Financial Literacy is the Key to Protecting Your Finances

Let’s play a quick game of true or false:

Imagine you have $100 in a savings account that earns 2 percent interest a year. After five years, you would have $102. True or false? (It’s false).

Let’s say you have another savings account with an interest rate that earns 1 percent a year while the rate of inflation is 2 percent a year. After a year, the money in your savings account would buy the same amount as it does today. True or false? (It’s false, again).

Are you starting to sweat? You wouldn’t be the only one. Most people struggle with these financial basics according to a slew of studies.

  • Nearly two-thirds of respondents (61 percent) failed to answer more than three out of five questions correctly according to the latest FINRA survey on financial literacy.
  • Americans didn’t perform much better in Standard and Poor’s international study, the results of which show just 57 percent of the country is financially literate.
  • Meanwhile, fewer than half of respondents in a Raddon study passed a financial quiz.

While these surveys produced slightly different results, they all have one thing in common: they show the average American struggles to understand what economists have deemed the “fundamentals” of finances — things like basic numeracy, compounding interest, risk diversification, and inflation.

These concepts help people manage their money

Whether the decision is to take out an installment loan for the first time or how to invest for your retirement, your choice has the potential to impact your finances for a long time. Choose the right option, and you’ll meet your financial goals. Choose the wrong one, and you may struggle to pay back a cash advance or retire on time.

Financial literacy will improve your chances of making the right decisions.

Getting an online installment loan and investing for your future rely on basics like interest rates and inflation. When you understand how these concepts can affect your cash loan or savings, you’ll be in a better position to find the right loan or retirement investment for your needs.

More importantly, you’ll be less likely to lock into a cash advance, stock option, or any other financial contract with rates, terms, and conditions you don’t understand — saving you from charges and other penalties you overlooked.

Education is your number one defence against financial illiteracy

It’s true — people with strong financial skills are better at money management, choosing loans and credit cards, and investing their money. But these people aren’t born with these skills — they learned them by studying the basics. That means anyone can become financially literate, too.

With April being National Financial Literacy Month, now’s the best time to start learning. Don’t worry — you don’t have to hit the books too hard. Brushing up on the basics can be easy when you check in with these resources:

  • gov: This is the official portal for the federal government’s financial literacy and education programs. It’s a convenient and easy place for all ages to explore the basics of budgeting, saving, borrowing, and investing.
  • Call 1-800-FED-INFO: If you don’t have access to the Internet, you can receive the same helpful information from financial representatives operating the government’s phone line. They can direct you towards services and benefits related to financial literacy.
  • Money Smart: Learn money management skills through the Federal Deposit Insurance Corporation’s (FDIC) financial education program. It has a free podcast that goes over banking basics, budgeting, and borrowing.
  • Money as you grow: The Consumer Financial Protection Bureau (CFPB) is a fantastic resource for parents of children of all ages, giving them the tools they need to help encourage financial literacy and smart money management in their kids.

Take some time one evening or weekend to go through these resources to find the best one for your needs. They can help guide you through simple budgeting, saving, and borrowing.

Once you brush up on the basics, you’ll be in a better position not only to manage your money in the day-to-day but also for less common situations. You’ll know what to do if you need money quickly to cover an unexpected repair, and you’ll know how to diversify your investments to reduce your risk in the future.

With greater financial literacy, simple questions like the ones up above won’t produce a thin sheen of flop sweat at your brow. Unlike most of the country, you’ll be able to answer simple questions with confidence.