Financial literacy extends beyond reading and writing, but sadly, many Americans lack the necessary information to make wise financial decisions. According to the 2023 TIAA Institute-GFLEC Personal Finance Index, only 48% of U.S. adults could correctly answer 28 basic money questions in a recent survey. This figure has remained relatively stagnant since the survey began in 2017. Alarmingly, one in four respondents couldn’t answer even seven questions correctly, indicating a significant gap in financial literacy.
The Impact of Limited Financial Literacy
The report highlights the consequences of low financial literacy. Low financial literacy increases the likelihood of financial hardship by four times and increases the likelihood of having trouble paying monthly bills. They are also three times more likely to be burdened by debt, financially fragile, and lack emergency savings to cover their living expenses for a month. Additionally, individuals with very low financial literacy were over four times more likely to stop saving for retirement in 2022 due to inflation’s impact on their finances.
The Need for Financial Education
With personal finance often overlooked in traditional education, many individuals find themselves unprepared to navigate the complexities of managing their finances. The tide is shifting, though, as more and more states realize the value of financial literacy. Currently, 22 states mandate some form of personal finance education, a significant jump from just six states in 2019. This positive trend aims to equip high school students with the knowledge they need to make sound financial decisions in adulthood.
Taking Control of Your Personal Finances
By comprehending and putting the basic principles of financial management into practice, you have the power to take control of your personal finances.
By focusing on the following five key areas, you can lay a solid foundation for your financial journey.
Start by assessing your income from various sources, including your regular paycheck, self-employment earnings, or any side hustles. Understanding your total income is crucial for effective financial management.
Managing your expenses is paramount. Differentiate between fixed expenses like housing and healthcare and variable costs like entertainment and food. Ensure that your spending remains within your income and allocate funds for non-negotiable expenses, such as taxes. Making an informed choice about how to use your money will be made easier for you if you have a budget or flexible spending plan in place.
Saving money is key to achieving financial security. Set aside money for unforeseen expenses, short-term objectives like trips, mid-term objectives like car purchases, and long-term objectives like retirement. The amount you save will depend on your current lifestyle and future aspirations.
Over time, investing can be a powerful tool for increasing your wealth. Spend money on investments like stocks, bonds, real estate, mutual funds, or even cryptocurrencies to achieve your medium- and long-term goals. Assess the potential growth and risks associated with each investment option.
Don’t forget to safeguard your assets with appropriate insurance coverage. Homeowners or renters insurance will provide protection against property loss or theft. Auto insurance will cover vehicle repairs and medical expenses in the event of a collision. Life insurance ensures financial support for your chosen beneficiaries upon your passing.
Increasing Financial Literacy
Consider using the following resources to further your financial literacy
Consult a professional
Certified Financial Planners (CFPs) have a fiduciary duty and can help you determine your income, manage your debts, and develop a tailored strategy to meet your unique goals.
Robo-advisors offer low-cost access to investment advice. These online platforms utilize mathematical algorithms designed by financial experts, investment managers, and data scientists to provide personalized recommendations.
Explore personal finance books
There are plenty of books on personal finance available that cover a variety of topics, including retirement planning, debt repayment, and stock trading. These books provide in-depth information as well as helpful guidance.
Dive into personal finance books
There is no shortage of personal finance books available, covering various subjects such as stock trading, debt repayment, and retirement planning. These books offer in-depth knowledge and practical advice.
Increasing your financial literacy is essential for establishing a solid financial foundation and realizing your financial objectives. You can control your financial future by grasping the fundamentals of personal finance and making the most of the resources at your disposal. Start by assessing your earnings, managing your spending, saving diligently, investing wisely, and protecting your assets. With dedication and a commitment to learning, you can navigate the complexities of personal finance and secure a prosperous future.