The basics of financial literacy
The ripple effects of the COVID-19 pandemic showed how fragile economies can be and gave millions of people the impression that their financial well-being may not be as controllable as they imagined it was prior to 2020. Personal finances are indeed vulnerable to forces that shape both local and global economies, but individuals are not helpless against such variables. Financial literacy is a term that can be defined is various ways, but is perhaps most usefully characterized as an individual’s ability to utilize various financial skills. Budgeting, investing and sound borrowing strategies each fall under the umbrella of financial literacy, and understanding how can help people better prepare for what’s to come.
Budgeting
Budgeting is one of the foundations of financial literacy and its value is not unrecognized. According to a 2023 survey from Nerdwallet conducted by The Harris Poll, 74 percent of the more than 2,000 adults surveyed indicated they have a monthly budget.
However, 84 percent of survey respondents who have a budget admitted they exceed it. This area of financial literacy is most useful when individuals not only recognize the need to budget, but also the benefits of living within a budget once it’s established.
Investing
One of the more notable lessons of the pandemic is just how quickly inflation can affect cost of living and quality of life. According to the U.S. Bureau of Labor Statistics, the cost of storebought food increased by 23.5 percent between February 2020 and May 2023. While that was an extraordinarily high increase for such a short period of time, inflation affects the value of a dollar, and financially literate individuals recognize that a dollar saved today will be less valuable 20 years from now. Investing helps individuals grow their money so they can meet all of their future expenses. Nerdwallet notes the average stock market return is about 10 percent per year (though that, too, is vulnerable to inflation), which shows just how vital sound investing is to securing your financial future.
Borrowing
Borrowing money is not bad, even though it’s often discussed through the lens of credit card debt. Credit card debt is a significant issue, as data from the Federal Reserve indicated Americans’ total credit card balance exceeded $1 trillion in the third quarter of 2023. But borrowing to buy consumer goods and borrowing to finance an education or home purchase are two wildly different things. Numerous studies have shown that lifetime earnings are significantly higher among collegeeducated adults than individuals whose formal education ended with high school. In addition, the S&P Corelogic Case-shiller U.S. National Home Price Index indicates the historical annual average national home appreciation rate was 4.8 percent between 1987 and July 2023. In relation to financial literacy, borrowing to fund an education and/ or purchase a home is a far more effective long-term financial strategy than borrowing to purchase consumer goods.
Financial literacy can help individuals lay a sound financial foundation that can make them less vulnerable to unforeseen variables that threaten the stability of local and global economies.