We are in an ever-evolving economic landscape, and one’s understanding of finance—financial literacy—plays a crucial role in making decisions that are informed on both the present and the future. While most of the future involves things we can’t control, there are many aspects that will stay consistent. Costs over time, typically go up, for example. In periods of inflation, the buying power of cash that isn’t invested is likely going to decrease. Yet, financial literacy is a concept that is often misunderstood or overlooked.
What is financial literacy, and why does it matter to us and the people we care about? Before we get into that, please remember this information is provided to inform, not instruct. Always do your own research and work with a professional before making financial decisions.
Understanding Financial Literacy
At its core, financial literacy is the ability to understand and use various financial skills, including personal financial management, budgeting, and investing. It involves a knowledge that is necessary to make financially responsible decisions—decisions that are integral to our everyday lives.
These decisions are so integral and day to day that according to a study on financial literacy in America: on average, Americans spend seven hours per week dealing with personal finance issues, three of which are at work. People with low financial literacy spend double that amount.1 As individuals, we could all use that time for something else. If you’re a business owner, you may see the benefit of making sure employees have the information and skills they need, to increase their focus at work.
Some decisions may be as simple as deciding to eat at a top dollar restaurant downtown Grand Rapids, or getting a burger from our favorite burger joint. (Speaking of burgers, have you read our post comparing retirement plans to Cheeseburgers? You need to, if you haven’t! Click Here to Read).
Other decisions could be more complex, such as choosing to buy the brand new remodel in East Grand Rapids, or building your own house in Forrest Hills, Michigan.
This may include (and is not limited to) understanding how to save, invest, and manage money, understanding the implications of loans and credit, planning for retirement, and even the ability to discern financial risks and opportunities. It's not about becoming a financial expert but about understanding the basics well enough to make informed decisions and take action that is beneficial for your financial health. Do we really need to take an expensive vacation if it means putting our credit card utilization over 80%? Or could we not fly out of state, and vacation in town in Grand Rapids, or just out of town anywhere in West Michigan? (If you’re part of our extended audience, flying to Grand Rapids may be more expensive than your local town, so work with us here!).
Why Financial Literacy Matters
So, why is financial literacy so crucial for us and our loved ones? Here are a few reasons:
- Navigating Financial Landscape: Today's financial landscape is more complex than ever, with a myriad of investment options, credit opportunities, and retirement plans. Without financial literacy, individuals may struggle to understand these opportunities, making them susceptible to poor financial decisions, scams, and high-interest debt.
- Ensuring Financial Stability and Independence:
A fundamental understanding of money management typically will aid in pursuing financial stability. With financial literacy, individuals may be better able to plan and follow a budget, manage credit, build savings, and invest wisely, leading better odds of their goals for financial independence.
- Mitigating Future Financial Crises:
Unexpected financial crises may strike at any time, be it job loss, health emergencies, or global events like the COVID-19 pandemic. Financial literacy allows for better preparation for such uncertainties through savings and emergency funds. Our proprietary process refers to this under a larger bundle of "Unepected Life Events". In this case, a financial crisis is a bad unexpected event. However while an inheritance or winning the lottery may seem like a good unexpected event, consider how good that event would be if you lack financial literacy to take meaningful actions to protect and preserve this sudden financial benefit you receive.
- Securing Retirement:
Many individuals find planning for retirement daunting. A lack of understanding can lead to insufficient savings for the future. Financial literacy helps individuals understand retirement plans, social security benefits, and the importance of early and regular saving.
- Creating a Financially Responsible Future Generation:
By setting an example for our children and teaching them about money, budgeting, saving, and investing, we may raise a financially aware generation, well-equipped to face the financial challenges of adulthood.
Wrapping it up: financial literacy is a crucial life skill that influences almost every aspect of our lives. It gives us the power to navigate through financial uncertainty, protect ourselves from fraud, plan for the future, and ensure a secure and comfortable life for ourselves and those we care about. By promoting financial literacy, we invest in our futures and that of our loved ones, empowering each other to build strong, financially secure lives.
As always, please remember we are providing all of this as a source of information, not a plan of action. Always do your own research and work with a professional when making decisions of a financial or otherwise nature. Ready to start your journey with our team? You can Schedule a FIT Meeting with us at any time by clicking that link and booking directly with the advisor.
Sources:
- The Importance of Financial Literacy: Opening a New Field. Copyright Annamaria Lusardi & Olivia S. Mitchell. Working Paper 31145 www.nber.org/papers/w31145. Under two paragraphs are quoted. L2 Advisors owns no copyright for this material.