Financial literacy is a big problem in the United States. In recent studies only 9.4% of American students performed at the top level in a financial literacy test that included such tasks as calculating the balance on a bank statement and interpreting income tax brackets. Statistics have shown Nevada ranked lowest in Financially Literacy in America. People spend more than they make, only 40 percent of residents have a “rainy day” fund, and are constantly borrowing from non-bank lenders like payday lenders, and 20 percent spend more than they make, having more month than money every month.
People with low financial literacy borrow more, have less wealth and end up paying unnecessary fees for financial products. They tend to buy on credit and are unable to pay their full balance each month and end up spending more on fees. They do not invest, have trouble with debt and a poor understanding of the terms of their mortgages or loans. And while this may not seem like a problem, it impacts more of the population than you could believe. The perfect example is the financial impact on the economy from a lack of understanding mortgage products and subsequent defaults. Financial literacy has broad implications for economic health and improvement can lead the way to a global economy that is competitive and strong.
Financial Literacy is just as relevant now as always; increasing the knowledge, skills, and confidence of individuals of all ages to make responsible financial decisions is critical to their prosperity. Looking at achieving financial literacy takes:
- Knowledge — the understanding of personal and broader financial matters.
- Skills — the ability to apply that financial knowledge in everyday life.
- Confidence — the self-assurance to make important decisions.
- Responsible financial decisions — the ability of individuals to use the knowledge, skills, and confidence they have gained to make choices appropriate to their own circumstances.
Most parents are not comfortable discussing finances with children, for fear that they do not know the basics themselves. Many parents are living paycheck to paycheck because they failed to gain the knowledge, skills, and confidence to make responsible financial decisions during the early stage of their lives. It’s time to arm young people to face financial decisions and responsibilities much earlier in their lives than earlier generations to eliminate potential risks and pitfalls.
Discussions are taking place among those who have responsibility for school curricula that will help ensure the focus on financial literacy takes place in classrooms across the United States. Home economics classes required in middle and high school focused on cooking, how to run a “mock” restaurant and everyday home activities. They attempted to show us how to be frugal. The problem is, it was not enough information to understand why we should “want” to be frugal. We wanted new outfits and to be cool with the latest everything. What was the point in having money and not spending it? Other than “staying out of debt,” the issue to save never covered the “why” of frugality. You only achieve financial freedom when you act frugally and build up a safety net around you to insulate from tough economic times.
In my teens and 20s, I just put any extra money I had in my savings account at the bank, and I only thought of it as there for when I wanted to buy something or emergencies. I knew I was earning interest on my savings, it didn’t seem like much. A savings account is one of the simplest types of bank accounts available to let you store cash securely and earn interest on your money.
Banks and credit unions offer three kinds of savings vehicles, each with varying requirements and levels of return. Knowing the differences, what’s good about them, what could be a problem, is the first step toward finding the right savings account.
A basic savings account offers a low rate, keep your money safe and allow you quick access to it in the case of an emergency. Saving accounts can require a minimum amount of money to open the account and a specific balance to avoid fees. Accounts with high daily or monthly minimum balance requirements tend to offer better rates than those with no or lower minimums, but you can still find high yields without the requirement. You don’t necessarily have to maintain a minimum balance each month, but read the terms of the account so you know what to expect.
I didn’t know I could have put some of that money to work elsewhere. If I’d just put a single $5,000 investment at age 25 in a mutual fund, where I could have earned an annual average return of 10% (close to what the stock market averages over long periods) it could have grown to more than $225,000 over 40 years. And just imagine what I might have if I’d kept adding money monthly; over the years.
Benjamin Franklin best stated how you can make a lot of money with money; “Money makes money. And the money that money makes, makes money”. Mutual fund wealth building can be in the form of dividends. If you put money away in healthy, growing dividend-paying companies, you can collect regular dividends over the years and reinvest them in additional shares of stock. Over decades the dollars you put away can work for you, generating more dollars that can earn more dollars, and so on. More on mutual funds in future articles to come.
With over 20 plus years of experience in the financial, insurance and banking industries; Crystal D. Smith founded Peciaum Education Center for Finances (PEC Finances) a Nevada Nonprofit Corporation with IRS 501c3 tax code exempt status to eradicate financial illiteracy.