Financial Literacy Is Important Because 2 Out Of 3 Americans Can’t Pass A Literacy Test | Learn How To Make Your Children More Aware
By: The Truly Wealthy
Tags: Financial Literacy, Financial Planning, Money Management, Financial, Financial Literacy Tips

The number one problem in today’s generation and the economy is the lack of financial literacy — Alan Greenspan, Former Chair of the Federal Reserve of the United States.

For better or worse, money touches all the areas of life. Financial literacy is crucial because it equips us with the knowledge and skills that we need to manage money effectively. Lack of financial literacy and not having the skills to manage personal finances cost a high amount to Americans in the year 2019. NFEC conducted a research in the year 2019 to estimate how much Americans lost during the year due to lack of financial knowledge and poor money management habits.

A total of 2,506 people participated in the survey between 31st December 2019 and 3rd January 2020. Six different age groups were interviewed in the survey, which asked a single question from the participants — “During the past year (2019), how much money do you think you lost because you lacked knowledge about personal finances?”

If we generalize the results to represent the then population of 240 million adults, lack of financial literacy cost Americans a total of more than $307 billion in 2019. That is surely a whopping number.

Financial literacy is as imperative as earning money. Financial literacy power individuals to manage money with confidence, effectively allocate the earnings to the goals and limit the debt sensibly. In this blog, we’ll be covering the importance of financial literacy and how to teach money management skills to your children?

Let’s start with the basics -

What is Financial Literacy?

Financial Literacy is the confluence of financial, credit and debt management and the knowledge that is quintessential to make financially sound decisions — these decisions are integral to our everyday lives. Financial literacy impacts the daily issues an average family makes while managing their expenses, investing in a home, funding in their children’s education and ensuring an income at retirement.

According to the United States Treasury’s Financial Literacy and Education Commission, financial literacy is “the ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial wellbeing.” Lack of financial management knowledge makes it hard to make major financial decisions like opening the right kind of savings account, investing, planning for retirement and paying off debts from student loans or credit cards.

Why is Financial Literacy Important?

Financial literacy helps you manage money with complete confidence, which means effectively allocating the earned money to the goals and limiting the debt.

In the year 2016, Bank of America conducted a study which included participants between the age of 18–26. Here are the findings of the study:

Only 16% of the millennials were optimistic about their financial future. 24% were not too optimistic about their financial future. 54% were somewhat optimistic when it comes to the financial future. 6% were not at all optimistic about their financial future.

The study showed that we are missing extremely valuable opportunities to teach the skills that will help the young generation become financially responsible citizens.

In the same year, Fortune published an article which stated that 2 out of 3 Americans can’t pass a financial literacy test. Vince Shorb, CEO of the National Financial Educators in California, US, while promoting financial literacy, asked 1,100 young adults between age 18–24 what high-school-level course they want to be a part of their curriculum. Over 50% of students asked to include “money management.”

Lack of financial literacy among the coming generations not only affect the economy of the nation but also leads to mental health issues like anxiety. In a report published by Bank of America in partnership with USA Today, author Andrew Pepler describes how the financial state of millennials determines their happiness and wellbeing in other areas of life. The survey published in 2015 portrays the cyclical nature of financial stress. Millennials who worry about their finances, at the later stage become worried about other areas of their lives.

The report shows the rising of anxiety amongst millennials due to lack of financial literacy and highlights the stress caused due to lack of money to manage the student loan, cost of living and for the wedding. Thus, financial literacy is not a thing of adults, like various other values, this should be inculcated in children from a young age itself. From the moment of birth, a child starts developing behavioural habits. Building financial literacy for children involves taking proactive steps to mold positive behaviours around money handling that counteract marketing and other social influences.

Here are expert perspectives on why financial literacy is important?

Paul Goebel, Director, Student Money Management Center at the University of North Texas

Cherry Dale, Director of Financial Education, Virginia Credit Union

“Financial literacy, for me, is the most personal debt I have…between my wife and I we paid off $110,000 of debt in five years, because we just learned how to organize our finances in such a way that allowed us to do that. You know, we don’t make a ton of money, but by learning the process and learning what you can do to better organize your life through financial literacy, you can accomplish things a heck of a lot faster and more efficiently.”

Phil Schuman, Director, MoneySmarts Program at Indiana University

Latoya Goree, Director, Office of Financial Literacy at UMKC

Travis Cook, Education Specialist, Utah State Board of Education

What are the Basic Financial Literacy Skills?

There are so many choices when it comes to how to safeguard and invest in your money. Although teaching Financial Literacy Skills can be overwhelming, financial literacy begins with basic skills which should be taught to children at the young age itself. In the book, The Art of Allowance, author John Lanza has identified following three core money-smart skills that kids can begin learning at early stage:

Distinguishing between needs and wants

Setting and saving for goals

Making smart money choices

These basic skills provide the foundation for financial literacy skills. Every family has a different approach to develop the financial understanding among children. It is important for parents to understand that when we learn from our experiences and embrace our financial mistakes, we craft a useful program for our children. Many parents have also found that during the process of teaching their children, they also learned a lot about themselves and made adjustments on how they used to manage money.

When you equip your children with basic financial literacy skills, you will make your teenagers traveling towards adulthood with increased responsibility of handling their own financial responsibilities.

5 Financial Literacy Skills to Teach your Children

Financial literacy starts by teaching the following lessons to your children:

Sensible and responsible financial decisions start by being able to differentiate what is necessary to have and what is nice to have. Families spend their money first on essential needs like food, shelter and healthcare. Meanwhile, spending money on nice-to-have purchases such as toys and vacations is a priority after essential needs are met.

Older children and teenagers can further refine the difference between needs and wants. For instance, smartphones in today’s internet-driven world can be considered as a need, however desiring iPhone11 is a luxury. Likewise, home is a necessity, however, having a personal bathroom falls into the category of want.

Children, whether from poor or average households or wealthy families, need to know that money is finite, which means money used in purchasing one item won’t be available to purchase the other item. An easy way to teach this is to make children participate in everyday choices.

For instance, you can take them for grocery shopping and let them decide between two items, such as nutrition-rich milk powder (need) and cookies (want), and tell them that you don’t have enough budget to buy both.

According to Adrienne Penta, executive director of the Center for Women and Wealth, one of the foundational financial lessons is to make your child understand how to make a purchase. Practicing delayed gratification helps children make savings for necessary expenses in adulthood like college.

Parents can help children practise delayed gratification by not purchasing every item they request. Parents can solidify this even more by not making impulse purchases themselves and explaining to children while shopping that they are not purchasing something because they don’t need this at the moment. When it comes to children making their own purchases, parents should ask questions like “Is it necessary to have it now or can you have it later?”

Most of the lessons children need to learn to become financially literate relates to the behavior and value, and not to the technical aspects of how money works. However, credit is an exception here.

Children should be taught that credit means borrowing from others and this comes with a cost. Children should also know that credit can be a valuable tool. According to Dave Ramsey, personal finance expert and American Radio Host, credit can lead to overspending and significant interest expenses. However, credit is not bad as long as it is used responsibly and this is what you need to teach your children — using credit to their advantage.

Teaching credit to young kids can be intricate as it is an abstract topic, however, teenagers can grasp the concepts and can use online debt calculators to see how interest adds up into loan.

By the time your kid is a teenager, you should provide them with savings examples by setting them up with a simple bank account. This takes money management to the next level and will prepare them for managing a much heftier account as they grow old.

By the time they join their college they will be equipped with the importance of savings. And by the time they head off to the university to accomplish their dreams, they will more likely have a savvy sensibility about managing their expenses.

One of the hard parts of giving children the control over money is that they are sure to commit mistakes, which might make you lose some of your hard-earned bucks. But, it is not important to rescue them from every mistake, they should have the liberty of making their own decisions. By learning from their mistakes, they will grow into adults who can manage their money as well.

The Bottom Line

As 7th century Muslim sage Ali ibn Abi Talib promoted, “There is no greater wealth than knowledge, and no greater poverty than ignorance.” Knowledge of managing the finances can not keep children off the debts, but with savings for emergencies.

We hope this article helped you in understanding the importance of financial literacy and why it is important to equip the coming generation with knowledge of money management. Comment your views and share with us further advice or tips on how to help children become financially literate.