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How well do you truly understand your finances? And what's the best way to evaluate your financial literacy? This primer will help you start thinking about these questions.
I generally steer clear of calendar-based theme months. I believe Valentine’s Day was invented by Hallmark to sell greeting cards, and I will ignore all evidence to the contrary. But April is Financial Literacy Month, and even though May is almost here, it’s still a good time to revisit the concept of financial literacy.
Why? Because by some measures, more than half of all Americans suffer from it. Worse still, because “financial literacy” is poorly named, most of those who suffer from it remain undiagnosed.
What Financial Literacy Is Not
Financial literacy is not the ability to read a prospectus or a financial statement. It is not a deep understanding of the inverse relationship between risk and reward. It is not a proven ability to time the market. And it is not the ability to understand the difference between a call option and a put option.
What Financial Literacy Is
There are many definitions of financial literacy, but the one I think works best is this: knowledge and understanding about financial matters, and the means and willingness to incorporate that knowledge. Having the skills and the know-how itself isn’t enough. You have to actually use those attributes in order to be truly financially literate.
A good resource from the valuable website financialliteracy.com offers a 30-step program to financial wellness. If 30 steps sounds intimidating, it shouldn’t. The steps are mostly easy, and many are common sense. Others are things you’re doing already. I found step 2 to be particularly valuable—a quick quiz you can use to measure your financial literacy. Answer the questions honestly, and you may surprise yourself by how financially literate you are not.
For example, the quiz asks, “As a rule, do you (sometimes, always, or never):
• Pay your rent or mortgage and bills on time?
• Save at least 10% of your net income?
• Keep 3 months’ net income in reserve for emergencies?
• Plan ahead for large expenses?
• Set and keep financial goals?
• Comparison shop?
Getting Past the Name-Calling
As a dentist, the idea of being “illiterate” about anything is most likely an insult. And this where I think the concept of “financial literacy” fails to adequately address the problem. Literacy is too closely associated with the ability to read. But when it comes to financial literacy, that’s not what we’re talking about at all.
But despite a poor name, the concept of financial literacy is one that everyone can embrace—particularly the “putting your knowledge into practice” aspect of it. Knowing what to do is great. Actually doing it is a worthier pursuit.
And if you do find yourself in financial difficulty, don’t panic. You aren’t alone, and the tribulations don’t have to be lasting. Keep your chin up, refine your economic plan, try to avoid the situations above, and take it easy on yourself. No one is immune to financial difficulty.