While it may be true that “knowledge is power,” it’s still surprising how little knowledge most people have about money, saving, and investing. Recently a popular financial website gave a quiz on investing concepts, asking questions about very basic concepts like what stock ownership means, the definition of diversification, and the effects of compound interest. The average respondent was able to answer just under half of the questions correctly (48%).
Certainly, a professional, fiduciary advisor can be a major help in creating a sound financial plan. But any plan works best when you understand the basic principles upon which the plan is built. This means that cultivating basic literacy in areas like investing, budgeting, and the principles of the financial markets is an important contributor to achieving your most important financial goals. Not only that, but having a basic understanding of some core concepts can help to de-mystify your finances, which in turn can reduce the stress many feel when thinking about their financial futures.
Financial Literacy for Kids
Any parent can tell you that kids will model what they observe—both bad and good.
The same is true of financial behaviors. Kids who grow up in a home where a budget is followed and where saving and investing are a priority are much more likely to make wise financial choices as adults. Conversely, if you grew up in a house where credit cards were always the answer to the latest needs (or wants) and bill-paying time was fraught with tension, it’s probable that you’ll take those same spend-now-pay-later behaviors into your adulthood.
But financial education outside the home can make a huge difference. Even kids who may not have the advantage of a financially stable or secure home can learn the principles of good financial decision-making, which in turn greatly increases their chances of becoming financially responsible adults.
A 2018 study sponsored by the National Endowment for Financial Education reported that overwhelmingly, kids who were exposed to good personal finance principles during their K–12 years were more likely to seek out lower-cost student loans or grants when making decisions on financing their college educations. And when they graduate from college, those same students tend to have lower delinquency rates on debt and better average credit scores, according to a 2020 study conducted by the investor education foundation of FINRA, a financial industry regulatory group. Finally, a study conducted by the Brookings Institution found that student participation in financial literacy studies was highly correlated with superior results in asset accumulation and net worth achieved by age 25.
But even if your kids don’t have access to a personal finance course at their school, you can still access high-quality programs to help them acquire the knowledge and attitudes that contribute to success. Online resources like MoneyTime, WorldOfMoney, and others offer fun, parent-guided activities that help kids learn sound principles delivered in age-appropriate contexts. In other words, you don’t need to wait for the schools to do it for you: you can take charge of your kids’ financial education.
Financial Literacy for Young Adults
For those in the process of establishing careers and families, it is vital to have a basic understanding of budgeting, loans and credit, saving, and investing. Consider the following statistics:
- 21% of Gen Z respondents and 28% of Millennials reported having no training at home in how to build financial wealth;
- 32% of Gen Z and 46% of Millennials say they have more credit card debt than emergency savings.
Clearly, there’s a gap between what young professionals need to know and what they’re currently putting into practice. Fortunately, it has never been easier to access both the knowledge and the tools you need to stay abreast of your accounts and your spending. Apps like CreditKarma (formerly Mint.com) can put banking and investing account information, loan balances, monthly spending, and more personal financial data in the palm of your hand.
Financial Literacy for Late-Career Professionals and Retirees
For those who have worked hard, built careers, and are either in the “retirement glidepath” or entering the early years of retirement, the need for financial literacy hasn’t ended. There are some important basics you need to stay on top of. In addition to the never-ending need to stay in control of your budget,
- How much do you know about how your tax-advantaged accounts (401(k), 403(b), IRA) are invested?
- Have you estimated your retirement income needs?
- Do you have a plan for any required minimum distributions (RMDs) you’ll need to take?
- Do you know the most advantageous age to begin drawing your Social Security?
- How does pension income factor into your retirement spending plan?
- How much growth do you need in your investment account to maintain your desired retirement lifestyle for your expected lifespan?
Of course, acquiring the services of a professional, fiduciary financial advisor can be a major advantage for anyone seeking greater financial security. Your financial advisor can help you fine-tune your strategy and can also help you identify areas where you may be able to improve. But those who benefit most from the services of a financial advisor are often those who have already put in the time to acquire foundational knowledge in the areas outlined above. After all, the more you know, the more effectively you’ll be able to participate in designing your unique financial blueprint.
At The Planning Center, we want you to be well-informed. Our fiduciary obligation to our clients means that we want to provide you with all the information you need, delivered in terms that you understand. To learn more about how we can provide financial guidance for each stage of life, please visit our website.
