Sense & Centsibility Blog
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Financial capabilities everyone needs to develop: part 1

April is National Financial Literacy Month. If you follow LSS Financial Counseling, you know that we focus on working with people to achieve financial wellness every month, not just April. However, instead of using the term financial literacy, I prefer to use the term financial capabilities.

Financial Literacy vs. Financial Capabilities

Investopedia defines financial literacy as “the ability to understand and effectively use various financial skills, including personal financial management, budgeting, and investing.” There is nothing inherently wrong with this definition, nor wanting people to understand and use various financial skills. However, the definition doesn’t recognize that successful money management takes more than understanding certain concepts and mastering certain skills. It also requires knowing oneself and having the resources available to successfully manage money. 

Financial capability encompasses more than just knowledge and skills. The Center for Financial Inclusion (CFI) defines it as:

“…the combination of attitude, knowledge, skills, and self-efficacy needed to make and exercise money management decisions that best fit the circumstances of one’s life, within an enabling environment that includes, but is not limited to, access to appropriate financial services.”

According to the American Psychological Association (APA), self-efficacy reflects confidence in the ability to exert control over one's own motivation, behavior, and social environment.” In other words, according to CFI, “[Financial capability is] not just what you know, but whether you have the willingness, confidence and opportunity to act.”

A financially capable person, then, is someone who:

  • Sees the value in managing money proactively (attitude).
  • Knows what is needed to make appropriate money management decisions and act on them.
  • Has the skills to turn that knowledge into practice.
  • Believes and has confidence that they can act on that desire (self-efficacy).
  • Has access to the support that can assist them in acting on that desire.
  • Can make financial decisions that are best for their particular circumstances. What works for a 20-year-old college student is not going to be the same thing that works for a 40-year-old parent in the middle of their career, or for a 75-year-old retiree.

Let’s take a look at skills that make up financial capability.

Setting Goals

Have you ever heard the saying, “A goal is a dream with a deadline?” What are your dreams? How do you intend to reach them?

Setting a SMART goal is an effective tool to reach goals and shows a high level of self-efficacy. SMART stands for Specific, Measurable, Achievable, Realistic and Time-based. Creating a SMART goal means breaking down a vague goal, like “I want to save more money,” into something more specific: “Starting next week, I will direct deposit $38.46 from each paycheck into my savings account so I can build $1,000 emergency savings in one year.” The goal is not only described in detail, but how it will be achieved and by when. This process is also used to make the goal realistic and achievable. In this case, list the resources that are available to reach the goal: regular and adequate income to save, a savings account and access to direct deposit.

For those who are just building their financial capability, a learning goal may be a better fit. Learning goals are focused on creating habits and/or gathering data. They can be transformational because of the knowledge one gains. For example, a person who wants to save money, but currently isn’t, needs to determine what the barriers to saving are. Is it too little income? Are essential costs (housing, food, transportation, etc.) eating up all available funds? Is it overspending on non-essentials? In this case, tracking expenses and income for a specific amount of time would be a learning goal to determine what needs to change to reach the goal of saving more.

For more information about reaching specific financial goals, visit the Consumer Financial Protection Bureau website.

Maximizing Income

Maximizing income means:

  • Knowing how much you earn.
  • Knowing the difference between gross and net income.
  • Understanding tax terms and how to prepare tax returns, either on your own or through a trusted tax preparer.
  • Knowing how to find a trusted tax preparer.
  • Understanding the value of the benefits you receive through work or government programs.
  • Determining what training and education you need to increase your pay. A person doesn’t necessarily need a four-year education to reach their earning potential. Apprenticeships, trade schools and two-year colleges are a good start for many, with lower upfront costs.

To figure out what type of education you will need, calculate the opportunity costs. Put simply, this requires that you factor the value of the road taken and the road not taken. For example, when deciding whether to attend college, it’s important to look at the time and the money that will be spent earning that degree and the income, time and real-world experience that will be lost by attending college. You will also need to determine if future income will be lower if you don’t have the degree.

Spending Wisely

Many people don’t think of spending as a skill, but it is. How much we spend, what we spend our money on, how much money we have to spend and the outcome of those choices all affect our life significantly. If a person consistently spends more than their income, it leads to debt and much stress. On the other hand, if a person spends significantly less than their income, but doesn’t plan for what they will do with the leftover funds, they can feel equally as stressed about their financial situation — even if it doesn’t lead to debt.

Spending is one area of financial capability where values, expectations, status and emotions all come in to play. How decisions about spending are handled in any household can be a source of peace or a source of contention. As a financial counselor, I have worked with people who earned significant income and made spending decisions that put them in debt and left them vulnerable with no savings. I also worked with those who earned very little and managed their spending choices carefully, had no debt and were able to build an emergency savings fund worth three months of living expenses.  Much of this comes down to self-efficacy. The person with the lower income and savings showed high self-efficacy, because they exerted control over their own motivation, behavior and social environment (circumstances).

What knowledge, skills and self-efficacy are necessary for spending wisely?

  • Creating a workable budget.
  • Choosing between needs and wants.
  • Prioritizing spending.
  • Using credit or debit cards appropriately.
  • Understanding the influence of marketing – both direct and indirect – on spending choices and learning tricks to resist those influences.

Here are some tricks to resist marketing tactics:

  • Ask what is being sold through the advertising, is it a product or an ideal lifestyle?
  • Pay attention to the emotions that ads elicit. Ads are made to make us believe purchasing the product will make our lives better. Will it?
  • Make a list of things you will purchase and stick to it.
  • Use cash instead of debit, credit or electronic payments. An MIT study showed that people spent up to 100% more when using credit.
  • Employ a “cooling-off” period when the impulse to purchase a want is high.
  • Ask, “Will this purchase add value to my life?”
  • Track spending to determine where overspending is happening.

Sometimes impulsive or compulsive spending may be a sign of emotional distress or a symptom of mental illness or substance abuse disorder. In those instances, seeking professional help may be necessary.

There are three other capabilities everyone needs for financial wellness: setting aside money for savings, borrowing money when appropriate and protecting oneself from catastrophic losses and scams. I will cover those in “Financial Capabilities Everyone Needs – Part Two.”

LSS Financial Counseling has certified, experienced financial counselors who work with individuals across the nation to build financial capabilities. You can schedule a free, confidential appointment by calling 888.577.2227, or you can get your support online.

Shannon Doyle


Author Shannon Doyle is Program Manager for Partnerships and Education for LSS Financial Counseling.