Improving Financial Literacy in 2014

Financial LiteracyAs you bounce around the Internet, reading various news stories related to finance, business, or the economy, you are likely to come across the phrase financial literacy. Perhaps not surprisingly, attention to the concept and use of the term seems to have increased following the 2008 financial crisis and the resultant impact on individuals and decimation of families.

Not only have the news stories about the topic increased, in the year that ended yesterday, numerous states enacted legislation or adopted resolutions with regards to teaching financial literacy in our schools. No doubt that attention to the concept and definitive actions by state legislatures is a good thing.

With that as our back drop, and as we head into 2014, there are three questions for SavvyReaders to consider. First, what exactly does it mean to be financially literate? Second, what are some key concepts to master to attain financial literacy – particularly with regards to retirement planning?Financial Literary Third, how exactly does being financially literate benefit you and your family?

Dictionary.com offers these definitions of financial and literate respectively:

fi•nan•cial [fi-nan-shuhl, fahy-] adjective. Pertaining to monetary receipts and expenditures; pertaining or relating to money matters.

lit•er•ate [lit-er-it] adjective. Having knowledge or skill in a specified field.

Taken together, I believe we can answer the first question by stating that financial literacy means that an individual possesses knowledge and understanding of matters pertaining to money matters.

With regards to the second question, there are numerous concepts that should be understood; however, I want to focus on the five that I believe are most critical: compound interest, investment options, fees, emergency funds, and withdrawal plans.

Compound Interest: While simple Interest is calculated one time, solely as a percentage of the principal sum, compound interest is calculated not only on the initial principal but also the accumulated interest of prior periods. It is discussed in detail here, here, and here.

Investment Options: An investment is an item (asset) that is purchased with the hope that it will appreciate in value, generally with the purpose of generating future income. Common investment options to know and understand include equities (stocks), bonds, mutual funds, exchange traded funds (EFT), life-cycle funds and index funds.

Fees: As might be suspected, it is impossible to avoid fees entirely, in one of their various forms (e.g. management, adviser, trading, loads, etc.), when choosing any of the above investment options. Therefore, an essential key to successful investing is to keep them to a minimum. The value of minimizing fees is discussed here and in one of our SavvyRecommendations, The Retirement Gamble.

Emergency Funds: This is a cash account that is used only in the event of an emergency, to fill critical financial gaps, or meet unexpected expenses.  It is immediate access to cash that allows you to take care of unforeseen circumstances without impacting the money you have committed to saving and investing.  Its importance is discussed in detail here.

Withdrawal Plans: While many people focus on building a fiscal foundation during their 20s and 30s; and accumulating wealth as they enter their 40s, they often do not adequately consider the third stage of retirement planning which includes developing a practical withdrawal plan.  Doing so will ensure that you will not run out of money halfway through retirement. Developing your withdrawal plan is discussed here.

Next week we’ll consider the third question, “how exactly does being financially literate benefit you and your family?”

Blogger-in-Chief here at RetirementSavvy and author of Sin City Greed, Cream City Hustle and RENDEZVOUS WITH RETIREMENT: A Guide to Getting Fiscally Fit.

12 Comments

  1. When I was in high school, the only financial education we received was how to balance a check book-which now, is the least of my worries.

    • I know exactly what you mean. Similar story here. The only financial education I recall from middle and high school was how to write a check and balance the register. Until we get around to making Personal Finance part of the Standards, on the same level as math, science, social studies, etc., the vast majority of people will struggle with finances, and ultimately, society as a whole suffers when most remain ignorant.

      Thanks for stopping by, Michelle. Great to hear from ya.

  2. A Google+ reader chimes in with…

    “Always keeping up to speed on economic data that comes out monthly, always trying to predict interest rates and watching the bond market closely.”

  3. I believe it is necessary to incorporate financial literacy at a very young age, particularly in elementary schools. You change the behavior at that stage, and you have a financially savvy citizen for life! That is why I believe the children’s book series “Finance for Kidz” by Prof Dheeriya are so useful and important. It is better to teach the right stuff at an early age than try to fix problems later on.

    • I absolutely agree that the sooner we start teaching financial literacy, the better off we will all be. I will have to check out the book and perhaps add it as a SavvyRecommendation. Thanks for bringing it to my attention and thanks for stopping by and adding to the conversation.

  4. Love your set of important concepts! I think the only one I would add would be to understand the importance of living beneath your means. Want less and spend less – so you can save and invest more!

    • ‘Living Below Your Means’ is a critical practice, no doubt. Maybe I will have do a follow-up post highlighting suggested practices/concepts. Thanks joining the conversation, Kali and I’m hopeful you have a great 2014!

  5. When it comes to the definition of Financial Literacy I think it’s important to find REAL financial education & that doesn’t always mean the accepted forms of higher education.
    I think the education you get from financially successful folks like Chuck Bentley, Kiyosaki, Trump & Larry Burkette are more valuable (in some ways) than what is learned in colleges and universities.

    • Agreed that it is important to look to numerous sources, from multiple disciplines and mediums, to get a more comprehensive education. That is part of the rationale behind the SavvyRecommendations. I do not necessarily agree with everything stated in the books, documentaries, movies, websites, etc. that I recommend; however, I believe exposure to different thoughts is important for individuals to form their own fiscal identity and develop a retirement plan that works for them.

  6. This is a great over view of the concept of financial literacy. I would add another component that I believe to be useful which is to keep track of spending on a monthly basis. I find that people often don’t know exactly where their money is going and that is a key step in having a handle on your finances.

    Great post!

    • Thanks for adding your voice to the conversation, Kay. And you are absolutely correct that keeping track of spending on a monthly basis – budgeting – is a key component of understanding, and practicing, financial literacy. That is one of the concepts, along with managing debt, that just missed making my top five.

    • I agree that knowing exactly where your money is going is a key to REAL financial literacy. It floors me to think of how many folks don’t know where a large portion of their paycheck ends up.

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