Why is Financial Literacy Important?

There is little question that a sizable proportion of our nation’s citizens lack full capacity to handle their money effectively. But before we launch into explaining “why is financial literacy important,” we should define the term “financial literacy” and discuss some of the varying definitions offered by different national organizations. Financial literacy is important because it gives people knowledge about how to manage their money and plan for the future.

Financial Literacy is an Essential Life Skill for Everyone

Many individuals, unaware of the statistics and benefits surrounding financial literacy, often ask the question, “Why is financial literacy important?” So indeed, why is financial literacy important in a modern economy when technical skills like computer science seem to take precedence over learning basic personal finance? Financial literacy is an essential skill that every person, regardless of the field they enter into, will need in order to manage their financial situations effectively, save for retirement adequately, and live financially stable lives.

Extensive Why is Financial Literacy Important Policies

Quotes on the Importance of Financial Literacy

“I want kids to understand the importance of savings and investing. It’s crucial that people understand the importance of financial literacy, because it’s actually life-saving.” – Mellody Hobson, President of Ariel Investments

“Being promoted to a top position in your organization, or even being elected to public office, does not suddenly endow you with financial literacy, if you did not acquire and develop it, earlier in your life.” – Strive Masiyiwa, founder of Econet Wireless

“The good news, though, is that all of us can improve the security of our futures through financial literacy. With a better understanding of the basics of finance—how to save, budget and invest—we can increase both our earning potential and our prospects for a solid financial future.” – Reba Dominski, President of U.S. Bank Foundation

40.2% of those with low levels of financial literacy relied on parents, friends, and acquaintances as their most important source of financial knowledge, compared to 20.8% of those with the highest levels of financial literacy (National Bureau of Economic Research). http://www.nber.org/papers/w13565.pdf

Researchers at NBER demonstrated the positive relation between the average stock market participation between the individual’s community and the individual’s participation rate in the markets. This effect was proven to be stronger in more sociable communities (National Bureau of Economic Research). http://www.nber.org/papers/w13168.pdf

Financial Literacy Leads to Financial Inclusion

The results from a nationwide telephone survey asking whether the individual had taken an economics or business course at high school and whether they were banked found a statistically significant association between level of high school financial education and being banked (Wiley). https://onlinelibrary.wiley.com/doi/pdf/10.1111/j.1745-6606.2010.01171.x

Low-income workers attending an employer-sponsored financial education program were 11.5% more likely to participate in 401(k) plans and save more for retirement than peers who elected not to attend the education initiative (National Bureau of Economic Research). http://www.nber.org/papers/w5655.pdf

A team of researchers surveyed students at 15 geographically diverse colleges to assess financial knowledge and behavior. Student responses were organized into 1 of 6 categories based on the type of financial education policy a student’s home state had for high school. The categories ranged from a state with no standards at all to states that required a financial literacy course and assessment in high school. Students whose home states required financial education courses were found to be more likely to save, less likely to make late credit card payments, and more likely to take on a healthy amount of financial risk. While 1.3% of those with no state standards ‘maxed out’ their credit cards, only 0.7% of those with a required course and corresponding assessment ‘maxed out’ their credit cards. When asked if used a budget, 46.7% of those with no state standards replied yes while 52.9% of those with a course and assessment replied yes (National Endowment for Financial Education). https://www.nefe.org/Portals/0/WhatWeProvide/PrimaryResearch/PDF/Gutter_FinMgtPracticesofCollegeStudents_Final.pdf

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Lack of Financial Literacy Education Imperils Adults

31% of adults report they have no savings and 29% report they are saving more than they were last year (National Foundation for Credit Counseling). https://www.nfcc.org/NewsRoom/FinancialLiteracy/files2013/NFCC_NBPCA_2013%20FinancialLiteracy_survey_datasheet_key%20findings_032913.pdf

A survey of 15-year-olds in the United States found that 18 percent of respondents did not learn fundamental financial skills that are often applied in everyday situations, such as building a simple budget, comparison shopping, and understanding an invoice (Organization for Economic Cooperation and Development). http://www.oecd.org/education/Education-at-a-Glance-2014.pdf

65% of adults in the United States report using a saving account (National Foundation for Credit Counseling). https://www.nfcc.org/wp-content/uploads/2017/03/NFCC_BECU_2017-FLS_datasheet-with-key-findings.pdf

15% of adults roll over $2,500 or more in credit card debt each month (National Foundation for Credit Counseling). https://www.nfcc.org/wp-content/uploads/2017/03/NFCC_BECU_2017-FLS_datasheet-with-key-findings.pdf

85% claimed they were ‘somewhat’ or ‘very’ unlikely to discuss their amount of credit card debt with strangers, more than the percentage of respondents who would avoid divulging details about their love life (CreditCards.com). https://www.creditcards.com/credit-card-news/poll-credit-card-taboo-subject-2013-1276.php

Data Sharing is Key to Success of Financial Literacy Movement

Proper training in financial literacy prepares learners to make prudent decisions about their finances in the future. In order for the benefits of financial literacy to be realized, however, a proper transfer of knowledge must be facilitated by a curriculum that is based on research. Only then can financial literacy empower individuals to have lower rates of loan default, increased participation in the stock market, and other financial habits that promote financial health.

The Financial Literacy and Education Commission (FLEC) says developing delivery channels through partnerships with the private sector and education providers is critical in extending the reach of the program and making resources accessible to all portions of the community (US Dept of the Treasury). https://www.treasury.gov/resource-center/financial-education/Documents/NationalStrategyBook_12310%20(2).pdf

The Citi foundation cautions that repeating the same experiment or conducting similar research due to a lack of correspondence between two programs hurts the overall financial literacy movement (Citigroup). https://www.citigroup.com

Financial Literacy is Beyond Important – It is a Fundamental Life Skill

When educators are asked the question, why is financial literacy important, they are aware that many may not understand the benefits of learning a skill that was not even touched upon in school. Citing numerous studies and statistics evidencing the benefits and the impact of financial literacy education, educators are able to make an effective case for why financial literacy is important. Understanding personal finance means being able to make sustainable financial decisions that reduce debt, increase the savings and secure your financial future.

There is little question that a sizable proportion of our nation’s citizens lack full capacity to handle their money effectively. But before we launch into explaining “why is financial literacy important,” we should define the term “financial literacy” and discuss some of the varying definitions offered by different national organizations.

They have less debt and more savings. They grow an emergency fund and build a nest egg for a comfortable retirement. They find ways to make money work for them over time. People without financial literacy are often negatively impacted. They end up overworked, just to service their ever-growing debt levels. They have no way of dealing with a financial emergency. Their money is gone before they ever receive it. Trapped in the black hole of spiraling debt, they always owe more money than they receive. This just scratches the surface in answering the question, “Why is financial literacy important?”

As stated by the National Financial Educators Council (NFEC), the definition of financial literacy is: “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.” The NFEC also has identified ten key skill areas in which people must attain competency in order to be financially literate: goal-setting, budgeting, credit and debt, income and skills development, investment, risk management, entrepreneurship, and community service.

The U.S. Government Accountability Office (GAO) also has identified a national need for financial literacy training, and their definition is as follows: “the ability to make informed judgments and to take effective actions regarding the current and future use and management of money. It includes the ability to understand financial choices, plan for the future, spend wisely, and manage the challenges associated with life events such as a job loss, saving for retirement, or paying for a child’s education.” Thus while the GAO points out some of the general topic areas in which Americans need to be educated, this office does not directly provide instruction programs.

According to Jump$tart, a coalition of diverse stakeholders in financial literacy education, financial literacy can be defined as: “the ability to use knowledge and skills to manage one’s financial resources effectively for lifetime financial security. Financial literacy is not an absolute state; it is a continuum of abilities that is subject to variables such as age, family, culture, and residence. Financial literacy refers to an evolving state of competency that enables each individual to respond effectively to ever-changing personal and economic circumstances.”

Visit the NFEC website (https://www.financialeducatorscouncil.org) to read more financial literacy articles like this one and obtain more information about their programs.