Why is Financial Literacy Important for Families?

Why is Financial Literacy Important for Families?

whatisfinancialliteracyJason Hartman’s team has been noticing that a fair amount of searchers are finding us by asking this simple question—why is financial literacy important? And while we’ve written about a variety of topics, we’re very dedicated to the practice of educating people—of teaching them to be financially literate citizens of the world.

Let’s first provide a definition. According to a publication from the US Treasury Department, financial literacy is the ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial well-being. And we’re committed to that—helping you to reach your financial goals and build wealth throughout your lifetime, no matter your age or income.

But why is financial literacy so important?

There are a few reasons. First, you’re going to need to retire someday. Social Security is no longer the major source of retirement income it once was, and your smart savings now will really pay off in the long run. You want to be financially literate to make your retirement not just survivable, but enjoyable.

And, you may have noticed, we’re living longer. While we’re very happy about that, it’s important to account for those extra years we’ve got to fund. No one wants to be a burden to their family, and sound financial practices now will ensure that doesn’t happen.

Consumers bare more of the burden for their own savings now, too. Many companies offer retirement plans that allow for consumer choice. Being financially literate enough to make these decisions can mean the difference between running out of money and not, so it is key that you understand the financial decisions you’re now responsible for making.

The financial environment is changing faster than ever—inflation, interest rates, etc. effect you in ways you may not have noticed before. Having at least the basic vocabulary to address the changing financial climate will get you a long way. You’ve got a ton of options now—a huge variety of credit cards, different types of mortgages, various IRAs, a ton of opportunities for investment. Make sure you know what you’re dealing with. You’ve got a ton of financial service companies too—banks, online banks, credit unions, insurance firms, mortgage companies, financial planners, credit card companies. And the list goes on.

So what now?

While we hope we’ve established the importance of financial literacy, we’d like to encourage you to read further. This blog is a great place to start! And, there are a large amount of great books on the subject. There are free classes at libraries and extension education centers. There’s a wealth of information available to you.

And don’t feel like you’ve got to take it all in at once. It’s perfectly okay to start small. Practice investing in a peer network, or read just one book. Begin following a blog. Try writing one detailing your experience toward being financially literate. Have fun—and in doing so, remember that your smart financial decisions have lasting implications.

The Financially Literate Family

We hear it time and time again—I wish I had developed a greater sense of financial literacy at an earlier age. It isn’t taught in schools, and it isn’t always intuitive. We grow up thinking that money comes from banks and ATM machines—that it is endless and always valuable. As Jason Hartman has written about, that isn’t always true. Inflation, for example, is happening at record rates. But teaching children financial literacy begins with being a financially literate family.

Practice

The best way to develop a financially literate family is to get in lots of practice. Children (and perhaps some adults) should receive a monthly or weekly allowance to begin teaching the value of money. This way, children can begin saving for items they want. Suddenly, money has value and so does earning it. Perhaps they’ll earn a raise or have the ability to earn more allowance with greater chores or by showing initiative—this way, children learn that work and dedication results in wealth.

You might also give them the chance to invest their money in things that you choose or make up—practice makes for better decisions later on. You can also give them help setting purchasing parameters. Responsible buying behavior doesn’t come naturally, and having a talk about it early on will be infinitely helpful in establishing a family of financially literate people.

Real practice

Now that you’ve begun savings money, you’re going to need somewhere to stash it. Even children can open bank accounts with your signature, and they’ll likely find it an exciting and adult experience. It gives them real money management practice, but it also establishing a relationship with a bank early on. This can lead to perks later in life!

There are also a variety of programs designed to promote financial literacy that are run by the bank. These develop good savings habits and are essentially free financial education programs.

Set goals

Now that you’ve become practicing financial literacy as a family, you’ll want to set financial goals. If you’re doing this anyway (you probably should be) than set a good example for your children and share your own money goals. Sit down with them and help them to set their own.

It’s never too early to begin saving for college, so perhaps they might start a savings account now. But let them set some of their own savings goals now, which will automatically provide incentive for responsible spending.

You might also talk about dividing money into multiple accounts—spending, savings, charity, for example. This way, they’ll understand the multifaceted nature of spending and saving. Write down goals and check in every so often to see if they’re being met, both in the short and long term. Maybe provide a visual too—children learn in a variety of ways.

Demonstrate good habits

Take your children shopping when you go and make sure you’re making smart purchases. They can spend their money then too, and they’ll be able to plan. Teach them not to buy everything they want and to compare prices. Don’t refund them when they make a purchase that breaks. Work to educate the family and establish a pattern of family financial literacy!

(photo credit: SFU Public Affairs and Media Relations via photopin cc)

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The Young Wealth Team

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