Financial literacy is the ability to understand how money works in the world: how someone manages to earn or make it, how that person manages it, how he/she invests it (turn it into more) and how that person donates it to help others. More specifically, it refers to the set of skills and knowledge that allows an individual to make informed and effective decisions with all of their financial resources.Financial Education is important because the health and strength of entire nations depend on the financial literacy of every individual. When people know how to make sound decisions about their personal finances, their strong financial behavior leads to financially secure lives. The fewer people who make bad decisions about their personal finances, the stronger the society will become.

Instead of asking why financial education is important, perhaps we should be asking how to impart a strong personal finance education to every citizen to reap the full benefits of a financial education. When every person is financially secure, the nation will be financially secure.

Impoves Lifelong Financial Behaivour

Although the financial consequences of being financially illiterate are well known in certain circles, others may ask, “Why is financial education important?” Does financial education really improve the financial health of those who undergo the curriculum? Financial educators can use evidence of financial behavior molding after undergoing a financial education program as direct evidence. Financial education programs, whether it be through informal means or through a structured program offered by an initiative, has the ability to produce real changes in financial behavior.

Reasons Why Financial Education Matters

1. Financial Education Helps You Gain Control 

If you feel overwhelmed by debt, or are struggling to make payments on your loans and bills, learning how to manage your finances well is the first step to gaining control. Putting that advice to use and working to eliminate your debt is the second step. Learn to understand what you can realistically afford and what you might need to trim from your budget. Financial education can offer you a way out when debt feels overwhelming.

2. Financial Education Helps End the Debt Cycle

Learning to make a budget and to understand how your income relates to your expenses can help you avoid accumulating debt in the future. Understanding how your finances work and what makes them healthy is part of learning to live without debt. You will probably need credit again at some point in your future, so it is important to learn how to use credit wisely instead of using it in ways that harm you.

3. Financial Education Helps You Understand Your Money

Financial education helps you better understand how money works and what your money can do for you. For example, if you need to make a big decision about whether to buy a house or car or whether to save for an emergency or retirement, working with a financial counselor can help. A counselor can take a close look at your income and expenses and help you see if you have room to make a large purchase or how making such a purchase would affect the rest of your financial life.

4. Financial Education Helps You Plan for the Future

To plan for your future, you need to understand what different savings options are and how they may impact your goals. For example, if you are planning on retiring someday, financial education can help you understand how much money you’ll need. It can help you understand how to save based on your current income, inflation, and how long you anticipate living in retirement.

5. Financial Education Helps You Understand Your Choices

Understanding money and how finances work can help you understand the reason behind some choices you might need to make. For example, if you are saving for a vacation, you might decide not to make another large purchase that could derail your goal. If you plan on buying a home in the future, it can help you understand why you don’t want to open a credit card right now, or how doing so could get in the way of getting the best mortgage offer.

Financial Education Is Widely Accessible

Another problem that was present in the past was that we did not have access to something that can teach us how to make investments or simply control our finances properly. This did change. You can find ebooks online, buy books and read blogs, as was already highlighted. Children can be taught about the importance of financial education at a really early age. Why not take that into account and take advantage of this?

Compounding the problems associated with poor financial literacy, it appears financial decision making is also getting more onerous for consumers. Five trends are converging that demonstrate the importance for making thoughtful and informed decisions about finances:

Consumers are shouldering more of the financial decisions:

Retirement planning is one example of this shift. Past generations depended on pension funds to provide the bulk of their retirement funding. Pension funds are managed by professionals and put the financial burden on the companies or governments that sponsored them. Consumers were not involved with the decision making, typically did not even contribute their own funds, and they were rarely made aware of the funding status or investments held by the pension. Today, pensions are more a rarity than the norm, especially for new workers. Instead, employees are being offered the ability to participate in 401K saving plans, in which they need to make investment decisions and contribute to the plans.

Complex options:

Consumers are also being asked to choose among various investment and savings products. These products are more sophisticated than in the past, asking consumers to choose among different products options offering varying interest rates and maturities, decisions they are not adequately educated to make. Deciding on complex financial instruments with a large range of options can impact the consumer’s ability to buy a home, finance an education or save for retirement, further complicating financial decision making.

Lack of government aid:

The major source of retirement income in past generations was Social Security. But the amount paid by Social Security is not enough, and it may not be available at all in the future. The Social Security Board of Trustees reported that by 2033 the Social Security Trust Fund may be depleted, a scary prospect for many. So now, Social Security acts more like a potential safety net that may provide enough for basic survival.

Longer life spans:

We are living longer. This means we need more retirement savings than prior generations.

Changing environment:

The financial landscape is very dynamic. Now a global marketplace, there are many more participants in the market and many more factors that can influence it. Taken together these factors can cause conflicting views and difficultly in creating, implementing and following a financial roadmap.

Too many choices:

Banks, credit unions, brokerage firms, insurance firms, credit card companies, mortgage companies, financial planners, and other financial service companies are all vying for assets creating confusion for the consumer.

Importance

Financial literacy is crucial to help ensure consumers save enough to provide adequate income in retirement while avoiding high levels of debt that might result in bankruptcy and foreclosures. A study from financial services company TIAA-CREF showed that those with high financial literacy plan for retirement and in essence have double the wealth of people who do not plan for retirement. Conversely, those with low financial literacy borrow more, have less wealth and end up paying unnecessary fees for financial products. In other words, those with lower financial literacy tend to buy on credit, and are unable to pay their full balance each month and end up spending more on interest fees. This group also does not invest, has trouble with debt and a poor understanding of the terms of their mortgages or loans. Even more worrisome, many consumers believe that they are far more financially literate than they really are.

Financial education is so much more important now than it used to be. We are faced with huge problems in many industries so it is vital that we make the smart decisions. Since this is definitely something that is possible right now, it is the time to get educated.

Any improvement in financial literacy will have a profound impact on consumers and their ability to provide for their future while avoiding the pitfalls of debt. Recent trends are making it all the more imperative that consumers understand basic finances because they are being asked to shoulder more of the burden of investment decisions in their retirement accounts while having to decipher more complex financial products and options. The tasks are not easy but a better understanding and more knowledge can ease the burden tremendously.

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