Financial literacy and education

What Is Financial Literacy?

It refers to a variety of important financial skills and concepts. It is the ability to understand and effectively use various financial skills, including personal financial management, budgeting, and investing. Key aspects of it include knowing how to create a budget, plan for retirement, manage debt, and track personal spending. When you are financially literate, you have the foundation of a relationship with money, and it is a lifelong journey of learning. It is the key to success when it comes to money.

Financial literacy encompasses knowing how investment decisions made today will impact your tax liabilities in the future.

Financial illiteracy of people is not an individual problem. It has a wider effect on the entire population. All one needs is to look at the financial crisis of 2008 to see the financial impact on the entire economy that arose from a lack of understanding of mortgage products (creating a vulnerability to predatory lending). Financial literacy is an issue with broad implications for economic health.

They don’t teach it at school

Lack of financial education among kids

There is a lack of financial education our children receive in school. Many of today’s youth have credit cards before they leave high school, yet they have never had a course in money or how to invest it, let alone understand how compound interest works on credit cards.

Without financial literacy and the knowledge of how money works, kids are not prepared to face the world that awaits them, a world in which spending is emphasized over savings.

One of the reasons the rich get richer, the poor get poorer, and the middle class struggles in debt is because the subject of money is taught at home, not in school. Most people learn about money from their parents. So what can a poor parent tell their child about money? They simply say “Stay in school and study hard.” The child may graduate with excellent grades but with a poor person’s financial programming and mind-set. It was learned while the child was young.

Money is not taught in schools. Schools focus on scholastic and professional skills, but not on financial skills. This explains how smart bankers, doctors and accountants who earned excellent grades in school may still struggle financially all of their lives. Our staggering national debt is due in large part to highly educated politicians and government officials making financial decisions with little or no training on the subject of money.

A problem with school is that you often become what you study. So if you study, say, cooking, you become a chef. If you study the law, you become an attorney, and a study of auto mechanics makes you a mechanic. The mistake in becoming what you study is that too many people forget to mind their own business. They spend their lives minding someone else’s business and making that person rich.

If you are going to build the Empire State Building, the first thing you need to do is dig a deep hole and pour a strong foundation. If you are going to build a home in the suburbs, all you need to do is pour a 6-inch slab of concrete. Most people, in their drive to get rich, are trying to build an Empire State Building on a 6-inch slab.

Kids graduate from school with virtually no financial foundation.

One day, sleepless and deep in debt in suburbia, living the American Dream, they decide that the answer to their financial problems is to find a way to get rich quick.

Why you need to be financially literate?

Increased financial intelligence can be used to solve many of life’s common problems. Without financial training, we all too often use the standard formulas to get through life, such as to work hard, save, borrow and pay excessive taxes. Today we need better information.

Today we live in times of great and fast change. There will be many booms and busts. Too many people are focused too much on money and not their greatest wealth, which is their education. If people are prepared to be flexible, keep an open mind and learn, they will grow richer and richer through the changes. If they think money will solve problems, they will have a rough ride. Intelligence solves problems and produces money. Money without financial intelligence is money soon gone.

It’s not how much you make, it’s how much you keep, and how many generations you keep it. We have all heard stories of lottery winners who are poor, then suddenly rich, then poor again. Or stories of professional athletes, who, at the age of 24, are earning millions of dollars a year, and are sleeping under a bridge by age 34.

If you want to be rich, you need to be financially literate.

Educated dads stress the importance of reading books, while rich dads stress the need to master financial literacy.

A society that expects most individuals to take responsibility for the management of their own expenditure and income after tax, that expects most adults to own their own homes and that leaves it to the individual to determine how much to save for retirement and whether or not to take out health insurance, is surely storing up trouble for the future by leaving its citizens so ill-equipped to make wise financial decisions.

The first step towards understanding the complexities of modern financial institutions and terminology is to find out where they came from. Only understand the origins of an institution or instrument and you will find its present-day role much easier to grasp.

The rewards for ‘getting it’ have never been so immense. And the penalties for financial ignorance have never been so stiff.

10 things you can learn about money in 10 minutes that will change your life

LIBBY KANE AND KATHLEEN ELKINS

Business Insider

On Inc., Ilya Pozin wrote about 10 things anyone can learn in 10 minutes to make them more productive for the rest of their life.

More productive is one thing — but how about richer?

Only 10 minutes won’t teach you everything there is to learn about managing your money and building wealth, but setting aside some time to learn one of these 10 things can only improve your financial know­how.

Know your net worth

Financial literacy and education - Net worth

How to figure out where all of your money is going

Most of us know how much cash is flowing into our bank accounts each month — but just how much is flowing out? Do you know how much you spend eating out, on monthly subscriptions, or on coffee? Chances are it’s more than you think.

If you redirect smaller, everyday expenses towards a retirement account, it can accumulate and grow into thousands of dollars over time, thanks to the power of compound interest.

Where can you cut back? First, you’ll need to figure out where all of your money is going. There are plenty of apps out there that will automatically track and categorize your expenses for you, such as Mint, You Need a Budget, Personal Capital, and LearnVest.

If apps aren’t for you, try keeping a spreadsheet on your computer or writing down your daily purchases in a notebook.

How to change your mindset about money

Contrary to popular belief, finishing rich isn’t necessarily dependent on the size of your paycheck — and it has more to do with psychology and mindset than you may think.

This should strike you as good news, since anyone can change their thoughts, beliefs, and habits to reflect those of the rich.

Start by thinking of money as something to invest, rather than something to save or spend. As self­made millionaire Grant Cardone writes on Entrepreneur:

The only reason to save money is to invest it. Put your saved money into secured, sacred (untouchable) accounts. Never use these accounts for anything, not even an emergency. This will force you to continue to follow step one (increase income). To this day, at least twice a year, I am broke because I always invest my surpluses into ventures I cannot access.

Next, start making choices like the rich and developing “rich habits.” As self­made millionaire T. Harv Eker says, “The fastest and easiest way to create wealth is to learn exactly how rich people, who are masters of money, play the game.”

Which debts you should pay off first

Debt

How big your emergency fund should be

Emergency reserve fund

How your partner views money

As uncomfortable as they may be, money conversations are crucial — particularly if you’re thinking about popping the question. After all, arguments about money are a leading predictor of divorce.

“Smart couples talk about money all the time,” writes financial adviser David Bach in his book, “Smart Couples Finish Rich.” “When you work together on your finances, you can compound the results. When you don’t, the same can be said for the mistakes you will invariably make.”

Where do you start?

First, you’ll want to understand the financial background of your partner, Bach says. You’ll want to find out how your partner feels about money and what they consider to be its purpose in their life. This will allow you to understand how they make financial decisions.

Next, you can discuss the more concrete details, such as who is responsible for paying which bills, whether you want a joint account, and what your specific money goals are as a couple.

How to make sure you always have money to save

Believe it or not, in many cases having enough money to save is a matter of mindset, not dollars.

“What most people do when they earn a dollar is pay everyone else first,” Bach writes in “The Automatic Millionaire.” “They pay the landlord, the credit card company, the telephone company, the government, and on and on.

“The reason they think they need a budget is to help them figure out how much to pay everyone else so at the end of the month — or the year, or their working life — they will have something ’left over’ to pay themselves.”

How do you fix this? You pay yourself first.

That simply means considering your savings as much as priority as the rent or the gas bill, and if you need to cut back on spending, savings isn’t an area you do it. Of course, there will be exceptions — people who truly don’t have wiggle room to rearrange their budgets — but if you’re meeting your financial obligations with room to spare, building your savings is as simple as changing your mind.

How to automate your finances

Changing your mind about your savings is easily accomplished in minutes, but how can you be sure you’ll stick to your new resolve?

Easy: Automate your finances.

Automating your finances means choosing where your money goes ahead of time and setting up a system to make sure it gets there, without taking a detour into your barista’s hands. Jim Wang, founder of Wallet Hacks, says it’s a great tactic for anyone who feels a little lazy about their money.

So how do you do it?

Wang drew his automation plan as a map, which you can see here. Ramit Sethi, author of “I Will Teach You To Be Rich,” created a simple flowchart to outline the process, which you can see above.

Once you set up your system, it will continue to work without your input or oversight, minus regular checking of your credit card accounts to make sure there isn’t any evidence of error or fraud.

How much money you need to keep in your checking account

The answer will be different for everyone.

Financial planner Tom Gilmour explains to LearnVest:

As a general rule of thumb, I recommend storing the equivalent of one month of your take­home pay in your checking account.

This gives you the security of a 30­day cushion — which should give you the peace of mind that you have enough to cover your expenses for the next month. It also safeguards against the stress of being on the verge of overdrafting or feeling unprepared to deal with an unexpected expense.

Gilmour warns that once you have that single month, it’s time to find other places for your money, whether that’s savings accounts, retirement accounts, or other investments. Because a checking account earns no interest at all, it should be considered a temporary stopover for your cash.

Once you have that month of pay in your account, you’ll have peace of mind, and you’ll be able to make the most of every other dollar you have.

What kinds of insurance you need

Everyone has to have health insurance, or pay a fee. If you have a car, you’re required to have auto insurance. If you own a home, you must to buy homeowner’s insurance.

But beyond that?

Here are a few rules of thumb:

If you support yourself, get disability insurance. LearnVest has an easy­to­follow primer on how to calculate how much you need.

If you have children or other dependents, share outsized debts like a mortgage with a spouse, or have substantial private student loans, get life insurance. Term policies are sufficient for most people. If you have a high net worth, you might want to look into whole life insurance for its tax breaks.

If you are a renter, get renter’s insurance. In addition to covering break­ins or damage from a fire or severe weather, renter’s insurance will cover you if your car is ever broken into. “Anything that is not part of your vehicle that is stolen from your car — golf clubs in your trunk, for example — is not covered by auto insurance,” Jonathan Meaney, a certified financial planner and wealth manager at Carter Financial, told Business Insider, “Your renter’s insurance on the other hand, will cover those items.”

When everything is going swimmingly, insurance seems like an unwelcome extra cost. But when the waves start breaking and something goes seriously wrong, it can make all the difference.

Tags

1. Talented, hard working people don’t earn a whole lot
2. Money is only an idea. Take action.
3. The five horsemen of personal finance apocalypse
4. Accounting

TODO

1. Top 10 Personal Finance Podcasts: https://www.investopedia.com/top-10-personal-finance-podcasts-5088034

Reading material

1. 10 Financial Subjects Everyone Needs to Learn: https://wealthup.com/financial-topics-schools-should-teach-sept-21-2024/