Financial Literacy

Written by True Tamplin, BSc, CEPF®

Financial literacy is the knowledge and confidence to make smart financial decisions. It doesn’t just mean balancing a checkbook, but also taking advantage of opportunities for your future self such as savings accounts and Roth IRAs that offer tax benefits over traditional checking or savings accounts. Financial literacy can help you get rid of debt and build wealth. Financial education is the key to financial literacy.

Why Is It Important? 

Financial literacy is about being empowered to make the best possible financial decisions for yourself, your family, and your future. It’s not just about accumulating wealth or earning a high salary—although both are nice benefits of being financially literate. It allows you to take control of money matters without relying on someone else to do it for you. Financial literacy can improve your overall quality of life. It also has the power to change the world for the better.

How to Raise Financial Literacy Levels

You can’t magically impart financial knowledge to someone. Financial literacy isn’t a simple subject.  Financial decisions are emotionally laden choices about things people care most about. It’s not enough to tell someone that credit cards are expensive, for example — you have to help them see that the cost is coming out of their future and that the scars from using a credit card will last much longer than the initial thrill or relief of getting something they want. Financial education is about developing skills, not knowledge alone — it’s about helping people to think critically about money choices. Effective financial literacy programs also involve experiential learning. Here are some actionable steps that can give you an opportunity to improve your financial literacy levels: 

1. Create a Budget

One of the most basic but effective ways to get more control over your money is by sticking to a monthly budget. This plan will help you identify exactly where your money is going so that you know how much you’ll have for savings, entertainment, and debts. Financial experts recommend using software to help you build a budget that works for you.

2. Find Ways to Increase Your Income

Building a monthly budget will show you exactly how much money is coming in and going out of your accounts, but sometimes expenses can go beyond what’s listed on the report or identified by other people who know your financial situation.  So, you might need to find ways to bring in extra income. Even if it’s an hour a week of bartending on the weekends or babysitting for a neighbor once a month, every little bit helps.

3. Say No to Credit Cards

Yeah, that piece of plastic with your name on it is the gateway drug into the world of credit card debt. The problem with them is that once you run up a balance, it can be hard to pay it down quickly because of high-interest rates and minimum payments that don’t reduce the balance. Financial experts recommend waiting until you can pay off your balances in full each month before treating yourself to something expensive with a credit card.

4. Only Spend What You Have

Financial experts agree that impulsive spending on things you don’t really need is a surefire way to get yourself into debt troubles or hamper your ability to save for the future. Financial literacy means learning how to say no and putting away your wallet when you feel the urge to buy something that isn’t on your budget. Financial literacy also teaches how to recognize a situation where purchasing an object, even if it’s available for sale, is not the smartest option.

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7 Expert Perspectives on Why Financial Literacy Is Important

By Samantha Rose

For better or worse, money touches all areas of life. Financial literacy can help.

Why is financial literacy important?

Financial literacy is important because it equips us with the knowledge and skills we need to manage money effectively. Without it, our financial decisions and the actions we take—or don’t take—lack a solid foundation for success. And this can have dire consequences:

Given the above statistics, it might not be surprising that nearly two-thirds of Americans can’t pass a basic test of financial literacy.

To explore the importance of financial literacy, we turned to personal finance experts working in colleges, high schools, and credit unions. Together, the populations they serve span a broad range of ages, incomes, and backgrounds. These educators witness first-hand the impact that financial literacy—or the lack of financial literacy—can have on a person’s life.

We posed the same question to each of them: “Why is financial literacy important?” Here’s what they had to say.

Expert perspectives on why financial literacy is important

“For college students, financial literacy is important because the formula for college success today only has two factors: grades and money. Professors and instructors thoroughly educate students on academic requirements and grading policies. It’s often new financial responsibilities and realities that campuses are not adequately educating or preparing students for success. Research has even shown that students are more likely to drop out of school because of “outside pressures” than poor grades. Student success is no longer constrained to classrooms or defined by academic performance alone. The future success of our students relies on providing opportunities for them to learn, develop, and strengthen core life skills they need today and more importantly tomorrow as successful graduates. Our team is proud to be creating a new paradigm within higher education by bringing the topic of money out of the shadows. We have become national leaders in our field by confirming that personal financial education services are no longer an exception for today’s students—they are an expectation.”

“Finances inherently—whether or not it’s incredibly short-term in just buying lunch for that day or long-term saving for retirement—help you accomplish whatever your goals are. And financial literacy is important because if you learn about it, it’s going to teach you how to be efficient with your finances in such a way that you can accomplish more goals, and the goals that you do have, faster.

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

“I think if people truly understand the way that financial systems work at an early age, or even later on in life—if they’ve made poor decisions but learn how they can go back and fix them and start planning for the future—they can then encompass that and take the steps to make a better life for themselves.”

Cherry Dale, Director of Financial Education, Virginia Credit Union

“Financial literacy, for me, 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.”

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How 7 tips from ‘Rich Dad Poor Dad’ could help you save up quickly

There are some must-read books in personal finances that will help you develop good saving habits.

Undergoing training and taking the time to read can help you improve economic control so you can become more financially literate and, ultimately, increase your financial freedom.

While many manage perfectly well relying on their intuition to guide their spending habits, it can also be useful to expand your knowledge and set up a budget, an emergency fund, or ensure you have a financial contingency plan in the event of something unexpected.

One way to get on the right track with your money is by reading. 

There is a wide range of reading material that can help you apply a better philosophy to your finances. 

One of them is Rich Dad, Poor Dad, a must-read if you want to learn about personal finance. 

It offers smart ways to escape the vicious circle of working hard for others your whole life while failing to save anything.

Here are seven helpful lessons you can apply from the book to your own life.

1. The rich make their money work for them

You must have heard the phrase “live to work or work to live”. 

This is one of the basic concepts addressed in the book. 

Most work to survive. If they have money problems, they ride them out or ask for a raise. 

This is the vicious cycle most middle and working-class people fall into.

Generally, people with fewer financial resources study to get a good education to qualify for more relevant jobs so they can then earn more money. 

They tend to avoid taking risks for fear of not being able to pay their debts, being fired, or not having the money they need to survive.

On the other hand, rich people make money and don’t work to earn it. 

In other words, they buy assets that generate income. This is one of the book’s most important lessons.

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7 Lessons from The Richest Man in Babylon: Build Wealth Like a Millionaire

By Andrew

The Richest Man in Babylon by George S. Clason is a fascinating lesson in personal finance written in short, easy-to-digest stories. It was first published in 1926, but the classic parable style and timeless concepts about how to build wealth continue to provide value as if it was written today.

Originally written as a series of pamphlets, the parables were eventually collected into a book. The book provides many timeless lessons about spending, saving, and investing to build wealth that are as applicable today as when it was first written.

The Richest Man in Babylon – Summary in 3 Sentences

The book is set in ancient Babylon, and follows the story of Arkad, the richest man in all of Babylon, imparting his wisdom to a younger man, Bansir, who wishes to become wealthy.

It lays out the basics of personal finance – spend less than you earn, save 10% of your income, and invest wisely – in an engaging parable format (stories told to teach a lesson). The book teaches that if you follows these basic lessons, work hard, and continue improving your skills, you can build future wealth through passive streams of income.

7 Lessons from The Richest Man in Babylon

The book is divided into three sections. The first 7 lessons are the “cures for a lean purse” that Arkad (the richest man in Babylon) shares with Bansir, and then there are two other related parables that impart the last two bits of wisdom. This article will cover the overarching lessons in the book.

Here is a summary of the main lessons from The Richest Man in Babylon:

  1. Pay Yourself First
  2. Live Within Your Means
  3. Put Your Money to Work
  4. Keep Your Money Safe
  5. Be a Homeowner
  6. Insure Your Future Income
  7. Improve Your Skills to Earn More Income

Lesson 1 – Pay Yourself First

This, my students, was the first cure I did discover for my lean purse: For
each ten coins I put in, to spend but nine.

The first lesson given by the wealthy Arkad to his students was to pay yourself first. This may be the most basic maxim in all of personal finance, but if you don’t follow it, you will never escape the paycheck to paycheck cycle.

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