The Financial Literacy Gap
Did you know, according to JP Morgan, only 1 out of 3 families have an emergency fund of at least a few months’ expenses? Then, according to an article from CNN money, most Americans cannot afford a $400+ emergency without going into debt. There must be some cause behind these numbers, and the solution is called financial literacy.
Financial literacy is a loose definition thrown around in the personal finance world, but simply put, you understand how to spend your money wisely. A major key to financial literacy is having an emergency fund of 6-12 months for expenses on rainy days. If you have a $400 emergency such as a car repair and can't afford it with money in the bank, putting that on a credit card will send you down a rabbit hole of debt, which would be hard to come out of or will cost you a lot more than $400 since the average credit card interest rate can be over 20% APR (annual percentage rate).
When people do not understand the basic concepts of personal finance, economists and other professionals call this the personal financial literacy gap. This gap can be dangerous to our financial health since one emergency or sudden event can weaken it. People who have many financial issues may end up living paycheck to paycheck like 78% of adults in America and are one step away from poverty. Ending up in poverty means you will have to rely on government support such as food stamps, which can cost taxpayers millions if a sudden national crisis occurs such as a pandemic and many people living paycheck to paycheck suddenly lose their jobs. Here, having financial literacy such as having an emergency fund and increasing income and/or cutting back on spending to avoid living paycheck to paycheck may have saved them from needed government support and ending up in poverty.
One issue leading to this lack of financial awareness among adults is the lack of states requiring personal finance classes in high school. Teaching students in high school how to avoid living paycheck to paycheck and understand the fundamentals of personal finance can inspire students and give them confidence in their future. 53% of adults are financially anxious and teaching teens these basic tips to understand their finances, which will help reduce the chances of financial anxiety. But being financially anxious is still common among everyone.
What's the solution to this crisis? There are many solutions and not all solutions are one size fits all. The best thing adults can do is find classes teaching the fundamentals of personal finance may help them get ahold of their financial lives and understand taxes, retirement accounts, how to avoid bad debt, etc. Then, all U.S states and territories should require a financial literacy class for at least one semester in high school to teach the following fundamentals such as budgeting, savings, retirement, investing, taxes. By the time they become adults, they will already have financial skills to help them in their journeys. Until this becomes a reality, a great way to improve your financial literacy is to watch channels such as PBS digital studios Two Cents YouTube channel to learn some basics, and explore YouTube to find other creators trying to help the financially illiterate one step at a time.
And to help financial literacy classes be required in high schools, reach out to your elected officials at the state and federal level and ask them about their thoughts and opinions for financial literacy for students. We are all young adults in high school and would really benefit to understand how to survive financially in the volatile world for finance. Hopefully, Gen Z can become the first generation with the best financial literacy. Have a great day and don’t forget to be a Teen Trillionaire.
Written by Ian Cohen