Understanding financial matters and being equipped to make informed financial decisions – our personal financial capability – is key to not only weathering financially difficult times and making ends meet but also building toward a financially stable future. We would like to present some startling findings regarding the state of financial capability in the United States.
According to a 2012 study on financial decision-making by the Financial Industry Regulatory Authority’s Investor Education Foundation, 19 percent of people surveyed reported spending more in the previous year than their annual income that year, and that didn’t include what they spent on a home, car or other big investment.
The study also found that 56 percent of participants lacked a rainy day fund sufficient to cover three months of expenses in case of emergencies. FINRA also asked participants five questions on personal finance topics that the average person might encounter in everyday life. Only 39 percent of study participants could answer three or more questions correctly.
Closing these gaps involves tackling the economic, structural and societal issues that underlie them. That won’t happen overnight and is beyond what any one person or family can do. But there are things each of us can do – or encourage others to do – to move further on the road of personal financial capability.
Here are some places to start:
- Open and use a checking or savings account at a bank or credit union.
- Avoid nontraditional financial providers, such as payday lenders and car-title lenders.
- Get a free personal credit report once a year from all three agencies: Equifax, Experian and TransUnion at www.annualcreditreport.com. Your credit report is used to determine your credit score, and your credit score plays a role in every aspect of your life. A low score can get in the way of renting an apartment, buying a home or getting a job.
- Establish good credit by paying bills regularly and on time; contact a creditor if a payment is going to be late.
- Avoid unnecessary debt.
- Create and stick to a household budget.
- Pay yourself first by starting to save. You could start by putting your income tax refund into a savings account. No amount is too small.
The Federal Reserve Bank of St. Louis offers free resources for classrooms and the general public to help people better understand economic and personal finance topics. They are available at www.stlouisfed.org/education.
When we take steps to improve our personal finances, we are increasing our chances for a financially secure future. We are also setting an example for our children and other young people to do the same.
Kathy Freeman is vice president of the Office of Minority and Women Inclusion at the St. Louis Fed. Mary Suiter is assistant vice president and economic education officer at the St. Louis Fed.