What is Financial Literacy?
Financial literacy is knowing how to make wise choices about money. Like, paying off your student loans or saving enough so you could retire when you get older. Financial literacy for college students is important because someone who has financial education knows how to manage student debts, savings, and investments. They likely know how to make a budget to ensure their earnings cover their expenses. And, they tend to understand the importance of saving for a rainy day.
Financial literacy may be learned. But, many Americans don’t have the knowledge and skills they need to manage their money. Just 40% of Americans said they would be able to cover an emergency expense of $1,000 without going into debt. And about 3 in 10 adults had no emergency savings, at all.
Sure, you may struggle to save if you don’t earn much, to begin with. But higher earners may lack financial literacy, too. In fact, 1 in 4 families making $150,000 a year or more still live paycheck to paycheck. That points to a need to learn financial literacy skills, like:
- Living within your means
- Money management and paying off debt
- Planning for future goals, like retirement
- Saving for unexpected expenses
Why is Financial Literacy Important for College Students?
Financial literacy is important for college students, so they could start their futures off on the right foot. Over half of those who go to college take on debt. When they graduate school, they may need to balance their loan payments with the expenses of adulthood. Like, rent, car payments, and healthcare.
Twelve years after starting college in 2003–04, 27% of college goers had defaulted on one or more student loan debts. And, even students who don’t borrow loans for college may face financial challenges. College students could avoid financial mistakes by learning the skills to make smarter money decisions.
If you’ve already made some financial choices you regret, it’s not too late. Learning financial literacy now could help you get back on the right track.
Are You Financially Literate?
The National Financial Capability Test typically tests the skills needed to earn, save, and grow your money. You could take the test to check your own financial literacy. Or, simply start with these 10 questions – Do you:
- Understand the ways credit and debit cards are different?
- Know how to make a monthly budget for all your bills and savings goals? (Extra credit if you stick to it!)
- Know how much money you need to cover six months of living expenses?
- Understand the concept of income taxes, and how to pay them?
- Have an emergency fund to cover unexpected expenses?
- If you have debt, do you have a plan to pay it off?
- If you’re a student, do you understand your options for financing college?
- Know what insurance is and how it works? (Think, home, auto, and life insurance.)
- Do you understand how compound interest works?
- Are you familiar with retirement savings options, like 401(k)plans?
If you answered “No” to some or many of these questions, it’s time to brush up on your financial literacy!
How to Build Financial Literacy as a College Student
College may be a great time to start building financial literacy. Especially since only35%of college students say they took a personal finance course in high school. If you’re still new to making smarter money decisions, here are some ways to get started:
Get in the habit of budgeting.
Without a budget, it may be easy to live beyond your means – even if you land an amazing job down the road. So, start budgeting while you’re still in college.
The “50-30-20 rule” may work for you. With this budget rule, you could spend 50% of your after-tax income on needs. Like, rent, groceries, and loan payments. You may spend 30% on things you want, like vacations, takeout, or streaming entertainment. And, 20% of your income should go to savings. Like, your retirement account and emergency fund.
Save an emergency fund.
Some experts advise that you save at least 3 to 6 months of living expenses. Other may likely suggest having at least a year’s income in the bank, in case of a job loss or another emergency. As a college student, you could start with a smaller goal, like $1,000. What could be important is getting in the habit of saving. Over time, you may grow your emergency fund as needed.
Borrow responsibly.
Whether you plan to borrow loans for college or you just opened your first credit card, you may be about to take on debt. And not all debt is the same. “Good” debt is an investment in your future. Like, earning a degree or buying a house. These investments will hopefully grow in value. For instance, a Bachelor’s degree holder may earn a median salary of over $26,000 more per year than someone with only a high school diploma. Investing in your education may make good financial sense.
But that’s not true of everything. Beware of “bad” debt. This is used to buy things that lose their value quickly – like clothes or the latest tech gadget. And be wary of accruing too much credit card debt, since it usually has high interest rates.
Get debt under control.
Total household debt in the U.S. was $14.3 trillion at the beginning of 2020. If some of that is yours, you should make a plan to pay it off. How?
The “debt snowball method” may be a great start. To do this, rank your loans from smallest to largest. Finish paying off the smallest loan, first. Like a snowball rolling down a hill, you may gain momentum. Soon, you’ll be ready to tackle your larger debts.
Another method is the “debt avalanche method.” This may be a better choice if you have a mix of high, low-, and no-interest loans. With this method, you’d pay the higher interest debts off, first. Then, move on to the low- and no-interest debts. This could help you save money on interest, in the long run.
Plan for future goals.
When you’re in college, buying your first house may feel far in the future. Retirement is probably even harder to imagine. But, you should start thinking about these goals now. That’s because the power of compound interest is on your side. In other words, money you invest while you’re young has plenty of time to increase in value.
Say you were to save $25 each month in a retirement account that earns 7% interest. After 40 years, you’d have nearly $60,000. So, even if you can’t save much, now, it may make sense to put aside as much as you can. Over time, you could increase your contributions to a savings account. Hopefully, you may be well on your way to your future goals whether it’s retirement or helping your own kids pay for college.