Americans have long insisted that all citizens learn basic literacy skills — reading, writing, and arithmetic. But only half of the states require students to learn financial literacy skills, which can be almost as important for a secure, productive life.
As we observe Financial Literacy Month in April, it is worth noting that more than 1 in 3 Americans are still not financially literate — that is, they are unable to understand and apply basic financial concepts. These include calculating how fast an interest-bearing savings account will grow, or figuring out whether your investments are staying ahead of inflation. Becoming financially literate also requires such basic skills as budgeting, spending, saving, investing, and managing risk.
Financial literacy skills help protect you and your family from scams, reduce financial stress and anxiety, and determine your lifelong standard of living. Your capability in this arena also shapes your access to higher education and housing and your ability to enjoy a comfortable retirement. As estate planners, we see the importance of financial literacy every day as we work with clients to understand tax, accounting, and other financial issues.
Here is a brief explanation of some essential financial literacy concepts.
BUDGETING AND SPENDING. Track your spending over one month and assess your financial goals, then use that information to make a plan for how you want to spend your money. A good basic framework to get started is the 50/20/30 rule: Allocate 50% of your net income to basic needs, 20% to savings, and 30% to nonessentials.
SAVING AND INVESTING. In allocating the 20% of earnings you devote to savings, put at least 10% into a savings or investment account and another 10% into an emergency fund to cover 3–6 months of expenses. To decide where to invest, familiarize yourself with the investment risk ladder, which compares asset classes from least to most risky — from basic tools such as cash and bonds, mutual funds, and exchange traded funds to riskier options like individual stocks, real estate, hedge funds, and commodities. Learn to distinguish between assets insured by the Federal Deposit Insurance Corp. (checking, savings, money market accounts, and CDs) and investments that are not FDIC-insured (stocks, commodities, annuities, mutual funds, cryptocurrencies, etc.).
DEBT MANAGEMENT. Avoid high-interest debt such as payday loans, personal loans, and credit cards, and pay those off first. Your credit score depends in part on what percentage of your total credit card borrowing limit you are using. If you have a mortgage, consider reducing the total interest you will pay by making payments twice a month. For other, lower interest debt, such as government-guaranteed student loans, make payments on time.
RETIREMENT PLANNING. Financially literate investors understand pensions, 401(k)s and Roth IRAs, Social Security, and annuities. If your employer offers a 401(k) or Roth IRA, sign up and invest at least enough to earn the maximum matching funds. Start saving early for retirement, building a diversified portfolio of stocks, bonds, and commodities. Also, start researching how much you will need to save to retire comfortably. Consider getting professional advice from a financial planner or investment advisor, who is required to put investors’ interests first.
RISK MANAGEMENT. Insurance is essential to avoiding catastrophic expenses, and it also is one of the least-understood financial products. Evaluate potential risks to your health, life, property, and ability to work and support yourself, then shop for adequate health, property damage, liability, disability, and life insurance. Be aware, however, that Insurance policies are only as reliable as the financial health of the insurer, so beware of high-pressure sales tactics or premiums that seem too good to be true.
If these topics seem baffling or confusing, it may be time to take charge of your financial literacy. Investopedia, a financial education website, posts hundreds of free resources. The online learning platforms Udemy, Coursera, and Khan Academy offer free or inexpensive courses in financial skills. Seeking guidance from a qualified financial advisor can be incredibly beneficial for individuals looking to navigate their financial journey effectively. Financial advisors offer personalized advice tailored to your unique circumstances, helping you make informed decisions about investments, debt management, retirement planning, and more.
Financial literacy is a key component in building and maintaining wealth for yourself and a steppingstone to creating generational wealth. If you would like to learn about strategies for transferring your hard-earned wealth to future generations and have that wealth be protected for their benefit, then we invite you to attend one of our upcoming estate planning seminars to learn more.
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