The Importance of Financial Literacy for Students

Defining Financial Literacy

Financial literacy is “the ability to use knowledge and skills to make effective and informed money management decisions,” according to Investopedia. Math is certainly part of financial literacy, but so is the ability to understand one’s credit rating, to avoid and pay down debt, and to understand how financial transactions and products work in order to make informed financial decisions.

How It Can Be Taught                                     

It’s important to take an active hand in preparing students for the financial world. Financial literacy can be taught to students as part of other subjects like math or history, or on its own, such as with modules like those created by the High School Financial Planning Program. Such education needn’t focus on complex economics topics. Rather, it should focus on topics that are easy for students to learn and that have immediate practical application. There  are  five recommendations for this :

·         Start financial literacy as early as kindergarten, and require a stand-alone personal finance course for high school students.

·         Include personal finance questions on standardized tests.

·         Provide students with hands-on learning opportunities, so they can use their finance skills.

·         Train teachers in personal finance and offer them incentives for teaching it in their classes.

·         Give parents the tools they need to discuss financial topics at home.

Why Financial Literacy Matters

Teaching students personal financial literacy early and throughout their educational career carries tangible benefits into their adult lives. “What if when young people started their first job, they already [knew to] put money into their retirement account?”  If young people could do this at age 20 rather than age 50, it would make an enormous difference. These skills can be integrated into existing lessons, such as by teaching about the financial implications of the Great Depression in history class.

Personal finance is difficult to navigate on one’s own, and the complexity of the financial system exploded over the past few decades.  Financial literacy can help students discern these risks for themselves as they enter the adult world and help them avoid risks, too. Young people are increasingly unable to manage their financial health effectively. People in age range of 18-24 are also paying off their debt at a dramatically lower rate than their parents did, meaning that many of these young people will never pay off their credit card debt. Consistent training in basic financial literacy could help alleviate much of this problem.

Benefits of Financial Literacy

Students who learn to manage their finances early and often become adults who are better equipped to live independently. By teaching kids to make good financial decisions, they learn to pay down debt or avoid it altogether. It has been estimated that  42 percent of young renters report rent as their top expense. Overpaying on rent means less money for bills, food, transportation and other expenses, which increases the likelihood of spending with credit cards. These credit cards then become another monthly expense, contributing to the cycle of debt and preventing the young person from planning for the future by investing or saving money.

Paying down debt and maintaining a good debt-to-income ratio contribute to a young person’s credit score. A young person can then use a good credit score to get better mortgage rates, more attractive financing options on cars and other important financial benefits.

Students who learn to navigate the world of debt and credit will tend to have more money for savings, which can help pay for large expenses without relying on credit, and they can set aside money for retirement accounts. In order to retire, one must be able to set aside enough money to meet annual expenses without an income . A young person struggling with credit card debt will have a hard time accumulating that kind of money for retirement. If teaching kids financial literacy in high school can have this kind of effect after only a short period of time, imagine the effect that a thorough financial education nationwide could have on future generations.

                                                                                    

  By Ruchi Madan