What does financial literacy mean?
Below are two definitions.
- According to the President’s Advisory Council on Financial Literacy, it is “the ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial well-being” (2008 Annual Report to the President).
- In an Investopedia post, it is “the ability to understand and effectively apply various financial skills, including personal financial management, budgeting, and investing. Financial literacy helps individuals become self-sufficient so that they can achieve financial stability” (Kenton, Will. “Financial Literacy.” Investopedia.com. Apr 19, 2020).
The common elements in both definitions are using skills to manage money to achieve stability, well-being and self-sufficiency. I would like to point out that simply knowing is not enough – you have to apply the skills and achieve the desired result.
I define financial literacy as the set of skills that enables people to make smart decisions with their money such as budgeting, saving, spending, and investing.
Are Americans financially literate?
Unfortunately, according to the evidence, we are not financially literate in knowledge or application.
- Over 75% of U.S. workers live paycheck to paycheck and are in debt.
- Sadly, about half of all workers think they will never get out of debt. (“Living Paycheck to Paycheck is a Way of Life for Majority of U.S. Workers, According to New CareerBuilder Survey”. Career builder.com. Aug 24, 2017.)
There are lots of statistics, but I think that’s enough already to warrant a big “F”.
That’s pretty grim news but let’s take this one step further. If kids don’t receive an education in personal finance at school, then it’s up to parents to teach them how to manage money. If you consider the failing grade above, then we have a big financial literacy problem in the U.S.
How can I help my kids?
There is hope! If you’re willing to put in the work, then you can turn your financial life around. While you are working on that, why not get your kids off to a good start so they don’t make the same mistakes that most of the people in the U.S. are making?