What you should know about financial literacy
If you have ever read articles or news on financial topics, most likely you have come across the term financial literacy. The goal of financial literacy training is to help people understand basic financial concepts. So they can effectively manage their money. This is a worthy goal. Especially if you take into account the statistics (the sample was made in America, but the situation in Russia is hardly better):
- Four out of five workers live paycheck to paycheck.
- More than a quarter have never saved money in their lives, spending all their earnings.
- Almost 75% have debts and loans.
Looking at these numbers, it is not at all surprising why financial literacy courses are so popular and actively being promoted both online and in real life.
Interestingly, in 2004, the US Senate even adopted a resolution, officially recognizing April as the month of financial literacy. The main objective of this decision is to “raise public awareness of the importance of financial education in the United States and the serious consequences that may be associated with a lack of understanding of personal budget management principles.”
As more and more people come to realize the importance of financial literacy, it is worth asking the following questions: what skills, traits and experience do financially literate people have? And how does a set of these traits and skills really affect your personal budget?
What is financial literacy?
Financial literacy is the possession of knowledge and skills that allow you to make sensible decisions related to money.
And do not let the word “literacy” mislead you. Knowing the rules, statistics, and facts about money is good. However, no one really became financially literate, without having tried in practice the “right” things that lead to the “right” financial results.
When you possess these skills, you’ll understand the main financial problems that most people face: lack of money, debt, wrong investments and much more. Financially literate people know how to manage their budget. They know how to use cash flows and will be able to explain to you the difference between a savings fund and pension contributions. Here are the aspects that financially literate people have mastered:
It’s one thing to learn addition and subtraction in elementary school, and quite another to apply these principles to your finances. Most people live paycheck to paycheck. And the main reason for this is the gap between mathematics, which they can afford, and what they actually spend. Financial literacy will teach you to save, save for your own purposes and distribute funds so as to be calm for your present and future.
If an unforeseen situation occurs and a large amount is urgently needed, the majority will not be able to get it. However, a wise minority knows that living from paycheck to paycheck is a so-called perspective. Therefore, they specifically set aside a certain percentage in the reserve – just for such cases.
In addition to mortgages, which almost every third person in the country has, people are burdening themselves with auto loans, study loans and credit cards. To see how this debt burden affects everyday life, you should be aware that many people pay about half of their monthly income to pay off debts. Financially literate people understand that spending time and money to pay off debts could be spent investing in your future.
By the way, in American schools are becoming increasingly popular lessons on financial literacy skills. And rightly so – financial awareness is as important as reading and writing.
How many people are financially literate?
Based on the previously reviewed statistics, it is fair to assume that most people do not know how to handle their money. And although no one can determine exactly how many people have financial literacy, the lack of these skills in the majority is pointless to deny.
For example, if we take the criterion of the ability to live not from paycheck to paycheck and calculate the number of such people, the result will be no more than 20%.
Another criterion for financial literacy can be the habit of keeping a budget – accounting for income, expenses and planning. So, less than a third of all workers are engaged in this. Most of them find it difficult to stick to their budget framework.
Let’s take a look at the results of a test conducted in the States. More than 17,000 people from all 50 states took part in financial literacy testing. According to the results, less than half of the participants (48%) were able to answer 30 questions that deal with pain such things as budget management, paying bills, setting financial goals and other topics related to personal finance.
Less than half answered basic questions, and the average result was 63% correct answers!
But there is a positive trend. Now many young people are interested in such topics and increase their financial literacy in special courses . In 2016, the American organization Ramsey Solutions Research interviewed more than 76,000 American students attending such courses and classes. And their results contrast sharply with the above statistics. Students who have completed financial literacy courses understood such key aspects as:
- the difference between credit and debit cards (86%);
- how income tax is formed (87%);
- how does home, motor and life insurance work (90%);
- What are pension funds and how they function (79%).
Are you financially literate?
To understand whether it is possible to classify oneself as financially literate people, one should consider the following questions and answer them honestly:
- Do you know how to create a monthly budget plan that includes all of your basic expenses, bills, debentures, and the necessary funds for future purchases?
- Do you have debts and loans? Do you take active steps to reduce them?
- Do you know how much money you spend on living for three to six months?
- Do you have a “reserve fund” that will allow in case of unforeseen circumstances not to worry about where to get the money? For example, in case of loss of work or the need to repair a car.
- Do you know what compound interest is and how they allow you to invest and accumulate funds?
- Do you know what types of insurance exist and which ones are necessary to protect finances and investments?
- Do you understand the difference between investments and insurance premiums?
What steps to take to become financially literate
If you answered positively to all questions or at least most of them, congratulations! Most likely, you are among the lucky few who, without exaggeration, can be called financially literate.
However, even if this is not the case, do not despair. There are seven basic steps that will bring you closer to understanding how money works. If you follow them, you can easily improve your financial situation and become more prosperous in terms of money.
Create a cash reserve
Set aside at least 10-15% of each income. This will help you feel more confident and will prevent unnecessary worries in case of unforeseen expenses. (Later it will be possible to postpone even more).
Eliminate all debts
Above, you yourself have seen how much debt slows down financial progress. To get started, just make a list. List on paper all available debts – from the smallest to the largest. Then gradually start paying them. Redeeming the smallest, go to the next, the last paying the largest. This creates a snowball effect and in the end all obligations are paid.
Savings are another area where good financial habits help. Having paid off debts and having accumulated a more or less voluminous reserve of money, direct all your energy towards saving living expenses. Hold on for three to six months. If everything works out, the annual amount will be quite impressive.
Set aside 15% of income for the upcoming retirement
As practice shows, it is never too late (or not too early) to start planning retirement. It never hurts to take care of the time when the work will have to leave due to age. And to secure a happy, comfortable old age. Use the services of proven pension funds or set aside funds yourself (for example, by investing in stocks or in real estate). Investing at a rate of 15% or more will help avoid long-term inflation. Or at least significantly reduce the damage from it.
Save money on training
Most students enroll in educational institutions for a fee. The most rational option is to attend to this issue in advance and begin to save money. You can also use special state programs.
Pay your mortgage as early as possible.
For most people, the monthly payment for a mortgage loan is the largest item of expenditure in a personal or family budget. Imagine that you will never again have to pay a mortgage. Why not hasten the moment to come?
Send money to your goals
The goal of financial literacy is not just knowledge. The real goal is to be able to use the money for really important needs. Such as a decent pension, the ability to spend more time with family, traveling, helping other people and so on.
Financial literacy is a better future.
After reading this article, most likely, you have already formed a clear idea of how financially literate you are and at what stage you are. Perhaps you still have something to learn. However, to tighten the missing knowledge and skills is not difficult. Especially considering how much material can be found online and how many financial literacy courses are organized everywhere.
It is very encouraging and encouraging that now more and more people are becoming financially literate. This not only benefits individuals, but can also change and transform for the better the family, the community and even the whole nation!
Many educational institutions, centers and individual teachers are already working to convey the importance of owning financial literacy to millions of people across the country. In the same America, thousands of high school and high school graduates annually receive training in the Personal Finance Management program. There they successfully master the rules of personal budget management and acquire all the necessary financial literacy skills that enable them to achieve success in life. It is very important that future generations possess this knowledge and be able to handle money.
If you are a teacher specializing in financial literacy, or have just embarked on the path of learning in this field, share your experience.