Did you know a lack of financial literacy could cost you tens of thousands of dollars in your lifetime?
Yes, personal finance may not be the most exciting topic. However, not understanding your finances can cost you a huge chunk of change.
If this sounds like you, it might be time to brush up on your money skills ASAP. Here’s why financial literacy is so important and what you can do to improve your understanding of how to manage your money.
The importance of financial literacy
Traditionally, financial literacy is your basic understanding of how to manage your money. This comprehension translates into skills such as:
- Creating a budget.
- Knowing the basics of investing.
- Learning how to manage and leverage debt.
According to PBS, “[Financial literacy] also includes skills like long-term vision and planning for the future, and the discipline to use those skills every day.”
When you think about managing your money, you might focus on the idea of building savings and investments as well as using credit wisely. But to be truly financially literate is to understand why those financial goals are important.
For example, you shouldn’t just be interested in building credit because you want to be approved for a loan in the near future. You should want to build your credit so you can receive the best financial opportunities – including interest rates, repayment terms, and lines of credit – throughout your lifetime.
It’s important to focus on the why and the overall big picture to make sure you’re making the right financial decisions for the right reasons.
What happens when you’re financially illiterate?
A survey by the National Financial Educators Council (NFEC) asked respondents the following question:
“Across your entire lifetime, about how much money do you think you have lost because you lacked knowledge about personal finances?”
One in four respondents said they’d lost more than $30,000 in their lifetimes due to a lack of financial knowledge. This could be due to a variety of factors, such as missing out on investment opportunities, taking on debt with high-interest rates, or losing money to overdraft fees.
Whatever the cause, can you imagine losing $30,000 over your lifetime because of your lack of understanding about money management? That’s an expensive consequence.
NFEC also released a financial literacy test. As of today, the majority of test takers have failed it. While the average grade test takers received was 63 percent, 70 percent is considered a passing grade.
So who’s doing the best? Test takers over 50 years old are leading the way with the highest average score: 76 percent. Meanwhile, the two age groups between 25 and 50 years old tied for second place with an average score of 73 percent.
Ages 24 and younger are currently failing the test, on average.
How you can improve your financial literacy skills
As you think about how to build up your financial literacy knowledge, just know that you don’t need to be an expert to do well financially. Start small by mastering the basics listed below.
Also, understand that you’re going to mess up more than once as you work to improve your money skills, and that’s okay. The important thing is that you learn from your financial mistakes so you can make smarter money choices in the future.
1. Map out your money and life goals
When you’re building up your financial literacy knowledge, it’s important to ask yourself the following: What do you want out of life? What kind of future would you have if you weren’t limited financially?
Start by mapping out your goals for the next year, five years, 10 years, and more. Since the road to healthy finances can be long, knowing the money goals you want to achieve can provide you with motivation along the way.
Don’t worry if you’re not 100 percent sure that your current goals will be your future goals. Get started with a list now and revisit it every year. You can always change course if new goals develop.
2. Start reading
Once you know what you want, it’s time to start reading as much as you can about the personal finance skills you’ll need to get there. Here are some good starting points:
- Learn how to create a budget.
- Understand how to pay off debt.
- Start building knowledge on investing.
- Figure out how credit works.
After you’ve gotten the lay of the land on these four topics, you can start building your knowledge base from there.
3. Seek help from trustworthy financial professionals
Although personal finance isn’t inherently complicated, our emotions and fears add a layer of complexity that can be hard to see through. That’s where talking to a trustworthy financial professional can help.
Whether it’s a fee-only financial advisor (so you’ll know they won’t try to sell you products for a commission) or a financial therapist, find someone who asks you a lot of questions about what you want from your money. That way you’ll know they’re keeping your goals and obstacles in mind as they advise you.
This is a case in which you might have to spend money you don’t yet have, so don’t stress if this isn’t an option right now. Just know it’s something you can use if you need a helping hand later on down the road.
When it comes to financial literacy, start small
If you feel like you know nothing about personal finance, the concept might seem overwhelming to manage. Give yourself a break and just start somewhere. As you learn new things, you’ll build momentum that will make it easier as you go along.
Remember, the more you understand about personal finance, the more empowered you’ll be to make decisions that help you grow your money. And that can lead to a better chance of cultivating the life you want.
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