How financial education can help you reach your financial goals

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How financial education can help you reach your financial goals

Many clients today have poor knowledge of money. In fact, a lack of financial literacy may be one of the reasons many Americans have difficulty saving, investing, and more often than not, seeking out a credit repair service company.

People cannot depend on one-time windfalls like the $1,400 stimulus payments provided as part of the American Bailout Plan for long-term financial planning. Instead, people must strengthen their financial understanding to manage their daily financial lives while looking ahead.

What is financial education?

Financial education is the gathering of knowledge about money, credit, and debt management necessary to live a financially responsible life. Paying off debt, budgeting, and recognizing the differences between different financial products are examples of financial education. In short, financial education has a tangible influence on families as they try to manage their budgets, buy a home, support their children’s education, or plan for retirement. In fact, there are also many financial education courses to help people understand it better.

People in established economies, as well as those in developing or economically growing countries, are affected by a lack of financial education. Nations around the world are dealing with clients who don’t understand financial principles, from Brazil to Bulgaria to India.

While financial literacy varies by education and wealth, research reveals that highly educated, high-salary clients can be just as uninformed about financial matters as less educated, low-income clients.

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At the same time, many people worry when they think about their own money. According to the Organization for Economic Cooperation and Development, choosing the right investment for a retirement savings plan is more stressful than going to the dentist (OECD).

Why is financial education important?

Financial education is essential to managing these elements, from everyday spending to long-term budget projections. As stated above, it is critical to plan and save enough to earn an adequate income for retirement while avoiding excessive amounts of debt that can lead to bankruptcy, defaults, and foreclosures.

However, the Board of Governors of the US Federal Reserve System found that many Americans are not ready for retirement in its study, Economic Well-being of American Households in 2020. More than a quarter said they had no funds retirement plan, and fewer than four in 10 said their retirement savings are current. More than 60% of people with self-directed retirement funds reported low confidence in making retirement decisions.

According to a study by the TIAA Institute, low financial literacy has left millennials, the largest percentage of the American workforce, unprepared for a major financial disaster. Even among people who say they are well-versed in personal finance, only 19% answered questions about financial basics correctly; 43 percent have used expensive alternative financial services, such as payday loans and pawnshops.

More than half do not have an emergency fund for three months and 37% are financially vulnerable (defined as unable or unlikely to raise $2,000 in a month in the event of an emergency). A study by the Investor Education Foundation also confirms these data and contains surveys among men and women on financial education.

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Financial education is increasingly important

Financial decision making is expected to become more onerous for consumers, exacerbating the challenges associated with financial illiteracy. Four themes are combined to highlight the need to make careful and educated financial decisions.

Some teams may be behind

The playing field is far from level when it comes to financial education. Despite the economic development of the last decade and the improvement in employment, FINRA’s research indicated that the gap between the haves and have-nots may be widening. The research also found discrepancies between ethnic groups, with white and Asian individuals performing better than black and Hispanic respondents.

White and Asian people answered 3.2 of the six research questions correctly. Hispanics answered 2.6 of the six questions correctly, while black adults answered 2.3 correctly.

This gap is also observed among younger individuals. According to a 2018 PISA survey, white and Asian 15-year-olds scored higher in financial literacy than the average U.S. for all students tested. Black and Hispanic children, on the other hand, scored much lower.

Consumers are making more financial decisions

Retirement planning is one example of the increasing responsibility Americans must take for their own financial security. Past generations relied on corporate pension plans, now known as defined benefit plans, to fund the bulk of their retirement.

These professionally managed pension funds imposed a financial burden on the companies or governments that supported them. Consumers did not participate in decision-making, rarely contributed to their own funds, and were unaware of their financial situation or pension investments.

Pensions are becoming more of the exception than the rule, particularly for new employees. Employees are often given the option of participating in 401(k) or 403(b) plans, where they must determine how much to contribute and how to invest the money.

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In previous generations, Social Security was a major source of retirement income; however, many people now find that the payments provided by Social Security are insufficient. In addition, the Social Security Board of Trustees anticipates that the Old Age and Survivors Insurance (OASI) Trust Fund (the source of retiree payments) would be depleted by 2033.

According to Investopedia’s 2022 Financial Literacy Survey, millennials and Gen Z will rely on 401(k) plans, while Gen X and boomers will rely on Social Security. According to the report, younger generations also want to integrate crypto into their retirement plans.

Savings and investment alternatives have become increasingly complicated

Consumers are increasingly being forced to choose among numerous investment and savings programs. These products are more complex than in the past, forcing clients to choose from a variety of alternatives with varying interest rates and maturities—decisions they are sometimes not well prepared to make. These decisions can influence a consumer’s ability to buy a home, finance a college education, or save for retirement, increasing decision-making pressure.

The number of organizations providing goods and services can often be overwhelming. Banks, credit unions, insurance companies, credit card companies, brokerage firms, mortgage companies, investment management organizations, and other financial service providers compete for assets, creating uncertainty on clients.

The financial climate is changing

The financial environment is constantly changing. In a global market, there are many more players and influencers. Financial markets are becoming increasingly fast-paced and volatile as a result of the rapidly changing environment caused by technological advances such as computerized trading. When these elements are combined, they can give rise to conflicting viewpoints and make it difficult to design, execute, and stick to a financial plan.

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Source: tit.edu.vn

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