Financial Literacy…How Important Is It?

LeeHeadShot4   Financial literacy has quickly become the hot new buzz term in personal financial management, but what does it truly mean?

Financial literacy refers to having a basic understanding of how money works, as well as, how to apply knowledge and skills in financial managment to make well informed decisions concerning personal financial matters.  How you earn money, manage money, invests money or donate money to help others are all part of financial literacy.  The more knowledgeable you are about basic financial principles, the better financial decisions you are able to make.

In the wake of the Great Recession, there’s been a lot of finger pointing going on where people of all stripes have played “the blame game” where personal finance meets personal responsibility.  While it is true that many consumers acted irresponsibly taking on more debt than they could afford, it’s also true that commercial entities took on more risk than they could reasonable manage.  Nonetheless, this isn’t about whose more at fault for the present state of our nation’s economy.  It’s about what you can do to take control of your personal economy.  The truth is that for over a generation our nation has fostered a culture of consumption and debt, and that culture has led consumers to take on more debt obligations than they could reasonable afford.

I remember when I was in high school one of the mandatory courses I had to take as a senior before I could graduate was Government and Economics – or “civics” as some like to call it.  Aside from learning how our government worked, this course also taught the basics in financial management. I admit it hasn’t always been easy for me to apply those financial skills I learned back then in my every-day life as a consumer, but I do try to live by the sound teachings I learned from that mandatory course back in my high school days and I can honestly say that in applying those teaches I’ve managed to make a few prudent financial decisions along the way.

I say this to make a point:  financial literacy is something that has to be taught! You can’t just pick it up as you go along. Granted, certain aspects of financial literacy are rooted in common sense, i.e., don’t spend more than you earn, but true financial literacy requires having a keen understanding of various aspects of consumer finance, such as, how to properly calculate interest rates whether it’s the Annual Percentage Rate (APR) on a credit card, the interest rate on an Adjustable Rate Mortgage (ARM) or simple compound interest earned on a savings account.  Knowing how to “do the math” properly can help you to make better buying decisions that are sure to affect your bottom line.

It’s a fact that wages have remained flat for many Americans. As such, our overall buying power gradually decreases over time with inflation.  Unfortunately, the only alternative many consumers have to made up the difference between what they earn and what they’d like to afford is to put more and more of their purchases on their credit card, or take out a home equity loan or a line of credit against their home.  Is there any wonder then why so many people are living paycheck-to-paycheck or that fewer households have anything in savings or that many ordinary people are unable to invest because they just don’t have the extra capital to do so?  The only way to change things is for consumers to return to using sound financial principles, and it begins with implementing one common sense practice – drafting a budget and maintain it regularly.

No matter who you are, what you do or what side of the economic divide you’re on every financial planner, credit counselor or tax accountant will tell you that unless you maintain a budget on a regular basis, you’ll never know where you’re money’s going, where the excesses are, what you can do realistically to cut back on expenses or how much of your hard earned money you can put to work earning you money.

Improving your financial literacy is key to becoming a better steward of our money and will also help you to make better financial decisions.  As you consider your financial literacy skills, ask yourself the following questions:

What steps have you taken to become more financial literate?

What’s the worst financial mistake you’ve ever made and what did you learn from it?

What’s the best financial decision you’ve ever made and how did the decision improve your net worth?

What advice would you give to your partner, spouse or child concerning how to invest in their financial future?

That’s my blogpost for this week.  Become part of the discussion by posting your comments below.  And don’t forget to tune in next week where I’ll once again share more ways you can break the debt cycle and then go…beyond.

Zebert L. Brown is the author of the book, Break the Debt Cycle in 3 Simple Steps He is also a 16 year Navy veteran with specialties in administrative management, career development and public relations.  Like him on Facebook and follow him Twitter.

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