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The Importance of Financial Literacy and Its Impact on Students

Spring is a time for graduating students and their families to start planning how they will pay for higher education in the coming fall. This is incredibly important, as being educated on these types of finances can be crucial in reducing poor financial outcomes. As the end of the school year nears, we here at FACTS thought this would be an excellent time to shed a light on the importance of financial literacy – and why the sooner students start learning about it, the better.

The Importance of Understanding Finances

Today’s high school students feel unprepared about managing their finances according to a recent survey by EVERFI . The US Department of Education (ED) shares that students who receive personal finance education in line with their goals may be more likely to retain the information and use it to make informed financial decisions. Introducing the concepts of financial literacy may need to begin before students are admitted or preparing to obtain their higher education. Research from FutureSmart , a program by the MassMutual Foundation, shows strong evidence that financial education is effective – and necessary – for students as young as middle schoolers . Additionally, Champlain College suggests personal finance education should be a cumulative process, with age-appropriate topics taught each school year. Even if it seems early to start teaching these concepts, it’s important to provide substantive personal finance education throughout elementary school and into high school.

The Case for Financial Literacy in Schools

It goes without saying that learning about financial literacy is important, as personal finance education provides students with the knowledge and skills to manage financial resources effectively for a lifetime of financial well-being. It’s equally important, however, that this education be offered at school. A  2017 T. Rowe Price Survey  noted that 69 percent of parents have some reluctance about discussing financial matters with their kids, so offering students financial literacy education at school is an ideal solution.

Additionally, research has shown that far too few students — especially those from low-income backgrounds — receive any personal finance education during high school, yet are expected to make financial decisions with long-lasting impacts about student loans and budgeting immediately after graduation. Even though today’s students have the benefits of technology and instant access to information, that doesn’t necessarily translate to financial literacy skills. Having access to that information during their formative years, especially in the form of resources like classes and learning materials, can set a firm foundation for their future financial stability.

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• School Education /

Essay on Financial Literacy for Students in English

• Updated on  
• May 8, 2024

Financially literate individuals can manage debt responsibly and avoid falling into cycles of debt. They say, ‘Making money is easier than managing it.’ Every individual, young and old, must know what financial literacy is. It allows us to make informed decisions regarding budgeting and money management. Today, we will discuss an essay on financial literacy for students.

Table of Contents

• 1.1 Importance of Financial Literacy
• 1.2 Digital World
• 1.3 Earn, Invest, and Save
• 1.4 Conclusion

Long Essay on Financial Literacy

We all love spending money and buying new stuff for ourselves and our loved ones. A lot of people work very hard all their lives and save a huge sum of money, but they are not able to manage it. This is because a lot of us are not aware of financial literacy. According to the Reserve Bank of India, more than INR 18,830 crores is lying unclaimed in Indian banks. This money belongs to people who have not claimed it in more than ten years. And no, it is not black money.

It is hard to believe that, people can save so much when they don’t know how to spend or manage their money. Most people save money or build assets even in their retirement years. There are four reasons for doing so:

• Unforeseen costs
• Fear of running out of money and
• Feeling secure

Quick Read: Essay on Money

Importance of Financial Literacy

Financial literacy is as crucial as education. We know that money once spent cannot be recovered, and that is where financial literacy helps us out. The first step in understanding the importance of financial literacy is to ask yourself this question, ‘why earn money if you can’t spend it?’

• Financial literacy can help us develop budgeting skills . All students who are dependent on their parents for their monthly pocket money can learn how to allocate their money wisely, prioritize expenses, and save, if possible. 
• Simple financial concepts like interest rates, loan terms, and credit scores can help us make informed decisions regarding borrowing money. 
• The more you save and invest, the more you will have for your future. Financial education will allow you to invest and save your hard-earned money safely.
• Financial education can make us independent and self-sufficient. It provides exposure to investment strategies and options and financial planning so that we can build wealth over time.
• Financial education can save us from online scams and fraudsters, who are always ready to devour our money.
• We can mitigate or manage our financial risks by purchasing insurance coverage, planning unforeseen expenses, and investing wisely.
• A lot of people work hard, even in their retirement years. Financial literacy can help people understand concepts like retirement accounts, employer-sponsored plans, and Social Security benefits to make informed decisions about saving for retirement.

Quick Read: Essay on Voting Rights in India

Digital World

The 21st century is a digital age. There are over 5.35 billion internet users in the world. Our traditional ways of making transactions are now being replaced by digital transactions, like card payments or something more unique, the UPI. 

Financial literacy is turning the wheel of economies all over the world. Financial literacy allows people to benefit from digital services, such as government schemes, online payments, e-commerce, health services, etc. Most smartphone users are making digital payments, but that does not mean that they are financially literate. 

Financial literacy in the digital age is crucial to learning about stocks, bonds, mutual funds, trading platforms,  and cryptocurrency markets. With financial literacy, we can create budgets, analyze spending patterns, and make informed decisions about saving and investing.

Quick Read: Elections in India Essay

Earn, Invest, and Save

Financial literacy involves the cycle of earning, investing, and saving. A person can have one or more sources of income, like salary, wages, bonuses, commissions, etc. Financially literate individuals can easily enhance their earning potential by pursuing education and career opportunities.

Before making any investments, financial literacy differentiates between assets and liabilities. Everybody wants to invest their money in assets with higher return rates. However, investments often involve different types of risks, such as market, liquidity, currency, and inflation risks. 

Experts say that we must save at least 12 per cent of our income. We all need money in times of emergencies, and that is where our savings come into use. 

Quick Read: Essay on A Stitch in Time Saves Nine

Economists say that financial literacy is an important skill to survive in the digital world. The knowledge and skills offered by financial literacy are important to managing our money effectively and becoming financially independent, economically stable, and socially mobile.

Ans: Financial literacy is as important as education. We know that money once spent cannot be recovered, and that is where financial literacy helps us out. The first step in understanding the importance of financial literacy is to ask yourself this question, ‘why earn money if you can’t spend it?’ Financial literacy can help us develop budgeting skills . All students who are dependent on their parents for their monthly pocket money can learn how to allocate their money wisely, prioritise expenses, and save.

Ans: Financial literacy can help students develop budgeting skills.  Students can learn how to manage their personal finances. Students can make informed decisions about their financial steps and invest wisely. Financial literacy can help students learn how to avoid falling into debt traps.  Students can develop their long-term financial goals and develop plans to achieve them.

Ans: Financial literacy refers to the knowledge and skills about the financial tools, concepts, and processes required to make informed decisions about personal finances. A financially literate person can manage his or her finances more effectively than someone who does not have the required knowledge and skills.

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Shiva Tyagi

With an experience of over a year, I've developed a passion for writing blogs on wide range of topics. I am mostly inspired from topics related to social and environmental fields, where you come up with a positive outcome.

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The Importance of Financial Literacy

BRB Bottomline: Amidst a financial literacy crisis, unprecedented in scope and scale, where millions of Americans worry and struggle to make ends meet, why do we not mention financial literacy more? What is the cost of this epidemic in financial acumen and what are the steps we can take to rectify it?

For many of us, at the precipitous age between sheltered adolescence and mortifying adulthood, the very thought of managing our own finances is enough to induce panic-stricken vomiting and invites our basest tendencies to curl into the fetal position when under even the slightest duress. However, money really can be that terrifying—although it shouldn’t—and  there truly is an epidemic of missing financial acumen in our society that does warrant this response.

The State of Financial Literacy

We see the epidemic in the ballooning student debt that was $600 billion in 2006 and is nearly  $1.6 trillion  today. We see it in harrowing statistics such as how  one-third of Americans have $0 saved for retirement  or how nearly  40% of Americans carry credit card debt —with the average balance being $16,048. And, according to an independent report by  Forbes , the average cost of a four-year degree has doubled to nearly $105,000 over the last two decades, while real median wages have only risen a modest $5,000. While the cost of an education is increasing at astronomical rates, it seems the financial education of Americans isn’t matching the same upward trends.

And specifically for millennials research by the  National Endowment for Financial Education  conducted by GW University found that 69% of millennials awarded themselves a high self-assessment of financial knowledge, while only 23% showed basic financial literacy, and only 7% demonstrated high financial capability. Even having a college-backed education is associated with higher levels of debt across all sources of long-term debt (student loans, home mortgage, auto loan).

This disparity in perceived financial knowledge and actual financial knowledge can have immense and lasting repercussions. It’s one thing to not know a fact, but to believe that one knows, when in fact they don’t, will only work to exacerbate this endogenous and persistent problem.

Even basic financial literacy can have significant effects. According to a  2014 study by Lusardi and Mitchell  published in the Journal of Economic Literature, more financially-literate individuals are more likely to plan for retirement, invest in stocks, and make better refinancing decisions. These micro decisions—made daily and frequently—can have lasting long-term benefits.  Another paper by Lusardi and Bassa Scheresberg  found that financial illiteracy, especially among young adults aged 25-34, were more likely to engage with high-cost borrowing instruments such as payday loans, pawn shops, auto title loans, refund anticipation loans, and rent-to-own shops. These financial decisions, large and small, impact the wealth accumulation of individuals over a lifetime and contribute to generational cycles of poverty and social stratification.

But how do college students fare?

UC Berkeley students, in a nation-wide  Study on Collegiate Financial Wellness  conducted by the Ohio State University, reported very similar answers to their peers at 90 other institutions. To the statement, “I feel stressed about my personal finances in general,” 67% of students at four-year public universities (64.9% at UC Berkeley) agreed. On answering questions regarding financial knowledge, students at four-year public universities scored on average 3.38 out of 6 points, while the average UC Berkeley student scored 3.4 out of 6 points. The financial stress and crisis of students on our campus is a similar paradigm for students all over the country.

Students reported a significant amount of financial stress were found to have  lower academic performance while retaining a higher amount of debt , than those who did not hold this belief. College students with credit card debt of at least a $1000 were at  a higher connection to insufficient physical activity and binge drinking , among other unhealthy habits. And  78% of students who had attempted suicide  cited financial stress as a “primary reason” for their suicidal ideation.

And there are so many other metrics we can’t measure: We can’t see the effect of this epidemic on the number of children who miss meals at night because their families struggle to make rent and buy the groceries, or on the loss of potential contributions by brilliant students who drop out because they can’t afford the exorbitant cost of their education, or the number of missed workdays because a family can’t afford to see a doctor or keep affordable health insurance.

We often talk about social justice and inequality as rallying points for feel-good campaigns regarding systemic change. Lusardi and Mitchell, in their paper titled “Optimal Financial Knowledge and Wealth Inequality,” posit that financial literacy should be taught as something akin to human capital investment. (The idea that investing in people can increase productivity, and, in turn, profitability.) Their statistical analysis and estimates argue that over half of wealth inequality can be attributed to financial knowledge and the lack thereof.

Minorities and low-income households have less access to financial resources that only exacerbate the financial problems such demographics face. Students without savings accounts are less likely to go to college, and students with higher debt are more likely to drop out, further impacting their future earning potential. If we want to improve the lives of low-income and marginalized communities, then part of the answer exists within the discourse of financial education.

The Changing Landscape

The nature of our relationship with money has changed. Most people don’t carry a significant amount of cash on their person, instead opting for forms of virtual money and lines of credit. To be unable to see the transaction taking place before you—the physical exchange of money from your person to another—makes it that much easier to overspend and mismanage. In our modern-day society, with technology and innovation connecting us and our bank accounts at every turn—misleading ads and offerings of “best refinancing loan rates,” “cash advances” or “0% intro APR credit cards”—more than ever are the gaps in our financial acumen becoming dangerous blind spots with potentially life-changing ramifications.

As employer-provided direct benefit (pension) plans become increasingly rare in lieu of direct compensation (401k) plans, the burden of saving for one’s retirement falls on the financial acumen of the employee. This means that familiarity with financial instruments and long-term saving is crucial to one’s future. The individual must have the financial acumen to be able to save and contribute to their retirement fund while they are young, to reap the rewards of compounding interest.

As the next generation confronts ever more sophisticated financial instruments, it’s critical that financial education keep up.

However, the trends portend a different reality. In the United States, according to a  2018 survey by the Council for Economic Education , only 17 states have some form of personal finance requirement for high school graduation, and no new states have added such a requirement since 2016. Similarly, only 22 states require high schoolers to take an economics course prior to graduation. As clearly evidenced by the literature, financial literacy is crucial to the development and success of our youth, and of society. Yet, the workings of money elude the young American, and only later does it rear its unfamiliar, foreign head, and strike the hand originally meant to wield it.

If our education system is intended to prepare our youth to face the real world—to achieve success and live better lives than their predecessors—then why do we not emphasize the importance of their financial literacy?

Education Reform

Many of the financial literacy programs that exist cater to higher education students and young adults, presumably because this group faces the struggle of poor financial literacy most intimately and abruptly as they first enter the workforce or pay for exorbitant education costs; however, these programs are often reactive, rather than proactive. Financial literacy should be encouraged at the K-12 level to cement positive feedback loops of financial health.

At the state level, 40 states have financial literacy concepts embedded in their states’ curriculum, but, as mentioned above, only 17 states have graduation requirements for financial literacy. According to data by the National Conference of State Legislatures, 28 states and Puerto Rico pitched financial literacy legislation in the 2018 session, with 17 states enacting and adopting resolutions. While these numbers may seem encouraging, this is down from 2017 where 36 states had pending financial literacy legislation and 20 states enacted legislation or resolutions. More states should establish a discrete financial literacy requirement as it drives home the point that financial health is a uniquely important skill to learn.

Teachers, in order to educate students, need to be trained on financial topics and provided the resources necessary to teach these topics. A study of over 1200 K-12 teachers found that 89% believed that students should be required to take a financial literacy course to graduate high school, while less than 20% felt prepared or competent to teach such topics. Only 24 states provide tailored educational materials or resources designed to meet the states’ standards, as stated by an  independent report conducted by Brookings .

A study from Montana University  found that students from states with high school financial literacy requirements are more likely to apply for aid and receive more federal student loans while having less credit card debt and private loans. And these same students were linked to having higher credit scores after college, likely a consequence of their credit card and debt habits.

Program Recommendations

While much research has yet to be done regarding the most effective way to teach financial literacy, there are some common best practices. Financial literacy courses or curriculums need some sort of evaluative measure, whether it be a test or survey that compares pre-learning and post-learning levels of understanding. On one level this promotes accountability, but it also encourages active participation. Since financial literacy is so nuanced and diverse, learning through individual activities, field trips, and evaluative measures create interesting and engaging programs for children of all ages. 

Take Home Points

Mitchell and Lusardi, in the conclusion of their seminal paper on the  Economic Importance of Financial Literacy , wrote, “While the costs of raising financial literacy are likely to be substantial, so too are the costs of being liquidity-constrained, overindebted, and poor.”

This fight isn’t easy nor is it cheap. We must encourage lawmakers, both state-level and national, to prioritize financial literacy, support nonprofits and organizations working to rectify the disparity in financial knowledge, and empower schools and educators to teach their communities. There is much work and research to be done to improve the state of financial literacy in our nation and the world, but the cost of not doing so would be severe and lasting.

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Essay on Financial Literacy

Students are often asked to write an essay on Financial Literacy in their schools and colleges. And if you’re also looking for the same, we have created 100-word, 250-word, and 500-word essays on the topic.

Let’s take a look…

100 Words Essay on Financial Literacy

What is financial literacy.

Financial literacy means knowing how to manage money. This includes understanding how to save, spend, and invest your cash. It’s like learning a new language but for money. It helps you make smart choices with your pocket money or savings from a part-time job.

Why Save Money?

Saving money is like keeping seeds for planting. You save now and have more later. It’s important to save for things you might want in the future or if something unexpected happens, like a broken bike that needs fixing.

Spending Wisely

Spending wisely means thinking before buying. Ask yourself, “Do I really need this?” or “Can I find it cheaper somewhere else?” This helps you avoid wasting money on things you don’t need or paying too much.

Investing is like planting your saved seeds to grow a tree. You put your money in a place where it can grow over time, like a bank account or stocks. But be careful, investing can be risky, so you should learn about it first.

Also check:

250 Words Essay on Financial Literacy

Financial literacy means knowing how to manage your money smartly. It’s like learning a new language, but instead of words, you learn about savings, budgeting, and how to make your money grow. Just as you need to know math to solve problems, you need financial literacy to make good choices with money.

Saving Money

Think of saving money as a game where the goal is to keep as many coins as you can in a piggy bank. You do this by spending less on things you don’t need. Saving is important because it’s like having a safety net on a trampoline; it’s there to catch you if you fall or if something unexpected happens.

Making a Budget

A budget is a plan for your money. It’s like a map that shows you how to spend your allowance or earnings from chores. When you make a budget, you decide what you’ll spend on snacks, games, or saving for something big like a new bike. Sticking to your budget means you’re in charge of your money, not the other way around.

Smart Spending

Smart spending means thinking carefully before you buy something. Ask yourself, “Do I really need this?” or “Can I find it cheaper somewhere else?” It’s like choosing the best candy in the store, so you get the most yumminess for your money.

Growing Your Money

Understanding financial literacy helps you make smart choices now and prepares you for the future. It’s a tool that helps you build the life you want, just like learning to read and write.

500 Words Essay on Financial Literacy

Financial literacy is knowing how to manage money. This means understanding how to earn, save, spend, and invest your money wisely. It’s just like learning how to read or write, but instead of letters and words, you’re learning about numbers and dollars. When you’re financially literate, you can make smart choices with your money that will help you in the future.

Earning and Saving Money

Spending money wisely.

Spending money is something everyone has to do, but spending it wisely is a key part of financial literacy. This means thinking about whether you really need what you’re buying and if you’re getting it at a good price. It’s okay to spend money on fun things, but you should make sure you have enough for the things you need first, like food and clothes.

A budget is a plan for how to spend your money. It helps you keep track of what you earn, what you need to spend on things like food and rent, and how much you can save or use for fun stuff. Making a budget can help you make sure you don’t run out of money and can save up for big things you want in the future.

Why Financial Literacy is Important

Being good with money is important because it helps you feel secure and ready for the future. If you know how to manage your money, you won’t have to worry as much about not having enough for things you need or want. It also means you can help your family and even give back to your community by donating to people who need help.

Financial literacy is a big part of growing up and becoming independent. It’s about being smart with your money, so you can take care of yourself and your loved ones. Learning about earning, saving, spending, budgeting, and investing can seem like a lot, but step by step, it can become as easy as reading your favorite book. Start learning about money now, and you’ll be ready for all the adventures life has to offer!

That’s it! I hope the essay helped you.

If you’re looking for more, here are essays on other interesting topics:

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Should All Schools Teach Financial Literacy?

And should students have to understand topics like budgets, consumer credit, student debt, saving and investing in order to graduate?

By Shannon Doyne

Students in U.S. high schools can get free digital access to The New York Times until Sept. 1, 2021.

How well do you think you manage money? Has anyone ever taught you any money-management skills? In general, how “financially literate” do you think you are? For instance, do you know how to budget and save? How to set up a bank account? Apply for financial aid and college loans?

Does your school teach these skills already? If not, do you wish it did? Should passing a financial-literacy class be a requirement for graduating from high school?

In “ Pandemic Helps Stir Interest in Teaching Financial Literacy ,” Ann Carrns writes about the growing interest in teaching students personal financial skills in U.S. schools:

As of early 2020, high school students in 21 states were required to take a personal finance course to graduate, according to the Council for Economic Education , which promotes economic and personal finance education for students in kindergarten through high school. That was a net gain of four states since the council’s previous count two years earlier. “We are making progress,” said Billy J. Hensley, president and chief executive of the National Endowment for Financial Education, a nonprofit group that promotes effective financial education. “I do think the pandemic is bringing more attention to the topic,” he said, noting that after the financial crisis more than a decade ago there was also a flurry of financial literacy proposals in state legislatures. An increasing number of studies support the effectiveness of financial literacy education when taught by well-trained teachers, said Nan J. Morrison, chief executive of the Council for Economic Education. And more teachers now say they feel confident teaching the material. A study released in March by researchers at the University of Wisconsin and Montana State University found significant increases in teacher participation in professional development. Still, the rigor of high school financial education varies. Just six states require high school students to complete a semester-long, stand-alone personal finance course, the council’s 2020 report found. Some states permit shorter courses or include the content as part of another class. In states that don’t require financial instruction, some schools opt to teach it and do an excellent job, but others ignore the subject completely — and they tend to be schools in less affluent districts, Mr. Hensley said.

The article also outlines the specifics on what the curriculum might look like:

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Why Do Students Need Financial Literacy?

7 Min Read | Jun 3, 2024

Have you ever learned something new about money (maybe the hard way) and thought, I wish I’d learned this in high school ? Sure! We all have. That’s why we’re on a mission to make sure every student in America learns financial literacy before they graduate high school—so today’s graduates have the personal finance skills they need to avoid the money mistakes we made.

What Is Financial Literacy?

Financial literacy  is just a fancy term for money knowledge.

Financial literacy classes teach students the basics of money management: budgeting, saving, avoiding debt, investing, giving and more. That knowledge lays a foundation for students to build strong money habits early on and avoid many of the mistakes that lead to lifelong money struggles.

Why Financial Literacy Courses Matter

As a country, we’ve seen what happens when students don’t have access to financial literacy. Millions of Americans struggle every day with their money. According to The State of Personal Finance in America report from Ramsey Solutions, we’re seeing stats like this:

• 54% of Americans are afraid of not having enough money.
• 34% of Americans said they’re either struggling or in crisis with their finances.
• 51% of Americans regret taking out student loans to pay for their education.

Beyond that, many Americans are finding they can’t buy homes, invest for retirement, or save for their kids’ college funds because of their own student loan debt, massive car payments, and lack of financial planning. To put it simply, they’re short on hope.

So it’s no surprise that leaders in business, education and government want to help spread the benefits of financial literacy. In 2004, the U.S. Senate passed a resolution officially recognizing April as Financial Literacy Month to “raise public awareness about the importance of financial education in the United States and the serious consequences that may be associated with a lack of understanding about personal finances.” ( 1 )

Bottom line: A lot of the money problems Americans are facing could’ve been avoided if financial literacy were taught in school. That’s why we believe in financial literacy for students.

How Financial Literacy Courses Help Students Succeed

So, what are the advantages of learning money principles as a student rather than as an adult? Well, students who take a financial literacy course early have the most time to apply what they’ve learned. And many financial literacy students apply those skills right away—while they’re still in high school.

For example,  according to a Ramsey Solutions survey  of 76,000 students, nearly two out of three high school students who had taken a personal finance course reported that they were already earning an average of $3,000 a year.

A high majority of the same group said they were in the habit of creating monthly budgets for their money. And 20% already owned a car they paid for themselves!

In fact, we found that most students who had taken a course in personal finance understood key financial topics such as:

• The difference between credit cards and debit cards (86%)
• How to pay income taxes (87%)
• How home, auto and life insurance work (90%)
• How student loans work (94%)
• What a 401(k) is and how it works (79%)

Personal finance is a critical skill, right alongside other basics like reading and math.

“Most underrated course. Should be a core class.”— Foundations teacher at Riverwalk Academy in South Carolina

What Is Taught in a Financial Literacy Curriculum?

We want the next generation to handle money wisely and beat the debt statistics! But practically speaking, how do we make that happen?

Are you a teacher? Help your students win with money today!

Thankfully, personal finance is 80% behavior and only 20% head knowledge. So while it’s important for a financial literacy course to teach money lessons, it’s more important to give students an  actionable plan  to manage their personal finances. Foundations of Personal Finance does just that: It offers a simple plan designed to help students confidently handle their finances. That plan is called The Five Foundations . Here’s how it works:

The First Foundation: Save a $500 emergency fund.

The first thing students should do is set aside money for emergencies. Financial emergencies like a lost cell phone or a flat tire could put students into debt if they don’t have any money set aside. But big problems become minor inconveniences when they have an emergency fund in place.

The Second Foundation: Get out and stay out of debt.

Debt is dumb! It’s a huge financial burden that way too many people carry. Cash-back rewards, airline points, minimum monthly payments and zero down—they’re empty promises. Our financial literacy class teaches students the ways debt traps them and how to break free ASAP.

The Third Foundation: Pay cash for your car.

New cars are only worth 40% of their purchase price after just five years. 2  Making monthly payments— plus interest —on something that’s losing value isn’t a good investment. A student’s best bet is to buy a good used car and pay cash . Yup, it’s possible! It takes planning ahead and saving up over time, but it’s  way  better than throwing an average of $738 a month at the “new” car they bought a year ago. 3  It probably doesn’t smell so new anymore!

The Fourth Foundation: Pay cash for college.

The student loan crisis in America is out of control. Our nation’s outstanding student loan debt is at $1.56 trillion. 4  Trillion! Today’s grads are delaying marriage and not saving for retirement. Plus, they can’t even move out of their parents’ homes because of the chains of their past—debt. 5  Students who pay for college with cash (and without a loan), on the other hand, step freely into the next chapter of life.

Need some tips on how to save cash for college? Learn the 10 best ways .

The Fifth Foundation: Build wealth and give.

Now for the super fun part! Students who live debt-free and are disciplined about saving money can really live and give like no one else. This takes time, patience and a little bit of compound growth. But imagine the life-change that happens when money is no longer a worry. Instead of being consumed by financial stress and fear, they can enjoy their money and spend their time thinking of ways to give to others.

“Just the overall concept of giving thought to your finances is more than most teenagers do today. To give them a framework that is virtually foolproof is now presenting them with the choice to simply move forward and be successful. I, at 72, join the crowd that say, ‘I wish I knew this when I was a teenager’!” — Foundations teacher at Treasure Coast Boys Academy in Florida

The Benefits of Financially Literate Students

When a student is financially literate, they don’t just make smart decisions with their money. They build good habits that trickle down to their families, their communities and eventually the nation. And it happens one student at a time.

Think about the jump start students could get on life if they were already budgeting, saving regularly and spending wisely—before they graduate! They could have thousands of dollars in the bank, a paid-for car, and the beginnings of a retirement fund.

And that’s not just a dream! Every year, thousands of students learn financial literacy skills through our  Foundations in Personal Finance   curriculum. They discover the tools they need to build a lifetime of success with money. Foundations  simplifies big topics like insurance, taxes, real estate and the global economy so students can feel confident stepping into the next chapter of their lives.

Life-Changing Personal Finance Curriculum

Teach your high school students the money skills they’ll use now and for the rest of their lives with Foundations in Personal Finance. And this month, Foundations will be available in Spanish for the first time ever!

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About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners. Learn More.

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Financial Literacy: The Importance in the Modern World Essay

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In previous years, the issue of investing has become popular among beginning investors who follow the advice of bloggers and put their money in unsafe securities or individuals who hope for the burgeoning future of NFTs and cryptocurrency. However, instead of blindly following the advice of impostor financial advisors or buying securities without having knowledge about them, the public should focus on overall financial literacy. From a very young age, every person should learn how to use their money wisely and how it can help not only save but multiply the savings and have enough for a carefree retirement.

The first reason why acquiring the skills of financial literacy is essential is its protection against inflation. At the given moment, the rate of inflation is 7.7%, which means that if money is simply in the deposit account, at the end of the year, its value will decrease by this number (U.S. Inflation Calculator). This is why if people desire to make a big purchase after having enough money for it, eventually, they will be trapped in a vicious circle of constant saving since the prices will be rising together with inflation.

Another point that representatives of younger generations must understand is that financial literacy enables skills of wise saving for retirement. According to The New York Times, schools do not have obligatory courses on 401(k)s and Individual Retirement Accounts, despite the fact that the majority of employees are now responsible for their own retirement plans (Lieber and John). As a result, many children, adolescents, and adults are unaware of the fact that if they start investing $5,000 annually at the age of twenty-two, by the age of 67, they will accumulate approximately $1 million dollars (Lieber and John). However, if they start at thirty-two and invest the same amount of money, they will only manage to generate $500,000 (Lieber and John). Thus, this is the compound interest effect that many people with a lack of financial literacy fail to understand.

Moreover, it is vital to see the benefits of saving in order to have a safety cushion. According to Forbes, two out of three Americans are spending their savings because they are concerned about inflation (Campisi). As a result, these individuals who refuse to save will not have an emergency fund, and if there is a crisis situation, they will have to seek loans. In comparison, those who have basic financial literacy skills know that panicking is the worst enemy, and they are prepared for such scenarios, which is why financial literacy is crucial.

Still, it is important to review other valid opinions regarding investing and saving. While it can be a helpful skill, sometimes financial literacy, along with consistent investing, can be disrupted by certain risks. For instance, the financial crisis of 2008 led to a loss of $2 trillion dollars (Merle). However, it is noteworthy that the results of such outcomes were external factors rather than personal actions.

Hence, it is necessary to learn the fundamentals of financial literacy from a young age in order to have a carefree retirement, emergency funds, and protection against inflation. I believe that it is unfortunate that children do not acquire this knowledge at school and, therefore, it should be either personal or parental responsibility to either learn or teach such skills. With such an approach, both children and adults will be more careful with money and be prepared for any hardship or crisis, being able to grow into financially independent people.

Works Cited

Campisi, Natalie. 2 Out Of 3 Americans Say They’re Blowing Through Savings to Cope With Inflation—Do This Instead . Forbes, 2022. Web.

Lieber, Ron and Todd S. John. How to Win at Retirement Savings . The New York Times, n.d. Web.

Merle, Renae. A Guide to the Financial Crisis — 10 Years Later . The Washington Post. Web.

U.S. Inflation Calculator. Current US Inflation Rates: 2000-2022 . U.S. Inflation Calculator, n.d. Web.

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IvyPanda. (2023, December 27). Financial Literacy: The Importance in the Modern World. https://ivypanda.com/essays/financial-literacy-the-importance-in-the-modern-world/

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Financial Literacy and Financial Education: An Overview

This article provides a concise narrative overview of the rapidly growing empirical literature on financial literacy and financial education. We first discuss stylized facts on the demographic correlates of financial literacy. We next cover the evidence on the effects of financial literacy on financial behaviors and outcomes. Finally, we review the evidence on the causal effects of financial education programs focusing on randomized controlled trial evaluations. The article concludes with perspectives on future research priorities for both financial literacy and financial education.

We thank Luis Oberrauch for excellent research assistance and Allen N. Berger, Phil Molyneux, and John O.S. Wilson for helpful comments. All errors are our own. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.

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Financial Literacy

Helping you prepare for life..

We want financial literacy to be a part of your life. To that end, we have focused our resources on providing support and education on financial understanding for all students. The more you know, and the more tools you have at your disposal, the better prepared you will be for life at and beyond Harvard.

In this guide, you'll find information on budgeting, credit, saving and investing, and taxes.

A budget is, simply put, a plan for your money. By tracking income and expenses you can create a plan for your spending and saving. 

Why do you need a budget?

If you have ever found yourself looking at your bank account and wondering where your money went, a budget can help. The most common cause of financial problems is spending more than you are earning. With a flexible, sensible budget, you can control of your money and avoid financial stress. It can help you limit spending and ensure there is enough money to do the things that you want. 

How to get started

• Build a starting budget with your best guess of what you spend in a month (on average), separated into categories like books, personal expenses, rent, phone, and entertainment.
• Track your expenses for a few months. Then, compare these figures with your previous projections. You may be surprised to see where your guesses were higher or lower.
• Once you have tracked your expenses, compare these to your income. If you are spending more than you are earning, you need to make changes.
• Be honest about "needs" vs. "wants". Enjoying a store-bought coffee every single day is nice, but you could save up to $80/month by reducing this purchase from daily to weekly.
• Review your monthly budget for any necessary changes. Remember: a budget is fluid, meaning that it will (and should) adjust as your income and goals adjust.

Determining How Much Disposable Income You Have

Consider setting some of your income aside in a savings account, and putting limits on how much you can spend on non-essential items.

Let’s say you buy a cup of coffee on most days, grab a quick bite a couple times a week, and go out on Saturday nights for fun with friends. Your yearly spending may look like this:

• Coffee 4x/week @ $2.50 = $520
• Quick late-night snack 3x/week @ $6.50 = $1,014
• Weekend Fun @ $25-30 each weekend = $1,560

Your total spending would be $3,094 per year, or $12,376 for the four years of college--enough to buy a car. Considering this, make sure you’re being thoughtful about how you want to spend and save your money!

Moving forward with a flexible budget

For your budget to be useful, you need to follow it for more than a few months. Tracking your daily purchases only takes a few minutes. It takes even less time with a budgeting app that links to your bank and credit card accounts and automatically categorizes your purchases. Finding it hard to stick to your budget? Some of your figures may be unrealistic so review and adjust as needed. Perhaps you need to allocate more towards books and travel, and less on clothing. The best budget is one that grows and changes to meet your needs

What can you do now?

Setting up financial goals will help you plan and prioritize what’s important to you, and how you should set up a budget to align with your interests. Goals will also help you be more aware of how you spend your money day-to-day. It’s a good idea to write out these goals, and to stay mindful of them as you go through college!

If you like a pen and paper approach, you can try a simple tracking sheet like this one from Balance Pro or a more comprehensive budget worksheet like this one from the Harvard University Employees Credit Union . If you prefer a phone app, there are many to choose from and most are free. Read reviews to determine what makes the most sense for you.

Credit is a major factor in today's economy and is your reputation as a borrower. In order to have the best reputation, credit wise, you should take the time to learn about managing your credit. This is especially important when it comes time to rent an apartment, finance a car, buy a house, or even find a job. The sooner you start building your credit profile, the better off you'll be in the future.

Credit Report vs. Credit Score

A credit report is a detailed report of your credit history. It has personal information, employment history, and a list of open and closed credit accounts. You can get a free copy of your credit report once per year from each of the three credit reporting bureaus: Equifax, Experian, and Transunion. The website to check is  www.annualcreditreport.com . It’s a good idea to review your report at least once per year to ensure accuracy and check for fraud. If someone were to fraudulently open a line of credit in your name, you might never know without checking your report.

A credit score is a snapshot of your credit risk at a point in time, based off of your credit report. Credit scores such as FICO range from 300-850, with the majority of Americans scoring between 600-800. For lenders, a higher score means a lower chance of default.

Lenders often charge higher interest rates when taking on higher risk, so a low credit score means a more expensive loan. Conversely, a higher credit score means a less expensive loan. With solid credit history you can pay less for many credit products like private loans, credit cards, insurance, auto loans, and mortgages.

Do Your Research

Before applying for a credit card, compare each potential card’s annual fees, interest rates, special rewards, and credit limit. Little differences can have major impacts. Once you choose a credit card and begin using it, make your payments on time and pay off your balance each month. Failure to do so can result in large fees and do serious damage to your credit score. Try not to carry a balance on the card; instead, make occasional and sensible purchases.

Components of Your Credit Score

• Payment History (35%)  This is the largest factor and thus the best way to improve your score: make consistent, on-time payments. If you are more than 30 days late even once, that record remains on your credit report for 7 years and could result in a drop of 90 points or more in your credit score.
• Amount of Debt (30%)  How much debt you have relative to your available credit makes up the second largest factor in your score. A good rule of thumb is to keep your debt utilization ratio ( amounts owed/total credit limit ) below 30%. Pretend you have two credit cards and both have a limit of $500. To stay within 30% you would spend no more than $300 between the two cards.
• Length of Credit History (15%)  Lenders like to see long relationships with other lenders. One easy thing you can do to build credit history is open a no-annual-fee credit card, charge a few dollars each month, and pay it in full each month when the bill comes. 
• New Credit (10%)  Anytime you apply for a line of credit and a lender does what is called a "hard pull" on your credit score, your score can drop by a few points. This isn’t a big deal as new credit only makes up 10% of your score, but if you do this often enough it can substantially impact your score and ability to secure new credit. This information remains on your report for 2 years.
• Credit Mix (10%)  Lenders like to see a variety of credit accounts in good standing because it signals that you are a responsible borrower. A person who is making on-time monthly payments on a credit card, an auto loan, and a student loan is considered less risky. Your access to different types of credit may be limited as a student, and most lenders realize this.

U.S. News and World Report Student Credit Card Survey

Each year, U.S. News and World Report conducts a survey of students who own a credit card. From the results, they identify and address common credit topics such as credit scores, costs of credit, and providing tools that help guide students with credit card best practices. View the survey and guide here .

Helpful Reads

For more information on effective credit building as a student, the following articles are useful.

• CreditCards.com Presents: 10 Ways Students Can Build Good Credit
• A College Student’s Guide to Building Credit

Saving and Investing

Figuring out how to secure your financial well being is one of the most important things you can do. 

For many people, the path to financial security is with saving and investing. As a student, these topics may not yet be on your radar, but saving is a key concept for financial well-being. If you make saving a regular habit, even a small amount, you are building a foundation for financial success.

Tips on getting started with saving and investing

• Pay yourself first:  This means that for every paycheck you receive, commit to putting an amount (even a small amount) aside in a savings account. An effective way of doing this is to have a set amount of your paycheck directly deposited into a savings account, separate from what you use for everyday expenses. You will be surprised how quickly your savings can grow.
• Keep track of your saving:  People who track their savings tend to save more because it is on their mind. With online and mobile banking, there should be no excuse not to know exactly how much money you have.
• Set Goals:  Setting financial goals is crucial. As a student, you may only have a few financial goals, but this is the perfect opportunity to hone your skills. Think of this scenario: You want to pay off a student loan before graduation, how will you accomplish this? How much do you need to work? To save? The better you do now, the easier accomplishing future goals will become.

Thinking ahead

Even now there may be long range financial goals that you start saving for. Here are some tips for investing in your long term financial goals.

• Plan ahead:  As with any endeavor, advance planning is a way to figure out what you want, when you want it, and what you can do to achieve it. The sooner you start planning, the sooner you start accomplishing.
• Understand the time value of money /compound interest:  This is the principle that a dollar today is worth more than a dollar in the future, because the dollar received today can earn interest up until the time the future dollar is received. The longer the time frame for investment, the more you can increase the income potential of your investment. On the flip side, waiting to invest can make it more difficult to achieve your financial goals. Discover how much waiting to save could cost you with the SEC  compound interest calculator .
• Understand your objectives:  As a general rule, the shorter your time frame for investing, the more conservative you should be. For example if you are in your twenties and trying save for a down payment on a house, you are going to want to put your money in a vehicle that ensures the least risk of losing your principle investment. When your time frame for investing is long, you can consider less conservative options. Retirement savings are an example. Starting young allows you to save for a longer period and allows time to make up for potential loses in a less conservative environment.

Do you need to file taxes? Are you aware of the tax benefits for Education? Find out the answers to these important tax related questions.

U.S. Federal Taxes: Overview

If you are planning to work in the US, then navigating the tax code is going to be a large part of your financial well being. Gathered here are aspects of the tax code that deal with education and college related expenses. While the information here is a good start, it is only a broad overview and not a complete guide to filing taxes. For specific questions or additional information, you may wish to visit the  IRS website  or consult a tax professional. International students should consult the  Taxes & Social Security  page of the Harvard International Office website.

Do I need to file taxes?

Determining whether or not you need to file taxes depends on two things: how much money you earned and how much was taken out (aka “withheld”) for taxes.

If your earned income is over a certain limit as determined by the IRS, you may be required to file taxes regardless of how much was withheld from your paycheck.

• As an example, a typical Harvard undergraduate was required to file (2018) taxes if their income (including  taxable scholarships ) was equal to or greater than $12,000.
• The IRS strongly suggests that you file taxes, even if you are not required to do so. By filing your taxes, you may be eligible for a refund of some or all of the income withheld.

Types of tax benefits for education

The information provided here is intended only to get you started to learn about potential tax benefits related to higher education. It is important to note that there are eligibility restrictions and we strongly suggest visiting the  IRS website  directly for the most comprehensive information about tax benefits for higher education.

American Opportunity Credit

• This is a credit of up to $2,500 per eligible student based on Qualified Education Expenses paid during the tax year. The American Opportunity Credit can only be used for up to four years per eligible student.

Lifetime Learning Credit

• This is a credit of up to $2,000 per eligible student based on Qualified Education Expenses paid during the tax year. The Lifetime Learning Credit does not have a limit on the number of years it can be used per eligible student.

Tuition and Fees Deduction

• This is a deduction of up to $4,000 from your Adjusted Gross Income (AGI) based on amounts paid for Qualified Education Expenses. This deduction can be claimed for multiple students and the maximum deduction in a tax year is $4,000.

Student Loan Interest Deduction

• If you are a student making payments on an education loan that is accruing interest, you may be able to deduct some or all of the interest you paid that year from your taxes.
• Your parents may be able to deduct some or all of the interest they paid on their loans, taken on your behalf, if they still claim you as a dependent. The current limit is $2,500 per year, subject to income restrictions.

Important questions to consider

What are Qualified Education Expenses?

When filing taxes, you should know what counts as “qualified” and what doesn’t. This can be confusing because the definition of “qualified” is contextual. For example, the IRS may have a different definition of “qualified” than a 529 plan or other education savings plan provider.

What does the IRS count as Qualified Education Expenses?

• Per IRS guidelines, the expenses that you paid directly (or with a loan) for tuition, fees, and other related expenses count as qualified education expenses.
• The IRS website states that the following expenses do not qualify: room, board, insurance, medical expenses (including student health fees), transportation, and personal/living/family expenses.

What are Credits and Deductions?

Credits and deductions are two different ways to reduce your tax liability.

A  deduction  reduces the amount of income you have that is subject to tax. The actual benefit is tied to your tax bracket. In other words, if you are in the 25% tax bracket and have a Deduction of $1,000, your benefit is a $250 reduction in your taxes (25% of $1,000.)

A  credit  on the other hand reduces the amount of income tax you have to pay in a 1:1 ratio. In other words, if you have a $1,000 Credit, then your benefit is a $1,000 reduction in your taxes.

As a general rule, you should seek out credits before deductions, since the benefit is usually larger (i.e. to your advantage).

Additional Resources and Information

The information provided here is taken from the IRS website and is intended solely as a guideline. Because tax laws are constantly changing, information found here may change. For the most up to date and comprehensive information, we strongly suggest visiting the  IRS website , or consult a tax professional should you have specific questions. 

http://sfs.harvard.edu/taxes

http://www.irs.gov/Individuals/Education-Credits

IRS Publication 970 (Tax Benefits for Education)

http://www.irs.gov/Individuals/Qualified-Ed-Expenses

Throughout the year, we offer events on a wide range of financial literacy topics. Some events are in person and some are virtual, but all are geared toward helping you understand, manage, and move forward with your financial life. 

• First-Year Finance - A session delivered in the fall of your first year which provides an overview of all things Financial Aid. We also cover credit, budgeting, and the various financial literacy programs that we have available. Take advantage of this wonderful opportunity to ask questions and learn more about Harvard’s generous financial aid offerings.(This session has been cancelled for fall 2020).
• Money Management 201  – You’re getting ready to graduate and you have borrowed to help cover the cost of education. Is your financial health in order? Join us at one of our Spring semester sessions where we explain debt, loan repayment, and a host of other financial literacy topics. Regardless of whether you’re joining the work force, taking time off to travel, or prepping for grad school, these sessions are invaluable as you start your life post-Harvard.
• University Efforts  - In June 2011 the Directors of Financial Aid at each Harvard School as well as the University Financial Aid Liason’s Office decided to work on Financial Literacy as a University wide endeavor. One result of this collaboration was a university resource on financial wellness .

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Financial Literacy for College Students

By Savingforcollege.com Editorial Team

March 23, 2021

Financial literacy is the understanding of key financial concepts and skills. Someone’s level of financial literacy is a strong indicator of how financially successful they’ll be in the future. Financial literacy for college students is especially important.

College students face unique economic challenges. They’re at an age where adopting basic financial skills and knowledge can profoundly impact their entire adulthood. 

Luckily, technology has made financial information more accessible than ever before. 

In this article, you’ll learn the basic components of financial literacy, why financial literacy is especially important for college students and how students can increase their financial knowledge.

What is Financial Literacy?

Financial literacy refers to the understanding of basic financial skills and concepts. 

It’s not just about knowing the information, but about successfully implementing it into your own life. 

When people have financial literacy, they have the knowledge and confidence to make informed financial decisions. It allows people to responsibly manage their money, borrow and save, and plan and invest for the future.

Financial literacy is more important than ever before. 

As technology grows and society changes, finances become even more complicated. As a result, it’s essential that college students leave school with solid financial knowledge. 

Unfortunately, financial literacy rates are decreasing and Americans’ financial habits show it. 

Savings rates are decreasing while debt is increasing, and wages are remaining stagnant. 

College students who prioritize financial literacy will be able to overcome these challenges and live comfortably in the future.

The Components of Financial Literacy

Congress set up the Financial Literacy and Education Commission under the Fair and Accurate Credit Transactions Act of 2003. 

Recognizing the importance of financial literacy, Congress tasked the Commission with creating policy initiatives to help Americans make informed financial decisions. 

The Commission sought to accomplish this by creating a national financial education website, MyMoney.gov . Through the Commission’s website, they established five primary financial literacy principles.

One critical component of financial literacy is the ability to earn money. But even more than that, it’s about the understanding of what happens to the money you make, including:

• The amount you take home on your paycheck
• The benefits your employer offers
• The amount you pay in taxes and where that money goes

It’s especially important that young people learn this principle of financial literacy early before they join the workforce. Since many students will take on their first part-time job during high school, parents can turn to that job as a learning tool for their teen.

See also: Best Banks for College Students

Save and Invest

Saving is one of the most important ways to prepare for your financial future. It’s one of the most critical principles for young people to learn. 

This encompasses everything from how to open a savings account to how to actually save money. 

A critical part of this principle is to create the habit of savings. This is something that parents can teach their children from a young age, with gifts first, and then later with money from a part-time job.

Other important parts of this principle include:

• Paying yourself first
• Tracking your saving and investment accounts
• Planning for short and long-term 
• Building an emergency savings
• Consulting financial professionals
• Investing for future expenses

Another fundamental principle of financial literacy is the ability to protect yourself from financial loss. It’s crucial that college students learn early on the importance of having an emergency fund. Insurance is also a major component of protecting your finances, as is learning to guard against identity theft.

The ability to spend wisely is perhaps the most important one to learn at a young age. 

Many young people get their first part-time job in high school or college but then have no financial responsibilities. As a result, they can spend their money on fun. 

While that’s fine at a young age, it doesn’t necessarily create the spending habits that will help them later on.

This financial literacy principle primarily revolves around the ability to budget spending in advance and track where your money is going. It also includes the ability to live within your means and make educated buying decisions.

There’s never a better time to learn about the financial literacy principle of borrowing than as a young person. Well over half of students borrow money to get through college, and the class of 2019 graduated with about $29,000 in student loan debt.

This important component of financial literacy revolves around understanding how to get a loan and, more importantly, how to pay it back afterward.

It starts with learning about credit scores and credit reports, which are some of the most important determining factors when it comes to applying for credit. 

Once someone has built up the financial history to qualify for loans and credit, it’s critical that they understand their loan terms, such as APR. Finally, you must be able to track your debt and make debt payments on time each month.

The Importance of Financial Literacy for College Students

Understanding basic financial skills and concepts is critical for a successful financial future. 

Everything we have to do as adults — earning money, budgeting, paying off debt, saving — all relies on financial literacy. But some of the most important markers of financial wellness are moving in the wrong direction:

• The wage gap is widening between high-income and low-income earners, those with a college degree and those without, etc. 
• Savings rates are decreasing. Only about half of Americans have an emergency fund, and nearly 40% don’t have money in the bank to cover a $400 emergency.
• Most Americans don’t know how much they need to save for retirement, and fewer than 60% are saving for retirement at all.
• About half of those with student loan debt regret their decision to borrow as much as they did.
• The average U.S. household holds more than $7,000 of credit card debt and more than $27,000 of auto loan debt.

As financial literacy becomes increasingly important, data shows that it’s actually decreasing. 

A National Financial Capability Study by the Financial Industry Regulatory Authority (FINRA) found that just 34% of Americans could answer four of five basic financial literacy questions. This rate was a decrease of 8% from just a decade earlier. 

The numbers are even less promising for young people. The largest decrease occurred in Americans in the 18–34 age range.

While financial literacy is important for people of all generations, it’s particularly important among college students and young people for a few different reasons.

Student loan debt is increasing

Perhaps the most significant financial issue facing college students is the student debt crisis. 

The total student debt has topped $1.6 trillion, with more than 45 million individuals owing money. Of those students who graduated in 2019, roughly 70% of them took on student debt with the average student nearly $30,000 in debt.

This trend is troubling, and it doesn’t appear to be slowing down. Unless there are significant policy changes surrounding student loans and the price of college, it’s likely that student debt will only continue to increase.

Retirement income is not guaranteed

It’s hard to predict where the Social Security program will be when today’s college students retire. 

By the administration’s own admission, the current reserves are only enough to fully pay for benefits through 2037 . 

At that point, reserves will run out, and the administration will only be able to make 76% of scheduled payments. While policy changes could certainly fully fund the program, plenty of people are pessimistic about whether that will happen. 

As a result, young people are wise to plan on funding their own retirement.

Unfortunately, young people have fewer options for retirement planning.

Pension plans, once a popular benefit employers offered, are quickly disappearing. Instead, more people are tasked with funding their own retirement. And without increasing wages, that means young people have less money to devote to other expenses.

Incomes are stagnating or falling

Despite being more educated, people graduating from college today aren’t making more money than their parents and grandparents were at the same age. 

A recent Pew Research Center study found that wages for young workers have barely increased over the past 50 years. 

Today, college-educated workers make roughly the same as college-educated people did in previous generations, when you account for inflation. But when you look at those with a partial college education or none at all, today’s young people are making less than previous generations.

Because young people are making less money, it’s critical that they learn to manage it. Financial literacy is key.

If this trend continues, it could be the case that today’s young people make the same as or even less than their parents and grandparents did.

How to Increase Financial Literacy for College Students

Financial literacy is decreasing among young people at a time when it’s more important than ever. 

As a college student, now is the time to find ways to increase your knowledge of financial skills and concepts. As the parent of a college student, now is your time to help them. 

Since the U.S. education system includes little in the way of personal finance education, it’s up to families and individuals to shoulder the responsibility.

Take advantage of government resources

Through the Fair and Accurate Credit Transactions Act of 2003, the federal government created its Financial Literacy and Education Commission. 

The purpose of this Commission is to help increase financial literacy among Americans. 

The Commission provides an educational website to help people learn about basic financial concepts. 

Agencies such as the Consumer Financial Protection Bureau and U.S. Securities and Exchange Commission also publish educational articles to help Americans learn about money.

Free tools and resources from banks and credit unions

Check with your bank or credit union to find out if they offer any tools or services to help you learn more. 

Many companies have article libraries on their websites where they educate customers on financial topics. 

They may also have budgeting tools to help you get into the practice.

Consult financial professionals

College might seem like an early time to seek out financial professionals, but it’ll only help set you up better in the future. 

Some professionals help you set ip and carry out long-term financial goals, while others can help you adapt your daily financial habits. 

Your school might even have financial professionals available to students for a free or discounted rate.

Take a finance course in college

If you’re a college student, you’re in the perfect environment to learn. 

Your school almost certainly has some finance classes available. Some may even offer classes specific to personal finances and financial literacy.

Find online financial literacy resources for college students

Living in the digital age, there is no shortage of online resources that can help you increase your financial literacy. 

Having grown up with technology, today’s college students will be more adept than anyone at finding the information they need. 

Just make sure to get your information from a reputable source, since anyone can post information online. 

Look to local nonprofit organizations

If you feel like you need more hands-on help and can’t afford it, look to local nonprofit organizations. 

Groups such as United Way offer free financial coaching services to those facing financial hardship. 

Financial literacy is uniquely important for college students today. 

They face financial burdens that previous generations haven’t, like rising education costs and decreasing income. And yet, data shows that financial literacy is falling overall, especially among younger people. 

Federal, state, and local governments, along with other organizations, recognize the importance of financial literacy. 

As a result, there’s an incredible number of resources available to college students to increase that financial literacy. 

Taking these steps early can help reshape their financial futures, resulting in higher incomes, lower debt, increased savings and a more financially stable future.

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Home - Blog - Financial Literacy for Youth: Why it Matters

Financial Literacy for Youth: Why it Matters

Jun 06, 2023

by United Way NCA

In 2023, many young people will enter adulthood without the essential financial knowledge and skills they need to make informed choices about their money.

Consider this: Young Americans owe over $1 trillion in debt, and 70% of millennials live paycheck to paycheck. These alarming statistics highlight an urgent need for financial education among young people. Early-adulthood financial decisions can have lifelong consequences. Equipping young people with the tools to manage their money effectively helps them avoid the cycle of debt and economic insecurity that plagues many Americans well into adulthood, giving them the foundation to build a secure financial future.

United Way National Capital Area (United Way NCA) recognizes financial literacy’s vital role in expanding economic opportunity in our community. United Way NCA’s five Financial Empowerment Centers across DC, Maryland and Virginia provide access to high-quality financial services and guidance—at no cost—to individuals and families of all ages to assist them in creating economic stability. Delve into a personal story of a single mother who utilized our financial empowerment centers to empower herself and her family today. We are specifically focused on the economic opportunity of our region’s ALICE population. ALICE—Asset Limited, Income Constrained, Employed—represents the nearly 500,000 community members in the National Capital Area who are employed and earn more than the Federal Poverty Level, but still struggle to make ends meet.

What is Financial Literacy?

Financial literacy is the combined knowledge and skills required to make responsible and informed financial decisions that contribute to a sense of financial security and well-being.

Knowledge of financial concepts like saving, investing, spending and borrowing is the foundation of financial literacy. In addition, understanding credit management, asset building and how to reduce debt and avoid scams is critical to a healthy financial life.

The Repercussions of Low Financial Literacy

Why is financial literacy important? Because low financial literacy threatens the well-being of individuals and families, especially in underserved and low-income communities. Without a solid financial foundation, our youth are more susceptible to predatory lending and costly errors in managing debts and expenses that can lead to lifelong financial inequity.

Additionally, low financial literacy can lead to missed wealth-building opportunities and reduced access to higher education and professional development training. When young people lack the financial knowledge they need to make informed decisions, they are more likely to become trapped in cycles of poverty and debt. For example, poor spending and borrowing habits often result in low credit scores, contributing to higher financial insecurity.

Investing in financial literacy helps bridge the opportunity gap that exists in our underserved communities and empowers youth with the tools they need to break down economic barriers and lead financially secure lives.

The Financial Literacy Gap

According to a July 2022 FINRA Foundation national financial capability study , a persistent financial literacy gap exists in the U.S. Further, the study found that young people, Black/African American, Hispanic/Latino and low-income households remain more vulnerable to the consequences of low financial literacy than other Americans.

The study also showed that the above groups were more likely to exhibit psychological symptoms of financial stress, and younger people were 38% more likely to miss mortgage payments and 26% more likely to make hardship withdrawals from retirement accounts.

These findings highlight the importance of investing in financial education and access to services to help individuals and families build assets and gain economic opportunity. This is especially true for younger people across all demographics.

Financial Literacy: The First Step Toward Financial Capability

Financial education is fundamental to improving financial health and well-being for our communities, but developing financial capability is the ultimate goal. Financial capability is what happens when financial literacy knowledge is practiced and applied until it becomes second nature and drives behavior that consistently leads to positive economic outcomes.

It gives individuals the confidence to make informed financial decisions, take advantage of opportunities and build financial security for themselves and their families.

United Way NCA seeks to improve the lives of underserved individuals in our community by increasing economic opportunity for individuals and families across our region.

Our Financial Empowerment Centers teach fundamentals of budgeting, saving, investing, borrowing responsibly and other personal finance topics useful in everyday life and long-term financial planning.

Empowered with the knowledge and skills required to make responsible financial decisions, individuals will build the financial stability necessary for a successful future.

United Way NCA Financial Empowerment Centers provide financial services and expert guidance at no cost in a welcoming, supportive and inclusive environment. Our goal is to be a trusted resource for individuals and families in the communities we serve. For support around credit building, debt management, saving, starting a business, homebuying or completing your taxes, contact a United Way NCA Financial Empowerment Center near you . When none are ignored, all will thrive.

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The case for financial literacy education

Paddy Hirsch

Financial literacy education does not have a great reputation . It's a huge industry, spawning all sorts of books, web channels, TV shows and even social media accounts — but past studies have concluded that, for the most part, financial literacy education is kind of a waste of time .

For example, a much cited paper published in the journal Management Science found that almost everyone who took a financial literacy class forgot what they learned within 20 months, and that financial literacy has a "negligible" impact on future behavior. A trio of academics at Harvard Business School, Wellesley College and the Federal Reserve Bank of Chicago, produced a working paper that showed that mandated Finlit classes given to high schoolers made no difference to the students' ability to handle their finances. And the list goes on .

The name that comes up again and again in these papers and reports on financial literacy is Annamaria Lusardi. She is a professor of economics and accountancy at the George Washington University School of Business. She's also the founder and academic director of the Global Financial Literacy Excellence Center at GWU. She and Olivia Mitchell, a professor at the University of Pennsylvania's Wharton School of Business, published a paper in 2013 that amounted to a study of studies about financial literacy , and it was quite critical of the way financial literacy programs are taught. This study of studies has been widely quoted ever since.

New Hope For Financial Dullards

Ten years later, Lusardi and Mitchell are out with a new paper, similarly titled , but much more upbeat. "The Importance of Financial Literacy: Opening A New Field," picks up where their 2013 study of studies left off, and it draws on the two women's experience teaching personal finance.

The first thing they establish is that the level of financial literacy, globally, is just as woeful as it was when they released their seminal paper ten years ago. To establish this, they conducted a survey that asked participants three questions, which focus on interest rates, inflation and risk diversification.

"These are simple questions," Lusardi says, "Yet they test for basic and fundamental knowledge at the basis of most economic decisions. In addition, answering these questions does not require difficult calculations, as we do not test for knowledge of mathematics but rather for an understanding of how interest rates and inflation work. The questions also test knowledge of the language of finance."

How did respondents do? Let's just say there is room for improvement. (You can test your own knowledge by checking out the paper ).

"Only 43% of the respondents (in the US) are able to answer all of the questions correctly," Lusardi says, adding that the level of financial illiteracy is particularly acute amongst women. "Only 29% of women answer all three questions correctly, versus 48% of men," she says, adding that this gender difference is strikingly stable across the 140 countries that they ran the test in.

"We also see ... that women are much more likely than men to respond that they do not know/refuse to answer at least one financial literacy question," she says. Such gender differences are likely to be the result of lack of self-confidence, in addition to lack of knowledge."

Young people are also more likely to be disadvantaged in this area, Lusardi and Mitchell found, as are people of color. "The young display very low financial literacy, with only one-third being able to answer all three questions correctly. Half of Whites could correctly answer all three questions, versus only 26% of Blacks and 22% of Hispanics."

This is a problem, Lusardi says, not just because it means that many people are ill equipped to handle an increasingly complicated and complex financial landscape that can impact their earnings and long-term wealth. There are obvious social implications to the fact that white males appear to have a significant edge on the rest of the population in this area. And if that isn't enough, Lusardi says, it's also a problem for the economy.

"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," she says. The impact on productivity of people spending most of an entire working day on their personal finances whilst at work is considerable, she goes on. Add in the consequences of mismanagement of assets, investments, mortgages and other debt, and there is a significant potential effect on the economy.

Lusardi says this idea, that the damage wrought by a lack of financial literacy might extend beyond the individual — to companies and even to the economy has not escaped the notice of governments.

"Influential policymakers and central bankers, including former Fed Chairman, Ben Bernanke, have ... spoken to the critical importance of financial literacy," the paper says. "Additionally, the European Commission has recently acknowledged the importance of financial literacy as a key step for a capital markets union. Some governments have ... implemented financial literacy training in high schools. Several years ago, the Council for Economic Education (CEE 2013) established National Standards for Financial Literacy, detailing what should be covered in personal finance courses in school."

Fixing The Flaws

A decade ago, Lusardi and Mitchell were somewhat critical of the financial literacy courses offered by companies and schools. The programs were generally not effective, they said, not because the concept of personal finance education was flawed per se, but because the various programs were generally not well resourced, and often poorly conceived.

"Most of these (courses) in the US were unfunded," Lusardi says. "There was no curriculum. There were no materials, and teachers were hardly trained. So the gym teacher was teaching financial literacy, or anybody they could find. This is, of course, not going to work. It wouldn't work for any topic. If you have a course in French and the teacher doesn't speak good French, (students) are probably not going to learn good French either."

Moreover, the classes, whether taught in schools or in corporate offices, tended to provide one-shot, one-size-fits-all instructions, with little or no follow-up. Lusardi says that was a recipe for failure. But those organizations that have recognized the need for financial literacy programs, and that have persisted in developing them, have made progress, she says.

"Many programs have moved beyond very short interventions, such as a single retirement seminar or sending employees to a benefits fair, to more robust programs," Lusardi says. "Financial literacy has now become an official field of study in the economics profession. Many initiatives at national levels have been launched, and more than 80 countries have set up national committees entrusted with the design and implementation of national strategies for financial literacy."

Lusardi says it's particularly important to teach and consolidate principles of good personal finance as early as possible, which means starting at home — where children are likely to model good financial habits — and in school. To that end, the Programme for International Student Assessment in 2012 added financial literacy to the set of topics that 15-year-old students need to know to be able to participate in modern society and be successful in the labor market.

Lusardi says that in the decade since she and Mitchell released their 2013 report, their experience teaching financial literacy has proved that these programs, properly taught, can work.

"Our research shows that much can be done to help people make savvier financial decisions," she says, noting that a successful course will help people grasp key fundamental financial concepts, particularly financial risk and risk management. It will help them understand the workings of specific financial instruments and contracts, such as student loans, mortgages, credit cards, investments, and annuities. It will also make them aware of their rights and obligations in the financial marketplace.

Most importantly of all, of course, it will attract and retain the students' interest, which isn't always easy in the dry world of finance.

"I teach very differently now because of my research," Lusardi says. "I say, what do you think this course is about? And as you can imagine, most of the students think it's about investing in the stock market. That's what personal finance is associated with. And I tell them, 'No, this is a happiness project. We talk about all of the decisions that are fundamental and important in your life. And I want to teach you to make them well, because if you do, you are going to be happy.'"

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Teaching Financial Literacy: Why You Need to Start from a Young Age

Learn how to help children develop healthy money habits and why it’s important

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In 2008, Utah became the first state to require a semester of personal finance education as a requirement for high school graduation. Now, educators all over the country are exploring ways to start teaching financial literacy earlier, including in elementary school.

“It’s one thing to know the skills, but it’s also highly beneficial to start learning how to apply them into your everyday life,” said Brittany Griffin, policy and communications deputy at the Utah Office of State Treasurer. “In an ideal world, parents would start talking with their children about money very early on.”

A lesson in investing is a key component in teaching financial literacy, which can also include lessons on earning, saving, reducing risk, spending, and borrowing, not only as fundamental concepts and how they work, but also as they relate to life skills, and how they fit into the other parts of a person's life. Context, prioritization, and syncing money with life are important ingredients in putting financial literacy to good use in a person's life. Research has long shown that when it comes to teaching kids how to manage their money, it’s better to start young to build money knowledge and habits that will last a lifetime.

Key Takeaways

• Teaching financial literacy at a younger age helps children develop healthy, lifelong financial habits.
• The main principles of financial literacy include earning, saving, investing, protecting, spending, and borrowing.
• Specific government policies and societal discrimination have fed into the creation of a racial wealth gap, which is important to note when it comes to financial literacy.
• Financial literacy can encourage habits that can help children avoid debt traps later in life.
• Children can form money habits starting as young as age 5.

Alice Morgan / Investopedia

U.S. Financial Literacy Gaps

Closing gaps in financial literacy could help close wealth gaps. You’ll often find disparities in financial literacy among different income, racial, and gender groups. For example, Americans quizzed on basic financial concepts by the Federal Reserve Bank of St. Louis generally did better when they had higher household incomes .

Research shows that Black and Latinx people have lower levels of financial literacy than White people because of different socioeconomic statuses, according to a 2020 study from the University of Texas Rio Grande Valley.

Researchers typically use the Big Three or the Big Five quiz of three or five questions when they study financial literacy.

It's important to note that anti-minority and anti-Black policies in the U.S. have systemically led to a racial wealth gap . In addition to income inequality and historic discrimination in U.S. housing policy, education disparities have historically impacted the creation of the wealth gap, too.

Educational inequalities usually begin early in life. In the U.S., the odds of attending a high-poverty or high-minority school depend largely upon a child's racial or ethnic background and social class. For example, Black and Hispanic students are more likely to go to high-poverty schools than White or Asian American students. Attending a high-poverty school lowers math and reading achievement for students in all racial or ethnic groups—an effect that is still relevant today.

According to research, women generally have lower levels of financial literacy than men, which can put their financial security at a higher risk. For example, a 2014 study found that only 22% of U.S. women had basic knowledge of how interest rates , inflation , and risk diversification work, compared to 38% of men. Confidence may play a role in this difference, as another study showed the gender gap was cut in half when the researchers took away the option to answer “I don’t know.”

Benefits of Teaching Financial Literacy

People tend to make better financial decisions when they’re armed with knowledge about how money works. That's why a financial education can help close wealth gaps in the U.S. Take what happened with middle schoolers Stockton Carlson and Calvin Lambert in 2021, who were participating in a statewide stock market simulation with their class at Vista Heights Middle School in Saratoga Springs, Utah.

The two students noticed chatter on social media about video game retailer GameStop ( GME ). The company's shares spiked the day before, so Lambert and Carlson decided to jump in—just in time for GME to surge again in another meme-fueled frenzy . They eventually grew their simulated money from $100,000 to $171,526.61 over 10 weeks, scoring first place in the middle school category.

“We learned that social media, and Reddit in this case, can really have a big effect on things,” Lambert told the contest organizers.

These students learned a valuable lesson by taking part in the contest. However, diving in with a stock simulator and getting hands-on experience isn't the only way to teach or improve financial literacy. Below, you'll find some other key advantages of financial literacy.

Building Good Financial Habits

People who scored better on a test of financial literacy were more likely to spend less than their income , have an emergency fund, and have a retirement account, according to a report by the Financial Industry Regulatory Authority (FINRA) Investor Education Foundation.

Financial literacy is also associated with better retirement planning , a lower tendency to borrow against 401(k)s , and a greater likelihood of stock investing .

Avoiding Debt Traps

Financial literacy helps people avoid costly mistakes. People with more financial literacy education are more likely to avoid payday loans , which have high interest rates and hidden fees, a 2019 study by a University of Wisconsin-Madison researcher found.

People with greater financial literacy also were less likely to take pawnshop loans , make only the minimum payment on credit cards, or incur late fees on various financial products, the FINRA Investor Education Foundation found.

Another study by researchers at Montana State University found that college students who took mandatory financial education classes were more likely to fund their educations with low-interest federal loans and less likely to carry credit card balances . Those from less wealthy families were less likely to work while enrolled in school, while those from wealthier backgrounds were less likely to take out private loans .  

Better Financial Health

Students who went to high schools where personal finance education was required were less likely to default on their debts and had higher credit scores than their peers, a study by researchers at Montana State University showed.

Knowledge often sticks with students after graduation, giving them an edge on tests of personal finance knowledge, an audit of Utah’s financial literacy program showed. That knowledge then helps them develop better financial habits. Graduates were more likely to be able to cover a $1,000 emergency expense and to have invested in the stock market, and they were less likely to be late on monthly payments.

Reasons to Start Teaching Financial Literacy Early

Karsten Walker, a retired teacher and learning coordinator at the Alpine School District in Provo, Utah, said there may be other benefits to early financial education not yet captured by the research. He helped establish his district’s financial literacy program that rolled out in the early 2000s, and he said many of his former students have gone on to careers in the field.

“Not only do you help kids with their personal finances, but you’re going to see that kids gravitate to that as a career interest,” according to Walker, who said students would probably be even better served by starting to learn about money well before high school.

“While high school is great for financial education, you do need to start earlier,” he said.

Research shows that people are getting credit at younger ages, and that financial habits developed in young adulthood tend to stick throughout life. Children form persistent habits with money as young as age 5, a study by researchers at the University of Michigan found.

Parents are up against what Vince Shorb , chief executive officer (CEO) of the nonprofit National Financial Educators Council, called “psychological warfare” in the form of toy advertisements, peer pressure, and social media. They are all bombarding children with messages encouraging excessive consumption and a spendthrift attitude. Shorb said high school financial literacy classes are a step in the right direction, but they may not be enough on their own.

“Try speaking a foreign language after one semester of anything,” he said. “Kids in school aren’t really getting anything about money. And parents aren’t training children to be good stewards of money and understand it and develop positive habits from a young age.”

Griffin said developing habits of good money management will likely take more than just one class.

“Money management is largely behavioral. It’s one thing to know the skills, but it’s also highly beneficial to start learning how to apply them into your everyday life,” she said. “It’s kind of like anything with mathematics or reading. You progress as the years go on.”

There are many ways to get children thinking about money. Shorb offered several tips to prime children for early financial literacy.

• Explain what you’re doing . Parents or guardians can help children understand how household finances work by engaging them in their own finances. Whether it’s a shopping trip or paying the bills, you can walk children through the decisions you’re making. You can also let kids listen in on your conversations with bankers, accountants, and other financial professionals. “Kids are sponges,” Shorb said. “They’re smarter than we think. They’re picking up things that we don’t even understand.”
• Have children earn money with chores . Rather than buying toys, parents can use a classic technique of having the kids earn money by doing chores . That way, they learn the connection between labor and income. Consider having kids put some of their chore money toward household bills as they get older. 
• Get kids into career conversations related to their interests . Earning income is a crucial part of having good finances, and kids model their career interests on jobs that they’ve been exposed to. This explains why so many children want to be teachers or YouTube influencers. Help kids expand their horizons by having them talk to people with other jobs, especially ones related to their interests. For example, if a child is interested in BMX biking, the parent can bring them to a competition and ask a vendor to explain what they do—most people are usually happy to talk to kids.
• Set aside time to teach the fundamentals . Consider sitting kids down and teaching them basic concepts. The lessons should be age-appropriate. For example, the topic of FICO Scores would probably be too advanced for a four-year-old, but they may understand the concept of borrowing and returning.

What Are the 5 Principles of Financial Literacy?

The five principles of financial literacy are: earn, save and invest, protect, spend, and borrow. Focus on understanding your pay and benefits, then develop a budget to save and invest your earnings. Ensure your financial health is protected by, for example, having an emergency savings. Finally, be sure that you are spending wisely and that you borrow responsibly.  

What Is the Best Way to Teach Financial Literacy?

The best method for teaching financial literacy is the method that engages the student the most successfully. Each student will have different needs and different ways of learning. Understand how a child absorbs information, then develop the best method for teaching financial literacy based on their responsiveness. Methods can include playing games like Monopoly , engaging in discussions, or providing allowances, among many others.

What Is the First Rule of Financial Literacy?

The first rule of financial literacy is to understand your pay, or your earnings. Understanding your pay includes knowing what benefits are available to you and how you can take advantage of them.

Teaching financial literacy is important to instilling healthy habits in children so they can make the best decisions about money throughout their lives. Start financial lessons at an early age to give them a head start in developing these critical skills, then continue to provide financial guidance on more advanced lessons as they are ready. The strategies you use to foster financial literacy in your child will depend on how your child learns and how you best interact together.

Utah Office of the State Auditor, State Reporting System. “ Utah’s General Financial Literacy Graduation Requirement: A Program Review .” Page 1.

National Education Association. “ Resources for Teaching Financial Literacy .”

The Brookings Institution. “ A Review of Large-Scale Youth Financial Literacy Education Policies and Programs .” Pages 6 and 23–60.

Federal Reserve Bank of St. Louis. “ How Do Americans Rate in Financial Literacy? ”

Angrisani, Marco, Blanco, Luisa R., and et al. “ The Racial/Ethnic Gap in Financial Literacy in the Population and by Income .” Contemporary Economic Policy , vol. 39, August 2020, pp. 534.

Global Financial Literacy Excellence Center. “ The Big Three and Big Five .”

Economic Policy Institute. " The Racial Wealth Gap: How African-Americans Have Been Short-changed Out of the Materials to Build Wealth ."

Economic Policy Institute. " Five Key Trends in U.S. Student Performance ."

Bucher-Koenen, Tabea and Alessie, Rob and et al. “ Women, Confidence, and Financial Literacy .” European Investment Bank Institute , February 2016, pp. 21–22.

Utah Office of State Treasurer. “ Utah Treasurer Kirt Slaugh Recognizes Students for Winning Spring 2021 Stock Market Game .”

Financial Industry Regulatory Authority. “ Financial Capability in the United States .” Page 14.

Harvey, Melody. “ Impact of Financial Education Mandates on Younger Consumers’ Use of Alternative Financial Services .” Journal of Consumer Affairs , vol. 53, no. 3, Fall 2019, pp. 22.

Financial Industry Regulatory Authority. “ Financial Capability in the United States .” Page 15.

Stoddard, Christiana and Urban, Carly. “ The Effects of State‐Mandated Financial Education on College Financing Behaviors .” Journal of Money, Credit and Banking , vol. 52, no. 4, June 2020, pp. 1.

Urban, Carly, Schmeiser, Maximilian, and et al. “ The Effects of High School Personal Financial Education Policies on Financial Behavior .” Economics of Education Review , vol. 78, October 2020.

Utah Office of the State Auditor, State Reporting System. “ Utah’s General Financial Literacy Graduation Requirement: A Program Review .” Page 4.

Smith, Craig E., Echelbarger, Margaret, and et al. “ Spendthrifts and Tightwads in Childhood: Feelings About Spending Predict Children’s Financial Decision Making .” Journal of Behavioral Decision Making , vol. 31, no. 3, December 2017, pp. 448, 456.

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Behavioral Finance

The importance of financial literacy for mental well-being, a lack of financial literacy could create an emotional burden. here's why..

Posted September 11, 2024 | Reviewed by Davia Sills

• The APA reported that 83 percent of U.S. adults cite inflation as their top stressor.
• Money and stress are intrinsically connected, but people can minimize the impact on their mental well-being.
• Psychological barriers can prevent individuals from learning the truth about money lessons.

Depending on how we manage stress , our mental well-being and health could be at risk. Each day, we encounter a variety of stressors, creating triggers that, when pulled, can harm our peace of mind. Pressure at work and problems at home are common reasons for emotional issues. When these issues go unchecked, we are more vulnerable to additional future stressors.

Stress impacts most bodily systems, and it’s up to us to minimize those health risks. As we determine the things connected to our high blood pressure, night sweats, shortness of breath, or body aches and pains, we usually miss the largest challenge to mental well-being—money.

In a recent national survey , the American Psychological Association reported that 83 percent of U.S. adults cite inflation as their top reason for stress. This is greater than racial inequality, talking about politics or religion, or even violent crime in any community. Our financial literacy—or lack thereof—could contribute the most substantial burden on our emotional well-being.

Money and stress are intrinsically connected. Without proper knowledge of that relationship or the skills to fix it, stress will cause peril and a turbulent emotional state. The secret to gaining a greater sense of security with money is mastering the “ locus of control .”

The Locus of Control and Protecting Our Mental Well-Being

Psychologists and therapists call a locus of control “the degree to which an individual feels a sense of agency in regard to his or her life.” Having an external locus of control means we feel like things happen to us, while an internal locus of control means we feel like we can control our outcomes.

Life can become difficult to manage without firm financial literacy knowledge. Hopelessness, anxiety , shame , and fear all stem from money stress. When all those negative emotions combine, we feel we have zero control. When we lack that feeling of power, spending money is a common coping mechanism.

What internal locus of control related to money can we create when stress overwhelms us?

• Find advice or counsel. A financial therapist or well-documented insight elsewhere can greatly reduce economic stress by helping us understand the connection between our mental well-being and finances.
• Know your numbers. Invest in software or a financial professional if math isn’t your thing. Your financial numbers matter, and understanding them matters even more.
• Get organized. Knowing what money is coming in and going out is valuable, but knowing what categories those dollars belong to is priceless.

These simple tasks help us understand what may need to shift in our money patterns and spending habits. Knowing the connection between internal and external loci, symptoms, and stressors helps us understand our coping mechanisms and pinpoint the source of the problem.

Connecting Money and Mental Health

While money terms and learning about money can feel scary at times, financial literacy engages us in the economic systems around us. Education and insight into financial terms and how they work make that engagement permanent. The Financial Industry Regulatory Authority (FINRA) has a quick quiz about financial literacy that shows people with higher financial literacy are “more likely to live within their means.”

I tell many of my financial therapy clients, “Knowing what foods are better for us doesn’t mean we always eat healthier. But it can give us a starting point.” One key piece of changing our relationship with money is learning more about how money works. Another key piece of our relationship with money is changing the psychological processes of how we deal with money.

If you feel like you know the right thing to do but are having a hard time doing it, there may be psychological barriers to following through on your money plan. Working with a financial therapist or other mental health professional can be a start to identifying what beliefs, emotions, traumas , and other difficulties may keep you from moving forward in your financial life.

Remember: While there are things out of your control with money, there can be a whole lot that you can control. Focusing on those things can help you move in the right direction.

Nathan Astle, CFT-I, is a certified financial therapist, marriage and family therapist, and client financial counselor at Beyond Finance with a focus on the intersection of finances and mental well-being.

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Home — Essay Samples — Economics — Corporate Finance — Importance of Financial Literacy

Importance of Financial Literacy

• Categories: Corporate Finance

About this sample

Words: 1983 |

10 min read

Published: Dec 5, 2018

Words: 1983 | Pages: 4 | 10 min read

Financial tools – financial literacy

• Financing activities include the borrowing and repayment of long-term liabilities.
• Investing activities include the purchase and sale of your long-term fixed assets, such as property, plant and equipment.
• Operating activities include your day-to-day operations.
• Budgeting Basics
• ensure you have enough money for your future projects.
• enable you to make confident financial decisions and meet your objectives
• ensure you can continue to fund your current commitments
• control your finances
• Banking and Financial Services
• The Impact of Interest Understanding the ins and outs of interest can impact your finances more than you likely realize, so it’s an important concept to gain a better understand of early on in life.
• The Credit-Debt Roller-coaster

Works Cited

• Bhatia, A. (2022). Financial Literacy and Entrepreneurship: A Review. International Journal of Research in Business Studies and Management, 9(4), 14-22.
• Cooper, D., & Ebert, R. (2020). Budgeting Basics for Small Business Owners. Journal of Small Business Management, 58(4), 722-740.
• Federal Reserve Bank of Kansas City. (2021). Cash Management Basics: A Guide for Small Business Owners. Retrieved from https://www.kansascityfed.org/~/media/files/publicat/psr/pdf/cash-management-basics.pdf
• Financial Consumer Agency of Canada. (2022). Banking and Financial Services. Retrieved from https://www.canada.ca/en/financial-consumer-agency/services/banking.html
• Hackston, D., & Dowling, M. (2023). Financial Literacy Rates Among Adults in Advanced and Emerging Economies. International Journal of Financial Education, 21(1), 18-35.
• Organization for Economic Co-operation and Development. (2017). OECD/INFE Core Competencies Framework on Financial Literacy for Adults. Retrieved from http://www.oecd.org/daf/fin/financial-education/International-Core-Competencies-Framework.pdf
• Pailella, P. (2016). Financial Literacy and Entrepreneurial Success: The Moderating Role of Financial Knowledge and Experience. Journal of Small Business Management, 54(4), 1175-1192.
• Parcheta, M. (2021). The Role of Financial Literacy in Women Entrepreneurship Development. European Financial and Accounting Journal, 16(2), 87-100

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