Financial Literacy
Let Credit Advisors Council Help You Become Financially Literate
Financial literacy is not a very difficult concept to comprehend. It simply means your ability, skills and acquired knowledge that allow you to make sound and promising decisions where it concerns your financial resources. It also refers to your understanding of basic financial concepts and their uses such as savings, investment, budget, expenses, credit, assets, liabilities, and financial obligations to mention a few.
You don’t have to take a college course to become financially literate. You can get basic knowledge about it from the Internet, financial books, financial management modules, and from getting wise and sound counsel from individuals who are well versed when it comes to managing finances.
One of the challenges of financial literacy is how you will use what you know to be able to maximize your financial resources to meet your needs and that of your family, establish a financially secure future for you and your loved ones, enjoy financial freedom even before you retire, and engage in investments that will allow your money to grow.
You don’t have to be a business operator or a full-blown investor to benefit from being financially literate. Being financially literate can help you prepare budgets for specific expenditures inside the home. If you are paying off loans, it also helps that you understand the little details of your financial obligations, so you know all your options.
Benefits of Financial Literacy
Essentially, financial literacy equips you with basic knowledge on how to make the most out of your financial resources without compromising the financial stability of your future.
You will learn how to save.
Savings is an important concept that you can learn if you are financially literate. Financial literacy teaches you the many benefits of saving money and what specific areas of your life you should be saving for. You will also come to understand the difference between saving for an emergency fund, educational fund, retirement fund, and health fund to mention some.
You will learn how to budget.
A lot of your potential financial pitfalls will begin with your lack of knowledge and skills when it comes to budgeting your finances. Budgeting often starts with your priorities. Your priorities often spring from your family’s basic needs such as food, water, clothing, shelter, utilities, and education. Financial literacy enables you to address this very crucial skill and help you come up with a financial management plan that will give you a secure future.
You will learn how to invest.
When you follow the disciplines behind saving and budgeting money, you will most likely end up having a little extra money to be able to invest in something that can potentially grow your finances. Investing gives you a new stream of income and therefore promises an increase in your finances.
Frequently Asked Questions Related to Financial Literacy
| Question | Answer |
|---|---|
| Which is better, to buy or lease a car? | To be able to come up with the best decision, you need to compute your total net cost and monthly payments. When both data are available, compare which option will be better for your present financial status. |
| How do I start saving for my children’s college fund? | You start by listing down all your financial obligations. You also need to list down your average income every month. When you complete these, determine how much you need to put aside monthly to eventually pay for your children’s education and commit to doing it religiously without compromising other financial dues. |
| How do I make a budget? | Start by listing down all the things you are regularly paying for every month from utility bills, car and home amortization, groceries, credit card dues, and medication if any. Estimate all you expenses and list them down as well. Be able to commit not to go beyond your allotted budget unless in cases of emergency. Do not make unplanned purchases. |
| How do I get out of debt? | Talk to a professional and reliable credit counselor to help you evaluate your credit record. A credit counselor can help you come up with an effective debt management plan that will let you pay off your debt little by little for a considerably helpful amount of time. A credit counselor can also mediate on your behalf to your creditors. |
Common Terms Related to Financial Literacy
Here are a few concepts related to financial literacy that you need to understand to better educate yourself when it comes to managing your personal finances:
| Term | Defanition |
|---|---|
| Assets | are known as possessions that have economic value. |
| Budget | a tool that allows the user to track exact income and expenses within a given period. |
| Checking Account | a deposit account in a financial institution that allows deposits and withdrawals. It is a very liquid type of deposit account. |
| Credit Card | plastic cards issued by credit institutions that enable owners to make purchases up to the set amount. The owner of the card is given a month to pay the amount used with interest. |
| Credit Score | is a number assigned to individuals that is indicative of their credit worthiness. Usually, creditors refer to this data to determine the ability of the applicant to pay the amount being borrowed. |
| Financial Management | refers to the efficient and effective management of money in a manner that allows individuals to accomplish their personal objectives. |
| Fixed Expenses | expenses that are the same every month. |
| Fixed Interest Rate | an interest rate that remains unchanging during the duration of the loan. |
| Interest | a fee paid to a financial institution for borrowed money. |
| Liabilities | these are things that are owed; financial obligations that must be paid. |
| Liquidity | the ease with which a financial asset can be turned into cash. |
| Mutual Fund | a pool of funds used by a financial service company to purchase a variety of stocks, bonds or money market instruments. |
| Opportunity Cost | the highest-valued alternative that is given up when a choice is made. |
| Return | earnings from an investment, usually expressed as an annual percentage rate. |
| Risk | the chance of experiencing financial loss. |
| Saving | income not spent on current consumption or taxes. |
| Savings Account | a basic type of account that can be opened in a financial institution that earns a minimal amount of interest over time. |
| Spending | using income for current consumption. |
| Variable Expenses | expenses that may change from week to week or from month to month. |
| Wealth | the stock of assets that have economic value; they can also produce additional income in the future. |
State of Financial Literacy in 2017
The Consumer Financial Protection Bureau is one of many organizations in America that exists with the objective to promote a single point of accountability for enforcing federal consumer financial laws while protecting the interests of consumers at the same time.
CFPB also exists to enhance the financial capability of adult Americans by equipping and educating them to be able to come up with wise financial decisions in life. It also hopes to teach Americans to face financial opportunities and challenges without fear simply by tapping into their basic knowledge of financial management. The organization educates Americans by giving our information and tools that teach them money management strategies and other relevant topics.
Each year, CFPB puts out a report on the state of financial literacy among adult Americans. The CFPB report reveals that numerous people in America encounter financial challenges. According to the data released by the Federal Reserve, at least one in every four adults in America is not able to pay his or her current month’s bill on time. The Federal Reserve data also reveals that 44% of adults can barely cover emergency expenses that amount to at least $400. These individuals fend for this emergency expense by either borrowing money or selling something.
One of the common problems of many Americans according to the CFPB report is that they very rarely make comparisons when intending to shop for something using credit. While others did their homework, and compared prices before purchasing a car, more people failed to compare loan prices and terms of payment before proceeding with the purchase.
The FINRA 2015 National Financial Capability Study tells us that many student loan borrowers did not really understand the conditions when they took out the loan. They failed to make the proper computations for the monthly dues when they proceeded with the loan. Most of these students expressed that given the opportunity they would have opted for a different alternative instead.
If you really think hard about it and evaluate the above-mentioned scenarios, most of the problem Americans encounter involving money could have been avoided if they were properly informed. Personal knowledge of how to effectively manage money is crucial to avoid major financial pitfalls in the future.
National Financial Literacy Programs and Education Laws
In America, 33 states have pending legislation pertaining to financial literacy in the year 2017. Three states have adopted resolutions or enacted legislation that are related to financial education issues and financial literacy. Mostly, the goals of these legislations are one and the same – to equip Americans to be better managers of their personal finances.
Even the U.S. Department of Education for quite some time has been forging partnerships with different organizations in coming up with financial education curriculums that would improve the financial understanding of Americans and hopefully help them become better at handling money.
In 2010 for instance, Secretary of Education Arne Duncan forged a partnership between T.C. Williams High School in Alexandria, Virginia, the Federal Deposit Insurance Corporation, and the National Credit Union Administration to advance financial education and savings.
In the same year, the U.S. Department of Education awarded a $1.7 million grant to the Tennessee Department of Education through the Financial Education for College Access and Success program to develop, maintain and evaluate middle school and high school personal finance instructional materials and teacher training.
Presently, America has the Financial Literacy and Education Commission that was made possible under the Fair and Accurate Credit Transactions Act of 2003. The commission’s made objective was to develop a national financial education website and a national strategy that will enforce and promote financial education. The commission is chaired by the Secretary of the Treasury and vice chaired by the Director of the Consumer Financial Protection Bureau.
In December 2017, the commission members convened to discuss trends and issues in household economic security. The meeting included a presentation of macro indicators that show a considerable recovery from the recession. The date showed that the net worth of households has reached a record high. Additionally, debt burdens have also dropped considerably. However, the median family has not experienced complete recovery in terms of wealth.
One of the most alarming contents in the meeting revealed that the burden of financing higher education has fallen heavily and solely on the students themselves. In the last 15 years, student loan balances have quadrupled. As a result, it is expected that young adults with pending student loans may have to delay purchase of their homes and other major financial decisions. This report, however, does not diminish the value of pursuing higher education. It is still considered a very good investment.
At the end of the day, no matter what your financial challenges may be, it really pays to consult the experts and financial management professionals where it concerns your money. When in doubt, there is no harm in seeking wise counsel.