Did you know nearly two-thirds of American adults can’t pass a basic financial literacy test?
This alarming statistic emphasizes the importance of prioritizing financial literacy training in our personal development. Neglecting this area poses a significant danger in our ability to achieve our long-term goals.
Many people feel unprepared for managing their personal finances because schools are not required to provide financial literacy training. This lack of education leads to a lack of confidence in managing finances.
How does one become “financially literate”? Is there an amount you need in the bank? Do you have to complete a college course? Do you get a trophy in the mail at some point?
For most people, financial wellness comes from a combination of life experience and making sense of the overwhelming and conflicting advice from the financial services world. This is incredibly challenging because it’s difficult to know if you have the right advice or are on track for your financial goals.
In this blog, we will address how you can become more proficient in your knowledge of personal finances, the benefits of doing so, and how to overcome barriers to financial literacy. Let’s jump in!
The Building Blocks of Financial Literacy
Financial literacy is a crucial skill that impacts various aspects of life.
At its core, becoming financially literate means you understand how money works, and can use this knowledge to make informed decisions. Put another way, understanding and effectively managing personal finances isn’t just about making money. It’s about making smart decisions that align with your values, priorities, and long-term aspirations.
To build your foundations in personal finance skills, it is important to develop an understanding of these key areas:
- Budgeting: This involves creating a plan for your money, outlining how much you earn, spend, and save. It helps you prioritize your spending and ensures that you’re living within your means. Budgeting is the foundation of good financial management.
- Saving: Saving is setting aside a portion of your income for future use or emergencies. It’s about building a financial cushion that can help you deal with unexpected expenses or achieve long-term goals, such as buying a car or traveling abroad.
- Investing: Investing is putting your money into assets with the expectation of generating a return in the form of income or appreciation. This could include stocks, bonds, mutual funds, or real estate. Investing is a key strategy for building wealth over time.
- Understanding Credit: Credit is the ability to borrow money or access goods and services with the understanding that you’ll pay for them later. It’s important to understand how credit works, how to build a good credit history, and how to manage debt responsibly to maintain your financial health.
Mastering the basics of personal finance will open doors for you to achieve more than you ever dreamed of. Areas impacted by financial planning include education, career, homeownership, and retirement – to name just a few.
A strong financial education equips you with the knowledge to make informed decisions about educational investments, manage student loans, and navigate the home-buying process confidently.
This understanding fosters career advancement, supports investing aspirations, and ensures a comfortable retirement with long-term financial security. Beyond these tangible benefits, financial literacy reduces financial stress, improves mental well-being, and empowers individuals to make confident, informed decisions about their financial futures.
Ultimately, financial literacy is about empowering individuals to take control of their financial lives, achieve their goals, and build a secure and prosperous future for themselves and their families.
The Benefits of Financial Literacy
To get even more practical, let’s examine three scenarios where having an understanding of personal finance would impact a person’s well-being and future plans.
The Importance of an Emergency Fund:
- Scenario: Sarah, a young professional saving for a new apartment, faces an unexpected car repair that she cannot cover with the money in her checking account.
- Without Financial Literacy: Without an emergency savings fund, Sarah puts her repair costs on a credit card, forcing her to delay her apartment plans and pay off her debt.
- With Financial Literacy: With an emergency fund, Sarah could cover unexpected expenses without affecting her debt level or future plans.
Managing Student Loans and Debt:
- Scenario: Michael, a recent engineering graduate, struggles to repay student loans and save for future goals like buying a car and a home.
- Without Financial Literacy: Without a debt management plan, Michael accrues additional interest and faces financial stress.
- With Financial Literacy: With a clear repayment strategy, Michael can save on interest and work towards achieving his future plans more efficiently.
- Scenario: Emily, in her early 30s, is unsure about investing for retirement and determining how much to save for a comfortable future.
- Without Financial Literacy: Emily might make uninformed investment choices, leading to insufficient retirement savings and financial insecurity.
- With Financial Literacy: With retirement planning knowledge, Emily can make informed investment decisions, maximize her savings, and aim for a secure retirement.
These practical scenarios show how important it is to have a good understanding of financial management. Having a robust financial education empowers you to make informed decisions about your finances, achieve financial stability, build wealth, and ultimately live a more secure and fulfilling life. It’s an essential life skill that can have a profound impact on your financial well-being and overall quality of life.
Overcoming Barriers to Financial Literacy
Starting to learn about money can feel tricky, especially when you’re faced with common barriers like a lack of education, feeling overwhelmed by complexity, cultural attitudes about money, and fears or lack of confidence. These barriers can make you feel stuck, unsure of where to begin, or even embarrassed to ask for help. Let’s explore some common barriers to feeling confident in your money and how bolstering your financial literacy can help.
- Lack of Educational Resources: Did you know that 78% of American adults are considered to be “financially illiterate”? Without basic financial knowledge, it’s easy to feel lost when trying to manage your money. You might avoid making a budget or feel unsure about how to save and invest. To overcome this barrier, start by learning some basic money skills. There are many easy-to-understand resources, like books and online articles, that can help you get the hang of these concepts.
- Feeling Overwhelmed by Complexity: The financial world can seem complicated with terms, products, and options that are hard to understand. This complexity can lead to confusion and hesitation to take action. To make things easier, break down complex topics into smaller, manageable parts. Seek guidance from your financial Mentor or someone you trust who can help explain things in a way that makes sense to you.
- Cultural Attitudes About Money: Talking about money is hard. Cultural norms and attitudes towards money can create feelings of shame, embarrassment, or reluctance to talk openly about financial matters. This can make it challenging to seek help or learn from others’ experiences. To break down this barrier, try to foster open conversations about money within your community or with trusted friends and family members. By sharing your thoughts and questions, you can learn from their experiences and feel more confident about managing your finances. Remember, your mentor is here to create a safe space for you to ask your money questions and ensure that you are on the right path.
- Fears or Lack of Confidence: Fears about making mistakes, facing financial hardships, or not knowing enough can hold you back from taking proactive steps to improve your financial situation. Low confidence can lead to avoidance and missed opportunities for growth. To build your confidence, start by setting small, achievable financial goals. Celebrate your progress along the way, and don’t be afraid to ask for help or seek professional guidance from your Mentor when needed.
Start a mini course in your Mentoro platform to improve your knowledge on personal finance today! Backed by behavioral science, these modules are tailored to your specific interests so you can learn the way you want to learn. Remember, improving your financial skills is a journey, and it’s okay to take it one step at a time. By acknowledging and addressing the barriers affecting your path to more financial literacy and staying committed to learning and growing, you’ll become more confident and better equipped to manage your money and reach your financial goals.