Why Young People Need a Crash Course in Financial Literacy
 

Is America failing finance? It appears many of us are...and very few others are anywhere near the Honor Roll. A 2013 survey conducted by the National Foundation for Credit Counseling found that 40 percent of Americans would give themselves a grade of C, D, or F when rating their personal finance knowledge. The same survey found that 39 percent of adults in the United States report that they have no savings.

In the aftermath of the financial crisis that left many Americans reeling, the reality is still bleak: Instead of living the American Dream, many are living paycheck to paycheck. John Vento says all of this is why the need for personal finance education has never been greater.

Vento fears that a lack of knowledge persists, and worse yet, that it is being passed down to the next generation.

"Many young people look to their parents for guidance on money issues," he notes. "Unfortunately, many parents lack a strong understanding of financial matters, and as a result, they miss opportunities for saving, lending, and basic financial services. We need to break this cycle-and one way to do so is to make financial literacy an educational focus in high schools, colleges, and universities."

"I truly believe the most dangerous threat to our nation and its citizens is a lack of financial literacy," says Vento. "Americans still struggle to make wise financial decisions because these concepts are not a focus in our education system. So when we reach adulthood, it's either sink or swim-and too often we make bad financial decisions and suffer the consequences later in life.

"Our educational system devotes a considerable amount of attention to teaching students about the dangers of drinking and driving, using drugs, and practicing safe sex," he adds. "But, unfortunately, the topic of financial literacy is largely ignored. Throughout our lives, we will encounter many questions and problems relating to money, but every one of them will fall, in some way, under one or more of the 10 financial literacy lessons."

Lesson 1: Live within your means. "Living within your means" is living on less than your take-home salary and any other resources you receive, such as income from an annuity or a trust. Living within your means does not mean existing from paycheck to paycheck. Living within your means does not mean living on credit or on loans. Living within your means does not mean turning to parents or friends to pay the tab when you cannot quite meet the rent or need to buy a new computer. It means not only figuring out how to pay for your needs and wants, but budgeting your income so that you still have a little money left over.

"The single most important step any individual must take to become financially independent is to commit to living within his or her means," says Vento. "In addition to living within your means, if you are ever going to get to Point X, you must also save money. Therefore, 'living within your means' includes not only such necessities as shelter, food, utilities, and clothing, but also payment into your personal savings. Ideally, that payment should be 10 percent or more of your gross pay."

Lesson 2: Understand taxes. The average American family pays more than one-third of its income in federal, state, and local income taxes-and even more in property taxes, excise taxes, sales taxes, and other hidden taxes, such as taxes on cigarettes, liquor, and certain luxuries. In other words, for just about everyone, taxes are our biggest personal expense, by far.

Lesson 3: Determine your financial position. Determining your financial position does not mean simply knowing your annual salary or identifying how much you take home in every paycheck-although that is definitely part of it.

Lesson 4: Manage debt. For many people, debt is a scary concept, although it need not be. The fact is there is good debt and there is bad debt. Understanding the difference between bad debt and good debt is imperative to becoming financially literate and financially independent. Basically, good debt is money that people borrow for purchases and situations that, in the long term, will help them amass wealth and ultimately reach Point X. Some examples of good debt include student loans, business loans, certain investment asset loans, and some personal-use asset loans (such as an affordable home mortgage).

Lesson 5: Insure your health and life. Even a sound, carefully planned investment strategy can fall apart if you have not prepared properly for unforeseen problems concerning health and life. If you or a member of your family is hit with a prolonged illness, a severe injury, a disability, or death (especially of the primary wage earner), the planning and investing you have so carefully developed can quickly disintegrate.

TAKE ACTION:

Plan ways to increase your Financial Literacy and help a young person you know learn an important lesson about money.