Basic Financial Education Competencies
More than 50% of those surveyed failed a short three-question quiz on financial basics, the TIAA-CREF Institute reported. Respondents, age 50 and older, lacked basic financial knowledge about interest rates and inflation. What’s worse, the youngsters aren’t doing any better. A study by the Financial Industry Regulatory Authority (FINRA) revealed that today’s younger generations are unlikely to be better at finance than their elders.
This is unfortunate but not surprising, given that only four states require high school students to take a personal finance course.
This situation is serious, since the lack of basic financial education can mean serious problems in the future. People who don’t have the basics of personal finance at their fingertips are less likely to increase their wealth, save money, or invest.
In response, the US Treasury now aims to streamline the process by introducing core competencies into what has been called the “financial education pyramid.” There are five items in Treasury’s “Financial Literacy Core Competencies.” This is what you need to know:
1. Income (what you earn)
- Gross salary versus net salary. This is a very basic concept that should make it much easier for anyone to analyze their pay stubs. “Gross pay” refers to the employee’s total salary before taxes (as well as other expenses) are deducted. The amount left over (this is the amount you actually receive) is your “net payment.”
- Benefits and taxes. It’s important for employees to go beyond the superficial understanding of the benefits of their workplace. Some companies offer multiple options for retirement funds, for example. Similarly, employees need to understand the calculation of income tax and how it affects their paycheck.
- Education. An employee’s income can be increased through education, an often overlooked detail that could really improve any worker’s finances.
2. Expenses (what you spend)
- Needs versus wants. One of the most repeated sayings when it comes to finances urges people to live within their means. Simply put, this means spending less than you earn. The easiest way to do this is to eliminate unnecessary and impulse purchases. Differentiating necessities from frivolous purchases can avoid the unfortunate situation of living paycheck to paycheck.
- Impact. Spending unnecessarily can have its impact beyond your personal life. Excessive materialism is a major concern that needs to be addressed.
3. Savings (what you save)
- Compound interest. The difference between saving money in a bank account and putting it in a jar is compound interest. The principal amount grows with interest. More importantly, the principal amount Plus the interest earned will continue to grow due to compound interest. This is why it’s a good idea to save consistently over a long period of time.
- Savings and investments. People must learn to differentiate between savings and investments. Portfolio diversification is crucial: It’s best to have a balance of safe savings accounts (despite low returns) and riskier investments (with higher returns) like bonds, stocks, and mutual funds.
- Calendar. Part of the “savings” area of the core competencies focuses on planning big items and long-term goals. This may mean paying for a house or saving for your retirement fund.
4. Credit and loans (what you borrow)
- Consequences of indebtedness. Using a credit card is not free. People should learn to choose the right loan or credit card by looking at terms, such as interest rates. Loans are not to be taken lightly.
- Credit scores. Not paying your bills or loans on time can have a serious impact on your credit score. This means difficulty getting loans in the future or having to pay higher premiums due to bad credit.
- Debt bonds. Learn how to manage current and future expenses to avoid being overdrawn. Possible debt payment scenarios should also be discussed.
- Renting versus owning a home. Getting a home loan is a serious responsibility. Learn how to calculate expenses and the best time to apply for a mortgage loan.
5. Protection (protect yourself)
- Identity theft and scams. Learn how to protect yourself from identity thieves.
- Credit report. It’s important to get a credit report (and know how to read it). You need to keep track of the data it contains and make sure you’re not the target of identity theft.
- Sure. Study the different types of insurance and the best coverage you may need.
- Emergency funds. One of the most important things any individual should have is an emergency fund. This should be able to cover at least six months of monthly expenses to protect people from sudden expenses like health issues and more.
If you’re interested in becoming more “financially smart,” there are several college courses that can help you become a much more “financially smart” person.
