What does it mean to be financially literate? Our new article shares the 5 basic areas of financial knowledge needed for today’s complex society.
Financial literacy is composed of the skills and knowledge which allow an individual to make informed and effective decisions concerning their finances.
Understanding and practicing basic money management skills — such as living within the means of a budget and handling credit and debt — is very important for students and grownups alike. However, according to an S&P Global FinLit Survey by the World Bank, Gallup, and George Washington University, just one-third of the world’s population is financially literate. On a country-by-country basis:
- Norway, Denmark, and Sweden tied for first place, with 71% of their populations ranking as financially literate.
- At the bottom of the spectrum was Yemen: just 13% of the Yemeni population was deemed financially literate.
- The US ranked a less-than-impressive 14th in the world, with 57% of Americans passing the test set before them.
These statistics only refer to the people who were tested and do not really consider the population as a whole.
Having little or no knowledge of financial management can affect many aspects of life. Until recently, schools have taught very little about financial literacy beyond basic arithmetic, resulting in the proliferation of financially illiterate masses in a world that demands increased literacy to survive.
The last five years have seen a definite increase in the number and diversity of programs designed to fight “Financial Illiteracy.” While their methods may differ, there are five basic areas of knowledge needed to function effectively in today’s complex society:
- Budgeting Basics: income, expenses and the need to strive for a “balanced budget.”
- Savings: the need to understand that time plays a significant role in finance — how much will you need later to do what you wish for or to meet unforeseen costs?
- Impact of Interest: the idea that money can make money or can cost money.
- Credit-Debt Relationship: in a world increasingly dependent on credit cards and digital forms of payment, which reinforce the habit of pushing payment down the road, it is more and more imperative for people to understand the relationship between credit and the debt it incurs.
- Investing: a large portion of the world, including many in the United States, count on investment for future financial growth. Whether it is an individual investing in his/her own future, or a corporation investing in its growth, this concept is the bulwark of our economic system.
Regardless of age, people need to be prepared for the financial world they live in. It begins with the basics! There are many sources of information about financial literacy. The best place to begin is the National Endowment for Financial Education.