Why financial literacy matters, from saving to paying off debt

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To succeed financially, knowledge is essential.

Yet many Americans lack financial knowledge. This can impact everything from the amount of money saved to the debt owed.

The situation is disastrous for more than one. More than half of Americans cannot cover a $1,000 emergency expense with their savings, according to a January survey by Bankrate. Meanwhile, about 20% of employees run out of money before their next paycheck, according to Salary Finance. This is up from 15% last year.

Meanwhile, American adults only answered 50% of the questions correctly on the TIAA Institute-GFLEC Personal Finance Index in 2021, a notorious measure of financial literacy. This is 2 percentage points less than the previous year.

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“Financial literacy can help Americans feel confident in the decisions they make every day,” said NFL linebacker Brandon Copeland, who teaches a personal finance course at his alma mater, the University of Pennsylvania.

“To hope to be successful in anything I do, I must first understand the rules and guidelines of this game,” he added. “The same goes for understanding money and how it works.”

Building good habits

These days, Americans are still grappling with the fallout from the Covid-19 pandemic and resulting inflation, which is costing the average American household an additional $296 per month, according to analysis by Moody’s Analytics.

Yet there will always be something that could disrupt your life, said Nan Morrison, president and CEO of the Council for Economic Education.

“There are a lot of things that can impact your income or the world around us, but making a decision in the moment won’t really be helpful,” she said.

“Having the right habits you need early in life…will help you through all of these changes.”

These behaviors include understanding your financial situation, budgeting, and saving for emergencies.

Save and invest

Married couple embracing on sofa

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Knowledge is also power when it comes to investing. As meme and cryptocurrency stock trading has become popular, it’s important to remember that saving for the long term is vital to your financial health, says Certified Financial Planner Cathy Curtis, Founder and CEO of Curtis Financial Planning in Oakland, California.

It’s something she recently advised her new hairdresser, after he confided in his anxiety about money and his concern for financial stability for his family. The stylist, in her mid-40s, invested in shares of a fintech company and in crypto through a popular trading app, but had no retirement savings or life insurance.

“If my hairdresser knew the basics of Roth [individual retirement accounts]for example, starting many years ago, he would be so far ahead,” Curtis said.

“Without basic financial education about the power of compound interest, the types of savings and retirement accounts available, and the importance of starting to save early, the financial future for many Americans is bleak.”

Helping relationships

Couples may have different opinions about money. When there is mismanagement of finances or a difference of opinion on how to use the money, it can create conflict.

“Many couples find it difficult to talk about money and if there is a lack of financial literacy in the couple, there could be many financial missteps,” says Dr. George James, Registered Marriage and Family Therapist , Chief Innovation Officer and Senior Therapist at the nonprofit Relationship Council.

“Having a better understanding of financial literacy can help relationships build a future and be on the same page,” he added. “It can also reduce the number of conflicts.”

Personal finance in schools

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Proponents believe it’s important to start learning good financial habits at a young age, and there’s no better place than school.

Twenty-five states require high school students to take personal finance courses, either in a stand-alone classroom or integrated into another course, according to the Council for Economic Education. Last week, Florida became the latest to sign a bill making a course mandatory for graduation.

Additionally, 46 personal finance bills are currently pending in 21 states, according to Next Gen Personal Finance’s bill tracking system.

The impact of this upbringing can be seen in several studies, proponents claim. It has been shown to reduce the likelihood of using payday loans among young adults and is positively correlated with asset accumulation by age 25.

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