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Money Management 101: Why Financial Literacy for Students is Important

Money Management 101: Why Financial Literacy for Students is Important

Do you remember filing your taxes for the first time?

We're sure it was a lovely experience with nothing but wholesome feelings attached. No? Well, join the club.

As it were, 68% of Americans make —at least— one major financial mistake before the age of 30. No wonder 30% of Americans have bad credit. They either never recover, or it takes them a very long time to return to a semi-healthy financial status.

Alas, imagine a world where you learned all about personal finance before you graduated high-school. It would have saved you —literally— thousands of dollars in interest fees alone.

That's why it's time to integrate financial literacy for students in our school systems.

Keep on reading to learn all about what exactly is financial literacy. In addition, we'll cover why it's so important, and how it can address the financial issues students start facing before they decimate their non-existent credit score.

What Is Financial Literacy?

In short, financial literacy is the equivalent of becoming literate in the manner of personal finance. This entails a thorough understanding of the basics of money management.

Examples of money management essentials would be budgeting, saving, debt, and investing. Having a concrete knowledge of how all of these factors work together to create a financial profile that will either serve you well (or ruin your life).

Therefore, it's a crucial step to building strong money habits early on and avoid many financial mistakes.

Financial Literacy for Students: How to Become Financially Literate

There's an actual list of five key principles of financial literacy, courtesy of the Federal Financial Literacy and Education Commission, established by Congress in 2003.

According to the commission, students need to understand each of these principles:

  1. Income: how much you earn, how income is calculated, how benefits and tax withholdings work
  2. Saving and investing: how to save and invest, how to create an emergency fund, how to save for short and long-term goals.
  3. Money protection: how insurance works, how to detect and avoid fraud
  4. Budgeting: how to budget and how to manage your spending
  5. Debt and credit: how to borrow money with fair interest rates, and how to get (maintain) good credit

Why Is Financial Literacy Important?

Obviously there is the great advantage of not having a credit report that's metamorphically on fire. Yet, there are other solid benefits to being financially literate. It'll help students manage their money with confidence, as well as limiting their future debt.

Here are a couple of overarching benefits of financial literacy.

Budget and Plan

Nothing can make or break your financing health than a budget (or the lack thereof).

In order for students to pay for their expenses, save or get rid of debt, they need to have a budget in place.

Considering that a budget usually doesn't come with the rain, they'll learn how to create a budget that is tailored to their priorities, lifestyle, and their financial goals.

Once they have a budget, they track their spending and integrate changes to their spending plan.  They'll get to learn about a variety of budgeting methods, like zero-based budgeting, two-account, and others.

Understand and Manage Debt

The core of financial literacy is understanding interest rates, and how they affect your finances.

When students are financially literate, they'll start recognizing whether an interest rate is too high or not. In addition, they'll seek out the lower interest rates available when they compare loan terms.

Furthermore, students will understand the importance of paying off credit card balances (in full) each month to prevent interest charges and high credit utilization rates.

Create an Emergency Fund

Nothing is more crucial than educating students on how life can be unfair sometimes, and that's why you need an emergency fund to help them deal with unexpected costs and expenses.

A financially literate student will know how much to set aside on a regular basis. This will help them create an emergency fund with three to six months' worth of expenses.

Plan for Retirement

Also under the savings umbrella, students will learn how to save for retirement. Of course, it'll be a bit of rough pill to swallow for students who can barely imagine graduating from high school, nevermind entering the workforce.

However, once you phrase it correctly, you'll be astonished at how eager students are at becoming millionaires by the age of 50 just by understanding how a retirement investment works.

Unique Financial Challenges Students Face

You might be thinking that students might be too young to understand the complexity of the tax system, or what a 401K can provide.

Yet, you'll find that students are already facing unique financial challenges that they need to be adequately prepared for.

For instance, students in high school will be making decisions regarding buying a car, moving away from home, and —drumroll, please— college.

These life events can either set them up for financial success or cripple their prospects.

Buying a Car

Or a truck. This is a judgment-free zone.

Regardless of the type of vehicle a student wants to buy, they need to be knowledgable about auto loans, creating a car budget and paying for insurance.

Moving Away From Home

Another reality about the transition to adulthood is moving away from home.

Do they know about the expenses of renting a place, and how to negotiate with landlords? In addition, they need to know how to apply for tenancy and having a living budget that includes paying their own water and electricity bills.

College: The Financial Tightrope

College finance is a whole different ballgame. Having the necessary financial awareness can help your students apply to the right colleges, and understand the costs associated with attending college.

These can range from tuition fees, books, and supplies to lab fees. Having financial guidelines to follow will help them navigate the transition from school to college in a financially healthy manner.

Financial Literacy in Schools

The whole country needs a solid course in financial literacy, there is no doubt about it.

However, if we can provide a well-planned program for our students before they need to make huge financial decisions, then we're taking preventative action instead of reactionary to issues we can't fix.

This is why financial literacy for students is so crucial. Armed with the knowledge and financial tools they need, our students can transition into adulthood without the fear of financial burden hanging around their necks.

Furthermore, there is still so much to provide to our students that's fun and academic in nature. From greenhouse gadgets to creating earthquake boxes, make sure to check out our teaching tools section for creative solutions to add to your classroom.

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