Financial literacy encompasses the knowledge and skills for personal financial planning, the selection of financial services, budgeting and investing, developing an insurance program, credit management, consumer purchases, consumer rights and responsibilities, and decision-making skills for all aspects of life as consumers, workers, and citizens. Financial literacy affects all aspects of an individual's planning and spending: income, money management, the use of credit, saving and investing, and decision making for the wise use of resources. A lifelong process, financial literacy is a critical area of knowledge and skills for all consumers who must make choices about their financial resources. From a child's earliest spending to a senior citizen's retirement decisions, individuals apply their knowledge and skills to financial choices. Managing finances has become increasingly complex.
ORGANIZATIONS PROMOTING FINANCIAL LITERACY
A number of organizations are active supporters of financial literacy, and many focus on financial education for young people. The Jump$tart Coalition for Personal Financial Literacy was convened in 1995 to promote personal financial literacy, particularly among young adults, and is a major source of financial literacy information. Membership in the coalition includes more than 160 organizations committed to improving young people's knowledge and skills. A few of the member organizations are: American Institute of Certified Public Accountants, American Council on Consumer Interest, Federal Deposit Insurance Corporation, Girl Scouts of the USA, NAACP, Social Security Administration, and the Foundation for Financial Literacy.
RESOURCES FOR FINANCIAL LITERACY
A function of Jump$tart is to serve as a clearinghouse for educational tools and resources, prekindergarten through adult, for all types of educational programs. These tools and resources, available from members of the coalition, include audiotapes, books, textbooks, booklets/pamphlets, periodicals, posters, simulations/games, software/xcompact disks, student workbooks, lesson plans, teaching guides, videos, and Web site links. Jump$tart maintains an online database of national training programs available to consumers and educators. The materials available from the Jump$tart clearinghouse help educators and students with financial literacy programs. The materials can also assist adults to develop financial literacy—an important point, since financial matters change throughout one's life. Materials are organized by topic: income, money management, saving and investing, and the use of credit.
What income is to be managed? This question is a first step in wise management of financial resources. All consumers must manage their finances, but incomes vary. "Stretching" income to meet needs and wants is a part of financial management; knowing how to develop goals for spending, based on a realistic understanding of income, is a basic part of financial literacy.
Money management is the process of planning how to get the most from money—how to use money to meet needs and wants. Budgeting, either by a formal or informal plan, is a first step in deciding what needs and wants must be met and what resources are available. Money management includes plans for saving and investing, not just spending. Too often consumers spend all of their income, which means no money is left for saving.
SAVING AND INVESTING
Consumers must set goals for saving and investing, because their choices of vehicles for saving and investing depend on those goals. Saving, contrasted to investing, may be thought of as safeguarding money for future use. Saving may not provide a return on money. Investing, however, may be defined as putting money to use in order to earn a return. Providing for the future can mean short-term savings and long-term investments. If a goal is to provide retirement income, a consumer should consider long-term investment. Buying a new small appliance, on the other hand, may require only short-term saving.
Income, money management, saving and investing, and the use of credit require consumer planning and decision-making skills. Underlying all aspects of financial literacy is the knowledge and skills for wise use of all financial resources a consumer may accumulate over a lifetime.
USE OF CREDIT
Knowledge about credit is a major part of financial literacy. Consumers use credit to buy durable and nondurable goods, large and small. Credit provides a convenient way to "buy now, pay later." Buying on credit enables a consumer to build a credit rating, a necessity for mortgages and loans. All consumers should be aware of the ways in which they can use credit as a convenient way to purchase goods and services, but they should also know the costs of credit and how to avoid the pitfalls of unwise use of credit.
SOME CONSEQUENCES OF FINANCIAL LITERACY
In 2003 and in 2004, Bankrate conducted financial literacy surveys of 1,000 Americans about what they know about and how they act upon twelve concepts basic to financial well-being. The 2004 survey showed that Americans were getting better at knowing what they need to do to achieve financial well-being, but they did not always act on their knowledge.
Bankruptcy is one of the severe consequences of a lack of financial literacy. In reaction to the number of bankruptcies declared after the Bankruptcy Reform Act of 1978, in 2005 the U.S. government tightened bankruptcy laws.
Financial literacy is a long-term solution to consumer problems with finances. In the Bankrate survey, individuals who were "financially literate" earned more, paid less for loans, used credit cards more wisely, had savings for emergencies, had prepared a will, lived by a monthly budget, and were more constant and careful shoppers for financial services. "Financially literate consumers" accepted the key concepts that:
- Money management is a long-term responsibility
- Consumers should be savers instead of spenders and must live within a budget
- Comparison shopping pays off
- Smart consumers pay bills on time, read their bank statements regularly, and shop for the best rates on credit
- Buying on a whim and snap decisions about buying must be avoided
- Individuals must regularly save and invest for retirement
These concepts are part of the foundation for financial literacy.
Bankrate.com. (2004, April 6). Bankrate survey: Americans nearly flunk financial literacy. Retrieved December 1, 2005, from http://www.bankrate.com/brm/news/financial-literacy2004/grade-home.asp
Jump$tart Coalition for Personal Financial Literacy. http://www.jumpstart.org
Mandell, Lewis (2005). Financial literacy—Does it matter? Washington, DC: Jump$tart Coalition for Personal Financial Literacy.
National Endowment for Financial Education. (2005). Education programs. Retrieved December 1, 2005, from http://www.nefe.org/pages/educationalprograms.html
U.S. Courts. (2005). Bankruptcy statistics. Retrieved December 1, 2005, from http://www.uscourts.gov/bnkrpctystats/bankruptcystats.htm
Betty J. Brown