The financial world is dynamic and evolving. Skills and knowledge acquired today may not be completely relevant in the future, and new products and new opportunities continue to emerge. Financial literacy skills need to evolve as well, keeping pace with the changes in the system.

There is a broad acceptance that financial literacy includes both the knowledge necessary to use the financial systems and the ability to use the financial system. Having the ability to use the financial system as part of the definition addresses those who might have sufficient knowledge but otherwise do not have access. You can’t be restricted from using the system by your capability or the system’s capability and still have high literacy.

Financial Skills Spectrum

Financial skills appear across the spectrum. At the lowest level of financial capability, we see those who are unable to bank or unable to manage to pay basic bills. At the higher end of the spectrum, we would see persons on track for all their goals that their resources allow, that they maintain sufficient reserves and protection, and live free of major financial concerns.

There is also a relationship between financial stress and location on this literacy/skills spectrum.

Those with lower financial literacy, and its attendant financial problems, are more likely to experience higher levels of financial stress.

Those at the upper end of the financial literacy/skills spectrum are less likely to experience high levels of financial stress. The benefits of increased financial literacy are more than merely greater potential comforts, there are actual mental and physical health benefits that can be associated with higher levels of financial literacy.

Improving financial literacy helps people advance along the spectrum, improving their financial outcomes and potentially reducing their financial stress.

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Financial System is not static

The financial system is not static.

Those who are reaching retirement age today entered the workforce when the 401(k) plan was new, personal computers were just being introduced into the workplace, and there was no internet.

They often took paper paychecks to the bank to cash or deposit them. Technology has transformed the financial system during their lifetime.

Disruptive technology increases in speed, the rate of disruption gets greater, technological change comes at increasing rates. The first cryptocurrency was introduced in 2009, there are over 13,000 cryptocurrencies as of this year. The financial implications of widespread adoption of blockchain technology haven’t even begun.

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Many users of the financial system are also experiencing some negatives for the first time. We haven’t had significant inflation in the US for many years – and the worst may be yet to come. A short burst of inflation can be absorbed without a lot of change; prolonged inflation wreaks havoc.

Having sufficient financial knowledge and skills for today is important. But today’s skills won’t be sufficient for the future. And the future is arriving faster than it ever did before, in terms of rate of change.

The Bottom Line

Financial literacy, both knowledge and skills, is important to achieving financial success and reducing financial stress.

Any improvement in these capabilities will move you in a positive direction on the spectrum, potentially improving financial outcomes and reducing financial stress.

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While the system is changing and evolving rapidly, the basics remain the same. Budgeting and basic money management techniques are fundamentally the same as they were 50 years ago. There are more options for managing cash assets, but the need and the techniques are unchanged. No one had to deal with cryptocurrency 50 years ago, it didn’t exist. No one really has to deal with cryptocurrency today, although that’s not likely to be true 50 years from now. The key is to master the basics, then add what knowledge or skills are necessary do manage your finances in a changing system. The financial system is not going to hold still, your financial knowledge and skills shouldn’t hold still either.

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