April is National Financial Literacy Month in the United States. Should you have a money party? Or maybe take a tour of a local Federal Reserve or bank? Really – exactly what are you supposed to do for financial literacy month?
What is financial literacy?
Before we break out the cake and punch, we should figure out what exactly financial literacy is. Simply put, financial literacy is a basic understanding of personal finance and how it applies to the money decisions an individual or a family needs to make. It can include basic budgeting, saving and spending knowledge and skills. It also covers having a basic understanding of credit cards, consumer loans and mortgages. And, let’s not forget the ability to balance a checkbook.
Unfortunately, surveys and studies indicate that the financial literacy of the average American is between 50% and 60% based on their ability to correctly answer basic financial questions. If this were a real test, those grades would be close to failing. And the scores have not changed much over the past several years that the surveys have been conducted.
Why is financial literacy important?
Financial literacy helps people make solid financial decisions in their personal life. It helps limit the mistakes that people can make with their money. What kind of mistakes? Mistakes that can run the spectrum from having an overdraft on their checking account (or 4 or 5) to paying extreme interest rates on credit cards to buying a house that they cannot afford.
Sure not every mistake is a big one. And some mistakes are lessons in the making. But without a basic system of teaching people about personal finance, financial literacy is likely to remain an issue.
But it’s just an adult thing right?
Not so fast. Teenagers are one of the groups (if not THE group) with the highest disposable income – even if they are not the ones actually earning it. In 2006, teens spent nearly $190 billion. Over half of it was spent on food, apparel, personal care items and entertainment.
Yet, their financial literacy scores are on par with the adult Americans in the survey – meaning that they are no wiser about basic personal finance than many of their parents.
Why is this important?
Teens are going to be making really big financial decisions in just a few short years. These decisions include choosing a college and how to finance their education as well as living on their own for the first time. And while Mom and Dad may be footing the bill for a good chunk of certain things, there are still many new temptations.
What if teens entering college do not fully understand how long that $30,000 per year student loan is going to cost them and how much? What if they do not know the fees and interest structure of that credit card they just got to buy pizza and gas with?
Getting started on the right financial foot with a few basic pieces of knowledge can make a huge difference in the lives of today’s teen when they become tomorrow’s college graduates and enter the workforce. That is what Financial Literacy Month is focused on: making sure that everyone gets the money education they need.