Financial literacy

In One Sentence

Financial literacy means understanding where money comes from, where it goes and how to make it work for you; without it, however much schooling you have, you're still illiterate when it comes to money.

Why It Matters

Earning a lot isn't the same as keeping it. At first, the gap between people who understand money and people who don't is too small to see, but compounding widens it year after year; twenty years on, two families may be living completely different lives. Living frugally is only the starting point. Once you've saved the money, you still need to understand how it works. That's why I wrote this book: the most valuable thing I can pass on to my family is the ability to manage money.

One Number

A study of about 2,000 American football players found that about 16% filed for bankruptcy within 12 years of retiring, and that this had almost nothing to do with how much they had earned (Carlson et al., NBER 2015 · Chapter I).

In the Book

The Preface says right at the start that what wealth should pass on is the ability to manage money. Section 2 of Chapter I looks at the price of financial illiteracy.

Go Further

• Pay yourself first Understanding money starts with paying yourself first.
• Passing it on Financial literacy is the most valuable thing to pass on to the next generation.
• The retirement gap People who don't understand money often find out only in old age that they don't have enough.
• Compounding Once you understand compounding, you know that the earlier you start, the better.
• Assets and liabilities When you can tell assets from liabilities, you know where your money should go.