What exactly is financial education?
People talk about it and write about it. It’s something of a buzzword now, spread in many ways and contexts, particularly during Financial Literacy Month, which just concluded in April.
In fact, it’s important to understand what it means and why it matters to all of us.
Financial education is not just understanding how to write a check and balance a checkbook (if that even applies). It’s having the confidence and understanding to manage your finances, or lack thereof, and the wherewithal to find a prudent path forward that supports you and your family in retirement and beyond.
So why is it important to increase financial education?
The growing divide between the haves and the have-nots is real. And just like education, being financially literate can help elevate a person from one category to another.
Statistics tell the story: Women and people of color are most at risk
- There has been a sharp drop in financial education in recent years regarding more complex topics such as inflation, financial risk, and mortgage rates. The nation has seemingly regressed, as the number of Americans surveyed by the FINRA Investor Education Foundation who were able to correctly answer most questions about important financial topics plummeted 8 percentage points in 2018 compared to 2009: 34% vs. 42 %, respectively.
- Specific segments of the population fared worse than others. The study showed a lower level of financial understanding among respondents who were black, younger, or had low incomes.
And while lack of financial literacy applies to both men and women, on average, women score lower than men when answering financial literacy questions, the Federal Reserve found. Although it is not fully understood why the gap in financial education exists, one factor may be the gender roles that have defined social standards in handling finances. For example, historically in affluent households, the man in a marriage has more often been the one in charge of making financial decisions. With financial responsibility on one spouse’s shoulders, the other may not feel the need to expand their knowledge of how to make, save, and invest money.
Why are the numbers getting worse? There may be many reasons, but some point to smaller school budgets in the years following the Great Recession, which has produced lower math literacy among students.
Financial education is one of the great dividers
So where do we start?
As we do with many topics, let’s start with education.
Teaching children the basics of finance from an early age is the first step. Financial education is one of the keys to the economic success of any individual.
In 2019, the US Commission on Financial Education and Education recommended that colleges require financial education courses as part of their curriculum, and as of 2021, 25 states have introduced bills requiring personal financial education for high school students.
By taking steps to increase financial education at home and in our communities, we are supporting the closing of the financial education gap, which also affects our economy more generally.
Having a sense of financial literacy at a young age, or having an adult who can help, could enable a student to make good decisions and prevent significant debt at a young age.
student loan debt
This is a big one. Too many students (or their parents) enter college not fully aware of the weight that student loan debt will place on them after college. Understanding the consequences of taking on a significant amount of debt of any kind is critical to not graduating “in the hole” and then having a career that doesn’t realistically get you out of that debt until you’re 30.
If you’re paying off student loan debt for more than a decade, combined with a lack of income you could be saving and investing, the losses are considerable.
credit card debt
The lure of plastic and “unlimited” purchasing power at a young age is like the song of the sirens. And just like mermaids, this type of spending could put a young adult on the rocks with crushing financial problems if they don’t understand the dangers of racking up debt with significant interest.
I’ve seen young professionals pay off college credit card debt. (And not student loan rates.)
And let’s not forget millennials and other adults who now realize they don’t know what they want to know, or need to know, about their own financial fitness.
Fortunately, there are great resources online to help with this, including https://handsonbanking.org/ (in English and Spanish) and programs supported by the National Endowment for Financial Education, among many others.
Financial education is important. Not only during Financial Literacy Month, which was in April, but during every month of the year.
Just like learning to read, financial education affects us all due to the ripple effect it has on our economy and the growing financial gap. And most critically, the lack of financial education also directly affects the success and potential of another generation of children and their families.
President and CEO, Francis Financial Inc.
Stacy is a nationally recognized financial expert and President and CEO of Francis Financial Inc., which she founded 15 years ago. She is a Certified Financial Planner® (CFP®) and Certified Divorce Financial Analyst® (CDFA®) providing advice to women going through transitions such as divorce, widowhood, and sudden wealth. She is also the founder of Savvy Ladies™, a nonprofit organization that has provided free personal finance education and resources to more than 15,000 women.