Many people understandably want it all: the career and the salary that comes with it, the security, the success, and the “happily ever after”.
Financial Literacy in the United States: How Important Is It?
At the very least, people want a career that will pay them enough to live a secure and comfortable life. However, what most people don’t know is that it doesn’t end at your income.
Arguably even more important than how much money you’re making is how you’re managing it, and that’s where financial literacy skills come in.
Any kind of skill relating to money can be categorized as financial literacy. You certainly can’t hope to ensure your family’s financial security or establish your own personal wealth without the skills.
On the other hand, without basic financial literacy, you are unlikely to have savings, will likely rack up losses due to poor financial decisions, and are at risk of falling into debt.
In this article, we will explore what financial literacy is, as well as argue for its importance.
What, exactly, is financial literacy?
Financial literacy is the ability to understand and use basic financial information to manage one’s financial resources. Having a high level of financial literacy can help you achieve many goals in your life, such as owning a home, investing in the securities markets, starting a business, and so on. Some of the key skills in financial literacy are listed below:
- Financial management skills: this is the ability to save and invest money to help it maintain its value and also grow.
- Credit: this is the ability to manage one’s debt to income ratio by always having a manageable level of debt.
Some of the common terminology you will hear in financial literacy includes the following:
- Creditworthiness: this is your ability and likelihood to pay back your debts. Lenders are always looking to loan money to the most creditworthy individuals.
- Credit score: this is a number representing your creditworthiness, as calculated based on your credit record. The higher your credit score, the greater your likelihood of being approved for a loan, and the better the terms you can get.
- Compound interest: Compound interest allows your money to earn interest on its interest. In the long term, this can cause your investment to grow exponentially.
- Collateral: this is a physical or financial asset that you put up to secure a loan. If you fail to pay the loan, the lender can auction your collateral to recoup their loan.
- Purchasing power: also known as buying power, this is a measure of how many goods and services you can pay for in a given currency, taking inflation into account.
- Investment portfolio: Your investment portfolio is the mix of investments you have made, such as stocks, bonds, and others. Your portfolio can sit in an investment account, such as a 401(k) or a Roth IRA
It is important to understand the basic terminology used when talking about your savings and investments as it allows you to make better decisions. It also gives you the opportunity to take part in financial conversations and debates.
For example, when you study financial literacy in college you may encounter questions like what do you think about the penny debate essay? Read about it here: https://eduzaurus.com/free-essay-samples/penny-debate/. How will discontinuing the penny affect normal people’s lives and why should we keep the penny, rather than discontinue it? Financial literacy would enable you to think reasonably about such a subject and allow you to take a well-thought-out stance.
The importance of financial literacy
So you might be wondering how important financial literacy is to your everyday life. How does knowing what collateral is help you achieve your financial goals in the near and long term? Below are a few reasons:
You will make better decisions
Financial literacy helps you to make more accurate and effective decisions in your life, helping you avoid debt traps and achieve your life goals.
For starters, you can use financial literacy to make better short-term goals. For example, say you want to go on vacation this year.
If you know about budgeting, you can create a weekly budget and then stick to it, allowing you to deposit a small amount each week to your savings account. This allows you to save for your vacation while staying on top of your bills and credit card payments.
Financial literacy can also help you achieve your long-term goals. Say you started a family and just had your first child. With basic financial literacy, you would know to open a 529 savings plan, which allows you to set aside tax-free savings for your child’s education.
You will be better prepared for emergencies
Life is pretty good at throwing curveballs to us, and financial literacy helps us catch them. There will always be unexpected things, such as car repairs, or hospital bills.
Basic financial literacy allows you to adequately plan for that with an emergency fund. You will also have the ability to look for and assess loan options and terms to help you deal with such unexpected occurrences.
You will make earlier and better investments
With financial literacy, you will understand the importance of making early investments and know all about investment options like IRAs and 401(k) accounts. This knowledge can help you start investing early in the right places.
You will be able to avoid pitfalls
Financial literacy will enable you to understand how credit works and to better manage your credit. With financial literacy, you will be able to avoid common debt pitfalls that most people fall into.
As you can see, financial literacy is not only important to your life – it is essential. By seeking to grow your financial literacy, you can easily achieve your life goals and avoid common financial pitfalls.
Brian Caudill is a writer and editor with years of experience. He enjoys writing about complex subjects for the everyday reader, making things easier to understand. When not writing, he’s most likely learning. He is an avid reader.