Financial literacy is understanding and using financial knowledge to make informed decisions. With the average American holding a debt balance of $96,371, it is an essential skill to make sound financial decisions and manage money effectively.
Unfortunately, financial literacy in the United States is low, with only 34% of adults having a basic understanding of financial concepts, even though more than 74% of states have mandatory financial literacy education, including my home state of Florida.
This lack of financial literacy has far-reaching consequences, from economic inequality to increased debt.
There are several causes of low financial literacy in the United States. One of the primary causes is a need for more education.
Many people need adequate financial education in school and are not taught the basics of money management.
Additionally, many people do not have access to financial resources, such as credit reports and scores, cash flow management, or access to reputable financial firms.
What Is Financial Literacy
Financial literacy is understanding and effectively using various financial skills, including personal financial management, budgeting, and investing.
It involves understanding financial concepts such as interest rates, inflation, risk, and diversification and making sound financial decisions.
Financial literacy is an important life skill that can help people make informed decisions about their money and achieve their financial goals.
Overview of Financial Literacy in the United States
Financial literacy in the United States is a growing concern. With the increasing complexity of the financial system and consumer financial products, Americans are facing a greater need to understand the basics of financial literacy.
Financial literacy is understanding and using financial information to make responsible decisions. This includes understanding how money works, how to budget, how to save, how to invest, and how to use credit responsibly.
According to LendingTree, 42% of American consumers said their credit scores prevented them from obtaining a financial product in the past year. However, 19% said they don’t know their credit score, and 11% said they don’t know how to check it.
The need for financial literacy in the United States has increased in recent years due to the economic downturn and the increasing complexity of the financial system. Many Americans are struggling to make ends meet, and the lack of financial literacy can make it challenging to make the best decisions when it comes to their finances.
The need for financial literacy is especially acute among young people. With the increasing cost of college tuition, many young people are facing a greater need to understand how to manage their finances. This includes understanding how to budget, how to save, how to invest, and how to use credit responsibly.
The student loan debt crisis is exhibit one of why young people need to be exposed to financial literacy as early as possible. As of January 2023, about 48 million Americans owe more than $1.7 trillion in student debt, surpassing auto loans and credit card debt.
Young college students, right after high school, as old as 18 years old, are forced to take thousands and thousands of dollars worth of debt without an understanding of interest rates and interest capitalization.
The federal government has taken steps to promote financial literacy in the United States. The Consumer Financial Protection Bureau (CFPB) has created a Financial Literacy and Education Commission (FLEC) to promote financial literacy in the United States. The FLEC has developed several resources to help Americans understand their finances, including a financial literacy curriculum for K-12 students, a financial literacy toolkit for adults, and a financial literacy website.
In addition, the federal government has created many programs to promote financial literacy. For example, the Jump$tart Coalition for Personal Financial Literacy is a non-profit organization that promotes financial literacy among young people. The organization provides resources and programs to help young people understand their finances.
Through its Financial Literacy for All initiative, for-purpose organization Operation HOPE provides targeted one-on-one financial coaching to all Americans at no cost. Numerous other organizations are dedicated to financially educating American consumers.
Causes of Low Financial Literacy in the United States
Lack of Education
Many people in the United States lack the necessary financial literacy education to make sound financial decisions. This is especially true for those who have not completed a college degree or had no access to financial literacy courses. Because many Americans can go through their primary and secondary schooling without being exposed to rudimentary financial topics, many educated ones can also be financially illiterate.
About 15 years ago, the Financial Industry Regulatory Authority (FINRA) developed a six-question quiz to measure the financial literacy of Americans. On average, 40% of Americans can correctly answer at least four of 6 questions. The six-quiz question addresses financial topics such as compounding interest, inflation, and diversification.
Poor Financial Habits
Many people in the United States have poor financial habits, such as spending more than they earn, not saving for retirement, and not budgeting. Too many people get into trouble financially because they don’t understand their cash flow. Learning how to master your cash flow, money coming and going out, is the first lesson in financial literacy. Consumers’ inability to delay gratification often exacerbates their poor financial habits. Indeed, to be financially confident, independent, and free, one must learn how to hold out now for a better reward later.
Lack of Financial Resources
Many people in the United States lack access to financial resources, such as financial advisors, banks, or credit unions. This can lead to a lack of understanding of managing their finances.
The poorer the community, the more its residents pay for financial products. Major financial institutions often abandon poor areas, leaving room for predatory firms to prey on citizens of those places.
Social Stigma
Discussing one’s finances is somewhat taboo in the United States. The social stigma can lead to a lack of knowledge about financial topics, as people may be too embarrassed to ask questions or seek advice.
Low Income
Low-income households often lack the resources to invest in financial literacy courses or hire financial advisors. As stated above, poor neighborhoods often lack access to traditional banking services. As a result, they resort to predatory lenders that charge them exorbitant fees and surcharges.
The Community Reinvestment Act (CRA) requires the Federal Reserve and other federal banking regulators to encourage financial institutions to help meet the credit needs of the communities in which they do business.
However, major financial institutions find ways to circumvent the law by closing branches in Low-and moderate-income neighborhoods and altering their data to show false compliance with the 1978 law.
The Impact of Low Financial Literacy
Financial literacy is understanding and using financial knowledge to make informed decisions about personal finances. Low financial literacy can significantly impact individuals, families, and society.
Individuals with low financial literacy are more likely to make poor financial decisions. They may be more likely to take on debt, make bad investments, or fail to save for retirement. This can lead to a debt and financial hardship cycle that can be difficult to break.
Also, people who are not financially literate are more susceptible to financial fraud and are more likely to follow the crowd and buy into meme stocks and other highly speculative financial assets.
Low financial literacy can also lead to a lack of financial security and an inability to plan for the future. Families with low financial literacy are more likely to struggle financially.
They may have difficulty budgeting and managing their money, leading to debt and financial hardship. This can have a long-term impact on the family’s financial security and ability to save for the future.
Low financial literacy can also have an impact on society as a whole. Financial illiteracy can lead to poor economic growth and stability, as individuals and families cannot make informed financial decisions. This can lead to increased poverty and inequality, as those with low financial literacy are more likely to be disadvantaged.
Providing individuals with access to financial education is essential to address the issue of low financial literacy. This can include teaching basic economic concepts like budgeting, saving, and investing. It can also include providing access to financial services, such as banking and credit, to help individuals better manage their finances.
Low financial literacy can significantly impact individuals, families, and society. Providing individuals with access to financial education and services is essential to help them make informed decisions about their finances. This can help to reduce poverty and inequality and promote economic growth and stability.
Strategies to Improve Financial Literacy
Several strategies can be used to improve financial literacy.
The first strategy is to increase access to financial education. Financial education should be available to everyone, regardless of income level or economic background. This can be done through various methods, such as providing free classes, workshops, and seminars on financial topics or offering online courses and resources. Schools should also incorporate financial literacy into their curriculum, as it is an important life skill that everyone should possess.
The second strategy is to encourage financial planning. Financial planning is setting goals, creating a budget, and planning to achieve those goals.
It is essential to have a plan in place to make informed decisions about spending, saving, and investing. Financial planners can help individuals create a program tailored to their specific needs and goals.
Both state and federal governments can provide large grants to reputable organizations that offer targeted one-on-one financial education to all Americans.
The third strategy is to promote financial literacy through the media. This can be done through public service announcements, commercials, and articles. Television, radio, and print media can be used to spread the message of financial literacy.
The government can provide grants to the National Public Ratio (NPR) to help promote unbiased financial education throughout the country.
Additionally, social media can be used to spread the message of financial literacy.
The fourth strategy is to create incentives for financial literacy. Financial literacy can be incentivized through tax credits, grants, and other financial assistance.
Additionally, employers can offer financial literacy courses to their employees. This can help employees become more financially literate, leading to better financial decisions, improved financial security, and increased employee satisfaction.
Finally, financial literacy should be taught in the home. Parents should teach their children the basics of financial literacy, such as budgeting, saving, and investing. This can help children develop the skills necessary to make sound financial decisions.
Parents can start by giving their kids an allowance. It does not matter whether it is $5 or $100 per month. An allowance can teach kids about savings and the consequences of poor financial decisions. Teaching financial literacy to adults is daunting because of stubborn financial habits. The earlier kids start learning about money, the better.
These are just a few strategies that can be used to improve financial literacy. By increasing access to financial education, encouraging financial planning, promoting financial literacy through the media, creating incentives for financial literacy, and teaching financial literacy in the home, individuals can become more financially literate and make better financial decisions.
Financial Independence Vs. Financial Freedom
Financial independence and financial freedom are two terms that are often used interchangeably, but they are not the same.
Financial independence is the ability to generate enough income to cover your living expenses without relying on a job or other source of income.
Financial freedom has the financial resources to do whatever you want without worrying about money.
Financial independence is the foundation for financial freedom, but economic freedom is the ultimate goal.
Financial confidence, the third piece, is the ultimate certainty in making day-to-day financial decisions. A holistic financial literacy education aims to make the participant financially confident, independent, and free.
Summary of Financial Literacy in the United States
Financial literacy in the United States is a significant issue. Even though financial literacy is a critical component of economic health, many Americans need more knowledge and skills to make sound financial decisions.
According to a recent survey, only 57% of Americans can correctly answer basic financial literacy questions.
This lack of financial literacy can lead to poor financial decisions, such as taking on too much debt, not saving enough, or not investing in the stock market.
To address this issue, the government and private organizations have taken steps to increase financial literacy in the United States.
These efforts include providing financial education in schools, offering free financial literacy classes, and creating public awareness campaigns. These initiatives aim to help Americans become more financially literate and make better financial decisions.
