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Financial literacy: Understanding finances and money

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Financial Literacy: Understanding Finances & Money

Al Waller: “Financial literacy” is a term that we often hear – and it is an important one too. However, numerous research studies have indicated that many people are actually not financially literate. In fact, according to the Financial Industry Regulatory Authority (FINRA), about 66% of the American population is considered financially illiterate. So, at the end of the day, what does it mean to be financially literate?

Welcome back to ClearPath – Your Roadmap to Health & WealthSM. I’m your host, Al Waller. With me is Catherine Collinson, CEO and president of nonprofit Transamerica Institute®. Catherine is here to help us define the term “financial literacy,” what it involves in our lives, and how it can impact our finances.

Before we get started, I want to remind our listeners that we would love to hear from you and get to know what topics you’d like to hear about. Please drop us a line at [email protected].

Catherine, nice to be together again.

Catherine Collinson: Hi Al. It’s great to be back.

Al Waller: Let’s start at the very beginning. What is meant by the term “financial literacy”?

Catherine Collinson: According to Investopedia, “Financial literacy is the ability to understand and effectively use various financial skills, including personal financial management, budgeting, and investing. It also means comprehending certain financial principles and concepts, such as the time value of money, compound interest, managing debt, and financial planning.”

Al Waller: I follow you but must confess that feels quite broad. Perhaps you may be able to help us by breaking down some key concepts that would be relatable in our everyday lives.

Catherine Collinson: As a good starting point, I would like to share with you some insights from MyMoney.gov, which is an initiative of the Federal Financial Literacy and Education Commission (FLEC) and outlines five principles of financial literacy. They are:

EARN – Make the most of what you earn by understanding your pay and benefits.

SAVE & INVEST – It’s never too early [or too late] to start saving for future goals such as a house or retirement, even by saving small amounts.

We've talked about this on the show – the importance of saving consistently over time, even if it's just small amounts – getting in the habit of saving and continuing to save.

PROTECT – Take precautions about your financial situation, accumulate emergency savings, and ensure that you have the right insurance to protect yourself for life's unforeseen circumstances.

SPEND – Be sure you are getting a good value, especially with big purchases, by shopping around and comparing prices and products.

BORROW – Borrowing money can enable some essential purchases and builds credit, but interest costs can be expensive. And, if you borrow too much, you will have a large debt to be repaid.

Al Waller: Really helpful! But I do realize that some of the steps related may be challenging for listeners. Perhaps you could help motivate us to learn more – for instance, explaining what are the benefits of being financially literate?

Catherine Collinson: And there are a lot of benefits to being financially literate. Some are more obvious than others but let me just share a few. The first gives you insights into your situation so you can create a structured, realistic budget. One of the things my grandmother always taught me was the importance of living within or beneath our means – so that we can save for the future, whatever those goals might be.

Being financially literate can also help you understand the best ways to save for retirement and other goals. It can help you form good spending habits and good saving habits. One of the things that is so important is learning about credit and establishing good credit, which can lower your interest rates when you're borrowing for a car, home, or any other major purchases.

Financially literacy can also help you avoid high interest rate debt and really focus on that. That one can really sneak up and cost a lot in the long run. Then overall being financially literate can just help you make better financial decisions in general.

Al Waller: Well, that all makes sense or is there really more to it?

Catherine Collinson: I've been thinking about this a lot, Al. What are the consequences or the costs of not being financially literate? They are actually quite far reaching. If you are not optimizing the money you have – making the most of your money and letting it slip through the cracks… We talk about saving consistently over time but just think about all those dribs and drabs of inefficient financial decisions and what they could lead up to in the long run in the form of lost savings.

The other thing is, especially as it relates to credit and the importance of credit, there are times in our life where we need to borrow. Imagine that something happens…and your credit is not stellar. That is going to make it much harder for you to buy a car, which you need to get to and from work. It could curtail or limit your decisions, and then what happens if the car conks out and you need car repairs? You don't have emergency savings, and your best choice is putting it on a credit card if that's even available to you. And I hate to say it, but “payday loans” are still a big industry in this country and they charge a lot. So, that is taking a huge chunk out of your paycheck that you maybe need to fix the car…but then how are you going to pay your rent? As I'm talking about it – it could easily go into a downward spiral.

Just being financially savvy and financially literate can help you map out your journey, or when life throws you curve balls – and it will – to make better informed decisions that will help you get back on track in the long run.

Al Waller: I'm pleased to note that you've consistently offered listeners tips to improve their financial outlooks. So, in that vein, what can you share with us regarding that today?

Catherine Collinson: I’m going to start with a vote of confidence – “you can do it!” It may seem overwhelming – one of my big tips is avoid getting overwhelmed because that could trip you up before you even get started.

Let's just talk about the importance of baby steps – starting small. One topic at a time, one idea at a time – and build on that.

The other tip I have is seek trusted resources, especially if you are doing internet research – do some due diligence on those websites and be hyper vigilant. Don't give away your personally identifying information. That could be really counterproductive. But start small and learn. Just one bit at a time can add up. Once you build a base of knowledge, things will get easier and then you will be able to expand it.

Al Waller: Well, those are some great ideas, and I particularly appreciate the tip to start small and work from there. Could you suggest some resources where people can learn more and increase their financial literacy?

Catherine Collinson: Well, of course. I'm a book person – I love books. Books are more than just books for me, they're friends! There are many excellent books out there on the subject. There are books in general and topic-specific books. Shop around. See what resonates with you. A lot of books – they're almost like workbooks where they'll have the idea or the topic or lesson and then a “test your knowledge” page and worksheets to apply it to your real life. I love those books – they work well for me.

Another thing is – look for classes on financial topics. Check out community colleges, adult education programs, libraries, community groups – there are lots of resources out there within your communities. It is just important to be aware that they are there and be on the lookout for them.

Another thing is your employer – especially if your employer offers a retirement savings plan, chances are they offer a financial wellness program that offers tools and resources and education for you to learn more about. Another “go to” source is the websites of the financial institutions that you may already be doing business with (your bank, credit union, or other type of organization). They often also have tools and resources as well.

Then lastly, there are resources like mymoney.gov, which I mentioned earlier in the show, as well as Investopedia…that have a wealth of knowledge available.

Then Al, how could I forget – our podcast! Here on ClearPath – Your Roadmap to Health & Wealth, we've already discussed a number of topics related to financial literacy – core concepts – and we're going to be doing even more in the future. A couple of previous episodes I want to point out and invite listeners to either check out if they haven't listened to it – or maybe even as a memory refresher – are the two episodes related to inflation. One is all about defining inflation and why it happens, how it works, and how it impacts our lives. Then the other is on how we can save money during this sort of excruciating time of inflation that we're living in.

Al Waller: Well, I think to your point, you really need to take an active role in terms of guiding your financial literacy and making sure what you do have works well for you.

Catherine, thanks so much…it’s always great to have you with us.

We hope you’ll join us for future episodes.

ClearPath – Your Roadmap to Health & Wealth is brought to you by Transamerica Institute, a nonprofit private foundation dedicated to identifying, researching, and educating the public about retirement security and the intersections of health and financial well-being. You can find our weekly podcast on WYPR’s website and mobile app, wherever you get your podcasts, and at transamericainstitute.org.

ClearPath – Your Roadmap to Health & Wealth is produced by the Transamerica Institute with assistance from WYPR.

If you have ideas for future episodes, comments, or feedback, please email us at [email protected].

Until the next time, I’m your host Al Waller. Stay safe, be well and thanks for listening.

The information provided here is for educational purposes only and should not be construed as insurance, securities, ERISA, tax, investment, legal, medical, or financial advice or guidance.

Al Waller is a long-time Baltimore native and employment expert with a 30-year career in leading and advising locally and globally based corporations on matters including: Talent Acquisition and Retention, Employee Relations, Training and Development.
Catherine Collinson is the founding president and CEO of nonprofit Transamerica Institute and its Transamerica Center for Retirement Studies, and she is a champion for Americans who are at risk of not achieving a financially secure retirement. With two decades of retirement industry-related experience, Catherine is a nationally recognized voice on workforce, aging, and retirement trends. She was named a 2018 Influencer in Aging by PBS’ Next Avenue. In 2016, she was honored with a Hero Award from Women’s Institute for a Secure Retirement (WISER) for her tireless efforts in helping improve retirement security among women.