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Why is Personal Finance Important?Bill Field2024-03-26T22:08:41+00:00
Why is Personal Finance Important?
Lack of awareness about how to manage money leads people to ask, “Why is personal finance important?” The reasons are too numerous to fully detail here. This question cuts to the core of what it takes to lead a secure, fulfilling life. Personal financial skills are important because without them, people usually spend their entire lives slaving for money, always in debt, never able to catch up and get ahead. This is bad enough, but the issue goes far deeper. When children watch their parents slaving for money, always owing more than they get from their hard work, the children usually repeat that behavior as adults. Why is personal finance important? Because without it, generations of people will most likely continue to live unfulfilling lives as slaves to money.”
Personal Financial Knowledge is Critically Important
Why is personal finance important? That is a common question that goes through the minds of individuals, especially recent graduates who have not experienced firsthand the consequences of financial illiteracy. To answer the question, “Why is personal finance important”, many educators and policy makers are able to cite academic studies along with reports produced by financial education foundations. These documents show that personal finance training leads to an increased knowledge of financial products, more effective budgeting, and more dollars being sent into retirement accounts to build a financially secure future. Sadly, the latest personal finance test data shows that most lack the basic money skills needed in the real world.
Personal Finance Education Teaches Important Life Skills
The states of Georgia, Idaho and Texas began mandating financial education starting in 2000. The improvement in credit scores after going through the program for each of these states is compared against the improvement in credit scores to a nearby state without state-mandated financial education. The credit scores are recorded on a 280-850 scale. For students participating in the programs’ 3rd year of implementation, credit scores increased 10.89 in Georgia, 16.19 in Idaho, and 31.71 in Texas (Financial Industry Regulatory Authority).
http:// www.finra.org /sites/default/files/investoreducationfoundation.pdf
The Federal Deposit Corporation (FDIC) analyzed the intermediate-term impact of a financial literacy program on consumers’ behavior and confidence 6 – 12 months after the end of the program. They found that consumers were more likely to have a checking account, budget wisely, save for retirement, and more. After the program, 78% of respondents reported they had a checking account, up from 12% before they had undergone the program. Another 69% reported their level of savings had increased after taking the program, with only 3% reporting that it had declined (Federal Deposit Insurance Corporation). https://www.fdic.gov/consumers/consumer/moneysmart/pubs/ms070424.pdf
Students who underwent the Moneytalks educational curriculum demonstrated positive behavioral changes. A ‘saving scale’ constructed by the author was the composite of a series of questions asking students about their savings habits. The mean value of the savings scale rose from a mean of 24.28 to 26,78, which was deemed statistically significant. Furthermore, statistically significant differences were noted for the proportion of kids who would compare price and buy on sale (University of California Division of Agriculture and Natural Resources). http://ucanr.edu/sites/consumereconomics/files/136495.pdf
The Importance of Learning Personal Finance Early in Life
An additional year of schooling increases the probability of having an investment income by 4.4% for whites and 1.7% for blacks (Harvard Business School). http://www.people.hbs.edu/scole/webfiles/cole-shastry-smarts%20HBS%20working%20paper.pdf
A statistically significant association was determined between negative financial habits, such as gambling among Australian youth, and the influence of peers and parents (Science Direct). https://www.sciencedirect.com/science/article/pii/S0140197103000137?via%3Dihub
“Without financial literacy, divorce rates soar, families rupture, and women stay with abusive men for financial security. A lack of jobs contributes to riots and illegal activity. Name any situation and it goes back to money. We need to focus on poverty eradication.” – John Hope Bryant, CEO of Operation HOPE
“Academic qualifications are important and so is financial education. They’re both important and schools are forgetting one of them.” – Robert Kiyosaki, founder of the Rich Dad Company
“Financial literacy is an issue that should command our attention because many Americans are not adequately organizing finances for their education, healthcare and retirement.” – Ron Lewis, former United States Representative
Lack of Personal Finance Awareness
58% of 18-26 year-olds set aside a portion of their income as savings (Bank of America). https://about.bankofamerica.com/assets/pdf/BOA_BMH_2016-REPORT-v5.pdf
More than 20% of renters aged 18-24 overspent their income by $100 per month (Time). http://business.time.com/2013/01/17/todays-young-adults-will-never-pay-off-their-credit-card-debts/
Two in five U.S. adults report keeping a budget and tracking their spending (National Foundation for Credit Counseling). https://www.nfcc.org/wp-content/uploads/2017/03/NFCC_BECU_2017-FLS_datasheet-with-key-findings.pdf
The average debt of students when they graduated from college rose from $18,550 (in 2004) to $28,950 (in 2014), an increase of 56 percent (Institute for College Access and Success). https://ticas.org/sites/default/files/pub_files/student_debt_and_the_class_of_2014_nr_0.pdf
46% of Americans say they have set aside 3 months’ worth of living expenses in the case of an emergency (US Financial Capability). http://www.usfinancialcapability.org/downloads/NFCS_2015_Report_Natl_Findings.pdf
Effective Personal Finance Education Programs
In order to increase the financial well-being of individuals within our communities, financial literacy is a necessity. It is the belief of the NFEC that personal finance should be required in high schools and elementary to help mold positive financial behaviors and help students work toward self-sufficiency. Those pleasantly surprised at the myriad of benefits that arise from being financially literate must also keep in mind that such knowledge is much easier to acquire through a reputable education program than other means. While good in intention, curriculum made by individuals without significant financial expertise will often glance over important detail and leave learners without much valuable knowledge.
The State Bank of Pakistan states that to help develop and disseminate content, it is important to partner with local and international entities and leverage their specialties (St. Benedict’s Preparatory School). http://www.sbp.org.pk
The Financial Consumer Agency of Canada (FCAC) confirms sharing best practices, lessons from failures, and other helpful advice will promote cooperation between financial literacy programs and enable the adequate coverage of the deluge of financial literacy skills (Government of Canada). https://www.canada.ca
Abundant Evidence About Why Personal Finance is Important
Still, some are not convinced of the benefits of teaching personal finance and repeat the question: why is personal finance important? Taking a look at the financial outcomes of an individual poorly versed in personal finance topics, it is easy to see that a lack of such knowledge leads to increased stress over financial matters, reduced savings towards retirement and poor choices overall that hamper individuals from attaining their financial goals. After reading into the academic literature and the abundance of evidence available, people will be able to answer the question of why is personal finance important, for themselves.
