What Does it Really Mean to be Financially Literate?

What does it mean to be financially literate and does it really matter in the overall scheme of things?

April is National Financial Literacy Month, a campaign dedicated to increasing the public’s understanding of personal finance. William Gale, a fiscal policy expert at the Brookings Institute, defines financial literacy, as the ability to make informed judgments and effective decisions regarding the use and management of money and wealth. Not surprisingly, individuals who are more financially literate are better equipped to make decisions regarding their budget, savings, consumption, borrowing habits, investment choices and retirement plans. This month seeks to educate individuals, young and old, to help them better manage their money.

A 2008 national survey from Jump$tart Coalition reports that the financial literacy of US high school students has sunk to its lowest level of 48.3%. The FINRA Investor Education Foundation state by state financial capability survey in 2010 also finds that young US adults, aged between 18 and 34, are more likely to be financially illiterate than older US adults. Women were also more likely to be less financially literate than men. Given that women live longer than men this could potentially put women at risk financially due to their limited knowledge of finance and assets.

Your lack of financial literacy can have broader negative economic consequences, contributing to bad business cycles, low savings rate, decreased value of the dollar and inflation. Lower levels of financial literacy are linked to negative behaviors such as debt accumulation, high cost borrowing, and lack of mortgage payments. In addition, poor financial decisions also hurt workplace productivity. On the flip side, there is a strong relationship between higher levels of financial literacy and good financial habits. Individuals who have a greater knowledge of finance are more involved in their personal finances like keeping track of expenses, paying bills on time, budgeting, and investing.

Shockingly enough, the 2013 Consumer Financial Literacy Survey reveals 33% of US adults learned about personal finance from their parents and 78% of US adults believe counseling from a financial professional would benefit them. Given these facts, it is no wonder that most people are not equipped with the knowledge to make sound financial decisions. In order to increase financial literacy we need to provide more educational resources in public schools, universities, workplaces and communities to close the gaps in knowledge and understanding of financial issues. You do need to be in the know about your money and how it works.

Financial literacy education has had a positive influence on students and employees. Students exposed to financial education believed the way they managed their money would impact their future. They were also more likely to set money aside for the future and pay off debt. Employee retirement seminars boosted employee participation and contributions to savings plan.

It’s in your best interest to be as financially literate as possible, no matter your goals or the circumstances of your situation. As a nation, US consumer debt totals over $1.3 trillion. There has never been a more important time to address the growing population of financial illiteracy. Stay tuned for the next post of our three part blog series on financial literacy!

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