Part I: Introduction
Chapter 2
Your Financial Literacy
Financial literacy has grown into a national concern. Congress has created Offices, Commissions, Advisory Councils, Bills and Strategies to improve our financial literacy. How do we achieve it? How do we teach our youth to become financially literate? Moreover, what is financial literacy?
Your financial literacy is more than being able to pass a vocabulary test: it is your ability to manage your money effectively. According to Jump$tart Coalition’s national survey of high school and college students (2008), high school seniors’ financial literacy has dropped to its lowest level in history: averaging just 48.3% on a 31-question exam. College students, however, averaged 64.8% on the same exam. Most of us could tell Jump$tart’s researchers the reason for this difference, and it is not because the college kids took a class in personal finance. (In fact, the high school survey found that students who took such a course did not score any higher than those who did not.)
Ever hear the saying “Experience is the best teacher?” The same holds here. Your financial literacy should change with your life stages.
The students who scored higher in financial literacy had been exposed to making financial decisions that directly impacted their life circumstances. College students are often involved in making financial choices, ranging from the options available for paying for college (student loans, scholarships, employment), to the amount they can spend on Saturday night. Their motivation (going to college) drove them to gain the appropriate skills and knowledge to create a plan to achieve this goal.
But everyone relates to money a little differently, depending on what they’ve been taught and what life stage they’re in. As your life stages and goals change, your ability to manage your money and reach your goals changes, too. I want to equip you with the knowledge you need to make sure these abilities can improve with your circumstances. In other words, I want to help you improve your financial literacy.
Life Stage Wisdom
Wisdom isn’t knowledge after the fact. Real wisdom is the application of knowledge at the exact moment needed.
— Rev. Dwight Ford, Exec. Director, ENCAP
We all have hindsight. Hindsight comes from awareness. Awareness grows from experience.
The key to true wisdom is to give people knowledge today so it is ready for them to apply at the very moment that they need it, so they can surmount the obstacles barring their success.
Your Life Stages
Most of us can relate to having our first car. Mine was a $200 beater. I wasn’t concerned about how it looked; I just wanted wheels. I also wasn’t worrying about saving money to buy my first house because I still lived with my parents. But I eventually wanted my own apartment, and eventually wanted to buy a house. I had to get out of the habit of spending all of my income, or I’d never get ahead. By reversing my bad habits I gained the means to buy nicer cars—and a home.
It would be so much easier if we all learned good money habits from the start, instead of playing catch up later in life. While each person’s life circumstances are as individual as snowflakes, there are some similarities in financial circumstances across a basic set of life stages. Which of the life stages below are you in?
| Life Stage | Financial Characteristics |
|---|---|
| Student | Assistance from parents, student loans, scholarships, often part-time employment; ready to test first tiers of independence; transportation is a high priority |
| Young Adult | Transitioning to independence; renting first apartment; setting up utilities; seeking partner; entering workforce; establishing credit; considering purchase of first home |
| Couplehood | Establishing family; learning to share income; agreeing on boundaries / budgets; identifying ways to save; living with spouse’s financial baggage |
| Divorced | Separating finances; budgeting to do more with less; re-educating / re-establishing career |
| Growing Family | Advancing in careers; planning for children’s college; prime earning years; considering larger home, vacations, investments |
| Blended Family | See Couplehood and Growing Family; complications of child support, insurance and survivorship responsibilities |
| Empty Nesters | Mastering careers; preserving and building wealth |
| Retirement | Preserving wealth, budgeting to live on fixed income; tax and estate planning; emphasis on medical care and investment management |
| Widowhood | See Retirement; re-learning to handle finances alone |
11When I was a child, I talked like a child; I thought like a child, I reasoned like a child. When I became a man, I put childish ways behind me.
— I Corinthians 13:11
The Excuses We Make
To successfully advance through the life stages in the previous section, you may want to buy a home and preserve your wealth. You should certainly want to stay out of unnecessary debt or pay banking fees, and to save for retirement. Yet we can become sidetracked or even disbelievers in these basic benchmarks for financial security when we make excuses for why it can’t be done.
A few statements I often hear:
“I don’t have enough money to budget right now.”
“I don’t earn enough to pay attention to what I’m spending.”
“I don’t need to be good with money because I have plenty of it.”
The lack of logic in these statements is pretty incredible. Why shouldn’t you be responsible with your money if you have less? If you’re living paycheck to paycheck, you can stop paying overdraft fees and start putting that money in savings by renting a cheaper apartment, or foregoing a few Starbucks lattes and restaurant meals for coffee and meals made at home. If you have cash to spare, why not pay off your credit cards, stop paying interest and start actually using that money?
I know a man who lives alone in a three-bedroom rented house, and he’s struggling financially. He could easily reduce his monthly expenses by $500 if he moved into a more appropriately sized domicile. I also know a couple that earns $40,000 a month, and they are paying $10,000 a month in interest on credit cards.
I meet people weekly who could quickly change their financial picture, if they could only see their situation clearly. In Part II we’ll bring bank fees and your financial toolbox into focus, effectively eliminating excuses not to pay attention. And hopefully you’ll see fees and interest for what they are: unnecessary.