What is financial literacy?

Financial literacy is about teaching Americans how to manage their personal finances and helping them understand money issues they’re likely to face in their lifetimes.

It is an important skillset missing in most Americans financial tool boxes and often become lessons that are improperly or painfully learned by trial and error.

Basically, financial literacy is about effectively managing one’s money. It is an essential personal skill that will benefit individuals throughout their lives – and it is not skill that everybody learns.

With money, such as wages, coming in and expenses going out, with due dates, finance charges and fees attached to invoices and bills, and with the overall responsibility of making the right decisions about major purchases and investments consistently, managing money can be challenging for most Americans.

Americans would think that because the financial stakes are so high and the skills of managing money are so essential that this would be a skill that gets taught in high school or even college. Unfortunately, personal finance is not taught in educational institutions at any level in the United States. It is not taught in K-12 education, undergraduate or even post graduate levels unless an individual is majoring in finance.

Financial literacy and managing money require a fundamental understanding of personal cash flow, net worth, debt, inflation, the purchasing power of money, and a willingness to embrace personal responsibility. That means paying bills in a timely manner, saving for emergencies and retirement, and avoiding excessive debt. It is important that individuals accept the fact that sometimes they have to sacrifice immediate demands and desires for long-term gain.

Countless stories exist regarding Americans being taken advantage of by bad actors, criminals and financial professionals pushing ill-suited products to unsuspecting individuals. Recently, a story was told how an unscrupulous stock broker convinced an unsuspecting individual, when he was younger, to invest their nest egg in a sure thing stock tip. Unfortunately, the only sure thing regarding the tip was that the unsuspecting victim would watch their nest egg shrink and ultimately disappear.

Personally, the author, as a young Naval Officer, fail victim to a well-meaning financial adviser selling high front loaded fee mutual funds to military officers. After a week of mulling over the thought of ten cents of every dollar invested would go to the adviser and the financial firm he represented, I overturned the decision to invest and pulled my capital from the company, minus the ten percent. Subsequently, I invested my hard earned capital in a no-load fund mutual fund. Fortunately, the financial lesson learned came at a reasonably small cost.

Thus, a key take away is that financial literacy is an essential skill for Americans; a skill that is not thought in our schools, but should be. And, financial literacy is critical for individuals if they desire to get their personal finances on track.

What follows are a few financial literacy tips that can help a person get started.

• Create a budget. The first step toward taking control of one’s financial life is to find out how much money one takes in and how much one spends.
• Pay yourself first. Consider automatically depositing a certain amount of wages into ones savings account each payday.
• Build an emergency fund. Set aside three to six months of savings in a bank account or money market account to cover unplanned expenses such as automobile repairs or medical bills. Avoid using credit cards.
• Eliminate credit card debt. Incidental purchases on credit add up. Paying only the minimum amount due each month on credit cards can result in finance charges that quickly make small purchases become very costly. If possible, pay the full balance every month or cut up your credit cards.
• Protect personal information. Take steps to reduce the risk of identity theft. Be skeptical and know whom your sharing your personal information; store personal information securely or dispose of by shredding. Maintain appropriate security on computers and other electronic devices. Check out the warning signs that someone might be using your personal information.
• Order credit report. Make sure the information is accurate, complete, and up-to-date. If errors are found, dispute them.
• Comparison shop for home mortgages. A mortgage is a product, just like a car, so the price and terms are negotiable. Compare all the costs involved in obtaining a mortgage. Shopping, comparing, and negotiating can save thousands of dollars.

Bottom line, to be financially literate means having the ability to not let money – or the lack of it – get in the way of one’s happiness as one works hard to build an American dream complete with financial security and a fulfilling retirement.