Home » Site Map » Blog » Loans » Financial Literacy 101: How Economic Education Helps Americans

Financial Literacy 101: How Economic Education Helps Americans

Financial literacy should be taught in grade school. I’m convinced of that. In states like Pennsylvania, providing a firm economic education is mandated. I entirely agree with that mandate. Not only does it helps Americans build better lives for themselves and their family, but financial literacy saves the public money.

If more citizens handle their own personal finances better, then the public doesn’t need to bail out its taxpayers as often. Financial crises don’t happen as much, because people know pitfalls to avoid. Economic collapse and spiraling public debt is less likely.

What Is Financial Literacy?

You might wonder what financial literacy is, so I’ll define my terms. According to Investopedia, here is what financial literacy is:

  • The possession of knowledge and understanding of financial matters.
  • Is mainly used in connection with personal finance matters.
  • Financial literacy often entails the knowledge of properly making decisions pertaining to certain personal finance areas like real estate, insurance, investing, saving (especially for college), tax planning and retirement.
  • Also involves intimate knowledge of financial concepts like compound interest, financial planning, the mechanics of a credit card, advantageous savings methods, consumer rights, time value of money, etc.

Of course, teaching is one thing, but learning is another. People have to understand and apply the lessons they are taught. The simplest lesson of financial literacy is this: earning is only half the equation. Spending and consumerism are the other half of personal finance. Having a sound household budget helps you retain the income you make. Having two people with similar incomes, but different spending habits, is like having two governments which have the same size tax base. If one institutes liberal fiscal policies and the other conservative fiscal policies, then one is likely to prosper more than the other.

Common Sense Strategies

Personal finance often comes down to common sense, but it’s harder to practice good reasoning when it comes to something as personal as your own financial well-being. Mistakes can happen for the strangest reasons.

Many people are intimidated by financial planning, so they ignore the process and procrastinate important decisions. Others set up good goals and start to act on the planning, but lose their way because of various emotional, psychological, and social factors.

I had an old supervisor who used to say, “Oh, what a tangled web we weave, when we practice to deceive.

Financial Literacy Month

April is Financial Literacy Month.

It was a good phrase, though he would throw that phrase out at almost any time around the business place, even when it was completely inappropriate. I used to think that was an odd thing to say in an office full of people, but when I think about the people amending their personal finance goals, I think they do weave a tangled web.

Most of the time, that web is woven through self-deception, though.

Some of the smartest people I know have serious psychological and social reasons they do really dumb, self-destructive things. They know what they’re doing is bad and likely to blow up in their faces, but they have a compunction which (almost) forces them down a certain path. I’m not excusing what they do; it’s entirely their own fault. But it brings me to my point: just clearing your head is a skill worth its weight in gold.

My own mantra is this: don’t let your mind be your enemy.

Set Financial Goals Which Work for You

In the mind of a rational person, a certain balance and moderation lead to prosperity. No matter what your own personal finances look like, always have financial goals you’ve set. Your budget and money are so important that you should always have a game plan.

“Having financial goals” might mean a plan to get out of debt. If you have no debt, it might mean building up your savings account with some sort of retirement plan.

If you already have a 401(k) or IRA building for you future and you still have some wealth to spread around, it might mean taking your cash out of a standard savings account and investing it in some targeted stocks and stock funds.

If you already have a stock portfolio, then planning financially might mean diversifying by investments in other securities like bonds, commodities, or more differentiated hedge funds. Maybe new investment planning means dipping your foot into the sometimes treacherous waters of the hedge funds, or learning about the futures market, Forex, or real estate.

The point being, now matter where you are with your finances, you should have a plan for how to build wealth. This is so much a part of all our lives that we shouldn’t leave this up to the ungentle winds of fate.

Protect What You Have

Whatever your savings are, make certain these stay put in your bank and continue to grow. Compound interest works miracles over time, if you have the foresight, discipline, and wherewithal to stick with the plan and leave the money alone.

When you put money in the bank, set it in your mind that the money does not exist. Have a hard-and-fast rule that the money is never touched, under any circumstances. Now I can understand that there is always some point where cash you have saved is taken out under emergencies, but have this understanding with yourself that nothing is worth raiding your savings. If that worst-case scenario happens, you’ll know when savings take second-seat to your family, but having this rule in place assures it’s really a worst-case scenario.

Have an Understanding with Your Spouse

Those who have a husband or wife has to take into account their spending practices, their financial discipline, and their overall good sense when it comes to money. It does no good for you to have tremendous self-control when it comes to spending if your spouse is just as undisciplined and out-of-control. So you have to have a plan.

Talk about your financial goals. Set goals together and have an understanding that these are bedrock principles, not airy dreams. Make it understood that the savings account is a sacred part of your plans for the future. When I say “sacred”, I mean pristine, inviolate, and (in a word) untouchable. Your husband or wife cannot touch the savings account, certainly not before discussing the subject.

In every single marriage, one spouse is better with money than the other. One is more spendthrift and profligate, while the other is more frugal and/or stingy. Even if the difference is one of degrees and not of miles, there’s still one of the two of you who has more economic and budgetary discipline. That person has to be the iron hand when it comes to building up your finances.

Trust Your Instincts, Not Your Friends

I learned this one all too well as a younger man. Your gut instincts tend to be a whole lot more perceptive than what you might imagine, so listen to them. If a friend, neighbor, or family member comes to you about a loan, an investment, or some other scheme to get you to fork over money, don’t be afraid to say “no”.

You aren’t the one imposing on the other here. They are the ones broaching the subject of money with you–not the other way around. Evaluate their plans as if they were a complete stranger trying to get you to split with your savings. If red flags are raised, say no and don’t feel bad about it.

The best thing you can do for a friend in this situation is to tell them you think their plan is batty. If you don’t have the kind of personality which makes that easy, simply beg off on the proposition and leave it at that, hoping this causes them to reevaluate their plans. But if you have sincere, profound doubts about their proposal, don’t ever give them the money, sign the check, or co-sign the loan. That’s the surest way to ruin your friendship–I’m not lying.

Speaking of Which: Don’t Lend Money to Friends

It becomes harder when the friend or loved one is asking for a loan because they’re in some kind of financial hardship, but the quickest way a friendship ends is when one party loans money to the other party. Friendly lending is going to add another dynamic to the relationship. Suppose the person tells you they intend on paying you back in 60 days. Two months go by and they don’t pay you back. What then?

More times than not, that’s exactly what’s going to happen. A friend thinks less about paying back a friend than they do the bank, the payday loan company, or the credit union. It’s informal, without interest, and completely unenforceable on your part. I bet you’d never consider having them sign paperwork on this loan, while they’d probably be offended if you asked them to sign a contract on this lending. They shouldn’t be.

The truth is, if the person was a good borrower, they wouldn’t have to ask you for money. They came to you because they don’t think they could get a loan from a legitimate bank, credit union, or other method. That should be the red flag you need there. Banks and lending institutions have imperfect, yet scientific, ways to determine who should get a loan. When I say “imperfect”, I only mean it’s not infallible. In fact, banks and credit card companies can predict pretty well when a person is a credit risk or not, so if they’re staying away, so should you.

Imagine a friend is asking for $1,000 to help with assorted house payments, car payments, and utilities. If they can’t pay that amount now, your thousand dollar loan isn’t likely to stave off default, insolvency, and bankruptcy. What you’re going to earn is a letter saying you’ll get in legal trouble if you discuss your friend’s debts with them again, because they just declared bankruptcy and listed you as a creditor. How’s that going to stick in your craw?

This is especially true of the younger generation, because everything is new and fresh. That means the classic manipulation tactics like obligation and guilt are more likely to work on you, because you might not have been burned by manipulators before. I’m not saying you should not practice goodwill and charity; I’m saying you have to be smart. As you get older, you’ll realize that a handful of the people who seem like your friends are actually skilled manipulators who are good at seeming friendly. They use fear, obligation, and guilt to keep you in a fog.

ABCs of Financial Literacy

When it comes to money matters, if you want to give to charity, give it to prove foundations with a track record of helping people. Give your friends time and help in finding the tools they need to succeed; don’t give them money. I’ve learned this the hard way. You probably will, too, because I wouldn’t have listened to me when I was your age.

Since I’m talking to the younger generation, this video provides advice for college students and millennials wanting to learn basic financial literacy. This video from Alpha Zeta Eta of Phi Theta Kappa provides the ABCs of Financial Literacy.

Getting a college education is only part of the success you’ll have in life. I would say two other aspects of your decision making are almost as important, if not as important.

(1) Educating yourself in financial literacy.

(2) Making good decisions in the people you surround yourself with.

Someone once said that you become a mixture of the 5 people you spend most of your time with. If those people have positive traits, it has a positive effect on your life. If those people have negative traits, they’ll have a negative effect on your life. Some people are a vortex of negativity, creating a whirlpool effect on the people surrounding them. Reach out a hand to help them out and they’ll drown you in their wake.

Instead, find people who embody good traits: naturally energetic, exuding positivity, building trusts, doing nice things with no expectation of rewards, having confidence, remaining humble, and making sensible choices with their money. Avoid braggarts, liars, people who assign blame, people who criticize others endlessly, people who make everything about money, people who spend money to be a big shot, people who spend money to make themselves feel better, people who can’t take criticism, and people who seem to view you as an extension of yourself.

Once you start to educate yourself, it helps you avoid both deception and self-deception.

Avoiding Self-Deception in Money Matters

It’s easy to give common sense advise in personal finance. It’s so much harder to maintain your discipline, go full steam ahead, and deal with the nonsense which comes your way. You never know when and from where the next challenge will emerge, but you can be sure it’s going to appear. Avoiding self-deception in personal money matters lets you make wise decisions, presenting opportunities by simply avoiding mistakes. In business as in sports, success often comes down to eliminating mistakes and executing your plan when everyone else is getting distracted and falling to pieces. It’s the same way with personal finance. Simply avoid the simple mistakes and you’ll go far.

%d bloggers like this: