You do not need to be an expert at numbers to live your life. You may likewise not need substantial finance knowledge to fulfill your day-to-day job. However, Harvard Business School Professor Richard Ruback advises, “If you speak the language of money, you will be more successful.” Financial literacy, after all, is a multi-dimensional concept. It is not just about a person’s knowledge but also takes into account skills, attitudes, and actual behavior.
So why is financial literacy a necessity for all ages? Financial literacy is an important skill for people of all ages to have. It gives individuals the knowledge and understanding to make good decisions about their finances, as well as the confidence to create plans for achieving their financial goals. Having an understanding of basic financial concepts such as budgeting, saving, investing, credit and debt can help individuals make smarter decisions about money that will benefit them in the long run. Financial literacy also allows people to plan for future events like retirement, college expenses or a major purchase, improving both their current and future financial situations.
In 2012, the Organization for Economic Cooperation and Development (OECD) International Network on Financial Education (INFE) defined financial literacy as the “combination of awareness, knowledge, skill, attitude and behavior necessary to make sound financial decisions and ultimately achieve individual financial wellbeing.” Understanding the fundamentals of finance is a crucial life skill that everyone should possess.
It is vital to make informed decisions about money management, whether for yourself or for an enterprise. So, in this blog post, we’ll provide tips and advice on how to achieve financial literacy.
Introduction to Financial Literacy
“I was like, I went to college, I’m working hard at this corporate job, but why am I living paycheck to paycheck?” Giovanna González-Chávez, a financial educator and speaker at The First Gen Mentor, wonders. “I did not want my life to be stressing all about money.”
Financial literacy begins with understanding the basics of personal finance, such as:
For people surrounded by a financially illiterate community, it may be difficult to start investing or build a stock portfolio right off the bat. Not all hope is lost, though, as simply understanding your “why”—envisioning the kind of lifestyle you want for yourself—can already be a good start.
Some, especially younger individuals, may be pressured to make enough money to buy a house or support their parents. Beware as these financial goals can both be a motivator and an emotional burden at the same time.
“It’s super important to get clarity on what you’re doing this for,” Giovanna shares. “Because it’s not always fun, to be on a budget or watch what you spend. Because we’re so family-oriented, it’s natural for us to be thinking about our parents, but that can also cause a lot of stress and anxiety.” Her advice is to think of goals that will spark joy and excitement, instead of overwhelming feelings.
Once you have a solid foundation, you can then explore more advanced topics like retirement planning, estate planning, and investment strategies. With this knowledge, you can make smart financial decisions and accomplish financial freedom.
Personal Financial Management
Personal financial management is a key aspect of financial literacy. By having a good grasp of its concepts, you will not be stressing about money all your life.
When you budget, you create a plan to spend your money. Having a spending plan (called “budget”) and sticking to it is crucial for successful financial management.
A budget typically includes the following:
- Fixed costs such as rent or mortgage payments, utility bills, and transportation expenses
- Variable costs like groceries, entertainment, and clothing
You can use this opportunity to determine which areas of spending should be prioritized. Money has to be spent on things that are most important to you. This will keep you away from being in debt under usual circumstances.
Monitoring your budget regularly will prevent you from overspending. Most importantly, you will be able to see where your money is going on a regular basis.
“It starts at home with financial education with me because I want my children to know how much it costs to live outside of the house. Our children go over the house budget and know what it costs to run our home. Everyone’s situation is different, but at the end of the day we need to be good stewards of our money and stop giving away our power to just putting our savings in a 401k because someone tells us to,” according to Kirsten Jacobsen, owner of a financial service agency.
By setting aside a certain amount of money each month into a savings account, you can protect yourself from unexpected expenses.
Common financial issues would be:
- Losing your job
- Having health problems that require hospitalization or immediate treatment
- Encountering unexpected home repairs
- Finding yourself having car troubles or car wreck
- Accumulating unplanned travel expenses
An emergency fund is not a cash reserve for a future home or vacation. Its use should strictly be limited for financial emergencies like the examples above. Suze Orman, a bestselling author and host of the Women & Money Podcast, clarifies, “An emergency savings fund is not an investment. It is security. It is peace of mind. It is protection.”
While you may not be delighted to think of deducting more from your paycheck, it would be wise to increase your emergency fund as your income increases. With an emergency fund, you can avoid going into debt if an unexpected expense arises.
While you cannot force your employees to follow the same financial principles you adhere to, you can provide tools to help them manage their finances wisely.
Understanding how to borrow and save money is an important part of financial literacy. It’s important to understand the different borrowing options available and to borrow responsibly. In addition, one should also be aware of the emotions driving these actions. After all, if you do not address mindsets and assumptions, the nuts and bolts of personal finance will hardly matter.
David Hundley, a principal machine learning engineer, explains, “There are subtle things people do and say that guide our choices in a way we are oblivious to.”
The matter of credit cards is a good example. Have you ever heard any of the following?
- “Credit cards are a scam.”
- “Credit cards are the worst.”
- “Credit cards are a trap.”
Told multiple times during a lifetime, you may subconsciously start to believe these things if you are not careful enough. The media further contributes to these scare tactics by showcasing the median credit card debt of households or by talking about having a debt crisis.
While not everyone has a good experience with credit cards in general, they can actually be a great way to borrow money and provide perks on top of it. Assuming that you pay your bill on time, you technically secured and paid off a free short-term loan.
The billing statements can also help you keep track of your spending much more easily than cash. They even let you access and download your transaction history at no additional cost. Some add free warranty extensions on your purchases, some offer free rental car insurance. Interestingly, you can get rewards and points worth a lot of dollars by just spending. With adequate information, you can judge for yourself whether or not credit cards are the root of all evil.
“Resist the temptation to apply for multiple credit cards at the same time, as doing so can lead to negative financial consequences,” Barney Moore, director at Paramount Financial Partners, cautions.
Keep in mind that other sources of credit exist as well. These would include:
- Installment loans (such as auto loans)
- Personal lines of credit
- Home equity lines of credit
- Service credit (such as utilities)
In fact, another source of credit could be a payday advance from the workplace. While it may seem counterintuitive to have this offering, this solution can benefit both the employees and the organization in many ways.
Saving money can provide a safety net in case of unexpected expenses and is necessary to reach your financial goals. The concept has similarities and differences with investing, but both share a common goal—to help you accumulate money.
“The rule of thumb is this: if the account can lose value, it’s not savings, it’s an investment,” says Rachel Marshall, co-founder and chief financial educator at The Money Advantage.
There are various ways to save, such as:
- Having a savings account
- Putting money in time deposit
- Through bonds
There is a growing need for more people to deal with their own retirement savings and pensions. Therefore, high levels of financial literacy will be needed.
You have to be willing to make planned savings for a better long-term financial situation. Constantly “living for today” by spending too much money could hinder financial resilience and create poor implications. With higher financial literacy, you would be more likely to make ends meet than those with lower financial literacy. Good financial behavior includes:
- Spending less than how much you earn
- Setting aside three months’ worth of emergency funds
- Calculating retirement savings needs
- Opening a retirement account
With sufficient financial knowledge, these individuals should be able to compare financial products and services and come up with a well-informed decision. Being capable of applying numeracy skills in a financial context is a good indicator that consumers will be able to handle their financial affairs independently.
Investment strategies are an important part of personal financial management. A diversified portfolio is key to mitigating risk and creating a secure financial future. There are various investment options, such as:
- Mutual funds
- Exchange-traded funds (ETFs)
It’s important to understand the different types of investments and the associated risks before investing your money. Charles Qi, a professional investment strategist, believes, “Put simply, investing is the fastest way to grow your wealth. By developing an investing strategy and building your portfolio, you’re better equipped to combat inflation, helping your money grow rather than shrink.”
In certain cases, consulting a financial advisor or professional may be wise. They will be able to help create an effective investment strategy that meets your needs. However, they may not always have your best interests in mind, and many people have simple needs that the costs of hiring a financial advisor may not be worth it.
Paying Your Bills and Tracking Spending
Financial control involves budgeting, record keeping, and being aware of one’s own financial position. You are considered financially literate when you:
- Prioritize and pay your bills on time
- Manage money and keep track of debt
- Create a budget and stick to it
- Understand payment options and interest rates
- Know the impact of late payments on financial standing
With proper understanding of this aspect of money management, individuals can maintain a good financial health. Note that despite a general comprehension of the concepts, people may still not make sound decisions. For example, one may be monitoring expenses but not do anything to control spending. For a secure financial future, knowledge and appropriate behavior are both important.
Benefits of Financial Literacy
Financial literacy has numerous benefits. With financial literacy skills, you can:
- Have an improved financial well-being
- Better manage your money and resources
- Make smarter decisions about finances
By having the skills to properly manage their finances, individuals can be more prepared for any financial situation that might arise.
Finally, with an understanding of financial literacy, people are better equipped to understand the risks associated with different investments and how to allocate their resources for maximum return.
Financial Schooling at the Workplace
Financial literacy has become a crucial aspect of the modern workplace. A growing number of companies are now providing relevant education to their employees. Helping your workers manage their finances more wisely boosts productivity, apparently.
The need for financial literacy has arisen due to the financial insecurity faced by many Americans despite a strong economy and record employment. Providing financial literacy benefits not only helps companies retain their workforce but also decreases healthcare costs due to less personal stress among employees.
Financial literacy curricula typically include online modules that cover various topics such as:
- Budgeting, emergency fund, debt reduction, saving for expenses and retirement
- Affording life events like buying a home, paying for kids’ education and weddings
The programs cost companies around $10 to $30 per employee per month, along with any signing or completion bonuses offered by the employers.
Investing in Human Resources
Financial literacy programs have shown significant returns for both employees and companies. M&T bank, for instance, has seen a “financial turnaround.” An amount of $5.1 million came from debt reduction and savings increases by employees. Ramsey’s SmartDollar program has shown an average turnaround of $16,200 in the first year for its participants. BrightPlan has reported a three-dollar return in hard savings by employees for each dollar invested by the client company.
Knowledge has become increasingly important in light of the growing financial burdens faced by Americans. Consumer debt has reached $4 trillion and the cost of living continues to rise, while around half of Americans do not have any emergency funds. The 2008 recession led to a heightened awareness of the need for financial literacy. This desire drove people to be better equipped financially.
Stress Reduction with Money Management
A financial literacy program can help employees understand the basics of finance and make responsible financial decisions. This can reduce uncertainty about their financial situation and lower stress levels.
In a survey conducted by PwC, employees who received financial literacy training reported a significant drop in stress levels, from 52.4% to 19.2%. Over half of the participants said they were now better equipped to manage their finances.
Productivity and Retention
Financial worries can be a major distraction for employees and can cause them to miss deadlines and produce lower quality work. A financial literacy program can help employees focus on their work by reducing their financial stress. According to a 2020 personal finance study, increasing productivity is a key reason for organizations to invest in financial literacy programs.
Moreover, financial wellness benefits are becoming increasingly important to employees. Financial Health Network found out that while most workers are interested in financial guidance, less than half are currently receiving any.
Offering debt-related benefits can be a major advantage for your organization. Some examples include:
- Audits and negotiations for medical bills
- Debt consolidation
- Emergency loans
Financial literacy programs have become an important aspect of the modern workplace and have proven to be beneficial for both employees and companies. Companies must embrace their responsibility to help their employees navigate their finances, lending their expertise and capacity for innovation to solve this global challenge.
In summary, having a strong foundation in financial literacy has numerous benefits for both individuals and society as a whole. With financial literacy, individuals can save more money, invest wisely, and reduce debt. They also understand investment risks and resource allocation, leading to better financial decisions.
With the right tools, resources, and education, anyone can gain the knowledge they need to become financially literate. If you want to take action right now, join our Master Your Cash Flow Challenge to learn about financial literacy basics and more.
Frequently Asked Questions
1. How do you provide financial literacy to employees?
The Consumer Financial Protection Bureau advises five principles to implement effective financial education in the workplace:
- Know individuals and families to be served
- Provide relevant and timely information
- Improve key money skills
- Build motivation
- Make it easy to make good decisions and follow through
In general, assess workers, use technology wisely, teach important skills, celebrate successes, and simplify steps if possible.
2. Explain how poor financial literacy can affect career.
Poor financial literacy can have a wide range of negative impacts, both on individuals and on society as a whole. Some of the most significant impacts include:
- High levels of debt
- Lack of career advancement
- Stress and anxiety
- Limited career choices
All of these may lead to poor work performance and lead to job loss, affecting career development.
In conclusion, poor financial literacy can have significant and long-lasting impacts on one’s career. This limits opportunities and hinders an individual’s ability to achieve financial stability and security.