Why Is Financial Literacy Important?

Why Is Financial Literacy Important?

Financial literacy is a crucial skill set because money plays a part in everything, whether you’re ordering a pizza, financing a vehicle, buying a house, saving, investing, funding your 401 (k), getting married, starting a business, planning a vacation or your retirement, and just about everything in between.

Money is inextricably woven into almost every aspect of our lives, and virtually everything we do in life is impacted, either directly or indirectly, by how we think about money.

Being financially literate means you understand the intricacies and dangers of money, credit, insurance, budgeting, buying, selling, investing, etc., how they all work together, and, most importantly, how to make them all work for you.

When you’re financially literate, life is better. It just is.

Your value as an employee, business owner, or entrepreneur increases exponentially. You become more effective as an adult, parent, advisor, and mentor and more trusted as an advice-giver, coach, friend, neighbor, and community leader. You’re also a more educated consumer, a more savvy negotiator, and a discerning investor who can spot trends, trouble, and opportunities others don’t see.

For decades, however, an alarming lack of financial literacy has quietly robbed millions of people of the futures they could have had.

Financial Literacy Can Protect You

It’s just the world we live in, but sadly, financially illiterate people make easy targets. That’s primarily because they tend to be more gullible, less knowledgeable, less discerning, and easier to deceive, trick, and manipulate. But criminals and scammers aren’t the only ones trying to exploit them.

Banks, insurers, cellular providers, credit card issuers, retailers, and finance companies have all been targeting and profiting from America’s collective lack of financial literacy for far too long.

Doesn’t Financial Literacy Start Early?

Surprisingly, financial literacy is not a subject that’s taught in most schools.

As a result, most Americans believe parents are primarily responsible for teaching their kids about money. In fact, according to a CNBC survey, 83% of U.S. adults said parents are the ones most responsible for educating their children about money.

In that same survey, however, only 15% of parents said they spoke with their children more than once a week about household finances. 13% said once a week, 16% said once a month, 24% said less than once a month, and 31% said they never talk to their kids about money.

Think About That For A Minute

As a high school or college student, we’re taught that to be “proficient” in a single topic, we must attend class for an hour or more each weekday, or at least several days a week, for a semester. With strict academic oversight, we also have to complete homework assignments correctly and pass a final proficiency exam to demonstrate our mastery of the subject.

Financial literacy, on the other hand, covers dozens of topics, and there is no mandatory attendance, training, homework, oversight, or final exams.

So it begs the question: If 85% of parents rarely or never talk to their kids about money and financial proficiency isn’t taught in school, how and where are young adults learning to manage their money?

Herd mentality: they simply copy what they see other people doing.

Big Finance Is Coming For You

Until the late 1970s, marketing financial products to teens and young adults was considered bad form, but by the early 1980s, everyone was doing it.

Nowadays, it’s normal for teens to be bombarded nonstop with offers for easy-to-get credit cards, retail cards, loans, and myriad financing options on everything from gaming systems to cell phones.

But here’s the rub. You don’t have to have an MBA in Finance to understand that giving access to thousands of dollars of instant money (i.e., credit cards) to tens of millions of teens and college students each year, most of whom either still live at home or are living on their own for the first time, who are also primarily jobless, with little to no income, little to no financial training, and little to no oversight, is a potential financial disaster just waiting for a place to happen.

Banks and finance companies have exploited this for decades. Arguably, it’s borderline unethical, but exploiting human nature is not illegal, so they earn hundreds of billions of dollars each year in interest and fees as each crop of young adult borrowers gets older and sinks deeper into debt.

Huge financial conglomerates, or “Big Finance,” as they are called, have turned the old expression, “You can shear a sheep a hundred times, but skin it only once,” into a Fortune 100 business model.

Herd Mentality In Action

Herd mentality, also called “groupthink,” is a psychological phenomenon that can profoundly impact human behavior. Simply put, it occurs when a group of rational, well-intentioned people makes irrational or non-optimal decisions spurred by the urge to conform to the group. If you know what to look for, you can see herd mentality in action all around you.

Big Finance knows what to look for, and it spends billions in advertising each year exploiting herd mentality.

Everyone knows debt occurs when people spend more money than they have and borrow to make up the difference. Most everyone would also probably agree that “in debt” is not a place where most rational, thinking people would choose to spend their lives.

That being said, consider this: The New York Fed reported that in the fourth quarter of 2023, total consumer debt hit $17.503 trillion. That number is so astronomically huge that it’s practically incomprehensible, so think of it this way: If the total consumer debt were a stack of $1 bills, it would reach from Earth to the moon … FIVE TIMES.

The bulk of “total consumer debt” is comprised of “essentials” like home mortgages, which is understandable because most people don’t have a half million dollars or more just lying around to buy a place to live.

But it also includes $1.6 trillion of “nonessential” debt like retail charge cards and credit cards.

Nonessential debt is a textbook example of how herd mentality can be weaponized against people. A few centuries ago, herd mentality protected people from things like not drinking water from a tainted stream or not walking alone at night, so the lions didn’t get them.

The problem with groupthink nowadays is that when kids grow up seeing their parents, siblings, friends, neighbors, and peers overspending, going into debt, and building their lives around their monthly debt payments, they come to believe it’s “normal” and tend to copy that behavior, often at the expense of their own better judgment.

Why Does It Even Matter?

If you’re thinking, “Who cares? Herd what? Billions, trillions, blah, blah, blah”, you’re not alone. But here’s the thing.

There’s only one reason why any of this even matters.

The reason is that, like it or not, and ready or not, Big Finance is coming for your money. But how much of it they get is going to be almost entirely up to you.

Your ONLY protection is to educate yourself and become financially savvy enough to prevent it from happening to you.

Off To A Rough Start

According to a new financial literacy assessment from the Organization for Economic Co-Operation and Development (OECD), teens in the US are desperately far behind students in other countries in terms of financial education.

The assessment raises a number of red flags, but the takeaway is that more than twice as many American teens routinely fail to meet the requirements to be considered financially literate as their Chinese and Russian counterparts.

Closer to home, the National Financial Educators Council (NFEC) revealed that 51% of 15-to-18-year-old students fail its financial literacy exam. That figure represents just over half of the people who are finished, or nearly finished, with high school and will be heading off to college, the military, or the workforce to make their way in the world.

WalletHub also reported that in Q1 2024, 85% of college students had at least one credit card, with the stated purpose being “for emergencies” or “to build credit.”

However, without some basic financial wisdom to guide them, chronic mismanagement of their first credit lines is how most people start building the foundation for a lifetime of debt and money problems.

For example, almost half (46%) of respondents in a US News survey said their debt was from nonessential purchases like dining, shopping, and impulse buying.

And that’s not all. Carrying balances, i.e., not paying off credit card debt each month to avoid paying interest on purchases, is a bad habit that is notoriously difficult to break. A College Finance study found that the average undergraduate carries a month-to-month credit card debt of $3,280.

Technically, credit card debt is considered a revolving account, and therein lies the danger. It’s still a loan, but unlike term loans, which have a preset simple interest rate, monthly payment, total payments due, and a final payoff date, revolving credit doesn’t work that way.

Instead, compounding interest rates fluctuate based on the Prime Rate, and there is no final payoff date. New charges increase the balance, which rolls from one month to the next and continues to accrue compounding interest each month until it’s paid off, which could be months, years, or even decades after the purchases were made.

The average credit card interest rate is 27.90%, compounding monthly, so it’s easy to see that financing impulse purchases or hanging out with friends at 28% interest for a year or more can quickly become expensive.

In addition to credit card debt, 54% of grads also finish college with student loan debt, an average that Experian says is $38,787.

If you combine the two, the “average” 23-24-year-old graduate leaves school over $42,000 in debt!

Money And Relationships

Literally thousands of books have been written on the topic of money and relationships.

We won’t expand on that here, except to say that while the expression “money can’t buy happiness” is subjective, it is an incontestable fact that financial disagreements and the lack of money are MAJOR contributors to unhappiness.

“Money is widely known as one of the leading causes of divorce in America. It’s estimated that financial problems contribute to 20-40% of all divorces. That means that for every ten marriages ending in divorce, four are because of money. Typically, around 41% of divorced Gen Xers, along with 29% of divorced Boomers, state that the reason their marriages ended was due to financial disagreements.” ^Source

To Be or Not To Be (Financially Literate)

Financial literacy is a choice.

It isn’t a gift only a lucky few receive by some cosmic lottery. No one is born with it; it never happens by accident, and people only become financially literate because they decide to.

It’s something that YOU can decide to do, too.

There comes a point in each person’s life when they make a decision about financial literacy.

They will decide to take some small, perhaps inconvenient, action and learn something that makes them a little more knowledgeable and financially literate. After a few times, a habit forms, and they repeat that process periodically throughout their lives.

OR, they will decide to make an excuse why they can’t, won’t, or don’t want to. After a few times, that, too, becomes a habit. And while it’s true that people can change their habits later on, not many do.

Which way you go is your choice.

So choose wisely.

The 50/50 Split

While the journey to financial literacy can begin at any age, most people choose it when they’re young adults and continue to expand their knowledge proactively throughout their lifetimes.

The fruits of their discipline will be sound financial decisions, reduced stress, peace of mind, and amassed wealth. They will manage their income and investments wisely and carefully, enjoy the best life offers, and be well-prepared when adversity strikes.

They will live comfortably on their terms, give generously, retire with dignity and financial security, enjoy their golden years, and leave a sizeable inheritance for their children.

How The Other Half Lives

Not to be all doom and gloom, but for everyone else, debt and financial lack will define every aspect of their existence.

It will determine where they can afford to live, shop, and eat, the cars they drive, the clothes they wear, the things they do for fun, the vacations they take, the people they associate with, and pretty much everything else.

A survey conducted by Payroll.org in September 2023 confirmed this when it highlighted the fact that 78% of Americans now live paycheck to paycheck. That means that after a lifetime of working hard, and while never intending to, they will join a jaw-dropping number of Americans who face the very real prospect of retiring without a penny in savings.

U.S. Census Bureau statistics bear this out: 50% of women and 47% of men between the ages of 55 and 66 have no retirement savings whatsoever.

Not Just A Coincidence

Pay particular attention to the striking similarity between the lack of financial literacy when they’re young and the lack of retirement savings when they’re older because IT’s ALMOST THE EXACT SAME NUMBER!

Remember those 51% of students who fail the NFEC exam each year when they’re 15 to 18? They’re the ones who grow up and become the 50% of adults who, 40 to 50 years later, have no retirement savings.

Unless dying young is their plan, reaching retirement age is inevitable for almost everyone. But reaching retirement age with no savings and nothing to live on for the rest of your life is not.

That is why financial literacy is so important.

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