IMPROVING FINANCIAL LITERACY IS IMPORTANT

  

Financial literacy is defined as “The ability to understand and effectively use various financial skills, including personal financial management, budgeting and investing.” In recent years, personal finance has become more complex. It is now more important than ever to understand the economy and how to employ the newer credit and investment products offered to the public.

Financial decisions we make between the ages of 25 to 65 can help provide for a comfortable retirement. Moreover, the financial literacy we accumulate during our years of working becomes invaluable when we come to depend on Social Security, retirement accounts and savings to maintain a reasonable standard of living.

Unfortunately, many older adults were never exposed to financial literacy. They did not receive any education or even advice to develop a sound financial plan.  With no strategy in place to reduce debt and increase savings, they often end up with inadequate fixed incomes and are unable to enjoy their golden years. In addition, many seniors left financial decision-making to a now-deceased spouse. These individuals lack financial knowledge and are more vulnerable to monetary fraud.

Financial literacy for young adults presents a different problem. The economy has dealt them a bad hand with the COVID-19 recession, high interest rates, college loans, and expensive housing. A November survey found that 64 percent of those between the ages of 27 and 42 have delayed a major financial decision because of the economy.

When young people experience bleak economic conditions, learning about and applying sound financial decisions seems less important. Peer pressure encourages short term “fear of missing out.” Disposable incomes are squandered on trendy clothing, travel, and entertainment. Saving for the future is not on their radar.

When it comes to investing, younger adults are unaware of the proven slow and steady wisdom of Benjamin Graham’s classic book The Intelligent Investor. Instead, social media encourages get-rich-quick investments offered by products like cryptocurrency and questionable cult stocks like GameStop and AMC theaters.

Online investment platforms, which are often designed to mimic sports betting sites, attract younger adults. The New York Times has reported that on the investment app Robinhood, young people buy and sell the riskiest financial products. Their inexperience has often led to staggering losses.

One in-depth barometer of personal financial health is the 28 questions given annually to US adults, known as the P-Fin index. This survey, developed by the TIAA Institute and the Global Financial Literacy Excellence Center has long been an accurate test to determine financial knowledge.

Data from the 2024 index reveals that financial literacy in the US has stayed constant at around 50 percent for eight consecutive years. The index explores eight functional areas across finance, such as earnings, savings, insuring, and comprehending risk. The results show that Americans appear most comfortable with financial knowledge on borrowing, saving, and consuming and the least confident financial risk.

Among the results, financial literacy with women has consistently lagged that of men by 10 percent. In 2024, young adults correctly answered only 37 percent of the survey questions. Individuals with low levels of financial literacy are twice as likely to be “debt constrained” and “financially fragile.”

Annamarie Lusardi, Senior Fellow at the Stanford Institute for Economic Research helped to organize the data from the report. She explains, “Financial literacy is an essential skill in today’s society. The consistently low levels of financial literacy among the most vulnerable groups are troubling.  It is high time to change the conversation about money, starting with adding financial education in schools and colleges.”

How do we ensure that more Americans are taught sound financial practices at an early age? Every year, more research and published reports extol the importance of teaching financial literacy. But a recent survey completed by Intuit found that 81 percent of high school students continue to get financial knowledge only from their parents.

Advocates for financial literacy agree that at least one semester of a stand-alone finance course would address the problem. To be effective, the offering cannot be diluted by weaving it into math or economics courses. Teacher training is another hurdle to overcome. Public education must be willing to spend resources to develop training programs and effective curriculum materials.

Instilling financial responsibility at a young age sets students on the path of long-term financial wellness. The key components of financial literacy would include: 1) understanding how money is spent through budgeting, 2) learning how to use credit cards and other forms of credit responsibly, 3) studying interest rates and debt repayment strategies, and 4) receiving financial education on different investment options.

Teaching financial literacy would benefit our society as well as individuals. Informed financial choices would help reduce poverty and elderly dependence on Medicaid for long-term health care. For younger Americans, planning and achieving financial goals for retirement would replace casual decision making. Mental health would improve by reducing financial stress.

Older Americans also require strategies for financial literacy. The “Money Smart for Older Adults Program,” developed by the FDIC, is one of many good options. It raises awareness among older adults and their caregivers on how to prevent fraud, scams, and other elder financial exploitation. The curriculum encourages advanced planning and informed financial decision-making.

Improving financial literacy is time and resources well spent for individuals and for our society.  Unexpected monetary setbacks affect us all. Financial literacy can help us plan ahead and soften the blow.