Why is Financial Literacy Important?
Our financial decisions significantly affect the course of our life. Hence, equipping today’s adolescents with strong financial knowledge is essential. This will equip teenagers to eventually become confident adults who can make wise financial choices and secure a stable future for themselves.
Financial literacy classes teach students the foundations of finance. Students will learn the fundamentals of investing and managing their finances. These foundations are crucial; they will influence how much of someone’s pay check they are willing to save to how a person may choose to invest. Learning the foundations of finance can have a significant impact on one’s future.
Lack of Financial Literacy Knowledge
Many countries worldwide lack sufficient financial literacy education, and one example that can be examined is America. A 2010 study conducted by Alabama’s State Department of Education revealed only 27% of a representative sample of young adults could accurately calculate basic interest-rate problems and define concepts of inflation and risk diversification. When a follow-up survey was conducted in 2018, results showed an alarmingly similar knowledge gap amongst college students.
Poor financial literacy skills have measurable consequences, correlated with negative credit behaviors like higher rates of borrowing and mortgage delinquency. With consumers today being faced with more options of investment opportunities and savings products than in the past, having sound financial knowledge to make informed decisions is more important than ever. These significant choices may shape a consumer’s ability to save for retirement, or to purchase their first house.
Why Should This Issue be Addressed?
In a post-pandemic world where global economies remain unstable, becoming financially literate is more important than ever. So why is this key life skill not commonly taught as part of a school’s core curriculum?
Looking closer into the United States, each state will obviously have an interest in making sure their citizens are financially informed. This makes the lack of financial literacy an important issue policymakers must address.
Currently, most financial education efforts focus on an older age demographic: mostly college students and adults. Yet many believe this is too little too late, and that by introducing such concepts in high school, consumers will be more aware of their decisions from a younger age. Introducing younger children and teenagers to general concepts such as positive saving and spending habits has been shown to be the training wheels for financial well-being as adults. Hence, although implementing compulsory financial education programs will likely be costly, this subject should be considered a worthwhile investment in human capital.
States must look past the initial costs of implementing such educational programs, as they have proven results. For example, research on states that implemented state-mandated finance education showed increases in credit scores between 1.8%-5.2% three years after such classes were required. Financial education in schools has also been described as the “great equalizer” by the director of educational outreach at Next Gen Personal Finance, Yanely Espinal. He believes that such coursework is “the opportunity for us to create access for all students regardless of their zip code, regardless of their parents’ knowledge level or income level, regardless of whether their families know this information or not.”
Moving Forward
Hence, the benefits of financial literacy are clear and will quickly outweigh the initial cost of implementing such programs in schools. The United States has recently seen improvement in the education system’s awareness of financial literacy’s importance; Florida is the latest state to mandate financial education within high schools, requiring all high school students to take at least a half credit class in personal finances.
However, over half of the states still do not mandate personal finance education, leaving many youths across the country potentially uneducated on these essential life skills. All states should look into improving their financial education requirements not only in high school but also in earlier education to ensure that kids learn from a young age the importance of financial literacy and grow up with the ability to manage their finances competently.
