive.
This is where financial wellness comes in, and it starts with helping employees identify their current financial situation. Employees want access to resources that will help them improve their financial position and overall quality of life, but sometimes they just don’t know where to start.
Help them define their financial goals and develop a personalized roadmap towards their financial success.
It all starts with education, but it must be personal. The educational tools and resources must meet individuals exactly where they are in their financial journey. And a crucial element to driving engagement within educational platforms is motivation.
Many financial wellness programs offer incentives and rewards to create engagement and drive behavioral change. You must encourage employees to change their habits and their behaviors to create a lifestyle of financial well-being.
President, Real Intelligence LLC
It impacts the lives of others
Financial literacy is probably the least recognized educational topic. The education system has ignored this very critical topic for generations due to their commitment to the basics: math, science, literature, and history.
Here’s why this is so incredibly important: it affects enormous life decisions that can impact the lives of others – in either a positive way or a detrimental way.
When was the last time you heard of someone negatively impacting someone else’s life because they failed an algebra test?
Here are a couple of examples:
Not having financial literacy can affect future generations
While serving on a local board for Junior Achievement several years ago, I was asked to teach a class on how to build and use credit to a classroom full of inner-city high school students. This was a very rough neighborhood!
So, here I was, the white guy in the suit trying to engage this group of kids who didn’t connect with me on a social level and who didn’t want to be there at all. I had to think fast. I threw out a challenge to them. “If I offered to give each of you $1 million OR one penny doubled each day for thirty days, which would generate a bigger outcome?”
They couldn’t wait to figure this out. We went through the math together, and everyone was amazed to learn that the power of doubling your money was more significant than a one-time lump sum. My challenge resurfaced, however, when I began discussing the importance of building good credit.
The reason: they had given up on the idea of ever being able to own their own home, start their own business, or attend college. THIS is the real consequence of not having financial literacy. It is now generational.
One generation after another made poor decisions about finances, and now younger generations have no confidence in the capitalistic system.
Not having financial literacy will make you vulnerable to scams
On the other side of the wealth spectrum, we see people who have achieved some level of success in their lives (I call these people middle-class millionaires) who look like all of us but have enough money to be dangerous. The reason I say this is because their level of financial literacy is also challenged.
The result is they end up trusting manipulative salespeople who make outlandish claims about insane investment performance rates they can achieve. Some have scare tactics about the stock and bond markets to sell some high commission guaranteed product that isn’t intended to be a long-term investment but instead, an insurance policy.
Others become so fearful of these salespeople that they don’t talk to anyone! They end up making it up based on what the next-door neighbor says. Oh, no.
Financial literacy needs to be addressed in schools, colleges, and at the community level.
The decisions that each of us makes affect our families, the community (more successful people pay more in taxes to support community services) and these decisions offer the potential to realize the kind of dignity we all seek.
CEO & Founder, Finance Pal and Community Tax, LLC
To make smart and responsible financial decisions
In today’s consumerist society, financial literacy indeed seeps into every aspect of your life and affects most decisions you will have to make. Being financially literate requires having to restrain from making poor choices that will have negative consequences on your financial well-being.
Instead, budgeting your money, planning for retirement, managing debt, and making overall smart and responsible financial decisions will contribute to your financial health. It’ll help you achieve goals related to early retirement, making big purchasing decisions, and gaining financial freedom.
Steven J. Weil, Ph.D., EA, LCAM
President, RMS Accounting
Financial literacy must be taught as early as possible
Give your children money, and in most cases, the money soon will be gone; and the child will often have little if anything to show for it. All too often, not only is this true, but the results are even worse when children inherit.
We have seen many times where generational wealth transferred from one generation to another, wealth accumulated over a lifetime only lasted the next generation a few years.
Why does this happen? In most cases, it is because we have left others to provide the financial education we should be passing on to our children. The time to do this is when they are young and in their formative years.
Schools don’t teach anything about handling money, investing, insurance, risk management, and planning for the future. But as parents, we can.
From understanding (as my granddaughter put it), “daddy works so we can go to Disney World” to knowing that spending money today means not being able to buy something tomorrow, children can learn how to handle money and how to save. They can learn how to understand markets, investments, and the fundamentals of decision making.
Andrew Housser, MBA
co-CEO, Freedom Debt Relief
To achieve the things you want to do in your life
Financial literacy is the understanding of, and knowledge of how to use, responsible money management skills so that you can achieve the things you want to do in your life.
Managing finances is not an innate skill, but something that is learned – just like math, reading, and writing. Learning about budgets, credit, credit ratings, mortgages, fees, points, savings, interest (and how it can compound for or against you), the actual cost of carrying credit, and more is not rocket science.
They are things most people can learn without too much difficulty. Starting financial literacy education at an early age (even toddlers) is ideal, but it’s never too late to learn these skills.
Related: Best Investing Books for Beginners
The ability to manage your finances well will allow you to achieve your goals. Those goals could be long-term ones, such as buying a house, sending a child to college, or retiring at a certain age.
Those can also include shorter-term ones, such as buying a new TV, taking a vacation, or even having the time to pursue a hobby or sports interest.
Looking at finances and financial literacy as a way to do what you want in your life helps you understand what it means to live within your means, without going into debt. In doing so, you can find a great sense of peace – and a brighter future.
Greg A. Lemons, CPA
Owner, Padgett Business Services | Previous CFO and Controller, Two Fortune 500 Companies
Financial literacy can mean different things depending on your goals
If you’re thinking of starting your own business, financial literacy means understanding how to read a financial statement with an income statement and balance sheet, understanding how a business is taxed, and understanding how you, the owner, can receive income.
It’s also crucial for small business owners to understand financial ratios that relate to their industry.
For example, in the restaurant industry, the average cost of goods sold runs around 40 percent of sales. If a restaurant’s cost of products sold is 55% of sales, they’ll want to take a closer look at their food costs or perhaps increase their prices.”
Financial literacy is especially critical when you’re thinking of starting a business.
Good understanding increases the likelihood that your business will survive, generate profit and income, and thrive.
Victor Fong, CPA, LIT
Trustee and Licensed Insolvency Trustee, Fong and Partners Inc.
To be “literate” in a spoken language (e.g., English) means to be able to read and write it. This requires knowledge of its vocabulary and its grammatical rules.
Hence, to be “financially literate”, one needs to learn its core vocabulary that affects your life.
To know your financial vocabulary
- What is an asset?
- What is a liability?
- What is a balance sheet?
- What is a profit/loss statement?
- What is equity or net worth?
- What is interest?
- What is compound interest?
- What is rate of return on an investment?
One also needs to learn its “rules of grammar” – i.e., basic financial calculations such as:
- How to calculate your equity/net worth (i.e., asset – liability = net worth)
- How to calculate compound interest
- How to calculate your rate of return on an investment
Director, Magnus Financial Group LLC
Financial literacy affects the economy’s health and sustainable growth
For example, paying for higher education has become an increased burden for many Americans.
During the last severe economic downturn, many types of household debt (mortgages, credit cards, auto loans, etc.) decreased, while student debt continued to climb. By 2012, student debt surpassed credit card debt as the second-largest form of household debt behind mortgages.
Educating children on basic financial principals should start at the earliest possible age. I’ve seen that kindergarten children can grasp basic budgeting concepts.
A straightforward approach I’ve found helpful when illustrating budgeting to young children (and college students!) is the use of a bucket of water.
The basic concept is that the water represents money, turning the sink handles represents the job and the bucket represents the bank. If you spill all the water out of a bucket (spend all your money) and have none left, you must go back to the sink (work) to earn more water (money).
A bank account doesn’t operate much differently.
For older children, what my experience working with families has made abundantly clear is that having transparent financial conversations that impact all members of the family is usually more beneficial than ignoring the matter altogether.
While the education system is failing our children through a lack of a continuous financial literacy curriculum, that doesn’t prevent parents, grandparents, and other influential family members from instilling a core set of competencies that will last a lifetime.
Entrepreneur | Founder and CEO, The Money Experience | Co-founder and CEO, Redstar Ventures
To align one’s financial decisions with your priorities in life
For a nation that often seems more obsessed with money than others (and is richer than most), we seem to know very little about how money works. As has been reported by multiple studies, Americans young and old score very low on surveys measuring our understanding of even the most fundamental concepts in personal finance, such as savings, debt, and investment.
Why does this matter? We are amid large-scale demographic and economic trends that are putting a lot of pressure on the system, and the stark reality is that more and more decisions that determine how well we do in these trends are being placed into our own hands.
Goals like being able to own or rent appropriate housing, finance personal hobbies, pay for one’s children’s education and retire at a reasonable age (if at all!) require us to make better financial decisions — to be more financially literate.
There is a standard definition of financial literacy: the ability to use knowledge and skills to manage financial resources effectively. While it touches on essential basics, this definition fails to address a crucial nuance inherent in any discussion about money.
It skims over the fact that managing financial resources “effectively” rarely looks the same, person to person.
So what is financial literacy?
It is the ability to make financial decisions that align with one’s priorities, contributing to a higher quality of life.
One-size-fits-all financial education has been at the forefront of the financial literacy wave ever since it gained momentum, but to us, it’s the wrong approach. Focusing on the ‘how’ without addressing the personal ‘whys,’ ‘whens,’ and ‘whats’ of financial decision-making leaves a lot of room for choices that are deemed “best practices” but don “t necessarily reflect an individual “s best interests.
Understanding the relationship between one’s priorities and the money needs, choices, and consequences that go along with them is extremely important and is often missing from the financial literacy conversation.
Whether because of cultural, religious, or other social overlays, economic accident, or other reasons best left to sociologists to explain, we seem to live in a society where we often build a wall between our finances and what we may call our “real lives.”
For the greater good of society
It’s hard to argue that arming ourselves with the knowledge to make better decisions about money and life wouldn’t result in better personal financial outcomes. There is also a greater good for society that would come of a clearer understanding of how money works with the quality of life.
Life is not all about money.
But it would be foolish to ignore how closely interlinked it is with all the other things we care about in life — health, comfort, safety, family, security, and our greater community.
Investor | Entrepreneur | Author, The Boss Lady Investor, You Don’t Need a D!*k to Understand Money
Financially literacy is understanding how money works in its various forms like cash, credit, investments, and how to manage it so that you can afford to live and thrive.
This literacy includes understanding the differences in spending, saving, putting on credit, investing, and the associated products that are used in these activities (savings accounts, CDs, stocks, bonds, mutual funds, credit scores, mortgage statements, real estate, other investments).
A financially literate person doesn’t have to use all of these products but to be indeed financially literate. Therefore, to be able to assess and make the best decisions for their financial needs, they need to have a basic understanding of the leading financial products available.
Being financially literate is not the same as being financially responsible
Many people are financially literate yet still, make poor financial decisions. For people wanting to thrive, they need to pair their knowledge about money with good choices with money.
Debt Payoff & Wealth Building Strategist, Plantsonify
Make wise decisions regarding savings
Financial literacy is the education and understanding of finances. This can include more focused topics such as personal finance, budgeting, and debt payoff. These personal finance topics aren’t often taught extensively in school but are a huge determining factor in your quality of life.
Having necessary money management skills will allow you to budget and live within your means. Budgeting and allocating money towards categories like groceries and car maintenance takes the stress off of you and your family. You don’t have to worry about unscheduled expenses since you have healthy savings to cover them.
Financial literacy allows you to make wise decisions regarding retirement savings. You’ll understand the various places you can put those savings and not need to worry about how you’ll be taken care of in your golden years.
Being financially literate is an all-around understanding of managing money.
By becoming fluent in necessary personal finance, you’ll create a family environment with less stress and the ability to build generational wealth.
Founder and CEO, DebtMD
Financial literacy is the ability to make sound, intelligent financial decisions with the end goal being to achieve financial independence. This may include utilizing debit or credit for individual purchases, investing disposable income, and budgeting.
Without financial literacy, you won’t reach financial stability
No matter how much income you earn, without financial literacy, you will be unable to reach your financial goals and achieve your desired level of comfort in terms of financial stability. Many people don’t know the difference between good debt (mortgage, student loans) and bad debt (credit cards).
While debt is generally viewed as a negative, if used judiciously, it can help you meet some of your financial goals. In the end, financial literacy comes down to continue educating yourself.
If you don’t make a conscious effort to learn about debt, credit, budgeting, etc., it’ll be challenging to make the right financial decisions and ultimately achieve your financial goals.
Founder and Owner, The Military Wallet and Cash Money Life | Air Force Veteran, Department of Defense
To allocate your financial resources efficiently
Financial literacy helps consumers make good, effective choices about how they utilize their finances. Having the right financial skills and knowledge (financial literacy) helps you routinely pay off debt, avoid new liability, save money, and pad your retirement fund, all at the same time.
To set you up for life-long financial success
For example, exercising this knowledge can help you create and optimize your budget. This requires setting reachable goals, accurately and honestly assessing your current finances, setting your priorities, and then choosing the right budget plan for yourself.
Without financial literacy, you can’t accurately or effectively assess these factors.
Personal Finance Expert, ScoreSense
To avoid common financial confusions
Financial literacy is a general term for having a practical understanding of personal finances but also a broad understanding of standard financial products and professionals and their utility.
When I was in practice, I found that, after at least a few years in the working world, most people did have at least a general understanding of personal finances from the components of net pay to various types of bank and retirement accounts and basic insurance.
By mid-career, most had a general understanding of financial products and professionals but often had common confusions. For example, many confused the tax name and characteristic of accounts with financial products or specific investments. I often heard, “Oh, there’s no risk in my retirement account because there is a guaranteed option.”
Another might be confused to learn that an IRA is merely a tax designation, and such accounts can have any legally allowed investments within, especially if their IRA was at a bank. They thought that a fixed rate was all that was possible in an IRA.
To avoid falling into innumerable tax and decision traps
One woman, I knew, paid half of her mortgage off before a divorce settlement was finalized, then was beyond chagrined to find that she still owed half of the mortgage that remained.
Another man had significant joint accounts with a helpful child, but when he died, all of the joint accounts were now owned by that child, disinheriting three other heirs.
In my early career, I had to break sad pension and insurance news to a divorced widow: The life policy that was to replace the survivor income on her husband’s pension, (he got an unreduced pension, but is then provided no survivor payment). She relied on the policy substitute was canceled by him just before his death: He was owner, and she should have been.
Hence, she had no control over the policy!
Wives who have their husbands handle all finances tend to suffer most from poor financial literacy, whether inadvertently or by deception. From tax gotchas to financial product beneficiary and benefit particulars, one must gain detailed financial literacy, even if only to understand what an advisor may recommend.
Financial Advisor, CRG Financial Services, Inc.
Financial literacy is your ability to understand financial topics and navigate those topics in your financial journey, so you can successfully plan your finances. It’s incredibly important because if you don’t know what you’re doing, then how could you be at all confident you’re making the right decisions.
If you know how to save, budget, and invest, you’ll be so far ahead of the game.
The five substantial parts of financial literacy are:
- budgeting (cost control)
- debt repayment
You need to get your expenses under control to pay down debt effectively. And you need to have your debt under control so you can save for the future.
You need to have the right insurance so that you can protect yourself and your property. You need to learn how to invest effectively, so your savings can do more for you!
Marketing & Growth Manager, Fundsquire
Literacy, or knowing how to read, is an integral part of navigating the modern world, understanding human interaction, and is almost indispensable to success. Similarly significant, though way less common, is financial literacy, knowing how to manage your primary resource – money.
While most people learn their ABCs in school, most are still ignorant about powerful concepts like compound interest, credit scores, and diversification. Many times, these bits of knowledge are major factors that influence life success, differentiating the rich from the poor and putting people on different paths for their entire lives.
Working in finance has allowed me to understand that it’s often not skill or talent that creates millionaires, but financial knowledge.
Spending less than you earn, investing early, looking for value investments that stand the test of time are some of the ingredients of wealth.
While many people see breakout successes like sports and movie stars as examples of “making it,” the enormous fortunes have been built much less glamorously and patiently by people who understood the basics about money.
To provide peace of mind and confidence to forge your financial path
This is particularly true for artists and other freelancers who’ll rarely fit into a ‘typical’ work and cash flow pattern and therefore require a personalized approach to their financial wellness plan.
Financial literacy involves understanding the concepts of investing and building a balanced portfolio and determining how to apply that knowledge to their unique circumstances.
To adapt conventional financial approaches that suit your needs
Even if an artist or freelancer works with a financial advisor, having basic financial literacy knowledge will help them adapt traditional investment approaches to suit their needs better and provide assurance that sound decisions are being made for them.
Attempting to mold an artistic or freelance lifestyle into the financial planning model of more conventional workers fails to address the person’s individualistic needs. It can ultimately lead to discouragement and a lack of a supportive financial safety net.
Instead, they can discover the individuality—and help it shine—by forging the right path forward through financial literacy. Furthermore, the impact of automation on financial planning and wellness—including robo-advisor algorithms—and the overwhelming myriad of potential assets to invest in makes financial literacy a crucial component of everyone’s life.
Personal Finance Expert | Editor, Benzinga
Financial literacy is synchronous with your life plan
Financial literacy is more than just about using Mint or spreadsheets to track money. Money and goal-setting are the tools you can use to fulfill your dreams and values.
So, it goes like this: Values —–> Goals —–> Spreadsheets
In other words, you need to pinpoint your values, figure out your goals (which will support those values), and use a spreadsheet to track them.
Here’s how to do it.
- First, pick a value to help you determine the role that money plays in your life. Think big, overarching themes. For example, “I want to be able to go on vacations!” isn’t a value — that’s a goal. Instead, title your value “Adventure.” That’s much more comprehensive.
- Next, orient your goals toward how you’ll fulfill your value. Start by writing down precisely what you’d like to accomplish in the context of that value. Maybe you’ll write down, “I’d like to take a trip to Japan in November of 2024.” Be specific — and don’t forget to write it down! There’s massive power in writing down your goals. Writing it down ensures you’ll make it happen.
- Finally, create your spreadsheet. This is how you’ll make your goals happen and build your financial roadmap. Here’s where you use your spreadsheet or another financial tracker to contribute $50 per month to, say, a money market fund and save up $3,000 over five years for your trip to Japan.
- Here’s one more step: Create more than just one value. What about five benefits? What are the other roles money plays in your life? Then, sort out your goals, create your spreadsheet, and contribute money toward those goals. These could involve a plan for retirement savings, college savings for kids, etc.
Financial literacy is all about ensuring you get what you want out of life.
You’ve only got one life to live — be sure you’re channeling your money toward your dreams.
To help keep your business
My answer to financial literacy is from a business perspective, ie, business financial literacy.
Business owners, unless they are bookkeepers or CPA’s, start their businesses because they want to solve a problem, have an excellent product/service, or help people in another way. Financials are the last thing on their minds, and they generally don’t pay attention to them.
Understanding and monthly review of financial statements will keep them in business. Not getting and analyzing financial statements each month can lead to bankruptcy.
Financial literacy is understanding the company’s profit and loss statement, balance sheet, and cash flow.
It also has the confidence that pricing is right, profitability is at the level the owners want it to be, and having the courage to fix the minor issues, so they don’t become major crises.
Good financials help business owners make sound business decisions.
Managing Editor, The Money Manual
We teach our kids how to ride a bike, swim, read, arithmetic, how to cook, and do the laundry. And for whatever reason, financial literacy doesn’t cut a lot of parents, and most school curriculum.
In essence, financial literacy is the necessary skills that are needed to make smart financial decisions with money. It is just as important to teach as anything else, if not more so.
Their financial decisions shape so many people’s lives. Did they take out student loans? Do they have credit cards? Have they bought a house?
Financial decisions have lasting consequences
Wrong choices can be debilitating. Right choices can be positively life-changing.
You hear the far-ranging stories all of the time, whether it’s the person who took out student loans and is never able to get out for under the interest payments to the person who started putting money into an IRA in high school who was ready to retire at 50.
I’m so happy to see that we’re moving in a direction where people are advocating for financial literacy to be taught in schools. I don’t think we’re far off from it being a class alongside geometry and history.
But, until that time, it’s so important to take financial literacy seriously.
If you’re a parent, make sure that it’s a skill that you’re teaching your kids before they go off on their own. And, if it’s something that you don’t feel adequately educated on as an adult, do whatever it takes to get up to speed, and quickly.
Your life will be better for it.
Financial literacy is your ability to understand, comprehend, and act on what you read when it comes to your finances.
In many respects, it’s similar to other forms of literacy. For example, digital literacy is the ability to understand and use digital products such as a computer or phone.
Financial literacy is so critical because we all use and are affected by money.
However, financial literacy isn’t consistently taught in schools, and that means we leave school with different levels of financial literacy.
Financial literacy education has a role in building an understanding of how money can be used to meet your goals in life to close those gaps and ensure pathways to financial independence and the ability to retire when we want to stop working.
This includes topics like budgeting or investing – it all starts with financial literacy education.
Financial Advisor & Licensed Insurance Agent, FloridaCarInsurance.com
Financial literacy, at its core, is having the money to manage one’s finances wisely.
But if you do more than scratch the surface, financial literacy is not just knowing that it is essential to manage your money effectively. Still, real financial literacy equips the consumer with the “how” and not only the “what” and “why” of wealth accumulation and management.
Increasing your financial literacy is a proactive approach to your finances in which you develop skills in and knowledge of budgeting, investing, saving, and retirement and tax planning to make sound decisions about your financial future.
Educating individuals with general financial principles such as “Pay Yourself First” and “The Rule of 72” can give them the building blocks they need to begin building their bastions of financial literacy.
As their understanding of general financial concepts and products increases, they will have a preliminary blueprint from which they can continue crafting and customizing their financial fortresses.
The importance of empowering citizens and consumers who are financially literate cannot be overstated.
Financial literacy can elevate individuals and families to achieve financial stability, to become self-sufficient savers, and to break the cycle of poverty in a community that may have spanned multiple generations.
A lack of understanding of financial concepts has often led to individuals and families who are already in bleak monetary circumstances to making poor financial decisions that compound their adverse economic situations.
Author, Savvy Dollar
Sure, the textbook definition of 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.
Okay, but is that all it takes to get ahead financially? Just take a summer course on finance?
The truth is, for many, it is not the lack of knowledge of compound interest and investing in a 401(k) that is holding them back financially.
The intent is there; the issue is the will power to make sound financial decisions.
Whether it effective window advertising that leads to an impulse purchase, exciting friends with expensive habits, or late-night QVC specials, the temptation to over-spend your budget is out there.
There is no doubt that the textbook knowledge of financial literacy is essential. Still, you can argue that learning how to control the emotional impulses that lead to bad financial decisions is more crucial to your financial well-being.
After all, the basic principle of building wealth is to spend less than you earn.
It today’s world where everything is over-hyped and the FOMO (Fear of Missing Out) affects all ages (teens and adults), mastering your financial behavior is essential.
Perhaps, courses on financial literacy for today’s youth should include the psychology of human behavior when it comes to spending. Healthful habits to follow should precede any “book knowledge” courses on finance.
Having both skills is crucial if you want to be able to live a good life without debt and retire in style!
Financial literacy is learning to navigate your finances effectively. It’s something we’re not taught coming out of our education systems but is imperative to being a high functioning adult.
Financial literacy changes as we age and have different needs.
For example, getting out of school, you need to learn things like budgeting, understanding how credit works and how it can help/hurt you. As you age, you need to understand health insurance/medicare products, retirement planning, and social security planning.
Not understanding financial strategies and tools can have a direct effect on your life, and all it takes is a basic understanding to prevent financial burdens for most Americans.