Sandra and John have struggled financially for their entire lives. But things got worse for them after they had a child. Without any savings, the medical bills from the birth buried them so deep that they couldn’t keep up with credit card bills or rent. And they depended on the local food bank and WIC to keep food in the fridge. That’s when they decided they needed help. They wanted to give their daughter something they never had — a role model for financial responsibility. So they got involved in a free financial literacy course taught by a nonprofit agency in their community and learned the skills they needed to get on their feet and stay there.
The situation in which Sandra and John found themselves didn’t just affect them. Financial illiteracy impacts communities and the entire economy. Look no further than the Great Recession, caused in part by people who didn’t understand the terms of their mortgages or loans. So what is financial literacy, how does teaching financial literacy improve the economy and how do people gain financial knowledge?
Financial literacy isn’t about being able to understand complex balance sheets or being an expert in wealth management. It’s “the knowledge that is necessary to make financially responsible decisions—decisions that are integral to our everyday lives.” That means knowing how credit cards work, understanding how to manage a checking account, and figuring out how to stay out of debt, at least as much as possible. It’s the decisions you make when you’re balancing your budget, planning for retirement, buying a house or figuring out how to pay for college. Being financially illiterate is like trying to understand the world without being able to read or write.
“Just as it was not possible to live in an industrialized society without print literacy—the ability to read and write, so it is not possible to live in today’s world without being financially literate,” said Annamaria Lusardi of George Washington University. To fully participate in society today, financial literacy is critical.”
Personal debt usually means people are spending money, which helps the economy, right? No. Evidence shows that high levels of private debt hurt economic growth. Having high amounts of personal debt causes people to spend less, which results in stagnant economic growth. It’s also a predictor of a more significant problem for the economy. That’s because high personal debt feeds investment asset bubbles. When those bubbles burst, they can devastate the economy, like the housing bubble burst that resulted in the Great Recession. Financial literacy gives people the knowledge they need to stay out of unnecessary debt, which helps keep the economy healthy.
Studies show that people who are financially literate successfully plan for retirement. And why is that good for the economy? People who are prepped for their post-career years borrow less, accumulate more wealth than those who are financially illiterate, and therefore, have more money to spend in retirement. And spending, without borrowing, helps the economy grow. This group also is more likely to invest and understand their loans and mortgages, so they don’t default or file for bankruptcy. Adequately planning for retirement, which benefits the economy, takes financial literacy.
Reduced Income Inequality
Reducing income inequality, which will help the economy, requires increasing financial literacy. According to researchers at the Wharton School at the University of Pennsylvania, “one-third of financial inequality in the U.S. could be accounted for by the differences in financial literacy.” So increasing financial literacy will reduce income equality. And it means more people will have money to spend, invest and save for retirement, which improves the economy.
It’s never too late to learn financial literacy, and it’s not hard to find a program to help. The Dodd-Frank Act of 2010 required the Consumer Financial Protection Bureau to develop a plan to improve financial literacy. At mymoney.gov, people can assess their financial well-being and find ways to get help. There also are nonprofits around the country like Community Action Services and Food Bank in Utah, which offers free one-on-one assistance and counseling. Its Financial Learning Center teaches budgeting, debt management, and how to save and build credit scores. Community Action also provides mini-classes on financial topics that interest the community, which may include:
- Pay Yourself First: Why You Should Save
- How Credit History Affects Your Future
- Credit as an Asset
- How to Establish Credit
- How to Avoid Predatory Lending
- Debit vs. Credit: When to Use Them
- Eliminating Debt: Power Pay
- Retirement Readiness
If you’re ready to gain financial knowledge, it’s not hard to find online and in-person assistance.
Financial illiteracy results in poor personal finance decisions, which ends up hurting local and national economies. But government and local agencies are fighting financial illiteracy with community and online help. When communities increase financial literacy, they reduce debt, increase retirement planning and experience less income inequality—and that results in an improved economy.