Financial literacy is a common skill everyone should learn in our society. However, it’s not one that’s always discussed in schools. Although, as a society, we are slowly improving on that as our world is progressing. However, that is not going to help people who have already left school. Thankfully, resources such as blogs, podcasts, YouTube channels, and other platforms give people simple ways to learn more about finance, outside of the education system. Throughout this blog, we will discuss the impact of financial literacy and how it can improve your life.
What is Financial Literacy?
Financial literacy is your ability to determine what financial decisions are likely to lead you to achieving your financial goals and knowing when to act on them.
How Do you Become Financially Literate?
Assuming that you didn’t get enough financial education in school, you will need to take things into your own hands. You can do this by exposing yourself to new ideas from as many different people and perspectives as you can. You can read books, take classes, watch videos, or read blogs related to money. Any of these can have a positive effect on your financial situation.
These resources can introduce you to new ideas that you may not have noticed before. Then, these ideas can lead you to saving or making more money or help you discover new passions in life. These outlets can give you confidence during uncertain times that the world isn’t coming to an end when your finances are tight. These outlets can also encourage you when things are going well to help keep you motivated.
Most importantly, if you’re starting out and didn’t get much financial education, these outlets can introduce you to opportunities that get you excited about researching finance. This will get you thinking about what you can accomplish in your life, with your resources.
The American Budget
Before we get into a specific example showing how impactful financial literacy can be, let’s take a look at the average American’s budget.
House – An average American household spends approximately $20,000 a year on their houses. Some of these costs include mortgage or rent payments, utilities, maintenance and repairs, and property taxes. The average price of a home is $300,000. With that said, the cost of your home can vary depending on where you live.
Apartment – The average cost for a one-bedroom apartment is $950. A two-bedroom apartment typically runs around $1,200 a month.
Transportation – This is the next largest category, and the majority of Americans spend around $9,000 a year on their vehicle. These costs include fuel, maintenance, repairs, public transportation, plane tickets, and more.
Food – Groceries for your home cost around $4,000 a year while dining out costs around $3,000 a year. These numbers mean our total food costs are, on average, $7,000 a year, with half of that due to dining out.
Healthcare – For an American to receive healthcare, it costs them about $4,500 a year. This includes health insurance, prescription medication, and doctor visits.
Personal Care/Clothing – People usually spend around $2,500 a year on their personal care and clothing. Clothing costs include tailoring and dry cleaning, not just buying clothes.
Entertainment – Americans spend roughly $3,000 a year on different forms of entertainment such as concerts, festivals, streaming services, and gaming.
Insurance – Insurance costs can vary depending on your level of coverage and what type of coverage you’re looking for. These costs include life insurance, homeowners insurance, and renters insurance.
Theory in Practice
In this example, we will be breaking down a couple, Bill and Mary, who just graduated high school and are looking to start college at the end of summer. They will have no debt and will be able to work all summer before going to college. They will each earn the same amount of money from their jobs, and in both cases, they will be making $12 an hour from their summer and school jobs.
When they graduate, they will both have $60,000 a year in household income after they graduate. As far as Bill and Mary’s expenses go, they each will be getting a new car every seven years. Now, let’s dive into the example and see the difference financial literacy makes in your life.
Bill and Mary’s Life Journey
Bill and Mary have just graduated from high school and are looking to go to college. As mentioned above, they will work the summer after graduating from high school and during college for $12 an hour. During the summer, they will work full time, and during the school year, they will work 20 hours a week.
Therefore, Bill and Mary make about $10,000 the summer before college and $31,000 a year combined while going to school. Once Bill and Mary graduate, they get new jobs, and each job will pay $30,000 for a total household income of $60,000 a year.
Bill and Mary attended four-year universities in-state, which cost them about $25,000 a year. The $25,000 a year includes all tuition, fees, and books. Between food, transportation, and occasionally having fun, Bill and Mary spent an additional $850 a month. Therefore in total, they spent over $60,000 a year while they were both in school.
Four years have gone by, and unfortunately for Bill and Mary, they have racked up a lot of student debt. They will graduate with over $100,000 in student loans they need to pay back. Their loans will amount to $1,000 a month combined they will need to pay every month.
After graduating from college, Bill and Mary’s budget looks similar to the average American expenses.
- Housing – $20,000
- Transportation – $9,000
- Health – $4,600
- Personal – $2,500
- Food – $7,150
- Misc – $1,000
- Insurance – $6,000
- Debt – $12,000
- Total – $62,250
In total, Bill and Mary spend everything they make. However, there some things worth noting. First is their insurance bill. They will pay about $6,000 a year for their insurance. This is due to them having a life insurance policy, homeowners insurance, and two cars to insure.
Another thing to notice is that they aren’t doing any charitable giving, saving, or investing since they can’t afford it. Lastly, their entertainment budget is zero. They had to cut that to make their debt payments every month. Therefore, unless they were able to find some other sources of income or slash their current expenses, this is likely how Bill and Mary will live for the next several years.
Unless you want to be living paycheck to paycheck, that’s how important becoming financially literate can be for your future. Some people are very fortunate that they can live a pretty comfortable life even if the situation isn’t ideal. With that said, we have a fantastic opportunity to set ourselves up for an extraordinary life if you’re willing to learn about how money works and how you want to work with money. Do you want your children to learn more about financial literacy? For more information, visit The Christ School. This Orlando private school has an incredible reputation.