Although saving and budgeting can be difficult, it is imperative to be financially literate as a young adult, because it helps you manage income, budget for expenses and save for things like education, or a new car. Based on research data from the Financial Industry Regulatory Authority, 63% of Americans are financially illiterate, meaning they lack the basic skills to reconcile their bank accounts, pay their bills on time, pay off debt, and plan for the future. Unfortunately, personal finance has not yet become a required subject in schools, so students are unaware of how to manage their money once they leave school and are out in the real world.
What Does it Mean to be Financially Literate?
The term ‘financially literate’ has numerous definitions, but simply put, it means to be knowledgeable about the fundamental facts of money. Being financially literate allows you to have the knowledge, skills, and confidence to make responsible financial decisions that suit your own financial situations. Individual financial circumstances usually change over time, so financial knowledge and skills must evolve as well. Paying for post-secondary education, buying a home, and planning for retirement are just some situations that test your abilities to plan and budget, manage debt, and to choose financial products and services.
How to Become Financially Literate?
There isn’t anything obscure or complex when it comes to understanding money. The most crucial step to becoming fiscally responsible is to learn self-control. The sooner you learn to control your impulses to spend, the easier it will be for you to budget and save. This can be difficult since we live in a consumer culture, where the economy is focused on the selling of consumer goods. Starting an emergency fund can go a long way, even if you’re putting aside a small amount of money in your savings. It’s better to be prepared for emergencies, rather than borrowing money on credit and risk ending up in financial trouble. Also, know where your money goes. The best way to do this is by budgeting. For example, once you notice how much the cup of coffee you’re buying every morning adds up over time, you’ll realize that making small changes in your everyday expenses can have a big impact on your financial situation.
What are the Consequences of Being Financially Irresponsible?
The mismanagement of money can leave people in serious financial trouble. Poor budgeting leaves a person with little money, which makes them more likely to borrow funds. Too many outstanding loans can negatively affect your credit score, which banks and credit institutions use to determine how good of a borrower you are. Financial illiteracy causes many people to become victims of predatory lending, subprime mortgages, fraud, and high interest rates, all of which potentially result in bad credit, bankruptcy, or foreclosure.
As stated, it is imperative to be financially literate because it helps individuals become self-sufficient so that they can achieve financial stability. It doesn’t take a special background to know how to manage money well. Budgeting, along with planning and self-control can increase your chances of becoming financially responsible.