Are you financially literate?

Happy Financial Literacy month!

April is financial literacy month and was created to educate people on the importance of understanding personal finance. This is exactly why I created this blog!

Our country is in a personal financial crisis, which I wrote at length about previously. Here are some daunting statistics that illustrate this point:

  • Nearly four out of every five U.S. workers live paycheck to paycheck.
  • Over a quarter never save any money from month to month. (Source)
  • Almost 75% are in some form of debt, and most assume they always will be.
  • Not surprisingly, about 49% of Americans are anxious about their current financial well-being (Source)
  • Only 24 percent of millennials demonstrate basic financial literacy
  • 157 million Americans have credit card debt to pay off
  • 44 million have student loan debt outstanding
  • Two-thirds of Americans would struggle to scrounge up $1,000 in an emergency (Source)

As you can see, we have to get our financial lives under control. We have to increase our knowledge and improve our financial literacy.

Before we do that, we have to figure out what financial literacy is.

What is financial literacy?

Having the ability and the knowledge to understand and navigate the various topics related to one’s financial life, including budgets, emergency fund, debt, retirement savings, goal savings, investing, and insurance.

Why is it so important?

As I mentioned in the beginning, we are in a personal financial crisis and those statistics prove it.

People aren’t saving enough for retirement, people are using debt to buy things that they don’t need, and fewer people understand what they are doing with their financial life.

The level of financially literate people needs to improve. We need to encourage and educate people to make better decisions with their money.

We need to stress that budgeting is important, protecting oneself with insurance is vital, and that saving for the future is essential.

What are concepts to one’s financial life?

Budgets

I stress the importance of creating and maintaining a budget in almost every post that I write, and for good reason. Your budget is your playbook. It’s what tells your money where it’s going and it keeps you on track toward your financial goals.

There are some key steps in creating a budget.

  • Write down your expenses for the month. After you write down all of your necessary spending like bills, food, and savings, write down your discretionary spending (fun money). Keep this at a minimum so you can focus more on increasing your savings and decreasing your debt.
  • Track your spending. Go back a few months and record your spending for those months. Categorize your expenses to find out exactly where your money is going and how much is being spent. This will give you a good idea of how your average month’s expenses compare to the expenses written in your budget. Cut where necessary.
  • Important line items. Savings (emergency, short-term goals, retirement), debt (student loans, credit cards, etc.), discretionary spending, and total. Where possible, increase your spending, increase your debt payments to so you get rid of debt faster, and decrease your discretionary spending. Finally, make sure your total at the end of each month is in the green (made more than spent).

For an in-depth look at creating a budget, click here.

Emergency fund

Having an emergency fund is a huge part of the financial literacy equation. If you have an emergency fund, unexpected expenses can be handled and paid for without wreaking havoc on your normal monthly budget.

The best way I’ve found to save for emergencies is to make it regular and make it automatic. We save a set amount of money each week for emergencies, and it takes place every Monday, automatically.

Standard advice is to save 3-6 months worth of expenses. If you are having trouble with this, start small and start slow. Start by saving $5 per week or $5 per month. Every so often, bump up your savings by a couple of dollars.

Before you know it, you will have a solid amount aside for emergencies.

College Savings

A common goal among parents is to be able to put your kids through college, or at least to be able to help a considerable amount. We also have that goal and are currently saving a set amount per month for our sons’ future education.

We are using a 529 college savings plan. There’s still somewhat of a debate between the Coverdell ESA and the 529 about which is better, but I believe the 529 is best.

Here are some key statistics about the 529:

  • Savings grow tax-deferred and withdrawals are tax-free when used for qualified education expenses
  • Annual max contribution of $70,000
  • Anyone can contribute to account (family members, friends, etc.)
  • If savings aren’t used by the beneficiary, can transfer to a sibling without penalty
  • Funds used to pay for non-qualified expenses penalized at 10% (Source)

Retirement Savings

Another huge part of our financial literacy handbook. Saving for retirement is vital. Odds are you won’t have a pension from your employer to count on and Social Security will only replace a portion of your income. That means the rest is on you.

Experts say to save at least 15% of your paycheck for retirement. This is a great number to work for. If you can only contribute 3% is that enough to take advantage of the full company match? If it isn’t you need to do what you can to increase your contribution percentage so you can get that match. That’s free money!

There are many vehicles that you can use for your retirement savings.

  • Employer plans
    • 401(k)
    • SIMPLE IRA
    • SEP IRA
  • Individual plans
    • Traditional IRA
    • Roth IRA

There are also various new technologies that have made saving easier. Acorns is one of the more popular ones. It rounds up all of your purchases to the nearest dollar and invests the difference.

You can find more programs like it here and here.

Debt

Debt in the scheme of financial literacy is the ability to understand what it is and how it impacts your finances.

Generally, debt is bad. Debt detracts a portion (sometimes a large portion) of your monthly budget in order to pay it down instead of saving for your goals.

Debt, more often, costs you money as well in the form of interest, with credit cards being the worst culprit. The average credit card balance and interest rate is $5,500 and 15%, respectively. (Source)

The most popular reason why debt is bad is it gives you the opportunity to buy a home through a mortgage.

Along with understanding debt and how it impacts you, is the ability to get out of it, and there are several methods/techniques to use that can help.

Credit cards

  • Snowball method – This method is designed to knock out your smallest balances first. Once your smallest balance is gone, move along to the next smallest balance.
  • Avalanche method – The avalanche method was created to attack your debt with the highest interest first. Once that debt is paid, move to the next highest balance.
  • Balance transfer – The purpose of this method is to roll a high-interest debt to a 0% interest credit card. You can save a lot of money on interest payments this way, but be advised, the 0% interest if for a limited time only.
  • Personal loan – This method is designed to consolidate your outstanding debt and attempt to reduce your interest rate.

Student loans

There are really two ways to help reduce your student loans.

  • Refinance – This can be a very effective way to consolidate your loans and lower your interest rate on your debt.
  • Loan forgiveness – This, generally, applies to loans through the federal government. If you took out federal student loans and went to work for the government after you graduated, you could have those loans forgiven. You’ve had to been making payments on this debt for a certain amount of time, however, before you can be eligible.

For more on student loan refinance/repayment, visit an article I wrote for My Millennial Guide, here.

For more on getting rid of your debt, visit a previous post I wrote, here.

Investing

The biggest thing you should know about investing your hard earned money is to minimize fees and keep it simple.

Where people get in trouble is trying to time the market and letting their emotions cloud their decision making.

Take that money your busted your butt for, invest in index ETFs. Diversify among stocks and bonds, international and domestic. Arrange your money according to your risk and time horizon.

General advice – Stocks are generally riskier than bonds. The younger you are the more tolerant to risk you should be. This means more stocks and fewer bonds. As you age you will slowly shift that mix to more bonds and less stock.

Investing is another very important part of your financial health. Remember to keep it simple and to keep fees as low as possible.

Insurance

For the most part, insurance is self-explanatory. You need to buy insurance to protect the things you have. If you have a car, but auto insurance. If you have a home or rent an apartment, buy homeowners insurance or renters insurance.

You should also protect your ability to earn. A lot of people stress the importance of life insurance, and life insurance is extremely important, but you’re more at risk of being disabled than you are of dying.

Life insurance is vitally important if you have a family that relies on you. Even if you don’t have a family, a little life insurance isn’t a bad idea. If God forbid, something happens to you, being prepared to lessen the burden on your family will mean a great deal to them.

Conclusion

The biggest thing we can do to improve personal financial knowledge in this country is to do everything we can to educate. Pushing for legislation isn’t a bad way to go.

If we require schools to teach a basic finance course, that’s a great way to introduce the material and encourage future learning.

The importance of financial literacy cannot be stressed enough. We all need to be better with our money.

Money certainly is not everything and life has way too many beautiful and amazing things to make money the center of it. But money does serve a purpose, and the better we can understand it and use it to our advantage, the better.

So readers, how should we go about improving this?

Published by

Financial Health and Wealth

I am a Financial Consultant and Blogger. I live in the Greater Milwaukee area. I am married with a six-month-old son. My goal with this blog is to educate people to better understand basic finances and to help save them money along the way

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