04/07/2023
Financial Literacy Begins at Home
It is never too early to start teaching—or learning—good money habits.
The thought comes to mind because April is Financial Literacy Month. Congress passed a resolution in 2003 creating the distinction. President Obama later took it a step further and declared April as National Financial Capability Month.
Studies show that learning about finances in school helps to develop good spending, saving, and investment habits as an adult. For example, students who study personal finance at a young age are more likely to leverage lower-cost loans and grants as a means to pay for college. As a result, they are less likely to rely on higher-costing private loans or credit cards with exorbitant interest rates for these expenses, according to a study by Christiana Stoddard and Carly Urban for the National Endowment for Financial Education.
Learning these lessons leads to better credit scores and lower debt rates as young adults. According to the Brookings Institution, teenage financial literacy led to greater asset accumulation and net worth by the age of 25.
Admittedly, financial decisions can be complicated. For example, budgeting to purchase a home and factoring in the associated costs of borrowing and maintenance and insurance and various other things creates a mathematical equation few can do in their head.
However, learning how to make good financial decisions is possible, no matter your age.
Let’s start with unlearning bad myths, such as carrying a credit card balance each month will help build a credit score. No, it won’t. Credit cards are among the most expensive ways to borrow money, which is why they should be used as a convenience or to manage cash flow and paid off each month.
Next, let’s build good budgeting habits. For some people, it can help to write down expenses so you can “see” where your money goes. Prioritize expenses in order of importance, such as rent, food, paying debt, saving, and an emergency fund. Some people also use the “envelope method.” Once your fixed costs are paid, such as rent and debt, split your money into envelopes according to how much you want to spend in each category. When the envelope is empty, your discretionary spend on that category is finished.
Finally, consider more involved strategies, such as paying yourself first. Go back to the envelopes, and after fixed costs, your first discretionary spend is paying yourself. This builds discipline and will help to ensure an unexpected cost, such as a car repair, is manageable rather than a crisis.
Learning wise financial habits now, and passing them along to your children, will pay rewards for a lifetime.
