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Why you need to care about financial literacy

April is Financial Literacy Month, and improving financial literacy may be more important than ever. With recent legislative changes to retirement plans, proposed student debt relief in question, and expiring COVID relief measures, it’s crucial for Americans to understand what’s going on with their finances.

What is financial literacy?

Financial literacy is the ability to understand and manage one’s personal finances. It may include topics such as income, debt, interest rates, credit scores, budgeting, saving and investing. To state it more simply, Padgett president Roger Harris puts it this way: “Financial literacy means that you understand your life by the numbers.”

Why does financial literacy matter?

It’s important because it allows individuals to make informed decisions about their money and be more prepared for the future. “Even though our lives may seem simple, sometimes they’re more complicated than we think, and we need to understand it,” Roger says.

CNBC reported that U.S. adults only scored an average 50% out of 28 basic financial questions in 2022. Financial illiteracy can be expensive: a National Financial Educators Council report showed that the lack of financial literacy cost respondents an average of $1,819 last year.

“The consequences for financial illiteracy are often financial as well,” Roger adds. “It’s all money. Financial illiteracy can lead to people making a bad decision because they don’t know what they’re doing, missing opportunities to save. It’s about learning how to understand and manage your finances, so if you don’t have it, you’re probably going to mismanage your funds.”

“There’s a good example of financial illiteracy in the tax world,” Roger continues. “If I ask someone how much tax they paid, someone who got a refund may tell me they paid none. But that’s not accurate—you would have just paid more tax than you owed. People often hand off tax documents without really looking at them. You still paid taxes, and people who get large refunds have, in essence, loaned the government money at zero interest.”

Data also shows that those who are financially literate are more likely to reach financial stability, and are often less vulnerable to scams, fraud and predatory loans. “If you don’t know these things, you’re susceptible to someone telling you what’s wrong or getting bad advice and not knowing how to question it,” Roger says.

How can I be more financially literate?

To become more financially literate, it is important to educate yourself on personal finance topics. “The first step is to try,” Roger says.

Financial education is on the rise, especially among younger generations. Although Gen Z has the lowest rates of financial literacy, they have the highest rates when it comes to taking financial education classes, and have shown motivation to learn. If you are offered a financial education class, that is a great option to get started.

Additionally, it’s important to regularly review your financial statements and track your spending. “Pay attention to the financial documents that are sent to you,” Roger adds. “They’re sent to you for a reason.” Paying bills promptly, setting aside savings, and checking your credit score can also help you have a better understanding of your individual financial situation.

Other ways to improve your financial literacy include reading books, listening to podcasts, researching financial topics online, and consulting a financial professional.

“Ask questions,” Roger encourages. “Ask questions and ask the right people. You can start with the person who sent you the information—why’d they send you that bank statement, that brokerage statement, that tax document? Ask someone who’s really qualified to answer.”

If you need an advisor to help you understand and strengthen your financial situation, Padgett is here to help! Our network of CPAs and EAs are ready to work with you, so contact us today.

We encourage you to contact us with any questions.

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