How to Cultivate Financial Literacy for Your Gap Year

The second reason to learn about money right now is that it makes you more competitive in the working world. Employers want a financially-literate workforce—so much so that many invest in it as an employee benefit, providing financial literacy classes and counseling for their employees. Depending on the position you’re applying for, some employers such as banks and retailers may require you to take a simple financial literacy test as part of their hiring process. If you apply to work with a non-profit, the organization may not test you; however, financial literacy will still help you in your new potential role. No matter where you send in your application, knowing a little about credit, currency, and checking accounts will give you confidence and help you to stand out from the crowd while applying for jobs.

The third reason to learn about money right now is that your level of financial competence will have direct bearing on your financial position—both immediately and in the future. The sooner gain financial knowledge, the greater the potential for positive impact. Making smart financial decisions leads to greater wealth and security. What’s more, scientists continue to correlate financial stress with poor mental and physical health and, conversely, financial literacy with better health outcomes.

What Constitutes Financial Literacy?

An important part of financial literacy and financial health is goal-setting. So make a list of your goals. These could include owning a car, buying a sewing machine, backpacking in Southeast Asia for 3 months (when it’s safe and healthy to do so, of course), or any other major purchase or experience that’s important to you. Find out what you can expect it to cost to reach each of them. And factor these expenses into a revised, realistic monthly or weekly budget for the year.  

If you take a job before your gap year, you’re going to have some money in your pocket each month. This is a great opportunity to think about what lies ahead for you. Would you like to spend your gap year interning with NGOs in South America once the pandemic ends? What will flights, hostels, meals, and transportation cost for 6 months or a year? 

If you take a job during your gap year, you’ll learn more about your academic and professional interests while making money. What will you do with that money after your gap year? Will you use it to pay for tuition that your student loans may not cover? Would you like to own a car?

Making the Most of Your Money

Are you in the habit of stashing the cash you save in your sock drawer?  Now’s the time to break it and open the best savings account you can find. Find the one that offers the highest interest rate and the lowest fees. Do you want to open an account with a Credit Union, which is a member-owned institution, or with a commercial bank, a for-profit institution? You can look more into the difference between them here. Often online banks can offer higher rates and fewer fees because they’re not saddled with the overhead costs of operating physical branches. Not familiar with how interest rates work? Check out an online tutorial that explains it. Interest is a critical concept, not just in saving, but also investing and borrowing money.

“Compound interest is the eighth wonder of the world. Someone who understands it, earns it; someone who doesn’t, pays it.”

Albert Einstein

Give Yourself Credit

The average amount of debt per capita ranges from around $30,000 in West Virginia to around $88,000 in Washington, DC. A lot of that debt is associated with home mortgages and student loans, but high-interest credit card debt is also a significant factor: the average credit card debt person is over $6,000. Many people only manage to make the minimum payment due on their cards, which may be less than the actual new interest added to their accounts each month. That causes a snowball effect. Their credit card balances increase even though they’re making payments against their accounts. 

If that sounds to you like a pretty good argument never to open a credit card account, you’re about half-right. Generally speaking, it’s a bad idea to carry more debt than you can afford. But building a solid credit history is the key to being able to borrow money when you need it—for example, to pay for college—at a low interest rate. In short, having a lot of long-term debt is bad. Having a little short-term debt is good. 

One thing you might consider doing during your gap year is building a positive credit profile. Once you can demonstrate that you have a regular income, you might try applying for a credit card. Start small—for example, with a gas credit card. Gas up using your card each week. When you get your bill, pay the entire balance off at the end of the month. That’s the way to establish good credit and pave the way for low-interest loans for the things you really need in the future.

Become an Investor

What comes to mind when you picture an investor? A Wall Street shark?  A fat cat surrounded by moneybags? The truth is, investors come in all shapes, sizes, and net worth and investing is growing more democratized all the time. While you’re doing your gap year, why not try a little investing? There are some really interesting apps out there that give you access to investment markets with—quite literally—just the spare change you’d get when you buy a Red Bull at the corner store. Some allow you to limit the companies you invest in to environmentally- and socially-responsible organizations. You won’t make a boatload of money investing your spare change. But you will become—you guessed it—more financially literate.

Tap into Financial Literacy Resources

Is money a topic you feel comfortable talking about with your parents? If so, you might want to start right there. But money is often a taboo topic at the family dinner table. One reason is that parents don’t feel confident enough in their own skills to pass them along to their kids. Or sometimes, they feel like they haven’t set a great example. But gap years are about becoming more independent. Five minutes of Google searching will yield a great selection of free financial education materials created by government, non-profit, and private organizations. Employer-sponsored classes, if you work for a company that offers them, are a terrific option, too.

Summing it All Up

Money is a big deal—but it’s not so big that you can’t get your arms around it. Focus on five key concepts—saving, goal-setting, budgeting, credit, and investing—and spend 15 minutes a day attending to your own finances and financial education. You’ll arrive at college—not to mention adult life—better prepared and better positioned to enjoy a secure financial future.

Author Bio:
Susan Doktor is a journalist, business strategist, and mom to a gap year kid who hails from New York City. She writes on a wide range of topics, including finance, education, and government affairs. Follow her on Twitter @branddoktor.