April is Financial Literacy month! According to recent financial literacy and wellness studies from Standard & Poor’s (S&P), Global Financial Literacy Survey, the TIAA Institute- Personal Finance Index, and FINRA, many US adults lack basic financial literacy skills. Moreover, because so many adult Americans lack the basics of financial literacy skillsets, they cannot make sound financial decisions per the Milken Institute’s Financial Literacy Report in the United States. When people cannot make sound financial decisions, they tend to have less money throughout their lifetime and are less likely to pass down wealth to their children, increasing the wealth gap in our country. Therefore, to help close the wealth gap, all Americans must have basic financial literacy skills.
What is Financial Literacy?
At the core, financial literacy is simply knowing how to manage money, make more money, and protect the money you have earned. Conceptually financial literacy seems easy to learn- just spend less money than what you make, invest your money for many years and create a will to pass down the wealth you have gained to your loved ones. However, the record high of increasing personal debt in America reported by the Federal Reserve (April 2022) is evidence and an alarming indicator that financial literacy is either a misunderstood skill set or is an area that needs more attention.
What is the Impact of Financial Literacy in Society?
When society truly understands and values the importance of financial literacy, there is a decrease in personal debts that do not build equity, such as personal loan debt and credit card debt (specifically credit cards that are not paid in full each month). These debts cause people to pay large sums of money in interest instead of making more money through earning interest from investments. Albert Einstein said it best, those who understand interest earn it… those who do not pay it.” The impact of people lacking financial literacy skills is paying interest for years, if not decades, instead of investing the money spent in interest and earning interest vice paying it. This is one negative impact of the lack of financial literacy skillsets that widen the wealth gap in our country. Companies earning the interest make a higher profit and have more money to reinvest into the company. Meanwhile, those who are paying interest loose the ability to build wealth.
Financial literacy also impacts people’s credit scores. Typically those who have a high credit score understand the basics of credit management. However, there are exceptions when life happens. For example, if someone loses their job, although they have an emergency savings account after the emergency savings account is gone and the person still does not have a job, they may have to make a decision between placing food on the table vice paying a student loan, in this case, someone’s credit score may begin to fall. Overall though, those who understand financial literacy and place financial literacy skillsets into practice will typically have a higher credit score because they know that over 60% of their FICO credit score is based on making their payments on time and borrowing less than they need as the amounts owed. Having a high credit score allows you to qualify for lending products such as reward credit cards or lower interest rates for a mortgage. People can leverage mortgages to build wealth because, typically, real estate will gain value and will be worth more money over time. When someone does not understand how to build a high credit score by not paying their bills on time or having a credit card balance close to the credit card’s limit, their credit score will suffer. A lower credit score means fewer opportunities to qualify for a mortgage and, worse, having a high-interest rate paid monthly to a lender.
The lack of financial literacy in our society harms people and our economy. People who are not financially literate are more likely to be in debt, have fewer savings, and make poorer choices that can have long-term consequences. Financial literacy helps to reduce these problems by teaching people how to manage their money wisely and understand the risks associated with different types of investments. In addition, increased financial literacy would help create a more stable economy by encouraging consumers to make more intelligent purchases and save. Therefore, it is essential to learn how to manage your money effectively to achieve sustainable peace of mind. At Tailored WealthSaver, we are dedicated to helping to improve financial literacy skillsets. If you would like to learn financial terms to enhance your financial literacy skillset, download our free e-book, The Language Guide: 55 Must-Know Financial Terms here
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