Money, currency, and finances are incredible: they power both ordinary, day-to-day interactions in our lives, the global economy, and everything in between. Money gives people more than just the ability to buy things – at its core, it comes down to having deeper things like choices, freedom, and security. Having a strong base in personal finance skills is the key to unlocking those greater attributes that money can provide. Understanding personal finance and how to leverage money, the banking system, loans, investments, and more means that money works for you, not the other way around.
Studies show that people who take money management courses make improvements in multiple types of financial wellness measures. However, not everyone gets a foundation or education in personal finance from school or their families, so they may have to seek out resources to fill in their knowledge gaps.
In this blog, we’ll cover why personal finance education is important (with data) and some foundational topics in personal finance. Let’s dive in!
Importance of Personal Finance Education
First, let’s cover why personal finance education is so important and impactful: it is a key to building empowerment and financial well-being. As you gain more knowledge and awareness of how the financial system works, you can make informed decisions about budgeting, saving, and investing, which paves the way for financial success. Personal finance goes beyond having sufficient or surplus money to cover your needs. Both are also about knowing how to use your money effectively. There are many people with high incomes who lack personal finance education and in turn make money choices that don’t serve their needs as well as people with modest incomes but equipped with solid personal finance skills.
As a result of having education about personal finance, that personal finance savvy can bring about financial wellness. For example, another valuable impact of personal finance education is that it can provide better access to credit. Financial institutions are more inclined to extend credit to individuals who have demonstrated responsible financial behavior, and often at lower interest rates, meaning the cost of borrowing money is less. This access to credit becomes a powerful tool, since most people need it to make significant life purchases such as buying a home or car or opens doors to things like starting a business. It creates opportunities that may have otherwise been out of reach if you had to pay in full for something at the time of purchase. Keep reading – in the next section we share some links to free online courses you can take to build your finance skills!
Additionally, finances and mental health impact one another, and having a solid handle on your finances can help you minimize money stress. The ability to budget effectively and plan for future expenses can reduce anxiety about potential financial uncertainties. People with strong personal finance savvy can bounce back more easily from unexpected financial challenges as they have the financial knowledge to navigate through difficult times. Check out our blog about the psychology of money to dig deeper into the relationship between money and our mental health!
Outcomes of Personal Finance Education
Personal finance education is important because in short, it helps people form better financial habits that set them up for success!
First, let’s look at a study that found that personal finance education positively impacted the students’ bank account deposit amounts and account holding. The Federal Deposit Insurance Corporation (the agency that insures bank deposits, of which Milli is a member) offered a financial literacy curriculum for adults called Money Smart to enhance their money management skills. The FDIC measured the results of over 600 students before and after the program. Prior to taking the course, just 19% of the students had a savings account, but that rose to 69% after the program. After the program, 69% of students increased their level of savings, and 53% decreased their debt. The course took between 10 and 20 hours to complete, so a bit of an investment in time, though many would consider it well worth it for the gains in financial security.
Being educated about personal finance can also positively impact someone’s credit score. The National Financial Educators Council points to some promising data about the positive effects of financial education. They report that three states started mandating personal finance education starting in 2000, and they measured credit scores before and after. They reported, “the credit scores are recorded on a 280-850 scale. For students participating in the programs’ 3rd year of implementation, credit scores increased 10.89 in Georgia, 16.19 in Idaho, and 31.71 in Texas.”
Researchers from the University of Pennsylvania conducted a review of multiple studies to see the broader impacts of financial literacy. The research shows that more financially literate people were more likely to have more wealth, more likely to refinance mortgages when it was in their financial best interest, and less likely to struggle with credit card debt or use alternative high-cost borrowing methods.
Access to personal finance education to build financial literacy, however, is not universal. According to the Council for Economic Education, as of August 2023, 30 states in the U.S. require high school students to take a personal finance course to graduate, and 25 states require a course in economics. This is great progress from the year 2000 when only seven states required a personal finance course. However, it still means millions of American high school students graduate and begin their adulthood without formal education on money and finance.
Fortunately, there are tons of resources to learn about personal finance, such as books, podcasts, and blogs like this. There are also free online personal finance courses offered by universities if you’re looking for a structured learning experience:
- Brigham Young University – Beginner, Intermediate, and Advanced Personal Finance Courses
- Purdue University – Planning for a Secure Retirement
- University of Illinois—Urbana-Champaign – Financial Planning for Young Adults
- Duke University – Behavioral Finance
Foundational Personal Finance Topics
If you’re looking for a roadmap to build your knowledge on the foundations of personal finance, get familiar with these topics:
Mastering budgeting is the first step towards building a strong financial foundation, as we all must make decisions about how to spend our money to meet our needs. Strong budgeting involves allocating income wisely, distinguishing between needs and wants, and planning for future goals. A well-crafted budget empowers individuals to manage expenses, then move on to saving and investing.
Looking to build or refine your own budget? We’ve got a guide to budgeting for beginners and fine-tuning your finances for those looking to take their budget to the next level.
After (or concurrent with) budgeting, many finance experts recommend the next personal finance step is to build a special dedicated emergency fund. This financial cushion provides peace of mind as it allows someone to cover unforeseen financial challenges, like sudden expenses, or meet their needs in case of a job loss. By having a dedicated emergency fund, people can navigate disruptions and minimize their need to rely on credit to meet their needs, since credit can come with additional borrowing costs and make the initial expense more costly.
How much should you save in an emergency fund? Finance experts recommend a goal of one month’s worth of your expenses to start, then three months, then six months. Others set a target for having their annual health insurance deductible saved, if they’re planning for medical expenses.
If you’re looking for a place to keep your emergency fund, check out Milli’s Savings Account! Our competitive annual percentage yield means you can grow your emergency fund passively, and our savings automations can help you build it up over time. If you ever need to use the money in the emergency fund, you can instantly transfer money from your Milli Savings Account to the Spending Account and make purchases with the Milli Visa® Debit Card. It’s easy, convenient, and designed to help you have access to your money for the things that matter most to you.
Once you master covering your expenses and have an emergency fund, broader saving is the next step. Saving gives your incoming money the role of preparing for future spending and growth by compounding with interest. Savings often fund major life goals or milestones like buying a home and funding retirement, which are the two biggest assets that make up Americans’ net worth. Having savings also allows you the freedom to make choices that align with your values and goals, because it’s financially feasible.
Many budgeting models recommend setting a target to save 20% of your after-tax income (with 50% going to needs and 30% going to wants), which is a helpful benchmark.
However, being able to save money at all requires more than just discipline: you need sufficient disposable income. Budgeting will only go so far. If you find you need or want more cashflow coming in to reach your goals, check out our tips on increasing your income to increase your savings.
Debt management is a pivotal aspect of personal finance, because it is a structured approach to paying back existing loans or navigating future borrowing. Borrowing money often comes with a cost in the form of interest on the balance, so it’s important to be intentional about using borrowing wisely. Strategic lending can make significant expenses manageable; loans for homes, education, and vehicles, when managed prudently, make it possible for people to access essential assets and investments. Understanding how to leverage lending responsibly and effectively pay back any existing debt can help you meet your needs and work toward your long-term goals.
Saving for retirement is another core pillar of personal finance, as it is a proactive step you can take to secure your financial well-being in later years. Some are motivated to save to retire from work early and dedicate time and energy to their passions – that’s something worth saving for!
Saving for retirement involves regularly contributing to retirement investment accounts, like 401(k)s or individual retirement accounts that grow over time and build a nest egg. There are also some tax advantages to certain retirement accounts that can be helpful in the present. By starting early and consistently saving, you can harness the power of compounding and turn a small percentage of your income now into enough to live on comfortably in the future.
Personal finance is important because of the critical role that money plays in our lives. The data backs it up; the studies we dove into show the positive impact that personal finance education can have on personal finance outcomes. These studies are a good reminder to consistently carve out some time to keep your knowledge current. Fortunately, there is wider access to educational materials thanks to the internet, so it’s easier than ever to get informed. Pick up a personal finance book or tune into a personal finance podcast to brush up your knowledge or learn about a completely new aspect of money management!
Looking for a bank that can help you learn money management? Sign up for Milli and take advantage of our spending tracking, automated savings, and competitive Annual Percentage Yield. We’ll help you build strong financial habits so you can have more money for the things that matter most. Download from the App Store or Google Play today!
Keep reading on the Milli blog to deepen your personal finance knowledge: