The Importance of Personal Finance

There is no shortage of education in the field of finance. There are various academicians who work tirelessly in the field of finance. Many theories have been developed, and many conjectures have been disproved. Every year thousands of people graduate with finance as their major. However, most of these people are trained in the field of corporate finance. They are trained to manage money for corporations as well as to make financial decisions for them. However, when it comes to making financial decisions on their own behalf, Americans and people all over the world struggle with finances. This is why the field of personal finance is important.

In this article, we will have a look at some of the reasons which make it necessary to inculcate personal finance in the curriculum of every individual.

The Dire Situation in America and How Personal Finance Can Help

• The wealth gap, i.e., the gap between the rich and the poor, has been increasing rapidly in the past few years. The American middle class has been rapidly shrinking as a large number of high-paying blue-collar jobs are now being automated.

• There have been several surveys conducted, and it has been revealed that nearly 70% of all Americans live paycheck to paycheck! This means that they spend literally all the money that they earn within the same time period. Hence, they are completely broke at the beginning of the next period. Hence, if their paycheck was delayed even by a week, a lot of these people would find themselves unable to meet their obligations unless they borrowed from payday loans or other such sources where high-interest rates are charges! This situation is dangerous, given the fact that COVID-19 has fundamentally changed the economy. There are various industries such as airlines, hotels, and commercial real estate where the chances of layoffs have increased.

• The average student loan debt in America has been rising at an unprecedented rate. It now stands at an average of $35000 per student and has doubled over the past ten years. As a result, less than 25% of Americans have any kind of emergency fund set aside. In fact, about 60% of Americans aged between 18 and 25 are spending at least $100 more than they make every month. Only one in five Americans have a written budget or a plan by which they allocate their money towards their expenses. The rest are often making ad-hoc impulsive purchases, which negatively impact their financial status in the long run.

• It is important to teach personal finance early on in life. This is because students who learn personal finance in their classrooms are more likely to have an investment based passive income later on in their lives. Constantly, young adults who see their parents struggling for money because of poor financial hygiene are also likely to adopt those bad habits. As of now, most students learn their financial habits informally in their homes. There are no financial classes where they are taught about personal financial strategies, which will help them in the long run.

• The inability of the people to understand personal finance is not only difficult for them, but it is also a burden for the state. A lot of these people will end up unemployed and may depend on welfare payments being made by the state. These welfare obligations add up and lead to higher taxes. Hence, teaching personal finance is not only in the individual’s best interest but also in the state’s best interest.

• A higher degree of personal financial education is also associated with a higher income. This means that fewer people get involved in illegal activities such as drugs and gambling. Also, there are fewer instances of divorce and domestic violence in such areas. Districts that have spent a large amount of money on financial education have to spend a lot less on law enforcement. The empirical evidence is quite clear. The investment in teaching people how to do personal financial planning pays rich dividends over the long term.

• There are certain states like Georgia, Idaho, and Texas, which have made financial education mandatory over the years. They have conducted studies over the past ten years. There is a significant difference in the credit scores of those who had undergone personal financial education as compared to those who did not. This is evidence that the behavior of the people who underwent this training was positively impacted by it.

• The Federal Deposits Insurance Committee (FDIC), which is a government body that guarantees bank deposits in America, also conducted a study. They found that people who underwent financial education were twice as likely to have a checking account, have a monthly budget, and save something for their retirement.

The bottom line is that personal financial literacy is the need of the hour. It will help the governments as well as individuals, make their lives better. This is the reason why governments all over the world have already started spending huge sums of money in order to educate their workforce.

Authorship/Referencing - About the Author(s)

The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.