What is financial literacy? It is understanding the basic concepts used in financial decision-making. It has also been described, by the Organisation for Economic Co-operation and Development, as ‘an essential life skill’ which ‘can make a crucial difference in the lives of people, in their opportunities, in their success. It is a foundation stone for wellbeing, for entrepreneurship, for social mobility, for inclusive growth.’
A number of sources have documented the waning financial literacy of both millennials (see Forbes) and the aging baby boomer population (see this study from the American Society of Aging). In response to these generational trends, Annamaria Lusardi, of the Global Financial Literacy Excellence Centre (GFLEC), and Olivia Mitchell, of the Wharton School of the University of Pennsylvania, developed three simple questions to measure financial literacy. These questions have been cited in numerous publications and studies, from The Atlantic to FINRA. And they show that only 30% of adults can answer them correctly.
So how can you make sure you are financially literate and not part of the ever-widening 70%? Here are a few tips to follow:
- Talk to other people (friends or family). Especially if they are successful. Try to find out their attitudes and motivations. Making a start is the most important step.
- Don’t try to learn everything at once. Just choose one topic that’s important to you. Like buying a house or planning your retirement.
- Read widely. Don’t rely on one self-help book. The more varied articles or books you read, the more you will learn.
- Prioritize what’s important to you, make a plan and stick to it. Your financial plan should be about what you want in life. Now you can start to use you knowledge.
According to Lusardi and Mitchell, financially savvy people are more likely to plan, save, invest and accumulate wealth. They’re less likely to have credit card debt, and when they borrow, they manage their loans well. They refinance their mortgages when it makes sense to do so, tend not to borrow against their 401(k) plans, and are less likely to use high-cost borrowing methods.
All of this means you’ll have a little cash to take investing one step further, on crowdfunding platforms like Small Change.