Why should everyone be financially literate? Obviously, being financially literate has innumerable advantages for the individual. These range from the ability to plan for long-term investments like children’s college education, or one’s own retirement, to the ability to minimize wasteful spending. For society, there are many advantages as well. For example, a reduction of poverty and a more efficient operation of government. There would be fewer bankruptcies, fewer individuals needing expensive government services and less crippling debt. Below is a look at the advantages of being financially literate:
For the individual, being financially literate means a basic knowledge of how to spend, save and invest. Everybody should know how credit cards, debit cards, checking accounts, savings accounts, stocks, bonds, IRAs and mutual funds operate. Fortunately, these subjects are often covered in high school Economics courses and can also be readily found at the college level. Online, much help for learning financial literacy exists in convenient form: The National Endowment for Financial Education, or NEFE, provides a wide range of financial education services tailored to different age groups and levels of expertise.
Many individuals may suffer financially because they do not know how credit cards, checking accounts and debit cards work. Some individuals may not even have bank accounts reports NBC News. This is often due to fear of mismanagement of their funds by banks or previous bad experiences with joint accounts. By avoiding bank accounts, and by extension, any sort of formal investment, many individuals lose considerable purchasing power over time due to inflation. Holding cash over time is dangerous.
Though most Americans do have both savings and checking accounts, many are not well-educated on the dangers of overdraft fees or credit card interest rates that get many consumers into trouble. Credit care debt is especially dangerous because many Americans are lulled into a false sense of security by credit card companies allowing only minimal initial payments, such as 10 percent of the monthly balance. However, when the remaining 90 percent of the balance continues to accrue interest, in some cases at extremely high interest rates, this quickly generating massive debt.
To be financially literate, citizens must have a basic understanding of debt and interest rates. Many do not understand interest rates on loans and can get into big trouble by naively taking out large loans, such as extensive student loans, and later being shocked at how much debt is added to the loan by compounding interest, reports Business Insider. Knowing the true burden of a loan is important before taking on such a responsibility and can dissuade many who do not actually need loans from taking them as a mere convenience. Knowledge of how debt works, and how it can affect one’s credit score, can save many Americans from struggle and heartache.
Finally, individuals need to know how to invest their savings to generate funds needed for large purchases like real estate, college education and retirement. According to Forbes, many Americans do not actively invest and have little knowledge of basic investments like mutual funds or Individual Retirement Accounts (IRAs). As of 2010, an estimated 75 percent of Americans nearing retirement had less than $30,000 in their retirement accounts. However, many financial planners say that you should aim for a nest egg of $1,000,000! Young people beginning their full-time career should take time to start IRA and 401(k) plans to begin building up a retirement nest egg, and to enjoy the tax deduction status of many retirement investments.
Such financial literacy should not be the sole domain of the individual however. Good financial literacy by individuals benefits society as a whole, which is why secondary and post-secondary education should make such knowledge a necessity for graduation. Individuals who fail to save for retirement will place more of a burden on Social Security, which is already overburdened. Individuals who fail to save for their children’s college educations will increase the student loan bubble, which now claims over $1 trillion in total debt! For every individual who goes broke and must rely on government services, the tax burden for all ratchets upward.
Healthy, financially liquid consumers are good for the economy. By being financially literate, a person can avoid going broke and no longer stimulating the economy. By spending wisely now, a person can continue to spend later; this generates both private-sector economic stimulation and tax revenue. Thus, good financial literacy is not just a boon for the individual, but for all U.S. citizens.