Marc A. Hebert's Money Sense: Financial literacy important as money matters grow more complexBy MARC A. HEBERT
April 13. 2018 9:06PM
Along with showers, April brings us National Financial Literacy Month. We all know that literacy is the ability to read and write, but what exactly does financial literacy mean?
According to Wikipedia, "financial literacy is the possession of the set of skills and knowledge that allows an individual to make informed and effective decisions with all of their financial resources." Essentially, it is an understanding of how money works.
Having defined financial literacy, what makes it so important that an entire month has been devoted to it? Consider this: According to 2017 Financial Literacy Around the World, a Standard and Poor's Rating Services Survey, the "U.S. doesn't even make the list of the top ten most financially literate countries - it is 14th. When asked five questions about risk diversification, inflation, interest, and compound interest, only 57% of Americans received a passing score. Denmark, Norway, and Sweden each received a score of 71%, followed by Israel and Canada, which each received a score of 68%. Other countries that earned high grades for financial literacy include the U.K., the Netherlands, Germany, Australia, and Finland. Other countries ahead of the U.S. were New Zealand, Singapore, and the Czech Republic. The U.S. was tied with Switzerland."
Scores like these matter. Understanding basic finances is a must in order to make good financial decisions, especially as money matters are becoming increasingly complex. One example is in the area of pensions and retirement benefits. In the past, companies sponsored pension plans, which meant that the participant was not involved with the decision-making process. The company funded the plan, made the investment decisions, and paid the participant a certain sum for life. Pensions are now rare. More workers are offered the ability to participate in 401(k) plans. The choice of investments and contribution levels is now theirs to make instead of the company doing it for them.
We are also living longer, which impacts retirement plan decisions. To make matters more complicated, the costs of health care have outpaced inflation, making retirement savings in our 401(k)s even more urgent.
The government may not be there to support us either. In the past, Social Security was factored into the retirement income equation. Now there is a question of how it will survive and actually pay benefits.
Retirement planning is just one area of personal finance. Paying for college and saving for a house are other examples. The basics are at play - budgeting and handling credit and debt are at the top of the list.
The answers to the financial literacy question are evolving as well. Employers have started to offer more educational resources about the retirement and health plans they offer. Employers benefit as additional education might mitigate the link between financial stress and low productivity.
Help is also coming in schools. Many are offering personal finance courses that aim to teach students basic money skills. The purpose is to give students important life skills and offer courses with the same rigor and intensity applied to other disciplines. One organization that helps New Hampshire students is the NH Jump $tart Coalition, which improves financial literacy by providing advocacy, research, activities and resources for students at the pre-kindergarten level through college. For more information, check out www.nhjumpstart.org.
The information is out there. Tackle one topic at a time. Resources to check out include the Treasury Department's Financial Literacy and Education Commission website and MyMoney.gov. Information also can be found in newspapers and magazines. Adult education centers sometimes have courses, and young learners might also find personal finance podcasts helpful. Books on personal finance are plentiful, and information on the internet abounds. Just keep asking and achieving financial literacy is possible.
Marc A. Hebert, M.S., CFP, is a senior member and president of the wealth management and financial planning firm The Harbor Group of Bedford. Email questions to Marc at email@example.com. Your question and his response might appear in a future column.