According to a Standard & Poors analyst and the IMF, less than 1/3 of all adults globally have a basic understanding of how money and finances work. And let’s be clear, I’ve made my fair share of mistakes, but I knew how they were going to affect me AND the community at large. Bankruptcy, Foreclosures, bad credit are all ways to band-aid the lack of financial literacy.
Financial Literacy is a general working knowledge of money and financial systems and management. It doesn’t have to mean knowing how the gears work in a financial institution or what all the fancy terms mean for the stock market. But it should include a general idea of savings, investing, assets & liabilities, needs and wants, and opportunity costs.
Why is this important? In order to make decisions that break down the barriers of financial inclusion, you must first have an idea about what those barriers might be. Only then can you understand how your decisions affect your ability to reach financial success or avoid financial destruction. And how your decisions affects your community at large.
One popular example is the knowledge of student loan debt. Understanding the repayment guidelines and interest rates will affect your post graduation job choices for one. It will also affect lifestyle choices you can or can’t make upon graduation including will you have to move back home. Trust me, your lifestyle can be severely diminished once you understand how those monthly payments eat up a newly graduated person’s salary. Or, in the alternative, you don’t pay back the loans – that has an economic affect on the country as well as lingering financial affects on you personally. How? Well, those loans are backed by the federal government, not the bank. You don’t pay your loans, the government will – but the government doesn’t do anything to make money, they tax the citizens to get the money they need to meet their obligations…..your obligations, obligations that the government doesn’t forgive easily.
Other issues that are untaught and therefore misunderstood is the nature of employment, the options at renting, the importance of credit, taxes and tax collection….Oh, the list goes on.
Do you feel you are financially literate enough? Here’s a brief test posted in Investopedia – once you’ve taken the test, click the link in the title to see how well you did –
So what were the five survey questions used to determine financial literacy? The questions and answers are below:
- Suppose you have some money? Is it safer to put your money into one business or investment, or into multiple businesses or investments?
- Suppose over the next ten years the prices of the things you buy double. If your income also doubles, will you be able to buy less than you can buy today, the same as you can buy today or more than you can buy today?
- Suppose you need to borrow $100. Which is the lower amount to pay back: $105 or $100 plus 3%?
- Suppose you put money in the bank for two years and the bank agrees to add 15% per year to your account. Will the bank add more money to your account that second year than it did the first year, or add the same amount of money both years?
- Suppose you had $100 in a savings account and the bank adds 10% per year. How much money would you have after five years if you did not remove any? More than $150, exactly $150, or less than $150?
Take the test and consider it for a moment and we’ll chat again soon!