Financial literacy is the ability to understand the fundamental concepts of earning, spending, saving and investing. It’s a necessary step toward becoming financially independent and creating wealth.
Sadly, young adults often have low levels of financial literacy. This leads to poor credit scores, limited savings and missed opportunities for wealth building and homeownership.
1. Managing Your Money
Whether it’s saving to buy a first home, buying a new car or paying for college, financial literacy is key. But many teens don’t know the basics of how to manage their money.
Fortunately, it’s not too late for young adults to start learning the four spheres of financial literacy: earning, spending, saving and investing. And the sooner they learn these skills, the more likely they are to be able to achieve their financial goals.
Managing money is a lifelong skill that can be learned at any age. Those who learn the basics early are better equipped to be resilient against predictable and unpredictable life events, like a lost job or a costly medical emergency. They may also find themselves less reliant on others to (mis)manage their money, such as unlicensed commission-based advisers or well-intentioned relatives who can’t resist lending you their beloved but overpriced family heirlooms. By comparison, a steady savings plan can yield dramatic results.
2. Managing Your Credit
Financial literacy means understanding and effectively using a range of personal finance skills. This includes budgeting, saving, investing, avoiding financial fraud, managing debt and planning for the future. When kids are taught financial literacy at a young age, they have the foundation for a healthy relationship with money that lasts a lifetime.
As teens move out of their parents’ homes and start to form their own households, they make significant decisions about their post-secondary education and careers that shape their future incomes. They also may begin to use credit cards and other financial products that require careful budgeting and the ability to understand and evaluate the tradeoffs of various options.
Studies show that the more often kids discuss spending and financial matters with their parents, the higher they score on a variety of financial literacy tests. That is why teaching financial literacy should be a priority for teachers, parents and other caregivers.
3. Managing Your Debt
A good relationship with money is one of the most valuable skills people can learn. It can help them save, invest and protect their wealth. But many people lack this knowledge. In fact, according to recent studies, more than three-quarters of American teens lack confidence in their financial literacy, leaving them vulnerable to predatory lending and a lack of money management skills that could put them at a disadvantage throughout life.
Managing debt is critical. It’s about paying all your bills on time and keeping your balances low. It’s also about reducing the interest rates on your debt to make it easier and more affordable to pay off what you owe.
Young adults can learn how to manage their debt with a little guidance from those around them and the right tools. Thankfully, there are many innovations available today that can make it easier to stay on top of your finances, including online budgeting and money management apps.
4. Managing Your Investments
As the next generation enters the workforce, it is crucial that they have the financial literacy to manage their own finances. They will need to know how to budget, save money and invest wisely. This will help them avoid costly mistakes that can lead to financial instability and long-term consequences.
Studies have shown that Americans who lack financial knowledge face higher debt rates and bankruptcy rates than those who are financially literate. This has a ripple effect and can prevent these individuals from renting an apartment, buying a home or securing certain jobs.
Young adults should take advantage of opportunities to learn how to make sound financial decisions, like attending a youth investment group or Junior Achievement program in their community. They should also use the many innovations available today that will empower them to learn financial literacy at their own pace. For example, there are new digital platforms that provide custodial accounts for teens that can be used to schedule monthly deposits of real money and set allowances for achieving goals.