Steve Lear

Recently, the Minnesota Legislature made personal finance a required course for high school graduation. This is an important first step to ensure that young people acquire the skills to make good financial decisions while pursuing higher education, entering the workforce, and giving back to their communities.

When you are financially literate, you understand financial concepts like budgeting, debt management, and investing. The ability to make smart money decisions produces clear benefits such as economic stability, less stress, and an overall higher quality of life.

However, the Financial Industry Regulatory Authority (FINRA) estimates that nearly 66% of Americans are financially illiterate, which can lead to many problems. You are more vulnerable to fraud without a clear understanding of financial concepts. You are also more likely to struggle with debt, and uncontrolled debt can snowball into additional issues such as poor credit, bankruptcy, or foreclosure.

A solid understanding of financial literacy can help people avoid basic financial planning mistakes, such as failing to establish an emergency fund or saving enough for retirement. According to research by the TIAA Institute, more than half of all American millennials lack an emergency reserve, which is defined as having enough savings to cover three months of expenses. More than a quarter of them are considered financially fragile – unlikely to be able to come up with $2,000 in one month to cover an emergency expense. A 2020 Federal Reserve report found that more than a quarter of Americans had no retirement savings, and fewer than 40% of working Americans considered their retirement savings on track.

Financial illiteracy can also have serious social consequences. For example, one major cause of 2008’s Great Recession was a lack of understanding about mortgage products, which increased predatory lending. Foreclosures created a downward spiral in the housing market, contributing to a global recession.

Investing in financial literacy pays long-term dividends. Today’s financially literate students become tomorrow’s smart consumers, productive workers, informed citizens, and effective leaders, contributing to the economic strength of our state and a better life for everyone. This makes financial literacy an important tool for social justice.

Three Ways to Promote Financial Literacy

1. Lead by example

Talking to peers, such as colleagues, neighbors, friends, and family, can be a great way to spread financial information. Help those around you by sharing your financial successes – and mistakes – so they can learn from them. Don’t shy away from including kids in your conversations. It is much easier to start with good money habits than try to break bad habits later.

Financial literacy can also be learned through community education, podcasts, TED Talks, articles, books (such as Morgan Housel’s The Psychology of Money), or consulting a financial professional.

2. Build your financial resilience

Financial literacy doesn’t guarantee financial resiliency. Your finances are affected by many factors that are out of your control, such as employment, interest rates, and inflation. However, there are steps you can take to minimize risk and ensure you stay financially afloat in tough times:

• Create a budget
  Track your monthly income compared to your monthly expenses. You must know where you are spending money to be able to make changes if necessary. A clear picture of your expenses helps determine how much money to set aside for emergencies.
• Establish an emergency reserve
  The traditional recommendation is to keep enough money to cover three to six months of expenses in an easily accessible location, such as a high-yield savings account. By establishing an emergency reserve, you will have the funds to cover an unexpectedly large expense so that you don’t go into debt or dip into your retirement savings (triggering a penalty).
• Track your credit
  A good credit score qualifies you for the lowest mortgage, loan, and credit card interest rates. Stay on top of your credit by annually requesting a free credit report from the three major credit bureaus—Experian, Equifax, and TransUnion—and reviewing it for errors or inaccuracies.
• Invest in your future
  Build financial resilience by saving for tomorrow, today. If you are working, you may be able to leverage your employer’s retirement savings plan, such as a 401(k), to take advantage of an employer match and tax-advantaged savings. Time is an investor’s greatest asset. Saving for your future today will give your investments time to compound, which can help them grow exponentially over a long enough time horizon.
• Consider working with a professional
  At some point, your financial situation may feel too complicated to handle on your own. Maybe you have a complex compensation plan at work that includes restricted stock units (RSUs), stock options, stock appreciation rights (SARs), or an employee stock purchase plan (ESPP). Maybe your tax bill has grown exponentially, and you are curious about long-term strategies to minimize your liability. Perhaps you are nearing retirement and know you only have one shot to get it right. Working with a professional financial planner can help provide peace of mind in any of these circumstances. Financial planners have both education and experience in dealing with complicated financial situations. They can help you build financial resiliency by creating a financial plan tailored to your unique needs.

3. Give to organizations that support financial literacy

Your support can come through lobbying, volunteering, or cash donations; however, please be sure you are on the path to financial resilience (seen #2 above) before considering any charitable contributions. There are many great, locally-based organizations actively working to promote and improve financial literacy in Minnesota:

• Minnesota Council on Economic Education (MCEE): Specializes in training teachers and engaging students to equip Minnesotans with the economic and personal finance knowledge and skills to make informed decisions in our complex world. https://www.mcee.umn.edu
• Best Prep: Provides students with educational programs in business, career, and financial literacy skills. https://www.bestprep.org
• Minnesota JumpStart Coalition for Financial Literacy: Improves financial literacy for Minnesota youth by collaborating with organizations that offer equitable and inclusive access to effective financial education resources and programming within their communities. https://www.mn.jumpstart.org

Final Thoughts

Financial literacy is the key to financial stability. It begins with understanding financial concepts and the consequences of your decisions. It’s enhanced by determining your goals, values, and capacity. Once you have clarity about who you are, what you want, and your capabilities, you have the tools to build a financially secure future. This is the ultimate goal of financial literacy – the freedom to create the life most meaningful to you.

Sources:

• https://www.forbes.com/sites/truetamplin/2023/09/21/financial-literacy–meaning-components-benefits–strategies/?sh=18bb845a68cd
• https://www.investopedia.com/terms/f/financial-literacy.asp
• https://mn.jumpstart.org/
• https://www.aboutschwab.com/mss/story/why-financial-literacy-will-unite americans#:~:text=Financial%20literacy%20is%20a%20powerful,compete%20in%20our%20evolving%20world.