More than 50% of respondents failed a short, three-question quiz on basic financial concepts, the TIAA-CREF Institute reported. Respondents, aged 50 and over, lacked basic financial knowledge about interest rates and inflation. What’s worse, young people are not doing better. A study by the Financial Industry Regulatory Authority (FINRA) revealed that today’s younger generations are unlikely to be better at finance than their elders.
This is unfortunate but not surprising, given that only four states require high school students to take a personal finance course.
This situation is dire, as a lack of basic financial knowledge can spell serious problems down the road. People who don’t have the basics of personal finance at their fingertips are less likely to increase wealth, save money, or invest.
In response, the US Treasury now aims to simplify the process by introducing core competencies in what has been dubbed the “financial literacy pyramid.” There are five elements in the Treasury “Financial Literacy Core Competencies”. This is what you need to know:
1. Income (what you earn)
- Gross salary versus net salary. This is a very basic concept that should make it easy for anyone to analyze their payroll. The “gross salary” refers to the total salary of the employee before deduction of taxes (as well as other expenses). The remaining amount (this is the amount you actually receive) is your “net pay.”
- Benefits and taxes. It is important for employees to go beyond a cursory understanding of the benefits of their workplace. Some companies offer multiple options for retirement funds, for example. Similarly, employees must understand the calculation of income tax and how it affects their paycheck.
- Education. An employee’s income can be increased through education, an often-overlooked detail that could really improve any worker’s finances.
2. Expenses (what you spend)
- Needs versus wants. One of the most repeated sayings when it comes to finances urges people to live within their means. Simply put, this means spending less than you earn. The easiest way to do this is to eliminate unnecessary and impulsive purchases. Differentiating needs from frivolous shopping can avoid the unfortunate situation of living from one salary to another.
- Consequences. Spending unnecessarily can have an impact beyond your personal life. Excessive materialism is a major concern that needs to be addressed.
3. Savings (what you save)
- Compound interest. The difference between saving money in a bank account and saving money in a jar is compound interest. The principal amount grows with the interest. More importantly, the principal amount More accrued interest will continue to grow due to compound interest. That’s why it’s a good idea to save consistently over a long period of time.
- Savings and investments. People must learn to differentiate between savings and investments. Diversifying your portfolio is crucial: Better to have a balance between safe savings accounts (despite low returns) and riskier investments (with higher returns) like bonds, stocks, and mutual funds.
- Planning. Part of the “savings” area of core competencies focuses on planning for expensive items and long-term goals. This can mean paying for a house or saving for your retirement fund.
4. Credit and loans (what you borrow)
- Consequences of borrowing. Using a credit card is not free. People must learn how to choose the right loan or credit card by looking at terms such as interest rates. Loans are not to be taken lightly.
- Credit scores. Not paying your bills or loans on time can have a serious impact on your credit score. This means difficulty obtaining loans in the future or having to pay higher premiums due to bad credit.
- Debt bonds. Learn how to manage current and future expenses to avoid an overdraft. Possible debt repayment scenarios should also be discussed.
- Renting versus owning a home. Getting a home loan is a big responsibility. Learn how to calculate expenses and the best time to apply for a home loan.
5. Protection (protect yourself)
- Identity theft and scams. Learn how to protect yourself from identity thieves.
- Credit report. Getting a credit report (and knowing how to read it) is important. You need to keep track of the data it contains and ensure that it is not the subject of identity theft.
- Sure. Study the different types of insurance and the best coverage you may need.
- Emergency fund. One of the most important things any individual should have is an emergency fund. This should be able to cover at least six months of monthly expenses to protect people from sudden expenses like health problems and more.
If you are interested in being more “financial savvy”, there are several college courses that can help you become a much more “financial savvy” person.
