Before we dive into financial literacy 101, it’s important to understand why financial literacy matters and why we should be spending time on it in the first place.
There are 3 important benefits to financial literacy and they have almost nothing to do with money. Let’s take a quick look:
1. Improve Outcomes Without Sacrifice
Most people associate sacrifice and hard work when it comes to financial literacy. They assume that financial literacy is code for not spending any money and living like a monk without enjoying any of the finer things in life. In fact … the opposite is true. The purpose of financial literacy is to improve the stability in your life or during your retirement simply by making better decisions that don’t require any noticeable sacrifice.
For example, one of the biggest financial decisions of your life might be buying a house. However, without being financially literate, you won’t be able to evaluate your financing options and which one will helps you preserve your wealth over the long term.
There may be no noticeable difference in the loan payments and how you budget each month. But without an understanding of interest rates and the time value of money, you could choose a loan that costs you a lot more money over the long term.
These types of decisions add up over the years and lack of financial literacy can force you to either retire later, or accept a lower standard of living in retirement.
2. Financial Literacy Reduces Anxiety
The most common source of stress for most people is money worries. This is a shame because nearly everyone — even those towards the lower end of the economic ladder can build a sound financial foundation if they make the right decisions.
The reason this is possible is because most of the people that earn less than average are young. Adjusting for age demographics when looking at average incomes, we find that most people who earn very little money are younger.
This is good news not only because their incomes are likely to increase as they get older and gain more experience but also because they have plenty of runway to build a stable financial future … if … they are financially literate.
Simply through education, we can help allay many of the worries that people suffer from nearly every minute of their lives. On the flip side, even if someone earns a lot of money, poor financial decisions can cause distress. That’s why most lottery winners end up declaring bankruptcy in only a few years. They weren’t financially literate.
3. Financial Literacy Can Improve Relationships
Just as money concerns are a major source of stress for individuals … guess what one of the biggest sources of turmoil are in marital relationships?
You guessed it … money.
The good news is that a couple doesn’t needs to raise their household income in order to dissolve most of these money conflicts. Simply through knowledge and understanding the consequences of their decisions, couples can more easily manage the landmines that pop up over the course of their time together (housing, cars, kids, education, etc).
Armed with the right financial knowledge, couples can avoid one of the biggest causes of conflict. This doesn’t mean that these decisions will be easy or that there won’t be some tough choices to make along the way. But with financial literacy, couples can know the costs and benefits of their decisions and navigate these issues together with mutual understanding.
Now let’s get started with Financial Literacy 101.