why financial literacy matters
day to day living expenses living within your means short term borrowing long term budget forecasting to manage these and other essential financial realities properly as you go through life you must be financially literate it is important to plan and save enough to provide adequate income in retirement while avoiding high levels of debt that might result in bankruptcy defaults and foreclosures in its economic well being of u s households in 2022 report the u s federal reserve system board of governors found that many americans are not prepared for retirement twenty eight percent indicated that they have no retirement savings while about 31 of those not yet retired felt that their retirement savings were on track among those who have self directed retirement savings about 63 admitted to feeling low levels of confidence in making retirement decisions 3lack of financial literacy has left millennials the largest share of the american workforce unprepared for a severe financial crisis according to research by the tiaa institute even among those who reported having a high knowledge of personal finance only 19 answered questions about fundamental financial concepts correctly 4forty three percent reported using expensive alternative financial services such as payday loans and pawnshops more than half lacked an emergency fund to cover three months of expenses and 37 were financially fragile defined as unable or unlikely to be able to come up with 2 000 within a month in the event of an emergency 4millennials also carry large amounts of student loan and mortgage debt in fact 44 of them said they have too much debt 5though these may seem like individual problems they have a wider effect on the entire population than previously believed the lack of knowledge of mortgage products prior to the 2008 financial crisis created widespread vulnerability to predatory lending the financial impact of that crisis affected the entire economy financial literacy is an issue with broad implications for economic health if you are a younger individual retirement may seem years away yet it is one of the best goals to begin saving for that s because the earlier you start the longer your invested savings will have to compound and the more money you ll end up with an employer sponsored retirement account such as a 401 k can help benefits of financial literacybroadly speaking the benefit of financial literacy is that it empowers individuals to make smarter decisions about their finances in addition strategies to improve financial literacy skillsdeveloping financial literacy involves learning and practicing skills related to budgeting managing and paying off debts and more it means understanding and using credit and investment products wisely the good news is that no matter where you are in life and financially it s never too late to start practicing good financial habits here are several practical strategies to consider track how much money you receive each month and how much you spend you can use an excel spreadsheet paper or a budgeting app your budget should include income paychecks investments alimony fixed expenses rent mortgage payments utilities loan payments discretionary spending nonessentials such as eating out shopping and travel and savings to build savings this reverse budgeting strategy involves choosing a savings goal such as paying for higher education deciding how much you want to contribute toward it each month and setting that amount aside before you divvy up the rest of your expenses stay on top of monthly bills making sure that your payments are always sent to arrive on time consider taking advantage of automatic debits from a checking account or bill pay apps and sign up for payment reminders by email phone or text once a year consumers can request a free credit report from each of the three major credit bureaus equifax experian and transunion through the federally created website annualcreditreport com 6review these reports and dispute any errors by informing the credit bureau of inaccuracies because you can get three of them consider spacing out your requests throughout the year to monitor your credit regularly in a 2022 survey by the federal reserve 27 of adults in the u s reported not doing okay financially the number who reported not living comfortably increased from 2021 7a good credit score enables you to obtain the best interest rates on loans and credit cards among other benefits monitor your score via a free credit monitoring service or if you can afford to and want to add an extra layer of protection for your personal information use a credit monitoring service in addition be aware of what can raise or lower your scores such as credit inquiries and credit utilization ratios use your budget to stay on top of debt by reducing spending and increasing repayment develop a debt reduction plan such as paying down the loan with the highest interest rate first if your debt is excessive contact lenders to renegotiate repayment consolidate loans or find a debt counseling program if your employer offers a 401 k retirement savings account be sure to sign up and contribute the maximum to receive the employer match consider opening an ira and creating a diversified investment portfolio of stocks fixed income and commodities if necessary seek financial advice from professional advisors to help you determine how much money you will need to retire comfortably and develop strategies to reach your goal example of financial literacyemma is a high school teacher who tries to inform her students about financial literacy through her curriculum she educates them on the basics of a variety of financial topics such as personal budgeting debt management saving for college and retirement insurance investing and even tax planning emma s students can and will use these concepts for things like renting an apartment getting a first job or even just paying for fun activities such as going to the movies understanding concepts such as credit cards bank accounts interest rates opportunity costs debt management compound interest and budgets for example could help her students start saving and manage the student loans that they might rely on to fund their college education it could keep them from amassing dangerous levels of debt and threatening their credit scores similarly she expects that certain topics such as income taxes and retirement planning will eventually prove useful to all students no matter what they end up doing after high school 