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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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 5.87% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 5.87% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on ourstudent loan refinance product.
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4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
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