Financial literacy represents a significant area of financial wellness. Thus, the teaching of financial literacy must go beyond the basics of creating a budget and avoiding credit card debt. It must deliver real-world skills and knowledge about the challenges of debt and taxes, investing in the stock market, taking advantage of an employer’s 401(k) plans, managing credit and mortgages, accumulating wealth and many other financial topics.

Definition of Financial Literacy

The National Financial Educators Councils (NFEC) states, “A lot of people know what they should do; however a good majority freeze up when it comes time to make a financial decision. Most have the knowledge but lack the confidence to make the right decision and take action in a decisive manner. Since money is directly tied to peoples emotional state we feel including this component in our financial literacy definition is critical.”

Thus, we must take action now to combat this real world threat resulting the lack of financial literacy to Americans financial security. The National Financial Educators Council’s defines financial literacy definition as:

“Possessing the skills and knowledge on financial matters to confidently take effective action that best fulfills an individual’s personal, family and global community goals.”

Successful Investors are disciplined and patient, have developed good financial and investing habits, demonstrate positive financial Mindset and exhibit a belief in themselves.

Conversely, the principals of basic financial literacy and money management are not that complicated. The basic money management concepts are simple and once you have it down, you can apply the concepts for the rest of your life. Considering, the world that high school and college graduates will enter revolves around inherently money.

“The single biggest difference between financial success and financial failure is how well you manage your money. It’s simple: to master money, you must manage money.” T. Harv Eker, author Millionaire Mind

A 2009 Sports Illustrated report found that almost eight out of 10 former NFL football players suffer from financial stress within two years of their retirement. What’s more, the National Bureau of Economic Research estimates that one in six will file bankruptcy.

What is Financial Literacy

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 gratification for long-term financial security.

Americans Falling Behind

According to Money magazine, nearly half of American workers have saved less than fifty grand ($50K) for retirement, and fifteen percent (15%) had not saved a single cent. This means that for many Americans, their senior years will not be so golden and a majority of those will struggle financially due to their lack of financial literacy.

In the 2018 National Financial Capability Study (NFCS), almost half (46%) of survey respondents have not set aside in an emergency or ‘rainy day’ fund sufficient to cover expenses for three months in case of sickness, job loss, economic downturn, or other emergency according to FINRA Investor Education Foundation

More than half of millennials (about 54 percent) say debt is their “biggest financial concern.” according to a recent Wells Fargo Study.

“A compelling body of evidence demonstrates a strong association between financial literacy and household well-being. Survey after survey shows that households that demonstrate low levels of financial literacy are those that tend not to plan for retirement, borrow at high interest rates, and acquire fewer assets.” Shawn Cole

Taking Responsibility

A majority of Americans appear to have not taken responsibility for their financial security during their working lifetimes, after retirement or have done much retirement planning before retirement.

Forty-one percent of respondents have tried to figure out how much they need, their number, to save for retirement, while 54% have not. The act of planning for retirement remains a ‘strong positive indicator’ of retirement wealth, according to FINRA.

According to Dave Ramsey, the goal behind teaching financial literacy is to help people develop a stronger understanding of basic financial concepts—that way, they can handle their money better.

Ramsey considers financial literacy a worthy goal, especially when you consider a few stats about how the typical American handles money:

• Nearly four out of every five U.S. workers live paycheck to paycheck.
• Over a quarter never save any money from month to month.
• Almost 75% are in some form of debt, and most assume they always will be.(1)

Additionally, there’s a $6.6 trillion gap between the pensions and retirement savings of U.S. households and what they should have to maintain their living standards in retirement – and the gap is growing. Retirement Income Deficit report by Retirement USA tells us that:

• 41% of baby boomers expect their standard of living to decrease in retirement. Transamerica Center for Retirement Studies.
• Only 14% of baby boomers have a written retirement strategy. Transamerica Center for Retirement Studies.
• 83% said that personal financial challenges had a large impact or some impact on overall employee performance. Society for Human Resource Management
• 46% of Americans have less than $10,000 saved for retirement. Employment Benefit Research Institute
• Student load debt exceeds $1.1 Trillion. Fastweb and FinAid

“The number one problem in today’s generation and economy is the lack of financial literacy.” Alan Greenspan, Former Chairman, Federal Reserve

Financial Literacy must become a priority in our high school classrooms and college campuses across our great country. Too many Americans are being left behind financially due their inability to effectively manage their money and control their personal finances.

Over the past decade, the U.S. economy has witness the longest period of economic expansion in it history. Yet, a majority of Americans failed to participate in the expansion as measured by the widening income, wealth and retirement gaps evident in the country.

And, you can conclude that the lack of financial literacy is a major reason behind the gap.

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Sources:

1. https://www.usfinancialcapability.org/downloads/NFCS_2018_Report_Natl_Findings.pdf
2. http://www.retirement-usa.org
3. https://www.daveramsey.com/blog/what-is-financial-literacy