Why Financial Literacy Is Not Just a Buzz Term
- Most Americans do not understand finances well.
- This lack of understanding can cause debt problems in American households.
- You can improve your finances and yur life with a little knowledge about how credit works.
Most Americans have very low debt literacy
Not so long ago, cash was the preferred payment method for daily purchases, but times have certainly changed. As consumer shopping behaviors have evolved (think Amazon and online shopping) so has our relationship with credit cards and debt.
Credit can cloud our view of spending, making it easy to forget how much we have spent on something and/or how we are tracking our monthly budget. It can also lead to unintended debt that stays with us long after the useful life of whatever we bought on credit.
A research study from M.I.T. showed that since the 1970’s there has been growing evidence supporting the theory that credit cards encourage spending. In addition, a Dartmouth College study found that most Americans have very low debt literacy – with only one third of the population understanding the principal of compound interest or how credit cards work.
How credit works is an important part of financial literarcy
Unfortunately, this lack of understanding about the fundamentals of how credit works has had a terrible impact on the financial situation of the average American.
Today, the average American household carries an astounding $137,063 in debt, according to the Federal Reserve’s latest statistics. Yet the U.S. Census Bureau reports that the median household income was just $59,039 last year – it doesn’t seem sustainable.
The development of financial literacy skills is a lifelong process
Every day, consumers experience financial hardships and are in critical need of assistance to manage their personal debts every day.
Providing your children with personal financial management tools and education is imperative to putting them on the path to financial security. The development of fundamental financial literacy skills is a lifelong process that begins with something as simple as putting a few coins in a piggy bank, and eventually grows into understanding complex ideas such as compound interest, revolving debt and creating a budget.
Although financial literacy on its own won’t solve the consumer debt crisis. However, with increased financial capability, young adults will be able to better manage their personal finances in a way that will enable them to minimize debt, build wealth, and achieve their own financial freedom.