The Importance of Financial Literacy

by | Aug 6, 2021 | Financial Planning

Financial literacy is a topic of growing attention, as fewer individuals reportedly understand how credit, saving and investing works. According to the Financial Industry Regulatory Authority [FINRA] Foundation’s National Financial Capability Study, only 34% of participants were able to correctly answer four of five questions designed to test their financial literacy. This figure represents a shockingly steep decline from the 2009 iteration, where only 42% answered four of five questions correctly, and this is obviously not good news.

So, what is causing the decline in financial literacy? It’s no secret that knowing where your money is going and learning how to invest has become more complex. Further, the advent of new fintech services, combined with the growing number of investment options available to the average investor, is complicating matters even further. Companies like Robinhood are making IPOs and options trading accessible to the average person, but most do not understand the risks or complexities associated with these investments. The fact is, as investment options grow, so will the need to continue learning.

The best option to ensure you aren’t making poor financial decisions is to seek the assistance of an experienced financial professional, but the work doesn’t stop there. It’s very important for you to understand what financial literacy is and why it is important.

What is financial literacy?

Gaining financial literacy is a lifelong journey, beginning with your first interaction with money. Simply stated, it involves knowing how to effectively manage your assets in a way that will secure your future. However, the notion more expansively involves a deeper understanding of some complex personal financial concepts. For example, basic principles of financial literacy include budgeting and following a savings plan, with more complex ideas involving risk assessment, understanding complicated investment products and setting financial goals.

Financial literacy also extends to a collection of financial management skills that can allow you to make educated decisions and plan for a comfortable retirement. It involves the ability to weigh the opportunity costs of making an investment or a purchase, considering the short-term and long-term impacts of your choices, and ultimately feeling confident in your decisions.

Being financially literate doesn’t mean you need to know everything about the financial world, nor does it guarantee that you will never make bad decisions with your money. It will, however, ensure you know what questions to ask your financial advisor and what resources are available to help you make informed financial decisions.

Why does financial literacy matter?

Those who don’t understand the ins-and-outs of money management run the risk of facing stressful situations, like insufficient cash to deal with an emergency, crippling debt payments, poor credit or inadequate retirement savings. This is one reason why many Americans are unable to pay for unexpected expenses such as medical costs, home repairs, or automobile repairs without taking on debt. As a result, consumer debt is on the rise.

Additionally, many adults don’t consider what they need in their retirement accounts until it’s time to retire. With Social Security only covering about 40% of the average retiree’s expenses, this can be disastrous.

On the other hand, being financially literate can have a positive impact on your life. Those who learn and plan their finances properly can experience less worrying, better rest, and gain confidence that they are prepared for the future.

How can you achieve financial literacy?

With the noted decline in personal financial literacy, 25 states have introduced legislation which would add personal finance education to the high school curriculum. While this is a move in the right direction, there is much work yet to be done to improve access to financial education for future generations. Additionally, the added high school curriculum does not account for educating the post-high school population who need even more guidance toward financial literacy.

As you navigate your financial journey, you will find that you have good and bad moments along the way. Your knowledge about personal finance will grow through education as well as through life experiences.

Individuals looking to improve upon their financial literacy can find lots of free educational opportunities online. More specifically, the Federal Deposit Insurance Corporation [FDIC] began the Money Smart program in 2001. Money Smart aims to enhance individuals’ financial skills and build positive banking relationships. While seeking the help of an experienced financial professional is the most important step you can take, these no-cost educational programs can be invaluable in helping you understand the financial planning process.

Questions to Ask

As you become financially literate, you may find yourself asking new questions about your financial decisions, such as:

  • How do I manage the cost of this vacation, purchase, investment?
  • What are the rules of this transaction that I need to consider?
  • Are there penalties or late fees if I miss a payment or make a withdrawal from my account?
  • Does this expense replace any other existing expenses?
  • Am I sacrificing anything for this expense?
  • What do I stand to gain from this transaction?

By knowing what questions to ask, you can be more prepared to meet your financial goals.

Actions to Take

There are some actions you can take to immediately improve your financial literacy and advance toward meeting your goals:

  • Read as much as you can to learn about personal financial topics.
  • Learn how to create and follow a budget.
  • Identify areas where you can improve your current financial situation.
  • Learn to manage your debt in a manner that minimizes interest paid and eliminates debt quickly.
  • Begin planning for retirement as soon as possible so you are not starting the process late in your career.

This all sounds like a lot of hard work, and it is. But if you have an experienced financial professional to assist, you can skip a great deal of the learning curve and accelerate the progress toward your goals.

Find Your True North at Brookstone Wealth Management

Partnering with an experienced advisor can help you expand your financial literacy and navigate your financial plan. The right advisor will help you focus on the knowledge you need for your specific situation and gain confidence that you are on track to meet your financial goals.

At Brookstone Wealth Management, we can develop your Financial Fingerprint™ – a custom financial plan that is quick to assembleeasy to understand, and simple to modify as your circumstances change.

So, if you are looking to sharpen your financial literacy or if you need assistance navigating your financial future, contact the team at Brookstone Wealth Management. We offer a complete suite of wealth management services, supported by an experienced team of financial and legal professionals. Our focus is on coaching, teaching and mentoring our clients and we would love the opportunity to help you find your True North.