Financial Education Core Competencies

More than 50% of respondents failed a short three-question quiz on financial basics, the TIAA-CREF Institute reported. The respondents – age 50 and above – lacked basic financial knowledge on interest rates and inflation. What’s worse, the youth aren’t doing any better. A study conducted by the Financial Industry Regulatory Authority (FINRA) revealed that today’s younger generations were unlikely to be better at finances than their elders.

This is unfortunate but unsurprising, given that only four states require high school students to take up a personal finance subject.

This situation is dire, as a lack of basic financial literacy can mean serious issues further down the line. People who do not have the basic tenets of personal finance in their grasp are less likely to grow their wealth, save money, or invest.

In response, the US Treasury now aims to simplify the process by introducing core competencies in what has been dubbed the “financial literacy pyramid”. There are five items in the Treasury’s “Financial Education Core Competencies”. Here’s what you need to know:

1. Income (What You Earn)

  • Gross versus net pay. This is a very basic concept that should make it much easier for anyone to analyze their pay slips. “Gross pay” refers to the employee’s total salary prior to the deduction of taxes (as well as other expenses). The amount left over (this is the amount that you actually receive) is your “net pay”.
  • Benefits and taxes. It is important for employees to go beyond cursory understanding of their workplace benefits. Some companies offer multiple options for retirement funds, for example. Similarly, employees should understand income tax calculation and how it affects their pay check.
  • Education. An employee’s income can increase through education – an oft-ignored detail that could truly improve any worker’s finances.

2. Expenses (What You Spend)

  • Needs versus wants. One of the most commonly repeated sayings where finance is concerned exhorts people to live within their means. Simply put, this means spending less than you make. The easiest way to do so is to eliminate unnecessary and impulse purchases. Differentiating necessities from frivolous purchases can prevent the unfortunate situation of living from paycheck to pay check.
  • Consequences. Spending unnecessarily can have its impact beyond your personal life. Excessive materialism is a major concern that must be addressed.

3. Savings (What You Save)

  • Compound interest. The difference between saving money in a bank account and stashing money away in a jar is compound interest. The principal amount grows with interest. More importantly, the principal amount plus the interest earned will continue to grow due to compound interest. This is why it’s a good idea to save consistently over a long stretch of time.
  • Savings and investments. Individuals must learn to differentiate between savings and investments. Diversifying the portfolio is crucial – it’s best to have a balance of safe (despite low returns) savings accounts and riskier investments (with higher returns) like bonds, stocks, and mutual funds.
  • Planning. Part of the “savings” area of the core competencies focuses on planning for big ticket items and long-term goals. This can mean paying for a home or saving up for your retirement fund.

4. Credit and Loans (What You Borrow)

  • Consequences of borrowing. Using a credit card is not free. People should learn how to choose the right loan or credit card by looking at the terms such as interest rates. Borrowing should not be taken lightly.
  • Credit scores. Not paying your bills or loans on time can have serious impact on your credit score. This means difficulty getting loans in the future or having to pay higher premiums due to bad credit.
  • Debt obligations. Learn to manage current and future expenses in order to prevent being overdrawn. Possible debt repayment scenarios should also be discussed.
  • Renting versus owning a home. Taking out a home loan is a serious responsibility. Learn to figure out the expenses and the best time to pursue a home loan.

5. Protection (Protecting Yourself)

  • Identity theft and scams. Learn to protect yourself from identity thieves.
  • Credit report. Getting a credit report (and knowing how to read your credit report ) is important. You have to keep track of the data it contains and ensure that you’re not the subject of identity theft.
  • Insurance. Study the different types of insurance and the best coverage you may require.
  • Emergency fund. One of the most important things any individual must have is an emergency fund. This should be able to cover at least six months’ worth of monthly expenses to protect people from sudden expenses like health problems and more.

If you are interested in becoming more “financially savvy” there are several college courses which can help you become a much more “financially savvy” person.