Friday, September 25, 2009

By 

James W. Stone

You've probably heard the term "Financial Literacy." Do you know what it means? That is a bit of a problem because it means different things to different people. You might have heard the term used to explain why homeowners got mortgages they couldn't pay back; or the term might have been used to explain why people end up with overwhelming credit card debt. In both of these cases you would have heard about "LOW Financial Literacy." Lack of financial literacy is one of the reasons given for people getting into money trouble. But that only describes some of the effect of not being financially literate. It does not define what financial literacy is.

Financial Literacy is the skill set you need to deal with money and financial matters in your life.

A literate person is one who can read and comprehend what they are reading. A financially literate person is one who can keep track of their money and make decisions about how they spend it and invest it to accomplish their objectives.

To the average person, financial literacy means knowing how to maintain a simple household budget with a bank account and credit cards. This includes knowing how to save for emergencies, save for special purchases, and save for retirement. Financial literacy also means knowing how to make decisions to spend money wisely. To do all these things, you need to understand some basic math. Actually, you can do all your household planning using only addition, subtraction, and multiplication. If you understand the way compound interest works you will be much more confident in making decisions about getting a loan, or saving money in an interest bearing account.

To some bankers and business owners, financial literacy is their job skill. They need to know a lot more about how money is used in credit situations. They need to understand the terms of financial contracts, and a lot more. They also need to know how to read an income statement and a balance sheet. Understanding complex tax codes and insurance practices also become part of financial literacy at that level. But let's get back to what financial literacy means for the average person.

Just like you need different financial literacy knowledge for different jobs, you need different financial knowledge at different stages of your life -- from childhood to retirement. You probably won't learn the basics of Social Security benefits until you are ready to collect them, but there are other things to learn earlier in life. Financial literacy education starts when your parents give you your first allowance. It continues with studies in arithmetic and economics in school. There are also some terrific school-related programs like Junior Achievement, Jump$tart Coalition, Money Smart, etc. Some of the programs are sponsored by the Federal Reserve Banks, FDIC, and insurance companies.

One of the problems with teaching financial literacy in school is that different states have differing curriculum requirements. There is no "core curriculum" that is designated as a nationwide requirement for teaching financial literacy. And it's not just states that differ on this issue. Many communities within a state have their own opinions about how to teach the basics of money in our lives.

Parents need to nudge their children into classes that will teach them the use of math to calculate loan payments and interest earned on savings. They need to make sure their children are being exposed to simulated economies in the classroom where the children can practice making decisions with money (while it is still a game to them).

After graduation from high school, we learn about financial matters as we need to. Those people who study business in college get their basic business financial education there. But the need to learn does not stop—it evolves. As you go through life you will learn many of the finer points about financial matters—as you need them. Among these topics will be balancing a checkbook, the ins-and-outs of credit cards, financing a car, buying a house, educational loans, retirement savings accounts, investments, medical insurance, Social Security, long-term health care, power-of-attorney, wills, etc. There is simply no way you are going to learn all these things in school.

I wouldn't recommend learning everything about credit from Visa®, or about buying a house from Re-Max®. Those sources may be a big help to you, but they may also be biased in their interpretation of decisions you need to make. Instead, get on the internet and look at www.mymoney.gov. This site is a government sponsored collection of information and links. Mymoney.gov has advice, tools, and resources to answer your financial questions. It also provides timely advice about scams, and pointers for financial decisions that require caution.

Financial Literacy is developed over a lifetime, but it needs to start in school. Schools need community support to encourage the development of robust curriculums that include math and financial decision strategies. After students get that basic foundation of knowledge in school, they will be better able to use the pieces of information that will be picked up later in life.

If you're an adult finding that you need to become more financially literate, check out mymoney.gov. If you need more help than you find there, talk with an officer at your bank. Or ask your community college if they have non-credit courses that might help you with specific areas of need. Don't feel bashful or ashamed; the best way to find answers is to ask questions.

James W. Stone
Copyright 2009, James W. Stone, all rights reserved worldwide