A 2016 study from the National Capability Study by the FINRA estimated that nearly two-thirds of Americans couldn’t pass a basic financial literacy test, meaning they got fewer than four answers correct on a five-question quiz. What can be concluded from the study is that Americans demonstrate relatively low levels of financial literacy and have difficulty applying financial decision-making skills to real life situations.

Financial literacy is about money management. And, managing money is a lacking skillset of most Americans. A significant part of money management is the ability to make ends meet through spending less than you earn and possessing adequate savings. Individuals who are not balancing monthly income and expenses are not saving and thus may find themselves struggling to make ends meet.

Personal finance expert Manisha Thakor, founder of MoneyZen Wealth Management, emphasized that it is important to learn to live within your means — making sure that no matter what your income is you have something leftover to set aside for savings and investing, and that you are not carrying credit card or consumer debt. Make sure that your mortgage, car loan, and student loan are the only types of debt you carry.

If you’re not saving and have not created an emergency fund, it’s a sign that you’re not living within your means and that you are spending more than you earn. For every year that you work, she advises that an individual should strive to fund a year of retirement. In an ideal world, people would be saving 10, 15, 20 percent of their earned income.

Living below ones means and agreesively saving is key for working adults to not engage in lifestyle creep. As your income goes up, temptation escalates to live larger and spend more. It’s not always frivolous or non-essential spending that is the culprit. Oftentimes the frivolous spending can be on children or what one deems essential for an upgraded lifestyle.

Individuals should commit to viewing money as something much bigger than just a tool, but as a means to an end. Give money purpose or make it a means to achievimg long term goals and aspirations, such as buying a home, saving for retirement or sending a kid to college.

Ms. Thakor states that people must view money as part of creating a desirable “financial well-being” — an aspect of well-being that individuals grow and nurture the way they would spiritual well-being, physical well-being, and emotional well-being throughout their lives.

Please understand that risk and security are fundamental personal finance concepts. Regarding risk, according to Ms. Thakor, there are three components to risk: one’s willingness, one’s ability, and one’s need.

• Willingness means being able to “sleep well at night”. As an investor, do you have the “psychological predisposition” toward taking risk or not?
• Ability is “a function of an investor’s age and the stability of their income”. If they are a very young director of sales, they have a much higher capacity to take risk than a 60-year-old retiree.
• The final piece is need. “An individual should not take more risk than they need.” One should know the “least amount of risk that they need to assume” in order to realize their long term goals.

It is important to appreciate that much of the America’s personal finance industry, which we will call Wall Street, is geared towards getting the retail investor, which we will call Main Street, to take on more risk because it generates more fees and revenue for Wall Street. Essentially, in the American culture, there exist a paradigm toward growing for growth’s sake. And, as individual retail investors, there is no good reason to blindly follow the crowd.

https://www.huffpost.com/entry/financial-literacy-for-wo_b_5545266

Source: Financial Literacy for Women: An Interview With Manisha Thakor, HuffPost, 07/01/2014 11:27 am ET, Dec 06, 2017