The news is in, and it’s scary: Americans are falling behind the rest of the world when it comes to financial literacy. A recent study of 29,000 teens across 18 industrialized countries found that financial literacy rates in the United States fell right in the middle of the spectrum, just under Latvia and Poland and right above France and Russia. The most financially literate teens were in Shanghai.
But it’s not just the younger generation that’s lacking in financial know-how; research indicates that only
40 percent of U.S. adults keep a budget, and a third of Americans can’t answer three simple financial questions on topics such as how interest works, how inflation works, and the difference between stocks and funds.
Let’s combat this lack of financial literacy. Here are eight basic money lessons that everyone should know.
1. The earlier you start saving, the better off you’ll be when it’s time to retire, thanks to the “magic” of compounding interest. Saving your money in an interest-bearing account means that it compounds itself over time.
2. If you spend more than you earn, you’ll always be in debt. Simple rule: You must bring in more than you shell out in order to come out ahead. Living not only within, but also below your means is the key to financial security for the long term.
3. There is no reward without risk. If you keep your money safe in a low-interest account, such as a
bank account, you’re passing up on the the chance for higher returns. This may be fine for the short term, but over the long term, riskier investments — such as a highly diversified portfolio (see #4) — have a higher potential to produce significant rewards.
4. Diversification is key. Remember that old saying, “Don’t put all your eggs in one basket”? That really applies to your investments. True diversification is broad and deep, and it helps you weather the inevitable ups and downs of the market. Your financial advisor can help you ensure that your portfolio is truly diversified.
5. Treat managing your money as a lifestyle choice. Decide early on that you will control your money, and make it a habit. Create a balanced budget and stick to it, revisiting it when necessary.
6. Prioritize your spending. When it comes to spending money, what matters most? Is it saving for a new car each year, taking a vacation, or living in a nicer (more expensive) area? Does it make you happier to eat out or to renovate your kitchen? Figure out what is most fulfilling, and then prioritize. Differentiating between needs and wants can help you stay within your budget and still live comfortably.
7. Save smart. Create a financial plan that includes your long-term goals; then, adjust your savings
to meet that plan. Craft your investment and savings activities around your goals, so you can avoid surprises later.
8. Avoid debt. While some debts, such as student loans, mortgages and car loans, are almost unavoidable and help you get where you want to be in life, some types of debt — such as credit card debt — should be avoided if at all possible.
These basic tips are a start, but the financial industry is constantly changing. It’s essential to continue educating yourself and improving your financial literacy in order to make truly well-informed decisions.