In school, I always wanted to take a Personal Finance course but could never find one. I loved electives that gave real-world information. I once considered taking a small engine repair class just in case I ever need to fix a lawnmower.
With the role money plays in our day-to-day lives, financial literacy should be a priority for our schools. A lot has changed since I graduated high school, but still a mere six states require a standalone personal finance course while only 21 require students to take a course that includes personal finance topics.
More can be done. Financial knowledge can change the life of a student. And knowing what financial literacy is and why it’s so important will hopefully cause more parents to request it and more schools to require it.
How Does Financial Literacy Help?
Everything has a cost. Financial literacy helps you make the best decisions, based on your personal values. Here are the three areas that which financial literacy can help change your life.
Save Money: Knowing about personal finance can save you money on taxes, your mortgage, investing fees, and more.
Make Money: Investing in good mutual funds or index funds and buying a house in an appreciating market can make you money over time. Keeping track of your budget will show you any missed income.
Work Less: When you’re financially stable you can afford to take a pay cut for a job you love, have the power to turn down work when you’re busy, and retire on time or even a little early.
What is Financial Literacy?
Financial literacy isn’t difficult. You don’t have to be an expert to be financially literate. Rather, the principles of financial literacy boil down to knowing how to get, grow, and keep your money.
When you learn and apply basic personal finance concepts, you’ll be prepared to establish financial security and achieve the things you want with your money. Without this knowledge, it’s easy to fall prey to common pitfalls.
Lack of financial literacy is how predatory lenders, credit card scammers, and commissioned financial professionals take advantage of people. Knowing the basics helps you protect yourself and grow your financial safety net.
There are five areas foundational to financial literacy. Knowing the basics of each will give you what you need to succeed.
Budgeting is simply making a plan for your money. Most budgets are monthly. A monthly budget tells you where you’re overspending. But you should also have a yearly budget. This helps you cover annual and seasonal expenses and can help you set goals for increasing your income.
Once you have a budget in place, you can learn how to build better spending habits, start a side business, or negotiate for a raise or promotion at work.
Pocketsmith is cloud-based, where you can create budgets and set up alerts to let you know if your accounts are running low on funds.
Knowing how debt affects your financial life is crucial to becoming financially secure. You should know the interest rate of all your loans, understand how interest compounds on them, and how much it costs you if you don’t pay them off.
This includes knowing your credit score and how it’s calculated. A credit score is an analysis of how likely you are to pay back a loan or stay current on monthly payments. Maintaining and paying down your debt will increase that score and help you keep more of your money.
Knowing what’s taxed, what isn’t, and what you owe in taxes can help you save money around tax time by filing your own taxes. If you get professional help, this knowledge will help you understand what’s going on.
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You should look for ways to reduce your tax liability. For example, a small business may allow you to write off a home office, paying interest on student loans reduces your taxable income, and investing in a Roth IRA cuts down on the taxes you’ll owe in retirement.
You don’t need to study corporate financial statements and shareholder reports to invest in the stock market. Most investors just need to know the tax differences between their retirement accounts, namely their 401(k)--or a comparable employer-sponsored retirement plan--and IRA, and what’s inside them.
Your 401(k) and IRA are made up of stocks and bonds, usually grouped into mutual funds put together by a brokerage firm like Fidelity, Vanguard, or Schwab. Being familiar with these terms can help you maximize your returns and protect you from bad investments.
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4. Real Estate
Your house is probably the biggest purchase you’ll ever make. Knowing a little about real estate can be the difference between making a huge financial mistake and buying a great investment. Familiarize yourself with your market valuation, neighborhood appreciation, as well as types of mortgages and how much they’ll cost over time.
5. Estate Planning
If you have any assets, no matter how few, you need some rudimentary estate planning. That consists of a will, durable powers of attorney, and an advanced medical directive. Luckily you can now get all of those for $69 at Trust & Will with no lawyer consultation required.
You’ll also need some life insurance. A simple term life insurance policy is affordable and can provide for your family if you pass unexpectedly. How much life insurance you need is based on your income projections.
Related: Best Online Will Maker
Financial Literacy Books
There are several books that cover the concepts of financial literacy and offer insight from professionals who’ve seen its benefits firsthand.
Retire Before Mom and Dad by Rob Berger
Just as the title suggests, Retire Before Mom and Dad tells you how you can retire before your parents but it’s not just for young adults. Mom and dad, even grandmom and granddad would benefit from this information. This book covers the financial concepts and steps to take to reach financial freedom. It also does it in an extraordinary way--it’s easy to follow but also entertaining.
The Millionaire Next Door by Thomas J. Stanley
For an education on the buying habits and income streams of millionaires, read The Millionaire Next Door. It emphasizes the importance of budgeting, building multiple income streams, staying out of debt, and investing for retirement.
The Total Money Makeover by Dave Ramsey
The Total Money Makeover breaks down the path to financial literacy into seven baby steps including budgeting, debt, retirement, and real estate. It’s easy to read and filled with motivational stories of people who started with nothing and gained the knowledge to win with money.
I Will Teach You to be Rich by Ramit Sethi
I Will Teach You to be Rich dives into more nuanced topics like credit, banking, retirement accounts, spending, and buying your first home. Its got word-for-word scripts for negotiating and how to navigate financial conversations with your partner.
The Simple Path to Wealth by JL Collins
For a deeper dive into investing, retirement accounts, and what’s inside them, read The Simple Path to Wealth. You’ll finish the book feeling like you can take control of your own investing without paying someone to do it for you.
Financial Literacy is Essential to Living The Life You Want
Studies show that high school students who take a mandated personal finance course go on to make better financial decisions. But financial literacy in schools is distributed unevenly, compounding inequalities. Next Gen Personal Finance found that in schools where the majority of students are eligible for free or reduced lunch (a marker of income levels), only 3.9% of students were required to take a one-semester personal finance course.
Whatever you want to do in life, financial literacy will get you there faster. Take it upon yourself to read these books, learn these topics, and follow the advice - in the way it works for you
And until all schools require students to take a personal finance course, it’s up to you to teach your kids financial literacy. Econedlink and Next Gen Personal Finance are great resources for video and interactive lessons to teach students of all ages important money lessons.